Avery Dennison(AVY) - 2021 Q4 - Annual Report

Part I Business A global materials science manufacturer operating through LGM, RBIS, and IHM segments with a focus on innovation 2020 Net Sales Contribution by Segment | Segment | 2020 Net Sales Contribution | | :--- | :--- | | Label and Graphic Materials (LGM) | ~68% | | Retail Branding and Information Solutions (RBIS) | 23% | | Industrial and Healthcare Materials (IHM) | 9% | - International operations are a substantial part of the business, representing approximately 76% of net sales in 2020[7] - The company operates approximately 190 manufacturing and distribution facilities in over 50 countries[7] LGM Segment The largest segment, LGM, manufactures and sells pressure-sensitive label and packaging materials globally - The LGM segment manufactures and sells pressure-sensitive materials (papers, films, foils) coated with adhesives, which are sold to label converters[8] - Key markets for label and packaging materials include home/personal care, beer/beverage, durables, pharmaceutical, wine/spirits, and food[9] - Major competitors in this segment are UPM Raflatac, Lintec Corporation, Ritrama SpA for label materials, and 3M and Orafol Group for graphics and reflective products[9] RBIS Segment The RBIS segment provides branding and information solutions, including RFID, to retailers and apparel brands - RBIS designs and sells branding solutions like graphic tickets, tags, and labels, as well as information solutions including item-level RFID, price ticketing, and brand protection[10] - Primary competitors include Checkpoint Systems, Inc. (a subsidiary of CCL Industries), R-pac International Corporation, and SML Group Limited[10] IHM Segment The IHM segment manufactures adhesive-based materials and tapes for industrial and healthcare markets - IHM products include tapes, fastening systems, and other adhesive-based materials for automotive, electronics, building/construction, industrial, personal care, and medical applications[11] - Primary competitors for industrial and healthcare materials are 3M, Tesa-SE, and Nitto Denko Corporation[13] Research, Development and Innovation Innovation efforts focus on materials science, RFID, medical technologies, and sustainable products - R&D efforts are directed at developing new products, improving productivity, and enhancing sustainability, with specific focus on RFID and medical technologies[14] Human Capital Resources The company's highly international workforce is concentrated in Asia, with a focus on safety and inclusion Workforce Distribution (Year-End 2020) | Region/Function | Workforce Percentage (Year-End 2020) | | :--- | :--- | | By Region | | | Asia Pacific | 60% | | Europe | 18% | | North America | 16% | | Latin America | 6% | | By Function | | | Operations | 67% | | Non-Operations | 33% | - The company's global Recordable Incident Rate was 0.21 in 2020, significantly lower than the manufacturing industry average of 3.0 in 2019[21] Risk Factors The company faces multifaceted risks including pandemic impacts, international operations, and market changes Risks Related to COVID-19 The COVID-19 pandemic negatively impacted 2020 financial results and poses ongoing operational risks - Net sales for fiscal year 2020 were down over 1% from the prior year due to the pandemic's impact, with a significant decline of approximately 15% in Q2 2020[27] - The pandemic has affected employees, with many office personnel working remotely and some manufacturing facilities experiencing temporary closures[29] - In Q1 2020, disrupted access to the commercial paper market led to a temporary $500 million drawdown from the revolving credit facility, repaid in Q2 2020[30] Risks Related to International Operations Significant international and emerging market sales create exposure to economic, political, and currency risks - Approximately 76% of 2020 net sales were from international operations, and about half originated in emerging markets[32][36] - Foreign currency translation negatively impacted 2020 net sales by approximately $67 million[34] - Risks in emerging markets include unstable political conditions, unreliable legal systems, and economic volatility[36] Risks Related to Business Business risks include competition, sustainability regulations, acquisition integration, and raw material costs - The company faces risks from changing consumer preferences and regulations regarding single-use plastics[40] - Recent acquisitions include Smartrac's RFID division for **$255 million** and ACPO, Ltd. for **$88 million**, which present integration risks[41] - The company expensed $113 million on research and development in 2020, with no guarantee of success[50] - The allowance for credit losses increased by approximately 65% from ~$27 million to ~$45 million in 2020 as a result of COVID-19[56] Risks Related to Income Taxes The effective tax rate is subject to risks from jurisdictional earnings mix, law changes, and deferred tax assets - The company's effective tax rate can be affected by changes in the mix of earnings in countries with differing statutory tax rates[57] - Potential changes in U.S. tax legislation, including a possible increase in the corporate tax rate, could materially impact results[59] - A significant portion of the company's indefinite-lived net operating loss carryforwards is concentrated in Luxembourg[63] Risks Related to Information Technology The company's IT infrastructure is vulnerable to system failures, cyberattacks, and data security breaches - The company's IT infrastructure is susceptible to risks including system obsolescence, human error, and malicious attacks like viruses and ransomware[66] - Security breaches could compromise confidential information, leading to legal claims and reputational damage[67][68] Risks Related to Human Capital Risks include competition for talent, succession planning, and potential labor disputes in non-U.S. locations - Competition to recruit and retain key management and highly-skilled employees is significant and could disrupt business operations[70] - The company is subject to potential work stoppages and labor disputes due to various non-U.S. collective labor arrangements[71] Risks Related to Our Indebtedness The company's $2.12 billion debt exposes it to financing, interest rate, and LIBOR transition risks - As of January 2, 2021, the company had approximately $2.12 billion of debt[72] - Average variable-rate borrowings in 2020 were approximately $338 million, exposing the company to interest rate fluctuations[74] - The planned discontinuation of LIBOR after 2021 poses a risk, as the company's revolving credit facility is based on it[75] Risk Related to Ownership of Our Stock Stock price is subject to market variability, and capital return programs like buybacks are not guaranteed - The company's stock price is subject to significant variability influenced by market demand and company performance[78] - Share repurchases totaled $104.3 million for the fiscal year, with $540.4 million remaining authorized for repurchase as of January 2, 2021[80] Risks Related to Legal and Regulatory Matters The company faces risks from intellectual property litigation and compliance with complex global regulations - The company is exposed to litigation risk involving patents and other intellectual property[81] - Failure to comply with anti-corruption laws like the U.S. Foreign Corrupt Practices Act (FCPA) could lead to substantial penalties[85] - The company is subject to numerous environmental, health, and safety laws globally and has accrued liabilities for environmental clean-up[86] Unresolved Staff Comments The company reports no unresolved comments from the SEC staff - None[96] Properties The company owns and leases numerous manufacturing facilities and offices globally, deemed adequate for current needs - The company operates major manufacturing facilities in the U.S. (Georgia, Indiana, Ohio) and internationally (Belgium, China, Germany, Mexico)[97][98] - The corporate headquarters in Glendale, California, and key divisional offices are leased[98] Legal Proceedings Details regarding legal proceedings are incorporated by reference from Note 8 of the financial statements - Information on legal proceedings is incorporated by reference from Note 8, "Contingencies," in the Notes to Consolidated Financial Statements[99] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[99] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock (AVY) trades on the NYSE, with active share repurchases in Q4 2020 - The company's common stock is listed on the New York Stock Exchange under the ticker symbol "AVY"[101] Q4 2020 Share Repurchase Activity | Period (Q4 2020) | Total Shares Purchased (in thousands) | Average Price Paid per Share | Approximate Dollar Value Remaining for Purchase (in millions) | | :--- | :--- | :--- | :--- | | Sep 27 – Oct 24, 2020 | 46.3 | $127.67 | $586.6 | | Oct 25 – Nov 28, 2020 | 168.9 | $145.39 | $562.0 | | Nov 29 – Jan 2, 2021 | 142.5 | $151.91 | $540.4 | | Total Q4 | 357.7 | $145.70 | $540.4 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section is incorporated by reference from the company's 2020 Annual Report - The information for this item is incorporated by reference from the 2020 Annual Report[104] Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the period[108] - Management concluded that the company's internal control over financial reporting was effective as of January 2, 2021[108] Part III Directors, Executive Officers, and Corporate Governance Information on directors is referenced from the Proxy Statement, while executive officer details are provided - Information concerning directors and corporate governance is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting[110] Executive Officers | Name | Age | Position | | :--- | :--- | :--- | | Mitchell R. Butier | 49 | Chairman, President and Chief Executive Officer | | Gregory S. Lovins | 48 | Senior Vice President and Chief Financial Officer | | Deena Baker-Nel | 50 | Vice President and Chief Human Resources Officer | | Lori J. Bondar | 60 | Vice President, Controller, Treasurer and Chief Accounting Officer | | Nicholas Colisto | 54 | Vice President and Chief Information Officer | | Deon Stander | 52 | Vice President and General Manager, RBIS | | Ignacio Walker | 44 | Vice President and Chief Legal Officer | Executive Compensation Information regarding executive compensation is incorporated by reference from the 2021 Proxy Statement - The information for this item is incorporated by reference from the 2021 Proxy Statement[113] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Details on security ownership are incorporated by reference from the 2021 Proxy Statement - The information for this item is incorporated by reference from the 2021 Proxy Statement[113] Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is referenced from the 2021 Proxy Statement - The information for this item is incorporated by reference from the 2021 Proxy Statement[113] Principal Accounting Fees and Services Details on principal accounting fees and services are incorporated by reference from the 2021 Proxy Statement - The information for this item is incorporated by reference from the 2021 Proxy Statement[113] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements and exhibits filed, with schedules omitted as not applicable - Financial statements are filed as part of the report, as listed in the Index to Financial Statements[114][115] - All financial statement schedules have been omitted because the required information is not present or is included elsewhere[114] - An Exhibit Index is provided, listing all exhibits filed with the report, including management contracts and compensatory plans[114][117] Form 10-K Summary The company reports that no Form 10-K summary is provided - None[121]