Avery Dennison(AVY) - 2022 Q4 - Annual Report

Sales and Operations - Materials Group and Solutions Group accounted for 72% and 28% of total net sales in 2022, respectively[10] - International operations represented approximately 72% of net sales in 2022[10] - The company operates nearly 200 manufacturing and distribution facilities in over 50 countries as of December 31, 2022[10] - Net sales for 2022 were $9,039.3 million, up from$8,408.3 million in 2021 and $6,971.5 million in 2020[172] - The company changed its operating structure in Q4 2022 to align with its overall business strategy, resulting in new reportable segments[185] - The company has two reportable segments: Materials Group and Solutions Group[332] Acquisitions and Investments - In 2022, the company acquired TexTrace and Rietveld for an aggregate purchase consideration of approximately$35 million[16] - The company made two venture investments in 2022 to advance technological solutions[16] - 2022 Acquisitions (TexTrace and Rietveld) totaled approximately $35 million, with potential earn-out payments of up to$30 million based on post-acquisition performance targets[213] - Company completed the acquisition of Thermopatch, Inc. in January 2023, expected to expand the Solutions Group product portfolio, with completion anticipated in Q1 2023[212] - Vestcom acquisition completed on August 31, 2021, for $1.47 billion, funded by cash, commercial paper borrowings, and senior notes, expanding Solutions Group capabilities[215] - Vestcom acquisition included$756.1 million in goodwill and $727.0 million in other intangibles, with net assets acquired totaling$1,465.1 million[216] - Other 2021 Acquisitions (ZippyYum and JDC) totaled approximately $43 million, with potential earn-out payments of up to$13 million[218] - Goodwill as of December 31, 2022, was $1,862.4 million, with$1,243.7 million attributed to the Solutions Group[220] - Vestcom acquisition included $135 million in indefinite-lived intangible assets (trade names and trademarks) and$592 million in finite-lived intangible assets (customer relationships and technology)[221][223] - Finite-lived intangible assets amortization expense for 2022 was $81.8 million, with estimated future amortization expenses of$80.9 million for 2023[226][227] - The company's venture investments had a total carrying value of $70 million as of December 31, 2022, with net gains of$13.5 million recognized in 2022[287] Workforce and Employee Data - Approximately 83% of employees were located outside the U.S. at year-end 2022[18] - Approximately 67% of employees were located in emerging markets at year-end 2022[18] - Over 20,000 employees, representing 57% of the global workforce, were in Asia Pacific at year-end 2022[18] - Approximately 66% of the global workforce worked in manufacturing facilities or supporting roles at year-end 2022[18] - Workforce by region: Asia Pacific accounts for 57%, North America 20%, Europe 18%, and Latin America 5%[19] - Workforce by function: Operations make up 66% of the workforce, while Non-Operations account for 34%[19] - Representation of women in manager and above roles increased from 35% in 2021 to 36% in 2022[21] - Membership within Employee Resource Groups (ERGs) increased by 32% in 2022 compared to 2021[21] - 98% of employees were paid above the applicable legal minimum wage at year-end 2022[22] - Global Recordable Incident Rate in 2022 was 0.23, significantly lower than the industry average of 3.3[23] - Employer contributions and employer match to the U.S. Employee Savings Plan were $27.3 million in 2022, up from$24.6 million in 2021 and $22.7 million in 2020[270] - The company recorded$7.3 million in restructuring charges in 2022, related to the reduction of approximately 830 positions[315] - The total restructuring charges by reportable segment and Corporate in 2022 were $7.7 million, with$7.9 million in the Solutions Group and $0.8 million in Corporate[318] Financial Performance - Net income for 2022 was$757.1 million, compared to $740.1 million in 2021 and$555.9 million in 2020[172] - Net income per common share for 2022 was $9.28, up from$8.93 in 2021 and $6.67 in 2020[172] - Total comprehensive income for 2022 was$676.0 million, down from $806.8 million in 2021 and$554.4 million in 2020[174] - Foreign currency translation loss for 2022 was $96.6 million, compared to a gain of$30.7 million in 2021 and a loss of $3.0 million in 2020[174] - Pension and other postretirement benefits net gain recognized for 2022 was$6.3 million, down from $27.9 million in 2021 and$6.2 million in 2020[174] - Dividends paid in 2022 were $238.9 million, up from$220.6 million in 2021 and $196.8 million in 2020[180] - Share repurchases in 2022 totaled$379.5 million, compared to $180.9 million in 2021 and$104.3 million in 2020[180] - Net cash provided by operating activities in 2022 was $961.0 million, down from$1,046.8 million in 2021 and $751.3 million in 2020[179] - Net cash used in investing activities in 2022 was$332.7 million, compared to $1,737.9 million in 2021 and$554.2 million in 2020[178] - Total shareholders' equity as of December 31, 2022 was $2,032.2 million, up from$1,924.4 million in 2021 and $1,484.9 million in 2020[176] - Retained earnings as of December 31, 2022 were$4,414.6 million, compared to $3,880.7 million in 2021 and$3,349.3 million in 2020[176] - Accumulated other comprehensive loss as of December 31, 2022 was $364.0 million, compared to$282.9 million in 2021 and $349.6 million in 2020[176] - Treasury stock as of December 31, 2022 was$3,021.8 million, compared to $2,659.8 million in 2021 and$2,501.0 million in 2020[176] - Net income for 2022 was $757.1 million, with net income per common share at$9.28 and diluted net income per share at $9.21[289] - The company repurchased 2.2 million shares of common stock in 2022 at an aggregate cost of$379.5 million[291] - Accumulated other comprehensive loss as of December 31, 2022 was $364.0 million, primarily driven by foreign currency translation losses of$314.0 million[294] - The company's Board authorized a share repurchase program of up to $750 million in April 2022, with$730 million remaining authorized as of December 31, 2022[291] Research and Development - The company focuses on research projects related to RFID, external embellishments, data and digital solutions, and printing technologies[15] - Research and development costs are expensed as incurred, with no capitalization of long-term incentive compensation in 2022, 2021, or 2020[206] Environmental and Sustainability - The company uses water-based emulsion and hot-melt adhesive technologies to minimize solvent emissions[26] - Environmental liabilities increased from $21.9 million at the beginning of 2022 to$24.3 million at year-end 2022, with $9 million classified as short-term[282] Taxes and Deferred Tax Assets - Income tax provision for the year ended December 31, 2022 was$242.2 million, with total deferred tax assets of $115.1 million and unrecognized tax benefits of$69.5 million[167] - The provision for income taxes in 2022 was $242.2 million, with$215.9 million in current taxes and $26.3 million in deferred taxes[319] - The company's income before taxes from U.S. operations was$232.4 million in 2022, compared to $88.0 million in 2021 and$123.8 million in 2020[322] - International income before taxes was $766.9 million in 2022, down from$904.6 million in 2021 and $613.5 million in 2020[322] - The effective tax rate was 24.2$508 million in 2021 to $463 million in 2022[325] - Tax credit carryforwards decreased from$35 million in 2021 to $10 million in 2022[325] - Total deferred tax assets decreased from$312.1 million in 2021 to $275.4 million in 2022[326] - Total deferred tax liabilities decreased from$356.0 million in 2021 to $345.6 million in 2022[326] - Unrecognized tax benefits decreased from$74 million in 2021 to $70 million in 2022[330] - The company may realize a decrease in uncertain tax positions of approximately$6 million in the next 12 months[331] Debt and Financial Instruments - Foreign exchange Value-At-Risk (VAR) model estimated no significant one-day loss in earnings for 2022 and 2021[156] - A 12 basis point increase in interest rates in 2022 would not have had a significant impact on interest expense[157] - Outstanding U.S. commercial paper borrowings as of December 31, 2022, were $128 million with a weighted average interest rate of 4.84$400 million to $1.2 billion, replacing LIBOR with Term SOFR, Euribor, and SONIA benchmark rates[230] - Company issued$500 million senior notes in August 2021 with a 2.250% interest rate, due February 15, 2032, and net proceeds of $493.7 million[231] - Company issued$300 million senior notes in August 2021 with a 0.850% interest rate, due August 15, 2024, and net proceeds of $298 million[231] - Total long-term debt at year-end 2022 was$2,495.4 million, compared to $2,774.2 million in 2021[233] - Expected long-term debt maturities for 2023, 2024, and 2025 are$250.0 million, $300.0 million, and$562.6 million, respectively[234] - Total interest costs in 2022 were $89.8 million, with$5.7 million capitalized as part of property, plant, and equipment costs[235] - Fair value of total debt was $2.85 billion at December 31, 2022, compared to$3.25 billion at January 1, 2022[235] - Aggregate notional value of outstanding foreign exchange contracts as of December 31, 2022, was $1.36 billion[237] - Fair value of cross-currency swap contracts was$15.5 million as of December 31, 2022[239] - Net gains recognized in income related to foreign exchange contracts were $1.3 million in 2022[242] Pension and Postretirement Benefits - Total international plan assets at fair value were$585.3 million in 2022, down from $874.6 million in 2021[249] - The projected benefit obligations for U.S. pension plans decreased from$66.8 million in 2021 to $51.8 million in 2022, while international pension obligations decreased from$882.4 million to $586.9 million[257] - Plan assets for international pension plans decreased from$874.6 million in 2021 to $585.3 million in 2022, with an actual return on plan assets of -$226.5 million[258] - The funded status of U.S. pension plans showed a deficit of $51.8 million in 2022, compared to$66.8 million in 2021, while international plans had a deficit of $1.6 million in 2022, down from$7.8 million in 2021[259] - The discount rate for U.S. pension plans increased from 2.49% in 2021 to 5.06% in 2022, while international plans saw an increase from 1.57% to 4.36%[259] - The net periodic benefit cost for U.S. pension plans was -$1.4 million in 2022, compared to$1.8 million in 2021, while international plans saw a decrease from $14.3 million to$7.4 million[263] - The expected return on assets for international pension plans increased from 2.61% in 2021 to 3.00% in 2022[264] - The actuarial loss recognized in accumulated other comprehensive loss for U.S. pension plans was $9.1 million in 2022, down from$15.6 million in 2021, while international plans saw a decrease from $41.5 million to$38.2 million[260] - The net amount recognized in other comprehensive loss for U.S. pension plans was -$6.5 million in 2022, compared to -$2.6 million in 2021, while international plans saw a decrease from -$41.9 million to -$2.8 million[261] - The service cost for international pension plans decreased from $19.0 million in 2021 to$16.5 million in 2022[263] - The interest cost for international pension plans increased from $8.9 million in 2021 to$10.8 million in 2022[263] - U.S. pension benefits are projected to decrease from $6.3 million in 2023 to$5.3 million in 2027, while international pension benefits are expected to increase from $22.2 million in 2023 to$27.0 million in 2027[268] - The company's postretirement health benefits obligation was approximately $2 million at year-end 2022, with a related loss of$11 million recorded in "Accumulated other comprehensive loss"[269] - The company's obligations under deferred compensation plans were $87.3 million at year-end 2022, down from$96.1 million in 2021[271] Leases and Contingent Liabilities - Operating lease costs were $70.8 million in 2022, up from$68.8 million in 2021 and $63.1 million in 2020[273] - Total leased assets were$189.2 million at year-end 2022, down from $211.9 million in 2021[273] - The weighted average remaining lease term for operating leases was 5.9 years as of December 31, 2022, with a weighted average discount rate of 3.2$174.1 million from 2023 to 2028 and thereafter, with a present value of $156.0 million[278] - The company recorded a contingent liability of$26.6 million related to the ADASA Inc. patent infringement litigation, with a potential outcome range of $5 million to$71 million[279] Stock-Based Compensation - Stock-based compensation expense is based on the fair value of awards, adjusted for estimated forfeitures, and amortized over the requisite service period[208] - Stock-based compensation expense for 2022 was $47.4 million, with a related tax benefit of$6.7 million[299] - Unrecognized compensation expense related to unvested stock-based awards as of December 31, 2022 was approximately $61 million, expected to be recognized over approximately two years[299] - The weighted average grant date fair value for Performance Units (PUs) was$163.97 in 2022, $191.86 in 2021, and$115.07 in 2020[302] - The number of unvested PUs at December 31, 2022, was 372.7 thousand, with a weighted average grant-date fair value of $147.45[305] - The weighted average grant date fair value for Market-Leveraged Stock Units (MSUs) was$141.80 in 2022, $216.06 in 2021, and$94.55 in 2020[306] - The number of unvested MSUs at December 31, 2022, was 208.5 thousand, with a weighted average grant-date fair value of $145.86[307] - The weighted average grant date fair value for Restricted Stock Units (RSUs) was$168.34 in 2022, $196.26 in 2021, and$111.71 in 2020[308] - The number of unvested RSUs at December 31, 2022, was 59.8 thousand, with a weighted average grant-date fair value of $159.23[311] - The compensation expense related to Long-Term Incentive Units (LTI Units) was$11.5 million in 2022, $21.3 million in 2021, and$13.8 million in 2020[313] Depreciation and Amortization - Depreciation for buildings and improvements is calculated over 10 to 45 years, and for machinery and equipment over 3 to 15 years using the straight-line method[192] - Leasehold improvements are depreciated over the shorter of the asset's useful life or the lease term, with maintenance costs expensed as incurred[192] - Software development costs are capitalized during the application stage and amortized over 5 to 10 years[194] - Venture investments are measured at cost less impairment,