News Column

AVERY DENNISON CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

July 31, 2014

ORGANIZATION OF INFORMATION

"Management's Discussion and Analysis of Financial Condition and Results of Operations," or MD&A, provides management's views on our financial condition and results of operations, and should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and notes thereto. It includes the following sections: Non-GAAP Financial Measures 19 Overview and Outlook 20 Analysis of Results of Operations for the Second Quarter 22 Results of Operations by Reportable Segment for the Second Quarter 23 Analysis of Results of Operations for the Six Months Year-to-Date 25



Results of Operations by Reportable Segment for the Six Months Year-to-Date 26

Financial Condition 28 Recent Accounting Requirements 31 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 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. 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, the extra week in the 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 sale of property, plant and equipment, plus (minus) net proceeds from sales (purchases) of investments, plus discretionary contributions to pension plans and charitable contribution to Avery Dennison Foundation utilizing proceeds from divestitures. 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 (deficit) 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. 19



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Table of Contents Avery Dennison Corporation OVERVIEW AND OUTLOOK Overview Sales Our sales increased 4% in the first six months of 2014 compared to the same period last year. Three Months Ended Six Months Ended (In millions) June 28, 2014 June 29, 2013 June 28, 2014 June 29, 2013 Estimated change in sales due to Organic sales change 4 % 5 % 5 % 4 % Foreign currency translation - (1 ) (1 ) - Reported sales change 4 % 4 % 4 % 4 %



Income from Continuing Operations

Income from continuing operations decreased approximately $26 million and $22 million in the second quarter and first six months of 2014, respectively, compared to the same periods last year. Major factors affecting the change in income from continuing operations in the first six months of 2014 compared to the same period last year included:



Positive factors:

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

Higher volume Offsetting factors:



Higher restructuring costs, primarily related to the consolidation of certain European operations in our Pressure-sensitive Materials segment

Higher employee-related costs

Divestitures

In July 2013, we completed the sale of our former Office and Consumer Products ("OCP") and Designed and Engineered Solutions ("DES") businesses and entered into an amendment to the purchase agreement, which, among other things, increased the target net working capital amount and amended provisions related to employee matters and indemnification. We continue to be subject to certain indemnification provisions under the terms of the purchase agreement. In addition, the tax liability associated with the sale is subject to completion of tax return filings in the jurisdictions in which the OCP and DES businesses operated. Cost Reduction Actions 2014 Actions During the first six months of 2014, we recorded $45.9 million in restructuring charges, net of reversals, related to restructuring actions we initiated in 2014 ("2014 Actions"), primarily related to the consolidation of certain European operations. These charges consisted of severance and related costs for the reduction of approximately 970 positions and asset impairment charges. We anticipate approximately $31 million in annualized savings from these restructuring actions, of which approximately $10 million is expected to be realized in 2014, with the remainder realized in 2015. During the first six months of 2014, we recorded approximately $4 million of transition costs related to the 2014 Actions. 2012 Program In 2013, we recorded $40.3 million in restructuring charges, net of reversals, related to the restructuring program we initiated in 2012 ("2012 Program"), which consisted of severance and related costs for the reduction of approximately 1,400 positions, lease and other contract cancellation costs, and asset impairment charges. In 2012, we recorded $56.4 million in restructuring charges, net of reversals, related to our 2012 Program, which consisted of severance and related costs for the reduction of approximately 1,060 positions, lease cancellation costs, and asset impairment charges. Restructuring costs were included in "Other expense (income), net" in the unaudited Consolidated Statements of Income. Refer to Note 9, "Cost Reduction Actions," to the unaudited Condensed Consolidated Financial Statements for more information. 20



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Table of Contents Avery Dennison Corporation Free Cash Flow Six Months Ended (In millions) June 28, 2014 June 29, 2013 Net cash provided by operating activities $ 9.8 $ 46.7 Purchases of property, plant and equipment (67.5 ) (49.9 ) Purchases of software and other deferred charges (14.4 ) (24.6 ) Proceeds from sale of property, plant and equipment .6 25.8 Sales of investments, net .1 .1 Plus divestiture-related payments and free cash outflow from discontinued operations .6 49.0 Free cash flow $ (70.8 )$ 47.1



Free cash flow in the first six months of 2014 decreased compared to 2013 primarily due to the timing of vendor payments, higher incentive compensation paid in 2014 for the 2013 performance year, and higher income tax payments, partially offset by the timing of inventory purchases and lower pension contributions in the current year.

2014 Outlook



Certain factors that we believe may contribute to results for 2014 are described below.

We expect organic sales growth of approximately 4% in 2014 compared to 2013.

The extra week in our 2014 fiscal year is anticipated to increase sales compared to 2013 and have a modest positive impact on earnings.

We expect earnings to increase in 2014 compared to 2013.

We estimate cash restructuring costs of approximately $50 million in 2014.

We expect our full year 2014 tax rate to be comparable to 2013.

We anticipate our capital and software expenditures in 2014 to be approximately $185 million. 21



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ANALYSIS OF RESULTS OF OPERATIONS FOR THE SECOND QUARTER

Income from Continuing Operations before Taxes

Three Months Ended (In millions) June 28, 2014 June 29, 2013 Net sales $ 1,615.8$ 1,552.3 Cost of products sold 1,187.6 1,134.8 Gross profit 428.2 417.5 Marketing, general and administrative expense 297.0 293.5 Interest expense 15.6 14.8 Other expense (income), net 38.5 (.3 ) Income from continuing operations before taxes $ 77.1 $ 109.5 As a Percentage of Sales Gross profit 26.5 % 26.9 % Marketing, general and administrative expense 18.4



18.9

Income from continuing operations before taxes 4.8 7.1 Sales



Sales from continuing operations increased 4% in the second quarter of 2014 compared to the same period last year on both reported and organic bases, primarily due to higher volume.

Refer to "Results of Operations by Reportable Segment for the Second Quarter" for further information.

Gross Profit Margin Gross profit margin for the second quarter of 2014 decreased compared to the same period last year due to changes in product mix, and higher employee-related costs, partially offset by benefits from productivity initiatives, including savings from restructuring actions, net of transition costs, and higher volume.



Marketing, General and Administrative Expense

Marketing, general and administrative expense increased in the second quarter of 2014 compared to the same period last year due to higher employee-related costs partially offset by benefits from productivity initiatives, including savings from restructuring actions, net of transition costs. Other Expense (Income), net Three Months Ended (In millions) June 28, 2014 June 29, 2013 Other expense (income), net by type Restructuring costs: Severance and related costs $ 35.9$ 5.4 Asset impairment charges 2.6 2.4 Other items: Gain on sale of assets (.6 ) (10.9 ) Loss from curtailment of pension obligation .6 - Legal settlement - 2.5 Divestiture-related costs(1) - .3 Other expense (income), net $ 38.5$ (.3 )



(1) Represents only the portion allocated to continuing operations.

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

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Net Income and Earnings per Share

Three Months



Ended

(In millions, except per share amounts) June 28, 2014 June 29, 2013 Income from continuing operations before taxes $ 77.1 $



109.5

Provision for income taxes 32.7



38.7

Income from continuing operations 44.4



70.8

Loss from discontinued operations, net of tax (1.9 ) (2.0 ) Net income $ 42.5$ 68.8 Net income per common share $ .45$ .69 Net income per common share, assuming dilution .44



.68

Net income as a percentage of sales 2.6 % 4.4 % Effective tax rate for continuing operations 42.4 35.3 Provision for Income Taxes The effective tax rate for continuing operations for the three months ended June 28, 2014 included a net tax expense of $5.8 million as a result of changes in certain tax reserves and valuation allowances. This net tax expense 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 tax benefits of $6.3 million, due primarily to the closing of tax years. The effective tax rate for the three months ended June 29, 2013 included $1.4 million of tax expense for revaluation of deferred tax balances due to changes in certain foreign statutory tax rates. Our effective tax rate can vary widely from quarter to quarter, resulting from interim reporting requirements, the recognition of discrete events and the timing of repatriation of foreign earnings. Refer to Note 11, "Taxes Based on Income," to the unaudited Condensed Consolidated Financial Statements for further information.



RESULTS OF OPERATIONS BY REPORTABLE SEGMENT FOR THE SECOND QUARTER

Operating income refers to income from continuing operations before interest and taxes. Pressure-sensitive Materials Three Months Ended (In millions) June 28, 2014 June 29, 2013 Net sales including intersegment sales $ 1,197.6$ 1,130.4 Less intersegment sales (16.7 ) (16.5 ) Net sales $ 1,180.9$ 1,113.9 Operating income (1) 86.5 117.5



(1) Included costs associated with restructuring in both quarters and loss from curtailment of pension obligation in 2014

$ 32.9 $ 1.7 Net Sales In the second quarter of 2014, sales in our Pressure-sensitive Materials segment increased approximately 6% compared to the same period last year on both reported and organic bases, primarily due to higher volume. On an organic basis, sales increased 9% in emerging markets, at a mid-single digit rate in Western Europe, and slightly in North America. In the second quarter of 2014, sales in our label and packaging materials product line increased on an organic basis at a mid-single digit rate. Combined sales on an organic basis for our graphics, reflective, and performance tapes product lines also increased in the second quarter of 2014 at a low-double digit rate. Operating Income Operating income decreased in the second quarter of 2014 compared to the same period last year reflecting higher restructuring and transition costs related to the consolidation of certain European operations, as well as higher employee-related costs, and modest net impact of raw material input costs and pricing, partially offset by benefits from productivity initiatives and higher volume. 23



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Retail Branding and Information Solutions

Three Months Ended (In millions) June 28, 2014 June 29, 2013 Net sales including intersegment sales $ 415.0$ 420.2 Less intersegment sales (.6 ) (.6 ) Net sales $ 414.4$ 419.6 Operating income (1) 28.3 23.6



(1)Included costs associated with restructuring and gain on sale of assets in both quarters

$ 5.6 $ 6.0 Net Sales In the second quarter of 2014, sales in our Retail Branding and Information Solutions segment decreased approximately 1% compared to the same period last year on both reported and organic bases due to lower volume, reflecting decreased demand from U.S.-based retailers and brands, partially offset by increased demand from Europe-based retailers and brands, including strong growth in our radio-frequency identification product line.



Operating Income

Operating income increased in the second quarter of 2014 primarily reflecting benefits from productivity initiatives, including savings from restructuring actions, partially offset by higher employee-related costs and lower volume. Vancive Medical Technologies Three Months Ended (In millions) June 28, 2014 June 29, 2013 Net sales including intersegment sales $ 23.0$ 19.1 Less intersegment sales (2.5 ) (.3 ) Net sales $ 20.5$ 18.8 Operating loss (1.7 ) (2.8 ) Net Sales In the second quarter of 2014, sales in our Vancive Medical Technologies segment increased approximately 9% compared to the same period last year, reflecting higher sales on an organic basis and the favorable effect of foreign currency translation. On an organic basis, sales increased approximately 6% due to higher volume. Operating Loss



Operating loss decreased in the second quarter of 2014 compared to the same period last year due to higher volume and lower operating expenses.

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ANALYSIS OF RESULTS OF OPERATIONS FOR THE SIX MONTHS YEAR-TO-DATE

Income from Continuing Operations before Taxes

Six Months Ended (In millions) June 28, 2014 June 29, 2013 Net sales $ 3,165.9$ 3,051.2 Cost of products sold 2,330.5 2,232.0 Gross profit 835.4 819.2 Marketing, general and administrative expense 593.7 594.4 Interest expense 31.0 27.0 Other expense, net 45.8 7.2



Income from continuing operations before taxes $ 164.9 $

190.6

As a Percentage of Sales Gross profit 26.4 % 26.8 % Marketing, general and administrative expense 18.8



19.5

Income from continuing operations before taxes 5.2 6.2 Sales Sales from continuing operations increased 4% in the first six months of 2014 compared to the same period last year due to higher sales on an organic basis, partially offset by the unfavorable impact of foreign currency translation. On an organic basis, sales increased approximately 5% due to higher volume.



Refer to "Results of Operations by Reportable Segment for the Six Months Year-to-Date" for further information.

Gross Profit Margin

Gross profit margin for the first six months of 2014 decreased compared to the same period last year due to changes in product mix, higher employee-related costs, and modest net impact of raw material input costs and pricing, partially offset by benefits from productivity initiatives, including savings from restructuring actions, net of transition costs.



Marketing, General and Administrative Expense

Marketing, general and administrative expense decreased in the first six months of 2014 compared to the same period last year, primarily reflecting benefits from productivity initiatives, including savings from restructuring actions, net of transition costs, partially offset by higher employee-related costs. Other Expense, net Six Months Ended (In millions) June 28, 2014 June 29, 2013 Other expense, net by type Restructuring costs: Severance and related costs $ 42.9$ 12.2 Asset impairment charges and lease and other contract cancellation charges 2.9 3.7 Other items: Gain on sale of assets (.6 ) (12.2 ) Loss from curtailment of pension obligation .6 - Legal settlement - 2.5 Divestiture-related costs(1) - 1.0 Other expense, net $ 45.8 $ 7.2



(1) Represents only the portion allocated to continuing operations.

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

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Net Income and Earnings per Share

Six Months Ended (In millions, except per share amounts) June 28, 2014 June 29, 2013 Income from continuing operations before taxes $ 164.9 $



190.6

Provision for income taxes 48.9



53.0

Income from continuing operations 116.0



137.6

Loss from discontinued operations, net of tax (2.3 ) (11.0 ) Net income $ 113.7$ 126.6 Net income per common share $ 1.19$ 1.27 Net income per common share, assuming dilution 1.17



1.25

Net income as a percentage of sales 3.6 % 4.1 % Effective tax rate for continuing operations 29.7 27.8 Provision for Income Taxes The effective tax rate for continuing operations for the six months ended June 28, 2014 included a net tax benefit of $3.7 million as a result of changes in certain tax reserves and valuation allowances and $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 net tax benefit of $3.7 million 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 more than offset by tax benefits of $15.8 million, due primarily to the closing of tax years. The effective tax rate for the six months ended June 29, 2013 included net tax benefits of $8.9 million related to changes in tax law, including $4.2 million of tax benefit attributable to the retroactive reinstatement of the federal research and development tax credit and a net $3.7 million tax benefit for revaluation of deferred tax balances due to changes in certain foreign statutory tax rates. Our effective tax rate can vary widely from quarter to quarter, resulting from interim reporting requirements, the recognition of discrete events and the timing of repatriation of foreign earnings. Refer to Note 11, "Taxes Based on Income," to the unaudited Condensed Consolidated Financial Statements for further information.



RESULTS OF OPERATIONS BY REPORTABLE SEGMENT FOR THE SIX MONTHS YEAR-TO-DATE

Operating income refers to income from continuing operations before interest and taxes. Pressure-sensitive Materials Six Months Ended (In millions) June 28, 2014 June 29, 2013 Net sales including intersegment sales $ 2,357.3$ 2,244.9 Less intersegment sales (32.9 ) (33.0 ) Net sales $ 2,324.4$ 2,211.9 Operating income (1) 198.5 222.4



(1) Included costs associated with restructuring in both years and loss from curtailment of pension obligation in 2014

$ 34.2 $ 5.3 Net Sales In the first six months of 2014, sales in our Pressure-sensitive Materials segment increased approximately 5% compared to the same period last year, reflecting higher sales on an organic basis, partially offset by the unfavorable impact of foreign currency translation. On an organic basis, sales increased 6% due to higher volume. On an organic basis, sales increased 10% in emerging markets, at a mid-single digit rate in Western Europe, and slightly in North America. In the first six months of 2014, sales in our label and packaging materials product line increased on an organic basis at a mid-single digit rate. Combined sales on an organic basis for our graphics, reflective, and performance tapes product lines also increased in the first six months of 2014 at a high-single digit rate. 26



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Table of Contents Avery Dennison Corporation Operating Income Operating income decreased in the first six months of 2014 compared to the same period last year primarily reflecting higher restructuring and transition costs related to the consolidation of certain European operations, as well as higher employee-related costs, and modest net impact of raw material input costs and pricing, partially offset by higher volume and benefits from productivity initiatives, including savings from restructuring actions, net of transition costs.



Retail Branding and Information Solutions

Six Months Ended (In millions) June 28, 2014 June 29, 2013 Net sales including intersegment sales $ 803.5$ 803.3 Less intersegment sales (1.4 ) (1.0 ) Net sales $ 802.1$ 802.3 Operating income (1) 44.9 38.2



(1)Included costs associated with restructuring and gain on sale of assets in both years

$ 11.6 $ 9.0 Net Sales In the first six months of 2014, sales in our Retail Branding and Information Solutions segment were comparable to the same period last year due to higher sales on an organic basis offset by the unfavorable impact of foreign currency translation. On an organic basis, sales increased approximately 1%, due to higher volume and changes in pricing.



Operating Income

Operating income increased in the six months of 2014 compared to the same period last year primarily reflecting benefits from productivity initiatives, including savings from restructuring actions, partially offset by higher employee-related costs. Vancive Medical Technologies Six Months Ended (In millions) June 28, 2014 June 29, 2013 Net sales including intersegment sales $ 44.2$ 38.0 Less intersegment sales (4.8 ) (1.0 ) Net sales $ 39.4$ 37.0 Operating loss (4.3 ) (5.5 ) Net Sales In the first six months of 2014, sales in our Vancive Medical Technologies segment increased approximately 6% compared to the same period last year, reflecting higher sales on an organic basis and the favorable impact of foreign currency translation. On an organic basis, sales increased approximately 4% due to higher volume. Operating Loss



Operating loss decreased in the first six months of 2014 compared to the same period last year due to higher volume and lower operating expenses.

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Table of Contents Avery Dennison Corporation FINANCIAL CONDITION Liquidity



Cash Flow from Operating Activities

Six Months Ended (In millions) June 28, 2014 June 29, 2013 Net income $ 113.7$ 126.6 Depreciation and amortization 99.4 103.3 Provision for doubtful accounts and sales returns 9.8 9.5 Net loss (gain) from asset impairments and sale/disposal of assets 3.8 (9.2 ) Stock-based compensation 14.5 17.6 Other non-cash items 25.9 28.2



Changes in assets and liabilities and other adjustments (1)

(257.3 ) (229.3 ) Net cash provided by operating activities $ 9.8



$ 46.7

(1) For cash flow purposes, changes in assets and liabilities and other adjustments exclude the impact of foreign currency translation (discussed below in "Analysis of Selected Balance Sheet Accounts").

During the first six months of 2014, cash flow provided by operating activities decreased compared to the same period last year due to the timing of vendor payments, higher incentive compensation paid in 2014 for the 2013 performance year, and higher income tax payments. These factors were partially offset by the impact of cash outflow related to the OCP and DES businesses in the prior year, the timing of inventory purchases and lower pension contributions in the current year.



Cash Flow for Investing Activities

Six Months Ended (In millions) June 28, 2014 June 29, 2013 Purchases of property, plant and equipment $ (67.5 )$ (49.9 ) Purchases of software and other deferred charges (14.4 ) (24.6 ) Proceeds from sale of property, plant and equipment .6 25.8 Sales of investments, net .1 .1 Other - .8 Net cash used in investing activities $ (81.2 )$ (47.8 )



Capital and Software Spending

During the first six months of 2014, we invested in new equipment in Europe, Asia and the U.S. During the first six months of 2013, we invested in new equipment primarily in Asia and the U.S.

Information technology investments in the first six months of both 2014 and 2013 were primarily associated with standardization initiatives.

Proceeds from Sale of Property, Plant and Equipment

In April 2013, we sold the property and equipment of our former corporate headquarter in Pasadena, California for approximately $20 million and recognized a pre-tax gain of $10.9 million in "Other expense (income), net" in the unaudited Consolidated Statements of Income.

Cash Flow for Financing Activities

Six Months Ended (In millions) June 28, 2014 June 29, 2013 Net change in borrowings and payments of debt $ 144.2$ 171.9 Dividends paid (60.9 ) (55.7 ) Share repurchases (153.4 ) (148.9 ) Proceeds from exercise of stock options, net 18.4



32.4

Other (2.7 ) (8.1 ) Net cash used in financing activities $ (54.4 )$ (8.4 ) 28



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Borrowings and Repayment of Debt,

Given the seasonality of our cash flow, during the first six months of 2014 and 2013, our commercial paper and foreign short-term borrowings were used mainly to fund share repurchase activity and support operational requirements and capital expenditures. Refer to "Share Repurchases" below for more information. In April 2013, we issued $250 million of senior notes, due April 2023. The notes bear an interest rate of 3.35% per year, payable semiannually in arrears. Net proceeds from the offering, after deducting underwriting discounts and offering expenses, of approximately $247.5 million were used to repay a portion of the indebtedness outstanding under our commercial paper program during the second quarter of 2013. Dividend Payments



Our dividend per share was $.64 in the first six months of 2014 compared to $.56 per share in the same period last year.

In April 2014, we increased our quarterly dividend to $.35 per share, representing a 21% increase from our previous dividend rate of $.29 per share.

Share Repurchases During the first six months of 2014, we repurchased approximately 3.1 million shares of our common stock at an aggregate cost of $153.4 million. During the first six months of 2013, we repurchased approximately 3.5 million shares of our common stock at an aggregate cost of $148.9 million.



As of June 28, 2014, shares of our common stock in the aggregate amount of approximately $302 million remained authorized for repurchase under our July 2013 Board authorization.

Analysis of Selected Balance Sheet Accounts

Long-lived Assets

In the six months ended June 28, 2014, goodwill increased by approximately $8 million to $759 million, which reflected the impact of acquisition adjustments and foreign currency translation. In the six months ended June 28, 2014, other intangibles resulting from business acquisitions, net, decreased by approximately $13 million to $83 million, which primarily reflected current year amortization expense.



Refer to Note 4, "Goodwill and Other Intangibles Resulting from Business Acquisitions," to the unaudited Condensed Consolidated Financial Statements for more information.

In the six months ended June 28, 2014, other assets increased by approximately $3 million to $489 million, which reflected increases in the cash surrender value of our corporate-owned life insurance and reclassification of certain assets from "Property, plant and equipment, net" to "Other assets." These increases were partially offset by the amortization of software and deferred charges, net of purchases and the collection of a long-term value-added tax receivable in Europe.



Shareholders' Equity Accounts

In the six months ended June 28, 2014, the balance of our shareholders' equity decreased by approximately $63 million to $1.43 billion, which primarily reflected the effect of share repurchases and dividend payments, partially offset by net income.

In the six months ended June 28, 2014, the balance of our treasury stock increased by approximately $119 million to $1.29 billion, which reflected share repurchase activity, partially offset by the use of treasury shares to settle exercises of stock options and vesting of stock-based awards and funding contributions to our U.S. defined contribution plan.



Impact of Foreign Currency Translation

Six Months Ended (In millions) June 28, 2014 June 29, 2013 Change in net sales $ (17 ) $ (5 ) Change in income from continuing operations (1 ) 1 International operations generated approximately 76% of our net sales during the six months ended June 28, 2014. Our future results are subject to changes in political and economic conditions in the regions in which we operate and the impact of fluctuations in foreign currency exchange and interest rates. 29



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Table of Contents Avery Dennison Corporation The effect of foreign currency translation on net sales in the first six months of 2014 compared to the same period last year primarily reflected the unfavorable impact from sales in Brazil, Argentina, India, and Australia, partially offset by the favorable impact from sales in certain countries in the European Union.



Effect of Foreign Currency Transactions

The impact on net income from transactions denominated in foreign currencies may be mitigated because the costs of our products are generally denominated in the same currencies in which they are sold. In addition, to reduce our income and cash flow exposure to transactions in foreign currencies, we enter into foreign exchange forward, option and swap contracts where available and appropriate.



Analysis of Selected Financial Ratios

We utilize the financial ratios discussed below to assess our financial condition and operating performance.

Working Capital and Operational Working Capital Ratios

Working capital (current assets minus current liabilities and net assets held for sale), as a percentage of annualized net sales, increased in the first six months of 2014 compared to the same period last year, primarily due to a decrease in short-term and current portion of long-term debt, as well as an increase in net trade accounts receivable and inventories.



Operational working capital, as a percentage of annualized net sales, is reconciled with working capital below. Our objective is to minimize our investment in operational working capital, as a percentage of annualized net sales, to maximize cash flow and return on investment.

Six Months Ended (Dollars in millions) June 28, 2014 June 29, 2013 (A) Working capital $ 505.0$ 165.3 Reconciling items: Cash and cash equivalents (221.9 ) (211.6 )



Current deferred and refundable income taxes and other current assets

(230.8 ) (250.5 )



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

227.5 438.2



Current deferred and payable income taxes and other current accrued liabilities

523.8 554.8 (B) Operational working capital $



803.6 $ 696.2 (C) Annualized net sales (year-to-date sales, multiplied by two)

$



6,331.8 $ 6,102.4 Working capital, as a percentage of annualized net sales (A) (C)

8.0 % 2.7 % Operational working capital, as a percentage of annualized net sales (B) (C) 12.7 % 11.4 % As a percentage of annualized net sales, operational working capital for the first six months of 2014 increased compared to the same period in the prior year. The primary factors contributing to this change, which include the impact of foreign currency translation, are discussed below.



Accounts Receivable Ratio

The average number of days sales outstanding was 63 days in the first six months of 2014 compared to 60 days in the first six months of 2013, calculated using the two-quarter average trade accounts receivable balance divided by the average daily sales for the first six months of 2014 and 2013, respectively. The increase in current year average number of days sales outstanding reflected the timing of collections and longer payment terms with customers.



Inventory Ratio

Average inventory turnover was 8.4 in the first six months of 2014 compared to 8.7 in the first six months of 2013, calculated using the annualized cost of sales (cost of sales for the first six months, multiplied by two) divided by the two-quarter average inventory balance for the first six months of 2014 and 2013, respectively. The decrease in the average inventory turnover from the prior year primarily reflected increased production to support expected higher sales. Accounts Payable Ratio The average number of days payable outstanding was 69 days in the first six months of 2014 compared to 67 days in the first six months of 2013, calculated using the two-quarter average accounts payable balance divided by the average daily cost of products sold for the first six months of 2014 and 2013. The increase in the average number of days payable outstanding from prior year was primarily due to the impact of extensions in payment terms with suppliers and the timing of inventory purchases. 30



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Table of Contents Avery Dennison Corporation Capital Resources



Capital resources include cash flows from operations, cash and cash equivalents and debt financing. At June 28, 2014, we had cash and cash equivalents of approximately $222 million held in accounts at third-party financial institutions.

Our cash balances are held in numerous locations throughout the world. At June 28, 2014, the majority of our cash and cash equivalents was held by our foreign subsidiaries. To meet U.S. cash requirements, we have several cost-effective liquidity options available. These options include borrowing funds at reasonable rates, including borrowings from foreign subsidiaries, and repatriating certain foreign earnings. However, if we were to repatriate incremental foreign earnings, we may be subject to additional taxes in the U.S. Our $675 million revolving credit facility (the "Revolver"), which supports our commercial paper program, matures on December 22, 2016. Based upon our current outlook for our business and market conditions, we believe that the Revolver, in addition to the uncommitted bank lines of credit maintained in the countries in which we operate, would, if necessary, provide sufficient liquidity to fund our operations during the next twelve months. As of June 28, 2014, no balances were outstanding under the Revolver.



We are exposed to financial market risk resulting from changes in interest and foreign currency rates, and to possible liquidity and credit risks of our counterparties.

Capital from Debt Our total debt increased by approximately $145 million in the first six months of 2014 to $1.17 billion compared to $1.03 billion at year-end 2013, primarily reflecting an increase in commercial paper and foreign short-term borrowings to fund share repurchase activity and support operational requirements and capital expenditures given the seasonality of our cash flow during the year. Credit ratings are a significant factor in our ability to raise short-term and long-term financing. The credit ratings assigned to us also impact the interest rates paid and our access to commercial paper, credit facilities, and other borrowings. A downgrade of our short-term credit ratings below our current levels could impact our ability to access the commercial paper markets. If our access to commercial paper markets were to become limited, the Revolver and our other credit facilities would be available to meet our short-term funding requirements, if necessary. When determining a credit rating, we believe that rating agencies primarily consider our competitive position, business outlook, consistency of cash flows, debt level and liquidity, geographic dispersion and management team. We remain committed to retaining an investment grade rating.



Off-Balance Sheet Arrangements, Contractual Obligations, and Other Matters

Refer to Note 15, "Commitments and Contingencies," to the unaudited Condensed Consolidated Financial Statements.

RECENT ACCOUNTING REQUIREMENTS

Refer to Note 17, "Recent Accounting Requirements," to the unaudited Condensed Consolidated Financial Statements.

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Table of Contents Avery Dennison Corporation


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