Avery Dennison Annual Report 2020

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FY2020 Annual Report · Avery Dennison

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Section II

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Annual Report

Avery Dennison Corporation | 2020 Integrated Report SECTION II

2020 Annual Report

Contents

Five-Year Summary

4 Management’s Discussion and Analysis of

Financial Condition and Results of Operations

21 Consolidated Financial Statements

26 Notes to Consolidated Financial Statements

60 Report of Independent Registered Public Accounting Firm

63 Other Information

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.

We believe that the most significant risk factors that could affect our financial performance in the near-term include:
(i) the impacts to underlying demand for our products and/or foreign currency fluctuations from global economic
conditions, political uncertainty, changes in environmental standards and governmental regulations, including as a result
of the coronavirus/COVID-19 pandemic; (ii) competitors’ actions, including pricing, expansion in key markets, and product
offerings; (iii) the degree to which higher costs can be offset with productivity measures and/or passed on to customers
through price increases, without a significant loss of volume; and (iv) the execution and integration of acquisitions.

Certain risks and uncertainties are discussed in more detail under “Risk Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended
January 2, 2021 and include, but are not limited to, risks and uncertainties relating to the following:

(cid:129) COVID-19
(cid:129) International Operations – worldwide and local economic and market conditions; changes in political conditions;
and fluctuations in foreign currency exchange rates and other risks associated with foreign operations, including
in emerging markets

(cid:129) Our Business – changes in our markets due to competitive conditions,

technological developments,
environmental standards, laws and regulations, and customer preferences; fluctuations in demand affecting
sales to customers; execution and integration of acquisitions; selling prices; fluctuations in the cost and
availability of raw materials and energy; the impact of competitive products and pricing; customer and supplier
concentrations or consolidations; financial condition of distributors; outsourced manufacturers; product and
service quality;
including sustainable or
sustainably-sourced products; investment in development activities and new production facilities; successful
implementation of new manufacturing technologies and installation of manufacturing equipment; our ability to
generate sustained productivity improvement; our ability to achieve and sustain targeted cost reductions; and
collection of receivables from customers

timely development and market acceptance of new products,

(cid:129) Income Taxes – fluctuations in tax rates; changes in tax laws and regulations, and uncertainties associated with
interpretations of such laws and regulations; retention of tax incentives; outcome of tax audits; and the
realization of deferred tax assets

(cid:129) Information Technology – disruptions in information technology systems,

including cyber-attacks or other
intrusions to network security; successful installation of new or upgraded information technology systems; and
data security breaches

(cid:129) Human Capital – recruitment and retention of employees; fluctuations in employee benefit costs; and collective

labor arrangements

(cid:129) Our Indebtedness – credit risks; our ability to obtain adequate financing arrangements and maintain access to

capital; volatility of financial markets; fluctuations in interest rates; and compliance with our debt covenants

(cid:129) Ownership of Our Stock – potential significant variability of our stock price and amounts of future dividends and

share repurchases

(cid:129) Legal and Regulatory Matters – protection and infringement of intellectual property and impact of legal and
regulatory proceedings, including with respect to environmental, health and safety, anti-corruption and trade
compliance

(cid:129) Other Financial Matters – fluctuations in pension costs and goodwill impairment

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.

Avery Dennison Corporation | 2020 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 (income), net(1)
Interest expense
Other non-operating expense (income), net(2)
Income before taxes
Provision for (benefit from) income taxes(3)
Equity method investment (losses) gains
Net income

Per Share Information
Net income per common share
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)

At End of Year
Property, plant and equipment, net
Total assets
Long-term debt and finance leases
Total debt
Shareholders’ equity

Other Information
Depreciation and amortization expense
Research and development expense
Effective tax rate(3)

2020

2019

2018

2017

2016

Dollars

% Dollars

$6,971.5 100.0 $7,070.1 100.0 $7,159.0 100.0 $6,613.8 100.0 $6,086.5 100.0
27.9
17.8
.4
1.0
.9
7.8
2.6
–
5.3

1,923.3
1,060.5
53.6
70.0
1.9
737.3
177.7
(3.7)
555.9

1,915.5
1,127.5
69.9
58.5
104.8
554.8
85.4
(2.0)
467.4

1,904.1
1,080.4
53.2
75.8
445.2
249.5
(56.7)
(2.6)
303.6

1,812.2
1,105.2
36.5
63.0
18.0
589.5
307.7
–
281.8

1,699.7
1,085.7
23.8
59.9
53.2
477.1
156.4
–
320.7

27.6
15.2
.8
1.0
–
10.6
2.5
(.1)
8.0

26.9
15.3
.8
1.1
6.3
3.5
(.8)
–
4.3

26.8
15.7
1.0
.8
1.5
7.7
1.2
–
6.5

27.4
16.7
.6
1.0
.3
8.9
4.7
–
4.3

2020

2019

2018

2017

2016

6.67

3.61

5.35

3.19

3.60

6.61
2.36

83.4

84.1

$1,343.7
6,083.9
2,052.1
2,116.8
1,484.9

3.57
2.26

84.0

85.0

$1,210.7
5,488.8
1,499.3
1,939.5
1,204.0

5.28
2.01

87.3

88.6

$1,137.4
5,177.5
1,771.6
1,966.2
955.1

3.13
1.76

88.3

90.1

$1,097.9
5,136.9
1,316.3
1,581.7
1,046.2

3.54
1.60

89.1

90.7

$ 915.2
4,396.4
713.4
1,292.5
925.5

$ 205.3
112.8

24.1%

$ 179.0
92.6
(22.7)%

$ 181.0
98.2
15.4%

$ 178.7
93.4
52.2%

$ 180.1
89.7
32.8%

(1) Included pretax charges for severance and related costs, asset impairment charges and lease cancellation costs, transaction and related costs, legal settlement, Argentine peso

remeasurement transition loss, net gain on investments, reversal of acquisition-related contingent consideration, and other items.

(2) Included pension plan settlements and related charges of $444.1 for fiscal year 2019.
(3) Included then-estimated tax benefit of $178.9 for fiscal year 2019 related to termination of U.S. pension plan.

2020 Annual Report | Avery Dennison Corporation

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® Stock Index, the average return (weighted by market capitalization) of the
S&P 500® 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, 2020.

Comparison of Five-Year Cumulative Total Return as of December 31, 2020

Avery Dennison Corporation

S&P 500 Index

Market Basket

$280

$260

$240

$220

$200

$180

$160

$140

$120

$100

$80
12/31/2015

Total Return Analysis(1)

Avery Dennison Corporation
S&P 500 Index
Market Basket(2)

12/31/2016

12/31/2017

12/31/2018

12/31/2019

12/31/2020

12/31/2015

12/31/2016

12/31/2017

12/31/2018

12/31/2019

12/31/2020

$100
100
100

$115
112
120

$191
136
146

$152
130
127

$226
171
162

$273
203
184

(1) Assumes $100 invested on December 31, 2015 and reinvestment of dividends.
(2) Average weighted by market capitalization.

Historical performance is not necessarily indicative of future performance.

Avery Dennison Corporation | 2020 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
5
8
9
11
17
19
20

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
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.

are not

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. While
some of
the items we exclude from GAAP financial
measures recur, they tend to be disparate in amount,
frequency, or timing.

2020 Annual Report | Avery Dennison Corporation

We use
to

these non-GAAP financial measures
underlying
internally
in
evaluate
performance, as well as to facilitate comparison to the
results of competitors for a single period and full year, as
applicable.

trends

our

We use the following non-GAAP financial measures

in this MD&A:

currency

(cid:129) Sales change ex. currency refers to the increase
or decrease in net sales, excluding the estimated
impact of
foreign currency translation, and,
where applicable, an extra week in our fiscal
year,
transitional
adjustment
reporting of highly inflationary economies, and
the reclassification of sales between segments.
foreign currency
The estimated impact of
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.

for

(cid:129) Organic sales change refers to sales change ex.
currency, excluding the estimated impact of
product line exits, acquisitions and divestitures.

We believe that sales change ex. currency
investors in
and organic sales change assist
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 insurance and sales (purchases) of
investments. Free cash flow is also adjusted for,
where applicable, 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
share
repurchases, and acquisitions.

reductions,

dividends,

debt

(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 investors in
requirements
assessing our working capital
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.

OVERVIEW AND OUTLOOK

COVID-19 Pandemic

outbreak

referred to herein as

In March 2020,
the

the World Health Organization
coronavirus/COVID-19
declared
(collectively
“COVID-19”) a
pandemic, which has continued spreading throughout the
U.S. and the world, resulting in governmental authorities
implementing numerous containment measures, including
travel bans and restrictions, quarantines, shelter-in-place
orders, and business limitations and shutdowns.

The safety and well-being of our employees has been
and will continue to be our top priority during this global
crisis, followed immediately by continuing to deliver high
quality products and service to our customers. We created
global, regional, and local emergency response teams to
manage immediate priorities, recognizing that some of our
role in supply chains for
businesses serve a critical
essential goods such as food, hygiene, and pharmaceutical
products, as well as e-commerce. To support the health
and well-being of our employees, customers, partners and
communities, the majority of our office-based employees
continue to work remotely and some of our operations
limited production or ceased operations for short periods
of time. We leveraged learnings from our early experience
in China to develop safety protocols for our manufacturing
remain operational, and
facilities to re-open and/or
established work-from-home
office
workers. To support the well-being of our employees, we
ensured that they continued to receive full pay during the
initial weeks of facility closures, and, where closures were
later extended in jurisdictions with weaker social safety
nets, particularly in our Retail Branding and Information
Solutions (“RBIS”) reportable segment, provided longer
periods of salary continuation. In addition,
in the fourth
quarter we provided supplemental payments to our front-
their having
line workers to express gratitude for

protocols

for

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

served our customers’ essential needs and increased our
level of community investment, by making a $10 million
contribution to the Avery Dennison Foundation in support
of charitable causes.

To meet our customer needs during periods of peak
label and packaging materials in North
demand for
America and Europe, we took a number of steps to reduce
backlogs, including leveraging our operational excellence
to maximize production capacity, providing pay premiums
for certain hourly employees, and temporarily allocating a
portion of coating assets that normally support our
graphics business to manufacture material for labels.

Overall, we have experienced negligible disruptions to
our supply chain. As the largest customer for many of our
suppliers, we have been able to secure continuity of
material supply, while benefitting from our global footprint
with dual sourcing for most commodities.

Overall, the pandemic had a negative impact on our
consolidated financial
for 2020. While we
results
experienced sequential improvements in the second half
of
the year, 2020 net sales were lower across our
reportable segments due to the negative impact of the
pandemic. Net sales for the second quarter of 2020 were
down approximately 15% from the same period in 2019.
However, we experienced sequential improvement in the
second half of the year, with net sales for the full year
down over 1% from the prior year. Our
label and
packaging materials largely serve essential categories and
experienced strong demand as a result of the pandemic,
given increased consumption of packaged goods and use
of e-commerce. Net sales of graphics and reflective
products declined due to lower demand. Net sales in RBIS
reportable segment declined significantly in the second
quarter of 2020,
though we experienced sequential
improvement in the remainder of the year, driven by net
sales growth in radio-frequency identification (“RFID”)
solutions and improvement
in the base business.
Additionally, net sales in our Industrial and Healthcare
Materials
declined
reportable
significantly in the second quarter mainly due to reduced
industrial demand, particularly in automotive end markets,
although we experienced sequential improvement in the
remainder of the year.

segment

(“IHM”)

impact

the full

We are unable to predict

that
COVID-19 will have on our 2021 results from operations,
liquidity and cash flows due to
financial condition,
including the duration and
numerous uncertainties,
severity of the pandemic and containment measures and
the related macroeconomic impacts. We continue to
actively manage this dynamic environment and update our
scenario planning to reflect the continuously evolving
aspects of the pandemic.

Avery Dennison Corporation | 2020 Annual Report

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

reductions and furloughs,

We executed various long-term productivity and
temporary cost saving actions to manage the downturn,
including deferrals of planned compensation increases,
hiring freezes, overtime and temporary labor reductions,
shift
temporary production
shutdowns, and travel and other discretionary spending
reductions. Our temporary cost saving actions resulted in
approximately $135 million of savings in 2020; we
anticipate the majority of these costs to return as markets
recover. While our balance sheet is strong and we have
ample liquidity, during the first quarter of 2020, we drew
down $500 million under our $800 million revolving credit
facility (“Revolver”) because commercial paper markets
were temporarily unavailable as a result of the pandemic.
During the second quarter, we were able to access
commercial paper markets and repaid the entire
$500 million we had drawn down from our Revolver.
Additionally, we heightened our focus on working capital
management. We paused share repurchase activity in
March 2020 and resumed repurchases late in the third
quarter of 2020. In the initial stages of the pandemic, we
maintained our dividend rate; in October, we increased the
rate by approximately 7%. We expect that our current
cash and cash equivalents and the cash flows generated
from operations will be sufficient to meet our operating
requirements through this downturn.

We continue to actively monitor

the COVID-19
situation and may take further actions that alter our
business operations as may be required by federal, state
or local authorities or that we determine are in the best
interests of our employees, customers, suppliers and
shareholders.

Fiscal Year

Normally, our fiscal years consist of 52 weeks, but
every fifth or sixth fiscal year consists of 53 weeks. Our
2020 fiscal year consisted of a 53-week period ending
January 2, 2021. Our 2019 and 2018 fiscal years
consisted of 52-week periods ending December 28, 2019,
and December 29, 2018, respectively.

Net Sales

The factors impacting the reported sales change are

shown in the table below.

Reported sales change

Foreign currency translation

Extra week impact

Sales change ex. currency(1)

Acquisitions

Organic sales change(1)

(1) Totals may not sum due to rounding

2020

2019

(1)%
1

(1)

(2)%
(2)

(3)%

(1)%
3

–

2%
–

2020 Annual Report | Avery Dennison Corporation

In 2020, net sales decreased on an organic basis
primarily due to the impact of COVID-19 on our markets
and customers. In 2019, net sales increased on an organic
basis primarily due to a combination of higher volume/mix
and pricing actions.

Net Income
Net

income

increased

from approximately
$304 million in 2019 to approximately $556 million in
2020. The major factors affecting the change in net
income in 2020 compared to 2019 were:

(cid:129) Prior-year settlement loss from U.S. pension plan

termination

(cid:129) Benefits from productivity initiatives,

including
temporary cost reduction actions, and savings
from restructuring actions, net of transition costs
input

(cid:129) Net impact of pricing and raw material

costs

Offsetting factors:

(cid:129) Lower

sales and unfavorable product mix

primarily due to the impact of COVID-19

(cid:129) Higher employee-related costs

Acquisitions

Subsequent to our fiscal year-end 2020, in February
to acquire JDC
2021, we announced our agreement
Solutions,
Inc., a Tennessee-based manufacturer of
pressure-sensitive specialty tapes, for a purchase price of
approximately
customary
adjustments. We believe this acquisition expands the
product portfolio in our IHM reportable segment. We expect
to complete this acquisition in the first quarter of 2021.

$24 million,

subject

On December 31, 2020, we

completed our
(“ACPO”), an Ohio-based
acquisition of ACPO, Ltd.
manufacturer of self-wound (linerless) pressure-sensitive
overlaminate products, for consideration of approximately
$88 million, subject to customary adjustments. We believe
this acquisition expands our product portfolio in the North
American business of our Label and Graphic Materials
(“LGM”) reportable segment. Consistent with the time
allowed to complete our assessment, our valuation of
including tangible
certain acquired assets and liabilities,
and intangible assets and environmental
is
preliminary.

liabilities,

Transponder

(RFID Inlay)

On February 28, 2020, we completed our acquisition
division
Smartrac’s
of
(“Smartrac”), a manufacturer of RFID products,
for
consideration of approximately $255 million (€232
million). We believe this acquisition enhances our research
and development capabilities, expands our product lines,
and provides added manufacturing capacity. Results for
Smartrac’s operations were included in our RBIS
reportable segment.

These acquisitions were not material, individually or in

Impact of Cost Reduction Actions

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

the aggregate, to our Consolidated Financial Statements.

Cost Reduction Actions
2019/2020 Actions

During fiscal year 2020, we recorded $56 million in
restructuring charges, net of reversals, related to our
2019/2020 actions. These charges consisted of severance
and related costs for the reduction of approximately 2,160
positions and asset impairment charges at numerous
locations across our company, which primarily included
actions in our LGM and RBIS reportable segments. The
actions in our LGM reportable segment were primarily
associated with consolidations of operations in North
in part in
America and its graphics business in Europe,
response to COVID-19. The actions in our RBIS reportable
segment were primarily related to global headcount and
footprint reduction, with some actions accelerated and
expanded in response to COVID-19. During fiscal year
2019, we recorded $25.2 million in restructuring charges
related to our 2019/2020 actions. These charges
consisted of severance and related costs for the reduction
of approximately 370 positions, as well as asset
impairment charges.

2018/2019 Actions

locations,

In April 2018, we approved a restructuring plan (the
“2018 Plan”) to consolidate the European footprint of our
LGM reportable segment, which reduced headcount by
approximately 390 positions, including temporary labor, in
connection with the closure of a manufacturing facility.
This reduction was partially offset by headcount additions
reduction of
in other
approximately 150 positions. During fiscal year 2020 and
2019, net restructuring reversals related to the 2018 Plan
were not material. The cumulative charges associated
with the 2018 Plan consisted of severance and related
the headcount reduction, as well as asset
costs for
impairment charges. The activities related to the 2018
Plan were substantially completed as of the end of the
second quarter of 2019.

resulting in a net

Net restructuring reversals during fiscal year 2020
related to other 2018/2019 actions, were not
that
material. During fiscal
recorded
$28.2 million in restructuring charges, net of reversals,
relating to these other 2018/2019 actions. These charges
consisted of severance and related costs for the reduction
of approximately 490 positions, as well as asset
impairment charges.

year 2019, we

During fiscal year 2020, we realized approximately
$65 million in savings, net of transition costs, primarily
from our 2019/2020 actions. During fiscal year 2019, we
realized approximately $50 million in savings, net of
transition costs, primarily from our 2018/2019 actions.

Restructuring charges were included in “Other
expense (income), net” in the Consolidated Statements of
Income. Refer to Note 13, “Cost Reduction Actions,” to the
Consolidated Financial Statements for more information.

U.S. Pension Plan Termination

this

termination, we

In 2019, we terminated the Avery Dennison Pension
In
Plan (the “ADPP”), a U.S. defined benefit plan.
settled
connection with
approximately $753 million of ADPP liabilities by entering
into an agreement to purchase annuities primarily from
American General Life Insurance Company and through a
combination of annuities and direct funding to the Pension
Benefit Guaranty Corporation for a small portion of former
employees and their beneficiaries. These settlements
resulted in approximately $444 million of pretax charges
in 2019, partially offset by related tax benefits of
approximately $179 million.

Refer to Note 6, “Pension and Other Postretirement
Benefits,” to the Consolidated Financial Statements for
more information.

Accounting Guidance Updates

Refer to Note 1, “Summary of Significant Accounting
Policies,” to the Consolidated Financial Statements for this
information.

Cash Flow
(In millions)

2020

2019

2018

Net cash provided by operating

activities

$ 751.3

$ 746.5

$ 457.9

Purchases of property, plant and

equipment

(201.4)

(219.4)

(226.7)

Purchases of software and other

deferred charges

(17.2)

(37.8)

(29.9)

Proceeds from sales of property,

plant and equipment

Proceeds from insurance and

sales (purchases) of
investments, net

Contributions for U.S. pension

plan termination

Free cash flow

9.2

7.8

9.4

5.6

4.9

18.5

–

10.3

200.0

$ 547.5

$ 512.3

$ 429.2

Avery Dennison Corporation | 2020 Annual Report

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

lower pension plan contributions,
compensation payments,

In 2020, cash flow provided by operating activities
increased compared to 2019 primarily due to higher net
lower payroll
income,
and incentive
and lower
severance payments related to restructuring actions,
partially offset by higher income tax payments, net of
refunds, and changes in operational working capital
primarily related to the timing of vendor payments.
In
2020, free cash flow increased compared to 2019 primarily
due to reduced purchases of software and other deferred
charges and purchases of property, plant and equipment,
partially offset by lower cash provided by operating
activities adjusted for our contribution to the ADPP.

Outlook

In addition to the continued uncertain impact of
COVID-19 on our businesses, certain factors that we believe
may contribute to our 2021 results are described below:

(cid:129) We expect net sales to increase by 5% to 9%,
including the impact of the Smartrac and ACPO
acquisitions, reflecting continued recovery in our
end-markets across our reportable segments.
(cid:129) We anticipate the effect of the extra week in
2020 will decrease net sales by approximately
1%.

(cid:129) We anticipate the majority of the temporary cost-
saving actions in 2020 to return as markets recover.
from
incremental
restructuring actions, net of transition costs, of
approximately $70 million.

anticipate

savings

(cid:129) We

(cid:129) We expect our full year effective tax rate to be in

the mid-twenty percent range.

(cid:129) Based on recent foreign currency exchange rates,
we expect foreign currency translation to increase
our net sales by approximately 2% and our
operating income by approximately $25 million.

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 (income), net
Interest expense
Other non-operating

expense (income), net

2020

2019

2018

$6,971.5
5,048.2

$7,070.1
5,166.0

$7,159.0
5,243.5

1,923.3

1,904.1

1,915.5

1,060.5
53.6
70.0

1,080.4
53.2
75.8

1,127.5
69.9
58.5

1.9

445.2

104.8

Income before taxes

$ 737.3

$ 249.5

$ 554.8

Gross profit margin

27.6%

26.9%

26.8%

2020 Annual Report | Avery Dennison Corporation

Gross Profit Margin

Gross profit margin in 2020 increased compared to
2019 primarily reflecting the net benefit of pricing and raw
input costs and the benefits from productivity
material
initiatives,
including temporary cost reduction actions,
material re-engineering and savings from restructuring
actions, net of transition costs, partially offset by the net
impact of lower volume and unfavorable product mix.

Gross profit margin in 2019 increased slightly
compared to 2018 reflecting benefits from productivity
initiatives, including material re-engineering and savings
from restructuring actions, net of transition costs, partially
offset by the net impact of higher employee-related costs
and unfavorable volume/mix.

Marketing, General and Administrative Expense

and administrative

Marketing, general

expense
decreased in 2020 compared to 2019 primarily due to
benefits from productivity initiatives, including temporary
cost reduction actions, and savings from restructuring
actions, net of transition costs, as well as, favorable
foreign currency translation, partially offset by the impact
of the Smartrac acquisition, increased allowance for credit
losses and the contribution to the Avery Dennison
Foundation.

and administrative

Marketing, general

expense
decreased in 2019 compared to 2018 reflecting the
benefits from productivity initiatives,
including savings
from restructuring actions, net of transition costs, and the
favorable impact of foreign currency translation, partially
offset by higher employee-related costs and growth
investments.

Other Expense (Income), Net
(In millions)

Other expense (income), net by type
Restructuring charges:

Severance and related costs
Asset impairment charges and lease

2020

2019

2018

$49.1

$45.3

$63.0

cancellation costs

6.2

5.1

10.7

Other items:

Transaction and related costs
Legal settlement
Argentine peso remeasurement

transition loss

Other restructuring-related charge
Net gain on investments
Net gain on sales of assets
Reversal of acquisition-related
contingent consideration

4.2
–

–
–
(5.4)
(.5)

2.6
3.4

–
–
–
(3.2)

–
–

3.4
.5
–
(2.7)

–

(5.0)

Other expense (income), net

$53.6

$53.2

$69.9

Refer to Note 13, “Cost Reduction Actions,” to the

Consolidated Financial Statements for more information.

Interest Expense
Interest

expense

approximately
$5.8 million in 2020 compared to 2019, primarily
reflecting lower borrowing rates on our outstanding
indebtedness.

decreased

Interest

expense

approximately
reflecting
interest costs related to the $500 million of

$17.3 million in 2019 compared to 2018,
additional
senior notes we issued in December 2018.

increased

Other Non-Operating Expense (Income), Net

the ADPP termination.

Other non-operating expense, net, decreased in 2020
compared to 2019 primarily due to the prior-year impact
of
In 2019, we recorded
approximately $444 million of final settlement charges
related to the termination of the ADPP, which increased
other non-operating expense compared to 2018.

Refer to Note 6, “Pension and Other Postretirement
Benefits,” and Note 14, “Taxes Based on Income,” to the
Consolidated Financial Statements for more information.

Net Income and Earnings per Share
(In millions, except percentages
and per share amounts)

2020

2019

2018

Income before taxes
Provision for (benefit from) income

$737.3

$249.5

$554.8

taxes

177.7

(56.7)

85.4

Equity method investment (losses)

gains

Net income

Net income per common share
Net income per common share,

(3.7)

(2.6)

(2.0)

$555.9

$303.6

$467.4

$ 6.67

$ 3.61

$ 5.35

assuming dilution

6.61

3.57

5.28

Effective tax rate

24.1% (22.7)% 15.4%

Provision for (Benefit from) Income Taxes

Our effective tax rate in 2020 increased compared to
2019, while our effective tax rate in 2019 decreased
compared to 2018, primarily due to the tax effects of the
settlement charges associated with the termination of the
ADPP and a discrete foreign structuring transaction in
2019. Moreover, our effective tax rate in 2018 reflected
tax benefits related to adjustments to our 2017 U.S. Tax
Cuts and Jobs Act (“TCJA”) provisional amount and a
discrete foreign tax planning action.

We expect our effective tax rate for 2021 to be in the
mid-twenty percent range. Our effective tax rate can vary
from period to period due to the recognition of discrete

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

events, such as changes in tax reserves, settlements of
income tax audits, changes in tax laws and regulations,
return-to-provision adjustments, and tax impacts related
to stock-based payments, as well as recurring factors,
such as changes in the mix of earnings in countries with
differing statutory tax rates and the execution of tax
planning strategies.

We continue to pursue planning opportunities in
certain foreign jurisdictions, some of which are to react to
the loss of concessionary tax rates in prior years. For
example, in 2020, we reached a tax incentive settlement
agreement with a foreign tax authority related to self-
developed intellectual property. We remain focused on
advancing our progress towards the realization of
additional opportunities.

Refer to Note 14, “Taxes Based on Income,” to the

Consolidated Financial Statements for more information.

RESULTS OF OPERATIONS BY REPORTABLE SEGMENT

Operating income refers to income before taxes,

interest and other non-operating expense (income), net.

Label and Graphic Materials
(In millions)

2020

2019

2018

Net sales including

intersegment sales
Less intersegment sales

Net sales
Operating income(1)

(1) Included charges associated with

restructuring actions and gain/losses
on sale of assets in all years,
transaction and related costs and
gain on investments in 2020, and
Argentine peso remeasurement
transition loss and a restructuring-
related charge in 2018.

$4,795.4
(80.3)

$4,826.1
(80.2)

$4,929.8
(78.7)

$4,715.1
688.8

$4,745.9
601.5

$4,851.1
568.2

22.2

28.3

61.8

Net Sales

The factors impacting reported sales change are shown in

the table below.

Reported sales change

Foreign currency translation

Extra week impact

Sales change ex. currency(1)

Acquisitions

Organic sales change(1)

(1) Totals may not sum due to rounding

2020

2019

(1)% (2)%
1

(1)

(1)
–

–

–
–

(1)%

Avery Dennison Corporation | 2020 Annual Report

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

In 2020, net sales decreased on an organic basis
primarily due to raw material deflation-related price
reductions, which more than offset higher volume/mix. On
an organic basis, net sales increased by a low-single digit
rate in emerging markets and North America and
decreased by a low-to-mid single digit rate in Western
Europe.

In 2019, net sales increased on an organic basis
primarily due to prior year pricing actions. On an organic
basis, net sales increased by a low-single digit rate in
emerging markets and were comparable to prior year in
North America and Western Europe.

Operating Income

Operating income increased in 2020 compared to
2019 primarily due to benefits from productivity initiatives,
including temporary cost
reduction actions, material
re-engineering and savings from restructuring actions, net
of
transition costs, and benefits from raw material
deflation, net of pricing and the impact of the extra week
in our 2020 fiscal year. These benefits were partially offset
by higher employee-related costs, unfavorable volume/mix
and increased allowance for credit losses.

Operating income increased in 2019 compared to
2018 primarily due to benefits from productivity initiatives,
including material
re-engineering and savings from
restructuring actions, net of transition costs, and lower
restructuring charges, partially offset by the unfavorable
impact of foreign currency translation and the combined
effect of volume/mix.

Retail Branding and Information Solutions
(In millions)

2020

2019

2018

Net sales including

intersegment sales
Less intersegment sales

Net sales
Operating income(1)

(1) Included charges associated with

restructuring actions and net gains
on sales of assets in all years,
transaction and related costs in 2020
and 2019 and loss on investment in
2020.

$1,658.4
(27.5)

$1,670.9
(20.6)

$1,617.9
(4.7)

$1,630.9
144.7

$1,650.3
196.6

$1,613.2
170.4

22.7

9.9

11.4

2020 Annual Report | Avery Dennison Corporation

Net Sales

The factors impacting reported sales change are

shown in the table below.

Reported sales change

Foreign currency translation
Extra week impact
Reclassification of sales between segments

Sales change ex. currency(1)

Acquisitions

Organic sales change(1)

(1) Totals may not sum due to rounding

2020

2019

(1)%
1
(2)
–

(2)
(7)

2%
2
–
1

5
–

(10)%

In 2020, sales ex. currency decreased from the prior
year due to a mid-teens rate decline in the base business
driven by temporary closures of apparel manufacturing
sites and lower demand for apparel, partially offset by an
approximate 40% increase in RFID solutions in the
segment, including the benefit of the Smartrac acquisition.
The substantial majority of our sales of RFID solutions is
reported within our RBIS reportable segment. On an
organic basis, sales in the segment related to RFID
solutions increased by a mid-single digit rate. Company-
wide, sales of RFID solutions increased on an organic
basis at a high-single digit rate.

In 2019, net sales increased on an organic basis
primarily due to continued strength in RFID solutions and
external embellishments.

Operating Income

Operating income decreased in 2020 compared to
2019 primarily due to lower volume, higher long-term
including costs associated
growth-related investments,
with the Smartrac acquisition, higher
restructuring
charges and increased allowance for credit losses, partially
offset by benefits from productivity initiatives,
including
reduction actions and savings from
temporary cost
restructuring actions, net of transition costs.

Operating income increased in 2019 compared to
2018 primarily due to higher volume and benefits from
from
productivity
savings
restructuring actions, net of
transition costs, partially
offset by higher employee-related costs.

initiatives,

including

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Industrial and Healthcare Materials
(In millions)

Net sales including intersegment

sales

Less intersegment sales

Net sales
Operating income(1)

(1) Included charges associated with

restructuring actions in all years and reversal
of acquisition-related contingent
consideration in 2018.

2020

2019

2018

$631.9
(6.4)

$682.7
(8.8)

$703.5
(8.8)

$625.5
58.2

$673.9
60.0

$694.7
62.9

FINANCIAL CONDITION

Liquidity

Operating Activities
(In millions)

Net income
Depreciation
Amortization
Provision for credit losses and

$ 8.4

$ 9.4

$ (1.0)

sales returns

Net Sales

The factors impacting reported sales change are

shown in the table below.

Stock-based compensation
Pension plan settlements and

related charges

Deferred taxes and other

non-cash taxes

Reported sales change

Foreign currency translation

Extra week impact

Sales change ex. currency(1)

Acquisitions

Organic sales change(1)

(1) Totals may not sum due to rounding

2020

2019

Other non-cash expense and loss

(7)% (3)%
–

(2)

(9)
–

–

–
–

(9)%

–%

(income and gain), net
Trade accounts receivable
Inventories
Accounts payable
Taxes on income
Other assets
Other liabilities
Net cash provided by operating

2020

2019

2018

$555.9
154.2
51.1

$ 303.6
140.3
38.7

$ 467.4
141.5
39.5

64.0
24.0

58.7
34.5

45.6
34.3

444.1

93.7

9.3

(216.9)

(32.7)

44.9
14.7
(6.0)
(68.2)
(35.2)
18.2
(76.1)

28.3
(42.2)
(18.1)
46.4
5.4
38.4
(114.7)

60.4
(62.5)
(70.5)
43.6
(35.5)
(11.6)
(255.3)

In 2020, net sales decreased on an organic basis due
to a high single-digit rate decline in industrial categories
and a mid-single digit decline in healthcare categories.

In 2019, net sales were comparable to prior year on

an organic basis.

Operating Income

Operating income decreased in 2020 compared to
2019 primarily due to lower volume, partially offset by
benefits from productivity initiatives, including temporary
cost reduction actions and savings from restructuring
actions, net of transition costs.

Operating income decreased in 2019 compared to
2018 primarily due to higher restructuring charges and a
prior-year
reversal of acquisition-related contingent
consideration, as well as higher employee-related costs,
largely offset by benefits from productivity initiatives,
including savings from restructuring actions, net of
transition costs, and the net benefit of pricing and raw
material costs.

activities

$751.3

$ 746.5

$ 457.9

lower pension plan contributions,

In 2020, cash flow provided by operating activities
increased compared to 2019 primarily due to higher net
lower payroll
income,
and incentive
compensation payments, and lower
severance payments related to restructuring actions,
partially offset by higher income tax payments, net of
refunds, and changes in operational working capital
primarily related to the timing of vendor payments.

In 2019, cash flow provided by operating activities
increased compared to 2018 primarily due to lower
pension plan contributions, improved operational working
incentive compensation payments,
capital, and lower
partially offset by higher severance payments related to
restructuring actions.

Avery Dennison Corporation | 2020 Annual Report

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Investing Activities
(In millions)

Purchases of property, plant and

2020

2019

2018

equipment

$(201.4) $(219.4) $(226.7)

Purchases of software and other

deferred charges

(17.2)

(37.8)

(29.9)

Proceeds from sales of property,

plant and equipment

9.2

7.8

9.4

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

5.6

4.9

18.5

(350.4)

(6.5)

(3.8)

$(554.2) $(251.0) $(232.5)

Purchases of Property, Plant and Equipment

In 2020, 2019 and 2018, we invested in equipment
and expanded manufacturing facilities to support growth,
and productivity improvements primarily in the U.S. and
certain countries in Asia,
India, and
China, for our LGM reportable segment and in China, the
U.S., and Malaysia for our RBIS reportable segment.

including Thailand,

Purchases of Software and Other Deferred Charges

In 2020 and 2019, we invested in information
technology upgrades worldwide.
In 2019, we also
system
invested
implementations in North America. In 2018, we invested
in enterprise resource planning system implementations in
North America and Asia.

enterprise

planning

resource

Proceeds from Sales of Property, Plant and Equipment

In 2020, the majority of the proceeds from sales of
property, plant and equipment was related to the sale of a
property in Europe. In 2019, the majority of the proceeds
from sales of property, plant and equipment was related
to the sale of three properties in North America, Asia and
Europe. In 2018, the majority of the proceeds from sales
of property, plant and equipment was related to the sale
of two properties in Europe.

Proceeds from Insurance and Sales (Purchases) of
Investments, Net

In 2020 and 2019, we had lower proceeds from
insurance associated with our company-owned life
insurance policies, partially offset by lower net (purchases)
sales of investments compared to the prior year.

2020 Annual Report | Avery Dennison Corporation

Payments for Acquisitions, Net of Cash Acquired, and
Investments in Businesses

In 2020, we paid consideration, net of cash acquired,
of approximately $255 million to acquire Smartrac, which
we initially funded through commercial paper borrowings,
and approximately $88 million to acquire ACPO. We also
invested in certain strategic unconsolidated businesses in
2020, 2019 and 2018.

Refer to Note 2, “Acquisitions,” to the Consolidated

Financial Statements for more information.

Financing Activities
(In millions)

Net increase (decrease) in

borrowings (maturities of
three months or less)

Additional borrowings under
revolving credit facility

Repayments of revolving credit

facility

Additional long-term borrowings
Repayments of long-term debt

and finance leases

Dividends paid
Share repurchases
Net (tax withholding) proceeds

related to stock-based
compensation

Payments of contingent

consideration

Net cash used in financing

activities

2020

2019

2018

$(110.4) $

(5.3) $ (77.6)

500.0

(500.0)
493.7

(270.2)
(196.8)
(104.3)

–

–
–

–

–
493.3

(18.6)
(189.7)
(237.7)

(6.4)
(175.0)
(392.9)

(19.7)

(17.4)

(32.2)

–

(1.6)

(17.3)

$(207.7) $(470.3) $(208.1)

Borrowings and Repayment of Debt

During 2020, 2019, and 2018, our commercial paper
borrowings were used for dividend payments, share
repurchases, capital expenditures, and other general
corporate purposes. During 2020, commercial paper
borrowings were also used for the Smartrac acquisition,
with those borrowings subsequently repaid using a portion
of the net proceeds of $493.7 million from the $500 million
of senior notes we issued in March 2020. We used the
remaining proceeds from these notes to repay the
$250 million aggregate principal amount of senior notes
that matured in April 2020. We also repaid $15 million of
medium-term notes that matured in June 2020.

In the first quarter of 2020, in light of uncertainty as a
result of COVID-19 regarding the availability of commercial
paper, which we typically rely upon to fund our day-to-day
operational needs, and the relatively favorable terms under
our recently-extended $800 million Revolver, we borrowed
$500 million from the Revolver with a six-month duration.
We repaid this amount in June 2020.

In December 2018, we issued $500 million of senior
notes, due December 2028. These senior notes bear an
interest rate of 4.875% per year, payable semi-annually in
arrears. The net proceeds from this 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
to fund our $200 million contribution to the ADPP in
connection with its termination.

Refer to Note 2, “Acquisitions,” and Note 4, “Debt,” to
for more

Financial Statements

the Consolidated
information.

Dividends Paid

We paid dividends per share of $2.36, $2.26, and
$2.01 in 2020, 2019, and 2018, respectively. In October
2020, we increased our quarterly dividend to $.62 per
share, representing an increase of approximately 7% from
our previous dividend rate of $.58 per share. In April 2019,
we increased our quarterly dividend to $.58 per share,
representing an increase of approximately 12% from our
previous dividend rate of $.52 per share.

Share Repurchases

From time to time, our Board authorizes the
repurchase of shares of our outstanding common stock.
Repurchased shares may be reissued under our long-term
incentive plan or used for other corporate purposes. In
2020, 2019 and 2018, we repurchased approximately
.8 million, 2 million, and 4 million shares of our common
stock,
temporarily paused share
repurchase activity in March 2020 as a result of
COVID-19 and resumed repurchases late in the third
quarter of 2020.

respectively. We

In April 2019, our Board authorized the repurchase of
shares of our common stock with a fair market value of up
to $650 million, exclusive of any fees, commissions or
other expenses related to such purchases, in addition to
the amount outstanding under our previous Board
authorization. Board authorizations remain in effect until
shares in the amount authorized thereunder have been
repurchased. As of
January 2, 2021, shares of our
common stock in the aggregate amount of $540.4 million
remained authorized for repurchase under this Board
authorization.

Net (Tax Withholding) Proceeds Related to Stock-Based
Compensation

In 2020, proceeds from stock option exercises
stock-based
tax withholding for

decreased while

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

compensation also decreased compared to 2019 primarily
as a result of fewer vesting of equity awards. In 2019,
proceeds from stock option exercises increased while tax
withholding for stock-based compensation decreased
compared to 2018 as a result of equity awards vesting at
lower share prices.

Approximately .05 million, .3 million, and .03 million
stock options were exercised in 2020, 2019, and 2018,
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 $133 million to $1.34 billion at year-end
2020, which primarily reflected purchases of property,
plant and equipment, the acquisitions of Smartrac and
ACPO, and the impact of foreign currency translation,
partially offset by depreciation expense.

Other

Goodwill increased by approximately $206 million to
$1.14 billion at year-end 2020, which reflected acquired
goodwill associated with the Smartrac and ACPO
acquisitions and the impact of foreign currency translation.
from business
acquisitions, net, increased by approximately $98 million
to $224.9 million at year-end 2020, which reflected the
valuations of other intangibles from the acquisitions of
Smartrac and ACPO and the impact of foreign currency
translation, partially offset by amortization expense.

intangibles

resulting

Refer to Note 3, “Goodwill and Other Intangibles
the

Resulting
Consolidated Financial Statements for more information.

from Business Acquisitions,”

Shareholders’ Equity Accounts

The balance of our shareholders’ equity increased by
approximately $281 million to $1.48 billion at year-end
to Note 11, “Supplemental Equity and
2020. Refer
Comprehensive Income Information,” to the Consolidated
Financial Statements for more information.

Impact of Foreign Currency Translation
(In millions)

Change in net sales

2020

2019

$ (67) $(230)

2020,

operations

international

generated
approximately 76% of our net sales. Our future results are
subject to changes in political and economic conditions in
the regions in which we operate and the impact of
fluctuations in foreign currency exchange and interest
rates.

Avery Dennison Corporation | 2020 Annual Report

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

The

unfavorable

currency
impact
translation on net sales in 2020 compared to 2019 was
primarily related to sales in Brazil,
India and Mexico,
partially offset by euro-denominated sales.

foreign

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 utilized certain
to mitigate our
foreign-currency-denominated debt
foreign currency translation exposure from our net
investment
to Note 5,
in foreign operations. Refer
“Financial
Instruments,” to the Consolidated Financial
Statements for more information.

Analysis of Selected Financial Ratios

We utilize the financial ratios discussed below to
assess our financial condition and operating performance.
investors in
We believe this information assists our
understanding drivers of our cash flow other than net
income and capital expenditures.

Operational Working Capital Ratio

Operational working capital, as a percentage of
annualized current-quarter net sales,
is reconciled to
working capital below. Our objective is to minimize our
investment in operational working capital, as a percentage
of annualized current-quarter net sales, to maximize our
cash flow and return on investment. Operational working
capital, as a percentage of annualized current-quarter net
sales, in 2020 was higher compared to 2019.

2020 Annual Report | Avery Dennison Corporation

(In millions, except percentages)

2020

2019

(A) Working capital
Reconciling items:

Cash and cash equivalents
Other current assets
Short-term borrowings and current
portion of long-term debt and
finance leases

Current income taxes payable and
other current accrued liabilities

$ 490.2

86.8

(252.3)
(211.5)

(253.7)
(211.7)

64.7

440.2

810.4

747.5

(B) Operational working capital

$ 901.5

$ 809.1

$7,394.8

$7,091.6

Operational working capital, as a

percentage of annualized current-
quarter net sales (B) ÷ (C)

12.2%

11.4%

Accounts Receivable Ratio

The average number of days sales outstanding was
61 days in 2020 compared to 62 days in 2019, calculated
using the accounts receivable balance at year-end divided
by the average daily sales in the fourth quarter of 2020
and 2019, respectively. The decrease in average number
of days sales outstanding primarily reflected focused
collection results, partially offset by the impact of foreign
currency translation.

Inventory Ratio

Average inventory turnover was 7.3 in 2020
compared to 7.8 in 2019, calculated using the annualized
fourth-quarter cost of products sold in 2020 and 2019,
respectively, and divided by the inventory balance at
year-end. The decrease in average inventory turnover
primarily reflected the timing of inventory purchases.

Accounts Payable Ratio

The average number of days payable outstanding
was 73 days in 2020 compared to 75 days in 2019,
calculated using the accounts payable balance at year-end
divided by the annualized fourth-quarter cost of products
sold in 2020 and 2019, respectively. The decrease in
average number of days payable outstanding primarily
reflected the timing of vendor payments, partially offset by
the impact of foreign currency translation.

Capital Resources

Capital resources include cash flows from operations,
cash and cash equivalents and debt financing, including
access to commercial paper supported by our Revolver.
We use these resources to fund operational needs.

At year-end 2020, we had cash and cash equivalents
of $252.3 million held in accounts at third-party financial
institutions. Our cash balances are held in numerous
locations throughout the world. At year-end 2020, 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 foreign earnings and profits, a portion would be
subject to cash payments of withholding taxes imposed
by foreign tax authorities. Additional U.S. taxes may also
result from the impact of foreign currency movements
related to these earnings and profits. Refer to Note 14,
“Taxes Based on Income,” to the Consolidated Financial
Statements for more information.

In February 2020, we amended and restated the
Revolver, eliminating one of the financial covenants and
extending its maturity date to February 13, 2025. The
maturity date may be extended for a one-year period
under certain circumstances. The commitments under the
Revolver may be increased by up to $400 million, subject
to lender approvals and customary requirements. The
Revolver is used as a back-up facility for our commercial
paper program and can be used for other corporate
purposes.

The Revolver contains a financial covenant
that
requires us to maintain a maximum leverage ratio
(calculated as a ratio of consolidated debt to consolidated
EBITDA as defined in the agreement) of not more than
3.50 to 1.00; provided that, in the event of an acquisition
by us that exceeds $250 million, the maximum leverage
ratio increases to 4.00 to 1.00 for the fiscal quarter in
which the acquisition occurs and three consecutive fiscal
quarters immediately following that fiscal quarter. As of
January 2, 2021 and December 28, 2019, our ratio was
substantially below the maximum ratio allowed by the
Revolver.

In addition to the Revolver, we have significant short-
term lines of credit available in various countries of
approximately $390 million in the aggregate at January 2,
2021. These lines may be cancelled at any time by us or
the issuing banks. Short-term borrowings outstanding
under our
lines of credit were $22.2 million and
$37.4 million at January 2, 2021 and December 28, 2019,

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

respectively, with a weighted average interest rate of
3.6% and 6.4%, respectively.

Refer to Note 4, “Debt,” to the Consolidated Financial

Statements for more information.

We are exposed to financial market risk resulting
from changes in interest and foreign currency rates, and to
possible liquidity and credit risks of our counterparties.

Capital from Debt

The carrying value of our total debt increased by
approximately $177 million to $2.12 billion at year-end
2020 compared to $1.94 billion at year-end 2019,
primarily reflecting our issuance of senior notes in March
2020, partially offset by long- and medium-term debt
repayments in the second quarter of 2020 and a net
decrease in commercial paper borrowings.

Credit ratings are a significant factor in our ability to
raise short- and long-term financing. The credit ratings
assigned to us also impact the interest rates we pay and
our access to commercial paper, credit facilities, and other
borrowings. A downgrade of our short-term credit ratings
could impact our ability to access commercial paper
markets. If our access to commercial paper markets were
to become limited, as it did in the first quarter of 2020 as a
result of COVID-19, we believe that the Revolver and our
other credit facilities would be available to meet our short-
term funding requirements. 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. There has been no change to the
credit ratings assigned to us as a result of COVID-19. We
remain committed to maintaining an investment grade
rating.

Fair Value of Debt

The estimated fair value of our long-term debt is
primarily based on the credit spread above U.S. Treasury
securities or euro government bond securities, as
applicable, on notes with similar rates, credit ratings, and
remaining maturities. The fair value of short-term
borrowings, which includes commercial paper issuances
and short-term lines of credit, approximates carrying value
given the short duration of these obligations. The fair
value of our total debt was $2.34 billion at January 2,
2021 and $2.05 billion at December 28, 2019. Fair value
amounts were determined based primarily on Level 2
inputs, which are inputs other than quoted prices in active
markets that are either directly or indirectly observable.
Refer to Note 1, “Summary of Significant Accounting
Policies,” to the Consolidated Financial Statements for
more information.

Avery Dennison Corporation | 2020 Annual Report

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
Contractual Obligations at End of Year 2020

(In millions)

Short-term borrowings
Long-term debt
Interest on long-term debt
Finance leases
Operating leases

Payments Due by Period

Total

2021

2022

2023

2024

2025

Thereafter

59.1
2,042.8
458.6
30.3
183.6

$ 59.1
–
62.0
14.1
47.9

–
–
62.0
5.5
34.7

–
250.0
56.0
4.8
25.4

–
–
53.6
4.5
19.5

–
644.9
45.9
1.3
15.3

–
1,147.9
179.1
.1
40.8

Total contractual obligations

$2,774.4

$183.1

$102.2

$336.2

$77.6

$707.4

$ 1,367.9

The table above does not include:

(cid:129) Purchase obligations or open purchase orders at
year-end – It is impracticable for us to obtain or
provide a reasonable estimate of this information
due to the decentralized nature of our purchasing
systems.
In addition, purchase orders are
generally entered into at fair value and cancelable
without penalty.

(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 Postretirement Benefits,” to
the Consolidated Financial Statements
for
information regarding our expected contributions
to these plans and plan terminations and
settlements.

(cid:129) Pension and postretirement benefit payments –
We have unfunded benefit obligations related to
defined benefit plans. Refer to Note 6, “Pension
and Other Postretirement Benefits,”
to the
Consolidated Financial Statements for more
information,
including our expected benefit
payments over the next 10 years.

(cid:129) Deferred compensation plan benefit payments –
It is impracticable for us to obtain a reasonable
estimate for 2020 and beyond due to the
volatility of payment amounts and certain events
that could trigger immediate payment of benefits
to participants.
In addition, participant account
balances are marked-to-market monthly and

2020 Annual Report | Avery Dennison Corporation

benefit payments are adjusted annually. Refer to
“Pension and Other Postretirement
Note 6,
Benefits,”
Financial
Consolidated
Statements for more information.

the

(cid:129) Cash-based

awards

employees

the end of

under
incentive compensation plans – The amounts to
be paid to employees under these awards are
based on our stock price and, as applicable,
achievement of certain performance objectives as
respective performance
of
reasonably
periods. Therefore, we
estimate the amounts to be paid on the
to Note 12,
respective vesting dates. Refer
“Long-term Incentive Compensation,”
to the
Consolidated Financial Statements for more
information.

cannot

their

(cid:129) Unfunded termination indemnity benefits to
certain employees outside of the U.S. – These
benefits are subject to applicable agreements,
laws and regulations. Refer to Note 6,
local
“Pension and Other Postretirement Benefits,” to
the Consolidated Financial Statements for more
information.

(cid:129) Unrecognized tax benefits of $72 million – The
resolution of the balance, including the timing of
payments, is contingent upon various unknown
factors and cannot be reasonably estimated.
Refer to Note 14, “Taxes Based on Income,” to
the Consolidated Financial Statements for more
information.

(cid:129) Payments related to cost reduction actions –
Payments for severance and other contract
terminations
applicable
to
laws and practices. Refer to
agreements,
Note 13,
to the
Consolidated Financial Statements for more
information.

“Cost Reduction Actions,”

subject

local

are

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

CRITICAL ACCOUNTING ESTIMATES

of goodwill for the excess up to the amount of goodwill of
that reporting unit.

The preparation of financial statements in conformity
with GAAP requires management to make estimates and
the
assumptions for
and
financial
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.

the reporting period and as of
These

statement

estimates

date.

Critical accounting estimates are those that are
important to our financial condition and results, and which
require us to make difficult, subjective and/or complex
judgments. Critical accounting estimates cover accounting
matters that are inherently uncertain because their future
resolution is unknown. We believe our critical accounting
estimates include accounting for goodwill, pension and
postretirement benefits, taxes based on income, and long-
term incentive compensation.

Goodwill

Business combinations are accounted for using the
acquisition method, with the excess of the acquisition cost
over the fair value of net tangible assets and identified
intangible assets acquired considered goodwill. As a
result, we disclose goodwill separately from other
intangible assets. Our reporting units are composed of
either a discrete business or an aggregation of businesses
with similar economic characteristics. We perform an
annual
impairment test of goodwill during the fourth
quarter. In performing the impairment tests, we have the
option to first assess qualitative factors to determine
is necessary to perform a quantitative
whether
assessment for goodwill
If the qualitative
assessment indicates that it is more-likely-than-not that
the fair value of a reporting unit is less than its carrying
value, we perform a quantitative
assessment. A
quantitative assessment primarily consists of a present
value (discounted cash flow) method to determine the fair
value of reporting units with goodwill.

impairment.

Certain factors may cause us to perform an
including
impairment test prior to the fourth quarter,
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 unit’s fair value, we recognize an impairment

for

capital

In consultation with outside specialists, we estimate
the fair value of our reporting units using various valuation
techniques, with the primary technique being a discounted
cash flow analysis. A discounted cash flow analysis
requires us to make various assumptions about our
reporting units, including their respective forecasted sales,
operating margins and growth rates, as well as discount
rates. Assumptions about discount rates are based on a
comparable
weighted average cost of
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
and
assumptions that we believe are reasonable. However,
actual future results may materially differ from these
estimates and projections. The valuation methodology we
use to estimate the fair value of reporting units requires
inputs and assumptions that
reflect current market
conditions, as well as the impact of planned business and
operational strategies that require management judgment.
The estimated fair value could increase or decrease
depending on changes in the inputs and assumptions.

information

projected

financial

In our annual

impairment analysis in the fourth
quarter of 2020, the goodwill of one reporting unit in our
LGM reportable segment was tested utilizing a qualitative
assessment. Based on this assessment, we determined
that the fair value of this reporting unit was more-likely-
than-not greater than its carrying value. Therefore, the
goodwill of this reporting unit was not impaired.

Additionally, in our annual 2020 impairment analysis,
the goodwill of one reporting unit in our Label and Graphic
Materials reportable segment and all reporting units in our
Industrial and Healthcare Materials and Retail Branding
and Information Solutions reportable segments were
This
tested
quantitative
assessment
these
reporting units
respective carrying
amounts, including goodwill, by more than 100% and the
goodwill of these reporting units was not impaired.

assessment.
the fair values of

a
indicated that

exceeded their

utilizing

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
In the event that we determine that
outside actuaries.

Avery Dennison Corporation | 2020 Annual Report

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

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. The assumed discount rates
for our international pension plans reflect market rates for
high quality corporate bonds currently available. Our
discount rates are determined by evaluating yield curves
consisting of large populations of high quality corporate
bonds. The projected pension benefit payment streams
are then matched with the bond portfolios to determine a
rate that reflects the liability duration unique to our plans.
As of January 2, 2021, a .25% increase in the discount
rates associated with our international plans would have
decreased our year-end projected benefit obligation by
$50 million and increased expected periodic benefit cost
the coming year by approximately $2 million.
for
Conversely, a .25% decrease in the discount
rates
associated with our
international plans would have
increased our year-end projected benefit obligation by
approximately $50 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 apply multiple
discount rates from a yield curve composed of the rates of
return on several hundred high-quality,
fixed income
corporate bonds available at the measurement date. We
believe
precise
measurement of service and interest cost by aligning the
timing of
to the
liability
the plans’
corresponding rates on the yield curve.

cash flows

approach

a more

provides

this

Long-term Return on Plan Assets

the

We determine

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,
including interest rates, are
current market conditions,

2020 Annual Report | Avery Dennison Corporation

evaluated and market data is reviewed for reasonableness
and appropriateness. An increase or decrease of .25% on
the long-term return on assets associated with our
international plans would have decreased or increased our
periodic benefit cost for the coming year by approximately
$2 million.

Taxes Based on Income

We are subject to income tax in the U.S. and multiple
foreign jurisdictions, whereby judgment is required in
evaluating and estimating our worldwide provision,
accruals for taxes, deferred taxes and for evaluating our
tax positions. Our provision for (benefit from) income
taxes is determined using the asset and liability approach
in accordance with GAAP. Deferred tax assets represent
amounts available to reduce income taxes payable in
future years. These assets arise because of temporary
differences between the financial reporting and tax bases
of assets and liabilities, as well as from net operating
losses and tax credit carryforwards. These amounts are
adjusted, as appropriate, to reflect changes in tax rates
expected to be in effect when the temporary differences
reverse. We evaluate the realizability of these future tax
deductions and credits by assessing the period over which
recoverability is allowed by law and the adequacy of
future expected taxable income from all sources, including
reversal of
forecasted
taxable temporary differences,
operating earnings and available tax planning strategies.
Our assessment of these sources of income relies heavily
on estimates. Our forecasted earnings by jurisdiction are
determined by how we operate our business and any
changes to our operations may affect our effective tax
rate. For example, our future income tax rate could be
adversely affected by earnings being lower
than
anticipated in jurisdictions in which we have significant
deferred tax assets that are dependent on such earnings
to be realized. We use historical experience along with
operating forecasts to evaluate expected future taxable
income. To the extent we do not consider it more-likely-
than-not that a deferred tax asset will be recovered, a
valuation allowance is established in the period we make
that determination. Tax planning strategies are defined as
“actions that: are prudent and feasible; an entity 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.

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.

relevant

tax expense and evaluating our

Tax laws and regulations are complex and subject to
different interpretations by taxpayers and governmental
taxing authorities. We review our tax positions quarterly
and adjust the balances as new information becomes
available. Significant judgment is required in determining
our
tax positions,
including evaluating uncertainties. Our estimate of the
potential outcome of any uncertain tax issue is subject to
facts and circumstances
our assessment of
existing at
taking into
consideration existing laws, regulations and practices of
the governmental authorities exercising jurisdiction over
our operations. We recognize and measure our uncertain
tax positions following the more-likely-than-not threshold
for recognition and measurement for tax positions we take
or expect to take on a tax return. For example, we
continue to monitor developments regarding the European
Commission state aid investigations, for jurisdictions in
which we have significant operations, such as the
Netherlands and Luxembourg.

the balance

sheet date,

Refer to Note 14, “Taxes Based on Income,” to the

Consolidated Financial Statements for more information.

Long-Term Incentive Compensation
Valuation of Stock-Based Awards

base

compensation

We base our stock-based compensation expense on
the fair value of awards, adjusted for estimated forfeitures,
amortized on a straight-line basis over
the requisite
service period for stock options and restricted stock units
for
(“RSUs”). We
performance units (“PUs”) on the fair value of awards,
adjusted for estimated forfeitures, and amortized on a
straight-line basis as these awards cliff-vest at the end of
the requisite service period. We base compensation
expense related to market-leveraged stock units (“MSUs”)
on the fair value of awards, adjusted for estimated
forfeitures, and amortized on a graded-vesting basis over
their respective performance periods.

expense

Compensation expense for awards with a market
condition as a performance objective, which includes PUs
and MSUs, is not adjusted if the condition is not met, as
long as the requisite service period is met.

We estimated the fair value of stock options 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. No
stock options were granted in fiscal years 2020, 2019 or
2018.

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

We determine the fair value of RSUs and the
component of PUs that is subject to the achievement of a
performance objective based on a financial performance
condition based on the fair market value of our common
stock as of the date of the grant, adjusted for foregone
dividends. Over the performance period of the PUs, the
estimated number of shares of our common stock issuable
upon vesting is adjusted upward or downward from the
target shares at the time of grant based on the probability
of the performance objectives established for the award
being achieved.

We determine the fair value of stock-based awards
that are subject to achievement of performance objectives
based on a market condition, which includes MSUs and
the other component of PUs, using the Monte-Carlo
simulation model, which utilizes multiple input variables,
including expected stock price volatility and other
assumptions appropriate for determining fair value, to
estimate
target
satisfying the
performance objectives established for the award.

the probability

Forfeiture Rate

Changes in estimated forfeiture rates are recorded as
cumulative adjustments in the period estimates are
revised.

these

Certain of

assumptions

are based on
management’s estimates,
in consultation with outside
specialists. Significant changes in assumptions for future
awards and actual forfeiture rates could materially impact
stock-based compensation expense and our results of
operations.

Valuation of Cash-Based Awards

Cash-based awards consist of long-term incentive
units (“LTI Units”) granted to eligible employees. LTI Units
are classified as liability awards and remeasured at each
quarter-end over the applicable vesting or performance
period. In addition to LTI Units with terms and conditions
that mirror
those of RSUs, we also grant certain
employees LTI Units with terms and conditions that mirror
those of PUs and MSUs.

RECENT ACCOUNTING REQUIREMENTS

Refer to Note 1, “Summary of Significant Accounting
Policies,” to the Consolidated Financial Statements for this
information.

Avery Dennison Corporation | 2020 Annual Report

Foreign Exchange Value-At-Risk

We use a Value-At-Risk (“VAR”) model to determine
the estimated maximum potential one-day loss in earnings
associated with our
foreign exchange positions and
contracts. This approach assumes that market rates or
prices for foreign exchange positions and contracts are
normally distributed. VAR model estimates are made
assuming normal market conditions. The model includes
foreign
Forecasted
transactions, firm commitments, and accounts receivable
and accounts payable denominated in foreign currencies,
which certain of these instruments are intended to hedge,
are excluded from the model.

contracts.

derivative

exchange

The VAR model is a risk analysis tool and does not
represent actual losses in fair value that we could incur,
nor does it consider the potential effect of favorable
changes in market factors.

In both 2020 and 2019, the VAR was estimated
using a variance-covariance methodology. The currency
correlation was based on one-year historical data
obtained from one of our domestic banks. A 95%
confidence level was used for a one-day time horizon.

The estimated maximum potential one-day loss in
earnings for our foreign exchange positions and contracts
was not significant at year-end 2020 or 2019.

Interest Rate Sensitivity

respectively,

In 2020 and 2019, an assumed 18 basis point and 30
rates
basis point,
affecting our variable-rate borrowings (10% of our
weighted average interest rate on floating rate debt)
would not have had a significant impact on interest
expense.

increase in interest

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

MARKET-SENSITIVE INSTRUMENTS AND RISK
MANAGEMENT

Risk Management

We are exposed to the impact of changes in foreign
currency exchange rates and interest rates. We generally
do not purchase or hold foreign currency or interest rate or
commodity contracts for trading purposes.

Our objective in managing our exposure to foreign
currency changes is to reduce the risk to our earnings and
cash flow associated with foreign exchange rate changes.
As a result, we enter into foreign exchange forward,
option and swap contracts to reduce risks associated with
the value of our existing foreign currency assets, liabilities,
firm commitments and anticipated foreign revenues and
costs, when available and appropriate. The gains and
losses on these contracts are intended to offset changes
in the related exposures. We do not hedge our foreign
currency translation exposure in a manner that would
entirely eliminate the effects of changes in foreign
exchange rates on our net income. We also utilize certain
foreign-currency-denominated debt
to mitigate our
foreign currency translation exposure from our net
investment in foreign operations.

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
objective, we may periodically use interest rate contracts
to manage our exposure to interest rate changes.

Additionally, we enter into certain natural gas futures
contracts to reduce the risks associated with natural gas
we anticipate using in our manufacturing operations.
financial
These amounts are not material
statements.

to our

In the normal course of operations, we also face other
risks that are either non-financial or non-quantifiable.
These risks principally include changes in economic or
political conditions, other risks associated with foreign
operations, commodity price risk and litigation and
compliance risk, which are not reflected in the analyses
described below.

2020 Annual Report | Avery Dennison Corporation

Consolidated Balance Sheets

(Dollars in millions, except per share amount)

Assets
Current assets:

January 2,
2021

December 28,
2019

Cash and cash equivalents
Trade accounts receivable, less allowances of $44.6 and $27.1 at year-end 2020 and 2019,

$ 252.3

$ 253.7

respectively
Inventories, net
Other current assets

Total current assets

Property, plant and equipment, net
Goodwill
Other intangibles resulting from business acquisitions, net
Deferred tax assets
Other assets

Liabilities and Shareholders’ Equity
Current liabilities:

Short-term borrowings and current portion of long-term debt and finance leases
Accounts payable
Accrued payroll and employee benefits
Accrued trade rebates
Income taxes payable
Other current liabilities

Total current liabilities

Long-term debt and finance leases
Long-term retirement benefits and other liabilities
Deferred tax liabilities and income taxes payable
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 2020 and 2019;

issued – 124,126,624 shares at year-end 2020 and 2019; outstanding – 83,151,174 and
83,366,840 shares at year-end 2020 and 2019, respectively

Capital in excess of par value
Retained earnings
Treasury stock at cost, 40,975,450 and 40,759,784 shares at year-end 2020 and 2019, respectively
Accumulated other comprehensive loss

Total shareholders’ equity

See Notes to Consolidated Financial Statements

1,235.2
717.2
211.5

2,416.2
1,343.7
1,136.4
224.9
197.7
765.0

1,212.2
663.0
211.7

2,340.6
1,210.7
930.8
126.5
225.4
654.8

$ 6,083.9

$ 5,488.8

64.7
1,050.9
239.0
140.2
86.3
344.9

1,926.0
2,052.1
503.6
117.3

$ 440.2
1,066.1
220.4
132.4
71.4
323.3

2,253.8
1,499.3
421.4
110.3

124.1
862.1
3,349.3
(2,501.0)
(349.6)

1,484.9

124.1
874.0
2,979.1
(2,425.1)
(348.1)

1,204.0

$ 6,083.9

$ 5,488.8

Avery Dennison Corporation | 2020 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 (income), net
Interest expense
Other non-operating expense (income), net

Income before taxes
Provision for (benefit from) income taxes
Equity method investment (losses) gains

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

2020

2019

2018

$6,971.5
5,048.2

$7,070.1
5,166.0

$7,159.0
5,243.5

1,923.3
1,060.5
53.6
70.0
1.9

737.3
177.7
(3.7)

1,904.1
1,080.4
53.2
75.8
445.2

249.5
(56.7)
(2.6)

1,915.5
1,127.5
69.9
58.5
104.8

554.8
85.4
(2.0)

$ 555.9

$ 303.6

$ 467.4

6.67

6.61

3.61

3.57

5.35

5.28

83.4
84.1

84.0
85.0

87.3
88.6

2020 Annual Report | Avery Dennison Corporation

Consolidated Statements of Comprehensive Income

(In millions)

Net income
Other comprehensive income (loss), net of tax:

Foreign currency translation:
Translation gain (loss)

Pension and other postretirement benefits:

Net gain (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 income (loss), net of tax

Total comprehensive income, net of tax

See Notes to Consolidated Financial Statements

2020

2019

2018

$ 555.9

$ 303.6

$ 467.4

(3.0)

2.3

(91.2)

6.2
2.9

(7.5)
(.1)

(1.5)

66.4
266.1

.5
(1.4)

333.9

(4.1)
93.8

1.1
(1.1)

(1.5)

$ 554.4

$ 637.5

$ 465.9

Avery Dennison Corporation | 2020 Annual Report

Consolidated Statements of Shareholders’ Equity

(Dollars in millions, except per share amounts)

Balance as of December 30, 2017
Tax accounting for intra-entity asset transfers(1)

Balance as of December 31, 2017
Net income
Other comprehensive income (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 of $2.01 per share

Balance as of December 29, 2018
Net income
Other comprehensive income (loss), net of tax
Repurchase of 2,222,937 shares for treasury
Issuance of 665,380 shares under stock-based

compensation plans

Contribution of 200,742 shares to 401(k) Plan
Dividends of $2.26 per share

Balance as of December 28, 2019
Net income
Other comprehensive income (loss), net of tax
Repurchase of 792,997 shares for treasury
Issuance of 389,102 shares under stock-based

compensation plans

Contribution of 188,229 shares to 401(k) Plan
Dividends of $2.36 per share

Common
stock, $1
par value

Capital in
excess of
par value

Retained
earnings

Treasury
stock

$2,596.7
(13.8)

$(1,856.7)
–

$2,582.9
467.4
–
–

$(1,856.7)
–
–
(392.9)

$862.6
–

$862.6
–
–
–

9.4

–
–

(24.1)

13.7
(175.0)

17.6

8.1
–

$124.1
–

$124.1
–
–
–

–

–
–

$124.1
–
–
–

$872.0
–
–
–

$2,864.9
303.6
–
–

$(2,223.9)
–
–
(237.7)

–
–
–

2.0
–
–

(13.6)
13.9
(189.7)

28.0
8.5
–

$124.1
–
–
–

$874.0
–
–
–

$2,979.1
555.9
–
–

$(2,425.1)
–
–
(104.3)

–
–
–

(11.9)
–
–

(3.4)
14.5
(196.8)

20.2
8.2
–

Accumulated
other
comprehensive
loss

Total

$(680.5) $1,046.2
(13.8)

–

$(680.5) $1,032.4
467.4
(1.5)
(392.9)

–
(1.5)
–

–

–
–

2.9

21.8
(175.0)

$(682.0) $ 955.1
303.6
333.9
(237.7)

–
333.9
–

–
–
–

16.4
22.4
(189.7)

$(348.1) $1,204.0
555.9
(1.5)
(104.3)

–
(1.5)
–

–
–
–

4.9
22.7
(196.8)

Balance as of January 2, 2021

$124.1

$862.1

$3,349.3

$(2,501.0)

$(349.6) $1,484.9

(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.

See Notes to Consolidated Financial Statements

2020 Annual Report | Avery Dennison Corporation

Consolidated Statements of Cash Flows

(In millions)

Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:

2020

2019

2018

$ 555.9

$ 303.6

$ 467.4

Depreciation
Amortization
Provision for credit losses and sales returns
Stock-based compensation
Pension plan settlements and related charges
Deferred taxes and other non-cash taxes
Other non-cash expense and loss (income and gain), net

Changes in assets and liabilities and other adjustments:

Trade accounts receivable
Inventories
Accounts payable
Taxes on income
Other assets
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 increase (decrease) in borrowings (maturities of three months or less)
Additional borrowings under revolving credit facility
Repayments of revolving credit facility
Additional long-term borrowings
Repayments of long-term debt and finance 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 (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

See Notes to Consolidated Financial Statements

154.2
51.1
64.0
24.0
.5
9.3
44.9

14.7
(6.0)
(68.2)
(35.2)
18.2
(76.1)
751.3

(201.4)
(17.2)
9.2
5.6
(350.4)

(554.2)

(110.4)
500.0
(500.0)
493.7
(270.2)
(196.8)
(104.3)
(19.7)
–

(207.7)

9.2

(1.4)
253.7

140.3
38.7
58.7
34.5
444.1
(216.9)
28.3

(42.2)
(18.1)
46.4
5.4
38.4
(114.7)
746.5

(219.4)
(37.8)
7.8
4.9
(6.5)

(251.0)

(5.3)
–
–
–
(18.6)
(189.7)
(237.7)
(17.4)
(1.6)

(470.3)

(3.5)

21.7
232.0

141.5
39.5
45.6
34.3
93.7
(32.7)
60.4

(62.5)
(70.5)
43.6
(35.5)
(11.6)
(255.3)
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

$ 252.3

$ 253.7

$ 232.0

Avery Dennison Corporation | 2020 Annual Report

Notes to Consolidated Financial Statements

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING

Use of Estimates

POLICIES

Nature of Operations

Our businesses produce 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 converted products and items not
involving
as
fasteners,
radio-frequency identification
(“RFID”) inlays and tags, and imprinting equipment and
related solutions, which serve the apparel and other end
markets.

pressure-sensitive
tickets,

components,

tags,

such

The coronavirus/COVID-19 pandemic (collectively
referred to herein as “COVID-19”) negatively impacted our
financial position and results of operations in fiscal year
2020, most significantly in our Retail Branding and
Information Solutions
and
(“RBIS”)
Healthcare Materials (“IHM”) reportable segments.

and Industrial

Principles of Consolidation

Our Consolidated Financial Statements include the
accounts of majority-owned and controlled subsidiaries.
Intercompany accounts,
transactions, and profits are
eliminated in consolidation. We apply the equity method
of accounting for
investments in which we have
significant influence but not a controlling interest.

Fiscal Year

Accounting Guidance Updates
Credit Losses

that

credit

requires

In the first quarter of 2020, using the modified
retrospective approach, we adopted amended accounting
guidance
losses on financial
instruments, including trade receivables, to be measured
based on the expected credit loss model instead of the
incurred loss model. The expected credit
loss model
requires us to consider forward-looking information to
estimate our allowance for credit losses. Our adoption of
this guidance did not have a material
impact on our
financial position, results of operations or cash flows.

2020 Annual Report | Avery Dennison Corporation

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 our 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
from these
estimates.

results could differ

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

allowance

We record trade accounts receivable at the invoiced
losses
reserve
for
amount. Our
credit
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) The financial condition of customers;
(cid:129) The aging of receivable balances;
(cid:129) Our historical collection experience; and
(cid:129) Current and expected future macroeconomic and

market conditions.

respectively. As of

No single customer represented 10% or more of our
net sales in, or trade accounts receivable at, year-end
2020 or 2019. However, during 2020, 2019, and 2018,
our ten largest customers by net sales in the aggregate
represented approximately 17%, 16%, and 15% of our
net sales,
January 2, 2021 and
December 28, 2019, our ten largest customers by trade
accounts
represented
trade accounts
approximately 13% and 12% of our
receivable,
customers were
respectively.
concentrated primarily in our Label and Graphic Materials
(“LGM”) reportable segment. We generally do not require
our customers to provide collateral.

aggregate

receivable

in the

These

Inventories

We state inventories 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

Notes to Consolidated Financial Statements

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
length of time the product has been included in inventory.

stage.
In addition, we capitalize implementation costs
incurred under a hosting 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.

Property, Plant and Equipment

Impairment of Long-lived Assets

We generally compute depreciation using the
straight-line method over the estimated useful lives of the
ranging from ten to 45 years for
respective assets,
buildings and improvements and three to 15 years for
machinery and equipment. Leasehold improvements are
depreciated over the shorter of the useful life of the asset
the associated leases. We expense
or
maintenance and repair costs as incurred; we capitalize
renewals and improvements. 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.

the term of

Leases

transportation, and equipment

Our leases primarily relate to office and warehouse
for
space, machinery,
information technology. For lease accounting purposes,
we do not separate lease and nonlease components, nor
do we record operating or finance lease assets and
liabilities for short-term leases. We determine if an
arrangement is a lease or contains a lease at inception.
We have options to renew or terminate some of our
leases. We evaluate renewal and termination options
based
lease
commencement date and over the lease term to determine
if we are reasonably certain to exercise these options. As
most of our leases do not provide an implicit rate, we use
our incremental borrowing rate based on the information
available at the lease commencement date to determine
lease payments. We recognize
the present value of
expense for operating leases on a straight-line basis over
the lease term, with variable lease payments recognized in
the periods in which they are incurred.

considerations

available

the

Software

We capitalize 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. We expense software
costs,
including internal and external training costs and
maintenance costs, incurred during the preliminary project
stage and the post-implementation and/or operation

We record impairment charges when the carrying
amounts of long-lived assets are determined not to be
recoverable. We measure recoverability by comparing the
undiscounted cash flows expected from the applicable
asset or asset group’s use and eventual disposition to its
carrying value. We calculate the amount of impairment
loss as the excess of the carrying value over the fair value.
Historically,
and
management strategy have caused us to reassess the
carrying amount of our long-lived assets.

in market

conditions

changes

Goodwill and Other Intangibles Resulting from Business
Acquisitions

We account for business combinations 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, patented and other developed
technology, and trade names and trademarks.

We perform an annual

impairment test of goodwill
during the fourth quarter. In performing the impairment
tests, we have the option to first assess qualitative factors
is necessary to perform a
to determine whether
quantitative assessment for goodwill
impairment. If the
qualitative assessment indicates that it is more-likely-
than-not that the fair value of a reporting unit is less than
its carrying value, we perform a quantitative assessment.
A quantitative assessment primarily consists of a present
value (discounted cash flow) method to determine the fair
value of reporting units with goodwill.

to the fourth quarter,

Certain factors may cause us to perform an impairment
test prior
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 unit’s fair value, we recognize an impairment
of goodwill for the excess up to the amount of goodwill of
that reporting unit.

Avery Dennison Corporation | 2020 Annual Report

Notes to Consolidated Financial Statements

for

capital

In consultation with outside specialists, we estimate
the fair value of our reporting units using various valuation
techniques, with the primary technique being a discounted
cash flow analysis. A discounted cash flow analysis
requires us to make various assumptions about our
reporting units, including their respective forecasted sales,
operating margins and growth rates, as well as discount
rates. Assumptions about discount rates are based on a
weighted average cost of
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
and
estimates
assumptions that we believe are reasonable. However,
actual future results may materially differ from these
estimates and projections. The valuation methodology we
use to estimate the fair value of reporting units requires
reflect current market
inputs and assumptions that
conditions, as well as the impact of planned business and
operational strategies that require management judgment.
The estimated fair value could increase or decrease
depending on changes in the inputs and assumptions.

information

projected

financial

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 our 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, patented and other developed
trade names and trademarks, and other
technology,
intangibles, on a straight-line basis over the estimated
useful life of the assets.
See Note 3,

“Goodwill and Other
from Business Acquisitions,”

Intangibles
for more

Resulting
information.

Foreign Currency

asset

translate

and liability

accounts of
international operations into U.S. dollars at current rates.
Revenues and expenses are translated at the weighted
average currency rate for the fiscal year. We record gains
and losses
resulting from hedging the value of
investments in certain international operations and from

2020 Annual Report | Avery Dennison Corporation

the translation of balance sheet accounts directly as a
component of other comprehensive income.

Financial Instruments

We enter into foreign exchange derivative contracts
to reduce our
risk from exchange rate fluctuations
loans and firm
associated with receivables, payables,
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 is 36 months for
forecasted foreign exchange and commodity transactions
and 10 years for cross-currency swap transactions.

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 any hedge and on
an ongoing basis, whether our hedges are highly effective.
If we determine that a hedge is not highly effective, we
prospectively discontinue hedge accounting. For cash flow
hedges, we record gains and losses as components of
other comprehensive income and reclassify them into
earnings in the same period during which the hedged
the
transaction affects earnings.
anticipated transaction is no longer likely to occur, we
recognize the change in fair value of the instrument in
current period earnings. We recognize changes in fair
value hedges in current period earnings. We also
recognize changes in the fair value of underlying hedged
items (such as recognized assets or liabilities) in current
period earnings and offset the changes in the fair value of
the derivative.

In the event

that

In the Consolidated Statements of Cash Flows,
hedges are classified in the same category as the item
hedged, primarily in operating activities.

also

utilized

foreign-currency-
denominated debt
foreign currency
to mitigate our
translation exposure from our net investment in foreign
operations.

certain

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
as
and
unobservable inputs in which little or no market data
exists, which require us to develop our own assumptions
to determine the best estimate of fair value.

observable;

defined

Level

Revenue Recognition

We recognize sales 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 for the product or service. We consider a number
factors in determining when we have transferred
of
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.

Our payment terms with our customers are generally
consistent with those used in our industries and the
regions in which we operate.
accept

limited
circumstances. We record an estimate for return 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. We
update our estimates each reporting period.

returns

certain

sales

Notes to Consolidated Financial Statements

Sales

and other

rebates, discounts,

customer
concessions represent variable consideration and are
common in the industries and regions in which we
operate, which we account for as a reduction to sales
based on estimates at the time at which products are sold.
We base these estimates 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, as necessary.

We exclude sales tax, value-added tax, and other
taxes we collect from customers from sales. We account
for shipping and handling activities after control of a
product is transferred to a customer 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. We record these costs in “Marketing, general
and administrative
the Consolidated
Statements of Income.

expense”

Research and Development

Research and development costs are related to
research, design, and testing of new products and
applications, which we expense as incurred.

Long-Term Incentive Compensation

No long-term incentive compensation expense was

capitalized in 2020, 2019, or 2018.

Valuation of Stock-Based Awards

base

compensation

expense

We estimated the fair value of stock options as of the
date of grant using the Black-Scholes option-pricing

Avery Dennison Corporation | 2020 Annual Report

Notes to Consolidated Financial Statements

model. This model requires input assumptions for our
expected dividend yield, expected stock price volatility,
risk-free interest rate, and the expected option term.

We determine the fair value of RSUs and the
component of PUs that is subject to the achievement of a
performance objective based on a financial performance
condition based on the fair market value of our common
stock as of the date of grant, adjusted for foregone
dividends. Over the performance period of the PUs, the
estimated number of shares of our common stock issuable
upon vesting is adjusted upward or downward from the
target shares at the time of grant based on the probability
of the performance objectives established for the award
being achieved.

We determine the fair value of stock-based awards
that are subject to achievement of performance objectives
based on a market condition, which includes MSUs and
the other component of PUs, using the Monte-Carlo
simulation method, which utilizes multiple input variables,
including expected stock price volatility and other
assumptions appropriate for determining fair value, to
estimate
target
satisfying the
performance objectives established for the award.

the probability

these

Certain of

assumptions

are based on
in consultation with outside
management’s estimates,
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. We
classify LTI Units are as liability awards and remeasure
them 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.

Forfeitures

We estimate expected forfeitures in determining the
compensation cost to be recognized each period, rather
than accounting for forfeitures as they occur. We record
changes in estimated forfeiture rates as cumulative
adjustments in the period estimates are revised.

See Note 12, “Long-term Incentive Compensation,”

for more information.

Taxes Based on Income

We are subject to income tax in the U.S. and multiple
foreign jurisdictions, whereby judgment is required in

2020 Annual Report | Avery Dennison Corporation

income taxes

evaluating and estimating our worldwide provision,
accruals for taxes, deferred taxes and for evaluating our
is
tax positions. Our provision for
determined using the asset and liability approach in
accordance with GAAP. Under this approach, deferred
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
realizability exists. We
recognize and measure our uncertain tax positions
for
following
recognition and measurement for tax positions we take or
expect to take on a tax return.

the more-likely-than-not

regarding their

threshold

See Note 14, “Taxes Based on Income,” for more

information.

NOTE 2. ACQUISITIONS

Subsequent to our fiscal year-end 2020, in February
to acquire JDC
2021, we announced our agreement
Solutions,
Inc., a Tennessee-based manufacturer of
pressure-sensitive specialty tapes, for a purchase price of
approximately $24 million,
customary
adjustments. We believe this acquisition expands the
product portfolio in our IHM reportable segment. We
expect to complete this acquisition in the first quarter of
2021.

subject

On December 31, 2020, we

completed our
(“ACPO”), an Ohio-based
acquisition of ACPO, Ltd.
manufacturer of self-wound (linerless) pressure-sensitive
overlaminate products, for consideration of approximately
$88 million, subject to customary adjustments. We believe
this acquisition expands our product portfolio in the North
American business of our LGM reportable segment.
Consistent with the time allowed to complete our
assessment, our valuation of certain acquired assets and
liabilities,
including tangible and intangible assets and
environmental liabilities, is preliminary.

Transponder

(RFID Inlay)

These acquisitions were not material, individually or in

the aggregate, to our Consolidated Financial Statements.

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 2020 indicated that no impairment

occurred during 2020. The assumptions used in our assessment of these assets were primarily based on Level 3 inputs.

Changes in the net carrying amount of goodwill for 2020 and 2019 by reportable segment were as follows:

(In millions)

Goodwill as of December 29, 2018
Translation adjustments

Goodwill as of December 28, 2019
Acquisitions(1)
Translation adjustments

Goodwill as of January 2, 2021

Label and
Graphic
Materials

Retail Branding
and Information
Solutions

Industrial and
Healthcare
Materials

$415.5
(7.7)

407.8
45.8
27.3

$480.9

$349.7
(.4)

349.3
112.7
9.8

$471.8

$176.6
(2.9)

173.7
–
10.0

$183.7

Total

$941.8
(11.0)

930.8
158.5
47.1

$1,136.4

(1) Goodwill acquired in 2020 related to the acquisitions of Smartrac, which is included in our RBIS reportable segment, and ACPO, which is included in our LGM reportable segment.
We expect the recognized goodwill related to the Smartrac acquisition not to be deductible for income tax purposes and the recognized goodwill related to the ACPO acquisition to
be deductible for income tax purposes.

The carrying amounts of goodwill at January 2, 2021 and December 28, 2019 were net of accumulated impairment

losses of $820 million recognized in fiscal year 2009 by our 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 2020. The carrying value of indefinite-lived intangible assets resulting from business acquisitions,
consisting of trade names and trademarks, was $22.2 million and $20.8 million at January 2, 2021 and December 28,
2019, respectively.

Finite-Lived Intangible Assets

In connection with our acquisitions of Smartrac and ACPO, we acquired approximately $106 million of identifiable
intangible assets, which consisted of customer relationships, trade names and trademarks, and patented and other
developed technology. We utilized the income approach and the cost approach to estimate the fair values of acquired
identifiable intangibles, primarily using Level 3 inputs. The discount rates we used to value these assets were between
13.5% and 16%.

The table below summarizes the preliminary amounts and weighted useful lives of these intangible assets as of the

acquisition date.

Patented and other developed technology
Customer relationships
Trade names and trademarks

Refer to Note 2, “Acquisitions,” for more information.

Weighted average
amortization
period
(in years)

11
7
5

Amount
(in millions)

$62.5
41.4
2.2

Avery Dennison Corporation | 2020 Annual Report

Notes to Consolidated Financial Statements

The table below sets forth our finite-lived intangible assets resulting from business acquisitions at January 2, 2021

and December 28, 2019, which continue to be amortized.

(In millions)

Customer relationships
Patented and other developed technology
Trade names and trademarks
Other intangibles

Total

2020

2019

Gross
Carrying
Amount

$373.3
147.3
28.2
.2

$549.0

Accumulated
Amortization

$254.1
69.8
22.2
.2

$346.3

Net
Carrying
Amount

Gross
Carrying
Amount

$119.2
77.5
6.0
–

$319.5
81.7
24.3
.2

$202.7

$425.7

Accumulated
Amortization

$238.7
61.3
19.8
.2

$320.0

Net
Carrying
Amount

$ 80.8
20.4
4.5
–

$105.7

Amortization expense for finite-lived intangible assets
resulting from business acquisitions was $19.9 million for
2020, $13.5 million for 2019, and $15.2 million for 2018.

We expect estimated amortization expense for finite-
lived intangible assets resulting from business acquisitions
for each of the next five fiscal years to be as follows:

(In millions)

2021
2022
2023
2024
2025

Estimated
Amortization
Expense

$25.1
24.0
23.0
21.2
20.4

NOTE 4. DEBT

Short-Term Borrowings

We had no outstanding borrowings from U.S.
January 2, 2021 and had
commercial paper as of
$83.2 million of outstanding borrowings from U.S.
commercial paper issuances with a weighted average
interest rate of 1.98% as of December 28, 2019.

We have a Euro-Commercial Paper Program under
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 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 $800 million revolving credit
facility (the
“Revolver”). There are no financial covenants under this
program. We had a balance of $36.9 million and
$50.1 million outstanding under
this program as of
January 2, 2021 and December 28, 2019, respectively.

Short-Term Credit Facilities

No balance was outstanding under the Revolver as of
January 2, 2021 or December 28, 2019. Commitment fees
associated with the Revolver in 2020, 2019, and 2018
were $.8 million, $1.2 million, and $1.2 million,
respectively.

In addition to the Revolver, we have significant short-
term lines of credit available in various countries of
approximately $390 million in the aggregate at January 2,
2021. These lines may be cancelled at any time by us or
the issuing banks. Short-term borrowings outstanding
lines of credit were $22.2 million and
under our
$37.4 million at January 2, 2021 and December 28, 2019,
respectively, with a weighted average interest rate of
3.6% and 6.4%, 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

In March 2020, we issued $500 million of senior
notes, due April 2030. These senior notes bear an interest
rate of 2.65% per year, payable semiannually in arrears.
Our net proceeds from the issuance, after deducting
underwriting discounts and offering expenses, were
$493.7 million, which we used to repay both existing
indebtedness under our commercial paper program used
to fund our Smartrac acquisition and our $250 million of
senior notes that matured in April 2020.

2020 Annual Report | Avery Dennison Corporation

In December 2018, we issued $500 million of senior
notes, due December 2028. These senior notes bear an
interest rate of 4.875% per year, payable semiannually in
arrears. Our net proceeds from this issuance, 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 August
2018 to fund our $200 million contribution to the Avery
Dennison Pension Plan (the “ADPP”) in connection with
its termination.

Long-term debt, including its respective interest rates,

at year-end is shown below.

(In millions)

Long-term debt
Medium-term notes:

2020

2019

Series 1995 due 2020 through 2025

30.0

45.0

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 2030 at 2.650%
Senior notes due 2033 at 6.0%
Less amount classified as current

–
249.3
612.1
494.6
494.2
149.0
–

250.0
249.1
553.4
493.9
–
148.9
(265.0)

Total long-term debt(2)

$2,029.2

$1,475.3

(1) These senior notes are euro-denominated.
(2) Includes unamortized debt issuance cost and debt discount of $8.7 million and
$4.9 million, respectively, as of year-end 2020 and $5.6 million and $5.7 million,
respectively, as of year-end 2019.

At year-end 2020 and 2019, our medium-term notes
had maturities in 2025 and from 2020 through 2025,
respectively, and accrued interest at a weighted average
fixed rate of 7.5%. In the second quarter of 2020, we
repaid $15 million of medium-term notes that matured in
June 2020.

We expect maturities of our long-term debt for each
of the next five fiscal years and thereafter to be as follows:

Year

2021
2022
2023
2024
2025
2026 and thereafter

(In millions)

–
–
250.0
–
644.9
1,147.9

Notes to Consolidated Financial Statements

Other

the Revolver

contained financial

Prior to its amendment and restatement in February
covenants
2020,
requiring that we maintain specified ratios of total debt
and interest expense in relation to certain measures of
income. In February 2020, one of the financial covenants
was eliminated. The remaining financial covenant requires
us to maintain a specified ratio of total debt in relation to a
certain measure of income. As of January 2, 2021 and
December 28, 2019, we were in compliance with our
financial covenants.
Our total

interest costs in 2020, 2019, and 2018
were $73.9 million, $81.1 million, and $63.8 million,
respectively, of which $3.9 million, $5.3 million, and
$5.3 million, respectively, was capitalized as part of the
cost of property, plant and equipment and capitalized
software.

NOTE 5. FINANCIAL INSTRUMENTS

As of January 2, 2021, the aggregate U.S. dollar
equivalent notional value of our outstanding commodity
contracts and foreign exchange contracts was $4.2 million
and $1.38 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
and foreign
exchange contracts on forecasted transactions as cash
flow hedges. We also enter
into foreign exchange
contracts to offset certain of our economic exposures
arising from foreign exchange rate fluctuations.

commodities

Refer to Note 7, “Commitments and Leases,” for

Cash Flow Hedges

information related to finance leases.

For derivative instruments that are designated and
qualify as cash flow hedges, the effective portion of the

Avery Dennison Corporation | 2020 Annual Report

Notes to Consolidated Financial Statements

loss”

other

“Accumulated

comprehensive

gain or loss on the derivative is reported as a component
of
and
reclassified into earnings in the same period(s) during
which the hedged transaction impacts earnings. Gains and
losses on these derivatives, representing either hedge
ineffectiveness or hedge components excluded from the
assessment of effectiveness, are recognized in current
earnings. Except for the cross-currency swap discussed
below, cash flow hedges were not material in 2020, 2019,
or 2018.

Cross-Currency Swap

Following our Smartrac acquisition and our issuance
of senior notes in March 2020, we entered into U.S. dollar
to euro cross-currency swap contracts with a total

Other Derivatives

including semiannual

notional amount of $250 million to have the effect of
converting the fixed-rate U.S. dollar-denominated debt to
interest
euro-denominated debt,
payments and the payment of principal at maturity. During
the term of the contract, which ends on April 30, 2030, we
pay fixed-rate interest in euros and receive fixed-rate
in U.S. dollars. These contracts have been
interest
designated as cash flow hedges and were effective as of
January 2, 2021, with a fair value of $(36.7) million. This
amount was included in “Long-term retirement benefits
and other liabilities” in the Consolidated Balance Sheets.
Refer to Note 9, “Fair Value Measurements,” to the
Consolidated Financial Statements for more information.

We recorded no ineffectiveness from our cross-

currency swap to earnings during 2020.

The following table shows the fair value and balance sheet locations of other derivatives as of January 2, 2021 and

December 28, 2019:

(In millions)

Balance Sheet Location

2020

2019

Balance Sheet Location

2020

2019

Foreign exchange contracts
Commodity contracts

Other current assets
Other current assets

$ 5.1
.1

$ 4.8
–

$ 5.2

$ 4.8

Other current liabilities
Other current liabilities

$ 8.4
.1

$ 4.7
–

$ 8.5

$ 4.7

Asset

Liability

For other derivative instruments not designated as
hedging instruments, the gain or loss is recognized in
current earnings.

The following table shows the components of the net
gains (losses) recognized in income related to these
derivative instruments:

foreign operations were greater
than the amount
designated as a net investment hedge, and, as such, the
net investment hedge was effective.
in
(losses),
“Accumulated other
(effective
portion) related to the net investment hedge were as
follows:

before
taxes,
comprehensive

recognized
loss”

Gains

(In millions)

Foreign exchange

contracts

Foreign exchange

contracts

Statements of
Income Location

Cost of products
sold
Marketing, general
and administrative
expense

Net Investment Hedge

In January 2018, we reduced the amount we
investment hedge in foreign
designated as a net
in March 2017 from €500 million to
operations
€255 million of our 1.25% senior notes due 2025. In May
2019, we de-designated the remaining net investment
hedge as a result of changes in our intercompany capital
structure.
the
de-designation, the net assets from our investment in

preceding

Through

period

the

2020 Annual Report | Avery Dennison Corporation

2020

2019

2018

(In millions)

2020

2019

2018

Foreign currency denominated debt

–

6.8

$ 1.3

$ 1.9 $ (1.5) $ 4.5

(14.2)

3.5

(27.0)

$(12.3) $ 2.0 $(22.5)

We recorded no ineffectiveness from our net

investment hedge to earnings during 2019 or 2018.

NOTE 6. PENSION AND OTHER POSTRETIREMENT

BENEFITS

Defined Benefit Plans

We sponsor a number of defined benefit plans, the
accrual of benefits under some of which has been frozen,
covering eligible employees in the U.S. and certain other
countries. Benefits payable to an employee are based
primarily on years of service and the employee’s
compensation during the course of his or her employment
with us.

We are also obligated to pay unfunded termination
indemnity benefits to certain employees outside the U.S.,
laws and
which are subject to applicable agreements,
regulations. We have not incurred significant costs related
to these benefits, and, therefore, no related costs have
been included in the disclosures below.

In 2019, we terminated and settled the ADPP, a U.S.
defined benefit plan. In connection with this termination,
we settled approximately $753 million of ADPP liabilities
by entering into an agreement to purchase annuities
primarily from American General Life Insurance Company
and through a combination of annuities and direct funding
to the Pension Benefit Guaranty Corporation for a small
portion of former employees and their beneficiaries. These
settlements resulted in approximately $444 million of
pretax charges in 2019, partially offset by related tax
benefits of approximately $179 million.

Plan Assets

equity

securities,

fixed income

Assets in our international plans are invested in
accordance with locally accepted practices and primarily
include
securities,
insurance contracts and cash. Asset allocations and
investments vary by country and plan. Our target plan
asset investment allocation for our international plans in
the aggregate is 37% in equity securities, 53% in fixed
income securities and cash, and 10% in insurance
contracts and other
to periodic
fluctuations among these asset classes.

investments, subject

Notes to Consolidated Financial Statements

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. 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 or minus
investment returns and changes in cash flows.

These methods may produce a fair value calculation
that may not be indicative of net realizable value or
reflective of future fair values. Furthermore, while we
believe these 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), international plan assets at fair

value:

(In millions)
2020
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
2019
Cash
Insurance contracts
Pooled funds – fixed income securities(1)
Pooled funds – equity securities(1)
Pooled funds – other investments(1)
Total international plan assets at fair value

Fair Value Measurements Using

Quoted
Prices
in Active
Markets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Other
Unobservable
Inputs
(Level 3)

$3.8
–

$ –
–

–
41.2

$1.2
–

$ –
–

–
36.3

Total

$ 3.8
41.2
469.9
332.8
49.5
$897.2

$ 1.2
36.3
329.9
268.8
98.2
$734.4

(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.

Avery Dennison Corporation | 2020 Annual Report

Notes to Consolidated Financial Statements

The following table presents a reconciliation of Level 3 international plan asset activity during the year ended

January 2, 2021:

(In millions)

Balance at December 28, 2019
Net realized and unrealized gain
Purchases
Settlements
Impact of changes in foreign currency exchange rates

Balance at January 2, 2021

Level 3 Assets

Insurance Contracts

$36.3
.5
4.0
(3.6)
4.0

$41.2

As a result of the ADPP settlements, there were no U.S. plan assets remaining as of December 28, 2019.

Plan Assumptions
Discount Rate

In consultation with our actuaries, we annually review
and determine the discount rates used to value our
pension and other postretirement obligations. The
assumed discount rate for each pension plan reflects
market rates for high quality corporate bonds currently
available. Our discount rate is determined by evaluating
yield curves consisting of large populations of high quality
corporate bonds. The projected pension benefit payment
streams are then matched with bond portfolios to
determine a rate that reflects the liability duration unique
to our plans.

approach

a more

provides

this

measurement of service and interest cost by aligning the
timing of a plan’s liability cash flows to its corresponding
rates on the yield curve.

Long-term Return on Assets

the

We determine

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, we
evaluate current market conditions,
including interest
rates, and review market data for reasonableness and
appropriateness.

Measurement Date

We measure the actuarial value of our benefit
obligations and plan assets using the calendar month-end
closest
for any
contributions or other significant events between the
measurement date and our fiscal year-end.

fiscal year-end and adjust

to our

2020 Annual Report | Avery Dennison Corporation

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:

Notes to Consolidated Financial Statements

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
Benefits paid
Settlements(1)
Foreign currency translation

Projected benefit obligations at end of year

Accumulated benefit obligations at end of year

Pension Benefits

2020

2019

U.S.

Int’l

U.S.

Int’l

75.7 $ 811.7
17.8
11.0
3.7
.4
53.5
(21.1)
(2.4)
79.3

–
1.8
–
–
7.1
(7.3)
–
–

$ 868.5
–
9.0
–
–
(27.1)
(20.7)
(754.0)
–

$ 755.8
15.6
14.8
4.1
1.8
56.8
(21.3)
(4.5)
(11.4)

77.3 $ 953.9

$ 75.7

$ 811.7

77.3 $ 883.6

$ 75.7

$ 754.0

(1) In 2020, settlements in our international plans related to lump-sum payments in Belgium, France and for certain expatriate employees. In 2019, settlements in the U.S. related to

the ADPP termination; settlements in our international plans related to lump-sum payments in Switzerland.

Plan Assets

(In millions)

Change in plan assets
Plan assets at beginning of year
Actual return on plan assets
Employer contributions(1)
Participant contributions
Benefits paid
Settlements(2)
Foreign currency translation

Plan assets at end of year

Pension Benefits

2020

2019

U.S.

Int’l

U.S.

Int’l

–
–
7.3
–
(7.3)
–
–

$ 734.4
91.5
17.2
3.7
(21.1)
(2.4)
73.9

$ 735.6
20.7
18.4
–
(20.7)
(754.0)
–

$ 631.8
118.5
13.6
4.1
(21.3)
(4.5)
(7.8)

–

$ 897.2

–

$ 734.4

(1) In 2019, we contributed $10 million to the ADPP to pay the remaining liabilities associated with its termination.
(2) In 2020, settlements in our international plans related to lump-sum payments in Belgium, France and for certain expatriate employees. In 2019, settlements in the U.S. related to

the ADPP termination; settlements in our international plans related to lump-sum payments in Switzerland.

Funded Status

(In millions)

Funded status of the plans
Other assets
Other accrued liabilities
Long-term retirement benefits and other liabilities(1)

Plan assets less than benefit obligations

Pension Benefits

2020

2019

U.S.

Int’l

U.S.

Int’l

–
(9.1)
(68.2)

$ 92.4
(1.5)
(147.6)

–
(7.5)
(68.2)

$ 50.8
(2.4)
(125.7)

$ (77.3) $ (56.7)

$ (75.7) $ (77.3)

(1) In accordance with our funding strategy, we have the option to fund certain of our U.S. liabilities with proceeds from our company-owned life insurance policies.

Avery Dennison Corporation | 2020 Annual Report

Notes to Consolidated Financial Statements

Weighted average assumptions used to determine year-end benefit obligations
Discount rate
Compensation rate increase

Pension Benefits

2020

2019

U.S.

Int’l

U.S.

Int’l

2.02%
–

1.26%
2.15

2.93% 1.66%

–

2.21

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 $295 million and $69 million, respectively, at
year-end 2020 and $263 million and $59 million, respectively, at year-end 2019.

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 $265 million and $69 million,
respectively, at year-end 2020 and $237 billion and $59 million, respectively, at year-end 2019.

Accumulated Other Comprehensive Loss

The following table shows the pre-tax amounts recognized in “Accumulated other comprehensive loss” in the

Consolidated Balance Sheets:

(In millions)

Net actuarial loss
Prior service (credit) cost

Net amount recognized in accumulated other comprehensive loss

Pension Benefits

2020

2019

U.S.

$18.2
–

Int’l

$ 83.3
(3.9)

U.S.

$15.5
–

Int’l

$101.9
(4.3)

$18.2

$ 79.4

$15.5

$ 97.6

The following table shows the pre-tax amounts recognized in “Other comprehensive loss (income)”:

Pension Benefits

2020

2019

2018

(In millions)

Net actuarial loss (gain)
Prior service credit
Amortization of unrecognized:

Net actuarial gain
Prior service credit (cost)

Settlements

U.S.

3.5
–

Int’l

U.S.

Int’l

U.S.

Int’l

$ (13.5) $ (44.6) $ (42.7) $ 33.5
–

1.8

–

$(27.2)
–

(.6)
–
(.2)

(5.2)
.4
(.3)

(.5)
–
(442.8)

(4.0)
.4
(.6)

(21.2)
(.8)
(92.0)

(8.1)
.5
(1.7)

Net amount recognized in other comprehensive loss (income)

2.7

$ (18.2) $ (487.9) $ (45.1) $ (80.5) $ (36.5)

2020 Annual Report | Avery Dennison Corporation

Notes to Consolidated Financial Statements

Plan Income Statement Reconciliations

The following table shows the components of net periodic benefit cost, which are recorded in net income for our

defined benefit plans:

Pension Benefits

2020

2019

2018

(In millions)

Service cost
Interest cost
Actuarial loss (gain)
Expected return on plan assets
Amortization of actuarial loss
Amortization of prior service (credit) cost
Recognized loss on settlements(1)

Net periodic benefit cost (credit)

U.S.

Int’l

–
1.8
3.7
–
.6
–
.2

6.3

$ 17.8
11.0
–
(18.5)
5.2
(.4)
.3

U.S.

–
2.7
2.5
–
.5
–
443.5

Int’l

$ 15.6
14.8
–
(21.0)
4.0
(.4)
.6

U.S.

–
34.5
(.6)
(42.5)
21.2
.8
92.0

Int’l

$ 19.2
15.7
–
(23.8)
8.1
(.5)
1.7

$ 15.4

$ 449.2

$ 13.6

$ 105.4

$ 20.4

(1) In 2020, settlements in the U.S. related to a non-qualified plan; settlements in our international plans related to lump-sum payments in Belgium, France and for certain expatriate
employees. In 2019, settlements in the U.S. related to the ADPP termination; settlements in our international plans related to lump-sum payments in Switzerland. 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 United Kingdom and France.

Service cost and components of net periodic benefit cost other than service cost were included in “Marketing, general
and administrative expense” and “Other non-operating expense (income), net” in the Consolidated Statements of Income,
respectively.

The following table shows the weighted average assumptions used to determine net periodic cost:

Discount rate
Expected return on assets
Compensation rate increase

Plan Contributions

Pension Benefits

2020

2019

2018

U.S.

2.89%
–
–

Int’l

1.66%
2.79
2.21

U.S.

3.73%
–
–

Int’l

2.39%
3.38
2.23

U.S.

Int’l

3.72% 2.25%
7.00
–

3.78
2.26

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 2021:

(In millions)

U.S. pension plans
International pension plans

Future Benefit Payments

The future benefit payments shown below reflect expected service periods for eligible participants.

(In millions)

2021
2022
2023
2024
2025
2026-2030

$ 9.2
13.4

Pension
Benefits

U.S.

Int’l

$ 9.2
6.9
6.4
6.7
6.1
24.8

$ 23.0
25.1
27.0
26.0
26.0
168.4

Avery Dennison Corporation | 2020 Annual Report

Notes to Consolidated Financial Statements

Postretirement Health Benefits

and

We provide postretirement health benefits to certain
of our retired U.S. employees up to the age of 65 under a
cost-sharing arrangement and provide supplemental
Medicare benefits to certain of our U.S. retirees over the
age of 65. Our policy is to fund the cost of
these
postretirement benefits from operating cash flows. While
we do not intend to terminate these postretirement health
benefits, we may do so at any time, subject to applicable
laws
our
postretirement health benefits obligation and related loss
recorded in “Accumulated other comprehensive loss”
approximately $3 million and approximately
were
$10 million,
year-end 2019, our
postretirement health benefits obligation and related loss
recorded in “Accumulated other comprehensive loss”
were
approximately $3 million and approximately
$8 million, respectively. Net periodic benefit cost was not
material in 2020, 2019, or 2018.

respectively. At

regulations. At

year-end

2020,

Defined Contribution Plans

We sponsor various defined contribution plans
worldwide, the largest of which is the Avery Dennison
Corporation Employee Savings Plan (“Savings Plan”), a
401(k) plan for our U.S. employees.
recognized

$22.7 million,
expense
$22.4 million, and $21.8 million in 2020, 2019, and 2018,
respectively, related to our employer contributions and
employer match of participant contributions to the Savings
Plan.

Other Retirement Plans

We have deferred compensation plans and programs
that permit eligible employees and directors to defer a

their

compensation
portion of
compensation. The
voluntarily deferred by the participant,
together with
certain employer contributions, earns specified and
variable rates of return. As of year-end 2020 and 2019,
we had accrued $95.1 million and $91.6 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 plan. Additionally, two
legacy deferred compensation plans had DSUs that were
issued under our
then-active 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 dividend payable date. DSUs are
converted into shares of our common stock upon a
director’s
retirement. Approximately
.1 million and .2 million DSUs were outstanding as of
year-end 2020 and 2019, respectively, with an aggregate
value of $22 million and $25 million, respectively.

resignation

We hold company-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
$254.8 million and $236.9 million at year-end 2020 and
2019, respectively.

NOTE 7. COMMITMENTS AND LEASES

Supplemental cost information related to leases is shown below.

(In millions)

Operating lease costs

2020

2019

$63.1

$ 65.4

Lease costs related to finance leases were not material in 2020 or 2019.

2020 Annual Report | Avery Dennison Corporation

Notes to Consolidated Financial Statements

Supplemental balance sheet information related to leases is shown below.

(In millions)

Assets

Operating
Finance(1)

Total leased assets

Liabilities
Current:

Operating
Finance
Non-current:
Operating
Finance

Total lease liabilities

Balance Sheet Location

Other assets
Property, plant and equipment, net

2020

2019

$161.3
38.2

$138.1
36.1

$199.5

$174.2

Other current liabilities
Short-term borrowings and current portion of long-term debt and finance leases

$ 44.3
5.6

$ 41.4
4.5

Long-term retirement benefits and other liabilities
Long-term debt and finance leases

116.0
22.9

98.9
24.0

$188.8

$168.8

(1) Finance lease assets are net of accumulated amortization of $8.3 million and $5.7 million as of January 2, 2021 and December 28, 2019, respectively.

Supplemental cash flow information related to leases

As of

January 2, 2021, we had no significant

is shown below.

(In millions)

Cash paid for amounts included in the

measurement of operating lease liabilities
Operating lease assets obtained in exchange

2020

2019

$54.9

$53.1

for operating lease liabilities

48.4

32.6

operating or finance leases that had not yet commenced.

In the first quarter of 2019, we adopted accounting
guidance that requires lessees to recognize on their
balance sheets the rights and obligations created by
leases. We elected to apply this guidance using a modified
retrospective approach.

Rent expense for operating leases was approximately

Cash flows related to finance leases were not material

$66 million in 2018.

in 2020 or 2019.

Weighted average remaining lease term and discount
rate information related to leases as of January 2, 2021 is
shown below.

Weighted average remaining lease term (in years):

Operating
Finance

Weighted average discount rate (percentage):

Operating
Finance

2020

6.2
3.2

4.3%
2.9

Operating and finance lease liabilities by maturity

date from January 2, 2021 are shown below.

(In millions)

Operating Leases

Finance Leases

2021
2022
2023
2024
2025
2026 and thereafter
Total lease payments
Less: imputed interest

Present value of lease

liabilities

$ 47.9
34.7
25.4
19.5
15.3
40.8
183.6
(23.3)

$160.3

$14.1
5.5
4.8
4.5
1.3
.1
30.3
(1.8)

$28.5

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
future results of operations should our
could affect
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
information were to
range of potential expenses.
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,

Avery Dennison Corporation | 2020 Annual Report

and anticipate that our share of remediation costs will be
determined pursuant to agreements that we negotiate
with the EPA or other governmental authorities.

the

These estimates could change as a result of changes
in planned remedial actions, remediation technologies, site
conditions, the estimated time to complete remediation,
laws and regulations, and other factors.
environmental
Because
associated with
uncertainties
of
environmental assessment and remediation activities, our
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 related to our environmental liabilities in

2020 and 2019 was as follows:

(In millions)

Balance at beginning of year
Charges, net of reversals
Payments

Balance at end of year

2020

2019

$21.4
3.0
(3.3)

$20.0
7.4
(6.0)

$21.1

$21.4

Approximately

$10 million,
$9 million
respectively, of the balance was classified as short-term
and included in “Other
in the
Consolidated Balance Sheets as of January 2, 2021 and
December 28, 2019.

liabilities”

current

and

Notes to Consolidated Financial Statements

and other regulatory and compliance matters could arise
in the future. The range of expenses for resolving any
future matters would be assessed as they arise; until then,
a range of potential expenses for such resolution cannot
be determined. Based upon current
information, we
believe that the impact of the resolution of these matters
would not be, individually or in the aggregate, material to
our financial position, results of operations or cash flows.

Environmental Expenditures

the

costs

estimates

Environmental expenditures are generally expensed.
However, environmental expenditures for newly acquired
assets and those that 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
complying 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 January 2, 2021, we have been designated by
the U.S. Environmental Protection Agency (“EPA”) and/or
other responsible state agencies as a PRP at twelve 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 these sites has been agreed
upon. We are participating with other PRPs at these sites

2020 Annual Report | Avery Dennison Corporation

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

January 2, 2021:

(In millions)

Assets

Investments
Derivative assets
Bank drafts

Liabilities

Cross-currency swap
Derivative liabilities

Fair Value Measurements Using

Quoted
Prices in
Active
Markets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Other
Unobservable
Inputs
(Level 3)

$27.4
.1
12.8

–
.3

$ 6.2
5.1
–

$36.7
9.2

$ –
–
–

$ –
–

Total

$33.6
5.2
12.8

$36.7
9.5

The following table provides the assets and liabilities carried at fair value, measured on a recurring basis, as of

December 28, 2019:

(In millions)

Assets

Investments
Derivative assets
Bank drafts

Liabilities

Derivative liabilities

Fair Value Measurements Using

Quoted
Prices in
Active
Markets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Other
Unobservable
Inputs
(Level 3)

Total

$30.6
5.2
21.3

$26.0
–
21.3

$ 6.0

$4.6
5.2
–

$5.6

$ –
–
–

$ –

Investments 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 January 2,
2021, investments of $1 million and $32.6 million were
included in “Cash and cash equivalents” and “Other
current assets,” respectively, in the Consolidated Balance
Sheets. As of December 28, 2019,
investments of
$.4 million and $30.2 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.

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, which
was included in “Other expense (income), 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.

Avery Dennison Corporation | 2020 Annual Report

Notes to Consolidated Financial Statements

NOTE 10. NET INCOME PER COMMON SHARE

NOTE 11. SUPPLEMENTAL EQUITY AND

Net income per common share was computed as

follows:

Common Stock and Share Repurchase Program

COMPREHENSIVE INCOME INFORMATION

and Restated

Our Amended

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.

Certificate

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
2020, we repurchased approximately .8 million shares of
our common stock at an aggregate cost of $104.3 million.
In 2019, we repurchased approximately 2 million shares
of our
common stock at an aggregate cost of
$237.7 million.

In April 2019, 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 then 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 $540.4 million as of January 2, 2021
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.

(In millions, except per share
amounts)

(A) Net income

(B) Weighted average number of
common shares outstanding

Dilutive shares (additional
common shares issuable
under stock-based awards)

common shares outstanding,
assuming dilution

Net income per common share

2020

2019

2018

$555.9

$303.6

$467.4

83.4

84.0

87.3

1.0

1.3

84.1

85.0

88.6

(A) ÷ (B)

$ 6.67

$ 3.61

$ 5.35

Net income per common share,
assuming dilution (A) ÷ (C)

$ 6.61

$ 3.57

$ 5.28

Certain stock-based compensation awards were not
included in the computation of net income per common
share, assuming dilution, because they would not have
had a dilutive effect. Stock-based compensation awards
excluded from the computation were not significant in
2020, 2019 or 2018.

2020 Annual Report | Avery Dennison Corporation

Notes to Consolidated Financial Statements

Accumulated Other Comprehensive Loss

The changes in “Accumulated other comprehensive loss” (net of tax) for 2020 and 2019 were as follows:

(In millions)

Balance as of December 29, 2018
Other comprehensive income (loss) before reclassifications, net of tax
Reclassifications to net income, net of tax

Net current-period other comprehensive income (loss), net of tax

Balance as of December 28, 2019
Other comprehensive income (loss) before reclassifications, net of tax
Reclassifications to net income, net of tax

Net current-period other comprehensive income (loss), net of tax

Foreign
Currency
Translation

Pension and
Other
Postretirement
Benefits

Cash Flow
Hedges

Total

$(247.4)
2.3
–

2.3

$(245.1)
(3.0)
–

(3.0)

$(434.3)
66.4
266.1

332.5

$(101.8)
6.2
2.9

$ (.3) $(682.0)
69.2
264.7

.5
(1.4)

(.9)

333.9

$(1.2) $(348.1)
(4.3)
2.8

(7.5)
(.1)

9.1

(7.6)

(1.5)

Balance as of January 2, 2021

$(248.1)

$ (92.7)

$(8.8) $(349.6)

The amounts reclassified from “Accumulated other comprehensive loss” to increase (decrease) net income were as

follows:

(In millions)

Cash flow hedges:

Foreign exchange contracts
Commodity contracts

Total before tax
Tax

Net of tax

Pension and other postretirement benefits
Tax

Net of tax

Total reclassifications for the period

2020

2019

2018 Statements of Income Location

$ .7 $
(.6)

2.1 $
(.2)

1.3 Cost of products sold
.1 Cost of products sold

.1
–

1.9
(.5)

1.4

1.4
(.3) Provision for (benefit from) income taxes

1.1

(3.8)
.9

(445.4)
179.3

(121.4) Other non-operating expense (income), net
27.6 Provision for (benefit from) income taxes

(2.9)

(266.1)

(93.8)

$(2.8) $(264.7) $ (92.7)

The following table sets forth the income tax expense (benefit) allocated to each component of other comprehensive

income (loss):

(In millions)

Foreign currency translation:
Translation gain (loss)

Pension and other postretirement benefits:

Net gain (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

2020

2019

2018

$ 27.5 $ (5.5) $ (9.1)

3.1
.9

19.4
179.3

(2.4)
27.6

(2.3)
–

.2
(.5)

.3
(.3)

Income tax expense (benefit) allocated to components of other comprehensive income (loss)

$ 29.2 $192.9 $ 16.1

Avery Dennison Corporation | 2020 Annual Report

Notes to Consolidated Financial Statements

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 March and non-employee
directors in May. Certain awards granted to retirement-eligible employees one year or more before the retirement date vest
upon retirement; these awards are accounted for as fully vested one year from the date of grant.

Our 2017 Incentive Award Plan (the “Equity Plan”), a long-term incentive plan for employees and non-employee
directors, allows us to grant stock-based compensation awards – including stock options, RSUs, PUs, MSUs and DSUs – 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 tax benefit were as follows:

(In millions)

Stock-based compensation expense
Tax benefit

2020

2019

2018

$24.0
2.9

$34.5
4.3

$34.3
4.7

This expense was included in “Marketing, general and administrative expense” in the Consolidated Statements of

Income.

As of January 2, 2021, we had approximately $31 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 may be granted to employees and non-employee directors 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.

No stock options were granted in fiscal years 2020, 2019 or 2018.
The following table summarizes information related to stock options:

Number of
options
(in thousands)

Weighted average
exercise price

Weighted average
remaining
contractual life
(in years)

Aggregate
intrinsic value
(in millions)

Outstanding at December 28, 2019
Exercised

Outstanding at January 2, 2021
Options vested and expected to vest at January 2, 2021
Options exercisable at January 2, 2021

206.2
(44.1)

162.1
162.1
162.1

$62.10
37.36

$68.84
68.84
$68.84

4.92

4.86
4.86
4.86

$14.3

$14.0
14.0
$14.0

The total

intrinsic value of stock options exercised
was $4.0 million in 2020, $23.5 million in 2019, and
$2.7 million in 2018. We received approximately
$2 million in 2020, $10 million in 2019, and $1 million in
2018 from the exercise of stock options. The tax benefit
associated with these exercised options was $1.0 million
in 2020, $5.7 million in 2019, and $.6 million in 2018. The
intrinsic value of a stock option is based on the amount by
which the market value of our stock exceeds the exercise
price of the option.

Performance Units (“PUs”)

PUs are performance-based awards granted to
eligible employees under the Equity Plan. PUs are payable
in shares of our common stock at the end of a three- or
four-year cliff vesting period provided that designated
performance objectives are achieved at the end of the
period. Over
the estimated
the performance period,
number of shares of our common stock issuable upon
vesting is adjusted upward or downward based on the
probability of
the performance
objectives established for the award. The actual number of

the achievement of

2020 Annual Report | Avery Dennison Corporation

Notes to Consolidated Financial Statements

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 $115.07, $104.43, and
$120.25 in 2020, 2019, and 2018, respectively.

The following table summarizes information related to

awarded PUs:

Unvested at December 28, 2019
Granted at target
Adjustment for above-target

performance(1)

Vested
Forfeited/cancelled

Number of
PUs
(in thousands)

Weighted
average
grant-date
fair value

427.5
116.9

$ 101.61
115.07

109.6
(245.8)
(51.6)

83.05
83.05
112.90

The following table summarizes information related to

awarded MSUs:

Unvested at December 28, 2019
Granted at target
Adjustments for above-target

performance(1)

Vested
Forfeited/cancelled

Number of
MSUs
(in thousands)

263.4
114.7

69.0
(177.2)
(34.0)

Weighted
average
grant-date
fair value

$ 115.71
94.55

92.88
99.36
112.57

Unvested at January 2, 2021

235.9

$ 110.89

(1) Reflects adjustments for the vesting of awards based on above-target performance

for each of the tranches of awards vesting in 2020.

The fair value of vested MSUs was $17.6 million in

Unvested at January 2, 2021

356.6

$ 112.31

2020, $15.9 million in 2019, and $24.0 million in 2018.

(1) Reflects adjustments for the vesting of awards based on above-target performance

for the 2017-2019 performance period.

The fair value of vested PUs was $20.4 million in

2020, $25.6 million in 2019, and $11.9 million in 2018.

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 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-level 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
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
$94.55, $135.85, and $117.75 in 2020, 2019, and 2018,
respectively.

to vesting. Each of

Restricted Stock Units (“RSUs”)

RSUs are service-based awards granted to eligible
employees and non-employee directors under our equity
plans. RSUs granted to employees generally vest ratably over
a period of
three to four years. 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 $111.71,
$107.18, and $106.44 in 2020, 2019, and 2018, respectively.
The following table summarizes information related to

awarded RSUs:

Unvested at December 28, 2019
Granted
Vested
Forfeited/cancelled
Unvested at January 2, 2021

Number of
RSUs
(in thousands)

59.7
32.7
(40.4)
(.6)
51.4

Weighted
average
grant-date
fair value

$ 97.56
111.71
93.70
109.24
$109.47

The fair value of vested RSUs was $3.8 million,
$4.4 million, and $5.1 million in 2020, 2019, and 2018,
respectively.

Avery Dennison Corporation | 2020 Annual Report

Notes to Consolidated Financial Statements

Cash-Based Awards
Long-Term Incentive Units (“LTI Units”)

LTI Units are cash-based awards granted to 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.

also grant performance-based,

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. 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 our common stock at each
quarter-end over their respective performance periods. The
compensation expense related to 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
$13.8 million in 2020, $19.1 million in 2019, and
$12.4 million in 2018. 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 $3.3 million in 2020,
$4.4 million in 2019, and $2.9 million in 2018.

NOTE 13. COST REDUCTION ACTIONS

Restructuring Charges

We have plans that provide eligible employees with
severance benefits in the event of an involuntary
termination. We calculate severance using the benefit
record
formulas under
restructuring charges from qualifying cost
reduction
actions for severance and other exit costs (including asset

applicable plans. We

the

2020 Annual Report | Avery Dennison Corporation

impairment
cancellation costs) when they are probable and estimable.

charges and lease and other

contract

2019/2020 Actions

reversals,

During fiscal year 2020, we recorded $56 million in
restructuring charges, net of
related to our
2019/2020 actions. These charges consisted of severance
and related costs for the reduction of approximately 2,160
positions and asset
impairment charges at numerous
locations across our company, which primarily included
actions in our LGM and RBIS reportable segments. The
actions in our LGM reportable segment were primarily
associated with consolidations of operations in North
America and its graphics business in Europe,
in part in
response to COVID-19. The actions in our RBIS reportable
segment were primarily related to global headcount and
footprint reduction, with some actions accelerated and
expanded in response to COVID-19. During fiscal year
2019, we recorded $25.2 million in restructuring charges
related to our 2019/2020 actions. These charges consisted
the reduction of
of severance and related costs for
approximately 370 positions, as well as asset impairment
charges.

2018/2019 Actions

In April 2018, we approved a restructuring plan (the
“2018 Plan”) to consolidate the European footprint of our
LGM reportable segment, which reduced headcount by
approximately 390 positions, including temporary labor, in
connection with the closure of a manufacturing facility. This
reduction was partially offset by headcount additions in
other locations, resulting in a net reduction of approximately
150 positions. During fiscal year 2020 and 2019, net
restructuring reversals related to the 2018 Plan were not
material. The cumulative charges associated with the 2018
Plan consisted of severance and related costs for the
headcount reduction, as well as asset impairment charges.
The activities related to the 2018 Plan were substantially
completed as of the end of the second quarter of 2019.

year 2019, we

Accruals for severance and related costs and lease
cancellation costs were included in “Other current
liabilities” in the Consolidated Balance Sheets. Asset
impairment charges were based on the estimated market
value of
if applicable.
Restructuring charges were included in “Other expense
(income), net” in the Consolidated Statements of Income.

less selling costs,

the assets,

Notes to Consolidated Financial Statements

During 2020, restructuring charges and payments were as follows:

(In millions)

2019/2020 Actions
Severance and related costs
Asset impairment charges

2018/2019 Actions
Severance and related costs
Lease cancellation costs

Total

Accrual at
December 28,
2019

Charges,
Net of
Reversals

Cash
Payments

Non-cash
Impairment

Foreign
Currency
Translation

Accrual at
January 2,
2021

$21.9
–

$49.8
6.2

$(45.7)
–

–
(6.2)

6.5
.3

(.7)
–

(6.0)
–

–
–

$28.7

$55.3

$(51.7)

$(6.2)

$2.3
–

.2
–

$2.5

$28.3
–

–
.3

$28.6

During 2019, restructuring charges and payments were as follows:

(In millions)

2019/2020 Actions
Severance and related costs
Asset impairment charges

2018/2019 Actions
Severance and related costs
Lease cancellation costs
Asset impairment charges

Total

Accrual at
December 29,
2018

Charges,
Net of
Reversals

Cash
Payments

Non-cash
Impairment

Foreign
Currency
Translation

Accrual at
December 28,
2019

–
–

$21.9
3.3

–
–

40.7
–
–

24.0
.3
1.6

(57.1)
–
–

–
(3.3)

–
–
(1.6)

–
–

(1.1)
–
–

$21.9
–

6.5
.3
–

$40.7

$51.1

$(57.1)

$(4.9)

$(1.1)

$28.7

The table below shows the total amount of restructuring charges incurred by reportable segment and Corporate.

(In millions)

Restructuring charges by reportable segment and Corporate
Label and Graphic Materials
Retail Branding and Information Solutions
Industrial and Healthcare Materials
Corporate

Total

NOTE 14. TAXES BASED ON INCOME

Taxes based on income were as follows:

(In millions)

Current:

U.S. federal tax
State taxes
International taxes

Deferred:

U.S. federal tax
State taxes
International taxes

Provision for (benefit from) income taxes

2020

2019

2018

$ 27.9
18.7
8.4
.3

$ 29.0
9.8
9.4
2.2

$ 57.8
11.9
4.0
–

$ 55.3

$ 50.4

$ 73.7

2020

2019

2018

$ 1.1
1.9
168.5

$ 11.0
.5
148.1

$ (19.7)
.8
134.3

171.5

159.6

115.4

5.0
1.6
(.4)

6.2

(168.0)
(8.9)
(39.4)

(216.3)

(6.3)
2.3
(26.0)

(30.0)

$177.7

$ (56.7) $ 85.4

Avery Dennison Corporation | 2020 Annual Report

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)

Tax provision computed at the U.S. federal statutory rate(1)
Increase (decrease) in taxes resulting from:
State taxes, net of federal tax benefit(1)
U.S. pension plan settlements and related charges(1)
Tax Cuts and Jobs Act(2)
Foreign earnings taxed at different rates(3)
GILTI high-tax exclusion election, net(4)
Foreign tax structuring and planning transactions(5)
Excess tax benefits associated with stock-based payments
Valuation allowance
U.S. federal research and development tax credits
Tax contingencies and audit settlements(6)
Other items, net

Provision for (benefit from) income taxes

2020

2019

2018

$154.8

$ 52.4

$116.5

6.9
–
–
51.4
(12.5)
–
(3.2)
(3.3)
(6.2)
(5.5)
(4.7)
$177.7

(12.8)
(76.6)
–
56.2
–
(47.9)
(7.8)
2.0
(6.1)
(11.8)
(4.3)

3.9
–
(34.7)
44.0
–
(31.0)
(7.7)
10.7
(6.1)
(11.9)
1.7
$(56.7) $ 85.4

(1) Included in 2019 and 2018 are tax effects of the pension plan settlement charges associated with the termination of the ADPP. In 2019 and 2018, tax benefits of $102 million and
$19 million on the pretax charges, respectively, were reflected in the tax provision computed at the U.S. federal statutory rate and state taxes, net of federal tax benefit. Moreover, in
2019, the tax benefit of $77 million related to the release of stranded tax effects in AOCI through the income statement was reflected in U.S. pension plan settlements and related
charges.

(2) During 2018, we recognized a net tax benefit of $34.7 million as a result of the TCJA. This amount included our TCJA provisional amount and subsequent adjustments, 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. We finalized our TCJA provisional amount as defined under SEC Staff Accounting Bulletin No. 118 in 2018.

(3) All years included certain U.S. international tax provisions imposed by the TCJA and foreign earnings taxed in the U.S., net of credits.
(4) In 2020, we recognized a tax benefit of $12.5 million as a return-to-provision adjustment resulting from our decision to elect to exclude certain high-taxed foreign income from our
2019 GILTI inclusions. This election will provide a reversal of certain 2019 GILTI tax expense recognized in 2019. We expect to make the election by amending our 2019 U.S. tax
return within the time allowed under applicable regulations.

(5) In 2019, we recognized a net tax benefit of $47.9 million related to a foreign structuring transaction. This net benefit resulted from the elimination of recapture conditions to which
our previously recognized net operating losses were subject. By eliminating these conditions, our losses became permanent, and the offsetting deferred tax liability related to future
recapture was released. In 2018, we recognized a net tax benefit of $31 million related to a foreign planning transaction. This net benefit resulted from 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.

(6) In 2020, we recognized a net tax benefit of $5.5 million. This amount included $22.4 million of tax benefits from decreases in certain tax reserves, including associated interest and
penalties, as a result of closing tax years, and the effective settlements of certain foreign tax audits, partially offset by $16.6 million of tax charge related to our eligibility for
incentive tax rates in a foreign jurisdiction for tax years 2016-2020 and additional interest and penalty accruals.

Income before taxes from our U.S. and international

operations was as follows:

(In millions)

U.S.
International

2020

2019

2018

$123.8
613.5

$(355.4) $ (7.3)
562.1

604.9

Income before taxes

$737.3

$ 249.5

$554.8

Our effective tax rate was 24.1%,

(22.7)%, and
15.4% for fiscal years 2020, 2019, and 2018, respectively.
Our 2020 provision for (benefit from) income taxes
included: (i) $22.1 million of net tax charge related to the
tax on global intangible low-taxed income (“GILTI”) of our
foreign
foreign subsidiaries and the recognition of
withholding taxes on current year earnings, partially offset
by the benefit from foreign-derived intangible income
(“FDII”) and (ii) a $12.5 million return-to-provision

adjustment recognized in the fourth quarter related to an
election to be made on our 2019 amended U.S. tax return.

In July 2020, the U.S. Department of Treasury issued
final regulations that provide certain U.S. taxpayers with
an annual election to exclude foreign income that is
subject to a high effective tax rate from their GILTI
inclusions, with an option to retroactively apply them to
their 2018 through 2020 tax years. While we have not yet
made our determination on whether to make the election
for all applicable tax years, we have made the
determination to do so for tax year 2019. We continue to
evaluate the impact of these regulations and currently
anticipate that the benefits from electing these exclusions
on our original or amended returns may be significant for
certain years. We will reflect the impacts on our provision
for (benefit from) income taxes upon the completion of our
evaluation within the time allowed under applicable
regulations.

2020 Annual Report | Avery Dennison Corporation

Our 2020 provision for (benefit from) income taxes
also included: $5.5 million of net tax benefit primarily from
including associated
decreases in certain tax reserves,
interest and penalties, as a result of closing tax years in
foreign jurisdictions, partially offset by increases in
reserves from our change in judgment and additional
In the fourth quarter of
interest and penalty accruals.
2020, our eligibility for incentive tax rates in a foreign
jurisdiction was denied under audit for tax years 2016-
2019. We appealed the decision through the tax
administration review process, and anticipate our appeal
could continue into the judiciary for a final determination.
As a result, we recognized a $14.3 million of tax charge
related to our change in judgment on our uncertain tax
positions for tax years 2016-2020.

(benefit

Moreover, our 2020 provision for

from)
income taxes was not significantly affected by a tax
incentive settlement agreement reached with a foreign tax
authority related to self-developed intellectual property.
Under the agreement, the impact for applicable tax years
to the net benefit, after
was
considering related uncertain tax positions previously
recognized in our Consolidated Financial Statements.

roughly equivalent

Our 2019 provision for (benefit from) income taxes
included $179 million of tax benefit related to the effective
settlement of the ADPP, $102 million of which was the
related tax effect on the pretax charge of $444 million,
and $77 million of which was related to the release of
stranded tax effects in AOCI
through the income
statement. The tax effects were stranded primarily as a
result of the U.S. federal tax rate change under the TCJA.
Refer to Note 6, “Pension and Other Postretirement
Benefits,” for more information. Our 2019 provision for
(benefit from) income taxes also reflected the following
items: (i) $47.9 million of tax benefit from a foreign tax
structuring transaction resulting in previously recognized
tax losses becoming permanent; (ii) $24.7 million of net
tax charge related to the tax on GILTI of our foreign
subsidiaries and the recognition of foreign withholding
taxes on current year earnings, partially offset by the
benefit from FDII; (iii) $11.8 million of net tax benefit from
the effective settlement of certain German tax audits and
decreases in reserves as a result of closing tax years,
partially offset by additional interest and penalty accruals,
and increases in reserves from our change in judgment;
and (iv) $7.8 million of tax benefit related to excess tax
benefits associated with stock-based payments. Effective
in 2019, we implemented certain operational structure
changes to more closely align with our business
strategies, one benefit of which was to reduce our base
erosion payments below the statutory threshold. As a

Notes to Consolidated Financial Statements

result, our 2019 provision for (benefit from) income taxes
did not include a tax charge related to Base Erosion
Antiabuse Tax (“BEAT”).

tax benefit

Our 2018 provision for (benefit from) income taxes
included the following items:
(i) $34.7 million of tax
benefit for measurement period adjustments to our 2017
TCJA provisional amount in accordance with guidance
provided under SEC Staff Accounting Bulletin No. 118; (ii)
$31 million of net tax charge for GILTI and BEAT, and the
recognition of foreign withholding taxes on current year
earnings, partially offset by the benefit from FDII; (iii)
from the effective
$11.9 million of net
settlement of certain German tax audits and decreases in
reserves as a result of closing tax years, partially offset by
additional interest and penalty accruals, and increases in
reserves from our change in judgment; and (iv) $31 million
of net tax benefit 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. Our 2018 provision for (benefit from)
income taxes was not significantly impacted by the
$10.7 million increase in our valuation allowance primarily
due to offsetting changes in deferred taxes and uncertain
tax positions.

U.S. Tax Reform

things,

The TCJA enacted in the U.S.

in December 2017
significantly changed U.S. corporate income taxation by,
reducing the federal corporate
among other
implementing a modified
income tax rates to 21%;
territorial tax system prospectively by providing a dividend
received deduction on certain dividends from our foreign
subsidiaries; loss of domestic manufacturing deductions;
limitations
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.

the deductibility

our

As of December 29, 2018, we completed our
accounting for
the TCJA
the income tax effects of
following the guidance of SAB 118. Specifically, we
included $34.7 million of net tax benefit as measurement
period adjustments primarily related to (i) $9.5 million of
to the transition tax,
tax charge as an adjustment
reflecting subsequent
regulatory and administrative
guidance issued by the Internal Revenue Service (“IRS”)
and certain state taxing authorities and the finalization of
our foreign earnings and profits as well as taxes; (ii)
$39.6 million of tax benefit as an adjustment to the
remeasurement of deferred taxes as a result of our
decision to accelerate certain deductions in conjunction

Avery Dennison Corporation | 2020 Annual Report

Notes to Consolidated Financial Statements

with the completion of our 2017 U.S. federal income tax
return; (iii) $3.6 million of tax charge as an incremental
for foreign withholding taxes associated with
accrual
changes in our indefinite reinvestment assertions after
information required to make such determination was
obtained; and (iv) $9.4 million of tax benefit from releasing
a previously recorded uncertain tax position after we did
not take the position on our 2017 U.S. federal income tax
return.

Our accumulated earnings in foreign subsidiaries are
not indefinitely reinvested. As a result of the one-time
transition tax and the dividend received deduction
prescribed by the TCJA, our accumulated earnings in
foreign subsidiaries can generally be repatriated to the
U.S. without material tax consequences. As of January 2,
2021, we recorded a deferred tax liability of $39 million
related to future tax consequences from repatriating our
accumulated earnings in foreign subsidiaries that are not
indefinitely reinvested.

Deferred Taxes

Deferred taxes reflect

the temporary differences
between the amounts at which assets and liabilities are
recorded for financial reporting purposes and the amounts
utilized for tax purposes. The primary components of the
temporary differences that gave rise to our deferred tax
assets and liabilities were as follows:

(In millions)

Accrued expenses not currently deductible
Net operating loss carryforwards
Tax credit carryforwards
Stock-based compensation
Pension and other postretirement benefits
Lease liabilities
Other assets
Valuation allowance

2020

2019

$ 24.9
161.4
55.9
10.7
52.4
39.0
32.2
(68.2)

$ 25.7
154.6
46.5
11.8
57.8
30.5
21.3
(67.7)

Total deferred tax assets(1)

308.3

280.5

Depreciation and amortization
Repatriation accrual
Foreign operating loss recapture
Lease assets

(80.2)
(39.0)
(3.6)
(38.7)

(41.6)
(18.9)
(3.4)
(29.7)

Total deferred tax liabilities(1)

(161.5)

(93.6)

Total net deferred tax assets

$ 146.8

$186.9

(1) Reflect gross amounts before jurisdictional netting of deferred tax assets and

liabilities.

2020 Annual Report | Avery Dennison Corporation

We assess the available positive and negative
evidence to estimate if sufficient future taxable income is
expected to 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 not 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, the relevant carryforward
periods, and these 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.

Net

loss

operating

carryforwards

foreign
subsidiaries at January 2, 2021 and December 28, 2019
were $563 million and $508 million, respectively. Tax
credit carryforwards of both domestic and foreign
subsidiaries at January 2, 2021 and December 28, 2019
totaled $56 million and $47 million,
If
foreign net operating losses and tax credit
unused,
carryforwards will expire as follows:

respectively.

(In millions)
Year of Expiry

2021
2022
2023
2024
2025
2026 - 2040
Indefinite life/no expiry

Total

Net Operating
Losses(1)

Tax Credits

2.1
5.3
4.3
3.8
5.9
19.1
522.7

.4
.5
4.4
.3
7.2
36.2
6.5

$563.2

$55.5

(1) Net operating losses are presented before tax effects and valuation allowance.

Certain indefinite-lived foreign net operating losses
may require decades to be fully utilized under our current
business model.

January 2, 2021, we had net operating loss
carryforwards in certain states of $664 million before tax
effects. Based on our estimates of future 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 $624 million of these carryforwards.

As of January 2, 2021, our provision for (benefit from)
income taxes did not materially benefit from applicable tax
holidays in foreign jurisdictions.

Unrecognized Tax Benefits

NOTE 15. SEGMENT AND DISAGGREGATED REVENUE

Notes to Consolidated Financial Statements

As of January 2, 2021, our unrecognized tax benefits
if recognized,
totaled $72 million, $63 million of which,
would reduce our annual effective income tax rate. As of
December 28, 2019, our unrecognized tax benefits totaled
$70 million, $61 million of which,
if recognized, would
reduce our annual effective income tax rate.

Where applicable, we accrue potential

interest and
penalties related to unrecognized tax benefits in income
tax expense. The interest and penalties we recognized
during fiscal years 2020, 2019 and 2018 were not
material, individually or in aggregate, to the Consolidated
Statements of Income. We have accrued balances of
$22 million and $22 million for interest and penalties, net
of tax benefit,
in the Consolidated Balance Sheets at
January 2, 2021 and December 28, 2019, respectively.

A reconciliation of the beginning and ending amounts

of unrecognized tax benefits is set forth below:

(In millions)

Balance at beginning of year
Additions for tax positions of current year
Additions (reductions) for tax positions of prior

years, net

Settlements with tax authorities
Expirations of statutes of limitations
Changes due to translation of foreign currencies

Balance at end of year

2020

2019

$69.9
6.5

$80.8
7.5

5.2
(3.3)
(8.7)
2.4

(6.7)
(1.9)
(8.0)
(1.8)

$72.0

$69.9

It is reasonably possible that, during the next 12
months, we may realize a decrease in our uncertain tax
positions,
of
interest
approximately $10 million, primarily as a result of audit
settlements and closing tax years.

penalties,

including

and

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
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. The final determination of tax audits and
any related legal proceedings could materially differ from
amounts reflected in our tax provision for (benefit from)
income taxes and the related liabilities. To date, we and
our U.S. subsidiaries have completed the IRS’ Compliance
Assurance Process Program through 2017. With limited
exceptions, we are no longer subject
to income tax
examinations by tax authorities for years prior to 2010.

INFORMATION

Segment Reporting

We have the following reportable segments:

(cid:129) Label and Graphic Materials – manufactures and
sells pressure-sensitive label and packaging
materials and films for graphic and reflective
products;

(cid:129) Retail Branding and Information Solutions –
designs, manufactures and sells a wide variety of
including
branding and information solutions,
brand and price tickets, tags and labels (including
RFID inlays), and related services, supplies and
equipment; and

(cid:129) Industrial

and

Healthcare

–
manufactures and sells performance tapes and
other adhesive products for industrial, medical
and other applications, as well as fastener
solutions.

Materials

Intersegment sales are recorded at or near market
prices and are eliminated in determining consolidated
sales. We evaluate our performance based on income
from operations before interest expense and taxes.
Corporate expense is 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 that
information internally. As our reporting structure is neither
organized nor reviewed internally by country, results by
individual country are not provided.

Avery Dennison Corporation | 2020 Annual Report

Revenue by geographic area is shown below.
Revenue is attributed to geographic areas based on the
location from which products are shipped.

(In millions)

2020

2019

2018

Net sales to unaffiliated

customers

U.S.
Europe
Asia
Latin America
Other international

Net sales to unaffiliated

customers

$1,683.6
2,164.7
2,378.5
440.3
304.4

$1,638.8
2,160.2
2,458.5
498.3
314.3

$1,625.1
2,251.4
2,473.2
490.0
319.3

$6,971.5

$7,070.1

$7,159.0

Net sales to unaffiliated customers in Asia included
sales in China (including Hong Kong) of $1.31 billion in
2020, $1.38 billion in 2019, and $1.43 billion in 2018.

Notes to Consolidated Financial Statements

Disaggregated Revenue Information

Disaggregated revenue information is shown 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)

2020

2019

2018

Net sales to unaffiliated

customers

Label and Graphic Materials:

U.S.
Europe
Asia
Latin America
Other international

Total Label and Graphic

Materials

Retail Branding and

Information Solutions:
Apparel
Printer Solutions

Total Retail Branding and
Information Solutions

Industrial and Healthcare

Materials

Net sales to unaffiliated

customers

$1,294.3
1,758.1
1,040.8
340.3
281.6

$1,246.6
1,767.9
1,065.0
375.4
291.0

$1,256.0
1,851.3
1,081.2
367.8
294.8

4,715.1

4,745.9

4,851.1

1,432.3
198.6

1,458.5
191.8

1,441.7
171.5

1,630.9

1,650.3

1,613.2

625.5

673.9

694.7

$6,971.5

$7,070.1

$7,159.0

2020 Annual Report | Avery Dennison Corporation

Notes to Consolidated Financial Statements

Additional Segment Information

Additional

financial
segment is shown below.

information

reportable

(In millions)

2020

2019

2018

(In millions)

2020 2019 2018

Intersegment sales
Label and Graphic Materials
Retail Branding and Information

Solutions

Industrial and Healthcare Materials

$ 80.3 $ 80.2 $ 78.7

27.5
6.4

20.6
8.8

4.7
8.8

Intersegment sales

$114.2 $ 109.6 $ 92.2

Other expense (income), net by reportable

segment

Label and Graphic Materials
Retail Branding and Information Solutions
Industrial and Healthcare Materials
Corporate

$22.2 $28.3 $61.8
11.4
(1.0)
(2.3)

22.7
8.4
.3

9.9
9.4
5.6

Other expense (income), net

$53.6 $53.2 $69.9

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), net

$688.8 $ 601.5 $ 568.2

144.7
58.2
(82.5)
(70.0)

196.6
60.0
(87.6)
(75.8)

170.4
62.9
(83.4)
(58.5)

(1.9)

(445.2)

(104.8)

Income before taxes

$737.3 $ 249.5 $ 554.8

Capital expenditures(1)
Label and Graphic Materials
Retail Branding and Information

Solutions

Industrial and Healthcare Materials

$ 87.3 $ 137.8 $ 151.5

101.6
17.3

63.1
24.2

57.1
19.3

Other expense (income), net by type
Restructuring charges:

Severance and related costs
Asset impairment charges and lease

cancellation costs

Other items:

Transaction and related costs
Legal settlement
Argentine peso remeasurement

transition loss

Other restructuring-related charge
Net gain on investments
Net gain on sales of assets
Reversal of acquisition-related
contingent consideration

$49.1 $45.3 $63.0

6.2

5.1

10.7

4.2
–

–
–
(5.4)
(.5)

2.6
3.4

–
–
–
(3.2)

–
–

3.4
.5
–
(2.7)

–

(5.0)

$53.6 $53.2 $69.9

Capital expenditures

$206.2 $ 225.1 $ 227.9

Other expense (income), net

Depreciation and amortization

expense(1)

Label and Graphic Materials
Retail Branding and Information

Solutions

Industrial and Healthcare Materials

Depreciation and amortization

expense

$107.0 $ 100.2 $ 104.7

71.6
26.7

52.6
26.2

49.0
27.3

$205.3 $ 179.0 $ 181.0

(1) Corporate capital expenditures and depreciation and amortization expense are

allocated to the segments based on their percentage of consolidated net sales.

Property, plant and equipment, net, in our U.S. and

international operations were as follows:

(In millions)

2020

2019

2018

Property, plant and
equipment, net

U.S.
International

Property, plant and
equipment, net

$ 403.1
940.6

$ 366.9
843.8

$ 317.3
820.1

$1,343.7

$1,210.7

$1,137.4

Avery Dennison Corporation | 2020 Annual Report

Notes to Consolidated Financial Statements

NOTE 16. SUPPLEMENTAL FINANCIAL INFORMATION

Allowance for Credit Losses

Inventories

Net inventories at year-end were as follows:

(In millions)

Raw materials
Work-in-progress
Finished goods

Inventories, net

2020

2019

$ 268.6 $ 231.6
201.0
230.4

210.3
238.3

$ 717.2 $ 663.0

Property, Plant and Equipment

Major classes of property, plant and equipment,

stated at cost, at year-end were as follows:

(In millions)

Land
Buildings and improvements
Machinery and equipment
Construction-in-progress

Property, plant and equipment
Accumulated depreciation

2020

2019

26.1
746.4
2,538.6
165.2

25.1
687.4
2,316.9
142.2

3,476.3
(2,132.6)

3,171.6
(1,960.9)

Property, plant and equipment, net

$ 1,343.7

$ 1,210.7

Software

Capitalized software costs at year-end were as

follows:

(In millions)

Cost
Accumulated amortization

Software, net

2020

2019

$ 506.5
(370.1)

$ 487.2
(334.4)

$ 136.4

$ 152.8

Software amortization expense was $29.0 million in

2020, $20.8 million in 2019, and $20.2 million in 2018.

Given the short-term nature of trade receivables, our
allowance for credit losses is based on the financial
condition of customers, the aging of receivable balances,
our historical collections experience, and current and
expected future macroeconomic and market conditions,
including as a result of COVID-19. Balances are written
off in the period in which they are determined to be
uncollectible.

The activity related to our allowance for credit losses

in 2020 was as follows:

(In millions)

Balance at beginning of year
Provision for credit losses(1)
Amounts written off
Other, including foreign currency translation

Balance at end of year

$27.1
20.3
(5.7)
2.9

$44.6

(1) Primarily reflects estimated impacts on customers from COVID-19.

Provisions for credit losses were $10.6 million and

$5.1 million in 2019 and 2018, respectively.

Equity Method Investment

As of January 2, 2021, we held a 22.9% interest in
PragmatIC Printing Limited (“PragmatIC”), a company that
develops flexible electronics technology. The carrying
value of this investment was $5.3 million and $8.8 million
as of
January 2, 2021 and December 28, 2019,
respectively, and was included in “Other assets” in the
In 2019, we made an
Consolidated Balance Sheets.
additional
in PragmatIC of approximately
$4 million.

investment

2020 Annual Report | Avery Dennison Corporation

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)

2020

2019

2018

Research and development

expense

$ 112.8

$ 92.6

$ 98.2

Supplemental Cash Flow Information

Cash paid for interest and income taxes was as

follows:

(In millions)

Interest
Income taxes, net of refunds

2020

2019

2018

$ 69.6
203.4

$ 74.3
155.0

$ 54.9
153.5

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 $7.2 million, $9.7 million, and
$13.4 million in 2020, 2019, and 2018, respectively.

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 January 2, 2021
and December 28, 2019:

(In millions)

January 2, 2021 December 28, 2019

Other current liabilities
Long-term retirement
benefits and other
liabilities

Total deferred revenue

$18.9

1.4

$20.3

$12.6

$12.9

Revenue recognized from amounts included in
deferred revenue as of December 28, 2019 was
$12.0 million in 2020. Revenue recognized from amounts
included in deferred revenue as of December 29, 2018
was $10.8 million in 2019. Revenue recognized from
amounts included in deferred revenue as of December 30,
2017 was $12.2 million in 2018. This revenue was
included in “Net sales” in the Consolidated Statements of
Income.

Avery Dennison Corporation | 2020 Annual Report

Notes to Consolidated Financial Statements

NOTE 17. QUARTERLY FINANCIAL INFORMATION (Unaudited)

(In millions, except per share data)

2020
Net sales
Gross profit
Net income
Net income per common share
Net income per common share, assuming dilution

2019
Net sales
Gross profit
Net income (loss)(1)
Net income (loss) per common share
Net income (loss) per common share, assuming dilution

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

$1,723.0
485.1
134.2
1.61
1.60

$1,528.5
382.9
79.7
.96
.95

$1,729.1
484.2
150.5
1.80
1.79

$1,990.9
571.1
191.5
2.30
2.28

$1,740.1
465.4
(146.9)
(1.74)
(1.74)

$1,795.7
482.3
143.4
1.70
1.69

$1,761.4
471.7
144.6
1.72
1.71

$1,772.9
484.7
162.5
1.95
1.92

(1) In the first quarter of 2019, we recognized final settlement charges associated with the termination of the ADPP. Refer to Note 6, “Pension and Other Postretirement Benefits,” for

more information.

“Other expense (income), net” by type for each quarter is presented below.

(In millions)

2020
Restructuring charges:

Severance and related costs
Asset impairment charges

Other items:

Loss (gain) on investments
Transaction and related costs
Gain on sale of assets

Other expense (income), net

2019
Restructuring charges:

Severance and related costs
Asset impairment charges and lease cancellation costs

Other items:

Legal settlement
Transaction costs
Net gain on sales of assets

Other expense (income), net

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

2.4
–

–
2.5
–

37.5
1.8

–
.7
–

6.5
4.4

1.5
–
–

2.7
–

(6.9)
1.0
(.5)

4.9

40.0

12.4

(3.7)

10.4
.3

6.1
1.4

–
–
(3.2)

–
–
–

3.3
–

3.4
–
–

25.5
3.4

–
2.6
–

7.5

6.7

31.5

2020 Annual Report | Avery Dennison Corporation

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
including our chief executive officer and chief financial officer, we conducted an evaluation of the
management,
effectiveness of internal control over financial reporting based on the framework in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal Control – Integrated Framework (2013), management has concluded that
internal control over financial reporting was effective as of January 2, 2021. The effectiveness of internal control over
financial reporting as of January 2, 2021 has been audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report included herein.

Mitchell R. Butier
Chairman, President and Chief Executive Officer

Gregory S. Lovins
Senior Vice President and Chief Financial Officer

Avery Dennison Corporation | 2020 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 January 2, 2021 and December 28, 2019, and the related consolidated statements of income, of
comprehensive income, of shareholders’ equity and of cash flows for each of the three years in the period ended
January 2, 2021, 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 January 2, 2021, 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 January 2, 2021 and December 28, 2019, and the results of its operations and its
cash flows for each of the three years in the period ended January 2, 2021 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of January 2, 2021, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 7 to the consolidated financial statements, the Company changed the manner in which it

accounts for leases in 2019.

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.

2020 Annual Report | Avery Dennison Corporation

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.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated
financial statements that was communicated or required to be communicated to the audit committee and that (i) relates
to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our
opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit
matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it
relates.

Income Taxes

As described in Notes 1 and 14 to the consolidated financial statements, the Company is subject to income tax in the
U.S. and multiple foreign jurisdictions, whereby management applies judgment in evaluating and estimating the
Company’s worldwide provision, accruals for taxes, deferred taxes and for evaluating the Company’s tax positions. As of
and for the year ended January 2, 2021, management recorded a provision for income taxes of $177.7 million, recorded
total net deferred tax assets of $146.8 million and disclosed unrecognized tax benefits of $72.0 million. As disclosed by
management, significant judgments and estimates are required by management when determining the Company’s tax
expense and evaluating tax positions,
including uncertainties. Management’s estimate of the potential outcome of
uncertain tax issues is subject to management’s assessment of relevant facts and circumstances existing at the balance
sheet date, as well as existing laws, regulations and practices of any governmental authorities exercising jurisdiction over
the Company’s operations. Management’s assessment of the future realizability of the Company’s deferred tax assets
relies heavily on forecasted earnings in certain jurisdictions, and such forecasted earnings are determined by the manner
in which the Company operates its business.

The principal considerations for our determination that performing procedures relating to income taxes is a critical
audit matter are (i) the significant judgment by management when accounting for income taxes, including evaluating the
potential outcome of various uncertain tax issues and the realizability of deferred tax assets; (ii) a high degree of auditor
judgment, effort and subjectivity in performing procedures and evaluating evidence related to the potential outcome of
uncertain tax issues and the realizability of deferred tax assets on a jurisdictional basis; and (iii) the audit effort involved
the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our
overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls
relating to accounting for income taxes, including controls over the identification and recognition of uncertain tax issues
and the realizability of deferred tax assets on a jurisdictional basis. These procedures also included, among others,
(i) testing the income tax provision and the rate reconciliation and (ii) evaluating management’s process for assessing the
potential outcome of uncertain tax issues and the future realizability of deferred tax assets. Evaluating management’s
process for assessing the potential outcome of certain uncertain tax issues included evaluating management’s
assessment of existing laws and regulations and practices of governmental authorities exercising jurisdiction over the
Company’s operations. Evaluating management’s process for assessing the future realizability of certain deferred tax
assets on a jurisdictional basis included evaluating estimates of future taxable income, evaluating management’s

Avery Dennison Corporation | 2020 Annual Report

application of income tax law, and testing the completeness and accuracy of underlying data used in management’s
assessment. Evaluating management’s estimates of future taxable income involved evaluating whether the estimates
used by management were reasonable considering the current and past performance of the Company on a jurisdictional
basis and whether the estimates were consistent with evidence obtained in other areas of the audit. Professionals with
specialized skill and knowledge were used to assist in evaluating the reasonableness of management’s assessment of the
potential outcome of uncertain tax issues and the future realizability of deferred tax assets, including the application of
relevant foreign and domestic income tax laws and regulations, the provision for income taxes and the reasonableness of
management’s assessment of whether it is more-likely-than-not that certain tax positions will be sustained.

Los Angeles, California
February 24, 2021

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.

2020 Annual Report | Avery Dennison Corporation

Other Information

Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
601 South Figueroa Street, Suite 900
Los Angeles, California 90017
(213) 356-6000

Registrar and Transfer Agent
Broadridge Corporate Issuer Solutions, Inc.
P.O. Box 1342
Brentwood, New York 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
virtually, with attendance via the internet at 1:30 p.m.
Pacific Time on April 23, 2021. For more information on
attending and asking questions during the virtual meeting,
please refer to our 2021 Proxy Statement.

The Direct Share Purchase and Sale Program

Shareholders of

record may reinvest

their cash
dividends in additional shares of our common stock at
Investors may also invest optional cash
market price.
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 2020 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
an unqualified annual written
affirmation, along with the Chief Executive Officer’s
certificate that he is not aware of any violation by the
listing
Company of NYSE’s
standards, on April 30, 2020.

corporate governance

(“NYSE”)

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

2020

2019

$ .58
.58
.58
.62

.52
.58
.58
.58

$ 2.36

$ 2.26

Number of shareholders of record as of fiscal

year-end

4,195

4,397

Avery Dennison Corporation | 2020 Annual Report