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Table of Contents

 

 

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 4, 2015.

 

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

 

(I.R.S. Employer Identification No.)

 

 

incorporation or organization)

 

 

 

 

 

 

 

 

 

207 Goode Avenue

 

 

 

 

Glendale, California

 

91203

 

 

(Address of Principal Executive Offices)

 

(Zip Code)

 

 

Registrant’s telephone number, including area code: (626) 304-2000

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

x Large accelerated filer

o Accelerated filer

o Non-accelerated filer

o Smaller reporting company

 

(Do not check if a smaller reporting company)

 

 

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

 

Number of shares of $1 par value common stock outstanding as of August 1, 2015: 91,437,757

 



Table of Contents

 

AVERY DENNISON CORPORATION

 

FISCAL SECOND QUARTER 2015 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 4, 2015 and January 3, 2015

2

 

Condensed Consolidated Statements of Income

 

 

Three and Six Months ended July 4, 2015 and June 28, 2014

3

 

Condensed Consolidated Statements of Comprehensive Income

 

 

Three and Six Months ended July 4, 2015 and June 28, 2014

4

 

Condensed Consolidated Statements of Cash Flows

 

 

Three and Six Months ended July 4, 2015 and June 28, 2014

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

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

18

 

Non-GAAP Financial Measures

 

 

Overview and Outlook

 

 

Analysis of Results of Operations for the Second Quarter

 

 

Results of Operations by Reportable Segment for the Second Quarter

 

 

Analysis of Results of Operations for the Six Months Year-to-Date

 

 

Results of Operations by Reportable Segment for the Six Months Year-to-Date

 

 

Financial Condition

 

 

Recent Accounting Requirements

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

31

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3.

Defaults Upon Senior Securities

32

Item 4.

Mine Safety Disclosures

32

Item 5.

Other Information

33

Item 6.

Exhibits

33

Signatures

 

34

Exhibits

 

 

 



Table of Contents

 

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, which may or may not occur. Words such as “aim,” “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “foresee,” “guidance,” “intend,” “may,” “might,” “objective,” “plan,” “potential,” “project,” “seek,” “shall,” “should,” “target,” “will,” “would,” or variations thereof, and other expressions that refer to future events and trends, identify forward-looking statements. These forward-looking statements, and financial or other business targets, are subject to certain risks and uncertainties, which could cause our actual results to differ materially from the expected results, performance or achievements expressed or implied by such forward-looking statements.

 

Certain risks and uncertainties are discussed in more detail under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 3, 2015 and include, but are not limited to, risks and uncertainties relating to the following: fluctuations in demand affecting sales to customers; worldwide and local economic conditions; fluctuations in currency exchange rates and other risks associated with foreign operations, including in emerging markets; the financial condition and inventory strategies of customers; changes in customer preferences; fluctuations in cost and availability of raw materials; our ability to generate sustained productivity improvement; our ability to achieve and sustain targeted cost reductions; the impact of competitive products and pricing; loss of significant contracts or customers; collection of receivables from customers; selling prices; business mix shift; timely development and market acceptance of new products, including sustainable or sustainably-sourced products; investment in development activities and new production facilities; integration of acquisitions and completion of potential dispositions; amounts of future dividends and share repurchases; customer and supplier concentrations; successful implementation of new manufacturing technologies and installation of manufacturing equipment; disruptions in information technology systems, including cyber-attacks or other intrusions to network security; successful installation of new or upgraded information technology systems; data security breaches; volatility of financial markets; impairment of capitalized assets, including goodwill and other intangibles; credit risks; our ability to obtain adequate financing arrangements and maintain access to capital; fluctuations in interest and tax rates; changes in tax laws and regulations, and uncertainties associated with interpretations of such laws and regulations; outcome of tax audits; fluctuations in pension, insurance, and employee benefit costs; the impact of legal and regulatory proceedings, including with respect to environmental, health and safety; changes in governmental laws and regulations; protection and infringement of intellectual property; changes in political conditions; the impact of epidemiological events on the economy and our customers and suppliers; acts of war, terrorism, and natural disasters; and other factors.

 

We believe that the most significant risk factors that could affect our financial performance in the near-term include: (1) the impacts of economic conditions on underlying demand for our products and foreign currency fluctuations; (2) competitors’ actions, including pricing, expansion in key markets, and product offerings; and (3) the degree to which higher costs can be offset with productivity measures and/or passed on to customers through selling price increases, without a significant loss of volume.

 

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.

 

1



Table of Contents

 

Avery Dennison Corporation

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(Dollars in millions)

 

July 4, 2015

 

January 3, 2015

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

246.0

 

$

227.0

 

Trade accounts receivable, less allowances of $34.6 and $30.5 at July 4, 2015 and January 3, 2015, respectively

 

1,011.4

 

958.1

 

Inventories, net

 

512.1

 

491.8

 

Current deferred and refundable income taxes

 

102.9

 

107.5

 

Assets held for sale

 

2.0

 

.8

 

Other current assets

 

123.7

 

136.1

 

Total current assets

 

1,998.1

 

1,921.3

 

Property, plant and equipment

 

2,613.3

 

2,654.5

 

Accumulated depreciation

 

(1,761.6

)

(1,779.2

)

Property, plant and equipment, net

 

851.7

 

875.3

 

Goodwill

 

698.4

 

721.6

 

Other intangibles resulting from business acquisitions, net

 

55.7

 

67.4

 

Non-current deferred income taxes

 

300.3

 

311.0

 

Other assets

 

449.4

 

463.6

 

 

 

$

4,353.6

 

$

4,360.2

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings and current portion of long-term debt and capital leases

 

$

182.2

 

$

204.3

 

Accounts payable

 

856.0

 

797.8

 

Current deferred and payable income taxes

 

47.6

 

64.9

 

Other current liabilities

 

465.0

 

530.8

 

Total current liabilities

 

1,550.8

 

1,597.8

 

Long-term debt and capital leases

 

969.5

 

945.3

 

Long-term retirement benefits and other liabilities

 

608.6

 

622.8

 

Non-current deferred and payable income taxes

 

128.0

 

127.8

 

Commitments and contingencies (see Note 15)

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, $1 par value per share, authorized – 400,000,000 shares at July 4, 2015 and January 3, 2015; issued – 124,126,624 shares at July 4, 2015 and January 3, 2015; outstanding – 91,572,765 shares and 90,458,956 shares at July 4, 2015 and January 3, 2015, respectively

 

124.1

 

124.1

 

Capital in excess of par value

 

818.0

 

823.9

 

Retained earnings

 

2,213.2

 

2,137.1

 

Treasury stock at cost, 32,553,859 shares and 33,667,668 shares at July 4, 2015 and January 3, 2015, respectively

 

(1,455.2

)

(1,471.3

)

Accumulated other comprehensive loss

 

(603.4

)

(547.3

)

Total shareholders’ equity

 

1,096.7

 

1,066.5

 

 

 

$

4,353.6

 

$

4,360.2

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

2



Table of Contents

 

Avery Dennison Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

(In millions, except per share amounts)

 

July 4, 2015

 

June 28, 2014

 

July 4, 2015

 

June 28, 2014

 

Net sales

 

$

1,516.0

 

$

1,615.8

 

$

3,044.0

 

$

3,165.9

 

Cost of products sold

 

1,098.4

 

1,187.6

 

2,196.4

 

2,330.5

 

Gross profit

 

417.6

 

428.2

 

847.6

 

835.4

 

Marketing, general and administrative expense

 

273.8

 

297.0

 

574.7

 

593.7

 

Interest expense

 

15.3

 

15.6

 

30.6

 

31.0

 

Other expense, net

 

27.7

 

38.5

 

42.0

 

45.8

 

Income from continuing operations before taxes

 

100.8

 

77.1

 

200.3

 

164.9

 

Provision for income taxes

 

36.5

 

32.7

 

64.4

 

48.9

 

Income from continuing operations

 

64.3

 

44.4

 

135.9

 

116.0

 

Loss from discontinued operations, net of tax

 

(1.0

)

(1.9

)

(1.0

)

(2.3

)

Net income

 

$

63.3

 

$

42.5

 

$

134.9

 

$

113.7

 

 

 

 

 

 

 

 

 

 

 

Per share amounts:

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

.70

 

$

.47

 

$

1.49

 

$

1.22

 

Discontinued operations

 

(.01

)

(.02

)

(.01

)

(.03

)

Net income per common share

 

$

.69

 

$

.45

 

$

1.48

 

$

1.19

 

Net income (loss) per common share, assuming dilution:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

.69

 

$

.46

 

$

1.46

 

$

1.19

 

Discontinued operations

 

(.01

)

(.02

)

(.01

)

(.02

)

Net income per common share, assuming dilution

 

$

.68

 

$

.44

 

$

1.45

 

$

1.17

 

Dividends per common share

 

$

.37

 

$

.35

 

$

.72

 

$

.64

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Common shares

 

91.2

 

94.9

 

90.9

 

95.4

 

Common shares, assuming dilution

 

93.0

 

96.7

 

92.8

 

97.3

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

3



Table of Contents

 

Avery Dennison Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

(In millions)

 

July 4, 2015

 

June 28, 2014

 

July 4, 2015

 

June 28, 2014

 

Net income

 

$

63.3

 

$

42.5

 

$

134.9

 

$

113.7

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

3.0

 

(3.1

)

(69.1

)

(4.0

)

Pension and other postretirement benefits

 

11.7

 

5.4

 

19.3

 

10.9

 

Cash flow hedges

 

.3

 

(.5

)

(.7

)

(.6

)

Other comprehensive income (loss), before tax

 

15.0

 

1.8

 

(50.5

)

6.3

 

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

 

4.7

 

2.6

 

5.6

 

3.8

 

Other comprehensive income (loss), net of tax

 

10.3

 

(.8

)

(56.1

)

2.5

 

Total comprehensive income, net of tax

 

$

73.6

 

$

41.7

 

$

78.8

 

$

116.2

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

4



Table of Contents

 

Avery Dennison Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Six Months Ended

 

(In millions)

 

July 4, 2015

 

June 28, 2014

 

Operating Activities

 

 

 

 

 

Net income

 

$

134.9

 

$

113.7

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

64.9

 

66.0

 

Amortization

 

31.8

 

33.4

 

Provision for doubtful accounts and sales returns

 

15.2

 

9.8

 

Net losses from asset impairments and sales/disposals of assets

 

11.1

 

3.8

 

Stock-based compensation

 

13.2

 

14.5

 

Other non-cash expense and loss

 

26.7

 

25.9

 

Changes in assets and liabilities and other adjustments

 

(126.9

)

(257.3

)

Net cash provided by operating activities

 

170.9

 

9.8

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(56.4

)

(67.5

)

Purchases of software and other deferred charges

 

(4.0

)

(14.4

)

Proceeds from sales of property, plant and equipment

 

2.8

 

.6

 

(Purchases) sales of investments, net

 

(.3

)

.1

 

Other

 

1.5

 

 

Net cash used in investing activities

 

(56.4

)

(81.2

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net (decrease) increase in borrowings (maturities of 90 days or less)

 

(15.8

)

145.0

 

Payments of debt (maturities longer than 90 days)

 

(5.5

)

(.8

)

Dividends paid

 

(65.7

)

(60.9

)

Share repurchases

 

(61.5

)

(153.4

)

Proceeds from exercises of stock options, net

 

61.3

 

18.4

 

Other

 

(4.0

)

(2.7

)

Net cash used in financing activities

 

(91.2

)

(54.4

)

 

 

 

 

 

 

Effect of foreign currency translation on cash balances

 

(4.3

)

(3.9

)

Increase (decrease) in cash and cash equivalents

 

19.0

 

(129.7

)

Cash and cash equivalents, beginning of year

 

227.0

 

351.6

 

Cash and cash equivalents, end of period

 

$

246.0

 

$

221.9

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

5



Table of Contents

 

Avery Dennison Corporation

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1.  General

 

The unaudited Condensed Consolidated Financial Statements and 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 notes thereto in our 2014 Annual Report on Form 10-K, which should be read in conjunction with this Quarterly Report on Form 10-Q. The accompanying unaudited Condensed Consolidated Financial Statements include normal recurring adjustments necessary for a fair statement of our interim results.

 

Fiscal Period

 

The second quarters of 2015 and 2014 consisted of thirteen-week periods ending July 4, 2015 and June 28, 2014, respectively. The six months ended July 4, 2015 and June 28, 2014 consisted of twenty-six-week periods. Interim results of operations are not necessarily indicative of future results.

 

Note 2.  Sale of Product Line and Discontinued Operations

 

Sale of Product Line

 

In May 2015, we sold certain assets and transferred certain liabilities associated with a product line in our Retail Branding and Information Solutions (“RBIS”) reportable segment for $1.5 million.  This sale resulted in a pretax loss which, when combined with exit costs related to the sale, totaled $7.7 million in the second quarter of 2015. The exit costs included $3.4 million of severance costs, of which $.1 million had been paid as of July 4, 2015.  In the first quarter of 2015, we recorded an impairment charge of approximately $2 million related to certain long-lived assets of this product line as well as $.6 million of other costs related to this sale. This loss and these costs were included in “Other expense, net” in the unaudited Condensed Consolidated Statements of Income.

 

Discontinued Operations

 

Loss from discontinued operations, net of tax, during the second quarter and six months ended July 4, 2015 included $1 million of tax expense related to the completion of certain tax return filings related to the sale of our former Office and Consumer Products (“OCP”) and Designed and Engineered Solutions (“DES”) businesses. Loss from discontinued operations, net of tax, during the second quarter and six months ended June 28, 2014 included costs related to the resolution of certain post-closing adjustments from the sale of the OCP and DES businesses. We continue to be subject to certain indemnification obligations under the terms of the purchase agreement. In addition, the tax liability associated with the sale is subject to completion of remaining tax return filings in certain foreign jurisdictions where we operated the OCP and DES businesses.

 

Note 3.  Inventories

 

Net inventories consisted of:

 

(In millions)

 

July 4, 2015

 

January 3, 2015

 

Raw materials

 

$

191.0

 

$

183.6

 

Work-in-progress

 

155.1

 

150.4

 

Finished goods

 

166.0

 

157.8

 

Inventories, net

 

$

512.1

 

$

491.8

 

 

Note 4.  Goodwill

 

Changes in the net carrying amount of goodwill for the six months ended July 4, 2015, by reportable segment, were as follows:

 

(In millions)

 

Pressure-sensitive

Materials

 

Retail Branding

and Information

Solutions

 

Total

 

Goodwill as of January 3, 2015

 

$

306.6

 

$

415.0

 

$

721.6

 

Translation adjustments

 

(18.1

)

(5.1

)

(23.2

)

Goodwill as of July 4, 2015

 

$

288.5

 

$

409.9

 

$

698.4

 

 

The carrying amounts of goodwill at July 4, 2015 and January 3, 2015 were net of accumulated impairment losses of $820 million, which were included in our RBIS reportable segment.

 

6



Table of Contents

 

Avery Dennison Corporation

 

There was no goodwill associated with our Vancive Medical Technologies reportable segment.

 

Note 5.  Debt and Capital Leases

 

The estimated fair value of our long-term debt is primarily based on the credit spread above U.S. Treasury securities 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 carrying value given the short duration of these obligations.  The fair value of our total debt was $1.21 billion at July 4, 2015 and $1.22 billion at January 3, 2015. Fair value amounts were determined based primarily on Level 2 inputs, which are inputs other than quoted prices in active markets that are either directly or indirectly observable.

 

Our various loan agreements require that we maintain specified financial covenant ratios of total debt and interest expense in relation to certain measures of income.  We were in compliance with our financial covenants as of July 4, 2015.

 

In May 2015, we extended and amended the lease on our Mentor, Ohio facility for an additional ten years.  This facility is used primarily for the North American headquarters and research center of our Materials Group business. Because ownership of the facility transfers to us at the end of the lease term, it was accounted for as a capital lease. The carrying value of the lease at inception was approximately $26 million, of which approximately $24 million was included in “Long-term debt and capital leases” and approximately $2 million was included in “Short-term borrowings and current portion of long-term debt and capital leases” in the unaudited Condensed Consolidated Balance Sheets at July 4, 2015.

 

Note 6.  Pension and Other Postretirement Benefits

 

Defined Benefit Plans

 

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

 

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

 

The following table sets forth the components of net periodic benefit cost (credit), which are recorded in income from continuing operations, for our defined benefit plans:

 

 

 

Pension Benefits

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 4, 2015

 

June 28, 2014

 

July 4, 2015

 

June 28, 2014

 

(In millions)

 

U.S.

 

Int’l

 

U.S.

 

Int’l

 

U.S.

 

Int’l

 

U.S.

 

Int’l

 

Service cost

 

$

.1

 

$

3.3

 

$

.1

 

$

3.2

 

$

.2

 

$

7.0

 

$

.2

 

$

6.7

 

Interest cost

 

11.0

 

4.3

 

11.4

 

6.2

 

21.7

 

8.8

 

22.4

 

12.2

 

Expected return on plan assets

 

(12.9

)

(5.3

)

(13.0

)

(6.5

)

(25.8

)

(10.8

)

(26.0

)

(13.0

)

Recognized net actuarial loss

 

5.1

 

2.3

 

4.2

 

1.3

 

10.2

 

4.8

 

8.1

 

2.6

 

Amortization of prior service cost (credit)

 

.3

 

 

.3

 

.1

 

.6

 

(.1

)

.6

 

.2

 

Recognized loss on curtailment(1)

 

 

 

 

.6

 

 

 

 

.6

 

Recognized loss on settlement(2)

 

 

3.8

 

 

 

 

3.8

 

 

 

Net periodic benefit cost

 

$

3.6

 

$

8.4

 

$

3.0

 

$

4.9

 

$

6.9

 

$

13.5

 

$

5.3

 

$

9.3

 

(1) Recognized loss on curtailment related to a pension plan in the Netherlands and was recorded in “Other expense, net” in the unaudited Condensed Consolidated Statements of Income.

(2) Recognized loss on settlement related to pension plans in Germany and France as a result of the sale of a product line in our RBIS reportable segment.  The loss on settlement was recorded in “Other expense, net” in the unaudited Condensed Consolidated Statements of Income.

 

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U.S. Postretirement Health Benefits

 

 

 

Three Months Ended

 

Six Months Ended

 

(In millions)

 

July 4, 2015

 

June 28, 2014

 

July 4, 2015

 

June 28, 2014

 

Interest cost

 

$

 

$

.1

 

$

.1

 

$

.1

 

Recognized net actuarial loss

 

.5

 

.7

 

1.1

 

1.4

 

Amortization of prior service credit

 

(.8)

 

(.8)

 

(1.6)

 

(1.6)

 

Net periodic benefit credit

 

$

(.3)

 

$

 

$

(.4)

 

$

(.1)

 

 

We make contributions to our defined benefit plans sufficient to meet the minimum funding requirements of applicable laws and regulations, plus additional amounts, if any, we determine to be appropriate. All of the contributions made in the first six months of 2015 and 2014 were made to meet minimum funding requirements.

 

The following table sets forth our contributions to our defined benefit plans:

 

 

 

Six Months Ended

 

(In millions)

 

July 4, 2015

 

June 28, 2014

 

U.S.

 

$

2.0

 

$

2.4

 

Int’l

 

9.3

 

10.6

 

U.S. postretirement health benefits

 

.6

 

.9

 

 

Note 7.  Research and Development

 

Research and development expense from continuing operations was $22.8 million and $48.4 million for the three and six months ended July 4, 2015, respectively, and $26.9 million and $51.9 million for the three and six months ended June 28, 2014, respectively.  This expense was included in “Marketing, general and administrative expense” in the unaudited Condensed Consolidated Statements of Income.

 

Note 8.  Long-Term Incentive Compensation

 

Equity Awards

 

Stock-based compensation expense from continuing operations was $5.8 million and $13.2 million for the three and six months ended July 4, 2015, respectively, and $8.5 million and $14.5 million for the three and six months ended June 28, 2014, respectively. This expense was included in “Marketing, general and administrative expense” in the unaudited Condensed Consolidated Statements of Income.

 

As of July 4, 2015, we had approximately $41 million of unrecognized compensation expense from continuing operations related to unvested stock-based awards, which is expected to be recognized over the remaining weighted-average period of approximately three years.

 

Cash Awards

 

Compensation expense from continuing operations related to long-term incentive units was $10.1 million and $15.3 million for the three and six months ended July 4, 2015, respectively, and $4.6 million and $9.9 million for the three and six months ended June 28, 2014, respectively. This expense was included in “Marketing, general and administrative expense” in the unaudited Condensed Consolidated Statements of Income.

 

Note 9.  Cost Reduction Actions

 

2014/2015 Actions

 

During the six months ended July 4, 2015, we recorded $33.9 million in restructuring charges, net of reversals, related to restructuring actions we initiated in 2014 that are continuing through 2015 (“2014/2015 Actions”). These charges consisted of severance and related costs for the reduction of approximately 605 positions, lease cancellation costs, and asset impairment charges.

 

In 2014, we recorded $66.5 million in restructuring charges, net of reversals, related to our 2014/2015 Actions.  These charges consisted of severance and related costs for the reduction of approximately 1,420 positions, lease cancellation costs, and asset impairment charges.

 

Approximately 245 employees impacted by our 2014/2015 Actions remained employed with us as of July 4, 2015. We expect charges and payments related to these actions to be substantially completed in 2015.

 

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

 

During the six months ended July 4, 2015, restructuring charges and payments were as follows:

 

(In millions)

 

Accrual at

January 3,

2015

 

Charges

(Reversals),

net

 

Cash

Payments

 

Non-cash

Impairment

 

Foreign

Currency

Translation

 

Accrual at

July 4, 2015

 

2014/2015 Actions

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and related costs

 

$

16.8

 

$

30.3

 

$

(26.0

)

$

 

$

(1.0

)

$

20.1

 

Asset impairment charges

 

 

3.4

 

 

(3.4

)

 

 

Lease cancellation costs

 

.1

 

.2

 

(.3

)

 

 

 

2012 Program

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and related costs

 

.8

 

 

 

 

(.1

)

.7

 

Total

 

$

17.7

 

$

33.9

 

$

(26.3

)

$

(3.4

)

$

(1.1

)

$

20.8

 

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

(In millions)

 

July 4, 2015

 

June 28, 2014

 

July 4, 2015

 

June 28, 2014

 

Restructuring costs by reportable segment and Corporate

 

 

 

 

 

 

 

 

 

 

 

 

 

Pressure-sensitive Materials

 

$

7.1

 

$

32.3

 

$

14.4

 

$

33.6

 

Retail Branding and Information Solutions

 

12.3

 

6.2

 

15.7

 

12.2

 

Vancive Medical Technologies

 

.6

 

 

1.7

 

 

Corporate

 

 

 

2.1

 

 

 

 

$

20.0

 

$

38.5

 

$

33.9

 

$

45.8

 

 

Note 10.  Financial Instruments

 

We enter into foreign exchange hedge contracts to reduce our risk from 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 enter into interest rate contracts to help manage our exposure to certain interest rate fluctuations.  We also enter into futures contracts to hedge certain price fluctuations for a portion of our anticipated domestic purchases of natural gas. The maximum length of time for which we hedge our exposure to the variability in future cash flows for forecasted transactions is 36 months.

 

As of July 4, 2015, the aggregate U.S. dollar equivalent notional value of our outstanding commodity contracts and foreign exchange contracts was $3.4 million and $1.2 billion, respectively.

 

We recognize all derivative instruments as either assets or liabilities at fair value in the unaudited Condensed Consolidated Balance Sheets. We designate commodity forward contracts on forecasted purchases of commodities and foreign exchange contracts on forecasted transactions as cash flow hedges and foreign exchange contracts on existing balance sheet items as fair value hedges.

 

The following table provides the fair value and balance sheet locations of derivatives as of July 4, 2015:

 

 

 

Asset

 

Liability

 

(In millions)

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Foreign exchange contracts

 

Other current assets

 

$

4.5

 

Other accrued liabilities

 

$

2.9

 

Commodity contracts

 

Other current assets

 

 

Other accrued liabilities

 

.6

 

 

 

 

 

 

 

Long-term retirement benefits and other liabilities

 

.1

 

 

 

 

 

$

4.5

 

 

 

$

3.6

 

 

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Avery Dennison Corporation

 

The following table provides the fair value and balance sheet locations of derivatives as of January 3, 2015:

 

 

 

Asset

 

Liability

 

(In millions)

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Foreign exchange contracts

 

Other current assets

 

$

10.3

 

Other accrued liabilities

 

$

10.5

 

Commodity contracts

 

Other current assets

 

 

Other accrued liabilities

 

1.0

 

 

 

 

 

 

 

Long-term retirement benefits and other liabilities

 

.2

 

 

 

 

 

$

10.3

 

 

 

$

11.7

 

 

Fair Value Hedges

For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative and the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings, resulting in no material net impact to income.

 

The following table provides the components of net gain (loss) recognized in income related to fair value hedge contracts.  The corresponding gains or losses on the underlying hedged items approximated the net gain (loss) on these fair value hedge contracts.

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

(In millions)

 

Location of Net Gains
(Losses) in Income

 

July 4,
2015

 

June 28,
2014

 

July 4,
2015

 

June 28,
2014

 

Foreign exchange contracts

 

Cost of products sold

 

  $

(.4

)

  $

(2.1

)

  $

1.0

 

  $

(3.0

)

Foreign exchange contracts

 

Marketing, general and administrative expense

 

(7.7

)

(3.5

)

4.0

 

(2.5

)

 

 

 

 

  $

(8.1

)

  $

(5.6

)

  $

5.0

 

  $

(5.5

)

 

Cash Flow Hedges

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of “Accumulated other comprehensive loss” and reclassified into earnings in the same period(s) during which the hedged transaction impacts earnings.  Gains and losses on the derivative, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.

 

Gains (losses) recognized in “Accumulated other comprehensive loss” (effective portion) on derivatives related to cash flow hedge contracts were as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

(In millions)

 

July 4, 2015

 

June 28, 2014

 

July 4, 2015

 

June 28, 2014

 

Foreign exchange contracts

 

$

(1.8

)

$

(1.9

)

$

(1.5

)

$

(2.2

)

Commodity contracts

 

1.5

 

(.2

)

1.2

 

.2

 

 

 

$

(.3

)

$

(2.1

)

$

(.3

)

$

(2.0

)

 

The amount of gain or loss recognized in income related to the ineffective portion of, and the amount excluded from, effectiveness testing for cash flow hedges and derivatives not designated as hedging instruments were not material for the three and six months ended July 4, 2015 and June 28, 2014, respectively.

 

As of July 4, 2015, we expected a net gain of approximately $1 million to be reclassified from “Accumulated other comprehensive loss” to earnings within the next 12 months.  See Note 13, “Comprehensive Income,” for more information.

 

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Avery Dennison Corporation

 

Note 11.  Taxes Based on Income

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

(In millions)

 

July 4, 2015

 

June 28, 2014

 

July 4, 2015

 

June 28, 2014

 

Income from continuing operations before taxes

 

$

100.8

 

$

77.1

 

$

200.3

 

$

164.9

 

Provision for income taxes

 

36.5

 

32.7

 

64.4

 

48.9

 

Effective tax rate

 

 

36.2

%

 

42.4

%

 

32.2

%

 

29.7

%

 

The effective tax rate for continuing operations for the three and six months ended July 4, 2015 included $5.3 million of tax expense associated with the tax cost to repatriate non-permanently reinvested 2015 earnings of certain foreign subsidiaries; $.5 million of tax expense due to non-deductible employee-related expenses; and $.7 million and $4.1 million of tax benefits, respectively, due to decreases in certain tax reserves as a result of closing tax years.  Additionally, the effective tax rate for the six months ended July 4, 2015 included $1.6 million of net tax benefit related to changes in the effective tax rates in certain foreign municipalities.

 

The effective tax rate for continuing operations for the three and six months ended June 28, 2014 included $5.8 million of net tax expense and $3.7 million of net tax benefit, respectively, as a result of changes in certain tax reserves and valuation allowances.  Both the three and six months ended June 28, 2014 included $6.1 million of tax expense from an out-of-period adjustment to properly reflect the valuation allowance related to state deferred tax assets and $6 million of tax expense related to our change in estimate of the potential outcome of uncertain tax issues in China.  These expense items were offset by $6.3 million and $15.8 million of tax benefits in the three and six months ended June 28, 2014, respectively, due primarily to decreases in certain tax reserves as a result of closing tax years.  Additionally, the effective tax rate for the six months ended June 28, 2014 included $4.8 million of tax benefit from out-of-period adjustments to properly reflect deferred taxes related to acquisitions completed in 2002 and 2003.  The impact of the out-of-period adjustments was not material to the periods reported and any previous financial statements.

 

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.  With some exceptions, we and our subsidiaries are no longer subject to income tax examinations by tax authorities for years prior to 2006.

 

It is reasonably possible that, during the next 12 months, we may realize a decrease in our uncertain tax positions, including interest and penalties, of approximately $11 million, primarily as a result of closing tax years.

 

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Avery Dennison Corporation

 

Note 12.  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 4,
2015

 

June 28,
2014

 

July 4,
2015

 

June 28,
2014

 

(A)

Income from continuing operations

 

$

64.3

 

$

44.4

 

$

135.9

 

$

116.0

 

(B)

Loss from discontinued operations, net of tax

 

(1.0

)

(1.9

)

(1.0

)

(2.3

)

(C)

Net income available to common shareholders

 

$

63.3

 

$

42.5

 

$

134.9

 

$

113.7

 

(D)

Weighted-average number of common shares outstanding

 

91.2

 

94.9

 

90.9

 

95.4

 

 

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

 

1.8

 

1.8

 

1.9

 

1.9

 

(E)

Weighted-average number of common shares outstanding, assuming dilution

 

93.0

 

96.7

 

92.8

 

97.3

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

Continuing operations (A) ÷ (D)

 

$

.70

 

$

.47

 

$

1.49

 

$

1.22

 

 

Discontinued operations (B) ÷ (D)

 

(.01

)

(.02

)

(.01

)

(.03

)

Net income per common share (C) ÷ (D)

 

$

.69

 

$

.45

 

$

1.48

 

$

1.19

 

Net income (loss) per common share, assuming dilution:

 

 

 

 

 

 

 

 

 

 

Continuing operations (A) ÷ (E)

 

$

.69

 

$

.46

 

$

1.46

 

$

1.19

 

 

Discontinued operations (B) ÷ (E)

 

(.01

)

(.02

)

(.01

)

(.02

)

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

 

$

.68

 

$

.44

 

$

1.45

 

$

1.17

 

 

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 totaled approximately 1 million shares for both the three and six months ended July 4, 2015 and approximately 3 million shares and 4 million shares for the three and six months ended June 28, 2014, respectively.

 

Note 13.  Comprehensive Income

 

The changes in “Accumulated other comprehensive loss” (net of tax) for the six-month period ended July 4, 2015 were as follows:

 

(In millions)

 

Foreign
Currency
Translation

 

Pension and
Other
Postretirement
Benefits

 

Cash Flow
Hedges

 

Total

 

Balance as of January 3, 2015

 

$

(16.7

)

$

(530.6

)

$

 

$

(547.3

)

Other comprehensive (loss) income before reclassifications, net of tax

 

(69.1

)

.5

 

(.2

)

(68.8

)

Reclassifications to net income, net of tax

 

 

13.1

 

(.4

)

12.7

 

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

 

(69.1

)

13.6

 

(.6

)

(56.1

)

Balance as of July 4, 2015

 

$

(85.8

)

$

(517.0

)

$

(.6

)

$

(603.4

)

 

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Avery Dennison Corporation

 

The changes in “Accumulated other comprehensive loss” (net of tax) for the six-month period ended June 28, 2014 were as follows:

 

(In millions)

 

Foreign
Currency
Translation

 

Pension and
Other
Postretirement
Benefits

 

Cash Flow
Hedges

 

Total

 

Balance as of December 28, 2013

 

$

138.0

 

$

(418.1

)

$

(1.0

)

$

(281.1

)

Other comprehensive loss before reclassifications, net of tax

 

(4.0

)

(1.0

)

(1.6

)

(6.6

)

Reclassifications to net income, net of tax

 

 

8.0

 

1.1

 

9.1

 

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

 

(4.0

)

7.0

 

(.5

)

2.5

 

Balance as of June 28, 2014

 

$

134.0

 

$

(411.1

)

$

(1.5

)

$

(278.6

)

 

The amounts reclassified from “Accumulated other comprehensive loss” to increase (decrease) income from continuing operations were as follows:

 

 

 

Amounts Reclassified from Accumulated
Other Comprehensive Loss

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

(In millions)

 

July 4,
2015

 

June 28,
2014

 

July 4,
2015

 

June 28,
2014

 

Affected Line Item
in the Statements
Where Net Income
is Presented

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

(.2

)

$

(1.5

)

$

1.3

 

$

(1.5

)

Cost of products sold

 

Commodity contracts

 

(.3

)

.1

 

(.8

)

.2

 

Cost of products sold

 

 

 

(.5

)

(1.4

)

.5

 

(1.3

)

Total before tax

 

 

 

.2

 

.2

 

(.1

)

.2

 

Provision for income taxes

 

 

 

(.3

)

(1.2

)

.4

 

(1.1

)

Net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and other postretirement benefits(1)

 

(11.2

)

(6.4

)

(18.8

)

(11.9

)

 

 

 

 

4.5

 

2.7

 

5.7

 

3.9

 

Provision for income taxes

 

 

 

(6.7

)

(3.7

)

(13.1

)

(8.0

)

Net of tax

 

Total reclassifications for the period

 

$

(7.0

)

$

(4.9

)

$

(12.7

)

$

(9.1

)

Total, net of tax

 

(1) See Note 6, “Pension and Other Postretirement Benefits,” for more information.

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

(In millions)

 

July 4, 2015

 

June 28, 2014

 

July 4, 2015

 

June 28, 2014

 

Pension and other postretirement benefits

 

$

4.5

 

$

2.7

 

$

5.7

 

$

3.9

 

Cash flow hedges

 

.2

 

(.1

)

(.1

)

(.1

)

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

 

$

4.7

 

$

2.6

 

$

5.6

 

$

3.8

 

 

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Avery Dennison Corporation

 

Note 14.  Fair Value Measurements

 

Recurring Fair Value Measurements

The following table provides the assets and liabilities carried at fair value, measured on a recurring basis, as of July 4, 2015:

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Trading securities

 

$

18.0

 

$

8.6

 

$

9.4

 

$

–     

 

Derivative assets

 

4.5

 

 

4.5

 

–     

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

3.6

 

$

.7

 

$

2.9

 

$

–     

 

 

The following table provides the assets and liabilities carried at fair value, measured on a recurring basis, as of January 3, 2015:

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Trading securities

 

$

17.9

 

$

7.6

 

$

10.3

 

$

–     

 

Derivative assets

 

10.3

 

 

10.3

 

–     

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

11.7

 

$

1.2

 

$

10.5

 

$

–     

 

 

Trading securities 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 4, 2015, trading securities of $.5 million and $17.5 million were included in “Cash and cash equivalents” and “Other current assets,” respectively, in the unaudited Condensed Consolidated Balance Sheets.  As of January 3, 2015, trading securities of $.8 million and $17.1 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 are 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.

 

Note 15.  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.  We have accrued liabilities for matters where it is probable that a loss will be incurred and the amount of loss can be reasonably estimated.  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, 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

 

As of July 4, 2015, we have been designated by the U.S. Environmental Protection Agency (“EPA”) and/or other responsible state agencies as a potentially responsible party (“PRP”) at thirteen waste disposal or waste recycling sites, which are the subject of separate investigations or proceedings concerning alleged soil and/or groundwater contamination and for which no settlement of our liability has been agreed.  We are participating with other PRPs at these sites, and anticipate that our share of remediation costs will be determined pursuant to agreements entered into in the normal course of negotiations with the EPA or other governmental authorities.

 

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We have accrued liabilities for sites where it is probable that a loss will be incurred and the cost or amount of loss can be reasonably estimated.  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, 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 for the six months ended July 4, 2015 related to our environmental liabilities was as follows:

 

(In millions)

 

 

 

Balance at January 3, 2015

 

$

26.2

 

Charges (reversals), net

 

2.6

 

Payments

 

(3.5

)

Balance at July 4, 2015

 

$

25.3

 

 

As of July 4, 2015, approximately $11 million of the balance was classified as short-term and included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets.

 

Guarantees

 

We participate in receivable financing programs with several financial institutions whereby advances may be requested from these financial institutions.  We guarantee the collection of the related receivables.  At July 4, 2015, the outstanding amount guaranteed was approximately $18 million.  We believe our exposure to these guarantees is not material.

 

Unused letters of credit (primarily standby) outstanding with various financial institutions were approximately $47 million at July 4, 2015.

 

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Note 16.  Segment Information

 

Financial information by reportable segment from continuing operations is set forth below.

 

 

 

Three Months Ended

 

Six Months Ended

 

(In millions)

 

July 4, 2015

 

June 28, 2014

 

July 4, 2015

 

June 28, 2014

 

Net sales to unaffiliated customers

 

 

 

 

 

 

 

 

 

Pressure-sensitive Materials

 

$

1,114.1

 

$

1,180.9

 

$

2,234.7

 

$

2,324.4

 

Retail Branding and Information Solutions

 

383.8

 

414.4

 

771.9

 

802.1

 

Vancive Medical Technologies

 

18.1

 

20.5

 

37.4

 

39.4

 

Net sales to unaffiliated customers

 

$

1,516.0

 

$

1,615.8

 

$

3,044.0

 

$

3,165.9

 

Intersegment sales

 

 

 

 

 

 

 

 

 

Pressure-sensitive Materials

 

$

16.2

 

$

16.7

 

$

31.9

 

$

32.9

 

Retail Branding and Information Solutions

 

.6

 

.6

 

1.2

 

1.4

 

Vancive Medical Technologies

 

1.6

 

2.5

 

3.2

 

4.8

 

Intersegment sales

 

$

18.4

 

$

19.8

 

$

36.3

 

$

39.1

 

Income from continuing operations before taxes

 

 

 

 

 

 

 

 

 

Pressure-sensitive Materials

 

$

129.8

 

$

86.5

 

$

252.7

 

$

198.5

 

Retail Branding and Information Solutions

 

10.0

 

28.3

 

29.2

 

44.9

 

Vancive Medical Technologies

 

(1.4

)

(1.7

)

(3.5

)

(4.3

)

Corporate expense

 

(22.3

)

(20.4

)

(47.5

)

(43.2

)

Interest expense

 

(15.3

)

(15.6

)

(30.6

)

(31.0

)

Income from continuing operations before taxes

 

$

100.8

 

$

77.1

 

$

200.3

 

$

164.9

 

Other expense, net by reportable segment

 

 

 

 

 

 

 

 

 

Pressure-sensitive Materials

 

$

7.1

 

$

32.9

 

$

12.7

 

$

34.2

 

Retail Branding and Information Solutions

 

20.0

 

5.6

 

25.5

 

11.6

 

Vancive Medical Technologies

 

.6

 

 

1.7

 

 

Corporate

 

 

 

2.1

 

 

Other expense, net

 

$

27.7

 

$

38.5

 

$

42.0

 

$

45.8

 

Other expense, net by type

 

 

 

 

 

 

 

 

 

Restructuring costs:

 

 

 

 

 

 

 

 

 

Severance and related costs

 

$

16.8

 

$

35.9

 

$

30.3

 

$

42.9

 

Asset impairment charges and lease cancellation costs

 

3.2

 

2.6

 

3.6

 

2.9

 

Other items:

 

 

 

 

 

 

 

 

 

Loss on sale of product line and related exit costs

 

7.7

 

 

10.3

 

 

Gain on sale of assets

 

 

(.6

)

(1.7

)

(.6

)

Loss from curtailment of pension obligation

 

 

.6

 

 

.6

 

Legal settlement

 

 

 

(.5

)

 

Other expense, net

 

$

27.7

 

$

38.5

 

$

42.0

 

$

45.8

 

 

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Note 17.  Recent Accounting Requirements

 

In July 2015, the Financial Accounting Standards Board (“FASB”) amended guidance to simplify the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value.  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those years. We do not anticipate that adoption of this amended guidance will have a significant impact on our financial position, results of operations, cash flows, or disclosures.

 

In May 2015, the FASB amended guidance to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Additionally, the amended guidance removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. This guidance is effective for annual periods beginning after December 15, 2015, and interim periods within those fiscal years, and applied retrospectively.  Early adoption is permitted. Most of the plan assets in our U.S. and international pension plans are invested in funds that are valued at net asset value.  Although we do not anticipate that adoption of this guidance will have a significant impact on our financial position, results of operations, or cash flows, the adoption of this amended guidance may result in a significant amount of plan assets not being disclosed within the fair value hierarchy.

 

In April 2015, the FASB issued guidance about accounting for fees paid in a cloud computing arrangement. Examples of cloud computing arrangements include software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements. If a cloud computing arrangement includes a software license, as clarified in the guidance, then the software license element of the arrangement should be accounted for consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. This guidance is effective for annual periods beginning after December 15, 2015, and interim periods within those fiscal years and may be adopted prospectively or retrospectively.  We do not anticipate that adoption of this guidance will have a significant impact on our financial position, results of operations, cash flows, or disclosures.

 

In April 2015, the FASB revised guidance to allow employers with fiscal year-ends that do not coincide with a calendar month-end to make an accounting policy election to measure defined benefit plan assets and obligations as of the end of the calendar month closest to their fiscal year-end. Employers that make this election must apply the alternative measurement date to all defined benefit plans. The guidance also allows all employers to elect to remeasure defined plan assets and obligations in interim periods at the closest calendar month-end to an event that triggers the remeasurement. This revised guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those fiscal years.  We do not anticipate that adoption of this revised guidance will have a significant impact on our financial position, results of operations, cash flows, or disclosures.

 

In April 2015, the FASB revised guidance on the presentation of debt issuance costs. Under this revised guidance, debt issuance costs should be presented in the balance sheet as a direct deduction from the carrying value of the associated debt, consistent with the presentation of a debt discount. This revised guidance is effective for annual periods beginning after December 15, 2015, and interim periods within those fiscal years. We do not anticipate that adoption of this revised guidance will have a significant impact on our financial position, results of operations, cash flows, or disclosures.

 

In May 2014, the FASB issued revised guidance on revenue recognition. This revised guidance provides a single comprehensive model for accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This revised guidance will require an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. This revised guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This revised guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years, and can be applied retrospectively either to each prior reporting period presented or with the cumulative effect of adoption recognized at the date of initial application. Early adoption is permitted for fiscal periods beginning after December 15, 2016. We are evaluating the impact of this revised guidance, but based on the information that we have evaluated to date, we do not anticipate its adoption to have a significant impact on our financial position, results of operations, cash flows, or disclosures.

 

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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, should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and notes thereto, and includes the following sections:

 

Non-GAAP Financial Measures

18

Overview and Outlook

19

Analysis of Results of Operations for the Second Quarter

20

Results of Operations by Reportable Segment for the Second Quarter

22

Analysis of Results of Operations for the Six Months Year-to-Date

24

Results of Operations by Reportable Segment for the Six Months Year-to-Date

25

Financial Condition

27

Recent Accounting Requirements

30

 

NON-GAAP FINANCIAL MEASURES

 

We report 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 presentation of our financial results that are prepared in accordance with GAAP.  Based upon feedback from our investors and financial analysts, we believe that supplemental non-GAAP financial measures provide information that is useful to the assessment of our performance and operating trends, as well as liquidity. The measures we use may not be comparable to similarly named non-GAAP measures used by other companies.

 

Our non-GAAP financial measures exclude the impact of certain events, activities or strategic decisions.  By excluding certain accounting effects, both positive and negative, of certain items, we believe that we are providing meaningful supplemental information to facilitate an understanding of our core operating results and liquidity measures.  These non-GAAP financial measures are used internally to evaluate trends in our underlying performance, as well as to facilitate comparison to the results of competitors for a single period. While some of the items we exclude from GAAP financial measures recur, they tend to be disparate in amount, frequency, or timing.

 

We use the following non-GAAP financial measures in this MD&A:

·      Organic sales change refers to the increase or decrease in sales excluding the estimated impact of currency translation, product line exits, acquisitions and divestitures, and, where applicable, an extra week in the current or preceding fiscal year.  The estimated impact of 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.  We believe organic sales change assists investors in evaluating the underlying sales growth from the ongoing activities of our businesses and provides improved comparability of results period to period.

·      Free cash flow refers to cash flow from operations, 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 sales (purchases) of investments. Free cash flow excludes uses of cash that do not directly or immediately support the underlying business, such as discretionary debt reductions, dividends, share repurchases, and certain effects of acquisitions and divestitures (e.g., cash flow from discontinued operations, taxes, and transaction costs).

·      Operational working capital 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 current assets and current liabilities of held-for-sale businesses.  We use this non-GAAP financial measure to assess 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 the working capital as a percentage of sales from period to period.  Additionally, the excluded items are not significantly influenced by our day-to-day activities managed at the operating level and may not reflect the underlying trends in our operations.

 

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OVERVIEW AND OUTLOOK

 

Overview

 

Sales

Our sales decreased 4% in the first six months of 2015 compared to the same period last year.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 4, 2015

 

July 4, 2015

 

Estimated change in sales due to

 

 

 

 

 

Organic sales change

 

4

%

3

%

Extra week in our prior fiscal year

 

 

1

 

Foreign currency translation

 

(10

)

(8

)

Reported sales change

 

(6

)%

(4

)%

 

Income from Continuing Operations

Income from continuing operations increased approximately $20 million in both the second quarter and first six months of 2015 compared to the same periods last year. Major factors affecting income from continuing operations in the first six months of 2015 included:

 

Positive factors:

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

·                  Higher volume and improved product mix

·                  Lower restructuring costs

 

Offsetting factors:

·                  Higher employee-related costs

·                  Foreign currency translation

·                  Higher income taxes

·                  Loss on sale of our industrial printer product line in our RBIS reportable segment and exit costs related to the sale

 

Sale of Product Line

In May 2015, we sold certain assets and transferred certain liabilities associated with a product line in our RBIS reportable segment for $1.5 million.  This sale resulted in a pretax loss which, when combined with exit costs related to the sale, totaled $7.7 million in the second quarter of 2015. The exit costs included $3.4 million of severance costs, of which $.1 million had been paid as of July 4, 2015.  In the first quarter of 2015, we recorded an impairment charge of approximately $2 million related to certain long-lived assets of this product line as well as $.6 million of other costs related to this sale.  This loss and these costs were included in “Other expense, net” in the unaudited Condensed Consolidated Statements of Income.

 

Cost Reduction Actions

 

2014/2015 Actions

During the first six months of 2015, we recorded $33.9 million in restructuring charges, net of reversals, related to restructuring actions we initiated in 2014 that are continuing through 2015 (“2014/2015 Actions”). These charges consisted of severance and related costs for the reduction of approximately 605 positions, lease cancellation costs, and asset impairment charges.

 

In 2014, we recorded $66.5 million in restructuring charges, net of reversals, related to our 2014/2015 Actions. These charges consisted of severance and related costs for the reduction of approximately 1,420 positions, lease cancellation costs, and asset impairment charges.

 

Approximately 245 employees impacted by our 2014/2015 Actions remained employed with us as of July 4, 2015. We expect charges and payments related to these actions to be substantially completed in 2015.

 

In 2015, we expect to realize at least $70 million in savings, net of transition costs, from our 2014/2015 Actions. We anticipate carryover savings from our 2014/2015 Actions in 2016.

 

Restructuring costs are included in “Other expense, net” in the unaudited Condensed Consolidated Statements of Income. Refer to Note 9, “Cost Reduction Actions,” to the unaudited Condensed Consolidated Financial Statements for more information.

 

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Free Cash Flow

 

 

 

Six Months Ended

(In millions)

 

July 4, 2015

 

June 28, 2014

 

Net cash provided by operating activities

 

$

170.9

 

$

9.8

 

Purchases of property, plant and equipment

 

(56.4

)

(67.5

)

Purchases of software and other deferred charges

 

(4.0

)

(14.4

)

Proceeds from sales of property, plant and equipment

 

2.8

 

.6

 

(Purchases) sales of investments, net

 

(.3

)

.1

 

Plus: cash outflow from discontinued operations

 

1.0

 

.6

 

Free cash flow

 

$

114.0

 

$

(70.8

)

 

Free cash flow in the first six months of 2015 improved compared to 2014 primarily due to the timing of vendor payments, lower incentive compensation paid in 2015 for the 2014 performance year, and lower capital expenditures in 2015.

 

2015 Outlook

 

Certain factors that we believe may contribute to results for 2015 are described below:

 

·                  We expect organic sales growth of approximately 3.5% to 4% in 2015 compared to 2014.

·                  We expect earnings to increase in 2015 compared to 2014.

·                  We estimate cash restructuring costs of approximately $50 million in 2015.

·                  We expect our full year 2015 tax rate to be in the low to mid-thirty percent range.

·                  We anticipate our capital and software expenditures in 2015 to be approximately $160 million.

 

ANALYSIS OF RESULTS OF OPERATIONS FOR THE SECOND QUARTER

 

Income from Continuing Operations before Taxes

 

 

 

Three Months Ended

(In millions)

 

July 4, 2015

 

June 28, 2014

 

Net sales

 

$

1,516.0

 

$

1,615.8

 

Cost of products sold

 

1,098.4

 

1,187.6

 

Gross profit

 

417.6

 

428.2

 

Marketing, general and administrative expense

 

273.8

 

297.0

 

Interest expense

 

15.3

 

15.6

 

Other expense, net

 

27.7

 

38.5

 

Income from continuing operations before taxes

 

$

100.8

 

$

77.1

 

 

 

 

 

 

 

As a Percentage of Sales

 

 

 

 

 

Gross profit

 

27.5

%

26.5

%

Marketing, general and administrative expense

 

18.1

 

18.4

 

Income from continuing operations before taxes

 

6.6

 

4.8

 

 

Gross Profit Margin

Gross profit margin for the second quarter of 2015 increased compared to the same period last year reflecting benefits from productivity initiatives, including savings from restructuring, net of transition costs, the impact of changes in foreign currency rates, and the net impact of pricing and raw material input costs. The increase was partially offset by higher employee-related costs and changes in segment mix.

 

Marketing, General and Administrative Expense

Marketing, general and administrative expense decreased in the second quarter of 2015 compared to the same period last year reflecting the impact of currency and benefits from productivity initiatives, including savings from restructuring, net of transition costs, partially offset by higher employee-related costs.

 

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Other Expense, net

 

 

 

Three Months Ended

(In millions)

 

July 4, 2015

 

June 28, 2014

 

Other expense, net by type

 

 

 

 

 

Restructuring costs:

 

 

 

 

 

Severance and related costs

 

$

16.8

 

$

35.9

 

Asset impairment charges and lease cancellation costs

 

3.2

 

2.6

 

Other items:

 

 

 

 

 

Loss on sale of product line and related exit costs

 

7.7

 

 

Gain on sale of asset

 

 

(.6

)

Loss from curtailment of pension obligation

 

 

.6

 

Other expense, net

 

$

27.7

 

$

38.5

 

 

Refer to Note 9, “Cost Reduction Actions,” to the unaudited Condensed Consolidated Financial Statements for more information regarding costs associated with restructuring.

 

Net Income and Earnings per Share

 

 

 

Three Months Ended

(In millions, except per share amounts)

 

July 4, 2015

 

June 28, 2014

 

Income from continuing operations before taxes

 

$

100.8

 

$

77.1

 

Provision for income taxes

 

36.5

 

32.7

 

Income from continuing operations

 

64.3

 

44.4

 

Loss from discontinued operations, net of tax

 

(1.0

)

(1.9

)

Net income

 

$