AVERY DENNISON CORPORATION 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 and should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and notes thereto.
NON-GAAP FINANCIAL MEASURES
We report our financial results in conformity with accounting principles generally accepted inthe United States of America , or GAAP, and also communicate with investors using certain non-GAAP financial measures. These non-GAAP financial measures are not in accordance with, nor are they a substitute for or superior to, the comparable GAAP financial measures. These non-GAAP financial measures are intended to supplement presentation of our financial results that are prepared in accordance with GAAP. Based upon feedback from investors and financial analysts, we believe that the supplemental non-GAAP financial measures we provide are useful to their assessments of our performance and operating trends, as well as liquidity. Our non-GAAP financial measures exclude the impact of certain events, activities or 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. We use these non-GAAP financial measures internally to evaluate trends in our underlying performance, as well as to facilitate comparison to the results of competitors for a single period.
We use the following non-GAAP financial measures in this MD&A:
Sales change ex. currency refers to the increase or decrease in net sales,
excluding the estimated impact of foreign currency translation, and, where
applicable, currency adjustment for transitional reporting of highly
? inflationary economies (
reclassification of sales between segments. The estimated impact of foreign
currency translation is calculated on a constant currency basis, with prior
period results translated at current period average exchange rates to exclude
the effect of currency fluctuations.
Organic sales change refers to sales change ex. currency, excluding the ? estimated impact of product line exits, acquisitions and divestitures, and,
where applicable, an extra week in our fiscal year.
We believe that sales change ex. currency and organic sales change assist investors in evaluating the sales change from the ongoing activities of our businesses and enhance their ability to evaluate our results from period to period.
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 the cash contributions related to the
termination of our
investors by showing the amount of cash we have available for debt reductions,
dividends, share repurchases, and acquisitions.
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 ? assessing our working capital requirements because it excludes the impact of
fluctuations attributable to our financing and other activities (which affect
cash and cash equivalents, deferred taxes, other current assets, and other
current liabilities) that tend to be disparate in amount, frequency, or timing,
and that may increase the volatility of working capital as a percentage of
sales from period to period. The items excluded from this measure are not
significantly influenced by our day-to-day activities managed at the operating
level and do not necessarily reflect underlying trends in our operations.
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Avery Dennison Corporation
OVERVIEW AND OUTLOOK
COVID-19 Pandemic
In March 2020 , the World Health Organization declared the outbreak of
coronavirus/COVID-19 (collectively referred to herein as "COVID-19") a pandemic,
which has continued to spread 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 businesses serve a critical role in supply chains
for 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 vast majority of our office-based employees are
working remotely and some of our operations have 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 facilities
to re-open and/or remain operational, and established work-from-home protocols
for 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.
To meet our customer needs during periods of peak demand for label and packaging
materials in North America and Europe , we took a number of steps to reduce
backlogs, including leveraging our scale and global footprint 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.
To date, disruptions to our supply chain during this challenging period have not
been significant. We believe that our position as the largest customer for many
of our suppliers, our global footprint with dual sourcing for most commodities,
and our inventory build strategy can mitigate future supply chain risk.
We are unable to predict the full impact that COVID-19 will have on our results
from operations, financial condition, liquidity and cash flows due to numerous
uncertainties, including the duration and severity of the pandemic and
containment measures and the related macro-economic impacts. Overall, the
pandemic did not have a material negative impact on our consolidated financial
results for the first quarter of 2020. While our label and packaging materials
largely serve essential categories and experienced higher demand as a result of
the pandemic, sales in our RBIS reportable segment declined modestly due to
lower demand in its base business and sales in our IHM reportable segment also
declined due to reduced industrial demand, particularly in automotive.
We expect that the pandemic will have a negative impact in our second quarter and full year 2020. We expect disruptions in certain of our businesses and operations, while some of our businesses may continue to be positively impacted.
We expect our RBIS reportable segment to be the most negatively impacted, most significantly in the second quarter, as a result of widespread retail store and apparel manufacturing closures. Likewise, we expect reduced demand in our graphics products and Industrial and Healthcare Materials reportable segment's industrial categories, driven largely by automotive end market weakness. We are actively managing this dynamic environment and have updated our plans to reflect the unique aspects of the pandemic. We continue to execute various long-term productivity and temporary cost saving actions to manage the downturn. These include deferrals of planned compensation increases, hiring freezes, overtime and temporary labor reductions, shift reductions and furloughs, temporary production shutdowns, and travel and other discretionary spending reductions. 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 because the commercial paper markets were temporarily unavailable as a result of the pandemic. Additionally, we plan to curtail a portion of our planned capital spending for 2020, while protecting our long-term investments in high value categories, and have heightened our focus on working capital management. We temporarily paused our share repurchase activity and maintained our quarterly dividend at the current rate. We expect that our current cash and cash equivalents and cash flows generated from operations will be sufficient to meet our operating requirements through this downturn. We continue to actively monitor this 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. 18 Table of ContentsAvery Dennison Corporation Net Sales
The factors impacting reported net sales change, as compared to the prior year period, are shown in the table below.
Three Months
Ended
March 28, 2020
Reported sales change (1) %
Foreign currency translation 2
Sales change ex. currency 1
Acquisitions (1)
Organic sales change - %
In the three months ended
Net Income (Loss)
Net income was$134 million in the first three months of 2020 compared to a net loss of$147 million in the same period last year. Major factors affecting the change in net income included the following:
? Prior year settlement loss from pension termination
? Net impact of pricing and raw material input costs
? Benefits from productivity initiatives, including savings from restructuring
actions, net of transition costs Offsetting factors:
? Impact of increased allowance for credit losses primarily as a result of
COVID-19
? Impact of foreign currency translation
Acquisition OnFebruary 28, 2020 , we completed the acquisition ofSmartrac's Transponder (RFID Inlay) division ("Smartrac"), a manufacturer of radio-frequency identification ("RFID") products, for consideration, subject to customary adjustments, of approximately$253 million (€230 million), approximately$7 million of which became payable as ofMarch 28, 2020 . We believe this acquisition will enhance our research and development capabilities, expand product lines, and provide added manufacturing capacity. Consistent with the time allowed to complete our assessment, the valuation of certain acquired assets and liabilities, including tangible and intangible assets, environmental liabilities and income taxes, is preliminary. This acquisition was not material to our unaudited Condensed Consolidated Financial Statements.
Cost Reduction Actions
2019/2020 Actions
During the three months ended
2018/2019 Actions
During the three months ended
Restructuring charges were included in "Other expense (income), net" in the unaudited Condensed Consolidated Statements of Income. Refer to Note 6, "Cost Reduction Actions," to the unaudited Condensed Consolidated Financial Statements for more information.U.S. Pension Plan Termination In connection with its termination in 2019, we settled approximately$753 million of liabilities of theAvery Dennison Pension Plan (the "ADPP") by entering into an agreement to purchase annuities primarily fromAmerican General Life Insurance Company and through a combination of annuities and direct funding to thePension Benefit Guaranty Corporation for a small portion of former employees and their beneficiaries. 19 Table of ContentsAvery Dennison Corporation Accounting Guidance Updates
Refer to Note 1, "General," to the unaudited Condensed Consolidated Financial Statements for this information.
Cash Flow
Three Months Ended
(In millions) March 28, 2020 March 30, 2019
Net cash provided by operating activities $ 4.4 $ 35.4
Purchases of property, plant and equipment (33.2) (41.8)
Purchases of software and other deferred charges (6.2) (5.5)
Proceeds from sales of property, plant and equipment - 7.3
Proceeds from insurance and sales (purchases) of
investments, net (.3) 4.5
Contributions for pension plan termination - 7.4 Free cash flow $ (35.3) $ 7.3 During the first three months of 2020, net cash provided by operating activities decreased compared to the same period last year primarily due to changes in operational working capital, partially offset by lower payroll and incentive compensation payments, lower pension plan contributions, and lower restructuring payments. During the first three months of 2020, free cash flow decreased compared to the same period last year due to a decrease in net cash provided by operating activities, lower proceeds from sales of property, plant and equipment and lower proceeds from sales of investments, partially offset by a decrease in purchases of property, plant and equipment.
Outlook
Certain factors that we believe may contribute to our 2020 results are described below:
Though the impact of COVID-19 on global demand for our products cannot be
? reasonably estimated at this time, we expect sales and earnings to decline in
2020 as a result of the pandemic.
? We anticipate partially offsetting this negative impact with significant
temporary cost savings.
? We anticipate incremental savings from restructuring actions, net of transition
costs, of
? We expect our full year effective tax rate to be in the mid-twenty percent
range.
? Based on recent foreign currency exchange rates, we expect foreign currency
translation to reduce our operating income by approximately
ANALYSIS OF RESULTS OF OPERATIONS FOR THE FIRST QUARTER
Income Before Taxes
Three Months Ended(In millions, except percentages)March 28, 2020
March 30, 2019 Net sales$ 1,723.0 $ 1,740.1 Cost of products sold 1,237.9 1,274.7 Gross profit 485.1 465.4
Marketing, general and administrative expense 281.0
276.3
Other expense, net 4.9 7.5
Interest expense 18.8 19.5Other non-operating expense, net (.5)
446.5
Income (loss) before taxes $ 180.9 $ (284.4)
Gross profit margin 28.2 % 26.7 %
Gross Profit Margin
Gross profit margin for the first quarter of 2020 increased compared to the same period last year primarily reflecting the net benefit of pricing and raw material input costs and benefits from productivity initiatives, including material re-engineering and savings from restructuring actions, net of transition costs, partially offset by unfavorable product mix and higher employee-related costs.
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Avery Dennison Corporation Marketing, General and Administrative Expense
Marketing, general and administrative expense increased in the first quarter of 2020 compared to the same period last year primarily due to increased allowances for credit losses, partially offset by benefits from productivity initiatives, including savings from restructuring actions, net of transition costs, and
lower
employee-related costs.
Other Expense , Net
Three Months Ended
(In millions) March 28, 2020 March 30, 2019
Other expense (income), net, by type
Restructuring charges:
Severance and related costs $ 2.4 $ 10.4
Lease cancellation costs - .3
Other items:
Transaction and related costs 2.5 -
Gain on sales of assets - (3.2)
Other expense, net $ 4.9 $ 7.5
Refer to Note 6, "Cost Reduction Actions," to the unaudited Condensed Consolidated Financial Statements for more information regarding restructuring charges.
Interest Expense
Interest expense decreased slightly in the first quarter of 2020 compared to the same period last year reflecting lower borrowing rates on our outstanding indebtedness.
Other Non-Operating Expense, Net
Other non-operating expense decreased in the first quarter of 2020 compared to the same period last year primarily due to the prior year impact of the ADPP termination.
Net Income and Earnings per Share
Three Months Ended(In millions, except per share amounts and percentages) March 28, 2020 March 30, 2019 Income (loss) before taxes $ 180.9$ (284.4) Provision for (benefit from) income taxes 46.3 (138.4) Equity method investment losses (.4) (.9) Net income (loss) $ 134.2$ (146.9) Per share amounts: Net income (loss) per common share $ 1.61 $ (1.74) Net income (loss) per common share, assuming dilution 1.60
(1.74)
Effective tax rate 25.6 % 48.7 %
Provision for Income Taxes
Our effective tax rate for the three months endedMarch 28, 2020 was 25.6%, compared to 48.7% in the same period last year. The decrease in tax rate was primarily due to the tax effects of the settlement charges associated with the termination of the ADPP in the three months endedMarch 30, 2019 . Refer to Note 8, "Taxes Based on Income," to the unaudited Condensed Consolidated Financial Statements for more information. 21 Table of ContentsAvery Dennison Corporation We currently expect our effective tax rate for fiscal year 2020 to be in the mid-twenty percent range. Our effective tax rate can vary from quarter to quarter due to the recognition of discrete events, such as changes in tax reserves, settlements of income tax audits, changes in tax laws and regulations, return-to-provision adjustments, 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. Our effective tax rate may be negatively impacted if the duration or severity of COVID-19 is longer or more detrimental than currently estimated. We continue to pursue planning opportunities in certain foreign jurisdictions primarily to react to the loss of concessionary tax rates. We believe that we are on track to realize these opportunities. We continue to evaluate certain key factors that may significantly influence the amount of benefit to be recognized in fiscal year 2020.
RESULTS OF OPERATIONS BY REPORTABLE SEGMENT FOR THE FIRST QUARTER
Operating income refers to income before taxes, interest and other non-operating
expenses.
Label and Graphic Materials
Three Months Ended
(In millions) March 28, 2020 March 30, 2019
Net sales including intersegment sales $ 1,203.2 $ 1,199.5
Less intersegment sales (22.4) (21.2)
Net sales $ 1,180.8 $ 1,178.3
Operating income(1) 171.9 139.5
(1)Included charges associated with restructuring actions in both years, transaction and related costs in 2020, and gain on sales of assets in 2019
$ 1.9 $ 7.6
Net Sales
The factors impacting reported net sales change are shown in the table below.
Three Months Ended
March 28, 2020
Reported sales change - %
Foreign currency translation 2
Sales change ex. currency 2
Acquisitions (1)
Organic sales change(1) 2 %
(1)Total does not sum due to rounding
In the first quarter of 2020, net sales increased on an organic basis compared to the same period in the prior year primarily due to higher volume/mix, which more than offset raw material-related price reductions. On an organic basis, net sales increased by mid-single digit rates inNorth America and low-single digits in emerging markets and were comparable to prior year inWestern Europe .
Operating Income
Operating income increased in the first quarter of 2020 compared to the same
period last year primarily due to benefits from higher volume and raw material
deflation, net of pricing and unfavorable product mix, benefits from
productivity initiatives, including material re-engineering and savings from
restructuring actions, net of transition costs, and lower restructuring charges.
These benefits were partially offset by increased allowance for credit losses.
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Avery Dennison Corporation Retail Branding and Information Solutions
Three Months Ended
(In millions) March 28, 2020 March 30, 2019
Net sales including intersegment sales $ 401.1 $ 402.5
Less intersegment sales (6.5) (4.2)
Net sales $ 394.6 $ 398.3
Operating income(1) 31.5 51.4
(1)Included charges associated with restructuring actions in both years, transaction and related costs in 2020, and gain on sales of assets of 2019
$ 2.5 $ (2.0)
Net Sales
The factors impacting reported net sales change are shown in the table below.
Three Months Ended
March 28, 2020
Reported sales change (1) %
Foreign currency translation 1
Sales change ex. currency -
Acquisitions (1)
Organic sales change (1) %
In the first quarter of 2020, net sales decreased on an organic basis compared
to the same period in the prior year due to a mid-to-high single digit decline
in the base business due to manufacturing closures and lower demand in apparel,
which more than offset a low double-digit increase in RFID solutions.
Operating Income
Operating income decreased in the first quarter of 2020 compared to the same period last year primarily due to higher long-term growth-related investments, an increased allowance for credit losses, and lower volume, partially offset by lower raw material costs and benefits from productivity initiatives, including savings from restructuring actions, net of transition costs.
Industrial and Healthcare Materials
Three Months Ended
(In millions) March 28, 2020 March 30, 2019
Net sales including intersegment sales $ 149.2 $ 166.1
Less intersegment sales (1.6) (2.6)
Net sales $ 147.6 $ 163.5
Operating income(1) 14.9 13.6
(1)Included charges associated with restructuring in
both years $ .5 $ 1.9
Net Sales
The factors impacting reported net sales change are shown in the table below.
Three Months Ended
March 28, 2020
Reported sales change (10) %
Foreign currency translation 2
Sales change ex. currency (8)
Acquisitions -
Organic sales change (8) %
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Avery Dennison Corporation In the first quarter of 2020, net sales decreased on an organic basis compared to the same period in the prior year due to a mid-single digit decrease in industrial categories and a low-single digit decrease in healthcare categories.
Operating Income
Operating income increased in the first quarter of 2020 compared to the same
period last year primarily due to benefits from productivity initiatives,
including savings from restructuring actions, net of transition costs, and lower
restructuring charges, partially offset by lower volume.
FINANCIAL CONDITION
Liquidity
Operating Activities
Three Months Ended
(In millions) March 28, 2020 March 30, 2019
Net income (loss) $ 134.2 $ (146.9)
Depreciation 36.8 34.9
Amortization 10.7 9.6Provision for credit losses and sales returns 31.2 14.8 Stock-based compensation 6.3 7.6 Pension plan settlements and related charges - 446.9 Deferred taxes and other non-cash taxes 6.4 (172.8) Other non-cash expense and loss (income and gain), net 4.4 3.3 Changes in assets and liabilities and other adjustments (225.6) (162.0) Net cash provided by operating activities $ 4.4
$ 35.4
During the first three months of 2020, net cash provided by operating activities
decreased compared to the same period last year primarily due to changes in
operational working capital, partially offset by lower payroll and incentive
compensation payments, lower pension plan contributions, and lower restructuring
payments.
Investing Activities
Three Months Ended
(In millions) March 28, 2020 March 30, 2019Purchases of property, plant and equipment $ (33.2)$ (41.8) Purchases of software and other deferred charges (6.2) (5.5) Proceeds from sales of property, plant and equipment - 7.3 Proceeds from insurance and sales (purchases) of investments, net (.3) 4.5
Payments for acquisition, net of cash acquired, and investments in businesses
(245.9) (6.5)
Net cash used in investing activities $ (285.6) $ (42.0)
Purchases of Property, Plant and Equipment
During the first three months of 2020, we invested in equipment to support
growth in
Purchases of Software and Other Deferred Charges
During the first three months of 2020 and 2019, we invested in information
technology upgrades worldwide. During the first three months of 2019, we also
invested in enterprise resource planning system implementations in
Proceeds from Sales of Property, Plant and Equipment
During the first three months of 2019, the majority of the proceeds from sales of property, plant and equipment was related to the sale of three properties inNorth America ,Asia andEurope . 24 Table of ContentsAvery Dennison Corporation
Proceeds from Insurance and Sales (Purchases) of Investments, Net
During the first three months of 2020, we had lower proceeds from insurance associated with our corporate-owned life insurance policies and higher net purchases of investments compared to the same period last year.
Payments for Acquisition, Net of Cash Acquired, and Investments in Businesses
During the first three months of 2020, we paid consideration, net of cash acquired, of approximately$246 million to acquireSmartrac , which we funded through commercial paper borrowings at that time. During the first three months of 2019, we paid$6.5 million for investments in unconsolidated businesses.
Financing Activities
Three Months Ended
(In millions) March 28 ,
2020
$ (106.0) $ 155.4 Additional borrowings under revolving credit facility 500.0 - Additional long-term borrowings 494.4 - Repayments of long-term debt and finance leases (1.1) (1.8) Dividends paid (48.4) (43.9) Share repurchases (45.2) (88.7)
Net (tax withholding) proceeds related to stock-based compensation
(20.0) (20.1)
Payments of contingent consideration - (1.6)
Net cash provided by (used in) financing activities $ 773.7 $ (.7)
Borrowings and Repayment of Debt
Given the seasonality of our cash flow from operating activities, during the first three months of 2020 and 2019, our commercial paper borrowings were used to fund dividend payments, share repurchases, and capital expenditures, and for other general corporate purposes. During the first three months of 2020, commercial paper borrowings were also used to fund theSmartrac acquisition, which we paid down using the net proceeds of$494.4 million from the$500 million of senior notes we issued inMarch 2020 . Subsequent to the end of the first quarter of 2020, we used the remaining proceeds from these notes to repay the$250 million aggregate principal amount of senior notes that matured onApril 15, 2020 . In light of recent uncertainty regarding the availability of commercial paper, which we typically rely upon to fund day-to-day operational needs, and the relatively favorable terms under our recently-extended$800 million revolving credit facility (the "Revolver"), inMarch 2020 , we borrowed$500 million from the Revolver with a six-month duration.
Refer to Note 4, "Debt" to the unaudited Condensed Consolidated Financial Statements for more information.
Dividends Paid
We paid dividends of$.58 per share in the first three months of 2020 compared to$.52 per share in the same period last year. InApril 2019 , we increased our quarterly dividend to$.58 per share, representing an increase of approximately 12% from our previous dividend rate of$.52 per share.
Share Repurchases
During the first three months of 2020 and 2019, we repurchased approximately .4 million and .9 million shares of our common stock, respectively.
Net (Tax Withholding) Proceeds Related to Stock-Based Compensation
During the first three months of 2020, tax withholding for stock-based compensation decreased compared to the same period in 2019 as a result of fewer equity awards vesting, partially offset by lower proceeds from fewer stock option exercises compared to the same period in 2019.
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Avery Dennison Corporation Analysis of Selected Balance Sheet Accounts
Long-lived Assets
In the three months ended
In the three months endedMarch 28, 2020 , other intangibles resulting from business acquisitions, net, increased by approximately$71 million to$197.6 million , which reflected the preliminary valuation of other intangibles from theSmartrac acquisition, partially offset by current year amortization expense and the impact of foreign currency translation.
Refer to Note 3, "
Shareholders' Equity Accounts As ofMarch 28, 2020 , the balance of our shareholders' equity was$1.17 billion . Refer to Note 10, "Supplemental Equity and Comprehensive Income Information," to the unaudited Condensed Consolidated Financial Statements for more information.
Impact of Foreign Currency Translation
Three Months Ended
(In millions) March 28, 2020
Change in net sales $ (34)
International operations generated approximately 75% of our net sales during the
three months ended March 28, 2020 . Our future results are subject to changes in
political and economic conditions in the regions in which we operate and the
impact of fluctuations in foreign currency exchange and interest rates.
The unfavorable impact of foreign currency translation on net sales in the first
three months of 2020 compared to the same period last year was primarily related
to euro-denominated sales and sales in China and Brazil .
Effect of Foreign Currency Transactions
The impact on net income (loss) 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. Refer to Note 7, "Financial Instruments," to the unaudited Condensed 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. We believe this information assists our
investors in understanding drivers of our cash flow other than net income (loss)
and capital expenditures.
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Avery Dennison Corporation 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 cash flow and return on investment. Operational working capital, as a percentage of annualized current-quarter net sales, in the first quarter of 2020, was higher compared to the first quarter of 2019. (In millions, except percentages) March 28, 2020 March 30, 2019 (A) Working capital $ 353.5 $ 283.2 Reconciling items: Cash and cash equivalents (742.0) (225.7) Other current assets (225.8) (211.0)
Short-term borrowings and current portion of long-term debt and finance leases
832.3 350.3
Accrued payroll and employee benefits and other current liabilities
697.0 656.5
(B) Operational working capital $ 915.0 $ 853.3
(C) First-quarter net sales, annualized $
6,892.0
13.3 % 12.3 % Accounts Receivable Ratio
The average number of days sales outstanding was 65 days in the first three months of 2020 compared to 63 days in the first three months of 2019, calculated using the trade accounts receivable balance at quarter-end divided by the average daily sales for the quarter. The increase in the average number of days sales outstanding primarily reflected delays in collections at the end of the quarter due to the impact of COVID-19 on many of our customers, partially offset by a higher allowance for credit losses.
Inventory Ratio
Average inventory turnover was 6.9 in the first three months of 2020 compared to 7.4 in the first three months of 2019, calculated using the annualized cost of sales (year-to-date cost of products sold, multiplied by four) divided by the inventory balance at quarter-end. The decrease in average inventory turnover primarily reflected short-term manufacturing facility closures and planned inventory pre-build as a result of COVID-19.
Accounts Payable Ratio
The average number of days payable outstanding was 76 days in the first three months of 2020 compared to 74 days in the first three months of 2019, calculated using the accounts payable balance at quarter-end divided by the average daily cost of products sold for the quarter. The increase in the average number of days payable outstanding from the prior year primarily reflected timing of vendor payments and inventory pre-build.
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. AtMarch 28, 2020 , we had cash and cash equivalents of$742 million held in accounts at third-party financial institutions.
Our cash balances are held in numerous locations throughout the world. At
To meetU.S. cash requirements, we have several cost-effective liquidity options available. These options include borrowing funds at reasonable rates, including borrowings from foreign subsidiaries, and repatriating foreign earnings and profits. However, if we were to repatriate incremental foreign earnings and profits, we may be subject to withholding taxes imposed by foreign tax authorities and additionalU.S. taxes due to the impact of foreign currency movements related to these earnings and profits. 27 Table of ContentsAvery Dennison Corporation InFebruary 2020 , we amended and restated our$800 million Revolver, extending its maturity date toFebruary 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. In light of recent uncertainty regarding the availability of commercial paper, which we typically rely upon to fund day-to-day operational needs, and the relatively favorable terms under the Revolver, inMarch 2020 , we drew down$500 million from the Revolver with a six-month duration. This balance remained outstanding as ofMarch 28, 2020 . No balance was outstanding under the Revolver as ofDecember 28, 2019 . 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 such fiscal quarter. As ofMarch 28, 2020 andDecember 28, 2019 , we were in compliance with our financial covenants under the Revolver. InMarch 2020 , we issued$500 million of senior notes, dueApril 2030 . The senior notes bear an interest rate of 2.65% per year, payable semiannually in arrears. The net proceeds from the offering, after deducting underwriting discounts and offering expenses, were$494.4 million , which we used to repay existing indebtedness under our commercial paper program, used to fund ourSmartrac acquisition and, subsequent to the end of the first quarter of 2020, the$250 million aggregate principal amount of senior notes that matured on
April 15, 2020 . Capital from Debt The carrying value of our total debt increased by approximately$881 million in the first three months of 2020 to$2.82 billion , primarily reflecting the borrowings under the Revolver and the issuance of senior notes inMarch 2020 , partially offset by 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 paid and our access to commercial paper, credit facilities, and other borrowings. A downgrade of our short-term credit ratings could impact our ability to access the commercial paper markets. If our access to commercial paper markets were to become limited, as it did in the first quarter of 2020 as a result of COVID-19, we expect 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. We remain committed to maintaining an investment grade rating. Off-Balance Sheet Arrangements, Contractual Obligations, and Other Matters
Refer to Note 12, "Commitments and Contingencies," to the unaudited Condensed Consolidated Financial Statements. Except as indicated therein, we have no material off-balance sheet arrangements as described in Item 303 (a)(4) of Regulation S-K.
RECENT ACCOUNTING REQUIREMENTS
Refer to Note 1, "General," to the unaudited Condensed Consolidated Financial Statements.
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