Avery Dennison Corp

Liquidity

Operating Activities

During the first three months of 2024, net cash provided by operating activities increased compared to the same period last year primarily due to higher net income, lower incentive compensation payments and lower tax payments, net of refunds.

Investing Activities

Purchases of Property, Plant and Equipment

During the first three months of 2024, in our Materials Group reportable segment, we primarily invested in buildings and equipment to support growth in the U.S. and in certain countries in Europe, primarily France; in our Solutions Group reportable segment, we primarily invested in buildings and equipment in certain countries in Asia Pacific, including Vietnam and China, in the U.S. and in certain countries in Latin America, primarily Mexico. During the first three months of 2023, in our Materials Group reportable segment, we primarily invested in buildings and equipment to support growth in certain countries in Europe, including France and the Netherlands, in the U.S. and in certain countries in Latin America, primarily Brazil; in our Solutions Group reportable segment, these investments were made in certain countries in Latin America, primarily Mexico, and Asia, including Malaysia, Hong Kong and China, and in the U.S.

Purchases of Software and Other Deferred Charges

During the first three months of 2024 and 2023, we primarily invested in information technology upgrades in the U.S.

Purchases and Proceeds from Sales of Argentine Blue Chip Swap Securities

During the first three months of 2024, we entered into Blue Chip Swap transactions that resulted in losses of approximately $6 million. Refer to Note 12, “Supplemental Financial Information,” to the unaudited Condensed Consolidated Financial Statements for more information.

Payments for Acquisitions, Net of Cash Acquired, and Venture Investments

During the first three months of 2023, we paid consideration, net of cash acquired, of approximately $44 million for the acquisition of Thermopatch, Inc. ("Thermopatch"). We funded the Thermopatch acquisition using cash and commercial paper borrowings.

Financing Activities

Borrowings and Repayment of Debt

During the first three months of 2024 and 2023, our commercial paper borrowings were used to fund acquisitions, dividend payments, share repurchases, capital expenditures and other general corporate purposes.

In March 2023, we issued $400 million of senior notes, due March 15, 2033, which bear an interest rate of 5.750% per year, payable semiannually in arrears. Our net proceeds from this issuance, after deducting underwriting discounts and offering expenses, were $394.9 million, which we used to repay both existing indebtedness under our commercial paper programs and the $250 million aggregate principal amount of senior notes that matured on April 15, 2023.

Refer to Note 3, “Debt,” to the unaudited Condensed Consolidated Financial Statements for more information.

Dividends Paid

We paid dividends of $0.81 per share in the first three months of 2024 compared to $0.75 per share in the same period last year. In April 2024, subsequent to the end of our first quarter 2024, we increased our quarterly dividend rate to $0.88 per share, representing an increase of approximately 9% from our previous quarterly dividend rate of $0.81 per share.

Share Repurchases

During the first three months of 2024 and 2023, we repurchased approximately 0.1 million and 0.3 million shares of our common stock, respectively.

Long-lived Assets

In the three months ended March 30, 2024, goodwill decreased by approximately $20 million to $1.99 billion, primarily reflecting the impact of foreign currency translation.

In the three months ended March 30, 2024, other intangibles resulting from business acquisitions, net, decreased by approximately $25 million to $823.8 million, reflecting current year amortization expense and the impact of foreign currency translation.

Refer to Note 2, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” to the unaudited Condensed Consolidated Financial Statements for more information.

Shareholders’ Equity Accounts

As of March 30, 2024, the balance of our shareholders’ equity was $2.20 billion. Refer to Note 8, “Supplemental Equity and Comprehensive Income Information,” to the unaudited Condensed Consolidated Financial Statements for more information.

Impact of Foreign Currency Translation

International operations generated approximately 70% of our net sales during the three months ended March 30, 2024. Our future results are subject to changes in political, social and economic conditions globally and in the regions in which we operate and the impact of fluctuations in foreign currency exchange and interest rates.

The unfavorable impact of foreign currency translation on net sales in the first three months of 2024 compared to the same period last year was primarily related to sales in China, partially offset by euro-denominated sales.

Effect of Foreign Currency Transactions

The impact on net income from transactions denominated in foreign currencies is largely 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. Refer to Note 5, “Financial Instruments,” to the unaudited Condensed Consolidated Financial Statements for more information.

Analysis of Selected Financial Ratios

We utilize the financial ratios discussed below to assess our financial condition and operating performance. We believe this information assists our investors in understanding the factors impacting our cash flow other than net income and capital expenditures.

Operational Working Capital Ratio

Operational working capital, as a percentage of annualized current-quarter net sales, is reconciled to working capital (deficit) below. Working capital (deficit) (current assets minus current liabilities) as of the first quarter 2024 decreased by approximately $767 million compared to the first quarter of 2023 primarily due to the reclassification of our $300 million of senior notes due in the third quarter of 2024 and €500 million of senior notes due in the first quarter of 2025 as well as an increase of approximately $48 million related to the contingent liability for the Adasa legal matter. Our objective is to minimize our investment in operational working capital, as a percentage of annualized current-quarter net sales, to maximize cash flow and return on investment. As shown below, operational working capital, as a percentage of annualized current-quarter net sales, in the first quarter of 2024 decreased compared to the first quarter of 2023.

Accounts Receivable Ratio

The average number of days sales outstanding was 63 days in the first quarter of 2024 compared with 60 days in the first quarter of 2023, calculated using the accounts receivable balance at quarter-end divided by the average daily sales in the respective quarter. The increase in average number of days sales outstanding was primarily due to the timing of collections, partially offset by foreign currency translation.

Inventory Ratio

Average inventory turnover was 6.2 in the first quarter of 2024 compared to 5.8 in the first quarter of 2023, calculated using the annualized first-quarter cost of products sold in 2024 and 2023, respectively, and divided by the inventory balance at quarter-end. The increase in average inventory turnover primarily reflected the impact of higher prior-year inventory balances due to customer inventory destocking.

Accounts Payable Ratio

The average number of days payable outstanding was 78 days in the first quarter of 2024 compared to 74 days in the first quarter of 2023, calculated using the accounts payable balance at quarter-end divided by the respective annualized first-quarter cost of products sold. The increase in average number of days payable outstanding primarily reflected the timing of vendor payments, partially offset by the impact of foreign currency translation.

Capital Resources

Capital resources include cash flows from operations, cash and cash equivalents and debt financing, including access to commercial paper borrowings supported by our $1.20 billion revolving credit facility (the “Revolver”). We use these resources to fund our operational needs.

As of March 30, 2024, we had cash and cash equivalents of $185.7 million held in accounts at third-party financial institutions. Our cash balances are held in numerous locations around the world. As of March 30, 2024, the majority of our cash and cash equivalents was held by our foreign subsidiaries, primarily in the Asia Pacific region.

To meet our 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 foreign earnings and profits. However, if we were to repatriate foreign earnings and profits, a portion would be subject to cash payments of withholding taxes imposed by foreign tax authorities. Additional U.S. taxes may also result from the impact of foreign currency fluctuations related to these earnings and profits.

The Revolver, which matures in February 2026, is used as a back-up facility for our commercial paper borrowings and can be used for other corporate purposes. No balance was outstanding under the Revolver as of March 30, 2024 or December 30, 2023.

We are currently considering various sources, including cash flows from operations, commercial paper borrowings and other financings, to repay approximately $300 million of senior notes and €500 million of senior notes maturing in the third quarter of 2024 and first quarter of 2025, respectively.

Capital from Debt

The carrying value of our total debt decreased by approximately $4 million in the first three months of 2024 to $3.24 billion.

Credit ratings are a significant factor in our ability to raise short- and long-term financing. The credit ratings assigned to us also impact the interest rates we pay and our access to commercial paper, credit facilities and other borrowings. A downgrade of our short-term credit ratings could impact our ability to access commercial paper markets. If our access to commercial paper markets were to become limited, we believe that the Revolver and our other credit facilities would be available to meet our short-term funding requirements. 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 maintaining an investment grade rating.

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

Refer to Note 10, “Commitments and Contingencies,” to the unaudited Condensed Consolidated Financial Statements for this information. Except as indicated therein, we have no material off-balance sheet arrangements as described in Item 303(b) of Regulation S-K.