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, 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 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 (
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 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 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 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 inChina 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 inNorth America andEurope , 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 has had a negative impact on our consolidated financial results year-to-date. Net sales for the second quarter of 2020 were down approximately 15% from the same period last year. However, we experienced sequential improvement in the third quarter of 2020, with our net sales for the period down approximately 2% from the same period last year, which was significantly better than we anticipated at the start of the quarter. While our label and packaging materials largely serve essential categories and experienced higher demand as a result of the pandemic in mid-March through May, demand slowed late in the second quarter and moderated in the third quarter. Sales of graphics products as well as sales in our RBIS reportable segment declined significantly in April due to lower demand, though we experienced sequential improvement during the rest of the second quarter and the third quarter. Additionally, sales in our Industrial and Healthcare Materials ("IHM") reportable segment declined significantly in the second quarter mainly due to reduced industrial demand, particularly in automotive end markets, although we experienced sequential improvement in the third quarter. We expect that the pandemic will have a negative impact for the fourth quarter and full year 2020. While we experienced sequential improvements in the third quarter of 2020, demand is lower across our businesses. 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 macroeconomic impacts. We are actively managing this dynamic environment and have updated our scenario planning to reflect the unique aspects of the pandemic. 19 Table of ContentsAvery Dennison Corporation We have continued to execute various long-term productivity and temporary cost saving actions to manage the downturn. These have included 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 ("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 have curtailed a portion of our planned capital spending for 2020, while protecting our long-term investments in high value product categories, and have heightened our focus on working capital management. We temporarily paused repurchasing shares during the second quarter of 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.
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
September 26, 2020 September 26, 2020
Reported sales change (2) % (6) %
Foreign currency translation 1 2
Sales change ex. currency(1) (1) (4)
Acquisitions (2) (2)
Organic sales change(1) (4) % (6) %(1)Totals may not sum due to rounding
In the three and nine months endedSeptember 26, 2020 , net sales decreased on an organic basis compared to the same period in the prior year primarily due to the impact of COVID-19 on our markets and customers.
Net Income
Net income increased from approximately$141 million in the first nine months of 2019 to approximately$364 million for the first nine months of 2020. Major factors affecting the change in net income included the following:
? Prior-year settlement loss from
? Benefits from productivity initiatives , including temporary cost reduction
actions, and savings from restructuring actions, net of transition costs
? Net impact of pricing and raw material input costs
Offsetting factors:
? Lower sales primarily due to the impact of COVID-19
? Higher restructuring charges
? Increased allowance for credit losses primarily as a result of COVID-19
? Impact of foreign currency translation
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Acquisition
On February 28, 2020 , we completed the acquisition of Smartrac's Transponder
(RFID Inlay) division ("Smartrac"), a manufacturer of radio-frequency
identification ("RFID") products, for consideration of approximately $255
million (€238 million). We believe this acquisition enhances our research and
development capabilities, expands our product lines, and provides added
manufacturing capacity. Consistent with the time allowed to complete our
assessment, our valuation of certain acquired assets and liabilities, including
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 nine months endedSeptember 26, 2020 , we recorded$52.7 million in restructuring charges related to our 2019/2020 actions. These charges consisted of severance and related costs for the reduction of approximately 2,050 positions at numerous locations across our company, which primarily included actions in our Label and Graphic Materials ("LGM") and RBIS reportable segments. The actions in LGM were primarily associated with the consolidation of our graphics business inEurope , in part in response to COVID-19. The actions in RBIS were primarily related to global headcount and footprint reduction, with some actions accelerated and 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.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.
Accounting Guidance Update
Refer to Note 1, "General," to the unaudited Condensed Consolidated Financial Statements for this information.
Cash Flow
Nine Months Ended
(In millions) September 26, 2020 September 28, 2019Net cash provided by operating activities $ 441.8 $ 467.0 Purchases of property, plant and equipment (91.7) (132.9) Purchases of software and other deferred charges (13.8) (27.4) Proceeds from sales of property, plant and equipment .2 7.7 Proceeds from insurance and sales (purchases) of investments, net 5.2 3.5 Contributions forU.S. pension plan termination - 9.5 Free cash flow $ 341.7 $ 327.4 During the first nine 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 severance payments related to restructuring actions. During the first nine months of 2020, free cash flow increased compared to the same period last year primarily due to a decrease in purchases of property, plant and equipment and reduced purchases of software and other deferred charges, partially offset by a decrease in net cash provided by operating activities and lower proceeds from sales of property, plant and equipment. 21 Table of ContentsAvery Dennison Corporation Outlook
Certain factors that we believe may contribute to our 2020 results are described below:
? We expect net sales to decline as a result of COVID-19, although the amount of
the decline is uncertain at this time.
? We anticipate partially offsetting the negative impact of COVID-19 on volume
with approximately
? We estimate restructuring charges of approximately
impairment charges recognized during the first nine months of 2020.
? We anticipate incremental savings from restructuring actions, net of transition
costs, of
? We expect our full year effective tax rate to be approximately 24%.
Based on recent foreign currency exchange rates, we expect foreign currency
? translation to reduce our net sales by approximately 1% and our operating
income by approximately
? We anticipate capital and software expenditures of
million.
ANALYSIS OF RESULTS OF OPERATIONS FOR THE THIRD QUARTER
Income Before Taxes
Three Months Ended(In millions, except percentages)September 26, 2020
September 28, 2019 Net sales $ 1,729.1 $ 1,761.4 Cost of products sold 1,244.9 1,289.7 Gross profit 484.2 471.7
Marketing, general and administrative expense 258.3
265.3
Other expense (income), net 12.4 6.7
Interest expense 15.6 19.0Other non-operating expense (income), net .1
.8
Income before taxes $ 197.8 $ 179.9
Gross profit margin 28.0 % 26.8 %
Gross Profit Margin
Gross profit margin for the third quarter of 2020 increased compared to the same period last year primarily reflecting benefits from productivity initiatives, including temporary cost reduction actions, material re-engineering and savings from restructuring actions, net of transition costs, and the net benefit of pricing and raw material input costs, partially offset by the impact of lower volume and unfavorable product mix.
Marketing, General and Administrative Expense
Marketing, general and administrative expense decreased in the third quarter of
2020 compared to the same period last year primarily due to benefits from
productivity initiatives, including temporary cost reduction actions,and savings
from restructuring actions, net of transition costs, partially offset by higher
employee-related costs.
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Other Expense (Income), Net
Three Months Ended
(In millions) September 26, 2020 September 28, 2019
Other expense (income), net, by type
Restructuring charges:
Severance and related costs $ 6.5 $ 3.3
Asset impairment charges 4.4 -
Other items:
Loss on investment 1.5 -
Legal settlement - 3.4
Other expense (income), net $ 12.4 $ 6.7
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 in the third quarter of 2020 compared to the same period last year primarily reflecting lower borrowing rates from recently issued long-term debt.
Other Non-Operating Expense (Income), Net
Other non-operating expense decreased in the third quarter of 2020 compared to the same period last year primarily due to lower pension costs.
Net Income and Earnings per Share
Three Months Ended
(In millions, except per share amounts and
percentages) September 26, 2020 September 28, 2019
Income before taxes $ 197.8 $ 179.9
Provision for (benefit from) income taxes 46.3 34.6 Equity method investment (losses) gains (1.0)
(.7)
Net income $ 150.5 $ 144.6
Per share amounts:
Net income per common share $ 1.80 $ 1.72
Net income per common share, assuming
dilution 1.79 1.71
Effective tax rate 23.4 % 19.2 %
Provision for (Benefit from) Income Taxes
Our effective tax rate for the three months endedSeptember 26, 2020 was 23.4% compared to 19.2% in the same period last year. The tax rate increase was primarily due to higher discrete benefits related to effective settlements of certain foreign tax audits in 2019. Refer to Note 8, "Taxes Based on Income," to the unaudited Condensed Consolidated Financial Statements for more information. 23 Table of ContentsAvery Dennison Corporation
RESULTS OF OPERATIONS BY REPORTABLE SEGMENT FOR THE THIRD QUARTER
Operating income refers to income before taxes, interest and other non-operating
expense (income), net.
Label and Graphic Materials
Three Months Ended
(In millions) September 26, 2020 September 28, 2019Net sales including intersegment sales $ 1,165.2 $
1,203.3
Less intersegment sales (19.8) (18.2)
Net sales $ 1,145.4 $ 1,185.1
Operating income(1) 173.1 159.0
(1)Included charges associated with
restructuring actions in both years $ 1.4 $
1.2
Net Sales
The factors impacting reported net sales change are shown in the table below.
Three Months Ended
September 26, 2020
Reported sales change (3) %
Foreign currency translation 1
Sales change ex. currency(1) (3)
Acquisitions -
Organic sales change(1) (3) %
(1)Totals may not sum due to rounding
In the third quarter of 2020, net sales decreased on an organic basis compared to the same period in the prior year primarily due to unfavorable volume/mix and raw material deflation-related price reductions. On an organic basis, net sales were comparable in emerging markets, increased by a low-single digit rate inNorth America and decreased by approximately 10% inWestern Europe .
Operating Income
Operating income increased in the third quarter of 2020 compared to the same period last year primarily due to benefits from productivity initiatives, including temporary cost reduction actions, material re-engineering, and savings from restructuring actions, net of transition costs, as well as, benefits from raw material deflation, net of pricing, partially offset by higher employee-related costs and unfavorable volume/mix.
Retail Branding and Information Solutions
Three Months Ended
(In millions) September 26, 2020 September 28, 2019Net sales including intersegment sales $ 433.4 $
412.4
Less intersegment sales (7.3) (5.6)
Net sales $ 426.1 $ 406.8
Operating income(1) 47.0 45.7
(1)Included charges associated with
restructuring actions in both years and loss
on investment in 2020 $ 4.4 $ 1.2
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Avery Dennison Corporation
Net Sales
The factors impacting reported net sales change are shown in the table below.
Three Months Ended
September 26, 2020
Reported sales change 5 %
Foreign currency translation 1
Sales change ex. currency(1) 5
Acquisitions (10)
Organic sales change(1) (5) %
(1)Totals may not sum due to rounding
In the third quarter of 2020, net sales increased ex. currency compared to the same period in the prior year due to approximately 65 % increase in sales of RFID solutions in the segment, including the benefit of theSmartrac acquisition, partially offset by an approximately 12% decline in the base business due to lower demand for apparel. The substantial majority of our sales of RFID solutions are reported within our RBIS reportable segment. On an organic basis, net sales in the segment related to RFID solutions increased by a high-teens rate. Company-wide, sales of RFID solutions increased on an organic basis by approximately 20%. Operating Income
Operating income increased in the third quarter of 2020 compared to the same period last year primarily due to benefits from productivity initiatives, including temporary cost reduction actions, and savings from restructuring actions, net of transition costs, partially offset by lower volume.
Industrial and Healthcare Materials
Three Months Ended
(In millions) September 26, 2020 September 28, 2019Net sales including intersegment sales $ 159.6 $
171.0
Less intersegment sales (2.0) (1.5)
Net sales $ 157.6 $ 169.5
Operating income(1) 12.5 17.7
(1)Included charges associated with
restructuring in both years $ 6.6 $ .9
Net Sales
The factors impacting reported net sales change are shown in the table below.
Three Months Ended
September 26, 2020
Reported sales change (7) %
Foreign currency translation (1)
Sales change ex. currency(1) (8)
Acquisitions -
Organic sales change(1) (8) %
(1)Totals may not sum due to rounding
In the third quarter of 2020, net sales decreased on an organic basis compared
to the same period in the prior year primarily due to a mid-single digit decline
in industrial categories and an approximately 11% decline in healthcare
categories.
Operating Income
Operating income decreased in the third quarter of 2020 compared to the same
period last year primarily due to lower volume and higher restructuring charges,
partially offset by benefits from productivity initiatives, including temporary
cost reduction actions and savings from restructuring actions, net of transition
costs, as well as favorable product mix.
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Avery Dennison Corporation ANALYSIS OF RESULTS OF OPERATIONS FOR THE NINE MONTHS YEAR-TO-DATE
Income Before Taxes
Nine Months Ended(In millions, except percentages)September 26, 2020
September 28, 2019 Net sales $ 4,980.6 $ 5,297.2 Cost of products sold 3,628.4 3,877.8 Gross profit 1,352.2 1,419.4
Marketing, general and administrative expense 758.7
807.3
Other expense (income), net 57.3 21.7
Interest expense 54.4 58.0Other non-operating expense (income), net (.2)
448.2
Income before taxes $ 482.0 $ 84.2
Gross profit margin 27.1 % 26.8 %
Gross Profit Margin
Gross profit margin for the first nine months of 2020 increased from the same
period last year primarily reflecting the benefit of pricing and raw material
input costs and benefits from productivity initiatives, including temporary cost
reduction actions, material re-engineering and savings from restructuring
actions, net of transition costs, partially offset by reduced fixed cost
leverage and unfavorable product mix.
Marketing, General and Administrative Expense
Marketing, general and administrative expense decreased in the first nine months of 2020 compared to the same period last year 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 theSmartrac acquisition and increased allowance for credit losses. Other Expense (Income), Net Nine Months Ended (In millions) September 26, 2020 September 28, 2019 Other expense (income), net, by type Restructuring charges: Severance and related costs $ 46.4 $ 19.8 Asset impairment charges and lease cancellation costs
6.2 1.7 Other items: Loss on investment 1.5 - Transaction and related costs 3.2 - Legal settlement - 3.4 Gain on sales of assets - (3.2) Other expense (income), net $ 57.3 $ 21.7
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 in the first nine months of 2020 compared to the same period last year reflecting lower borrowing rates on our outstanding indebtedness, partially offset by fees paid for borrowings under the Revolver.
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Avery Dennison Corporation Other Non-Operating Expense (Income), Net
Other non-operating expense decreased in the first nine months 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
Nine Months Ended
(In millions, except per share amounts and
percentages) September 26, 2020 September 28, 2019
Income before taxes $ 482.0 $ 84.2
Provision for (benefit from) income taxes 114.8 (58.9)
Equity method investment (losses) gains (2.8)
(2.0)
Net income $ 364.4 $ 141.1
Per share amounts:
Net income per common share $ 4.37 $ 1.68
Net income per common share, assuming
dilution 4.34 1.66
Effective tax rate 23.8 % (70.0) %
Provision for (Benefit from) Income Taxes
Our effective tax rate for the nine months endedSeptember 26, 2020 was 23.8% compared to (70.0)% in the same period last year. The change in tax rate was due to the tax benefits from the settlement charges associated with the termination of the ADPP in the nine months endedSeptember 28, 2019 . Refer to Note 8, "Taxes Based on Income," to the unaudited Condensed Consolidated Financial Statements for more information.
We estimate our effective tax rate for fiscal year 2020 to be approximately 24%.
Our effective tax rate can vary from quarter to quarter due to a variety of factors, such as changes in the mix of earnings in countries with differing statutory tax rates, 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 and execution of tax planning strategies. We do not currently expect our effective tax rate to be significantly impacted by COVID-19. However, this expectation may change 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 factors that may significantly influence the amount of benefit to be recognized in fiscal year 2020.
RESULTS OF OPERATIONS BY REPORTABLE SEGMENT FOR THE NINE MONTHS YEAR-TO-DATE
Operating income refers to income before taxes, interest and other non-operating
expense (income), net.
Label and Graphic Materials
Nine Months Ended
(In millions) September 26, 2020 September 28, 2019Net sales including intersegment sales $ 3,475.5 $
3,629.2
Less intersegment sales (55.1) (59.5)
Net sales $ 3,420.4 $ 3,569.7
Operating income(1) 483.1 460.6
(1)Included charges associated with
restructuring actions in both years,
transaction and related costs in 2020, and
gain on sale of assets in 2019 $ 28.3 $
13.2
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Avery Dennison Corporation
Net Sales
The factors impacting reported net sales change are shown in the table below.
Nine Months Ended
September 26, 2020
Reported sales change (4) %
Foreign currency translation 2
Sales change ex. currency(1) (2)
Acquisitions -
Organic sales change(1) (2) %
(1) Totals may not sum due to rounding
In the first nine months of 2020, net sales decreased on an organic basis compared to the same period in the prior year due to the combined effects of lower volume/mix and raw material deflation-related price reductions. On an organic basis, net sales decreased by a low-single digit rate in emerging markets, increased by a low-single digit rate inNorth America and decreased by a mid-single digit rate inWestern Europe .
Operating Income
Operating income increased in the first nine months of 2020 compared to the same period last year primarily due to benefits from productivity initiatives, including temporary cost reduction actions, material re-engineering and savings from restructuring actions, net of transition costs, as well as, benefits from raw material deflation, net of pricing. These benefits were partially offset by unfavorable volume/mix, higher restructuring charges, unfavorable foreign currency translation, increased allowance for credit losses and higher employee-related costs.
Retail Branding and Information Solutions
Nine Months Ended
(In millions) September 26, 2020 September 28, 2019Net sales including intersegment sales $ 1,142.3 $
1,238.2
Less intersegment sales (19.4) (14.8)
Net sales $ 1,122.9 $ 1,223.4
Operating income(1) 67.2 147.5
(1)Included charges associated with
restructuring actions in both years,
transaction and related costs and loss on
investment in 2020, and gain on sale of
assets in 2019 $ 20.6 $ .9
Net Sales
The factors impacting reported net sales change are shown in the table below.
Nine Months Ended
September 26, 2020
Reported sales change (8) %
Foreign currency translation 1
Sales change ex. currency(1) (7)
Acquisitions (7)
Organic sales change(1) (14) %
(1) Totals may not sum due to rounding
In the first nine months of 2020, net sales decreased ex. currency compared to the same period in the prior year due to an approximately 20% decline in the base business driven by temporary closures of apparel manufacturing sites and lower demand for apparel, partially offset by a nearly 30% increase in RFID solutions in the segment including the benefit of theSmartrac acquisition. The substantial majority of our sales of RFID solutions are reported within our RBIS reportable segment. On an organic basis, sales in the segment 28 Table of ContentsAvery Dennison Corporation
related to RFID solutions increased by a low-single digit rate. Company-wide, sales of RFID solutions increased on an organic basis at a mid-single digit rate.
Operating Income Operating income decreased in the first nine months of 2020 compared to the same period last year primarily due to lower volume, higher long-term growth-related investments, including costs associated with theSmartrac acquisition, higher restructuring charges and increased allowance for credit losses, partially offset by benefits from productivity initiatives, including temporary cost reduction actions and savings from restructuring actions, net of transition costs, as well as lower raw material costs and lower employee-related costs.
Industrial and Healthcare Materials
Nine Months Ended
(In millions) September 26, 2020 September 28, 2019Net sales including intersegment sales $ 442.1 $
511.1
Less intersegment sales (4.8) (7.0)
Net sales $ 437.3 $ 504.1
Operating income(1) 34.9 47.8
(1)Included charges associated with
restructuring in both years $ 8.6 $ 4.2
Net Sales
The factors impacting reported net sales change are shown in the table below.
Nine Months Ended
September 26, 2020
Reported sales change (13) %
Foreign currency translation 1
Sales change ex. currency(1) (12)
Acquisitions -
Organic sales change(1) (12) %
(1) Totals may not sum due to rounding
In the first nine months of 2020, net sales decreased on an organic basis compared to the same period in the prior year primarily due to a mid-teens rate decline in industrial categories and a mid-single digit decline in healthcare categories. Operating Income
Operating income decreased in the first nine months of 2020 compared to the same
period last year primarily due to lower volume and higher restructuring charges,
partially offset by benefits from productivity initiatives, including temporary
cost reduction actions and savings from restructuring actions, net of transition
costs.
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FINANCIAL CONDITION
Liquidity
Operating Activities
Nine Months Ended
(In millions) September 26, 2020 September 28, 2019
Net income $ 364.4 $ 141.1
Depreciation 113.7 105.3
Amortization 36.1 28.1Provision for credit losses and sales returns 50.4 42.4 Stock-based compensation 12.1 25.5 Pension plan settlements and related charges - 446.9 Deferred taxes and other non-cash taxes 17.1 (176.4) Other non-cash expense and loss (income and gain), net 35.3 17.5 Changes in assets and liabilities and other adjustments (187.3) (163.4) Net cash provided by operating activities $ 441.8 $
467.0
During the first nine 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 severance
payments related to restructuring actions.
Investing Activities
Nine Months Ended
(In millions) September 26, 2020 September 28, 2019Purchases of property, plant and equipment $ (91.7) $ (132.9) Purchases of software and other deferred charges (13.8) (27.4) Proceeds from sales of property, plant and equipment .2 7.7 Proceeds from insurance and sales (purchases) of investments, net 5.2 3.5 Payments for acquisition, net of cash acquired, and investments in businesses (262.8) (6.5) Net cash used in investing activities $ (362.9) $
(155.6)
Purchases of Property, Plant and Equipment
During the first nine months of 2020 and 2019, we invested in equipment to
support growth in
Purchases of Software and Other Deferred Charges
During the first nine months of 2020 and 2019, we invested in information
technology upgrades worldwide. During the first nine months of 2019, we also
invested in enterprise resource planning system implementations in
Proceeds from Sales of Property, Plant and Equipment
During the first nine 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 .
Proceeds from Insurance and Sales (Purchases) of Investments, Net
During the first nine months of 2020, we had lower net purchases of investments and lower proceeds from insurance associated with our corporate-owned life insurance policies compared to the same period last year.
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Avery Dennison Corporation Payments for Acquisition, Net of Cash Acquired, and Investments in Businesses
During the first nine months of 2020, we paid consideration, net of cash acquired, of approximately$255 million to acquireSmartrac , which we initially funded through commercial paper borrowings, and we invested in certain strategic unconsolidated businesses. During the first nine months of 2019, we made investments in certain strategic unconsolidated businesses. Financing Activities Nine Months Ended (In millions) September 26, 2020 September 28, 2019 Net increase (decrease) in borrowings (maturities of three months or less) $ (57.1) $ 68.9 Additional borrowings under revolving credit facility 500.0 - Repayments of revolving credit facility (500.0) - Additional long-term borrowings 493.7 - Repayments of long-term debt and finance leases (268.9)
(17.7)
Dividends paid (145.2) (141.3)
Share repurchases (52.2) (204.3)
Net (tax withholding) proceeds related to
stock-based compensation (20.0) (17.4)
Payments of contingent consideration - (1.6)
Net cash used in financing activities $ (49.7)$ (313.4)
Borrowings and Repayment of Debt
Given the seasonality of our cash flow from operating activities, during the first nine 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 quarter of 2020, commercial paper borrowings were also used to fund theSmartrac acquisition, with those borrowings subsequently repaid using the net proceeds of$493.7 million from the$500 million of senior notes we issued inMarch 2020 . We used the remaining proceeds from these notes to repay the$250 million aggregate principal amount of senior notes that matured inApril 2020 . In the second quarter of 2020, we also repaid$15 million of medium-term notes that matured inJune 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. This amount was repaid inJune 2020 .
Refer to Note 4, "Debt" to the unaudited Condensed Consolidated Financial Statements for more information.
Dividends Paid
We paid dividends of$1.74 per share in the first nine months of 2020 compared to$1.68 per share in the same period last year. InApril 2019 , we increased our quarterly dividend to$.58 per share, representing an increase of approximately 12% from our previous dividend rate of$.52 per share. InOctober 2020 , we increased our quarterly dividend to$.62 , representing an increase of approximately 7%. Share Repurchases
During the first nine months of 2020 and 2019, we repurchased approximately .4 million and 2 million shares of our common stock, respectively. In the first quarter of 2020, we temporarily paused share repurchase activity as a result of COVID-19. We resumed the repurchase of shares late in the third quarter of 2020.
Analysis of Selected Balance Sheet Accounts
Long-lived Assets
In the nine months ended
In the nine months endedSeptember 26, 2020 , other intangibles resulting from business acquisitions, net, increased by approximately$68 million to$194.1 million , which reflected the valuation of other intangibles from theSmartrac acquisition and the impact of foreign currency translation, partially offset by current year amortization expense. 31 Table of ContentsAvery Dennison Corporation
Refer to Note 3, "
Shareholders' Equity Accounts
As of
Impact of Foreign Currency Translation
Nine Months Ended
(In millions) September 26, 2020
Change in net sales $ (103)
International operations generated approximately 75% of our net sales during the
nine months ended September 26, 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
nine months of 2020 compared to the same period last year was primarily related
to sales in Brazil and China , euro-denominated sales, and sales in India .
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. 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
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 cash flow and return on investment. Operational working capital, as a percentage of annualized current-quarter net sales, in the third quarter of 2020, was higher compared to the third quarter of 2019. (In millions, except percentages) September 26, 2020 September 28, 2019 (A) Working capital $ 558.5 $ 65.5 Reconciling items: Cash and cash equivalents (284.7) (224.2) Other current assets (214.5) (220.0) Short-term borrowings and current portion of long-term debt and finance leases 124.1 514.2 Accrued payroll and employee benefits and other current liabilities 759.1 712.5 (B) Operational working capital $ 942.5 $ 848.0 (C) Third-quarter net sales, annualized $ 6,916.4 $
7,045.6
Operational working capital, as a percentage
of annualized current-quarter net sales:
(B) ÷ (C) 13.6 % 12.0 %
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Avery Dennison Corporation
Accounts Receivable Ratio
The average number of days sales outstanding was 65 days in the first nine months of 2020 compared to 63 days in the first nine months of 2019, calculated using the average of the three quarter-end trade accounts receivable balances divided by the average daily sales for the first nine months. The increase in the average number of days sales outstanding primarily reflected the impact of COVID-19 on sales, partially offset by focused collection results.
Inventory Ratio
Average inventory turnover was 6.9 in the first nine months of 2020 compared to 7.7 in the first nine months of 2019, calculated using the annualized cost of sales (year-to-date cost of products sold, divided by three and multiplied by four) divided by the three-quarter average inventory balance at quarter-end.
The decrease in average inventory turnover primarily reflected lower cost of products sold due to lower volume and inventory build to meet unpredictable customer demands, both as a result of COVID-19, partially offset by focused efforts to optimize inventory balances relative to demand.
Accounts Payable Ratio
The average number of days payable outstanding was 73 days in the first nine months of 2020 compared to 74 days in the first nine months of 2019, calculated using the three-quarter average accounts payable balance divided by the average daily cost of products sold for the first nine months. The decrease in the average number of days payable outstanding from the prior year primarily reflected lower purchase levels related to inventory optimization efforts, partially offset by longer payment terms and 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 our operational needs. AtSeptember 26, 2020 , we had cash and cash equivalents of$284.7 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. 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 the first quarter of 2020, in light of the uncertainty 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 the Revolver, we drew down$500 million from the Revolver with a six-month duration. This amount was repaid inJune 2020 . No balance was outstanding under the Revolver as ofSeptember 26, 2020 orDecember 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 that fiscal quarter. As ofSeptember 26, 2020 andDecember 28, 2019 , our ratio was substantially below the maximum ratio required by the Revolver. InMarch 2020 , we issued$500 million of senior notes, dueApril 2030 . These senior notes bear an interest rate of 2.65% per year, payable semiannually in arrears. Our net proceeds from the offering, 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 ourSmartrac acquisition and our$250 million of senior notes that matured inApril 2020 . In the second quarter of 2020, we also repaid$15 million of medium-term notes that matured inJune 2020 . 33 Table of ContentsAvery Dennison Corporation Capital from Debt The carrying value of our total debt increased by approximately$205 million in the first nine months of 2020 to$2.14 billion , primarily reflecting the issuance of senior notes inMarch 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 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 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. Off-Balance Sheet Arrangements, Contractual Obligations, and Other Matters Refer to Note 12, "Commitments and Contingencies," to the unaudited Condensed Consolidated Financial Statements for this information. 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 for this information.
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