Market Overview

Avery Dennison Announces Second Quarter 2018 Results

Share:
  • 2Q18 Reported EPS of $1.07
    • Adjusted EPS (non-GAAP) of $1.66
  • 2Q18 Net sales increased 14.0% to $1.85 billion
    • Sales change ex. currency (non-GAAP) of 10.0%
  • FY18 Reported EPS guidance midpoint reduced by $0.33, driven by ~$0.60
    estimated impact of recently announced termination of U.S. pension plan
    • Raised FY18 guidance midpoint for Adjusted EPS by $0.08

Avery Dennison Corporation (NYSE:AVY) today announced preliminary,
unaudited results for its second quarter ended June 30, 2018. All
non-GAAP financial measures referenced in this document are reconciled
to GAAP in the attached tables. Unless otherwise indicated, comparisons
are to the same period in the prior year.

"We had another good quarter, with strong top-line growth and adjusted
EPS up 27 percent, driven primarily by strong operating results," said
Mitch Butier, President and CEO. "Label and Graphic Materials delivered
high-single digit organic growth and sustained its strong operating
margin; Retail Branding and Information Solutions expanded its margin
significantly on organic growth of nearly 10 percent, driven by strength
in both RFID and the base business; and Industrial and Healthcare
Materials delivered modest organic growth with margin in line with
expectations.

"Our current year outlook for adjusted earnings has improved despite
currency-related headwinds in the back half of the year," added Butier.
"Our ability to consistently achieve our strategic and financial goals
in the face of significant changes in the macro environment, including
the strengthening of the dollar and higher than expected inflation,
demonstrates the resilience of our business and the talent of our team."

For more details on the company's results, see the summary table
accompanying this news release, as well as the supplemental presentation
materials, "Second Quarter 2018 Financial Review and Analysis", posted
on the company's website at
www.investors.averydennison.com,
and furnished to the SEC on Form 8-K.

Second Quarter 2018 Results by Segment

Sales change ex. currency refers to the increase or decrease in sales
excluding the estimated impact of foreign currency translation. The
estimated impact of foreign currency translation is calculated on a
constant currency basis, with prior period results translated at current
period average exchange rates to exclude the effect of currency
fluctuations. Organic sales change refers to the increase or decrease in
sales excluding the estimated impact of foreign currency translation,
product line exits, and acquisitions and divestitures. Adjusted
operating margin refers to income before taxes, interest expense, other
non-operating expense, and other expense, net, as a percentage of sales.

Label and Graphic Materials

  • Reported sales increased 11.9 percent; on an organic basis, sales grew
    7.3 percent. Sales on an organic basis increased at high-single digit
    rates in both Label and Packaging Materials and the combined Graphics
    and Reflective Solutions businesses.
  • Reported operating margin decreased 430 basis points to 9.2 percent,
    reflecting the impact of previously announced restructuring plan.
    Adjusted operating margin decreased 10 basis points to 13.8 percent as
    the benefit from higher volume/mix was more than offset by higher
    employee-related costs and the net impact of pricing and raw material
    costs, excluding the effects of currency.

Retail Branding and Information Solutions

  • Reported sales increased 11.1 percent; on an organic basis, sales grew
    9.5 percent, driven by strength in both radio frequency identification
    (RFID) solutions and the base business.
  • Reported operating margin increased 300 basis points to 10.9 percent
    as the benefits from higher volume, productivity, and reduced
    amortization expense were partially offset by higher employee-related
    costs and investments. Adjusted operating margin increased 260 basis
    points to 11.2 percent.

Industrial and Healthcare Materials

  • Reported sales increased 40.0 percent. Sales ex. currency increased
    35.3 percent; on an organic basis, sales grew 3.1 percent. Sales in
    industrial categories grew approximately 50 percent ex. currency and
    mid-single digits on an organic basis. Sales in healthcare categories
    were up low-single digits on an organic basis.
  • Reported operating margin increased 10 basis points to 9.2 percent, as
    a decline in adjusted operating margin was more than offset by the
    lack of M&A transaction costs incurred in the prior year. Adjusted
    operating margin declined 170 basis points to 9.3 percent, reflecting
    acquisition effects and the net impact of pricing and raw material
    costs, partially offset by the benefit of organic volume growth.

Other

Share Repurchases / Equity Dilution

The company repurchased 0.5 million shares in the second quarter at an
aggregate cost of $51 million. Net of dilution from long-term
incentives, the company's share count at the end of the quarter was down
by 1.0 million compared to the same time last year. Year-to-date, the
company returned $188 million in cash to shareholders through a
combination of share repurchases and dividends, up from $147 million for
the same period last year.

Income Taxes

The second quarter GAAP effective tax rate was 31.4 percent, up from
19.1 percent in the prior year. The full year GAAP effective tax rate is
estimated to be approximately 20 percent, reflecting the effect of the
anticipated third quarter pension contribution, which is expected to be
deducted on the company's 2017 U.S. income tax return.

The adjusted non-GAAP tax rate for the quarter was 25 percent,
consistent with the company's previous guidance.

Cost Reduction Actions

In the second quarter, the company realized approximately $9 million in
pretax savings from restructuring, net of transition costs, and incurred
pretax restructuring charges of approximately $59 million. Most of these
charges relate to severance costs associated with a previously announced
restructuring plan in Europe, the vast majority of which will be paid in
2019.

U.S. Pension Plan Termination

As announced in a Form 8-K furnished on July 11, 2018, the company has
begun the process to terminate the Avery Dennison Pension Plan, a
tax-qualified U.S. defined benefit plan. The company expects to
contribute $200 million in cash to the plan in 2018, and an estimated
$40 million in cash during 2019, to fully fund the plan and complete the
transaction. The company estimates that the after-tax impact of actions
connected with the termination will reduce reported EPS by $0.50 to
$0.70 in 2018, and an additional $4.25 to $4.45 during 2019, reflecting
estimated total pre-tax settlement charges in the range of $575 million
to $600 million.

Outlook

In its supplemental presentation materials, "Second Quarter 2018
Financial Review and Analysis," the company provides a list of factors
that it believes will contribute to its 2018 financial results. Based on
the factors listed and other assumptions, the company now expects 2018
reported earnings per share of $4.50 to $4.85. Excluding an estimated
$1.25 to $1.45 per share for restructuring charges, pension settlement
charges, and other items, the company now expects adjusted earnings per
share (non-GAAP) of $5.95 to $6.10.

Note: Throughout this release and the supplemental presentation
materials, amounts on a per share basis reflect fully diluted shares
outstanding.

About Avery Dennison

Avery Dennison (NYSE:AVY) is a global materials science company
specializing in the design and manufacture of a wide variety of labeling
and functional materials. The company's products, which are used in
nearly every major industry, include pressure-sensitive materials for
labels and graphic applications; tapes and other bonding solutions for
industrial, medical, and retail applications; tags, labels and
embellishments for apparel; and radio frequency identification (RFID)
solutions serving retail apparel and other markets. Headquartered in
Glendale, California, the company employs approximately 30,000 employees
in more than 50 countries. Reported sales in 2017 were $6.6 billion.
Learn more at www.averydennison.com.

"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995

Certain statements contained in this document are "forward-looking
statements" intended to qualify for the safe harbor from liability
established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements, and financial or other business
targets, are subject to certain risks and uncertainties. Actual results
and trends may differ materially from historical or anticipated results
depending on a variety of factors, including but are not limited to,
risks and uncertainties relating to the following: fluctuations in
demand affecting sales to customers; worldwide and local economic
conditions; changes in political conditions; changes in governmental
laws and regulations; fluctuations in foreign 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; execution and integration
of acquisitions; timely development and market acceptance of new
products, including sustainable or sustainably-sourced products;
investment in development activities and new production facilities;
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, including the Tax Cuts and Jobs Act, and uncertainties
associated with interpretations of such laws and regulations; outcome of
tax audits; fluctuations in pension, insurance, and employee benefit
costs, including risks related to the planned termination of our U.S.
pension plan; the impact of legal and regulatory proceedings, including
with respect to environmental, health and safety; protection and
infringement of intellectual property; 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
global economic conditions and political uncertainty on underlying
demand for our products and foreign currency fluctuations; (2) 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; (3) competitors' actions, including pricing,
expansion in key markets, and product offerings; and (4) the execution
and integration of acquisitions.

For a more detailed discussion of these and other factors, see "Risk
Factors" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition" in our 2017 Form 10-K, filed with
the Securities and Exchange Commission on February 21, 2018, and
subsequent quarterly reports on Form 10-Q. The forward-looking
statements included in this document are made only as of the date of
this document, and we undertake no obligation to update these statements
to reflect subsequent events or circumstances, other than as may be
required by law.

For more information and to listen to a live broadcast or an audio
replay of the quarterly conference call with analysts, visit the Avery
Dennison website at
www.investors.averydennison.com

 
Second Quarter Financial Summary - Preliminary, unaudited
(In millions, except % and per share amounts)
 
       

% Change vs. P/Y

           
2Q 2Q   Ex.

2018

2017

Reported

Currency (a)

Organic (b)

 
Net sales, by segment:
Label and Graphic Materials $ 1,257.3 $ 1,123.1 11.9 % 7.3 % 7.3 %
Retail Branding and Information Solutions 416.7 375.1 11.1 % 9.5 % 9.5 %
Industrial and Healthcare Materials   180.2     128.7   40.0 % 35.3 % 3.1 %
Total net sales $ 1,854.2 $ 1,626.9 14.0 % 10.0 % 7.5 %
                                   
As Reported (GAAP) Adjusted Non-GAAP (c)
2Q 2Q % % of Sales 2Q 2Q % % of Sales

2018

2017

Change

2018

2017

2018

2017

Change

2018

2017

Operating income (loss) / operating margins
before interest, other non-operating expense, and taxes,
by segment:
Label and Graphic Materials $ 115.5 $ 151.4 9.2 % 13.5 % $ 173.3 $ 156.4 13.8 % 13.9 %
Retail Branding and Information Solutions 45.3 29.5 10.9 % 7.9 % 46.7 32.3 11.2 % 8.6 %
Industrial and Healthcare Materials 16.6 11.7 9.2 % 9.1 % 16.8 14.1 9.3 % 11.0 %
Corporate expense   (20.6 )   (21.0 )   (22.9 )   (21.0 )
Total operating income / operating margins
before interest, other non-operating expense, and taxes $ 156.8 $ 171.6 (9 %) 8.5 % 10.5 % $ 213.9 $ 181.8 18 % 11.5 % 11.2 %
 
Interest expense $ 14.3 $ 16.2 $ 14.3 $ 16.2
 
Other non-operating expense (d) $ 2.6 $ 5.9 $ 2.4 $ 5.9
 
Income before taxes $ 139.9 $ 149.5 (6 %) 7.5 % 9.2 % $ 197.2 $ 159.7 23 % 10.6 % 9.8 %
 
Provision for income taxes (e) $ 43.9 $ 28.6 $ 49.3 $ 41.9
 
Equity method investment net losses ($0.4 ) --- ($0.4 ) ---
 
Net income $ 95.6 $ 120.9 (21 %) 5.2 % 7.4 % $ 147.5 $ 117.8 25 % 8.0 % 7.2 %
 
Net income per common share, assuming dilution $ 1.07 $ 1.34 (20 %) $ 1.66 $ 1.31 27 %
 

2018

2017

2Q Free Cash Flow (f) $ 147.3 $ 115.1

YTD Free Cash Flow (f)

$

127.6

$

93.0

 
  See accompanying schedules A-4 to A-8 for reconciliations from GAAP
to non-GAAP financial measures.
 
(a) Percentage change in sales excluding the estimated impact of foreign
currency translation.
 
(b) Percentage change in sales excluding the estimated impact of foreign
currency translation, product line exits, acquisitions and
divestitures, and, where applicable, the extra week in our fiscal
year.
 
(c) Excludes impact of restructuring charges and other items.
 
(d) In the first quarter of 2018, we adopted ASU No. 2017-07, Improving
the Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost,
on a retrospective basis. This ASU
requires employers with defined benefit plans to present the
components of net periodic benefit cost, other than service cost,
outside of operating income. Prior year results have been
reclassified as required by the ASU.
 
"Other non-operating expense" for the second quarter of 2018
includes pension settlement of $.2.
 
(e) We continue to assess our fourth quarter 2017 provisional estimate
defined under SEC Staff Accounting Bulletin No. 118 related to the
U.S. Tax Cut and Jobs Act of 2017. There was no significant impact
to our provisional estimate as of the end of the second quarter of
2018. We expect to complete our assessment within the allowed
one-year measurement period.
 
(f) Free cash flow refers to cash flow from operations, less payments
for property, plant and equipment, software and other deferred
charges, plus proceeds from sales of property, plant and equipment,
plus (minus) net proceeds from sales (purchases) of investments and
proceeds from insurance. Free cash flow will also be adjusted for
the cash contributions and cash tax effects of the planned
termination of our U.S. pension plan.
 

A-1

 
AVERY DENNISON CORPORATION
PRELIMINARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
 
    (UNAUDITED)
 
Three Months Ended   Six Months Ended
 
Jun. 30, 2018 Jul. 1, 2017 Jun. 30, 2018 Jul. 1, 2017
                     
 
 
Net sales $ 1,854.2 $ 1,626.9 $ 3,630.6 $ 3,199.0
 
Cost of products sold 1,352.8 1,174.3 2,645.8 2,304.0
                       
 
Gross profit 501.4 452.6 984.8 895.0
 
Marketing, general and administrative expense 287.5 270.8 582.5 550.6
 
Other expense, net(1) 57.1 10.2 69.9 16.7
 
Interest expense 14.3 16.2 27.5 32.9
 
Other non-operating expense(2) 2.6 5.9 5.9 9.4
                         
 
Income before taxes 139.9 149.5 299.0 285.4
 
Provision for income taxes(3) 43.9 28.6 77.2 52.3
 
Equity method investment net losses (0.4 ) --- (1.0 ) ---
                         
 
Net income $ 95.6 $ 120.9 $ 220.8 $ 233.1
                         
 
Per share amounts:
 
Net income per common share, assuming dilution $ 1.07 $ 1.34 $ 2.47 $ 2.59
                         
 
Weighted average number of common shares outstanding,
assuming dilution       89.0     89.9     89.4     90.0
 
 
(1)     "Other expense, net" for the second quarter of 2018 includes
severance and related costs of $58.8 and asset impairment and lease
cancellation charges of $.6, partially offset by gain on sale of
assets of $2.3.
 
"Other expense, net" for the second quarter of 2017 includes
severance and related costs of $7.3, asset impairment and lease
cancellation charges of $.3, and transaction costs of $2.6.
 
"Other expense, net" for the first half of 2018 includes severance
and related costs of $63.1, asset impairment and lease cancellation
charges of $9, and other restructuring-related charge of $.5,
partially offset by net gain on sales of assets of $2.7.
 
"Other expense, net" for the first half of 2017 includes severance
and related costs of $13, asset impairment and lease cancellation
charges of $.3, and transaction costs of $3.4.
 
(2) In the first quarter of 2018, we adopted Accounting Standards Update
(ASU) No. 2017-07, Improving the Presentation of Net Periodic
Pension Cost and Net Periodic Postretirement Benefit Cost,
on a
retrospective basis. This ASU requires employers with defined
benefit plans to present the components of net periodic benefit
cost, other than service cost, outside of operating income. Prior
year results have been reclassified as required by the ASU.
 
"Other non-operating expense" for the first half of 2018 includes
pension settlements of $.7.
 
(3) We continue to assess our fourth quarter 2017 provisional estimate
defined under SEC Staff Accounting Bulletin No. 118 related to the
U.S. Tax Cut and Jobs Act of 2017. There was no significant impact
to our provisional estimate as of the end of the second quarter of
2018. We expect to complete our assessment within the allowed
one-year measurement period.
 

A-2

AVERY DENNISON CORPORATION
PRELIMINARY CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
 
    (UNAUDITED)
 
ASSETS

 

Jun. 30, 2018

  Jul. 1, 2017
                           
       
Current assets:
Cash and cash equivalents $ 215.8 $ 209.4
Trade accounts receivable, net 1,236.2 1,138.1
Inventories, net 660.8 618.5
Assets held for sale 1.9 8.3
Other current assets 213.4 235.5
                           
 
Total current assets 2,328.1 2,209.8
 
Property, plant and equipment, net 1,084.5 1,017.8
Goodwill and other intangibles resulting from business acquisitions,
net
1,109.7 1,118.5
Non-current deferred income taxes 199.0 325.1
Other assets 441.8 420.6
                           
 
$ 5,163.1 $ 5,091.8
                           
 
LIABILITIES AND SHAREHOLDERS' EQUITY
   
 
Current liabilities:
Short-term borrowings and current portion of long-term debt and
capital leases
$ 384.3 $ 444.0
Accounts payable 1,034.4 930.9
Other current liabilities 690.5 597.5
   
 
Total current liabilities 2,109.2 1,972.4
 
Long-term debt and capital leases 1,289.7 1,276.3
Other long-term liabilities 742.3 773.3
Shareholders' equity:
Common stock 124.1 124.1
Capital in excess of par value 854.5 845.9
Retained earnings 2,702.1 2,621.8
Treasury stock at cost (1,939.1 ) (1,805.6 )
Accumulated other comprehensive loss (719.7 ) (716.4 )
   
 
Total shareholders' equity 1,021.9 1,069.8
   
 
      $ 5,163.1       $ 5,091.8  
 

A-3

AVERY DENNISON CORPORATION
PRELIMINARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
 
        (UNAUDITED)
 
Six Months Ended
 
       

 

   

Jun. 30, 2018

  Jul. 1, 2017
   
 
Operating Activities:
 
Net income $ 220.8 $ 233.1
 
Adjustments to reconcile net income to net cash provided by
operating activities:
 
Depreciation 69.1 59.7
 
Amortization 20.2 31.1
 
Provision for doubtful accounts and sales returns 23.1 19.8
 
Net losses from impairments, sales of assets, and investment
settlements
8.4 ---
 
Stock-based compensation 16.4 13.2
 
Loss from settlement of pension obligations 0.7 ---
 
Deferred income taxes (7.1 ) 6.0
 
Other non-cash expense and loss 28.1 28.1
 
Changes in assets and liabilities and other adjustments (170.2 ) (215.4 )
                   
 
Net cash provided by operating activities 209.5 175.6
                   
 
Investing Activities:
 
Purchases of property, plant and equipment (79.5 ) (66.5 )
 
Purchases of software and other deferred charges (13.9 ) (14.9 )
 
Proceeds from sales of property, plant and equipment 9.3 0.2
 
Sales (purchases) of investments and proceeds from insurance, net 2.2 (1.4 )
 
Payments for acquisitions, net of cash acquired, and investments in
businesses
(0.2 ) (300.9 )
 
 
Net cash used in investing activities (82.1 ) (383.5 )
 
 
Financing Activities:
 
Net increase (decrease) in borrowings (maturities of three months or
less)
108.3 (159.5 )
 
Additional long-term borrowings --- 526.6
 

Repayments of long-term debt and capital leases

(2.7 ) (1.5 )
 
Dividends paid (85.3 ) (76.2 )
 
Share repurchases (102.9 ) (70.3 )
 
Proceeds from exercises of stock options, net 0.2 17.5
 
Tax withholding for stock-based compensation (32.6 ) (20.0 )
 
Payment of contingent consideration (16.8 ) ---
                           
 
Net cash (used in) provided by financing activities (131.8 ) 216.6
 
 
Effect of foreign currency translation on cash balances (4.2 ) 5.6
 
 
(Decrease) increase in cash and cash equivalents (8.6 ) 14.3
 
Cash and cash equivalents, beginning of year 224.4 195.1
 
 
Cash and cash equivalents, end of period     $ 215.8         $ 209.4  
 

In the first quarter of 2018, we adopted ASU No. 2016-15, Classification
of Certain Cash Receipts and Cash Payments, on a retrospective basis.
This ASU reduces the diversity in the presentation and classification of
certain cash receipts and cash payments in the statement of cash flows.
Prior year results have been reclassified as required by the ASU.

A-4

Reconciliation of Non-GAAP Financial Measures to GAAP

We report our financial results in conformity with accounting principles
generally accepted in the United States of America, or GAAP, and also
communicate with investors using certain non-GAAP financial measures.
These non-GAAP financial measures are not in accordance with, nor are
they a substitute for or superior to, the comparable GAAP financial
measures. These non-GAAP financial measures are intended to supplement
presentation of our financial results that are prepared in accordance
with GAAP. Based upon feedback from investors and financial analysts, we
believe that the supplemental non-GAAP financial measures we provide are
useful to their 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. The accounting effects of these
events, activities or decisions, which are included in the GAAP
financial measures, may make it difficult to assess our underlying
performance in a single period. By excluding the accounting effects,
both positive or negative, of certain items (e.g., restructuring
charges, legal settlements, certain effects of strategic transactions
and related costs, losses from debt extinguishments, gains and losses
from curtailment and settlement of pension obligations, gains or losses
on sales of certain assets, and other items), we believe that we are
providing meaningful supplemental information that facilitates 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 the accompanying
news release and presentation:

Sales change ex. currency refers to the increase or decrease in
sales excluding the estimated impact of foreign currency translation.
The estimated impact of foreign currency translation is calculated on a
constant currency basis, with prior period results translated at current
period average exchange rates to exclude the effect of currency
fluctuations.

Organic sales change refers to the increase or decrease in sales
excluding the estimated impact of foreign currency translation, product
line exits, acquisitions and divestitures, and, where applicable, the
extra week in our fiscal year.

We believe that sales change ex. currency and organic sales change
assist investors in evaluating the sales growth from the ongoing
activities of our businesses and provide greater ability to evaluate our
results from period to period.

Adjusted operating income refers to income before taxes, interest
expense, other non-operating expense, and other expense, net.

Adjusted operating margin refers to adjusted operating income as
a percentage of sales.

Adjusted tax rate refers to the projected full-year GAAP tax
rate, adjusted to exclude certain unusual or infrequent events that are
expected to significantly impact the GAAP tax rate, such as updates to
the year-end 2017 TCJA provisional amount, as well as additional items
which could include other impacts related to the planned U.S. pension
plan termination and the effects of certain potential tax planning
actions.

Adjusted net income refers to income before taxes, tax-effected
at the adjusted tax rate, and adjusted for tax-effected restructuring
charges and other items.

Adjusted net income per common share, assuming dilution (adjusted EPS)
refers to adjusted net income divided by weighted average number of
common shares outstanding, assuming dilution.

We believe that adjusted operating margin, adjusted net income, and
adjusted EPS assist investors in understanding our core operating trends
and comparing our results with those of our competitors.

Free cash flow refers to cash flow from operations, less payments
for property, plant and equipment, software and other deferred charges,
plus proceeds from sales of property, plant and equipment, plus (minus)
net proceeds from sales (purchases) of investments and proceeds from
insurance. Free cash flow will also be adjusted for the cash
contributions and cash tax effects of the planned termination of our
U.S. pension plan. We believe that free cash flow assists investors by
showing the amount of cash we have available for debt reductions,
dividends, share repurchases, and acquisitions.

The following reconciliations are provided in accordance with
Regulations G and S-K and reconcile our non-GAAP financial measures with
the most directly comparable GAAP financial measures.

A-5

AVERY DENNISON CORPORATION
PRELIMINARY RECONCILIATION FROM GAAP TO NON-GAAP FINANCIAL
MEASURES
(In millions, except % and per share amounts)
     
(UNAUDITED)
 
Three Months Ended Six Months Ended
 
Jun. 30, 2018 Jul. 1, 2017 Jun. 30, 2018 Jul. 1, 2017
 
 
 
Reconciliation from GAAP to Non-GAAP operating margins:
 
Net sales $ 1,854.2 $ 1,626.9 $ 3,630.6 $ 3,199.0
             
 
Income before taxes $ 139.9 $ 149.5 $ 299.0 $ 285.4
                       
 
Income before taxes as a percentage of sales 7.5 % 9.2 % 8.2 % 8.9 %
                       
 
Adjustments:
Interest expense $ 14.3 $ 16.2 $ 27.5 $ 32.9
Other non-operating expense 2.6 5.9 5.9 9.4
             
 
Operating income before interest expense, other non-operating
expense, and taxes
$ 156.8 $ 171.6 $ 332.4 $ 327.7
                       
 
Operating margins 8.5 % 10.5 % 9.2 % 10.2 %
                       
 
 
Income before taxes $ 139.9 $ 149.5 $ 299.0 $ 285.4
 
Adjustments:
 
Restructuring charges:
 
Severance and related costs 58.8 7.3 63.1 13.0
 
Asset impairment and lease cancellation charges 0.6 0.3 9.0 0.3
 
Other restructuring-related charge --- --- 0.5 ---
 
Net gain on sales of assets (2.3 ) --- (2.7 ) ---
 
Transaction costs --- 2.6 --- 3.4
 
Interest expense 14.3 16.2 27.5 32.9
 
Other non-operating expense 2.6 5.9 5.9 9.4
             
 
Adjusted operating income before interest expense, other
non-operating expense,
and taxes (non-GAAP) $ 213.9 $ 181.8 $ 402.3 $ 344.4
 
 
Adjusted operating margins (non-GAAP) 11.5 % 11.2 % 11.1 % 10.8 %
 
 
 
Reconciliation from GAAP to Non-GAAP net income:
 
As reported net income $ 95.6 $ 120.9 $ 220.8 $ 233.1
 
Adjustments:
 
Restructuring charges 59.4 7.6 72.1 13.3
Other restructuring-related charge --- --- 0.5 ---
Net gain on sales of assets (2.3 ) --- (2.7 ) ---
Transaction costs --- 2.6 --- 3.4
Pension settlements 0.2 --- 0.7 ---
Tax effect on pre-tax adjustments and impact of adjusted tax rate(1) (5.4 ) (13.3 ) (15.2 ) (32.3 )
 
 
Adjusted net income (non-GAAP) $ 147.5 $ 117.8 $ 276.2 $ 217.5
 

A-5
(continued)

AVERY DENNISON CORPORATION
PRELIMINARY RECONCILIATION FROM GAAP TO NON-GAAP FINANCIAL
MEASURES
(In millions, except % and per share amounts)
 
      (UNAUDITED)
 
  Three Months Ended     Six Months Ended
   
Jun. 30, 2018 Jul. 1, 2017 Jun. 30, 2018 Jul. 1, 2017
                             
 
Reconciliation from GAAP to Non-GAAP net income per common share:
 
As reported net income per common share, assuming dilution $ 1.07 $ 1.34 $ 2.47 $ 2.59
 
Adjustments per common share, net of tax:
 
Restructuring charges, other restructuring-related charge, pension
settlements,
transaction costs, and net gain on sales of assets(1) 0.59 (0.03 ) 0.62 (0.17)
                             
 
 
Adjusted net income per common share, assuming dilution (non-GAAP) $ 1.66 $ 1.31 $ 3.09 $

2.42

                             
 
Weighted average number of common shares outstanding, assuming
dilution
  89.0     89.9       89.4     90.0

(1) The adjusted tax rate was 25% for the three and six
months ended June 30, 2018, and 26% and 28% for the three and six months
ended July 1, 2017, respectively.

 
    (UNAUDITED)
 
Three Months Ended Six Months Ended
 
Jun. 30, 2018 Jul. 1, 2017 Jun. 30, 2018 Jul. 1, 2017
                   
 
Reconciliation of free cash flow:
 
Net cash provided by operating activities $ 193.5 $ 161.7 $ 209.5 $ 175.6
 
Purchases of property, plant and equipment (43.9 ) (36.2 ) (79.5 ) (66.5 )
 
Purchases of software and other deferred charges (6.6 ) (8.0 ) (13.9 ) (14.9 )
 
Proceeds from sales of property, plant and equipment 2.4 0.2 9.3 0.2
 
Sales (purchases) of investments and proceeds from insurance, net 1.9 (2.6 ) 2.2 (1.4 )
                     
 
Free cash flow (non-GAAP)     $ 147.3   $ 115.1   $ 127.6   $ 93.0  
 

A-6

AVERY DENNISON CORPORATION
PRELIMINARY SUPPLEMENTARY INFORMATION
(In millions, except %)
(UNAUDITED)
 
    Second Quarter Ended
   
NET SALES OPERATING INCOME (LOSS) OPERATING MARGINS
2018 2017

2018(1)

2017(2)

2018 2017
 
Label and Graphic Materials $ 1,257.3 $ 1,123.1 $ 115.5 $ 151.4 9.2 % 13.5 %
Retail Branding and Information Solutions 416.7 375.1 45.3 29.5 10.9 % 7.9 %
Industrial and Healthcare Materials 180.2 128.7 16.6 11.7 9.2 % 9.1 %
Corporate Expense   N/A   N/A   (20.6 )   (21.0 ) N/A   N/A  
 
TOTAL FROM OPERATIONS $ 1,854.2 $ 1,626.9 $ 156.8   $ 171.6   8.5 % 10.5 %
 

(1) Operating income for the second quarter of 2018 includes
severance and related costs of $58.8 and asset impairment and lease
cancellation charges of $.6, partially offset by gain on sale of assets
of $2.3. Of the total $57.1, the Label and Graphic Materials segment
recorded $57.8, the Retail Branding and Information Solutions segment
recorded $1.4, the Industrial and Healthcare Materials segment recorded
$.2, and Corporate recorded ($2.3).

(2) Operating income for the second quarter of 2017 includes
severance and related costs of $7.3, asset impairment and lease
cancellation charges of $.3, and transaction costs of $2.6. Of the total
$10.2, the Label and Graphic Materials segment recorded $5, the Retail
Branding and Information Solutions segment recorded $2.8, and the
Industrial and Healthcare Materials segment recorded $2.4.

 
RECONCILIATION FROM GAAP TO NON-GAAP SUPPLEMENTARY INFORMATION
   
Second Quarter Ended
OPERATING INCOME   OPERATING MARGINS
 
2018 2017 2018 2017

Label and Graphic Materials

Operating income and margins, as reported $ 115.5 $ 151.4 9.2 % 13.5 %
Adjustments:
Restructuring charges:
Severance and related costs 57.8 4.7 4.6 % 0.4 %
Asset impairment charges --- 0.1 --- ---
Transaction costs   ---   0.2 ---   ---  
Adjusted operating income and margins (non-GAAP) $ 173.3 $ 156.4 13.8 % 13.9 %
 

Retail Branding and Information Solutions

Operating income and margins, as reported $ 45.3 $ 29.5 10.9 % 7.9 %
Adjustments:
Restructuring charges:
Severance and related costs 0.8 2.6 0.2 % 0.7 %
Asset impairment and lease cancellation charges   0.6   0.2 0.1 % ---  
Adjusted operating income and margins (non-GAAP) $ 46.7 $ 32.3 11.2 % 8.6 %
 

Industrial and Healthcare Materials

Operating income and margins, as reported $ 16.6 $ 11.7 9.2 % 9.1 %
Adjustments:
Restructuring charges:
Severance and related costs 0.2 --- 0.1 % ---
Transaction costs   ---   2.4 ---   1.9 %
Adjusted operating income and margins (non-GAAP) $ 16.8 $ 14.1 9.3 % 11.0 %
 

A-7

AVERY DENNISON CORPORATION
PRELIMINARY SUPPLEMENTARY INFORMATION
(In millions, except %)
(UNAUDITED)
 
    Six Months Year-to-Date
 
NET SALES   OPERATING INCOME   OPERATING MARGINS
2018 2017

2018(1)

 

2017(2)

2018   2017
   
Label and Graphic Materials $ 2,475.5 $ 2,212.7 $ 265.2 $ 289.1 10.7 % 13.1 %
Retail Branding and Information Solutions 802.7 741.9 80.0 56.8 10.0 % 7.7 %
Industrial and Healthcare Materials 352.4 244.4 29.6 24.9 8.4 % 10.2 %
Corporate Expense   N/A   N/A   (42.4 )     (43.1 ) N/A     N/A  
 
TOTAL FROM OPERATIONS $ 3,630.6 $ 3,199.0 $ 332.4     $ 327.7   9.2 % 10.2 %
 

(1) Operating income for the first half of 2018 includes
severance and related costs of $63.1, asset impairment and lease
cancellation charges of $9, and other restructuring-related charge of
$.5, partially offset by net gain on sales of assets of $2.7. Of the
total $69.9, the Label and Graphic Materials segment recorded $65.9, the
Retail Branding and Information Solutions segment recorded $6.1, the
Industrial and Healthcare Materials segment recorded $.2, and Corporate
recorded ($2.3).

(2) Operating income for the first half of 2017 includes
severance and related costs of $13, asset impairment and lease
cancellation charges of $.3, and transaction costs of $3.4. Of the total
$16.7, the Label and Graphic Materials segment recorded $7.2, the Retail
Branding and Information Solutions segment recorded $6.6, and the
Industrial and Healthcare Materials segment recorded $2.9.

 

RECONCILIATION FROM GAAP TO NON-GAAP SUPPLEMENTARY INFORMATION
 
    Six Months Year-to-Date
OPERATING INCOME   OPERATING MARGINS
   
2018   2017 2018   2017

Label and Graphic Materials

Operating income and margins, as reported $ 265.2 $ 289.1 10.7 % 13.1 %
Adjustments:
Restructuring charges:
Severance and related costs 58.4 6.7 2.4 % 0.3 %
Asset impairment charges 6.9 0.1 0.3 % ---
Other restructuring-related charge 0.5 --- --- ---
Loss on sale of assets 0.1 --- --- ---
Transaction costs   ---       0.4 ---     ---  
Adjusted operating income and margins (non-GAAP) $ 331.1     $ 296.3 13.4 %   13.4 %
 

Retail Branding and Information Solutions

Operating income and margins, as reported $ 80.0 $ 56.8 10.0 % 7.7 %
Adjustments:
Restructuring charges:
Severance and related costs 4.5 6.1 0.5 % 0.8 %
Asset impairment and lease cancellation charges 2.1 0.2 0.3 % ---
Net gain on sales of assets (0.5 ) --- (0.1 %) ---
Transaction costs related to sale of product line   ---       0.3 ---     ---  
Adjusted operating income and margins (non-GAAP) $ 86.1     $ 63.4 10.7 %   8.5 %
 

Industrial and Healthcare Materials

Operating income and margins, as reported $ 29.6 $ 24.9 8.4 % 10.2 %
Adjustments:
Restructuring charges:
Severance and related costs 0.2 0.2 0.1 % 0.1 %
Transaction costs   ---       2.7   ---     1.1 %
Adjusted operating income and margins (non-GAAP) $ 29.8     $ 27.8 8.5 %   11.4 %
 

A-8

AVERY DENNISON CORPORATION

PRELIMINARY SUPPLEMENTARY INFORMATION

(UNAUDITED)

   
Second Quarter 2018
     

Total
Company

 

Label and
Graphic
Materials

 

Retail Branding
and Information
Solutions

 

Industrial and
Healthcare
Materials

Reconciliation from GAAP to Non-GAAP sales change      
Reported sales change 14.0 % 11.9 % 11.1 % 40.0 %
Foreign currency translation     (4.0 %)   (4.6 %)   (1.6 %)   (4.7 %)
Sales change ex. currency (non-GAAP) 10.0 % 7.3 % 9.5 % 35.3 %
Acquisitions     (2.5 %)   ---     ---     (32.2 %)
 
Organic sales change (non-GAAP)     7.5 %   7.3 %   9.5 %   3.1 %
 
 
Six Months Year-to-Date 2018
     

Total
Company

 

Label and
Graphic
Materials

 

Retail Branding
and Information
Solutions

 

Industrial and
Healthcare
Materials

Reconciliation from GAAP to Non-GAAP sales change
Reported sales change 13.5 % 11.9 % 8.2 % 44.2 %
Foreign currency translation     (5.1 %)   (6.1 %)   (1.8 %)   (5.6 %)
Sales change ex. currency (non-GAAP)(1) 8.4 % 5.8 % 6.3 % 38.5 %
Acquisitions     (2.9 %)   (0.3 %)   ---     (35.6 %)
 
Organic sales change (non-GAAP)(1)     5.5 %   5.4 %   6.3 %   3.0 %

(1) Totals may not sum due to rounding

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