Highlights:

• 3Q20 Reported EPS of $1.79, up 5%
• Adjusted EPS (non-GAAP) of $1.91, up 15%
• 3Q20 Net sales declined 1.8% to $1.73 billion
• Sales change ex. currency (non-GAAP) of (1.3%)
• Organic sales change (non-GAAP) of (3.6%)
• Strong balance sheet (net debt to adj. EBITDA ratio of 1.9) with ample liquidity
• Free cash flow proving resilient… targeting more than $500 mil. for the year
• Increasing distributions to shareholders: raised dividend by 7% and resumed share repurchase late in the third quarter

Glendale, Calif. – Avery Dennison Corporation today announced preliminary, unaudited results for its third quarter ended September 26, 2020 and provided an update related to the impact of the COVID-19 pandemic on the company. 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.

“Revenue came in significantly better than we anticipated at the start of the quarter, which, combined with our cost reduction actions, enabled us to deliver strong earnings growth and free cash flow,” said Mitch Butier, chairman, president and CEO. “The extraordinary agility demonstrated by our team this year is driving solid performance on all fronts, ensuring the health and well-being of our employees, delivering for our customers, supporting our communities, and minimizing the impact of the recession for our shareholders.

“All three of our operating segments expanded their adjusted operating margins compared to last year, despite lower sales, as demand improved sequentially,” added Butier. “In particular, LGM delivered sequential improvement in sales across all regions except Europe, with faster-than-expected improvement in high value categories, such as graphics. RBIS likewise improved faster-than-expected, reflecting strong growth in both RFID and external embellishments, as well as a quicker rebound in the base.

“Once again, we are proving our resilience across business cycles,” said Butier. “I want to thank our entire team for their ongoing efforts to keep one another safe while delivering for our customers during this challenging period.”

COVID-19 Operational Update
The safety and well-being of employees has been and will continue to be the company’s top priority during this global health crisis. The company has taken steps to ensure employee safety, as well as help mitigate the financial impact to employees resulting from mandated facility closures and necessary layoffs.

The company has identified approximately 350 confirmed COVID-19 cases among its more than 30,000 employees. The company continues to adapt its safety protocols based on new information, and, with government-mandated lockdowns having been lifted, is focused on ensuring a safe return to the workplace where and when it believes it is appropriate to do so.

Following sharp drops in demand in the second quarter, the company’s volumes have generally been improving faster than expected, though the demand outlook for the fourth quarter and next year remains highly uncertain.

Operationally, all manufacturing sites remained open during the third quarter. Throughout the pandemic, disruptions to the company’s supply chain have been negligible.

In light of the near-term demand decline impacting some businesses, in addition to continuing its focus on long-term strategic restructuring, the company has undertaken temporary actions to reduce costs, including reductions in travel and other discretionary spending, reduced usage of overtime and temporary employees, delays of merit increases, and furloughs.

The company continues to estimate incremental savings from restructuring actions, net of transition costs, of $60 million to $70 million during 2020, and carryover savings, net of transition costs, of approximately $70 million in 2021. In addition, the company targets nearly $150 million in net temporary savings in 2020, the vast majority of which is expected to become a headwind as markets continue to recover.

In the third quarter, the company realized approximately $13 million in savings from restructuring actions, net of transition costs, realized approximately $30 million in temporary savings, and incurred net restructuring charges of approximately $11 million.

Balance Sheet, Liquidity, and Capital Deployment

The company’s balance sheet remains strong, with ample liquidity.

The company’s net debt to adjusted EBITDA ratio (non-GAAP) was 1.9 as of the end of the third quarter, below its long-term target of 2.3 to 2.6. The company currently has $800 million available under its revolving credit facility, and had approximately $285 million in cash and cash equivalents on hand at quarter-end.

The company’s long-term priorities for capital allocation support its primary objectives of delivering faster growth in high value categories alongside profitable growth of its base businesses. These priorities are unchanged in the current environment. In particular, the company continues to protect its investments in high value categories, while curtailing its original capital spending plans for the year by approximately $55 million in other areas of the business, and heightening its focus on working capital management.

The company announced today that it raised its dividend rate by 7%, a decision that had been postponed due to uncertainty associated with the pandemic. The company resumed the repurchase of shares late in the third quarter, following its decision to temporarily halt its share repurchase program in March, buying back approximately 58,000 shares at an aggregate cost of $7 million. Net of dilution from long-term incentive awards, the company’s share count at the end of the quarter was down by 0.4 million compared to the same time last year.

Third Quarter 2020 Results

Net sales were $1.73 billion, down 1.8%. Sales were down 1.3% ex. currency, and down 3.6% on an organic basis.

Reported operating margin increased 100 basis points to 12.3%. Adjusted EBITDA margin increased 190 basis points to 16.1%, while adjusted operating margin increased 140 basis points to 13.1%.

Reported net income was $1.79 per share, up 5%, and adjusted net income was $1.91 per share, up 15%, both of which were above the company’s expectations, reflecting a sales decline below the low end of its outlook range in July.

The company’s third quarter effective tax rate was 23.4%. Its adjusted tax rate (non-GAAP) for the quarter was 23.2%, reflecting the company’s expectation for a full year adjusted tax rate which is currently estimated to be approximately 24%.

Year-to-date free cash flow was $342 million, up 4.4% compared to the same period last year.

Third Quarter 2020 Results by Segment

Label and Graphic Materials
Reported sales declined 3.3%. Sales were down 2.6% on an organic basis, driven by both volume/mix and deflation-related price.

Label and Packaging Materials sales were down approximately 2% from prior year on an organic basis as growth in specialty and durable label categories was more than offset by a decline in the base business.

Sales declined by approximately 8% organically in the combined Graphics and Reflective Solutions businesses.

On an organic basis, sales were up low-single digits in North America, down roughly 10% in Western Europe, and comparable to prior year in emerging markets.

Reported operating margin increased 170 basis points to 15.1%. Adjusted operating margin increased 170 basis points to 15.2%, as the benefits of productivity, including material reengineering and net restructuring savings, as well as raw material deflation, net of pricing, more than offset higher employee-related costs and unfavorable volume/mix.

Retail Branding and Information Solutions
Reported sales increased 4.7%. Sales were up 5.2% ex. currency, and down 4.7% on an organic basis, reflecting strong organic growth in high value categories that was more than offset by an approximately 12% organic decline in the base business, driven by overall lower apparel demand. The ex. currency growth also reflected contribution from the Smartrac acquisition.

Enterprise-wide sales of RFID products were up approximately 65% ex. currency with the benefit of the Smartrac acquisition, and up approximately 20% organically, driven by new programs and recovery in the value segment of the apparel market.

Reported operating margin decreased 20 basis points to 11.0%, reflecting higher restructuring charges. Adjusted operating margin increased 60 basis points to 12.1%, as productivity more than offset unfavorable volume/mix.

Industrial and Healthcare Materials
Reported sales declined 7.0%. On an organic basis, sales declined 7.6%, reflecting a mid-single digit decline in industrial categories, and an approximately 11% decline in healthcare categories.

Reported operating margin decreased 250 basis points to 7.9%, reflecting higher restructuring charges. Adjusted operating margin increased 110 basis points to 12.1% due to favorable product mix, productivity and deflation, net of pricing, which more than offset the impact of lower volume.

Outlook

The company is prepared for a range of possible macro scenarios and how they might impact each of its businesses. The company currently expects sales to decline in 2020 on lower demand, with the second quarter representing the trough, and now anticipates that earnings will exceed prior year.

For the fourth quarter, the company anticipates an underlying sales trend that is similar to or better than the decline experienced in the third quarter. As previously communicated, the 2020 fiscal year includes one extra week in the fourth quarter, which is expected to add approximately one point to the company’s full year sales growth rate, and approximately four points of sales growth to the fourth quarter.

The company has initiated cost control and cash management actions to partially offset the decline in demand for certain of its businesses, and is targeting to deliver free cash flow of more than $500 million in 2020.

Other factors expected to impact the company’s full year financial performance are summarized in the company’s supplemental presentation materials, “Third Quarter 2020 Financial Review and Analysis.”

For more details on the company’s results, see the summary tables accompanying this news release, as well as the supplemental presentation materials, “Third Quarter 2020 Financial Review and Analysis,” posted on the company’s website at www.investors.averydennison.com, and furnished to the SEC on Form 8-K.

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