UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 2, 2022.

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________________ to ________________________

Commission file number 1-7685

AVERY DENNISON CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	95-1492269
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
8080 Norton Parkway Mentor, Ohio	44060
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (440) 534-6000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $1 par value	AVY	New York Stock Exchange
1.25% Senior Notes due 2025	AVY25	Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

x Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company o Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

Number of shares of $1 par value common stock outstanding as of July 30, 2022: 81,256,407

AVERY DENNISON CORPORATION

FISCAL SECOND QUARTER 2022 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

		Page
SAFE HARBOR STATEMENT		1
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets July 2, 2022 and January 1, 2022	2
	Condensed Consolidated Statements of Income Three and Six Months Ended July 2, 2022 and July 3, 2021	3
	Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended July 2, 2022 and July 3, 2021	4
	Condensed Consolidated Statements of Cash Flows Six Months Ended July 2, 2022 and July 3, 2021	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	Non-GAAP Financial Measures	15
	Overview and Outlook	16
	Analysis of Results of Operations for the Second Quarter	17
	Results of Operations by Reportable Segment for the Second Quarter	18
	Analysis of Results of Operations for the Six Months Year-to-Date	20
	Results of Operations by Reportable Segment for the Six Months Year-to-Date	21
	Financial Condition	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	28
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
Signatures		31
Exhibits

Safe Harbor Statement

The matters discussed in this Quarterly Report contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which are not statements of historical fact, contain estimates, assumptions, projections and/or expectations regarding future events, that may or may not occur. Words such as “aim,” “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “foresee,” “guidance,” “intend,” “may,” “might,” “objective,” “plan,” “potential,” “project,” “seek,” “shall,” “should,” “target,” “will,” “would,” or variations thereof, and other expressions that refer to future events and trends, identify forward-looking statements. These forward-looking statements, and financial or other business targets, are subject to certain risks and uncertainties, which could cause our actual results to differ materially from the expected results, performance or achievements expressed or implied by such forward-looking statements.

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

The more significant risks and uncertainties that may impact us are discussed in more detail under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Annual Report on Form 10-K filed on February 23, 2022, and subsequent quarterly reports on Form 10-Q. These risks and uncertainties include, but are not limited to, the following:

•COVID-19

•International Operations – worldwide and local economic and market conditions; changes in political conditions, including those related to the Russian invasion of Ukraine; and fluctuations in foreign currency exchange rates and other risks associated with foreign operations, including in emerging markets

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

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

•Information Technology – disruptions in information technology systems or data security breaches, including cyber-attacks or other intrusions to network security; and successful installation of new or upgraded information technology systems

•Human Capital – recruitment and retention of employees; and collective labor arrangements

•Our Indebtedness – credit risks; our ability to obtain adequate financing arrangements and maintain access to capital; fluctuations in interest rates; volatility of financial markets; and compliance with our debt covenants

•Ownership of Our Stock – potential significant variability of our stock price and amounts of future dividends and share repurchases

•Legal and Regulatory Matters – protection and infringement of intellectual property; impact of legal and regulatory proceedings, including with respect to environmental, anti-corruption, health and safety, and trade compliance

•Other Financial Matters – fluctuations in pension costs and goodwill impairment

Our forward-looking statements are made only as of the date hereof. We assume no duty to update these forward-looking statements to reflect new, changed or unanticipated events or circumstances, other than as may be required by law.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in millions, except per share amount)	July 2, 2022		January 1, 2022
Assets
Current assets:
Cash and cash equivalents	$	164.8	$	162.7
Trade accounts receivable, less allowances of $35.6 and $33 at July 2, 2022 and January 1, 2022, respectively	1,565.1		1,424.5
Inventories	990.1		907.2
Other current assets	228.8		240.2
Total current assets	2,948.8		2,734.6
Property, plant and equipment, net	1,451.0		1,477.7
Goodwill	1,856.0		1,881.5
Other intangibles resulting from business acquisitions, net	882.6		911.4
Deferred tax assets	119.9		130.2
Other assets	834.1		836.2
	$	8,092.4	$	7,971.6
Liabilities and Shareholders’ Equity
Current liabilities:
Short-term borrowings and current portion of long-term debt and finance leases	$	738.6	$	318.8
Accounts payable	1,410.9		1,298.8
Accrued payroll and employee benefits	220.5		299.0
Other current liabilities	630.5		631.3
Total current liabilities	3,000.5		2,547.9
Long-term debt and finance leases	2,493.4		2,785.9
Long-term retirement benefits and other liabilities	433.7		474.9
Deferred tax liabilities and income taxes payable	227.9		238.5
Commitments and contingencies (see Note 11)
Shareholders’ equity:
Common stock, $1 par value per share, authorized – 400,000,000 shares at July 2, 2022 and January 1, 2022; issued – 124,126,624 shares at July 2, 2022 and January 1, 2022; outstanding – 81,373,833 shares and 82,605,953 shares at July 2, 2022 and January 1, 2022, respectively	124.1		124.1
Capital in excess of par value	855.9		862.3
Retained earnings	4,182.0		3,880.7
Treasury stock at cost, 42,752,791 shares and 41,520,671 shares at July 2, 2022 and January 1, 2022, respectively	(2,914.0)		(2,659.8)
Accumulated other comprehensive loss	(311.1)		(282.9)
Total shareholders’ equity	1,936.9		1,924.4
	$	8,092.4	$	7,971.6

See Notes to Unaudited Condensed Consolidated Financial Statements

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended				Six Months Ended
(In millions, except per share amounts)	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Net sales	$	2,347.0	$	2,102.0	$	4,696.3	$	4,153.3
Cost of products sold	1,703.5		1,525.7		3,411.5		2,980.0
Gross profit	643.5		576.3		1,284.8		1,173.3
Marketing, general and administrative expense	332.7		307.0		687.7		619.3
Other expense (income), net	3.4		(.6)		1.8		.3
Interest expense	20.8		16.0		40.4		32.2
Other non-operating expense (income), net	(1.3)		(1.4)		(2.7)		(2.7)
Income before taxes	287.9		255.3		557.6		524.2
Provision for income taxes	73.4		70.4		144.9		128.5
Equity method investment (losses) gains	—		(1.1)		—		(2.4)
Net income	$	214.5	$	183.8	$	412.7	$	393.3
Per share amounts:
Net income per common share	$	2.63	$	2.21	$	5.03	$	4.74
Net income per common share, assuming dilution	$	2.61	$	2.19	$	5.00	$	4.69
Weighted average number of shares outstanding:
Common shares	81.7		83.0		82.0		83.0
Common shares, assuming dilution	82.1		83.8		82.6		83.9

See Notes to Unaudited Condensed Consolidated Financial Statements

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended				Six Months Ended
(In millions)	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Net income	$	214.5	$	183.8	$	412.7	$	393.3
Other comprehensive income (loss), net of tax:
Foreign currency translation	(53.7)		10.1		(33.4)		17.7
Pension and other postretirement benefits	.9		.8		1.7		2.0
Cash flow hedges	1.7		7.6		3.5		2.3
Other comprehensive income (loss), net of tax	(51.1)		18.5		(28.2)		22.0
Total comprehensive income, net of tax	$	163.4	$	202.3	$	384.5	$	415.3

See Notes to Unaudited Condensed Consolidated Financial Statements

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended
(In millions)	July 2, 2022		July 3, 2021
Operating Activities
Net income	$	412.7	$	393.3
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	88.2		80.8
Amortization	57.0		28.8
Provision for credit losses and sales returns	23.9		17.5
Stock-based compensation	23.9		18.5
Pension plan settlement loss	—		.4
Deferred taxes and other non-cash taxes	8.6		10.6
Other non-cash expense and loss (income and gain), net	15.0		13.8
Changes in assets and liabilities and other adjustments	(234.9)		(86.9)
Net cash provided by operating activities	394.4		476.8
Investing Activities
Purchases of property, plant and equipment	(106.8)		(83.8)
Purchases of software and other deferred charges	(9.9)		(6.4)
Proceeds from sales of property, plant and equipment	2.1		1.0
Proceeds from insurance and sales (purchases) of investments, net	2.0		.4
Proceeds from sale of product line	—		6.7
Payments for acquisitions, net of cash acquired, and investments in businesses	(37.0)		(33.8)
Net cash used in investing activities	(149.6)		(115.9)
Financing Activities
Net increase (decrease) in borrowings with maturities of three months or less	176.9		(36.2)
Repayments of long-term debt and finance leases	(3.4)		(3.1)
Dividends paid	(117.4)		(108.0)
Share repurchases	(268.7)		(95.0)
Net (tax withholding) proceeds related to stock-based compensation	(25.1)		(25.3)
Net cash used in financing activities	(237.7)		(267.6)
Effect of foreign currency translation on cash balances	(5.0)		(.8)
Increase (decrease) in cash and cash equivalents	2.1		92.5
Cash and cash equivalents, beginning of year	162.7		252.3
Cash and cash equivalents, end of period	$	164.8	$	344.8

See Notes to Unaudited Condensed Consolidated Financial Statements

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. General

The unaudited Condensed Consolidated Financial Statements and related notes in this Quarterly Report on Form 10-Q are presented as permitted by Article 10 of Regulation S-X and do not contain certain information included in the audited Consolidated Financial Statements and related notes in our 2021 Annual Report on Form 10-K, which should be read in conjunction with this Quarterly Report on Form 10-Q. These unaudited Condensed Consolidated Financial Statements contain all adjustments of a normal and recurring nature necessary for a fair statement of our interim results. Interim results of operations are not necessarily indicative of future results. These unaudited Condensed Consolidated Financial Statements reflect our current estimates and assumptions that affect our reported amounts of assets and liabilities and related disclosures as of the date of the financial statements and our reported amounts of sales and expenses during the reporting periods presented.

Fiscal Periods

The three and six months ended July 2, 2022 and July 3, 2021 each consisted of thirteen-week and twenty-six week periods, respectively.

Note 2. Acquisitions

During January 2022, we completed our acquisitions of TexTrace AG ("TexTrace"), a Switzerland-based technology developer specializing in custom-made woven and knitted radio-frequency identification ("RFID") products that can be sewn onto or inserted into garments, and Rietveld Serigrafie B.V. and Rietveld Screenprinting Serigrafi Baski Matbaa Tekstil Ithalat Ihracat Sanayi ve Ticaret Limited Sirketi (collectively, "Rietveld"), a Netherlands-based provider of external embellishment solutions and application and printing methods for performance brands and team sports in Europe. These acquisitions expand the product portfolio in our Retail Branding and Information Solutions ("RBIS") reportable segment.

The acquisitions of TexTrace and Rietveld are referred to collectively as the "2022 Acquisitions."

The aggregate purchase consideration for the 2022 Acquisitions was approximately $35 million. We funded the 2022 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 $30 million, subject to the acquired company achieving certain post-acquisition performance targets. As of the acquisition date, we include an estimate of the fair value of these earn-out payments in the aggregate purchase consideration.

The 2022 Acquisitions were not material, individually or in the aggregate, to the unaudited Condensed Consolidated Financial Statements.

Note 3. Goodwill and Other Intangibles Resulting from Business Acquisitions

The goodwill from the 2022 Acquisitions was not material to the unaudited Condensed Consolidated Financial Statements. Refer to Note 2, "Acquisitions," to the unaudited Condensed Consolidated Financial Statements for more information.

Changes in the net carrying amount of goodwill for the six months ended July 2, 2022 by reportable segment are shown below.

(In millions)	Label and Graphic Materials		Retail Branding and Information Solutions		Industrial and Healthcare Materials		Total
Goodwill as of January 1, 2022	$	456.4	$	1,236.0	$	189.1	$	1,881.5
Acquisitions(1)	—		16.3		—		16.3
Acquisition adjustment(2)	—		(2.3)		—		(2.3)
Translation adjustments	(21.0)		(10.9)		(7.6)		(39.5)
Goodwill as of July 2, 2022	$	435.4	$	1,239.1	$	181.5	$	1,856.0

(1)Goodwill acquired related to the 2022 Acquisitions. We expect the recognized goodwill related to the 2022 Acquisitions to be non-deductible for income tax purposes.

(2)Measurement period adjustment related to the finalization of the purchase price allocation for the acquisition of CB Velocity Holdings, LLC completed in August 2021.

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In connection with the 2022 Acquisitions, we acquired approximately $21 million of identifiable finite-lived intangible assets, which consisted of patented and other developed technology as well as customer relationships.

Amortization expense for all finite-lived intangible assets resulting from business acquisitions was $20.6 million and $6.5 million for the three months ended July 2, 2022 and July 3, 2021, respectively, and $41.1 million and $12.9 million for the six months ended July 2, 2022 and July 3, 2021, respectively.

Estimated future amortization expense related to existing finite-lived intangible assets for the remainder of fiscal year 2022 and for each of the next four fiscal years is shown below. These amounts include the effects of the 2022 Acquisitions and updated amounts from year-end 2021.

	Estimated Amortization Expense
2022 (remainder of year)	$	41.0
2023	81.0
2024	79.4
2025	78.6
2026	75.6

Note 4. Debt

The estimated fair value of our long-term debt is primarily based on the credit spread above U.S. Treasury securities or euro government bond securities, as applicable, on notes with similar rates, credit ratings and remaining maturities. The fair value of short-term borrowings, which include commercial paper issuances and short-term lines of credit, approximates their carrying value given the short duration of these obligations. The fair value of our total debt was $3.03 billion at July 2, 2022 and $3.25 billion at January 1, 2022. Fair values were determined based primarily on Level 2 inputs, which are inputs other than quoted prices in active markets that are either directly or indirectly observable.

Our $800 million revolving credit facility (the “Revolver”) contains a financial covenant requiring that we maintain a specified ratio of total debt in relation to a certain measure of income. As of both July 2, 2022 and January 1, 2022, we were in compliance with this financial covenant. No balance was outstanding under the Revolver as of July 2, 2022 or January 1, 2022.

Note 5. Cost Reduction Actions

2019/2020 Actions

During the six months ended July 2, 2022, we recorded $4 million in restructuring charges related to our 2019/2020 actions. These charges consisted of severance and related costs for the reduction of approximately 220 positions at numerous locations across our company. These actions, which were primarily taken in our RBIS reportable segment, largely related to global headcount and footprint reductions. Accruals for severance and related costs, as well as lease cancellation costs, were not material as of July 2, 2022.

Note 6. Financial Instruments

We enter into foreign exchange hedge contracts to reduce our risk from foreign exchange rate fluctuations associated with receivables, payables, loans and firm commitments denominated in certain foreign currencies that arise primarily as a result of our operations outside the U.S. We also enter into futures contracts to hedge certain price fluctuations for a portion of our anticipated domestic purchases of natural gas. The impact of these foreign exchange and commodities hedge activities on the unaudited Condensed Consolidated Financial Statements was not material.

In March 2020, we entered into U.S. dollar to euro cross-currency swap contracts with a total notional amount of $250 million to have the effect of converting the fixed-rate U.S. dollar-denominated debt to euro-denominated debt, including semiannual interest payments and the payment of principal at maturity. During the term of the contract, which ends on April 30, 2030, we pay fixed-rate interest in euros and receive fixed-rate interest in U.S. dollars. These contracts have been designated as cash flow hedges. The fair value of these contracts was $14.4 million as of July 2, 2022, which was included in "Other Assets" and $(10.3) million as of January 1, 2022, which was included in “Long-term retirement benefits and other liabilities” in the unaudited Condensed Consolidated Balance Sheets. Refer to Note 10, “Fair Value Measurements,” to the unaudited Condensed Consolidated Financial Statements for more information.

We recorded no ineffectiveness from our cross-currency swap to earnings during the three or six months ended July 2, 2022 or July 3, 2021.

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Note 7. Taxes Based on Income

The following table summarizes our income before taxes, provision for income taxes, and effective tax rate:

	Three Months Ended						Six Months Ended
(Dollars in millions)	July 2, 2022			July 3, 2021			July 2, 2022			July 3, 2021
Income before taxes	$	287.9		$	255.3		$	557.6		$	524.2
Provision for income taxes	73.4			70.4			144.9			128.5
Effective tax rate	25.5		%	27.6		%	26.0		%	24.5		%

Our provision for income taxes for the three and six months ended July 2, 2022 included $7 million and $13.7 million, respectively, of net tax charge related to the tax on global intangible low-taxed income (“GILTI”) of our foreign subsidiaries and the recognition of foreign withholding taxes on current year earnings, partially offset by the benefit from foreign-derived intangible income (“FDII”). Our provision for income taxes for the three and six months ended July 2, 2022 also included $5.8 million of net discrete tax benefit primarily from decreases in certain tax reserves, including interest and penalties, as a result of closing tax years.

Our provision for income taxes for the three and six months ended July 3, 2021 included $7 million and $14 million, respectively, of net tax charge related to the tax on GILTI of our foreign subsidiaries and the recognition of foreign withholding taxes on current year earnings, partially offset by the benefit from FDII. Our provision for income taxes for the three and six months ended July 3, 2021 included $3.5 million of net discrete tax charge related to tax effects on outcomes of certain legal proceedings and $3.6 million of net discrete tax benefit primarily from decreases in certain tax reserves, including interest and penalties, as a result of closing tax years. Our provision for income taxes for the six months ended July 3, 2021 also reflected $14.1 million of return-to-provision benefit related to an election made on our amended 2018 U.S. federal tax return.

In fiscal year 2020, the U.S. Department of Treasury issued final regulations that provide certain U.S. taxpayers with an annual election to exclude foreign income subject to a high effective tax rate from their GILTI inclusions. We have not yet determined whether to make the election for tax year 2021 or 2022. We continue to evaluate the impact of these elections and currently anticipate that the benefit from making this election on our 2021 or 2022 U.S. federal tax return may be significant.

The amount of income taxes we pay is subject to ongoing audits by taxing jurisdictions around the world. Our estimate of the potential outcome of any uncertain tax issue is subject to our assessment of the relevant risks, facts, and circumstances existing at the time. We believe that we have adequately provided for reasonably foreseeable outcomes related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, which may impact our effective tax rate. The final determination of tax audits and any related legal proceedings could materially differ from the amounts currently reflected in our tax provision for income taxes and the related liabilities. To date, we and our U.S. subsidiaries have completed the Internal Revenue Service’s Compliance Assurance Process Program through 2018. With limited exceptions, we are no longer subject to income tax examinations by tax authorities for years prior to 2010.

It is reasonably possible that, during the next 12 months, we may realize a net decrease in our uncertain tax positions, including interest and penalties, of approximately $5 million, primarily as a result of closing tax years.

Note 8. Net Income Per Common Share

Net income per common share was computed as follows:

	Three Months Ended				Six Months Ended
(In millions, except per share amounts)	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
(A)Net income	$	214.5	$	183.8	$	412.7	$	393.3
(B)Weighted average number of common shares outstanding	81.7		83.0		82.0		83.0
Dilutive shares (additional common shares issuable under stock-based awards)	.4		.8		.6		.9
(C) Weighted average number of common shares outstanding, assuming dilution	82.1		83.8		82.6		83.9
Net income per common share: (A) ÷ (B)	$	2.63	$	2.21	$	5.03	$	4.74
Net income per common share, assuming dilution: (A) ÷ (C)	$	2.61	$	2.19	$	5.00	$	4.69

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Certain stock-based compensation awards were not included in the computation of net income per common share, assuming dilution, because they would not have had a dilutive effect. Stock-based compensation awards excluded from the computation were not significant for the three or six months ended July 2, 2022 or July 3, 2021.

Note 9. Supplemental Equity and Comprehensive Income Information

Consolidated Changes in Shareholders’ Equity

	Three Months Ended				Six Months Ended
(In millions)	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Common stock issued, $1 par value per share	$	124.1	$	124.1	$	124.1	$	124.1
Capital in excess of par value
Beginning balance	$	844.6	$	845.8	$	862.3	$	862.1
Issuance of shares under stock-based compensation plans(1)	11.3		.7		(6.4)		(15.6)
Ending balance	$	855.9	$	846.5	$	855.9	$	846.5
Retained earnings
Beginning balance	$	4,023.2	$	3,504.4	$	3,880.7	$	3,349.3
Net income	214.5		183.8		412.7		393.3
Issuance of shares under stock-based compensation plans(1)	.9		.6		(4.9)		(7.1)
Contribution of shares to 401(k) plan(1)	4.6		4.9		10.9		9.8
Dividends	(61.2)		(56.4)		(117.4)		(108.0)
Ending balance	$	4,182.0	$	3,637.3	$	4,182.0	$	3,637.3
Treasury stock at cost
Beginning balance	$	(2,799.4)	$	(2,546.3)	$	(2,659.8)	$	(2,501.0)
Repurchase of shares for treasury	(117.2)		(39.4)		(268.7)		(95.0)
Issuance of shares under stock-based compensation plans(1)	.7		7.6		10.4		16.2
Contribution of shares to 401(k) plan(1)	1.9		1.4		4.1		3.1
Ending balance	$	(2,914.0)	$	(2,576.7)	$	(2,914.0)	$	(2,576.7)
Accumulated other comprehensive loss
Beginning balance	$	(260.0)	$	(346.1)	$	(282.9)	$	(349.6)
Other comprehensive income (loss), net of tax	(51.1)		18.5		(28.2)		22.0
Ending balance	$	(311.1)	$	(327.6)	$	(311.1)	$	(327.6)

(1)We fund a portion of our employee-related costs using shares of our common stock held in treasury. We reduce capital in excess of par value based on the grant date fair value of vesting awards and record net gains or losses associated with using treasury shares to retained earnings.

Dividends per common share were as follows:

	Three Months Ended				Six Months Ended
	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Dividends per common share	$	.75	$	.68	$	1.43	$	1.30

In April 2022, our Board authorized the repurchase of shares of our common stock with a fair market value of up to $750 million, excluding any fees, commissions or other expenses related to such purchases and in addition to the amount outstanding under our previous Board authorization. Board authorizations remain in effect until shares in the amount authorized thereunder have been repurchased. As of July 2, 2022, shares of our common stock in the aggregate amount of $840.8 million remained authorized for repurchase under our outstanding Board authorizations.

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Changes in Accumulated Other Comprehensive Loss

The changes in “Accumulated other comprehensive loss” (net of tax) for the six-month period ended July 2, 2022 were as follows:

(In millions)	Foreign Currency Translation		Pension and Other Postretirement Benefits		Cash Flow Hedges		Total
Balance as of January 1, 2022	$	(217.4)	$	(60.4)	$	(5.1)	$	(282.9)
Other comprehensive income (loss) before reclassifications, net of tax	(33.4)		—		4.6		(28.8)
Reclassifications to net income, net of tax	—		1.7		(1.1)		.6
Other comprehensive income (loss), net of tax	(33.4)		1.7		3.5		(28.2)
Balance as of July 2, 2022	$	(250.8)	$	(58.7)	$	(1.6)	$	(311.1)

The changes in “Accumulated other comprehensive loss” (net of tax) for the six-month period ended July 3, 2021 were as follows:

(In millions)	Foreign Currency Translation		Pension and Other Postretirement Benefits		Cash Flow Hedges		Total
Balance as of January 2, 2021	$	(248.1)	$	(92.7)	$	(8.8)	$	(349.6)
Other comprehensive income (loss) before reclassifications, net of tax	17.7		—		3.5		21.2
Reclassifications to net income, net of tax	—		2.0		(1.2)		.8
Other comprehensive income (loss), net of tax	17.7		2.0		2.3		22.0
Balance as of July 3, 2021	$	(230.4)	$	(90.7)	$	(6.5)	$	(327.6)

Note 10. Fair Value Measurements

Recurring Fair Value Measurements

Assets and liabilities carried at fair value, measured on a recurring basis, as of July 2, 2022 were as follows:

			Fair Value Measurements Using
(In millions)	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
Assets
Investments	$	31.5	$	25.2	$	6.3	$	—
Derivative assets	11.7		1.4		10.3		—
Bank drafts	7.4		7.4		—		—
Cross-currency swap	14.4		—		14.4		—
Liabilities
Derivative liabilities	$	8.1	$	—	$	8.1	$	—
Contingent consideration liabilities	11.9		—		—		11.9

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Assets and liabilities carried at fair value, measured on a recurring basis, as of January 1, 2022 were as follows:

			Fair Value Measurements Using
(In millions)	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
Assets
Investments	$	33.9	$	27.1	$	6.8	$	—
Derivative assets	7.1		.6		6.5		—
Bank drafts	14.1		14.1		—		—
Liabilities
Cross-currency swap	$	10.3	$	—	$	10.3	$	—
Derivative liabilities	3.6		—		3.6		—
Contingent consideration liabilities	7.6		—		—		7.6

Investments include fixed income securities (primarily U.S. government and corporate debt securities) measured at fair value using quoted prices/bids and a money market fund measured at fair value using net asset value. As of July 2, 2022, investments of $0.3 million and $31.2 million were included in “Cash and cash equivalents” and “Other current assets,” respectively, in the unaudited Condensed Consolidated Balance Sheets. As of January 1, 2022, investments of $0.5 million and $33.4 million were included in “Cash and cash equivalents” and “Other current assets,” respectively, in the unaudited Condensed Consolidated Balance Sheets. Derivatives that are exchange-traded are measured at fair value using quoted market prices and classified within Level 1 of the valuation hierarchy. Derivatives measured based on foreign exchange rate inputs that are readily available in public markets are classified within Level 2 of the valuation hierarchy. Bank drafts (maturities greater than three months) are valued at face value due to their short-term nature and were included in “Other current assets” in the unaudited Condensed Consolidated Balance Sheets.

Contingent consideration liabilities relate to estimated earn-out payments associated with certain acquisitions completed in 2022 and 2021. These payments are dependent on the respective acquired company achieving certain post-acquisition performance targets and are recorded based on the expected payments as of July 2, 2022. We have classified these liabilities as Level 3.

In addition to the items described above, we also have made venture investments in privately held companies and utilize the measurement alternative for equity investments that do not have readily determinable fair values, measuring them at cost less impairment plus or minus observable price changes in orderly transactions. The total carrying value of our venture investments was approximately $58 million and $52 million as of July 2, 2022 and January 1, 2022, respectively, and included in “Other assets” in the unaudited Condensed Consolidated Balance Sheets.

Note 11. Commitments and Contingencies

Legal Proceedings

We are involved in various lawsuits, claims, inquiries, and other regulatory and compliance matters, most of which are routine to the nature of our business. When it is probable that a loss will be incurred and where a range of the loss can be reasonably estimated, the best estimate within the range is accrued. When the best estimate within the range cannot be determined, the low end of the range is accrued. The ultimate resolution of these claims could affect future results of operations should our exposure be materially different from our estimates or should we incur liabilities that were not previously accrued. Potential insurance reimbursements are not offset against potential liabilities.

We are currently party to a litigation in which ADASA Inc. (“Adasa”), an unrelated third party, alleged that certain of our RFID products infringed on its patent. We recorded a contingent liability related to this matter in the second quarter of 2021 in the amount of $26.6 million based on a jury verdict issued on May 14, 2021. During the third quarter of 2021, the first instance judgment associated with the jury verdict was issued. This resulted in additional potential liability of $35.8 million for, among other things, royalties on a higher number of tags and royalties on tags sold after March 31, 2021. We have not increased our previously recorded contingent liability for this additional potential liability. With continued evaluation of the matter and our defenses, as well as consultation with our outside counsel, we continue to believe that Adasa’s patent is invalid and that, even if valid, we have not infringed it, and that the royalty rate used as the basis for the jury’s determination is unreasonable under prevailing industry standards, as well as that any liability related to this matter would be substantially lower than that which is reflected in either the jury verdict or the first instance judgment. On October 22, 2021, we appealed the judgment to the United States Court of Appeals for the Federal Circuit and continue to believe meritorious defenses exist to significantly reduce the liability we currently have recorded. As our appeal is still pending, we maintained our current contingent liability of $26.6 million for this matter as a reasonable estimate within the range of probable outcomes. We have largely completed our migration to alternative encoding methods used in our other RFID tags.

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Because of the uncertainties associated with claims resolution and litigation, future expenses to resolve these matters could be higher than the liabilities we have accrued; however, we are unable to reasonably estimate a range of potential expenses. If information were to become available that allowed us to reasonably estimate a range of potential expenses in an amount higher or lower than what we have accrued and determined such to be probable, we would adjust our accrued liabilities accordingly. Additional lawsuits, claims, inquiries, and other regulatory and compliance matters could arise in the future. The range of expenses for resolving any future matters would be assessed as they arise; until then, a range of potential expenses for such resolution cannot be determined. Based upon current information, we believe that the impact of the resolution of these matters would not be, individually or in the aggregate, material to our financial position, results of operations or cash flows.

Environmental Expenditures

Environmental expenditures are generally expensed. When it is probable that a loss will be incurred and where a range of the loss can be reasonably estimated, the best estimate within the range is accrued. When the best estimate within the range cannot be determined, the low end of the range is accrued. The ultimate resolution of these matters could affect future results of operations should our exposure be materially different from our estimates or should we incur liabilities that were not previously accrued. Potential insurance reimbursements are not offset against potential liabilities. We review our estimates of the costs of complying with environmental laws related to remediation and cleanup of various sites, including sites in which governmental agencies have designated us as a potentially responsible party (“PRP”). However, environmental expenditures for newly acquired assets and those that extend or improve the economic useful life of existing assets are capitalized and amortized over the shorter of the estimated useful life of the acquired asset or the remaining life of the existing asset.

As of July 2, 2022, we have been designated by the U.S. Environmental Protection Agency (“EPA”) and/or other responsible state agencies as a PRP at eleven waste disposal or waste recycling sites that are the subject of separate investigations or proceedings concerning alleged soil and/or groundwater contamination. No settlement of our liability related to any of these sites has been agreed upon. We are participating with other PRPs at these sites and anticipate that our share of remediation costs will be determined pursuant to agreements that we negotiate with the EPA or other governmental authorities.

These estimates could change as a result of changes in planned remedial actions, remediation technologies, site conditions, the estimated time to complete remediation, environmental laws and regulations, and other factors. Because of the uncertainties associated with environmental assessment and remediation activities, our future expenses to remediate these sites could be higher than the liabilities we have accrued; however, we are unable to reasonably estimate a range of potential expenses. If information were to become available that allowed us to reasonably estimate a range of potential expenses in an amount higher or lower than what we have accrued, we would adjust our environmental liabilities accordingly. In addition, we may be identified as a PRP at additional sites in the future. The range of expenses for remediation of any future-identified sites would be addressed as they arise; until then, a range of expenses for such remediation cannot be determined.

The activity related to our environmental liabilities for the six months ended July 2, 2022 is shown below.

(In millions)
Balance at January 1, 2022	$	21.9
Charges, net of reversals	1.0
Payments	(.9)
Balance at July 2, 2022	$	22.0

Approximately $3 million and $2 million, respectively, of this balance was classified as short-term and included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets as of July 2, 2022 and January 1, 2022.

Note 12. Segment and Disaggregated Revenue Information

Disaggregated Revenue Information

Disaggregated revenue information is shown below in the manner that best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Revenue from our Label and Graphic Materials reportable segment is attributed to geographic areas based on the location from which products are shipped. Revenue from our RBIS reportable segment is shown by product group.

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	Three Months Ended				Six Months Ended
(In millions)	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Net sales to unaffiliated customers
Label and Graphic Materials:
U.S.	$	417.5	$	357.7	$	837.1	$	722.6
Europe	580.4		535.9		1,139.4		1,051.5
Asia	290.0		297.9		598.8		621.0
Latin America	115.0		100.9		221.0		196.4
Other international	88.9		83.8		175.7		161.7
Total Label and Graphic Materials	1,491.8		1,376.2		2,972.0		2,753.2
Retail Branding and Information Solutions:
Apparel	486.7		469.6		1,001.3		898.0
Identification Solutions and Vestcom	170.8		59.7		335.2		114.0
Total Retail Branding and Information Solutions	657.5		529.3		1,336.5		1,012.0
Industrial and Healthcare Materials	197.7		196.5		387.8		388.1
Net sales to unaffiliated customers	$	2,347.0	$	2,102.0	$	4,696.3	$	4,153.3

Additional Segment Information

Additional financial information by reportable segment and Corporate is shown below.

	Three Months Ended				Six Months Ended
(In millions)	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Intersegment sales
Label and Graphic Materials	$	29.9	$	24.7	$	58.6	$	46.3
Retail Branding and Information Solutions	8.1		9.4		19.1		17.7
Industrial and Healthcare Materials	4.8		2.2		9.8		4.3
Intersegment sales	$	42.8	$	36.3	$	87.5	$	68.3
Income before taxes
Label and Graphic Materials	$	226.3	$	228.1	$	433.5	$	454.3
Retail Branding and Information Solutions	84.6		42.1		174.9		102.1
Industrial and Healthcare Materials	20.4		22.5		36.0		46.0
Corporate expense	(23.9)		(22.8)		(49.1)		(48.7)
Interest expense	(20.8)		(16.0)		(40.4)		(32.2)
Other non-operating expense (income), net	1.3		1.4		2.7		2.7
Income before taxes	$	287.9	$	255.3	$	557.6	$	524.2
Other expense (income), net, by reportable segment and Corporate
Label and Graphic Materials	$	.5	$	(28.5)	$	(2.7)	$	(30.4)
Retail Branding and Information Solutions	1.3		27.5		2.9		29.6
Industrial and Healthcare Materials	.1		.5		.1		.6
Corporate	1.5		(.1)		1.5		.5
Other expense (income), net	$	3.4	$	(.6)	$	1.8	$	.3

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Other expense (income), net, by type was as follows:

	Three Months Ended				Six Months Ended
(In millions)	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Other expense (income), net, by type
Restructuring charges:
Severance and related costs	$	3.1	$	1.6	$	4.0	$	4.0
Asset impairment charges and lease cancellation costs	—		.1		—		.6
Other items:
Transaction and related costs	.1		—		.3		.7
Outcomes of legal proceedings, net(1)	.7		(2.5)		1.7		(.4)
(Gain) loss on sales of assets, net	(.5)		.2		(.5)		.2
Gain on venture investment	—		—		(3.7)		—
Gain on sale of product line	—		—		—		(4.8)
Other expense (income), net	$	3.4	$	(.6)	$	1.8	$	.3
(1) First six months of 2021 include an indirect tax credit based on a Brazilian Federal Supreme Court ruling in the amount of $29.1 million, partially offset by a contingent liability related to a patent infringement lawsuit in the amount of $26.6 million. Refer to Note 11, “Commitments and Contingencies,” to the unaudited Condensed Consolidated Financial Statements for more information regarding the patent infringement lawsuit.

Note 13. Supplemental Financial Information

Inventories

The table below summarizes the amounts in inventories.

(In millions)	July 2, 2022		January 1, 2022
Raw materials	$	435.9	$	393.6
Work-in-progress	254.5		233.1
Finished goods	299.7		280.5
Inventories	$	990.1	$	907.2

Property, Plant and Equipment

The table below summarizes the amounts in property, plant and equipment, net.

(In millions)	July 2, 2022		January 1, 2022
Property, plant and equipment	$	3,591.8	$	3,626.2
Accumulated depreciation	(2,140.8)		(2,148.5)
Property, plant and equipment, net	$	1,451.0	$	1,477.7

Allowance for Credit Losses

The activity related to our allowance for credit losses is shown below.

	Six Months Ended
(In millions)	July 2, 2022		July 3, 2021
Beginning balance	$	33.0	$	44.6
Provision for (reversal of) credit losses	5.7		(2.7)
Amounts written off	(1.9)		(2.5)
Other, including foreign currency translation	(1.2)		—
Ending balance	$	35.6	$	39.4

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

NON-GAAP FINANCIAL MEASURES

We report our financial results in conformity with accounting principles generally accepted in the United States of America, or GAAP, and also communicate with investors using certain non-GAAP financial measures. These non-GAAP financial measures are not in accordance with, nor are they a substitute for or superior to, the comparable GAAP financial measures. These non-GAAP financial measures are intended to supplement the presentation of our financial results prepared in accordance with GAAP. Based on feedback from investors and financial analysts, we believe that the supplemental non-GAAP financial measures we provide are useful to their assessments of our performance and operating trends, as well as liquidity.

Our non-GAAP financial measures exclude the impact of certain events, activities or strategic decisions. The accounting effects of these events, activities or decisions, which are included in the GAAP financial measures, may make it more 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 venture 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 quarters and year-to-date periods, as applicable.

We use the non-GAAP 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 the reclassification of sales between segments, and, where applicable, an extra week in our fiscal year and 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 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 may increase the volatility of working capital as a percentage of sales from period to period. The items excluded from this measure are not significantly influenced by our day-to-day activities managed at the operating level and do not necessarily reflect the underlying trends in our operations.

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OVERVIEW AND OUTLOOK

Net Sales

The factors impacting the reported net sales change, as compared to the prior-year period, are shown in the table below.

	Three Months Ended July 2, 2022		Six Months Ended July 2, 2022
Reported net sales change	12	%	13	%
Foreign currency translation	5		4
Sales change ex. currency(1)