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11/02/2021 | 03:36pm EST
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 related notes.
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
financial measures. These
financial measures are not in accordance with, nor are they a substitute for or
superior to, the comparable GAAP financial measures. These
financial measures are intended to supplement the presentation of our financial
results that are prepared in accordance with GAAP. Based upon feedback from
investors and financial analysts, we believe that the supplemental
financial measures we provide are useful to their assessments of our performance
and operating trends, as well as liquidity.
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, outcomes of certain legal proceedings, 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, gains or losses on investments 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
financial measures internally to evaluate trends in our underlying performance,
as well as to facilitate comparison to the results of competitors for quarters
and year-to-date periods, as applicable.
We use the
financial measures described below 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, the calendar

shift resulting from the extra week in the prior fiscal year and currency

adjustment for transitional reporting of highly inflationary economies. 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

acquisitions and product line divestitures.

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, where applicable, certain acquisition-related
    transaction costs. We believe that free cash flow assists investors by showing
    the amount of cash we have available for debt reductions, dividends, share
    repurchases and acquisitions.

?   Operational working capital as a percentage of annualized current quarter net
    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
    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 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
    activities managed at the operating level and do not necessarily reflect the
    underlying trends in our operations.



  Table of Contents
                                                      Avery Dennison Corporation

Operational and Market Update
Uncertainty surrounding the global health crisis remains elevated as many parts
of the world are experiencing an increase in cases related to
with the greatest impact to the company in Southeast Asia, particularly in our
Retail Branding and Information Solutions ("RBIS") reportable segment. The
safety and well-being of employees has been and continues to be our top
priority. We have taken steps to ensure employee safety, quickly implementing
world-class safety protocols and continuing to adapt our guidelines as the
pandemic continues to evolve. Where appropriate, we may take further actions
required by international, federal, state or local authorities or that we
determine are in the best interests of our employees, customers, shareholders
and communities.
As supply chains remain constrained, we continue to actively manage through a
dynamic supply and demand environment. Demand across the majority of businesses
and regions remains strong, while raw materials, freight and labor availability
continue to be constrained. Inflation remains persistent and we have implemented
pricing and material
actions to offset higher costs. We are leveraging our global scale and working
closely with customers and suppliers to minimize disruptions and continue to
demonstrate agility and preparedness through robust scenario planning.
had a notably negative impact on our consolidated financial results in 2020,
most significantly in our RBIS and Industrial and Healthcare Materials ("IHM")
reportable segments. Our operations largely recovered from the prior-period
impact of
with this recovery reflected in higher volume across our businesses.
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        Nine Months Ended
                                                          October 2, 2021          October 2, 2021
Reported sales change                                                  20 %                     25 %
Foreign currency translation                                           (3 )                     (5 )
Extra week impact                                                       -                       (1 )
Sales change ex. currency
(1)                                                                    17                       19
Acquisitions and product line divestitures                             (3 )                     (2 )
Organic sales change
(1)                                                                    14 %                     17 %

(1) Totals may not sum due to rounding

In the three months and nine months ended October 2, 2021, net sales increased
on an organic basis compared to the same periods in the prior year due to higher
volume/mix and pricing actions.
Net Income
Net income increased from approximately $364 million in the first nine months of
2020 to approximately $557 million in the first nine months of 2021. Major
factors affecting the change in net income included the following:

  ?   Higher volume/mix

  ?   Favorable currency translation

   ?   Benefits from productivity initiatives, including savings from restructuring
       actions, net of transition costs

  ?   Benefit from the Brazil indirect tax credit

  ?   Lower allowances for credit losses

Offsetting factors:

  ?   Higher employee-related costs

  ?   The impact of prior-year temporary cost reduction actions

  ?   Higher tax provision

   ?   Net impact of higher selling prices, higher raw material costs, and higher
       freight costs

  ?   Contingent liability related to patent infringement litigation

  ?   Higher transaction and related costs



  Table of Contents
                                                      Avery Dennison Corporation

Vestcom Acquisition
On August 31, 2021, we completed our acquisition of CB Velocity Holdings, LLC
("Vestcom"), an Arkansas-based provider of shelf-edge pricing, productivity and
consumer engagement solutions for retailers and consumer packaged goods
companies for a purchase price of $1.46 billion, subject to customary
post-closing adjustments. We funded this acquisition using a combination of cash
and proceeds from commercial paper borrowings and issuances of senior notes.
Refer to Note 4, "Debt," to the unaudited Condensed Consolidated Financial
Statements for more information.
We believe Vestcom's solutions expand our position in high value categories
while adding channel access and data management capabilities to our RBIS
reportable segment.
Other 2021 Acquisitions
On March 18, 2021, we completed our acquisition of the net assets of ZippyYum,
LLC ("ZippyYum"), a California-based developer of software products used in the
food service and food preparation industries. We believe this acquisition
enhances the product portfolio in our RBIS reportable segment.
On March 1, 2021, we completed our acquisition of the issued and outstanding
stock of JDC Solutions, Inc. ("JDC"), a Tennessee-based manufacturer of
pressure-sensitive specialty tapes. We believe this acquisition expands the
product portfolio in our IHM reportable segment.
The acquisitions of ZippyYum and JDC are referred to collectively as the "Other
2021 Acquisitions."
The aggregate purchase consideration for the Other 2021 Acquisitions was
approximately $43 million. We funded the Other 2021 Acquisitions using cash and
commercial paper borrowings. In addition to the cash paid at closing, the
sellers in one of these acquisitions are eligible for earn-out payments of up to
approximately $13 million subject to the acquired company's achievement of
certain performance targets. We estimate the fair value of these earn-out
payments as of October 2, 2021 to be approximately $12 million, which has been
included in the $43 million of aggregate purchase consideration.
The Other 2021 Acquisitions were not material, individually or in the aggregate,
to the unaudited Condensed Consolidated Financial Statements.
Refer to Note 2, "Acquisitions," to the unaudited Condensed Consolidated
Financial Statements for more information.
Cost Reduction Actions
2019/2020 Actions
During the nine months ended October 2, 2021, we recorded $6.7 million in
restructuring charges related to our 2019/2020 actions. These charges consisted
of severance and related costs for the reduction of approximately 235 positions
at numerous locations across our company, which primarily included actions in
our RBIS reportable segment. The actions were primarily related to global
headcount and footprint reductions, with some actions accelerated or expanded in
response to COVID-19.
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.



Table of Contents

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