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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 2, 2016.

 

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 July 30, 2016: 88,857,084

 



Table of Contents

 

AVERY DENNISON CORPORATION

 

FISCAL SECOND QUARTER 2016 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, 2016 and January 2, 2016

2

 

Condensed Consolidated Statements of Income

 

 

Three and Six Months ended July 2, 2016 and July 4, 2015

3

 

Condensed Consolidated Statements of Comprehensive Income

 

 

Three and Six Months ended July 2, 2016 and July 4, 2015

4

 

Condensed Consolidated Statements of Cash Flows

 

 

Three and Six Months ended July 2, 2016 and July 4, 2015

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

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

20

 

Non-GAAP Financial Measures

20

 

Overview and Outlook

21

 

Analysis of Results of Operations for the Second Quarter

23

 

Results of Operations by Reportable Segment for the Second Quarter

25

 

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

27

 

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

29

 

Financial Condition

31

 

Recent Accounting Requirements

34

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4.

Controls and Procedures

35

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

36

Item 1A.

Risk Factors

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 3.

Defaults Upon Senior Securities

36

Item 4.

Mine Safety Disclosures

36

Item 5.

Other Information

37

Item 6.

Exhibits

37

Signatures

 

38

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 2, 2016, and subsequent quarterly reports on Form 10-Q, 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, except per share amount)

 

July 2, 2016

 

January 2, 2016

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

216.1

 

$

158.8

 

Trade accounts receivable, less allowances of $34.2 and $31.5 at July 2, 2016 and January 2, 2016, respectively

 

1,028.3

 

964.7

 

Inventories, net

 

524.1

 

478.7

 

Assets held for sale

 

4.4

 

2.5

 

Other current assets

 

169.6

 

170.7

 

Total current assets

 

1,942.5

 

1,775.4

 

Property, plant and equipment

 

2,600.8

 

2,599.9

 

Accumulated depreciation

 

(1,762.1

)

(1,752.0

)

Property, plant and equipment, net

 

838.7

 

847.9

 

Goodwill

 

691.0

 

686.2

 

Other intangibles resulting from business acquisitions, net

 

36.4

 

45.8

 

Non-current deferred income taxes

 

390.4

 

372.2

 

Other assets

 

395.8

 

406.2

 

 

 

$

4,294.8

 

$

4,133.7

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

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

 

$

199.0

 

$

95.3

 

Accounts payable

 

867.9

 

814.6

 

Other current liabilities

 

525.3

 

549.2

 

Total current liabilities

 

1,592.2

 

1,459.1

 

Long-term debt and capital leases

 

962.9

 

963.6

 

Long-term retirement benefits and other liabilities

 

674.5

 

637.4

 

Non-current deferred and payable income taxes

 

108.7

 

107.9

 

Commitments and contingencies (see Note 15)

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, $1 par value per share, authorized — 400,000,000 shares at July 2, 2016 and January 2, 2016; issued — 124,126,624 shares at July 2, 2016 and January 2, 2016; outstanding — 88,927,397 shares and 89,967,697 shares at July 2, 2016 and January 2, 2016, respectively

 

124.1

 

124.1

 

Capital in excess of par value

 

834.4

 

834.0

 

Retained earnings

 

2,385.5

 

2,277.6

 

Treasury stock at cost, 35,199,227 shares and 34,158,927 shares at July 2, 2016 and January 2, 2016, respectively

 

(1,698.7

)

(1,587.0

)

Accumulated other comprehensive loss

 

(688.8

)

(683.0

)

Total shareholders’ equity

 

956.5

 

965.7

 

 

 

$

4,294.8

 

$

4,133.7

 

 

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 2, 2016

 

July 4, 2015

 

 

July 2, 2016

 

July 4, 2015

 

Net sales

 

$

1,541.5

 

$

1,516.0

 

 

$

3,027.0

 

$

3,044.0

 

Cost of products sold

 

1,107.4

 

1,098.4

 

 

2,170.3

 

2,196.4

 

Gross profit

 

434.1

 

417.6

 

 

856.7

 

847.6

 

Marketing, general and administrative expense

 

269.2

 

273.3

 

 

547.4

 

573.7

 

Interest expense

 

15.4

 

15.3

 

 

30.7

 

30.6

 

Other expense, net

 

50.2

 

27.7

 

 

55.8

 

42.0

 

Income from continuing operations before taxes

 

99.3

 

101.3

 

 

222.8

 

201.3

 

Provision for income taxes

 

19.3

 

36.6

 

 

53.2

 

64.7

 

Income from continuing operations

 

80.0

 

64.7

 

 

169.6

 

136.6

 

Loss from discontinued operations

 

 

(1.0

)

 

 

(1.0

)

Net income

 

$

80.0

 

$

63.7

 

 

$

169.6

 

$

135.6

 

 

 

 

 

 

 

 

 

 

 

 

Per share amounts:

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

.90

 

$

.71

 

 

$

1.90

 

$

1.50

 

Discontinued operations

 

 

(.01

)

 

 

(.01

)

Net income per common share

 

$

.90

 

$

.70

 

 

$

1.90

 

$

1.49

 

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

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

.88

 

$

.69

 

 

$

1.87

 

$

1.47

 

Discontinued operations

 

 

(.01

)

 

 

(.01

)

Net income per common share, assuming dilution

 

$

.88

 

$

.68

 

 

$

1.87

 

$

1.46

 

Dividends per common share

 

$

.41

 

$

.37

 

 

$

.78

 

$

.72

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

 

Common shares

 

89.1

 

91.2

 

 

89.3

 

90.9

 

Common shares, assuming dilution

 

90.7

 

93.0

 

 

90.9

 

92.8

 

 

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 2, 2016

 

July 4, 2015

 

July 2, 2016

 

July 4, 2015

 

Net income

 

$

80.0

 

$

63.7

 

$

169.6

 

$

135.6

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(13.3

)

2.9

 

5.6

 

(69.1

)

Pension and other postretirement benefits

 

(15.5

)

7.2

 

(11.3

)

12.6

 

Cash flow hedges

 

1.2

 

.1

 

(.1

)

(.6

)

Other comprehensive (loss) income, net of tax

 

(27.6

)

10.2

 

(5.8

)

(57.1

)

Total comprehensive income, net of tax

 

$

52.4

 

$

73.9

 

$

163.8

 

$

78.5

 

 

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 2, 2016

 

July 4, 2015

 

Operating Activities

 

 

 

 

 

Net income

 

$

169.6

 

$

135.6

 

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

 

 

 

 

 

Depreciation

 

58.6

 

64.9

 

Amortization

 

30.8

 

31.8

 

Provision for doubtful accounts and sales returns

 

21.3

 

24.9

 

Net losses from asset impairments and sales/disposals of assets

 

3.2

 

11.1

 

Stock-based compensation

 

14.1

 

13.2

 

Loss from settlement of pension obligations

 

41.4

 

 

Other non-cash expense and loss

 

24.1

 

26.7

 

Changes in assets and liabilities and other adjustments

 

(147.1

)

(137.8

)

Net cash provided by operating activities

 

216.0

 

170.4

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(61.3

)

(56.4

)

Purchases of software and other deferred charges

 

(6.1

)

(4.0

)

Proceeds from sales of property, plant and equipment

 

3.2

 

2.8

 

Purchases of investments, net

 

 

(.3

)

Other

 

 

1.5

 

Net cash used in investing activities

 

(64.2

)

(56.4

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net increase (decrease) in borrowings (maturities of 3 months or less)

 

104.6

 

(15.8

)

Payments of debt (maturities greater than 3 months)

 

(1.2

)

(5.5

)

Dividends paid

 

(69.6

)

(65.7

)

Share repurchases

 

(160.1

)

(61.5

)

Proceeds from exercises of stock options, net

 

41.4

 

61.3

 

Other

 

(8.4

)

(4.0

)

Net cash used in financing activities

 

(93.3

)

(91.2

)

 

 

 

 

 

 

Effect of foreign currency translation on cash balances

 

(1.2

)

(4.3

)

Increase in cash and cash equivalents

 

57.3

 

18.5

 

Cash and cash equivalents, beginning of year

 

158.8

 

207.2

 

Cash and cash equivalents, end of period

 

$

216.1

 

$

225.7

 

 

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 2015 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.  Interim results of operations are not necessarily indicative of future results.

 

Fiscal Periods

The second quarters of 2016 and 2015 consisted of thirteen-week periods ending July 2, 2016 and July 4, 2015, respectively. The six months ended July 2, 2016 and July 4, 2015 each consisted of twenty-six-week periods.

 

Prior Period Financial Statement Revision

In 2015, we determined that certain of our benefit plans (that were frozen between 1994 and 2003) were not properly accounted for since their inception between 1984 and 1988. This resulted in an understatement of long-term retirement benefits and other liabilities and the cumulative historical expenses related to these benefit plans.  Additionally, we identified certain liquid short-term bank drafts with maturities greater than three months that were improperly classified as cash and cash equivalents instead of other current assets, which resulted in an overstatement of operating cash flows, and tax effects related to certain foreign pension plans that were not properly accounted for on our consolidated financial statements.

 

We assessed the materiality of these errors on our financial statements for prior periods in accordance with United States Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 99, Materiality, codified in Accounting Standards Codification (“ASC”) 250, Presentation of Financial Statements, and concluded that they were not material to any prior annual or interim periods.  However, the aggregate amount of the prior period revisions of approximately $24 million would have been material to our Condensed Consolidated Statements of Income in the period that the errors were identified. Consequently, in accordance with ASC 250 (SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), we have corrected these errors for all prior periods presented by revising the unaudited Condensed Consolidated Financial Statements and other financial information included herein. We also corrected the timing of immaterial previously recorded out-of-period adjustments and reflected them in the revised prior period financial statements, where applicable. Periods not presented herein will be revised, as applicable, in future filings.

 

6



Table of Contents

 

Avery Dennison Corporation

 

The effects of this revision on our unaudited Condensed Consolidated Statements of Income were as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 4, 2015

 

 

July 4, 2015

 

(In millions)

 

As
Previously
Reported

 

Adjustment

 

As
Revised

 

As
Previously
Reported

 

Adjustment

 

As
Revised

 

Marketing, general and administrative expense

 

$

273.8

 

$

(.5

)

$

273.3

 

$

574.7

 

$

(1.0

)

$

573.7

 

Income from continuing operations before taxes

 

100.8

 

.5

 

101.3

 

200.3

 

1.0

 

201.3

 

Provision for income taxes

 

36.5

 

.1

 

36.6

 

64.4

 

.3

 

64.7

 

Income from continuing operations

 

64.3

 

.4

 

64.7

 

135.9

 

.7

 

136.6

 

Loss from discontinued operations

 

(1.0

)

 

(1.0

)

(1.0

)

 

(1.0

)

Net income

 

63.3

 

.4

 

63.7

 

134.9

 

.7

 

135.6

 

Per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

.70

 

$

.01

 

$

.71

 

$

1.49

 

$

.01

 

$

1.50

 

Discontinued operations

 

(.01

)

 

(.01

)

(.01

)

 

(.01

)

Net income per common share

 

$

.69

 

$

.01

 

$

.70

 

$

1.48

 

$

.01

 

$

1.49

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

.69

 

$

 

$

.69

 

$

1.46

 

$

.01

 

$

1.47

 

Discontinued operations

 

(.01

)

 

(.01

)

(.01

)

 

(.01

)

Net income per common share, assuming dilution

 

$

.68

 

$

 

$

.68

 

$

1.45

 

$

.01

 

$

1.46

 

 

The effects of the revision on our unaudited Condensed Consolidated Statements of Comprehensive Income were as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 4, 2015

 

July 4, 2015

 

(In millions)

 

As
Previously
Reported

 

Adjustment

 

As
Revised

 

As
Previously
Reported

 

Adjustment

 

As
Revised

 

Net income

 

$

63.3

 

$

.4

 

$

63.7

 

$

134.9

 

$

.7

 

$

135.6

 

Foreign currency translation

 

3.0

 

(.1

)

2.9

 

(69.1

)

 

(69.1

)

Pension and other postretirement benefits

 

7.2

 

 

7.2

 

13.6

 

(1.0

)

12.6

 

Other comprehensive income (loss), net of tax

 

10.3

 

(.1

)

10.2

 

(56.1

)

(1.0

)

(57.1

)

Total comprehensive income, net of tax

 

73.6

 

.3

 

73.9

 

78.8

 

(.3

)

78.5

 

 

The effects of the revision on our unaudited Condensed Consolidated Statements of Cash Flows were as follows:

 

 

 

Six Months Ended July 4, 2015

 

(In millions)

 

As
Previously
Reported

 

Adjustment

 

As
Revised

 

Net cash provided by operating activities

 

$

170.9

 

$

(.5

)

$

170.4

 

Increase in cash and cash equivalents

 

19.0

 

(.5

)

18.5

 

Cash and cash equivalents, beginning of year

 

227.0

 

(19.8

)

207.2

 

Cash and cash equivalents, end of period

 

246.0

 

(20.3

)

225.7

 

 

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.  The pre-tax loss from the sale, when combined with exit costs related to the sale, totaled $7.7 million in the second quarter of 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.

 

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Discontinued Operations

Loss from discontinued operations 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. 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 formerly operated the OCP and DES businesses.

 

Note 2. Acquisition

 

In April 2016, we entered into an agreement to acquire the European business of MACtac (“Mactac”) from Platinum Equity for a purchase price of €200 million, including assumed debt. Mactac manufactures pressure-sensitive materials that complement our existing graphics portfolio. The purchase price is subject to certain adjustments in accordance with the terms of the agreement. On August 1, 2016, we completed this acquisition, which we funded with cash and through existing credit facilities.

 

Note 3.  Inventories

 

Net inventories consisted of:

 

(In millions)

 

July 2, 2016

 

January 2, 2016

 

Raw materials

 

$

197.4

 

$

180.5

 

Work-in-progress

 

162.0

 

143.0

 

Finished goods

 

164.7

 

155.2

 

Inventories, net

 

$

524.1

 

$

478.7

 

 

Note 4.  Goodwill

 

Changes in the net carrying amount of goodwill for the six months ended July 2, 2016, by reportable segment, were as follows:

 

(In millions)

 

Pressure-sensitive
Materials

 

Retail Branding
and Information
Solutions

 

Total

 

Goodwill as of January 2, 2016

 

$

277.9

 

$

408.3

 

$

686.2

 

Translation adjustments

 

3.2

 

1.6

 

4.8

 

Goodwill as of July 2, 2016

 

$

281.1

 

$

409.9

 

$

691.0

 

 

The carrying amounts of goodwill at July 2, 2016 and January 2, 2016 were net of accumulated impairment losses of $820 million, which were included in our RBIS reportable segment.

 

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 includes 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 $1.22 billion at July 2, 2016 and $1.08 billion at January 2, 2016. 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 $700 million revolving credit facility (the “Revolver”) contains financial covenants requiring that we maintain specified ratios of total debt and interest expense in relation to certain measures of income. As of July 2, 2016 and January 2, 2016, we were in compliance with our financial covenants.

 

In March 2016, we entered into an agreement with three commercial paper dealers to establish a Euro-Commercial Paper Program pursuant to which we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding of $500 million. Proceeds from issuances under this program may be used for general corporate purposes. The maturities of the notes may vary, but may not exceed 364 days from the date of issuance. Our payment obligations with respect to any notes issued under this program would be backed by the Revolver. There are no financial covenants under this program. As of July 2, 2016, there were no balances outstanding under this program.

 

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Avery Dennison Corporation

 

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 these benefits, and therefore, no related costs are included in the disclosures below.

 

In December 2015, we offered eligible former employees who were vested participants in the Avery Dennison Pension Plan (“ADPP”), a U.S. pension plan, the opportunity to receive their benefits immediately as either a lump-sum payment or an annuity, rather than waiting until they are retirement eligible under the terms of the plan. In the second quarter of 2016, approximately $70 million of pension obligations related to this plan were settled out of existing plan assets and a non-cash pre-tax settlement charge of $41.4 million was recorded in “Other expense, net” in the unaudited Condensed Consolidated Statements of Income.  This settlement required us to remeasure the remaining net pension obligations of the ADPP. As a result, approximately $72 million of additional net pension obligations with a corresponding increase in actuarial losses recorded in “Accumulated other comprehensive loss” was recognized primarily due to lower discount rates that were in effect when the plan was remeasured.

 

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 2, 2016

 

July 4, 2015

 

 

July 2, 2016

 

July 4, 2015

 

(In millions)

 

U.S.

 

Int’l

 

U.S.

 

Int’l

 

 

U.S.

 

Int’l

 

U.S.

 

Int’l

 

Service cost

 

$

.1

 

$

3.5

 

$

.1

 

$

3.3

 

 

$

.2

 

$

6.9

 

$

.2

 

$

7.0

 

Interest cost

 

8.5

 

4.2

 

11.6

 

4.3

 

 

18.3

 

8.3

 

22.9

 

8.8

 

Actuarial loss

 

1.7

 

 

 

 

 

1.7

 

 

 

 

Expected return on plan assets

 

(10.5

)

(5.4

)

(12.9

)

(5.3

)

 

(21.9

)

(10.7

)

(25.8

)

(10.8

)

Recognized net actuarial loss

 

4.8

 

1.8

 

5.1

 

2.3

 

 

9.2

 

3.6

 

10.2

 

4.8

 

Amortization of prior service cost (credit)

 

.3

 

(.1

)

.3

 

 

 

.6

 

(.2

)

.6

 

(.1

)

Recognized loss on settlements(1)

 

41.4

 

 

 

3.8

 

 

41.4

 

 

 

3.8

 

Net periodic benefit cost

 

$

46.3

 

$

4.0

 

$

4.2

 

$

8.4

 

 

$

49.5

 

$

7.9

 

$

8.1

 

$

13.5

 

 

(1)In 2016, recognized loss on settlements related to our U.S. pension plan as a result of the lump-sum pension payments described above; in 2015, recognized loss on settlements related to pension plans in Germany and France as a result of the sale of a product line in our RBIS reportable segment.  These losses on settlements were recorded in “Other expense, net” in the unaudited Condensed Consolidated Statements of Income.

 

 

 

U.S. Postretirement Health Benefits

 

 

 

Three Months Ended

 

Six Months Ended

 

(In millions)

 

July 2, 2016

 

July 4, 2015

 

July 2, 2016

 

July 4, 2015

 

Interest cost

 

$

 

$

 

$

.1

 

$

.1

 

Recognized net actuarial loss

 

.3

 

.5

 

.8

 

1.1

 

Amortization of prior service credit

 

(.8

)

(.8

)

(1.6

)

(1.6

)

Net periodic benefit credit

 

$

(.5

)

$

(.3

)

$

(.7

)

$

(.4

)

 

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Avery Dennison Corporation

 

Note 7.  Research and Development

 

Research and development expense from continuing operations was $22.7 million and $45.0 million for the three and six months ended July 2, 2016, respectively, and $22.8 million and $48.4 million for the three and six months ended July 4, 2015, 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 $6.6 million and $14.1 million for the three and six months ended July 2, 2016, respectively, and $5.8 million and $13.2 million for the three and six months ended July 4, 2015, respectively.  This expense was included in “Marketing, general and administrative expense” in the unaudited Condensed Consolidated Statements of Income.

 

As of July 2, 2016, we had approximately $54 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 $5.2 million and $14.7 million for the three and six months ended July 2, 2016, respectively, and $10.1 million and $15.3 million for the three and six months ended July 4, 2015, respectively. This expense was included in “Marketing, general and administrative expense” in the unaudited Condensed Consolidated Statements of Income.

 

Note 9.  Cost Reduction Actions

 

2015/2016 Actions

During the six months ended July 2, 2016, we recorded $12.4 million in restructuring charges, net of reversals, related to restructuring actions initiated during the third quarter of 2015 that we expect to continue through 2016 (“2015/2016 Actions”). These charges consisted of severance and related costs for the reduction of approximately 230 positions, lease cancellation costs, and asset impairment charges.

 

During fiscal year 2015, we recorded $26.1 million in restructuring charges, net of reversals, related to our 2015/2016 Actions. These charges consisted of severance and related costs for the reduction of approximately 430 positions, lease cancellation costs, and asset impairment charges.

 

No employees impacted by our 2015/2016 Actions taken through July 2, 2016 remained employed with us as of such date. We expect charges and payments related to these actions to be substantially completed in 2016.

 

2014/2015 Actions

During fiscal year 2015, we recorded $33.4 million in restructuring charges, net of reversals, related to restructuring actions we initiated in 2014 that continued through the second quarter of 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.

 

Approximately 55 employees impacted by our 2014/2015 Actions remained employed with us as of July 2, 2016. We expect charges and payments related to these actions to be substantially completed in 2016.

 

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, less selling costs, if applicable.  Restructuring charges were included in “Other expense, net” in the unaudited Condensed Consolidated Statements of Income.

 

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During the six months ended July 2, 2016, restructuring charges and payments were as follows:

 

(In millions)

 

Accrual at
January 2,
2016

 

Charges
(Reversals),
net

 

Cash
Payments

 

Non-cash
Impairment

 

Foreign
Currency
Translation

 

Accrual at
July 2,
2016

 

2015/2016 Actions

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and related costs

 

$

8.4

 

$

9.2

 

$

(17.0

)

$

 

$

.1

 

$

.7

 

Asset impairment charges

 

 

2.4

 

 

(2.4

)

 

 

Lease cancellation costs

 

.2

 

.8

 

(.5

)

 

 

.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014/2015 Actions

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and related costs

 

4.8

 

(.3

)

(2.3

)

 

 

2.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior actions

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and related costs

 

.7

 

(.1

)

 

 

 

.6

 

Total

 

$

14.1

 

$

12.0

 

$

(19.8

)

$

(2.4

)

$

.1

 

$

4.0

 

 

The table below shows the total amount of restructuring charges incurred by reportable segment and Corporate:

 

 

 

Three Months Ended

 

Six Months Ended

 

(In millions)

 

July 2, 2016

 

July 4, 2015

 

July 2, 2016

 

July 4, 2015

 

Restructuring charges by reportable segment and Corporate

 

 

 

 

 

 

 

 

 

Pressure-sensitive Materials

 

$

4.7

 

$

7.1

 

$

6.8

 

$

14.4

 

Retail Branding and Information Solutions

 

1.7

 

12.3

 

5.1

 

15.7

 

Vancive Medical Technologies

 

 

.6

 

.1

 

1.7

 

Corporate

 

 

 

 

2.1

 

 

 

$

6.4

 

$

20.0

 

$

12.0

 

$

33.9

 

 

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 2, 2016, the aggregate U.S. dollar equivalent notional value of our outstanding commodity contracts and foreign exchange contracts was $2.7 million and $1.53 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 designate 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 2, 2016:

 

 

 

Asset

 

Liability

 

(In millions)

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Foreign exchange contracts

 

Other current assets

 

$

2.6

 

Other current liabilities

 

$

5.0

 

Commodity contracts

 

Other current assets

 

.1

 

Other current liabilities

 

 

 

 

 

 

$

2.7

 

 

 

$

5.0

 

 

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The following table provides the fair value and balance sheet locations of derivatives as of January 2, 2016:

 

 

 

Asset

 

Liability

 

(In millions)

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Foreign exchange contracts

 

Other current assets

 

$

5.6

 

Other current liabilities

 

$

4.5

 

Commodity contracts

 

Other current assets

 

 

Other current liabilities

 

.7

 

 

 

 

 

$

5.6

 

 

 

$

5.2

 

 

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 gains (losses) recognized in income related to fair value hedge contracts. The corresponding gains or losses on the underlying hedged items approximated the net gains (losses) on these fair value hedge contracts.

 

 

 

Location of Net Gains

 

Three Months Ended

 

Six Months Ended

 

(In millions)

 

(Losses) in Income

 

July 2, 2016

 

July 4, 2015

 

July 2, 2016

 

July 4, 2015

 

Foreign exchange contracts

 

Cost of products sold

 

$

.7

 

$

(.4

)

$

1.7

 

$

1.0

 

Foreign exchange contracts

 

Marketing, general and administrative expense

 

6.9

 

(7.7

)

2.4

 

4.0

 

 

 

 

 

$

7.6

 

$

(8.1

)

$

4.1

 

$

5.0

 

 

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 2, 2016

 

July 4, 2015

 

July 2, 2016

 

July 4, 2015

 

Foreign exchange contracts

 

$

(.3

)

$

(1.8

)

$

(1.8

)

$

(1.5

)

Commodity contracts

 

.5

 

1.5

 

.3

 

1.2

 

 

 

$

.2

 

$

(.3

)

$

(1.5

)

$

(.3

)

 

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 was not material for the three and six months ended July 2, 2016 and July 4, 2015, respectively.

 

As of July 2, 2016, we expected a net loss of approximately $2 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 2, 2016

 

July 4, 2015

 

July 2, 2016

 

July 4, 2015

 

Income from continuing operations before taxes

 

$

99.3

 

$

101.3

 

$

222.8

 

$

201.3

 

Provision for income taxes

 

19.3

 

36.6

 

53.2

 

64.7

 

Effective tax rate

 

19.4

%

36.1

%

23.9

%

32.1

%

 

The effective tax rate for the three and six months ended July 2, 2016 included $6.7 million of tax benefit from the release of valuation allowances against certain deferred tax assets in a foreign jurisdiction associated with a structural simplification approved by the tax authority; $5 million and $6 million of tax benefits, respectively, from our change in judgment about tax filing positions in certain foreign jurisdictions as a result of new information gained from our interactions with tax authorities; and $.7 million and $3.3 million of tax benefits, respectively, due to decreases in certain tax reserves as a result of closing tax years.

 

The effective tax rate for the six months ended July 2, 2016 compared to the effective tax rate for the six months ended July 4, 2015 was also favorably impacted by a change in the geographic mix of income before taxes.

 

The effective tax rate for the three and six months ended July 4, 2015 included $5.3 million of tax expense associated with the repatriation of 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 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 $12 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 2,
2016

 

July 4,
2015

 

 

July 2,
2016

 

July 4,
2015

 

(A) Income from continuing operations

 

$

80.0

 

$

64.7

 

 

$

169.6

 

$

136.6

 

(B) Loss from discontinued operations

 

 

(1.0

)

 

 

(1.0

)

(C) Net income available to common shareholders

 

$

80.0

 

$

63.7

 

 

$

169.6

 

$

135.6

 

(D) Weighted average number of common shares outstanding

 

89.1

 

91.2

 

 

89.3

 

90.9

 

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

 

1.6

 

1.8

 

 

1.6

 

1.9

 

(E) Weighted average number of common shares outstanding, assuming dilution

 

90.7

 

93.0

 

 

90.9

 

92.8

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

Continuing operations (A) ÷ (D)

 

$

.90

 

$

.71

 

 

$

1.90

 

$

1.50

 

Discontinued operations (B) ÷ (D)

 

 

(.01

)

 

 

(.01

)

Net income per common share (C) ÷ (D)

 

$

.90

 

$

.70

 

 

$

1.90

 

$

1.49

 

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

 

 

 

 

 

 

 

 

 

 

Continuing operations (A) ÷ (E)

 

$

.88

 

$

.69

 

 

$

1.87

 

$

1.47

 

Discontinued operations (B) ÷ (E)

 

 

(.01

)

 

 

(.01

)

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

 

$

.88

 

$

.68

 

 

$

1.87

 

$

1.46

 

 

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 and .2 million shares for the three and six months ended July 2, 2016, respectively, and approximately 1 million shares for both the three and six months ended July 4, 2015.

 

Note 13.  Comprehensive Income

 

The changes in “Accumulated other comprehensive loss” (net of tax) for the six-month period ended July 2, 2016 were as follows:

 

(In millions)

 

Foreign
Currency
Translation

 

Pension and
Other
Postretirement
Benefits

 

Cash Flow
Hedges

 

Total

 

Balance as of January 2, 2016

 

$

(158.9

)

$

(521.6

)

$

(2.5

)

$

(683.0

)

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

 

5.6

 

(46.7

)

(1.2

)

(42.3

)

Reclassifications to net income, net of tax

 

 

35.4

 

1.1

 

36.5

 

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

 

5.6

 

(11.3

)

(.1

)

(5.8

)

Balance as of July 2, 2016

 

$

(153.3

)

$

(532.9

)

$

(2.6

)

$

(688.8

)

 

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Avery Dennison Corporation

 

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

 

$

(19.9

)

$

(525.6

)

$

 

$

(545.5

)

Other comprehensive loss before reclassifications, net of tax

 

(69.1

)

(.5

)

(.2

)

(69.8

)

Reclassifications to net income, net of tax

 

 

13.1

 

(.4

)

12.7

 

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

 

(69.1

)

12.6

 

(.6

)

(57.1

)

Balance as of July 4, 2015

 

$

(89.0

)

$

(513.0

)

$

(.6

)

$

(602.6

)

 

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 2,
2016

 

July 4,
2015

 

July 2,
2016

 

July 4,
2015

 

Affected Line Item
in the Statements
Where Net Income
is Presented

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

(1.2

)

$

(.2

)

$

(.9

)

$

1.3

 

Cost of products sold

 

Commodity contracts

 

(.3

)

(.3

)

(.6

)

(.8

)

Cost of products sold

 

 

 

(1.5

)

(.5

)

(1.5

)

.5

 

Total before tax

 

 

 

.4

 

.2

 

.4

 

(.1

)

Provision for income taxes

 

 

 

(1.1

)

(.3

)

(1.1

)

.4

 

Net of tax

 

Pension and other postretirement benefits(1)

 

(47.7

)

(11.2

)

(53.8

)

(18.8

)

 

 

 

 

16.5

 

4.5

 

18.4

 

5.7

 

Provision for income taxes

 

 

 

(31.2

)

(6.7

)

(35.4

)

(13.1

)

Net of tax

 

Total reclassifications for the period

 

$

(32.3

)

$

(7.0

)

$

(36.5

)

$

(12.7

)

Total, net of tax

 

 

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

 

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Avery Dennison Corporation

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

(In millions)

 

July 2, 2016

 

July 4, 2015

 

July 2, 2016

 

July 4, 2015

 

Pension and other postretirement benefits

 

$

(8.6

)

$

4.5

 

$

(6.7

)

$

6.7

 

Cash flow hedges

 

.5

 

.2

 

.1

 

(.1

)

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

 

$

(8.1

)

$

4.7

 

$

(6.6

)

$

6.6

 

 

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 2, 2016:

 

 

 

 

 

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

 

$

18.3

 

$

11.4

 

$

6.9

 

$

 

Derivative assets

 

2.7

 

0.1

 

2.6

 

 

Bank drafts

 

12.7

 

12.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

5.0

 

$

 

$

5.0

 

$

 

 

The following table provides the assets and liabilities carried at fair value, measured on a recurring basis, as of January 2, 2016:

 

 

 

 

 

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

 

$

11.3

 

$

6.6

 

$

 

Derivative assets

 

5.6

 

 

5.6

 

 

Bank drafts

 

24.8

 

24.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

5.2

 

$

.7

 

$

4.5

 

$

 

 

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 2, 2016, trading securities of $.5 million and $17.8 million were included in “Cash and cash equivalents” and “Other current assets,” respectively, in the unaudited Condensed Consolidated Balance Sheets. As of January 2, 2016, trading securities of $.3 million and $17.6 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 the short-term nature of these instruments and were included in “Other current assets” in the unaudited Condensed Consolidated Balance Sheets.

 

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.

 

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Avery Dennison Corporation

 

Environmental

As of July 2, 2016, 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 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 the 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.

 

We have accrued liabilities for sites where it is probable that a loss or cost will be incurred and the amount of loss or cost 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 2, 2016 related to our environmental liabilities was as follows:

 

(In millions)

 

 

 

Balance at January 2, 2016

 

$

17.7

 

Charges (reversals), net

 

4.9

 

Payments

 

(3.7

)

Balance at July 2, 2016

 

$

18.9

 

 

As of July 2, 2016 and January 2, 2016, approximately $9 million and $7 million of the balance was classified as short-term and included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets, respectively.

 

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Table of Contents

 

Avery Dennison Corporation

 

Note 16.  Segment Information

 

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

(In millions)

 

July 2, 2016

 

July 4, 2015

 

 

July 2, 2016

 

July 4, 2015

 

Net sales to unaffiliated customers

 

 

 

 

 

 

 

 

 

 

Pressure-sensitive Materials

 

$

1,145.1

 

$

1,114.1

 

 

$

2,237.1

 

$

2,234.7

 

Retail Branding and Information Solutions

 

378.0

 

383.8

 

 

756.1

 

771.9

 

Vancive Medical Technologies

 

18.4

 

18.1

 

 

33.8

 

37.4

 

Net sales to unaffiliated customers

 

$

1,541.5

 

$

1,516.0

 

 

$

3,027.0

 

$

3,044.0

 

Intersegment sales

 

 

 

 

 

 

 

 

 

 

Pressure-sensitive Materials

 

$

16.0

 

$

16.2

 

 

$

32.7

 

$

31.9

 

Retail Branding and Information Solutions

 

.5

 

.6

 

 

1.1

 

1.2

 

Vancive Medical Technologies

 

.1

 

1.6

 

 

.3

 

3.2

 

Intersegment sales

 

$

16.6

 

$

18.4

 

 

$

34.1

 

$

36.3

 

Income from continuing operations before taxes

 

 

 

 

 

 

 

 

 

 

Pressure-sensitive Materials

 

$

148.4

 

$

129.8

 

 

$

286.9

 

$

252.7

 

Retail Branding and Information Solutions

 

28.3

 

10.0

 

 

54.4

 

29.2

 

Vancive Medical Technologies

 

1.6

 

(1.4

)

 

.7

 

(3.5

)

Corporate expense

 

(63.6

)

(21.8

)

 

(88.5

)

(46.5

)

Interest expense

 

(15.4

)

(15.3

)

 

(30.7

)

(30.6

)

Income from continuing operations before taxes

 

$

99.3

 

$

101.3

 

 

$

222.8

 

$

201.3

 

Other expense, net by reportable segment

 

 

 

 

 

 

 

 

 

 

Pressure-sensitive Materials

 

$

6.4

 

$

7.1

 

 

$

8.5

 

$

12.7

 

Retail Branding and Information Solutions

 

2.4

 

20.0

 

 

5.8

 

25.5

 

Vancive Medical Technologies

 

 

.6

 

 

.1

 

1.7

 

Corporate

 

41.4

 

 

 

41.4

 

2.1

 

Other expense, net

 

$

50.2

 

$

27.7

 

 

$

55.8

 

$

42.0

 

Other expense, net by type

 

 

 

 

 

 

 

 

 

 

Restructuring charges:

 

 

 

 

 

 

 

 

 

 

Severance and related costs

 

$

3.6

 

$

16.8

 

 

$

8.8

 

$

30.3

 

Asset impairment charges and lease cancellation costs

 

2.8

 

3.2

 

 

3.2

 

3.6

 

Other items:

 

 

 

 

 

 

 

 

 

 

Loss from settlement of pension obligations

 

41.4

 

 

 

41.4

 

 

Transaction costs

 

1.7

 

 

 

1.7

 

 

Loss (gain) on sale of assets

 

.3