Item 6.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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ORGANIZATION OF INFORMATION
The information required by this Item appears under “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations”Operations, or MD&A, provides management’s views on our financial condition and results of operations, should be read in our 2021 Annual Report and is incorporated herein by reference.
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The information required by this Item is contained under “Market-Sensitive Instruments and Risk Management” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Annual Report and incorporated herein by reference.
| FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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The information required by this Item, includingconjunction with the Consolidated Financial Statements and Notesrelated notes thereto, Statementand includes the sections shown below.
NON-GAAP FINANCIAL MEASURES
We report our financial results in conformity with accounting principles generally accepted in the United States of Management ResponsibilityAmerica, 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 the presentation of our financial results prepared in accordance with GAAP. We use these non-GAAP financial measures internally to evaluate trends in our underlying performance, as well as to facilitate comparison to the results of competitors for quarters and year-to-date periods, as applicable. Based on feedback from investors and financial analysts, we believe that the supplemental non-GAAP financial measures we provide are also useful to their assessments of our performance and operating trends, as well as liquidity. Reconciliations are provided in accordance with Regulation G and S-K and reconcile our non-GAAP financial measures with the most directly comparable GAAP financial measures.
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 more difficult to assess our underlying performance in a single period. By excluding the accounting effects, positive or negative, of certain items (e.g., restructuring charges, outcomes of certain legal proceedings, certain effects of strategic transactions and related costs, losses from debt extinguishments, gains or losses from curtailment or settlement of pension obligations, gains or losses on sales of certain assets, gains or losses on venture investments, currency adjustments due to highly inflationary economies, and other items), we believe that we are providing meaningful supplemental information that facilitates an understanding of our core operating results and liquidity measures. 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 non-GAAP financial measures defined below in this MD&A.
•Sales change ex. currency refers to the increase or decrease in net sales, excluding the estimated impact of foreign currency translation, the reclassification of sales between segments; where applicable, an extra week in our fiscal year; the calendar shift resulting from the extra week in the prior fiscal year; and currency adjustment for transitional reporting of highly inflationary economies. 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 foreign currency fluctuations.
•Organic sales change refers to sales change ex. currency, excluding the estimated impact of acquisitions and product line divestitures.
We believe that sales change ex. currency and organic sales change assist investors in evaluating the sales change from the ongoing activities of our businesses and enhance their ability to evaluate our results from period to period.
•Adjusted free cash flow refers to cash flow provided by operating activities, less payments for property, plant and equipment, software and other deferred charges, plus proceeds from company-owned life insurance policies, plus proceeds from sales of property, plant and equipment, plus (minus) net proceeds from insurance and sales (purchases) of investments. Where applicable, adjusted free cash flow is also adjusted for certain acquisition-related transaction costs. We believe that adjusted free cash flow assists investors by showing the amount of cash we have available for debt reductions, dividends, share repurchases, and acquisitions.
•Operational working capital as a percentage of annualized current quarter net sales refers to trade accounts receivable and inventories, net of accounts payable, and excludes cash and cash equivalents, short-term borrowings, deferred taxes, other current assets and other current liabilities, as well as net current assets or liabilities held-for-sale divided by annualized current quarter net sales. We believe that operational working
capital as a percentage of annualized current quarter net sales assists investors in assessing our working capital requirements because it excludes the impact of fluctuations attributable to our financing and other activities (which affect cash and cash equivalents, deferred taxes, other current assets and other current liabilities) that tend to be disparate in amount, frequency or timing, and may increase the volatility of working capital as a percentage of sales from period to period. The items excluded from this measure are not significantly influenced by our day-to-day activities managed at the operating level and do not necessarily reflect the underlying trends in our operations.
OVERVIEW AND OUTLOOK
Fiscal Year
Our fiscal years generally consist of 52 weeks, but every fifth or sixth fiscal year consists of 53 weeks; our 2023, 2022, and 2021 fiscal years consisted of 52-week periods ending December 30, 2023, December 31, 2022 and January 1, 2022, respectively.
Net Sales
The factors impacting reported net sales change, as compared to the prior-year period, are shown in the table below.
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
Reported net sales change | | (8) | % | | 8 | % |
Foreign currency translation | | 1 | | | 6 | |
| | | | |
Sales change ex. currency(1) | | (7) | % | | 13 | % |
Acquisitions | | (1) | | | (4) | |
Organic sales change(1) | | (8) | % | | 10 | % |
(1) Totals may not sum due to rounding.
In 2023, net sales decreased on an organic basis primarily due to lower volume, partially offset by the impact of pricing actions. In 2022, net sales increased on an organic basis primarily due to pricing actions, partially offset by lower volume/mix.
Net Income
Net income decreased from approximately $757 million in 2022 to approximately $503 million in 2023. The major factors affecting this decrease were:
•Lower volume driven primarily by inventory destocking
•Higher restructuring charges
•Increase accrual for a legacy legal matter
•Higher employee-related costs
•Argentine peso remeasurement loss
•Growth investments
Offsetting factors:
•Benefits from productivity initiatives, including temporary cost-saving actions, material re-engineering and savings from restructuring actions, net of transition costs
•The net impact of pricing and raw material input costs
•Lower provision for income taxes
Business Acquisitions
2023 Business Acquisitions
On November 23, 2023, we completed our business acquisition of Silver Crystal Group ("Silver Crystal"), a Canada-based provider of sports apparel customization and application solutions across in-venue, direct-to-business and e-commerce platforms. On May 22, 2023, we completed our business acquisition of LG Group, Inc. ("Lion Brothers"), a Maryland-based designer and manufacturer of apparel brand embellishments. On March 6, 2023, we completed our business acquisition of Thermopatch, Inc. ("Thermopatch"), a New York-based manufacturer specializing in labeling, embellishments and transfers for the sports, industrial laundry, workwear and hospitality industries. These acquisitions expanded the product portfolio in our Solutions Group reportable segment.
The acquisitions of Silver Crystal, Lion Brothers and Thermopatch are referred to collectively as the "2023 Acquisitions."
The aggregate purchase consideration, including purchase consideration payable, for the 2023 Acquisitions was approximately $231 million. We funded the 2023 Acquisitions using cash and commercial paper borrowings. In addition to the cash paid at closing, the sellers in one of these acquisitions are eligible for earn-out payments of up to $5 million, subject to the acquired company achieving certain post-acquisition performance targets. As of the acquisition date, we included an estimate of the fair value of these earn-out payments in the aggregate purchase consideration.
The final allocations of purchase consideration for the 2023 Acquisitions to assets and liabilities are ongoing as we continue to evaluate certain balances, estimates and assumptions during the measurement period (up to one year from their respective acquisition date). Consistent with the allowable time to complete our assessment, the valuation of certain acquired assets and liabilities, including environmental liabilities and income taxes, is currently pending finalization.
The 2023 Acquisitions were not material, individually or in the aggregate, to the Consolidated Financial Statements.
2022 Business Acquisitions
In January 2022, we completed our business acquisitions of TexTrace AG ("TexTrace"), a Switzerland-based technology developer specializing in custom-made woven and knitted RFID products that can be sewn onto or inserted into garments, and Rietveld Serigrafie B.V. and Rietveld Screenprinting Serigrafi Baski Matbaa Tekstil Ithalat Ihracat Sanayi ve Ticaret Limited Sirketi (collectively, "Rietveld"), a Netherlands-based provider of external embellishment solutions and application and printing methods for performance brands and team sports in Europe. These acquisitions expanded the product portfolio in our Solutions Group reportable segment. The acquisitions of TexTrace and Rietveld are referred to collectively as the "2022 Acquisitions."
The aggregate purchase consideration for the 2022 Acquisitions was approximately $35 million. We funded the 2022 Acquisitions using cash and commercial paper borrowings. In addition to the cash paid at closing, the sellers in one of these acquisitions are eligible for earn-out payments of up to $30 million, subject to the acquired company achieving certain post-acquisition performance targets. As of the acquisition date, we included an estimate of the fair value of these earn-out payments in the aggregate purchase consideration.
The 2022 Acquisitions were not material, individually or in the aggregate, to the Consolidated Financial Statements.
Cost Reduction Actions
2023 Actions
In the third quarter of 2023, we approved a restructuring plan (the "2023 Plan") to further optimize the European footprint of our Materials Group reportable segment by reducing operations in a manufacturing facility in Belgium. The cumulative charges associated with the 2023 Plan consisted of severance and related costs for the reduction of approximately 210 positions as well as asset impairment charges. During 2023 we recorded $30.4 million in restructuring charges related to the 2023 Plan. The activities related to the 2023 Plan are expected to be substantially completed by mid-2025.
We recorded $49.0 million in restructuring charges, net of reversals, related to other 2023 actions (collectively with the 2023 Plan, "2023 Actions"). These charges consisted of severance and related costs for the reduction of approximately 1,450 positions and asset impairment charges at numerous locations across our company.
2019/2020 Actions
During 2022, we recorded $7.3 million in restructuring charges, net of reversals, related to our 2019/2020 actions. These charges consisted of severance and related costs for the reduction of approximately 830 positions and asset impairment charges at numerous locations across our company, reflecting actions in both our reportable segments. The actions in our Materials Group reportable segment were primarily associated with consolidations of its operations in North America and its graphics business in Europe, in part in response to the pandemic. The actions in our Solutions Group reportable segment were primarily related to global headcount and footprint reduction, with some actions accelerated and expanded in response to the pandemic. Our activities related to our 2019/2020 actions began in the fourth quarter of fiscal year 2019 and continued through fiscal year 2022.
We realized approximately $69 million and $26 million, respectively, in savings from restructuring, net of transition costs, primarily related to our 2023 actions in 2023 and our 2019/2020 actions in 2022.
Restructuring charges were included in “Other expense (income), net” in the Consolidated Statements of Income. Refer to Note 13, “Cost Reduction Actions,” to the Consolidated Financial Statements for more information.
Accounting Guidance Updates
Refer to Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements for this information.
Cash Flow
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Net cash provided by operating activities | | $ | 826.0 | | | $ | 961.0 | | | $ | 1,046.8 | |
Purchases of property, plant and equipment | | (265.3) | | | (278.1) | | | (255.0) | |
Purchases of software and other deferred charges | | (19.8) | | | (20.4) | | | (17.1) | |
Proceeds from company-owned life insurance policies | | 48.1 | | | — | | | — | |
Proceeds from sales of property, plant and equipment | | 1.0 | | | 2.3 | | | 1.1 | |
Proceeds from insurance and sales (purchases) of investments, net | | 1.9 | | | 1.9 | | | 3.1 | |
| | | | | | |
Payments for certain acquisition-related transaction costs | | — | | | .6 | | | 18.8 | |
Adjusted free cash flow | | $ | 591.9 | | | $ | 667.3 | | | $ | 797.7 | |
In 2023, net cash provided by operating activities decreased compared to 2022 primarily due to lower net income and higher tax payments, net of refunds, partially offset by changes in operational working capital and lower incentive compensation payments. In 2023, adjusted free cash flow decreased compared to 2022 primarily due to lower net cash provided by operating activities, partially offset by higher proceeds from company-owned life insurance policies and lower purchases of property, plant and equipment.
Outlook
Certain factors that we believe will contribute to our 2024 results are described below.
•We anticipate net sales to increase due to higher volume as our markets improve following significant inventory destocking downstream from our company in 2023, which we may partially offset with deflation-related pricing actions.
•We anticipate incremental savings from restructuring actions, net of transition costs.
•We expect an insignificant impact to our full-year operating income from foreign currency translation, based on recent rates.
•We expect our full-year effective tax rate to be in the mid-twenty percent range.
ANALYSIS OF RESULTS OF OPERATIONS
Income before Taxes
| | | | | | | | | | | | | | | | | | | | |
(In millions, except percentages) | | 2023 | | 2022 | | 2021 |
Net sales | | $ | 8,364.3 | | | $ | 9,039.3 | | | $ | 8,408.3 | |
Cost of products sold | | 6,086.8 | | | 6,635.1 | | | 6,095.5 | |
Gross profit | | 2,277.5 | | | 2,404.2 | | | 2,312.8 | |
Marketing, general and administrative expense | | 1,313.7 | | | 1,330.8 | | | 1,248.5 | |
Other expense (income), net | | 180.9 | | | (.6) | | | 5.6 | |
Interest expense | | 119.0 | | | 84.1 | | | 70.2 | |
Other non-operating expense (income), net | | (30.8) | | | (9.4) | | | (4.1) | |
Income before taxes | | $ | 694.7 | | | $ | 999.3 | | | $ | 992.6 | |
Gross profit margin | | 27.2 | % | | 26.6 | % | | 27.5 | % |
Gross Profit Margin
Gross profit margin in 2023 increased compared to 2022 primarily due to benefits from productivity initiatives, including temporary cost-saving actions, material re-engineering and savings from restructuring actions, net of transition costs, and the net impact of pricing and raw material inputs costs, partially offset by lower volume and higher employee-related costs.
Gross profit margin in 2022 decreased compared to 2021 primarily due to the net impact of higher selling prices, higher raw material costs and higher freight costs, as well as higher employee-related costs, partially offset by higher volume/mix primarily related to the impact of acquisitions.
Marketing, General and Administrative Expense
Marketing, general and administrative expense decreased in 2023 compared to 2022 primarily due to benefits from productivity initiatives, including temporary cost-saving actions and savings from restructuring actions, net of transition costs, partially offset by higher employee-related costs and growth investments.
Marketing, general and administrative expense increased in 2022 compared to 2021 primarily due to the impact of acquisitions and growth investments, partially offset by the impact of favorable foreign currency translation.
Other Expense (Income), Net
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Other expense (income), net by type | | | | | | |
Restructuring charges: | | | | | | |
Severance and related costs | | $ | 70.8 | | | $ | 7.6 | | | $ | 10.5 | |
Asset impairment charges and lease cancellation costs | | 8.6 | | | .1 | | | 3.1 | |
Other items: | | | | | | |
Outcomes of legal proceedings, net | | 64.3 | | | 6.3 | | | (.4) | |
Argentine peso remeasurement loss | | 29.9 | | | — | | | — | |
Transaction and related costs | | 5.3 | | | .3 | | | 20.9 | |
(Gain) loss on venture investments | | 1.5 | | | (13.5) | | | (23.0) | |
(Gain) loss on sales of assets | | .5 | | | (1.4) | | | .2 | |
Gain on sale of product line | | — | | | — | | | (5.7) | |
Other expense (income), net | | $ | 180.9 | | | $ | (.6) | | | $ | 5.6 | |
Refer to Note 13, “Cost Reduction Actions,” to the Consolidated Financial Statements for more information regarding restructuring charges.
Refer to Note 9, “Fair Value Measurements,” to the Consolidated Financial Statements for more information regarding gains on venture investments.
Refer to Note 8, "Contingencies," and Note 15, “Segment and Disaggregated Revenue Information,” to the Consolidated Financial Statements for more information regarding outcomes of legal proceedings.
Interest Expense
Interest expense increased by approximately $34.9 million in 2023 compared to 2022, primarily as a result of higher interest rates on borrowings and higher debt levels.
Interest expense increased by approximately $13.9 million in 2022 compared to 2021, primarily as a result of additional interest from the $800 million of senior notes we issued in August 2021 and higher interest rates on short-term borrowings.
Other Non-Operating Expense (Income), Net
Other non-operating income increased in 2023 compared to 2022 due to higher interest income, primarily in Argentina.
Net Income and Earnings per Share
| | | | | | | | | | | | | | | | | | | | |
(In millions, except percentages and per share amounts) | | 2023 | | 2022 | | 2021 |
Income before taxes | | $ | 694.7 | | | $ | 999.3 | | | $ | 992.6 | |
Provision for income taxes | | 191.7 | | | 242.2 | | | 248.6 | |
Equity method investment (losses) gains | | — | | | — | | | (3.9) | |
Net income | | $ | 503.0 | | | $ | 757.1 | | | $ | 740.1 | |
Net income per common share | | $ | 6.23 | | | $ | 9.28 | | | $ | 8.93 | |
Net income per common share, assuming dilution | | 6.20 | | | 9.21 | | | 8.83 | |
Effective tax rate | | 27.6 | % | | 24.2 | % | | 25.0 | % |
Provision for Income Taxes
Our effective tax rate in 2023 increased compared to 2022 primarily due to higher non-deductible expenses resulting from the impact of the Argentine peso remeasurement loss, higher tax charges from the recognition of uncertain tax positions in certain foreign jurisdictions, and lower U.S. federal return-to-provision benefits. Our effective tax rate in 2022 decreased compared to 2021 primarily due to higher benefits related to the settlement of certain foreign tax audits, partially offset by U.S. federal return-to-provision benefits that were lower than in 2021.
Many countries have enacted, or plan to enact, changes to their tax laws based on the Organization for Economic Cooperation and Development ("OECD") Base Erosion and Profit Shifting recommendations to implement a global minimum tax, namely the Pillar Two framework. The first component of the Pillar Two framework is expected to be effective for our company in 2024, with a second component expected to be effective in 2025. While we do not expect the implementation of a global minimum tax to have a material impact on our effective tax rate, our analysis is ongoing as the OECD continues to release additional guidance and countries implement legislation.
Our effective tax rate can vary from period to period due to a variety of factors, such as changes in our mix of earnings in countries with differing statutory tax rates, changes in our tax reserves, settlements of income tax audits, changes in tax laws and regulations, return-to-provision adjustments, tax impacts related to stock-based payments, and our execution of tax planning strategies.
Refer to Note 14, “Taxes Based on Income,” to the Consolidated Financial Statements for more information.
RESULTS OF OPERATIONS BY REPORTABLE SEGMENT
Operating income refers to income before taxes, interest and other non-operating expense (income), net.
Materials Group
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Net sales including intersegment sales | | $ | 5,968.4 | | | $ | 6,632.2 | | | $ | 6,312.3 | |
Less intersegment sales | | (157.1) | | | (137.1) | | | (105.8) | |
Net sales | | $ | 5,811.3 | | | $ | 6,495.1 | | | $ | 6,206.5 | |
Operating income(1) | | 700.9 | | | 859.3 | | | 883.3 | |
(1) Included charges associated with restructuring actions and related costs in all years, Argentine peso remeasurement loss and loss on sale of assets in 2023, outcomes of legal proceedings in 2023 and 2021, gain on venture investment in 2022, and gain on sale of product line, gain on sale of assets, and transaction and related costs in 2021 | | $ | 88.3 | | | $ | (13.4) | | | $ | (25.7) | |
Net Sales
The factors impacting reported net sales change are shown in the table below.
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
Reported net sales change | | (11) | % | | 5 | % |
Foreign currency translation | | — | | | 6 | |
| | | | |
Sales change ex. currency(1) | | (10) | | | 11 | |
| | | | |
Organic sales change(1) | | (10) | % | | 11 | % |
(1) Totals may not sum due to rounding.
In 2023, net sales decreased on an organic basis compared to the same period in the prior year due to lower volume driven primarily by inventory destocking, partially offset by the impact of pricing actions. On an organic basis, net sales decreased by a low double-digit rate in North America, a mid-to-high teens rate in Western Europe and a mid-to-high single digit rate in emerging markets.
In 2022, net sales increased on an organic basis compared to the same period in the prior year due to pricing actions, partially offset by lower volume/mix. On an organic basis, net sales increased a low double-digit rate in North America, a high-teens rate in Western Europe and by a mid-to-high single digit rate in emerging markets.
Operating Income
Operating income decreased in 2023 compared to the same period in 2022 primarily due to lower volume, higher restructuring charges and the Argentine peso remeasurement loss, partially offset by benefits from productivity initiatives, including temporary cost-saving actions, material re-engineering and savings from restructuring actions, net of transition costs, and the net impact of pricing and raw material input costs.
Operating income decreased in 2022 compared to the same period in 2021 primarily due to unfavorable volume/mix, the impact of unfavorable foreign currency translation, higher employee-related costs and the impact of a Brazil indirect tax credit in the prior year, partially offset by the net impact of higher selling prices, higher raw material costs and higher freight costs.
Solutions Group
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Net sales including intersegment sales | | $ | 2,588.5 | | | $ | 2,581.6 | | | $ | 2,239.1 | |
Less intersegment sales | | (35.5) | | | (37.4) | | | (37.3) | |
Net sales | | $ | 2,553.0 | | | $ | 2,544.2 | | | $ | 2,201.8 | |
Operating income(1) | | 165.7 | | | 302.3 | | | 257.2 | |
(1) Included charges associated with restructuring actions, outcomes of legal proceedings, and transaction and related costs in all years, loss on venture investments in 2023, gain on sales of assets in 2022, loss on sale of asset and gain on venture investments in 2021. | | $ | 86.3 | | | $ | 7.8 | | | $ | 36.6 | |
Net Sales
The factors impacting reported net sales change are shown in the table below.
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
Reported net sales change | | — | % | | 16 | % |
Reclassification of sales between segments | | — | | | (1) | |
Foreign currency translation | | 2 | | | 4 | |
| | | | |
Sales change ex. currency(1) | | 2 | | | 19 | |
Acquisitions | | (3) | | | (14) | |
Organic sales change(1) | | (1) | % | | 5 | % |
(1) Totals may not sum due to rounding.
In 2023, on an organic basis, net sales increased by a high single-digit rate in high-value categories and decreased by a low-double digit rate in the base business compared to the prior year. Company-wide, on an organic basis, sales of Intelligent Label solutions increased by a low-double digit rate compared to the prior year.
In 2022, on an organic basis, net sales increased by a mid-teens rate in high-value categories and decreased by a low-single digit rate in the base business compared to the prior year. Company-wide, on an organic basis, sales of Intelligent Label solutions increased by a mid-teens rate compared to the prior year.
Operating Income
Operating income decreased in 2023 compared to 2022 primarily due to an increased accrual for the Adasa legal matter (described in Note 8, "Contingencies" to the Consolidated Financial Statements), higher employee-related costs, lower volume, growth investments and the impact of unfavorable foreign currency translation, partially offset by benefits from productivity initiatives, including temporary cost-saving actions and savings from restructuring actions, net of transition costs.
Operating income increased in 2022 compared to 2021 primarily due to the combined benefit of higher organic volume and acquisitions, the impact of legal proceedings in the prior year, and lower transaction and related costs, partially offset by higher amortization of other intangibles resulting from business acquisitions, growth investments and higher employee-related costs.
FINANCIAL CONDITION
Liquidity
Operating Activities
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Net income | | $ | 503.0 | | | $ | 757.1 | | | $ | 740.1 | |
Depreciation | | 187.4 | | | 177.4 | | | 167.3 | |
Amortization | | 111.0 | | | 113.3 | | | 76.8 | |
Provision for credit losses and sales returns | | 49.9 | | | 50.1 | | | 35.7 | |
Stock-based compensation | | 22.3 | | | 47.4 | | | 37.2 | |
| | | | | | |
Deferred taxes and other non-cash taxes | | (24.4) | | | 18.4 | | | 2.6 | |
Other non-cash expense and loss (income and gain), net | | 37.1 | | | 23.5 | | | 11.7 | |
Trade accounts receivable | | (16.7) | | | (22.1) | | | (113.2) | |
Inventories | | 111.7 | | | (140.7) | | | (182.7) | |
Accounts payable | | (87.6) | | | 68.2 | | | 255.2 | |
Taxes on income | | (18.7) | | | 18.9 | | | (7.3) | |
Other assets | | 37.7 | | | 15.3 | | | 4.1 | |
Other liabilities | | (86.7) | | | (165.8) | | | 19.3 | |
Net cash provided by operating activities | | $ | 826.0 | | | $ | 961.0 | | | $ | 1,046.8 | |
In 2023, cash flow provided by operating activities decreased compared to 2022 primarily due to lower net income and higher tax payments, net of refunds, partially offset by changes in operational working capital and lower incentive compensation payments.
In 2022, cash flow provided by operating activities decreased compared to 2021 primarily due to changes in operational working capital, higher incentive compensation payments and the timing of payroll payments, partially offset by higher net income and lower income tax payments, net of refunds.
Investing Activities
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Purchases of property, plant and equipment | | $ | (265.3) | | | $ | (278.1) | | | $ | (255.0) | |
Purchases of software and other deferred charges | | (19.8) | | | (20.4) | | | (17.1) | |
Proceeds from company-owned life insurance policies | | 48.1 | | | — | | | — | |
Proceeds from sales of property, plant and equipment | | 1.0 | | | 2.3 | | | 1.1 | |
Proceeds from insurance and sales (purchases) of investments, net | | 1.9 | | | 1.9 | | | 3.1 | |
Proceeds from sale of product line and venture investment | | — | | | 1.1 | | | 7.6 | |
Payments for acquisitions, net of cash acquired, and venture investments | | (224.9) | | | (39.5) | | | (1,477.6) | |
Net cash used in investing activities | | $ | (459.0) | | | $ | (332.7) | | | $ | (1,737.9) | |
Purchases of Property, Plant and Equipment
In 2023, in our Solutions Group reportable segment, we primarily invested in buildings and equipment to support growth in certain countries in Asia Pacific, primarily Malaysia, in the U.S. and in certain countries in Latin America, primarily Mexico; 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, and in Asia Pacific, primarily China. In 2022, in our Solutions Group reportable segment, we primarily invested in buildings and equipment to support growth in certain countries in Asia Pacific, including Malaysia, China and Vietnam, and in the U.S.; in our Materials Group reportable segment, we primarily invested in buildings and equipment in the U.S. and certain countries in Europe, primarily France, and Latin America, primarily Brazil. In 2021, in our Materials Group reportable segment, we primarily invested in equipment to support growth in the U.S. and certain countries in Asia Pacific, including India and China, and Europe, including France and Luxembourg; in our Solutions Group reportable segment we primarily invested in equipment to support growth in certain countries in Asia Pacific, including China, Malaysia and Bangladesh, and in the U.S.
Purchases of Software and Other Deferred Charges
In 2023, 2022 and 2021, we invested in information technology upgrades worldwide.
Proceeds from Company-Owned Life Insurance Policies
In 2023, we utilized approximately $48 million of the cash surrender value available under our company-owned life insurance policies.
Proceeds from Sale of Product Line and Venture Investment
In 2022, we received proceeds of $1.1 million from the sale of a venture investment. In 2021, proceeds from the sale of a product line were in our Materials Group reportable segment.
Payments for Acquisitions, Net of Cash Acquired, and Venture Investments
We paid consideration, net of cash acquired, of approximately $223 million for the 2023 Acquisitions and $30 million for the 2022 Acquisitions. We funded the 2023 Acquisitions and 2022 Acquisitions using cash and commercial paper borrowings. In 2021, we paid consideration, net of cash acquired, of approximately $1.44 billion to acquire CB Velocity Holdings, LLC ("Vestcom") and $32 million to acquire ZippyYum, LLC ("ZippyYum") and JDC Solutions, Inc. ("JDC"). We funded the Vestcom acquisition using the net proceeds from the senior notes we issued in August 2021, commercial paper borrowings and cash. We funded the ZippyYum and JDC acquisitions using cash and commercial paper borrowings. We also made certain venture investments in 2023, 2022 and 2021.
Refer to Note 2, “Business Acquisitions,” to the Consolidated Financial Statements for more information.
Financing Activities
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(In millions) | | 2023 | | 2022 | | 2021 |
Net increase (decrease) in borrowings with maturities of three months or less | | $ | (36.6) | | | $ | 34.6 | | | $ | 259.2 | |
| | | | | | |
| | | | | | |
Additional long-term borrowings | | 394.9 | | | — | | | 791.7 | |
Repayments of long-term debt and finance leases | | (255.9) | | | (6.3) | | | (13.4) | |
Dividends paid | | (256.7) | | | (238.9) | | | (220.6) | |
Share repurchases | | (137.5) | | | (379.5) | | | (180.9) | |
Net (tax withholding) proceeds related to stock-based compensation | | (23.8) | | | (25.1) | | | (25.4) | |
Other | | (1.6) | | | — | | | (6.3) | |
Net cash (used in) provided by financing activities | | $ | (317.2) | | | $ | (615.2) | | | $ | 604.3 | |
Borrowings and Repayment of Debt
During 2023, 2022 and 2021, 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 our $250 million aggregate principal amount of senior notes that matured on April 15, 2023.
In August 2021, we issued $500 million of senior notes, due February 15, 2032, which bear an interest rate of 2.250%, payable semiannually in arrears. Our net proceeds from this issuance, after deducting underwriting discounts and offering expenses, were $493.7 million. Additionally, in August 2021, we issued $300 million of senior notes, due August 15, 2024, which we can repay without penalty on or after August 15, 2022 and bear an interest rate of 0.850%, payable semiannually in arrears. Our net proceeds from this issuance, after deducting underwriting discounts and offering expenses, were $298 million. We used the net proceeds from these two debt issuances to finance a portion of the Vestcom acquisition.
Refer to Note 2, “Business Acquisitions,” and Note 4, “Debt,” to the Consolidated Financial Statements for more information.
Dividends Paid
We paid dividends per share of $3.18, $2.93 and $2.66 in 2023, 2022 and 2021, respectively. In April 2023, we increased our quarterly dividend rate to $.81 per share, representing an increase of approximately 8% from our previous quarterly dividend rate of $.75 per share. In April 2022, we increased our quarterly dividend to $.75 per share, representing an increase of approximately 10% from our previous dividend rate of $.68 per share.
Share Repurchases
From time to time, our Board authorizes the repurchase of shares of our outstanding common stock. Repurchased shares may be reissued under our long-term incentive plan or used for other corporate purposes. In 2023, 2022 and 2021, we repurchased approximately 0.8 million, 2.2 million and 0.9 million shares of our common stock, respectively.
In April 2022 our Board authorized the repurchase of shares of our common stock with a fair market value of up to $750 million, excluding any fees, commissions or other expenses related to such purchases and in addition to any amount outstanding under our previous Board authorization. Shares of our common stock in the aggregate amount of $592.8 million as of December 30, 2023 remained authorized for repurchase under this Board authorization. Board authorizations remain in effect until shares in the amount authorized thereunder have been repurchased.
Net (Tax Withholding) Proceeds Related to Stock-Based Compensation
In 2023, tax withholding for stock-based compensation was comparable to 2022 and 2021.
Approximately .02 million stock options were exercised in 2021. Refer to Note 12, “Long-Term Incentive Compensation,” to the Consolidated Financial Statements for more information.
Analysis of Selected Balance Sheet Accounts
Long-lived Assets
Property, plant and equipment, net, increased by approximately $86 million to $1.63 billion at year-end 2023, which primarily reflected purchases of property, plant and equipment and the impact of foreign currency translation, partially offset by depreciation expense.
Goodwill increased by approximately $151 million to $2.01 billion at year-end 2023, which reflected the impact of the acquired goodwill associated with the 2023 Acquisitions and foreign currency translation.
Other intangibles resulting from business acquisitions, net, increased by approximately $9 million to $849.1 million at year-end 2023, reflecting the valuation of intangible assets associated with the 2023 Acquisitions, partially offset by current year amortization expense.
Refer to Note 3, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” to the Consolidated Financial Statements for more information.
Other assets decreased by approximately $1 million to $809.6 million at year-end 2023, primarily reflecting the utilization of the cash surrender value available under our company-owned life insurance policies, partially offset by higher operating lease assets.
Long-term Retirement Benefits and Other Liabilities
Other long-term retirement benefits and other liabilities increased by approximately $133 million to $500.3 million at year-end 2023, primarily reflecting the contingent liability recorded for the Adasa legal matter and higher operating lease liabilities.
Shareholders’ Equity Accounts
The balance of our shareholders’ equity increased by approximately $96 million to $2.13 billion at year-end 2023. Refer to Note 11, “Supplemental Equity and Comprehensive Income Information,” to the Consolidated Financial Statements for more information.
Impact of Foreign Currency Translation
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(In millions) | | 2023 | | 2022 |
Change in net sales | | $ | (58) | | | $ | (417) | |
In 2023, international operations generated approximately 69% of our net sales. Our future results are subject to changes in political, social and economic conditions in the regions in which we operate and the impact of fluctuations in foreign currency exchange rates.
The unfavorable impact of foreign currency translation on net sales in 2023 compared to 2022 was primarily related to sales in China, partially offset by favorable impact from 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 Consolidated Financial Statements for more information.
During 2023, the Argentine peso devalued significantly compared to the U.S. dollar which resulted in remeasurement loss of approximately $30 million which was included in "Other expense (income), net" in the Consolidated Statements of Income.
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. Our objective is to minimize our investment in operational working capital, as a percentage of annualized current-quarter net sales, to maximize our cash flow and return on investment. Operational working capital, as a percentage of annualized current-quarter net sales, in 2023 was lower than in 2022. Further information regarding the components of operational working capital is provided below.
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(In millions, except percentages) | | 2023 | | 2022 |
(A)Working capital (deficit) | | $ | 96.5 | | | $ | (17.8) | |
Reconciling items: | | | | |
Cash and cash equivalents | | (215.0) | | | (167.2) | |
Other current assets | | (245.4) | | | (230.5) | |
Short-term borrowings and current portion of long-term debt and finance leases | | 622.2 | | | 598.6 | |
Current income taxes payable and other current accrued liabilities | | 800.2 | | | 861.9 | |
(B)Operational working capital | | $ | 1,058.5 | | | $ | 1,045.0 | |
(C)Fourth-quarter net sales, annualized | | $ | 8,442.0 | | | $ | 8,103.6 | |
Operational working capital, as a percentage of annualized current-quarter net sales (B) ÷ (C) | | 12.5 | % | | 12.9 | % |
Accounts Receivable Ratio
The average number of days sales outstanding was 61 days in 2023 compared to 62 days in 2022, calculated using the accounts receivable balance at year-end divided by the average daily sales in the fourth quarter of 2023 and 2022, respectively.
Inventory Ratio
Average inventory turnover was 6.6 in 2023 compared to 6.0 in 2022, calculated using the annualized fourth-quarter cost of products sold in 2023 and 2022, respectively, and divided by the inventory balance at the respective year-end. The increase in average inventory turnover primarily reflected higher prior-year inventory balances due to customer inventory destocking.
Accounts Payable Ratio
The average number of days payable outstanding was 77 days in 2023 compared to 80 days in 2022, calculated using the accounts payable balance at year-end divided by the annualized fourth-quarter cost of products sold in 2023 and 2022, respectively. The decrease in the average number of days payable outstanding from the prior year primarily reflected the timing of vendor payments, the impact of acquisitions and 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 the Revolver. We use these resources to fund our operational needs.
At year-end 2023, we had cash and cash equivalents of $215.0 million held in accounts at third-party financial institutions in numerous locations throughout the world. At year-end 2023, 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 our 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.
In January 2023, we extended the maturity date of the Revolver by one year to February 13, 2026, and increased the commitments by $400 million, from $800 million to $1.2 billion. Additionally, we amended the Revolver to replace the LIBOR benchmark interest rate with Term SOFR, Euribor and SONIA benchmark interest rates. We use the Revolver as a back-up facility for our commercial paper program and for other corporate purposes.
The Revolver contains a financial covenant that requires us to maintain a maximum leverage ratio (calculated as a ratio of consolidated debt to consolidated EBITDA as defined in the agreement) of not more than 3.50 to 1.00; provided that, in the event of an acquisition by us that exceeds $250 million, which occurred when we acquired Vestcom, the maximum leverage ratio increases to 4.00 to 1.00 for the fiscal quarter in which the acquisition occurs and the three fiscal quarters immediately following that fiscal quarter. As of December 30, 2023 and December 31, 2022, our ratio was substantially below the maximum ratio allowed by the Revolver.
In addition to the Revolver, we have short-term lines of credit available in various countries of approximately $327 million in the aggregate at December 30, 2023. These lines may be cancelled at any time by us or the issuing banks. Short-term borrowings outstanding under these lines of credit were $1.0 million and $2.4 million at December 30, 2023 and December 31, 2022, respectively, with weighted average interest rates of 2.24% and 0.64%, respectively. Refer to Note 4, “Debt,” to the Consolidated Financial Statements for more information.
We are exposed to financial market risk resulting from changes in interest and foreign currency exchange rates, and to possible liquidity and credit risks of our counterparties.
We currently anticipate using cash flows from operations and commercial paper borrowings to repay the $300 million of senior notes we issued in 2021, which mature in the third quarter of 2024.
Capital from Debt
The carrying value of our total debt increased by approximately $142 million to $3.24 billion at year-end 2023 from 2022, primarily reflecting our issuance of $400 million of senior notes in March 2023 and the revaluation of our euro-denominated senior notes, partially offset by the repayment of our $250 million of senior notes maturing in April 2023 and a net decrease in commercial paper borrowings.
Credit ratings are a significant factor in our ability to raise short- and long-term financing. The credit ratings assigned to our company 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, the Revolver and our other credit facilities would be available
to meet our short-term funding requirements. When determining our credit rating, we believe that rating agencies primarily consider our competitive position, business outlook, consistency of cash flows, debt level and liquidity, geographic footprint and management team. We remain committed to maintaining an investment grade rating.
Fair Value of Debt
The estimated fair value of our long-term debt is primarily based on the credit spread above U.S. Treasury securities or euro government bond securities, as applicable, on notes with similar rates, credit ratings and remaining maturities. The fair value of short-term borrowings, which includes commercial paper issuances and short-term lines of credit, approximates their carrying value given their short duration. The fair value of our total debt was $3.11 billion at December 30, 2023 and $2.85 billion at December 31, 2022. Fair value amounts were determined based primarily on Level 2 inputs, which are inputs other than quoted prices in active markets that are either directly or indirectly observable. Refer to Note 1, “Summary of Significant Accounting Policies,” for more information.
Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
Material Cash Requirements at End of Year 2023
We have short- and long-term material cash requirements related to our contractual obligations that arise in the normal course of business. In addition to principal and interest payments on our outstanding debt obligations, our contractual obligations primarily consist of lease payments and purchase commitments.
Refer to Note 4, "Debt," to the Consolidated Financial Statements for a summary of our principal payments for short-term borrowings and long-term debt obligations as of December 30, 2023. Future interest payments for long-term debt as of December 30, 2023 are approximately $90 million in 2024; $87 million in 2025; $78 million in 2026; $78 million in 2027; $78 million in 2028; and $199 million from 2029 through maturity.
As of December 30, 2023, we have a commitment to purchase approximately $164 million of raw materials in fiscal year 2024.
Refer to Note 7, "Commitments and Leases," to the Consolidated Financial Statements for a summary of our lease obligations as of December 30, 2023.
Refer to Note 6, “Pension and Other Postretirement Benefits,” to the Consolidated Financial Statements for information regarding our defined benefit pension plan contributions and future benefit payments, deferred compensation plan benefit payments and unfunded termination indemnity benefits.
Refer to Note 12, “Long-term Incentive Compensation,” to the Consolidated Financial Statements for information regarding cash-based awards to employees under one of our long-term incentive compensation plans.
Refer to Note 14, “Taxes Based on Income,” to the Consolidated Financial Statements for more information regarding our unrecognized tax benefits of approximately $88 million.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions for the reporting period and as of the financial statement date. These estimates and assumptions affect our reported amounts of assets and liabilities, disclosure of contingent liabilities, and reported amounts of revenue and expense. Actual results could differ from these estimates.
Critical accounting estimates are those that are important to our financial condition and results, and which require us to make difficult, subjective and/or complex judgments. Critical accounting estimates cover accounting matters that are inherently uncertain because their future resolution is unknown. We believe our critical accounting estimates include accounting for goodwill, business combinations, pension and postretirement benefits, taxes based on income and long-term incentive compensation.
Goodwill
Business combinations are accounted for using the acquisition method, with the excess of the acquisition cost over the fair value of net tangible assets and identified intangible assets acquired considered goodwill. As a result, we disclose goodwill separately from other intangible assets. Our reporting units are composed of either a discrete business or an aggregation of businesses with similar economic characteristics.
We perform our annual impairment test of goodwill during the fourth quarter. Certain factors may cause us to perform an impairment test prior to the fourth quarter, including significant underperformance of a business relative to expected operating results, significant adverse economic and industry trends, significant decline in our market capitalization for an extended period of time relative to net book value, or a decision to divest a portion of a reporting unit. In performing impairment tests, we have the option to first assess qualitative factors to determine whether it is necessary to perform a quantitative assessment for goodwill impairment. If the qualitative assessment indicates that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative assessment.
A quantitative assessment primarily consists of using the present value (discounted cash flow) method to determine the fair value of reporting units with goodwill. We compare the fair value of each reporting unit to its carrying amount, and, to the extent the carrying amount exceeds the unit’s fair value, we recognize an impairment of goodwill for the excess up to the amount of goodwill of that reporting unit. In consultation with outside specialists, we estimate the fair value of our reporting units using various valuation techniques, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various assumptions about our reporting units, including their respective forecasted sales, operating margins and growth rates, as well as discount rates. Our assumptions about discount rates are based on the weighted average cost of capital for comparable companies. Our assumptions about sales, operating margins and growth rates are based on our forecasts, business plans, economic projections, anticipated future cash flows, and marketplace data. We also make assumptions for varying perpetual growth rates for periods beyond our long-term business plan period. We base our fair value estimates on projected financial information and assumptions that we believe are reasonable. However, actual future results may differ materially from these estimates and projections. The valuation methodology we use to estimate the fair value of reporting units requires inputs and assumptions that reflect current market conditions, as well as the impact of planned business and operational strategies that require management judgment. The estimated fair value could increase or decrease depending on changes in the inputs and assumptions.
In our annual impairment analysis in the fourth quarter of 2023, the goodwill of all reporting units in our Materials Group and Solutions Group reportable segments were tested utilizing a qualitative assessment. Based on this assessment, we determined that the fair values of these reporting units were more-likely-than-not greater than their respective carrying values. Therefore, the goodwill of our reporting units was not impaired.
Business Combinations
The results of acquired businesses are included in our Consolidated Financial Statements from their acquisition date. Assets and liabilities of an acquired business are recorded at their estimated fair values on the acquisition date. We engage third-party valuation specialists to assist us in determining these fair values where necessary. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill.
The allocation of purchase price requires management to make significant estimates and assumptions. While we believe our assumptions and estimates are reasonable, they are inherently uncertain and based in part on our experience, market conditions, our projections of future performance, and information obtained from management of the acquired companies. Critical estimates include, but are not limited to, the following:
•Future revenue and profit margins;
•Royalty rates;
•Discount rates;
•Customer retention rates;
•Technology migration curves; and
•Useful lives assigned to acquired intangible assets.
Acquired identifiable finite-lived intangible assets are amortized on a straight-line basis over their respective estimated useful lives to marketing, general and administrative expense.
Pension and Postretirement Benefits
The assumptions we use in determining projected benefit obligations and the fair value of plan assets for our defined benefit pension plans and other postretirement benefit plans are evaluated by management in consultation with outside actuaries. In the event that we determine that changes are warranted in the assumptions we use, such as the discount rate, expected long-term rate of return or health care costs, future pension and postretirement benefit expenses could increase or decrease. Due to changes in market conditions or participant population, the actuarial assumptions we use may differ from actual results, which could have a significant impact on our pension and postretirement liabilities and related costs.
Discount Rate
In consultation with our actuaries, we annually review and determine the discount rates we use in valuing our postretirement obligations. The assumed discount rates for our non-U.S. pension plans reflect market rates for high quality corporate bonds currently available. Our discount rates are determined by evaluating yield curves consisting of large populations of high quality corporate bonds. The projected pension benefit payment streams are then matched with the bond portfolios to determine a rate that reflects the liability duration unique to our pension and postretirement benefit plans. As of December 30, 2023, a 0.25% increase in the discount rates associated with our non-U.S. plans would have decreased our year-end projected benefit obligation by $27 million and decreased expected periodic benefit cost for the coming year by approximately $1 million. Conversely, a 0.25% decrease in the discount rates associated with our non-U.S. plans would have increased our year-end projected benefit obligation by approximately $27 million and would not have a significant impact on expected periodic benefit cost for the coming year.
We use the full yield curve approach to estimate the service and interest cost components of net periodic benefit cost for our pension and other postretirement benefit plans. Using this approach, we apply multiple discount rates from a yield curve composed of the rates of return on several hundred high-quality, fixed income corporate bonds available at the measurement date. We believe this approach provides a more precise measurement of service and interest cost by aligning the timing of plan liability cash flows to the corresponding rates on the yield curve.
Long-term Return on Plan Assets
We determine the long-term rate of return assumption for plan assets by reviewing the historical and expected returns of both the equity and fixed income markets, taking into account our asset allocation, the correlation between returns in our asset classes, and our mix of active and passive investments. Additionally, current market conditions, including interest rates, are evaluated and market data is reviewed for reasonableness and appropriateness. An increase or decrease of 0.25% on the long-term return on assets associated with our non-U.S. plans would have decreased or increased our periodic benefit cost for the coming year by approximately $2 million.
Taxes Based on Income
Because we are subject to income tax in the U.S. and multiple foreign jurisdictions, judgment is required in evaluating and estimating our worldwide provision for income taxes, accruals for taxes, deferred taxes and tax positions. Our provision for income taxes is determined using the asset and liability approach in accordance with GAAP. Deferred tax assets represent amounts available to reduce income taxes payable in future years. These assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating losses and tax credit carryforwards. These amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We evaluate the realizability of these future tax deductions and credits by assessing the period over which recoverability is allowed by law and the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. Our assessment of these sources of income relies heavily on estimates. Our forecasted earnings by jurisdiction are determined by how we operate our business and any changes to our operations may affect our effective tax rate. For example, our future income tax rate could be adversely affected by earnings being lower than anticipated in jurisdictions in which we have significant deferred tax assets that are dependent on such earnings to be realized. We use our historical experience and operating forecasts to evaluate expected future taxable income. To the extent we do not consider it more-likely-than-not that a deferred tax asset will be recovered, a valuation allowance is established in the period we make that determination.
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.
Tax laws and regulations are complex and subject to different interpretations by taxpayers and governmental taxing authorities. We review our tax positions quarterly and adjust the balances if and as new information becomes available. Significant judgment is required in determining our tax expense and evaluating our tax positions, including evaluating uncertainties. Our estimate of the potential outcome of any uncertain tax issue is subject to our assessment of relevant facts and circumstances existing at the balance sheet date, taking into consideration existing laws, regulations and practices of the governmental taxing authorities exercising jurisdiction over our operations. We recognize and measure our uncertain tax positions following the more-likely-than-not threshold for recognition and measurement for tax positions we take or expect to take on a tax return.
Refer to Note 14, “Taxes Based on Income,” to the Consolidated Financial Statements for more information.
Long-Term Incentive Compensation
Valuation of Stock-Based Awards
We base our stock-based compensation expense on the fair value of awards, adjusted for estimated forfeitures, amortized on a straight-line basis over the requisite service period for stock options and restricted stock units (“RSUs”). We base compensation expense for performance units (“PUs”) on the fair value of awards, adjusted for estimated forfeitures, and amortized on a straight-line basis as these awards cliff-vest at the end of the requisite performance period. We base compensation expense related to market-leveraged stock units (“MSUs”) on the fair value of awards, adjusted for estimated forfeitures, and amortized on a graded-vesting basis over their respective performance periods.
Compensation expense for awards with a market condition as a performance objective, which includes PUs and MSUs, is not adjusted if the condition is not met, as long as the requisite service period is met.
We determine the fair value of RSUs and the component of PUs that is subject to the achievement of a performance objective based on a financial performance condition based on the fair market value of our common stock as of the date of the grant, adjusted for foregone dividends. Over the performance period of the PUs, the estimated number of shares of our common stock issuable upon vesting is adjusted upward or downward based on the probability of achieving the performance objectives established for the award.
We determine the fair value of stock-based awards that are subject to achievement of performance objectives based on a market condition, which includes MSUs and the other component of PUs, using the Monte-Carlo simulation model, which utilizes multiple input variables, including expected stock price volatility and other assumptions appropriate for determining fair value, to estimate the probability of satisfying the respective target performance objectives established for the award.
Forfeiture Rate
Changes in estimated forfeiture rates are recorded as cumulative adjustments in the period estimates are revised.
Certain of our assumptions are based on management’s estimates, in consultation with outside specialists. Significant changes in assumptions for future awards and actual forfeiture rates could materially impact our stock-based compensation expense and results of operations.
Valuation of Cash-Based Awards
Cash-based awards consist of long-term incentive units (“LTI Units”) granted to eligible employees. LTI Units are classified as liability awards and remeasured at each quarter-end over the applicable vesting or performance period. In addition to LTI Units with terms and conditions that mirror those of RSUs, we also grant certain employees LTI Units with terms and conditions similar to those of PUs and MSUs.
RECENT ACCOUNTING REQUIREMENTS
Refer to Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements for this information.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management
We are exposed to the impact of changes in foreign currency exchange rates and interest rates. We generally do not purchase or hold foreign currency or interest rate or commodity contracts for trading purposes.
Our objective in managing our exposure to foreign currency changes is to reduce the risk to our earnings and cash flow associated with foreign exchange rate changes. As a result, we enter into foreign exchange forward, option and swap contracts to reduce risks associated with the value of our existing foreign currency assets, liabilities, firm commitments and anticipated foreign revenues and costs, when available and appropriate. The gains and losses on these contracts are intended to offset changes in the related exposures. We do not hedge our foreign currency translation exposure in a manner that would entirely eliminate the effects of changes in foreign exchange rates on our net income.
Our objective in managing our exposure to interest rate changes is to reduce the impact of interest rate changes on earnings and cash flows. To achieve this objective, we may periodically use interest rate contracts to manage our exposure to interest rate changes.
Additionally, we enter into certain natural gas futures contracts to reduce the risks associated with natural gas we anticipate using in our manufacturing operations. These amounts are not material to our financial statements.
In the normal course of operations, we also face other risks that are either non-financial or non-quantifiable. These risks principally include changes in economic or political conditions, other risks associated with international operations, commodity price risk, and legal and compliance risk, which are not reflected in the analyses described below.
Foreign Exchange Value-At-Risk
We use a Value-At-Risk (“VAR”) model to determine the estimated maximum potential one-day loss in earnings associated with our foreign exchange positions and contracts. This approach assumes that market rates or prices for foreign exchange positions and contracts are normally distributed. VAR model estimates are made assuming normal market conditions. The model includes foreign exchange derivative contracts. Forecasted transactions, firm commitments, accounts receivable and accounts payable denominated in foreign currencies, which certain of these instruments are intended to hedge, are excluded from the model.
The VAR model is a risk analysis tool and does not represent actual losses in fair value that we could incur, nor does it consider the potential effect of favorable changes in market factors.
In both 2023 and 2022, the VAR was estimated using a variance-covariance methodology. The currency correlation was based on one-year historical data obtained from one of our domestic banks. A 95% confidence level was used for a one-day time horizon.
The estimated maximum potential one-day loss in earnings for our foreign exchange positions and contracts was not significant at year-end 2023 or 2022.
Interest Rate Sensitivity
In 2023 and 2022, an assumed 41 and 12 basis point, respectively, increase in interest rates affecting our variable-rate borrowings (10% of our weighted average interest rate on floating rate debt) would not have had a significant impact on interest expense.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Avery Dennison Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Avery Dennison Corporation and its subsidiaries (the “Company”) as of December 30, 2023 and December 31, 2022, and the related consolidated statements of income, of comprehensive income, of shareholders’ equity and of cash flows for each of the three years in the period ended December 30, 2023, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 30, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 30, 2023 and December 31, 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the Reportapplicable rules and regulations of Independent Registered Public Accounting Firm,the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is containeda process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in our 2021 Annual Reportaccordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and incorporated herein by reference.procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition from Certain Product Revenue
As described in Notes 1 and 15 to the consolidated financial statements, revenue is recognized for an amount that reflects the consideration which is expected from the sale of products when the Company satisfies a performance obligation by transferring control of products to a customer. Management considers a number of factors in determining when control has been transferred to a customer, including the following: (i) the Company’s present right to payment; (ii) the customer’s legal title to the asset; (iii) physical possession of the asset; (iv) the customer’s significant risks and rewards of ownership of the asset; and (v) the customer’s acceptance of the asset. Control generally transfers to a customer at a point in time upon shipment or delivery, depending on the specific terms of sale with the customer. The Company’s consolidated net sales were $8,364.3 million for the year ended December 30, 2023, of which a majority relates to certain product revenue in the Company’s Materials Group and Solutions Group reportable segments.
The principal consideration for our determination that performing procedures relating to revenue recognition from certain product revenue is a critical audit matter is a high degree of auditor effort in performing procedures related to the Company’s revenue recognition from certain product revenue.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the recognition of certain product revenue as the amount of consideration which is expected from the sale of products when the Company satisfies a performance obligation. These procedures also included, among others (i) testing the completeness, accuracy, and occurrence of revenue recognized for a sample of revenue transactions by obtaining and inspecting source documents, such as purchase orders, invoices, contracts, proof of shipment, and subsequent payment receipts and (ii) confirming a sample of outstanding customer invoice balances as of December 30, 2023 and, for confirmations not returned, obtaining and inspecting source documents, such as invoices, proof of shipment, and subsequent payment receipts.
/s/ PricewaterhouseCoopers LLP
| | |
Los Angeles, California |
February 21, 2024 |
We have served as the Company’s auditor since at least 1960, which were the Company’s first financial statements subject to SEC reporting requirements. We have not been able to determine the specific year we began serving as auditor of the Company or a predecessor company.
Consolidated Balance Sheets
| | | | | | | | | | | | | | |
(Dollars in millions, except per share amount) | | December 30, 2023 | | December 31, 2022 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 215.0 | | | $ | 167.2 | |
Trade accounts receivable, less allowances of $34.4 at year-end 2023 and 2022 | | 1,414.9 | | | 1,374.4 | |
Inventories | | 920.7 | | | 1,009.9 | |
Other current assets | | 245.4 | | | 230.5 | |
Total current assets | | 2,796.0 | | | 2,782.0 | |
Property, plant and equipment, net | | 1,625.8 | | | 1,540.2 | |
Goodwill | | 2,013.6 | | | 1,862.4 | |
Other intangibles resulting from business acquisitions, net | | 849.1 | | | 840.3 | |
Deferred tax assets | | 115.7 | | | 115.1 | |
Other assets | | 809.6 | | | 810.5 | |
| | $ | 8,209.8 | | | $ | 7,950.5 | |
| | | | |
Liabilities and Shareholders’ Equity | | | | |
Current liabilities: | | | | |
Short-term borrowings and current portion of long-term debt and finance leases | | $ | 622.2 | | | $ | 598.6 | |
Accounts payable | | 1,277.1 | | | 1,339.3 | |
Accrued payroll and employee benefits | | 213.4 | | | 228.5 | |
Accrued trade rebates | | 142.4 | | | 173.8 | |
Income taxes payable | | 57.6 | | | 76.2 | |
Other current liabilities | | 386.8 | | | 383.4 | |
Total current liabilities | | 2,699.5 | | | 2,799.8 | |
Long-term debt and finance leases | | 2,622.1 | | | 2,503.5 | |
Long-term retirement benefits and other liabilities | | 500.3 | | | 367.1 | |
Deferred tax liabilities and income taxes payable | | 260.0 | | | 247.9 | |
Commitments and contingencies (see Notes 7 and 8) | | | | |
Shareholders’ equity: | | | | |
Common stock, $1 par value per share, authorized – 400,000,000 shares at year-end 2023 and 2022; issued – 124,126,624 shares at year-end 2023 and 2022; outstanding – 80,495,585 and 80,810,016 shares at year-end 2023 and 2022, respectively | | 124.1 | | | 124.1 | |
Capital in excess of par value | | 854.5 | | | 879.3 | |
Retained earnings | | 4,691.8 | | | 4,414.6 | |
Treasury stock at cost, 43,631,039 and 43,316,608 shares at year-end 2023 and 2022, respectively | | (3,134.4) | | | (3,021.8) | |
Accumulated other comprehensive loss | | (408.1) | | | (364.0) | |
Total shareholders’ equity | | 2,127.9 | | | 2,032.2 | |
| | $ | 8,209.8 | | | $ | 7,950.5 | |
See Notes to Consolidated Financial Statements
Consolidated Statements of Income
| | | | | | | | | | | | | | | | | | | | |
(In millions, except per share amounts) | | 2023 | | 2022 | | 2021 |
Net sales | | $ | 8,364.3 | | | $ | 9,039.3 | | | $ | 8,408.3 | |
Cost of products sold | | 6,086.8 | | | 6,635.1 | | | 6,095.5 | |
Gross profit | | 2,277.5 | | | 2,404.2 | | | 2,312.8 | |
Marketing, general and administrative expense | | 1,313.7 | | | 1,330.8 | | | 1,248.5 | |
Other expense (income), net | | 180.9 | | | (.6) | | | 5.6 | |
Interest expense | | 119.0 | | | 84.1 | | | 70.2 | |
Other non-operating expense (income), net | | (30.8) | | | (9.4) | | | (4.1) | |
Income before taxes | | 694.7 | | | 999.3 | | | 992.6 | |
Provision for income taxes | | 191.7 | | | 242.2 | | | 248.6 | |
Equity method investment (losses) gains | | — | | | — | | | (3.9) | |
Net income | | $ | 503.0 | | | $ | 757.1 | | | $ | 740.1 | |
| | | | | | |
Per share amounts: | | | | | | |
Net income per common share | | $ | 6.23 | | | $ | 9.28 | | | $ | 8.93 | |
Net income per common share, assuming dilution | | $ | 6.20 | | | $ | 9.21 | | | $ | 8.83 | |
| | | | | | |
Weighted average number of shares outstanding: | | | | | | |
Common shares | | 80.7 | | | 81.6 | | | 82.9 | |
Common shares, assuming dilution | | 81.1 | | | 82.2 | | | 83.8 | |
See Notes to Consolidated Financial Statements
Consolidated Statements of Comprehensive Income
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Net income | | $ | 503.0 | | | $ | 757.1 | | | $ | 740.1 | |
Other comprehensive income (loss), net of tax: | | | | | | |
Foreign currency translation: | | | | | | |
Translation gain (loss) | | (14.6) | | | (96.6) | | | 30.7 | |
Pension and other postretirement benefits: | | | | | | |
Net gain (loss) recognized from actuarial gain/loss and prior service cost/credit | | (25.2) | | | 6.3 | | | 27.9 | |
Reclassifications to net income | | (1.0) | | | 2.8 | | | 4.4 | |
Cash flow hedges: | | | | | | |
Gain (loss) recognized on cash flow hedges | | (7.0) | | | 4.9 | | | 5.4 | |
Reclassifications to net income | | 3.7 | | | 1.5 | | | (1.7) | |
Other comprehensive income (loss), net of tax | | (44.1) | | | (81.1) | | | 66.7 | |
Total comprehensive income, net of tax | | $ | 458.9 | | | $ | 676.0 | | | $ | 806.8 | |
See Notes to Consolidated Financial Statements
Consolidated Statements of Shareholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions, except per share amounts) | | Common stock, $1 par value | | Capital in excess of par value | | Retained earnings | | Treasury stock | | Accumulated other comprehensive loss | | Total |
Balance as of January 2, 2021 | | $ | 124.1 | | | $ | 862.1 | | | $ | 3,349.3 | | | $ | (2,501.0) | | | $ | (349.6) | | | $ | 1,484.9 | |
Net income | | — | | | — | | | 740.1 | | | — | | | — | | | 740.1 | |
Other comprehensive income (loss), net of tax | | — | | | — | | | — | | | — | | | 66.7 | | | 66.7 | |
Repurchase of 925,425 shares for treasury | | — | | | — | | | — | | | (180.9) | | | — | | | (180.9) | |
Issuance of 257,189 shares under stock-based compensation plans | | — | | | .2 | | | (7.2) | | | 16.6 | | | — | | | 9.6 | |
Contribution of 123,015 shares to 401(k) plan | | — | | | — | | | 19.1 | | | 5.5 | | | — | | | 24.6 | |
Dividends of $2.66 per share | | — | | | — | | | (220.6) | | | — | | | — | | | (220.6) | |
Balance as of January 1, 2022 | | $ | 124.1 | | | $ | 862.3 | | | $ | 3,880.7 | | | $ | (2,659.8) | | | $ | (282.9) | | | $ | 1,924.4 | |
Net income | | — | | | — | | | 757.1 | | | — | | | — | | | 757.1 | |
Other comprehensive income (loss), net of tax | | — | | | — | | | — | | | — | | | (81.1) | | | (81.1) | |
Repurchase of 2,173,416 shares for treasury | | — | | | — | | | — | | | (379.5) | | | — | | | (379.5) | |
Issuance of 223,676 shares under stock-based compensation plans | | — | | | 17.0 | | | (4.4) | | | 10.6 | | | — | | | 23.2 | |
Contribution of 153,803 shares to 401(k) plan | | — | | | — | | | 20.1 | | | 6.9 | | | — | | | 27.0 | |
Dividends of $2.93 per share | | — | | | — | | | (238.9) | | | — | | | — | | | (238.9) | |
Balance as of December 31, 2022 | | $ | 124.1 | | | $ | 879.3 | | | $ | 4,414.6 | | | $ | (3,021.8) | | | $ | (364.0) | | | $ | 2,032.2 | |
Net income | | — | | | — | | | 503.0 | | | — | | | — | | | 503.0 | |
Other comprehensive income (loss), net of tax | | — | | | — | | | — | | | — | | | (44.1) | | | (44.1) | |
Repurchase of 780,721 shares for treasury | | — | | | — | | | — | | | (137.5) | | | — | | | (137.5) | |
Issuance of 297,885 shares under stock-based compensation plans | | — | | | (24.8) | | | 8.9 | | | 16.5 | | | — | | | .6 | |
Contribution of 168,404 shares to 401(k) plan | | — | | | — | | | 22.0 | | | 8.4 | | | — | | | 30.4 | |
Dividends of $3.18 per share | | — | | | — | | | (256.7) | | | — | | | — | | | (256.7) | |
Balance as of December 30, 2023 | | $ | 124.1 | | | $ | 854.5 | | | $ | 4,691.8 | | | $ | (3,134.4) | | | $ | (408.1) | | | $ | 2,127.9 | |
See Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Operating Activities | | | | | | |
Net income | | $ | 503.0 | | | $ | 757.1 | | | $ | 740.1 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation | | 187.4 | | | 177.4 | | | 167.3 | |
Amortization | | 111.0 | | | 113.3 | | | 76.8 | |
Provision for credit losses and sales returns | | 49.9 | | | 50.1 | | | 35.7 | |
Stock-based compensation | | 22.3 | | | 47.4 | | | 37.2 | |
| | | | | | |
Deferred taxes and other non-cash taxes | | (24.4) | | | 18.4 | | | 2.6 | |
Other non-cash expense and loss (income and gain), net | | 37.1 | | | 23.5 | | | 11.7 | |
Changes in assets and liabilities and other adjustments: | | | | | | |
Trade accounts receivable | | (16.7) | | | (22.1) | | | (113.2) | |
Inventories | | 111.7 | | | (140.7) | | | (182.7) | |
Accounts payable | | (87.6) | | | 68.2 | | | 255.2 | |
Taxes on income | | (18.7) | | | 18.9 | | | (7.3) | |
Other assets | | 37.7 | | | 15.3 | | | 4.1 | |
Other liabilities | | (86.7) | | | (165.8) | | | 19.3 | |
Net cash provided by operating activities | | 826.0 | | | 961.0 | | | 1,046.8 | |
| | | | | | |
Investing Activities | | | | | | |
Purchases of property, plant and equipment | | (265.3) | | | (278.1) | | | (255.0) | |
Purchases of software and other deferred charges | | (19.8) | | | (20.4) | | | (17.1) | |
Proceeds from company-owned life insurance policies | | 48.1 | | | — | | | — | |
Proceeds from sales of property, plant and equipment | | 1.0 | | | 2.3 | | | 1.1 | |
Proceeds from insurance and sales (purchases) of investments, net | | 1.9 | | | 1.9 | | | 3.1 | |
Proceeds from sale of product line and venture investment | | — | | | 1.1 | | | 7.6 | |
Payments for acquisitions, net of cash acquired, and venture investments | | (224.9) | | | (39.5) | | | (1,477.6) | |
Net cash used in investing activities | | (459.0) | | | (332.7) | | | (1,737.9) | |
| | | | | | |
Financing Activities | | | | | | |
Net increase (decrease) in borrowings with maturities of three months or less | | (36.6) | | | 34.6 | | | 259.2 | |
| | | | | | |
| | | | | | |
Additional long-term borrowings | | 394.9 | | | — | | | 791.7 | |
Repayments of long-term debt and finance leases | | (255.9) | | | (6.3) | | | (13.4) | |
Dividends paid | | (256.7) | | | (238.9) | | | (220.6) | |
Share repurchases | | (137.5) | | | (379.5) | | | (180.9) | |
Net (tax withholding) proceeds related to stock-based compensation | | (23.8) | | | (25.1) | | | (25.4) | |
Other | | (1.6) | | | — | | | (6.3) | |
Net cash (used in) provided by financing activities | | (317.2) | | | (615.2) | | | 604.3 | |
Effect of foreign currency translation on cash balances | | (2.0) | | | (8.6) | | | (2.8) | |
Increase (decrease) in cash and cash equivalents | | 47.8 | | | 4.5 | | | (89.6) | |
Cash and cash equivalents, beginning of year | | 167.2 | | | 162.7 | | | 252.3 | |
Cash and cash equivalents, end of year | | $ | 215.0 | | | $ | 167.2 | | | $ | 162.7 | |
See Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
We are a global materials science and digital identification solutions company that provides a wide range of branding and information solutions that optimize labor and supply chain efficiency, reduce waste, advance sustainability, circularity and transparency, and better connect brands and consumers. Our products and solutions include labeling and functional materials, radio-frequency identification ("RFID") inlays and tags, software applications that connect the physical and digital, and a variety of products and solutions that enhance branded packaging and carry or display information that improves the customer experience. We serve an array of industries worldwide, including home and personal care, apparel, general retail, e-commerce, logistics, food and grocery, pharmaceuticals and automotive.
Principles of Consolidation
Our Consolidated Financial Statements include the accounts of majority-owned and controlled subsidiaries. Intercompany accounts, transactions and profits are eliminated in consolidation.
Fiscal Year
Our fiscal years generally consist of 52 weeks, but every fifth or sixth fiscal year consists of 53 weeks; our 2023, 2022, and 2021 fiscal years consisted of 52-week periods ending December 30, 2023, December 31, 2022 and January 1, 2022, respectively.
Accounting Guidance Updates
Supplier Finance Programs
In the first quarter of 2023, we adopted guidance that requires disclosures of key supplier finance program terms, information about obligations under these programs and a rollforward of these obligations. This guidance was effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the disclosure on rollforward information, which is effective for fiscal years beginning after December 15, 2023. See Note 16, “Supplemental Financial Information,” for more information.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make estimates and assumptions for the reporting period and as of the date of our financial statements. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenue and expense. As the effects of future events cannot be determined, actual results could differ significantly from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash on hand, deposits in banks, cash-in-transit, and bank drafts and short-term investments with maturities of three months or less when purchased or received. The carrying value of these assets approximates fair value due to the short maturity of these instruments.
Inventories
We state inventories at the lower of cost or net realizable value and categorize them as raw materials, work-in-progress, or finished goods. Cost is determined using the first-in, first-out method. We record inventory that is damaged, obsolete, excess and slow-moving to cost of products sold and we establish a lower cost basis for the inventory. Slow-moving inventory is reviewed by category and may be recognized partially or fully to cost of products sold depending on the type of product, level of usage and length of time the product has been included in inventory.
Trade Accounts Receivable
We record trade accounts receivable at the invoiced amount. Our allowance for credit losses reflects customer trade accounts receivable that are estimated to be partially or entirely uncollectible. These allowances are used to reduce gross trade receivables to their net realizable values. We record these allowances based on estimates related to the following:
•The financial condition of customers;
•The aging of receivable balances;
•Our historical collection experience; and
•Current and expected future macroeconomic and market conditions.
Property, Plant and Equipment
We generally compute depreciation using the straight-line method over the estimated useful lives of the respective assets, ranging from ten to 45 years for buildings and improvements and three to 15 years for machinery and equipment. Leasehold improvements are depreciated over the shorter of the useful life of the asset or the term of the associated leases. We expense maintenance and repair costs as incurred; we capitalize renewals and improvements. Upon the sale or retirement of assets, the accounts are relieved of the cost and the related accumulated depreciation, with any resulting gain or loss included in net income.
Leases
Our leases primarily relate to office and warehouse space, machinery, transportation, and equipment for information technology. We determine if an arrangement is a lease or contains a lease at inception. For lease accounting purposes, we do not separate lease and nonlease components, nor do we record operating or finance lease assets and liabilities for short-term leases. We have options to renew or terminate some of our leases. We evaluate renewal and termination options based on considerations available at the lease commencement date and over the lease term to determine if we are reasonably certain to exercise these options. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date to determine the present value of lease payments. We recognize expense for operating leases on a straight-line basis over the lease term, with variable lease payments recognized in the periods in which they are incurred.
Software
We capitalize software costs incurred during the application development stage of software development, including costs incurred for design, coding, installation to hardware, testing, and upgrades and enhancements that provide the software or hardware with additional functionalities and capabilities. We expense software costs, including internal and external training costs and maintenance costs, incurred during the preliminary project stage and the post-implementation and/or operation stage. In addition, we capitalize implementation costs incurred under a hosting arrangement that is a service contract. Capitalized software, which is included in “Other assets” in the Consolidated Balance Sheets, is amortized on a straight-line basis over the estimated useful life of the software, which is generally between five and ten years.
Venture Investments
We invest in privately held companies and utilize the measurement alternative for equity investments that do not have readily determinable fair values, measuring them at cost less impairment plus or minus observable price changes in orderly transactions. The carrying value of our venture investments is included in “Other assets” in the Consolidated Balance Sheets.
See Note 9, “Fair Value Measurements,” for more information.
Impairment of Long-lived Assets
We record impairment charges when the carrying amounts of long-lived assets are determined not to be recoverable. We measure recoverability by comparing the undiscounted cash flows expected from the applicable asset or asset group’s use and eventual disposition to its carrying value. We calculate the amount of impairment loss as the excess of the carrying value over the fair value. Historically, changes in market conditions and management strategy have caused us to reassess the carrying amount of our long-lived assets.
Goodwill and Other Intangibles Resulting from Business Acquisitions
We account for business combinations using the acquisition method, with the excess of the acquisition cost over the fair value of net tangible assets and identified intangible assets acquired considered goodwill. As a result, we disclose goodwill separately from other intangible assets. Other identifiable intangibles include customer relationships, patented and other developed technology, and trade names and trademarks.
We perform an annual impairment test of goodwill during the fourth quarter and, as necessary, if changes in facts and circumstances that indicate the fair value of a reporting unit may be less than its carrying value. Factors that may cause us to perform an impairment test outside of our annual assessment include significant underperformance of a business relative to expected operating results, significant adverse economic and industry trends, significant decline in our market capitalization for an extended period of time relative to net book value, or our decision to divest a portion of a reporting unit. In performing impairment tests, we have the option to first assess qualitative factors to determine whether it is necessary to perform a quantitative assessment for goodwill impairment. If the qualitative assessment indicates that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative assessment. A quantitative assessment primarily uses the present value (discounted cash flow) method to determine the fair value of reporting units with goodwill.
We compare the fair value of each reporting unit to its carrying amount, and, to the extent the carrying amount exceeds the unit’s fair value, we recognize an impairment of goodwill for the excess up to the amount of goodwill of that reporting unit.
In consultation with outside specialists, we estimate the fair value of our reporting units using various valuation techniques, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various assumptions about our reporting units, including their respective forecasted sales, operating margins and growth rates, as well as discount rates. Our assumptions about discount rates are based on the weighted average cost of capital for comparable companies. Our assumptions about sales, operating margins and growth rates are based on our forecasts, business plans, economic projections, anticipated future cash flows, and marketplace data. We also make assumptions for varying perpetual growth rates for periods beyond our long-term business plan period. We base our fair value estimates on projected financial information and assumptions that we believe are reasonable. However, actual future results may differ materially from these estimates and projections. The valuation methodology we use to estimate the fair value of reporting units requires inputs and assumptions that reflect current market conditions, as well as the impact of planned business and operational strategies that require management judgment. The estimated fair value could increase or decrease depending on changes in the inputs and assumptions.
We test indefinite-lived intangible assets, consisting of trade names and trademarks, for impairment in the fourth quarter or whenever events or circumstances indicate that it is more-likely-than-not that their carrying amounts exceed their fair values. In performing the impairment tests, we have the option first to assess qualitative factors to determine whether it is necessary to perform a quantitative assessment for indefinite-lived intangible asset impairment. If we decide not to perform a qualitative assessment, or if the qualitative assessment indicates that it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying value, we perform a quantitative assessment. Fair value is estimated as the discounted value of future revenues using a royalty rate that a third party would pay to use the asset. Variation in the royalty rates could impact our estimate of fair value. If the carrying amount of an asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
We amortize finite-lived intangible assets, consisting of customer relationships, patented and other developed technology, trade names and trademarks, and other intangibles, on a straight-line basis over their estimated useful lives.
See Note 3, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” for more information.
Foreign Currency
We translate asset and liability accounts of international operations into U.S. dollars at current rates. Revenues and expenses are translated at the weighted average currency rate for the fiscal year. We record gains and losses resulting from hedging the value of investments in certain international operations and from the translation of balance sheet accounts directly as a component of other comprehensive income.
We account for our operations in Argentina as highly inflationary, because the country’s three-year cumulative inflation rate exceeds 100%. As a result, the functional currency of our Argentine subsidiary is the U.S. dollar.
Financial Instruments
We enter into foreign exchange derivative contracts to reduce our risk from exchange rate fluctuations associated with receivables, payables, loans and firm commitments denominated in certain foreign currencies that arise primarily as a result of our operations outside the U.S. From time to time, we enter into interest rate contracts to help manage our exposure to certain interest rate fluctuations. We also enter into futures contracts to hedge certain price fluctuations for a portion of our anticipated domestic purchases of natural gas. The maximum length of time for which we hedge our exposure to the variability in future cash flows is 36 months for forecasted foreign exchange and commodity transactions and 10 years for cross-currency swap transactions.
On the date we enter into a derivative contract, we determine whether the derivative will be designated as a hedge. Derivatives designated as hedges are classified as either (1) hedges of the fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value” hedges) or (2) hedges of a forecasted transaction or the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (“cash flow” hedges). Other derivatives not designated as hedges are recorded on the balance sheets at fair value, with changes in fair value recognized in earnings. Our policy is not to purchase or hold any foreign currency, interest rate or commodity contracts for trading purposes.
We assess, both at the inception of any hedge and on an ongoing basis, whether our hedges are highly effective. If we determine that a hedge is not highly effective, we prospectively discontinue hedge accounting. For cash flow hedges, we record gains and losses as components of other comprehensive income and reclassify them into earnings in the same period during which the hedged transaction affects earnings. In the event that the anticipated transaction is no longer likely to occur, we recognize the change in fair value of the instrument in current period earnings. We recognize changes in fair value hedges in current period earnings. We also recognize changes in the fair value of underlying hedged items (such as recognized assets or liabilities) in current period earnings and offset the changes in the fair value of the derivative.
In the Consolidated Statements of Cash Flows, hedges are classified in the same category as the item hedged, primarily in operating activities.
See Note 5, “Financial Instruments,” for more information.
Fair Value Measurements
We define fair value as the price that would be received from selling an asset or paid for transferring a liability in an orderly transaction between market participants at the measurement date. In determining fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability.
We determine fair value based on a three-tier fair value hierarchy, which we use to prioritize the inputs used in measuring fair value. These tiers consist of Level 1, which are observable inputs such as quoted prices in active markets; Level 2, which are inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, which are unobservable inputs in which little or no market data exists, requiring us to develop our own assumptions to determine the best estimate of fair value.
Revenue Recognition
Substantially all of our revenue is derived from the sale of products. Our Materials Group reportable segment sells pressure-sensitive label materials, films, performance tapes and fasteners. Our Solutions Group reportable segment sells a wide variety of branding and information solutions-oriented products, such as tickets, tags, labels (including RFID inlays), as well as related equipment, services, and supplies, that provide our customers with solutions for them to optimize branding and engagement with their consumers and enable item visibility and traceability. We recognize revenue for an amount that reflects the consideration which we expect from the sale of our products when we satisfy a performance obligation by transferring control of our products to a customer. We consider a number of factors in determining when we have transferred control to a customer, including the following: (i) our present right to payment; (ii) the customer’s legal title to the asset; (iii) physical possession of the asset; (iv) the customer’s significant risks and rewards of ownership of the asset; and (v) the customer’s acceptance of the asset. Generally, there are no substantive differences in revenue recognition considerations among our various products. Control generally transfers to a customer at a point in time upon shipment or delivery, depending on the specific terms of sale with the customer.
Our payment terms with customers are generally consistent with those used in the industries and the regions in which we operate.
We accept sales returns in certain limited circumstances. We record a liability for estimated returns and a corresponding reduction to sales in the amount we expect to repay or credit customers, which we base on historical returns and outstanding customer claims. We update our estimates each reporting period.
Sales rebates, discounts and other customer concessions represent variable consideration and are common in the industries and regions in which we operate, which we account for as a reduction to sales based on estimates at the time at which products are sold. We base these estimates on our historical experience, as well as current information such as sales forecasts. We regularly review our estimates and adjust the revenue recognized from sales as necessary as additional information becomes available.
We exclude sales tax, value-added tax and other taxes we collect from customers from sales. We account for shipping and handling activities after control of a product is transferred to a customer as fulfillment costs and not as separate performance obligations. As a practical expedient, we have elected not to disclose the value of unsatisfied performance obligations for contracts with an expected length of less than one year. We generally expense sales commissions when incurred because the expected amortization period is one year or less. We record these costs in “Marketing, general and administrative expense” in the Consolidated Statements of Income.
Research and Development
Research and development costs are related to research, design and testing of new products and applications, which we expense as incurred.
Long-Term Incentive Compensation
No long-term incentive compensation expense was capitalized in 2023, 2022 or 2021.
Valuation of Stock-Based Awards
We base our stock-based compensation expense on the fair value of awards, adjusted for estimated forfeitures, amortized on a straight-line basis over the requisite service period for stock options and restricted stock units (“RSUs”). We base compensation expense for performance units (“PUs”) on the fair value of awards, adjusted for estimated forfeitures, and amortized on a straight-line basis as these awards cliff-vest at the end of the requisite service period. We base compensation expense related to market-leveraged stock units (“MSUs”) on the fair value of awards, adjusted for estimated forfeitures, and amortized on a graded-vesting basis over their respective performance periods.
Compensation expense for awards with a market condition as a performance objective, which includes PUs and MSUs, is not adjusted if the condition is not met, as long as the requisite service period is met.
We estimate the fair value of stock options as of the date of grant using the Black-Scholes option-pricing model. This model requires input assumptions for our expected dividend yield, expected stock price volatility, risk-free interest rate and expected option term.
We determine the fair value of RSUs and the component of PUs that is subject to the achievement of a performance objective using a financial performance condition based on the fair market value of our common stock as of the date of grant, adjusted for foregone dividends. Over the performance period of the PUs, the estimated number of shares of our common stock issuable upon vesting is adjusted upward or downward from the target shares at the time of grant based on the probability of the financial performance objectives established for the award being achieved.
We determine the fair value of stock-based awards that are subject to the achievement of performance objectives based on a market condition, which includes MSUs and the other component of PUs, using the Monte-Carlo simulation method, which utilizes multiple input variables, including expected stock price volatility and other assumptions appropriate for determining fair value, to estimate the probability of satisfying the target performance objectives established for the award.
Certain of these assumptions are based on management’s estimates, in consultation with outside specialists. Significant changes in assumptions for future awards and actual forfeiture rates could materially impact stock-based compensation expense and our results of operations.
Valuation of Cash-Based Awards
Cash-based awards consist of long-term incentive units (“LTI Units”) granted to eligible employees. We classify LTI Units as liability awards and remeasure them at each quarter-end over the applicable vesting or performance period. In addition to LTI Units with terms and conditions that mirror those of RSUs, we also grant certain employees LTI Units with terms and conditions that mirror those of PUs and MSUs.
Forfeitures
We estimate expected forfeitures in determining the compensation cost to be recognized each period, rather than accounting for forfeitures as they occur. We record changes in estimated forfeiture rates as cumulative adjustments in the period estimates are revised.
See Note 12, “Long-term Incentive Compensation,” for more information.
Taxes Based on Income
Because we are subject to income tax in the U.S. and multiple foreign jurisdictions, judgment is required in evaluating and estimating our worldwide provision, accruals for taxes, deferred taxes and tax positions. Our provision for income taxes is determined using the asset and liability approach in accordance with GAAP. Under this approach, deferred taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities. We record a valuation allowance to reduce our deferred tax assets when uncertainty regarding their realizability exists. We recognize and measure our uncertain tax positions following the more-likely-than-not threshold for recognition and measurement for tax positions we take or expect to take on a tax return.
See Note 14, “Taxes Based on Income,” for more information.
Recent Accounting Requirements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued guidance to expand annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. We are currently assessing the impact of adopting this guidance on our financial statement disclosures.
In December 2023, the FASB issued guidance on improvements to income tax disclosures in the rate reconciliation and income taxes paid. The guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. We are currently assessing the impact of adopting this guidance on our financial statement disclosures.
NOTE 2. BUSINESS ACQUISITIONS
2023 Business Acquisitions
On November 23, 2023, we completed our business acquisition of Silver Crystal Group ("Silver Crystal"), a Canada-based provider of sports apparel customization and application solutions across in-venue, direct-to-business and e-commerce platforms. On May 22, 2023, we completed our business acquisition of LG Group, Inc. ("Lion Brothers"), a Maryland-based designer and manufacturer of apparel brand embellishments. On March 6, 2023, we completed our business acquisition of Thermopatch, Inc. ("Thermopatch"), a New York-based manufacturer specializing in labeling, embellishments and transfers for the sports, industrial laundry, workwear and hospitality industries. These acquisitions expanded the product portfolio in our Solutions Group reportable segment.
The acquisitions of Silver Crystal, Lion Brothers and Thermopatch are referred to collectively as the "2023 Acquisitions."
The aggregate purchase consideration, including purchase consideration payable, for the 2023 Acquisitions was approximately $231 million. We funded the 2023 Acquisitions using cash and commercial paper borrowings. In addition to the cash paid at closing, the sellers in one of these acquisitions are eligible for earn-out payments of up to $5 million, subject to the acquired company achieving certain post-acquisition performance targets. As of the acquisition date, we included an estimate of the fair value of these earn-out payments in the aggregate purchase consideration.
The final allocations of purchase consideration for the 2023 Acquisitions to assets and liabilities are ongoing as we continue to evaluate certain balances, estimates and assumptions during the measurement period (up to one year from their respective acquisition date). Consistent with the allowable time to complete our assessment, the valuation of certain acquired assets and liabilities, including environmental liabilities and income taxes, is currently pending finalization.
The 2023 Acquisitions were not material, individually or in the aggregate, to the Consolidated Financial Statements.
2022 Business Acquisitions
In January 2022, we completed our business acquisitions of TexTrace AG ("TexTrace"), a Switzerland-based technology developer specializing in custom-made woven and knitted RFID products that can be sewn onto or inserted into garments, and Rietveld Serigrafie B.V. and Rietveld Screenprinting Serigrafi Baski Matbaa Tekstil Ithalat Ihracat Sanayi ve Ticaret Limited Sirketi (collectively, "Rietveld"), a Netherlands-based provider of external embellishment solutions and application and printing methods for performance brands and team sports in Europe. These acquisitions expanded the product portfolio in our Solutions Group reportable segment. The acquisitions of TexTrace and Rietveld are referred to collectively as the "2022 Acquisitions."
The aggregate purchase consideration for the 2022 Acquisitions was approximately $35 million. We funded the 2022 Acquisitions using cash and commercial paper borrowings. In addition to the cash paid at closing, the sellers in one of these acquisitions are eligible for earn-out payments of up to $30 million, subject to the acquired company achieving certain post-acquisition performance targets. As of the acquisition date, we included an estimate of the fair value of these earn-out payments in the aggregate purchase consideration.
The 2022 Acquisitions were not material, individually or in the aggregate, to the Consolidated Financial Statements.
Vestcom Acquisition
On August 31, 2021, we completed our business acquisition of CB Velocity Holdings, LLC (“Vestcom”), an Arkansas-based provider of shelf-edge pricing, productivity and consumer engagement solutions for retailers and consumer packaged goods companies, for purchase consideration of $1.47 billion. We funded this acquisition using cash and proceeds from both commercial paper borrowings and issuances of senior notes. Refer to Note 4, “Debt,” to the Consolidated Financial Statements for more information.
Vestcom’s solutions expanded our position in high-value categories and added channel access and data management capabilities to our Solutions Group reportable segment.
The impact of the Vestcom acquisition was not material to the pro forma net sales or net income of our combined operations for the periods presented. Post-acquisition net sales and net income related to Vestcom were not material to the Consolidated Statements of Income for 2021.
Other 2021 Business Acquisitions
On March 18, 2021, we completed our business acquisition of the net assets of ZippyYum, LLC (“ZippyYum”), a California-based developer of software products used in the food service and food preparation industries. This acquisition expanded the product portfolio in our Solutions Group reportable segment.
On March 1, 2021, we completed our business acquisition of the issued and outstanding stock of JDC Solutions, Inc. (“JDC”), a Tennessee-based manufacturer of pressure-sensitive specialty tapes. This acquisition expanded the product portfolio in our Materials Group reportable segment.
The acquisitions of ZippyYum and JDC are referred to collectively as the “Other 2021 Acquisitions.”
The aggregate purchase consideration for the Other 2021 Acquisitions was approximately $43 million. We funded the Other 2021 Acquisitions using cash and commercial paper borrowings. In addition to the cash paid at closing, the sellers in one of these acquisitions are eligible for earn-out payments of up to approximately $13 million subject to the acquired company’s achievement of certain post-acquisition performance targets. As of the acquisition date, we estimated the fair value of these earn-out payments to be approximately $12 million, which was included in the $43 million of aggregate purchase consideration.
The Other 2021 Acquisitions were not material, individually or in the aggregate, to the Consolidated Financial Statements.
NOTE 3. GOODWILL AND OTHER INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS
Goodwill
Results from our annual goodwill impairment test in the fourth quarter of 2023 indicated that no impairment occurred during 2023. The assumptions used in our assessment were primarily based on Level 3 inputs.
Changes in the net carrying amount of goodwill for 2023 and 2022 by reportable segment are shown below:
| | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | Materials Group | | Solutions Group | | | | | | Total |
Goodwill as of January 1, 2022 | | $ | 645.5 | | | $ | 1,236.0 | | | | | | | $ | 1,881.5 | |
Acquisitions(1) | | — | | | 16.3 | | | | | | | 16.3 | |
Acquisition adjustment(2) | | — | | | (.5) | | | | | | | (.5) | |
Translation adjustments | | (26.8) | | | (8.1) | | | | | | | (34.9) | |
Goodwill as of December 31, 2022 | | 618.7 | | | 1,243.7 | | | | | | | 1,862.4 | |
Acquisitions(3) | | — | | | 135.0 | | | | | | | 135.0 | |
| | | | | | | | | | |
Translation adjustments | | 12.0 | | | 4.2 | | | | | | | 16.2 | |
| | | | | | | | | | |
Goodwill as of December 30, 2023 | | $ | 630.7 | | | $ | 1,382.9 | | | | | | | $ | 2,013.6 | |
(1)Goodwill acquired related to the 2022 Acquisitions. We expect the recognized goodwill related to the 2022 Acquisitions not to be deductible for income tax purposes.
(2)Measurement period adjustment related to the finalization of the purchase price allocation for the Vestcom acquisition.
(3)Goodwill acquired related to the 2023 Acquisitions. We expect substantially all of the recognized goodwill related to the 2023 Acquisitions not to be deductible for income tax purposes.
The carrying amounts of goodwill at December 30, 2023 and December 31, 2022 were net of accumulated impairment losses of $820 million recognized in fiscal year 2009 by our Solutions Group reportable segment.
Indefinite-Lived Intangible Assets
Results from our annual indefinite-lived intangible assets impairment test in the fourth quarter indicated that no impairment occurred in 2023. The carrying value of indefinite-lived intangible assets resulting from business acquisitions, consisting of trade names and trademarks, was $155.3 million and $154.7 million at December 30, 2023 and December 31, 2022, respectively.
Finite-Lived Intangible Assets
In connection with the 2023 Acquisitions, we acquired approximately $94 million of identifiable finite-lived intangible assets, which consisted of customer relationships, patented and other developed technology, and trade names and trademarks. We utilized the income approach to estimate the fair value of acquired identifiable intangibles, primarily using Level 3 inputs. We applied significant judgment in determining the fair value of intangible assets, which included our estimates and assumptions with respect to estimated future revenue and related profit margins, customer retention rates, technology migration curves, royalty rates, discount rates and economic lives assigned to the acquired intangible assets.
The table below summarizes the amounts and weighted average useful lives of the intangible assets associated with the 2023 Acquisitions as of the acquisition date.
| | | | | | | | | | | | | | |
| | Amount (in millions) | | Weighted average amortization period (in years) |
Customer relationships | | $ | 68.8 | | | 11 |
Patented and other developed technology | | 22.2 | | | 7 |
Trade names and trademarks | | 3.0 | | | 6 |
| | | | |
In connection with the 2022 Acquisitions, we acquired approximately $21 million of identifiable finite-lived intangible assets, which consisted of patented and other developed technology as well as customer relationships.
Refer to Note 2, “Business Acquisitions,” for more information.
The table below sets forth our finite-lived intangible assets resulting from business acquisitions at December 30, 2023 and December 31, 2022, which continue to be amortized.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 |
(In millions) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer relationships | | $ | 922.5 | | | $ | 383.7 | | | $ | 538.8 | | | $ | 852.2 | | | $ | 330.1 | | | $ | 522.1 | |
Patented and other developed technology | | 278.3 | | | 130.2 | | | 148.1 | | | 261.9 | | | 104.3 | | | 157.6 | |
Trade names and trademarks | | 17.4 | | | 11.7 | | | 5.7 | | | 14.4 | | | 10.3 | | | 4.1 | |
Other intangibles | | 3.2 | | | 2.0 | | | 1.2 | | | 3.2 | | | 1.4 | | | 1.8 | |
Total | | $ | 1,221.4 | | | $ | 527.6 | | | $ | 693.8 | | | $ | 1,131.7 | | | $ | 446.1 | | | $ | 685.6 | |
Amortization expense for finite-lived intangible assets resulting from business acquisitions was $86.3 million for 2023, $81.8 million for 2022 and $44.6 million for 2021.
We expect estimated amortization expense for finite-lived intangible assets resulting from business acquisitions for each of the next five fiscal years and thereafter to be as follows:
| | | | | | | | |
(In millions) | | Estimated Amortization Expense |
2024 | | $ | 89.7 | |
2025 | | 88.9 | |
2026 | | 85.9 | |
2027 | | 85.4 | |
2028 | | 78.0 | |
2029 and thereafter | | 265.9 | |
NOTE 4. DEBT
Short-Term Borrowings
We had $112 million and $128 million of outstanding borrowings from U.S. commercial paper issuances as of December 30, 2023 and December 31, 2022, respectively, with a weighted average interest rate of 5.54% and 4.84%, respectively.
We have a Euro-Commercial Paper Program under which we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding of $500 million. Proceeds from issuances under this program may be used for general corporate purposes. The maturities of the notes vary, but may not exceed 364 days from the date of issuance. Our payment obligations with respect to any notes issued under this program are backed by our revolving credit facility (the “Revolver”). There are no financial covenants under this program. We had balances of $199.2 million and $213.0 million outstanding under this program as of December 30, 2023 and December 31, 2022, respectively, with a weighted average interest rate of 4.13% and 2.06%, respectively.
Short-Term Credit Facilities
In January 2023, we extended the maturity date of the Revolver by one year to February 13, 2026, and increased the commitments by $400 million, from $800 million to $1.2 billion. Additionally, we amended the Revolver to replace the LIBOR benchmark interest rate with Term SOFR, Euribor and SONIA benchmark interest rates. We use the Revolver as a back-up facility for our commercial paper program and for other corporate purposes.
No balance was outstanding under the Revolver as of December 30, 2023 or December 31, 2022. Commitment fees associated with the Revolver in 2023, 2022 and 2021 were $1.2 million, $0.9 million and $0.9 million, respectively.
In addition to the Revolver, we have short-term lines of credit available in various countries of approximately $327 million in the aggregate at December 30, 2023. These lines may be cancelled at any time by us or the issuing banks. Short-term borrowings outstanding under these lines of credit were $1.0 million and $2.4 million at December 30, 2023 and December 31, 2022, respectively, with weighted average interest rates of 2.24% and 0.64%, respectively.
From time to time, we provide guarantees on certain arrangements with banks. Our exposure to these guarantees is not material.
Long-Term Borrowings
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 our $250 million aggregate principal amount of senior notes that matured on April 15, 2023.
In August 2021, we issued $500 million of senior notes, due February 15, 2032, which bear an interest rate of 2.250%, payable semiannually in arrears. Our net proceeds from this issuance, after deducting underwriting discounts and offering expenses, were $493.7 million. Additionally, in August 2021, we issued $300 million of senior notes, due August 15, 2024, which we can repay without penalty on or after August 15, 2022 and bear an interest rate of 0.850%, payable semiannually in arrears. Our net proceeds from this issuance, after deducting underwriting discounts and offering expenses, were $298 million. We used the net proceeds from these two debt issuances to finance a portion of the Vestcom acquisition.
Our long-term debt, and related interest rates, at year-end 2023 and 2022 is shown below.
| | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 |
Long-term debt | | | | |
Medium-term notes: | | | | |
Series 1995 due 2025 | | $ | 30.0 | | | $ | 30.0 | |
Long-term notes: | | | | |
Senior notes due 2023 at 3.4% | | — | | | 249.7 | |
Senior notes due 2024 at 0.85% | | 299.6 | | | 299.0 | |
Senior notes due 2025 at 1.25%(1) | | 552.6 | | | 531.3 | |
Senior notes due 2028 at 4.875% | | 496.7 | | | 496.0 | |
Senior notes due 2030 at 2.650% | | 496.1 | | | 495.5 | |
Senior notes due 2032 at 2.25% | | 495.1 | | | 494.5 | |
Senior notes due 2033 at 6.0% | | 149.2 | | | 149.1 | |
Senior notes due 2033 at 5.75% | | 395.3 | | | — | |
Less amount classified as current | | (299.6) | | | (249.7) | |
Total long-term debt(2) | | $ | 2,615.0 | | | $ | 2,495.4 | |
| | | | | |
(1) | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
These senior notes are euro-denominated. The face value is €500 million. |
(2) | Included unamortized debt issuance costs and debt discounts of $11.3 million and $7.4 million, respectively, as of year-end 2023 and $10.5 million and $7.1 million, respectively, as of year-end 2022. |
None.
At year-end 2023 and 2022, our medium-term notes had accrued interest at a weighted average fixed rate of 7.5%.We expect maturities of our long-term debt for each of the next five fiscal years and thereafter to be as follows:
| | | | | | | | |
Year | | (In millions) |
2024 | | $ | 300.0 | |
2025 | | 583.4 | |
2026 | | — | |
2027 | | — | |
2028 | | 500.0 | |
2028 and thereafter | | 1,550.0 | |
Refer to Note 7, “Commitments and Leases,” for information related to finance leases.
Other
The Revolver contains a financial covenant that requires us to maintain a specified ratio of total debt in relation to a certain measure of income. As of December 30, 2023 and December 31, 2022, we were in compliance with our financial covenant.
Our total interest costs in 2023, 2022 and 2021 were $126.5 million, $89.8 million and $75.0 million, respectively, of which $7.5 million, $5.7 million and $4.8 million, respectively, was capitalized as part of the cost of property, plant and equipment and capitalized software.
The estimated fair value of our long-term debt is primarily based on the credit spread above U.S. Treasury securities or euro government bond securities, as applicable, on notes with similar rates, credit ratings and remaining maturities. The fair value of short-term borrowings, which includes commercial paper issuances and short-term lines of credit, approximates their carrying value given their short duration. The fair value of our total debt was $3.11 billion at December 30, 2023 and $2.85 billion at December 31, 2022. Fair value amounts were determined based primarily on Level 2 inputs, which are inputs other than quoted prices in active markets that are either directly or indirectly observable. Refer to Note 1, “Summary of Significant Accounting Policies,” for more information.
NOTE 5. FINANCIAL INSTRUMENTS
As of December 30, 2023, the aggregate U.S. dollar equivalent notional value of our outstanding commodity contracts and foreign exchange contracts was $5.8 million and $1.34 billion, respectively. Our outstanding foreign exchange contracts as of December 30, 2023 were recorded in various currencies, primarily the U.S. dollar, euro, Chinese renminbi, British pound sterling and Hong Kong dollar.
We recognize derivative instruments as either assets or liabilities at fair value in the Consolidated Balance Sheets. We designate commodity forward contracts on forecasted purchases of commodities and foreign exchange contracts on forecasted transactions as cash flow hedges. We also enter into foreign exchange contracts to offset certain of our economic exposures arising from foreign exchange rate fluctuations.
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of “Accumulated other comprehensive loss” and reclassified into earnings in the same period(s) during which the hedged transaction impacts earnings. Gains and losses on these derivatives, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings. Except for the cross-currency swap discussed below, cash flow hedges were not material in 2023, 2022 or 2021.
Cross-Currency Swap
In March 2020, we entered into U.S. dollar to euro cross-currency swap contracts with a total notional amount of $250 million to effectively convert our fixed-rate U.S. dollar-denominated debt into euro-denominated debt, including semiannual interest payments and the payment of principal at maturity. During the term of the contract, which ends on April 30, 2030, we pay fixed-rate interest in euros and receive fixed-rate interest in U.S. dollars. These contracts have been designated as cash flow hedges. The fair value of these contracts was $2.3 million as of December 30, 2023 and $15.5 million as of December 31, 2022, which were included in "Other Assets" in the Consolidated Balance Sheets. Refer to Note 9, “Fair Value Measurements,” to the Consolidated Financial Statements for more information.
We recorded no ineffectiveness from our cross-currency swap to earnings during 2023, 2022 or 2021.
Other Derivatives
The following table shows the fair value and balance sheet locations of other derivatives as of December 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Asset | | Liability |
(In millions) | | Balance Sheet Location | | 2023 | | 2022 | | Balance Sheet Location | | 2023 | | 2022 |
Foreign exchange contracts | | Other current assets | | $ | 6.3 | | | $ | 4.3 | | | Other current liabilities | | $ | 6.0 | | | $ | 9.6 | |
Commodity contracts | | Other current assets | | — | | | — | | | Other current liabilities | | — | | | .2 | |
| | | | $ | 6.3 | | | $ | 4.3 | | | | | $ | 6.0 | | | $ | 9.8 | |
For other derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings.
The following table shows the components of the net gains (losses) recognized in income related to these derivative instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | Statements of Income Location | | 2023 | | 2022 | | 2021 |
Foreign exchange contracts | | Cost of products sold | | $ | 3.4 | | | $ | 5.6 | | | $ | 1.4 | |
Foreign exchange contracts | | Marketing, general and administrative expense | | 5.5 | | | (4.3) | | | 21.0 | |
| | | | $ | 8.9 | | | $ | 1.3 | | | $ | 22.4 | |
NOTE 6. PENSION AND OTHER POSTRETIREMENT BENEFITS
Defined Benefit Plans
We sponsor a number of defined benefit plans, the accrual of benefits under some of which has been frozen, covering eligible employees in the U.S. and certain other countries. Benefits payable to an employee are based primarily on years of service and the employee’s compensation during the course of his or her employment with our company.
We are also obligated to pay unfunded termination indemnity benefits to certain employees outside the U.S., which are subject to applicable agreements, laws and regulations. We have not incurred significant costs related to these benefits, and, therefore, no related costs have been included in the disclosures below.
Plan Assets
Assets in our non-U.S. plans are invested in accordance with locally accepted practices and primarily include equity securities, fixed income securities, insurance contracts and cash. Asset allocations and investments vary by country and plan. Our target plan asset investment allocation for our non-U.S. plans in the aggregate is approximately 26% in equity securities, 59% in fixed income securities and cash, and 15% in insurance contracts and other investments, subject to periodic fluctuations among these asset classes.
Fair Value Measurements
The valuation methodologies we use for assets measured at fair value are described below.
Cash is valued at nominal value. Cash equivalents and mutual funds are valued at fair value as determined by quoted market prices, based upon the net asset value (“NAV”) of shares held at year-end. Pooled funds are structured as collective trusts, not publicly traded and valued by calculating NAV per unit based on the NAV of the underlying funds/trusts as a practical expedient for the fair value of the pooled funds. The pooled funds are categorized by the primary investment strategy which is primarily investments in equity and fixed income securities. The pooled funds categorized as other investments are primarily investments in real estate funds. Insurance contracts are valued at book value, which approximates fair value and is calculated using the prior-year balance plus or minus investment returns and changes in cash flows.
These methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While we believe these valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following table sets forth, by level within the fair value hierarchy (as applicable), non-U.S. plan assets at fair value:
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| | | | Fair Value Measurements Using |
(In millions) | | Total | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Other Unobservable Inputs (Level 3) |
2023 | | | | | | | | |
Cash | | $ | 1.3 | | | $ | 1.3 | | | $ | — | | | $ | — | |
Insurance contracts | | 42.6 | | | — | | | — | | | 42.6 | |
Pooled funds – real estate investment trusts | | 6.4 | | | — | | | — | | | 6.4 | |
Pooled funds – fixed income securities(1) | | 389.8 | | | | | | | |
Pooled funds – equity securities(1) | | 169.4 | | | | | | | |
Pooled funds – other investments(1) | | 53.7 | | | | | | | |
Total non-U.S. plan assets at fair value | | $ | 663.2 | | | | | | | |
2022 | | | | | | | | |
Cash | | $ | 6.4 | | | $ | 6.4 | | | $ | — | | | $ | — | |
Insurance contracts | | 37.1 | | | — | | | — | | | 37.1 | |
Pooled funds – real estate investment trusts | | 8.3 | | | — | | | — | | | 8.3 | |
Pooled funds – fixed income securities(1) | | 335.7 | | | | | | | |
Pooled funds – equity securities(1) | | 151.9 | | | | | | | |
Pooled funds – other investments(1) | | 45.9 | | | | | | | |
Total non-U.S. plan assets at fair value | | $ | 585.3 | | | | | | | |
(1)Pooled funds that are measured at fair value using the NAV per unit (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to reconcile to total non-U.S. plan assets.
The following table presents a reconciliation of Level 3 non-U.S. plan asset activity during the year ended December 30, 2023:
| | | | | | | | | | | | | | | | | | | | |
| | Level 3 Assets |
(In millions) | | Insurance Contracts | | Pooled Funds – Real Estate Investment Trusts | | Total |
Balance at December 31, 2022 | | $ | 37.1 | | | $ | 8.3 | | | $ | 45.4 | |
Net realized and unrealized gain (loss) | | 1.3 | | | (2.3) | | | (1.0) | |
Purchases | | 3.5 | | | — | | | 3.5 | |
Settlements | | (2.8) | | | — | | | (2.8) | |
| | | | | | |
Acquisition | | 1.1 | | | — | | | 1.1 | |
Impact of changes in foreign currency exchange rates | | 2.4 | | | .4 | | | 2.8 | |
Balance at December 30, 2023 | | $ | 42.6 | | | $ | 6.4 | | | $ | 49.0 | |
Plan Assumptions
Discount Rate
In consultation with our actuaries, we annually review and determine the discount rates used to value our pension and other postretirement obligations. The assumed discount rate for each pension plan reflects market rates for high quality corporate bonds currently available. Our discount rate is determined by evaluating yield curves consisting of large populations of high quality corporate bonds. The projected pension benefit payment streams are then matched with bond portfolios to determine a rate that reflects the liability duration unique to our plans.
We use the full yield curve approach to estimate the service and interest cost components of net periodic benefit cost for our pension and other postretirement benefit plans. Under this approach, we apply multiple discount rates from a yield curve composed of the rates of return on several hundred high-quality, fixed income corporate bonds available at the measurement date. We believe that this approach provides a more precise measurement of service and interest cost by aligning the timing of a plan’s liability cash flows to its corresponding rates on the yield curve.
Long-term Return on Assets
We determine the long-term rate of return assumption for plan assets by reviewing the historical and expected returns of both the equity and fixed income markets, taking into account our asset allocation, the correlation between returns in our asset classes, and our mix of active and passive investments. Additionally, we evaluate current market conditions, including interest rates, and review market data for reasonableness and appropriateness.
Measurement Date
We measure the actuarial value of our benefit obligations and plan assets using the calendar month-end closest to our fiscal year-end and adjust for any contributions or other significant events between the measurement date and our fiscal year-end.
Plan Balance Sheet Reconciliations
The following table provides a reconciliation of benefit obligations, plan assets, funded status of the plans and accumulated other comprehensive loss for our defined benefit plans:
Plan Benefit Obligations
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits |
| | 2023 | | 2022 |
(In millions) | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
Change in projected benefit obligations | | | | | | | | |
Projected benefit obligations at beginning of year | | $ | 51.8 | | | $ | 586.9 | | | $ | 66.8 | | | $ | 882.4 | |
Service cost | | — | | | 10.5 | | | — | | | 16.5 | |
Interest cost | | 2.4 | | | 24.7 | | | 1.2 | | | 10.8 | |
Participant contributions | | — | | | 4.5 | | | — | | | 4.6 | |
Amendments | | — | | | (.1) | | | — | | | — | |
Actuarial (gain) loss | | 1.4 | | | 51.3 | | | (9.1) | | | (244.9) | |
Acquisition | | — | | | 1.2 | | | — | | | — | |
Benefits paid | | (6.3) | | | (25.3) | | | (7.1) | | | (21.3) | |
Settlements | | — | | | (.6) | | | — | | | (1.0) | |
Foreign currency translation | | — | | | 26.8 | | | — | | | (60.2) | |
Projected benefit obligations at end of year | | $ | 49.3 | | | $ | 679.9 | | | $ | 51.8 | | | $ | 586.9 | |
Accumulated benefit obligations at end of year | | $ | 49.3 | | | $ | 628.7 | | | $ | 51.8 | | | $ | 540.2 | |
Plan Assets
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits |
| | 2023 | | 2022 |
(In millions) | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
Change in plan assets | | | | | | | | |
Plan assets at beginning of year | | $ | — | | | $ | 585.3 | | | $ | — | | | $ | 874.6 | |
Actual return on plan assets | | — | | | 54.6 | | | — | | | (226.5) | |
Acquisition | | — | | | 1.1 | | | — | | | — | |
Employer contributions | | 6.3 | | | 17.2 | | | 7.1 | | | 15.2 | |
Participant contributions | | — | | | 4.5 | | | — | | | 4.6 | |
Benefits paid | | (6.3) | | | (25.3) | | | (7.1) | | | (21.3) | |
Settlements | | — | | | (.6) | | | — | | | (1.0) | |
Foreign currency translation | | — | | | 26.4 | | | — | | | (60.3) | |
Plan assets at end of year | | $ | — | | | $ | 663.2 | | | $ | — | | | $ | 585.3 | |
Funded Status
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits |
| | 2023 | | 2022 |
(In millions) | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
Funded status of the plans | | | | | | | | |
Other assets | | $ | — | | | $ | 67.8 | | | $ | — | | | $ | 70.0 | |
Other accrued liabilities | | (6.1) | | | (.2) | | | (6.2) | | | (.4) | |
Long-term retirement benefits and other liabilities(1) | | (43.2) | | | (84.3) | | | (45.6) | | | (71.2) | |
Plan assets less than benefit obligations | | $ | (49.3) | | | $ | (16.7) | | | $ | (51.8) | | | $ | (1.6) | |
(1)In accordance with our funding strategy, we have the option to fund certain of our U.S. liabilities with proceeds from our company-owned life insurance policies.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits |
| | 2023 | | 2022 |
| | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
Weighted average assumptions used to determine year-end benefit obligations | | | | | | | | |
Discount rate | | 4.86 | % | | 3.78 | % | | 5.06 | % | | 4.36 | % |
Compensation rate increase | | — | | | 2.73 | | | — | | | 2.75 | |
For U.S. and non-U.S. plans combined, the projected benefit obligations and fair values of plan assets for pension plans with projected benefit obligations in excess of plan assets were $210 million and $76 million, respectively, at year-end 2023 and $165 million and $42 million, respectively, at year-end 2022.
For U.S. and non-U.S. plans combined, the accumulated benefit obligations and fair values of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $162 million and $43 million, respectively, at year-end 2023 and $132 million and $23 million, respectively, at year-end 2022.
Accumulated Other Comprehensive Loss
The following table shows the pre-tax amounts recognized in “Accumulated other comprehensive loss” in the Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits |
| | 2023 | | 2022 |
(In millions) | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
Net actuarial loss | | $ | 9.6 | | | $ | 73.2 | | | $ | 9.1 | | | $ | 38.2 | |
Prior service (credit) cost | | — | | | (3.4) | | | — | | | (3.5) | |
Net amount recognized in accumulated other comprehensive loss | | $ | 9.6 | | | $ | 69.8 | | | $ | 9.1 | | | $ | 34.7 | |
The following table shows the pre-tax amounts recognized in “Other comprehensive loss (income)”:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits |
| | 2023 | | 2022 | | 2021 |
(In millions) | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
Net actuarial (gain) loss | | $ | .9 | | | $ | 32.6 | | | $ | (5.6) | | | $ | (.8) | | | $ | (.7) | | | $ | (34.8) | |
Prior service credit | | — | | | (.1) | | | — | | | — | | | — | | | (.9) | |
Amortization of unrecognized: | | | | | | | | | | | | |
Net actuarial gain | | (.4) | | | 2.1 | | | (.8) | | | (2.5) | | | (.8) | | | (6.1) | |
Prior service credit (cost) | | — | | | .4 | | | — | | | .4 | | | — | | | .4 | |
Settlements | | — | | | .1 | | | (.1) | | | .1 | | | (1.1) | | | (.5) | |
Net amount recognized in other comprehensive loss (income) | | $ | .5 | | | $ | 35.1 | | | $ | (6.5) | | | $ | (2.8) | | | $ | (2.6) | | | $ | (41.9) | |
Plan Income Statement Reconciliations
The following table shows the components of net periodic benefit cost, which are recorded in net income for our defined benefit plans:
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| | Pension Benefits |
| | 2023 | | 2022 | | 2021 |
(In millions) | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
Service cost | | $ | — | | | $ | 10.5 | | | $ | — | | | $ | 16.5 | | | $ | — | | | $ | 19.0 | |
Interest cost | | 2.4 | | | 24.7 | | | 1.2 | | | 10.8 | | | 1.0 | | | 8.9 | |
Actuarial (gain) loss | | .5 | | | — | | | (3.5) | | | — | | | (1.1) | | | — | |
Expected return on plan assets | | — | | | (33.2) | | | — | | | (21.9) | | | — | | | (19.8) | |
Amortization of actuarial loss | | .4 | | | (2.1) | | | .8 | | | 2.5 | | | .8 | | | 6.1 | |
Amortization of prior service (credit) cost | | — | | | (.4) | | | — | | | (.4) | | | — | | | (.4) | |
Recognized loss (gain) on settlements | | — | | | (.1) | | | .1 | | | (.1) | | | 1.1 | | | .5 | |
Net periodic benefit cost (credit) | | $ | 3.3 | | | $ | (.6) | | | $ | (1.4) | | | $ | 7.4 | | | $ | 1.8 | | | $ | 14.3 | |
Service cost and components of net periodic benefit cost other than service cost were included in “Marketing, general and administrative expense” and “Other non-operating expense (income), net” in the Consolidated Statements of Income, respectively.
The following table shows the weighted average assumptions used to determine net periodic cost:
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| | Pension Benefits |
| | 2023 | | 2022 | | 2021 |
| | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
Discount rate | | 5.06 | % | | 4.36 | % | | 2.19 | % | | 1.57 | % | | 2.20 | % | | 1.26 | % |
Expected return on assets | | — | | | 4.71 | | | — | | | 3.00 | | | — | | | 2.61 | |
Compensation rate increase | | — | | | 2.75 | | | — | | | 2.33 | | | — | | | 2.15 | |
Plan Contributions
We make contributions to our defined benefit plans sufficient to meet the minimum funding requirements of applicable laws and regulations, plus additional amounts, if any, we determine to be appropriate. The following table sets forth our expected contributions in 2024:
| | | | | | | | |
(In millions) | | |
U.S. pension plans | | $ | 6.3 | |
Non-U.S. pension plans | | 13.8 | |
Future Benefit Payments
The future benefit payments shown below reflect the expected service periods for eligible participants.
| | | | | | | | | | | | | | |
| | Pension Benefits |
(In millions) | | U.S. | | Non-U.S. |
2024 | | $ | 6.3 | | | $ | 25.7 | |
2025 | | 6.1 | | | 24.8 | |
2026 | | 5.9 | | | 28.7 | |
2027 | | 5.4 | | | 29.0 | |
2028 | | 4.9 | | | 27.7 | |
2029-2033 | | 18.4 | | | 157.4 | |
Postretirement Health Benefits
We provide postretirement health benefits to certain of our retired U.S. employees up to the age of 65 under a cost-sharing arrangement and provide supplemental Medicare benefits to certain of our U.S. retirees over the age of 65. Our postretirement health benefit plan was closed to new participants retiring after December 31, 2021. Our policy is to fund the cost of these postretirement benefits from operating cash flows. While we do not intend to terminate these postretirement health benefits, we may do so at any time, subject to applicable laws and regulations. At year-end 2023, our postretirement health benefits obligation and related loss recorded in “Accumulated other comprehensive loss” were approximately $2 million and $10 million, respectively. At year-end 2022, our postretirement health benefits obligation and related loss recorded in “Accumulated other comprehensive loss” were approximately $2 million and $11 million, respectively. Net periodic benefit cost was not material in 2023, 2022 or 2021.
Defined Contribution Plans
We sponsor various defined contribution plans worldwide, the largest of which is the Avery Dennison Corporation Employee Savings Plan (“Savings Plan”), a 401(k) plan for our U.S. employees.
We recognized expense of $30.3 million, $27.3 million and $24.6 million in 2023, 2022 and 2021, respectively, related to our employer contributions and employer match of participant contributions to the Savings Plan.
Other Retirement Plans
We have deferred compensation plans and programs that permit eligible employees to defer a portion of their compensation. The compensation voluntarily deferred by the participant, together with certain employer contributions, earns specified and variable rates of return. As of year-end 2023 and 2022, we had accrued $88.2 million and $87.3 million, respectively, for our obligations under these plans. A portion of the interest on certain of our contributions may be forfeited by participants if their employment terminates before age 55 other than by reason of death or disability.
Our Directors Deferred Equity Compensation Program allows our non-employee directors to elect to receive their cash compensation in deferred stock units (“DSUs”) issued under our equity plan. Additionally, two legacy deferred compensation plans had DSUs that were issued under our then-active equity plans. Dividend equivalents, representing the value of dividends per share paid on shares of our common stock and calculated with reference to the number of DSUs held as of a quarterly dividend record date, are credited in the form of additional DSUs on the applicable dividend payable date. DSUs are converted into shares of our common stock, less fractional shares, and issued to the director upon his or her separation from our Board. Approximately 0.1 million DSUs were outstanding for both year-end 2023 and 2022, with an aggregate value of $19 million and $20 million, respectively.
We hold company-owned life insurance policies, the proceeds from which are payable to us upon the death of covered participants. The cash surrender values of these policies, net of outstanding loans, which are included in “Other assets” in the Consolidated Balance Sheets, were $228.4 million and $265.0 million at year-end 2023 and 2022, respectively.
NOTE 7. COMMITMENTS AND LEASES
Supplemental cost information related to leases is shown below.
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Operating lease costs | | $ | 73.6 | | | $ | 70.8 | | | $ | 68.8 | |
Lease costs related to finance leases were not material in 2023, 2022 or 2021.
Supplemental balance sheet information related to leases is shown below.
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | Balance Sheet Location | | 2023 | | 2022 |
Assets | | | | | | |
Operating | | Other assets | | $ | 200.2 | | | $ | 161.7 | |
Finance(1) | | Property, plant and equipment, net | | 29.6 | | | 27.5 | |
Total leased assets | | | | $ | 229.8 | | | $ | 189.2 | |
Liabilities | | | | | | |
Current: | | | | | | |
Operating | | Other current liabilities | | $ | 45.4 | | | $ | 42.4 | |
Finance | | Short-term borrowings and current portion of long-term debt and finance leases | | 6.3 | | | 5.4 | |
Non-current: | | | | | | |
Operating | | Long-term retirement benefits and other liabilities | | 152.3 | | | 113.6 | |
Finance | | Long-term debt and finance leases | | 7.0 | | | 8.2 | |
Total lease liabilities | | | | $ | 211.0 | | | $ | 169.6 | |
| | | | | |
(1) | Finance lease assets are net of accumulated amortization of $14.6 million and $12.4 million as of December 30, 2023 and December 31, 2022, respectively. |
Supplemental cash flow information related to leases is shown below.
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Cash paid for amounts included in measurement of operating lease liabilities | | $ | 55.8 | | | $ | 60.5 | | | $ | 54.2 | |
Operating lease assets obtained in exchange for operating lease liabilities | | 92.4 | | | 37.2 | | | 58.0 | |
Cash flows related to finance leases were not material in 2023, 2022 or 2021.
Weighted average remaining lease term and discount rate information related to leases as of December 30, 2023 and December 31, 2022 is shown below.
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
Weighted average remaining lease term (in years): | | | | |
Operating | | 7.1 | | 5.9 |
Finance | | 3.1 | | 2.7 |
Weighted average discount rate (percentage): | | | | |
Operating | | 4.1 | % | | 3.2 | % |
Finance | | 4.2 | | | 2.8 | |
Operating and finance lease liabilities by maturity date from December 30, 2023 are shown below.
| | | | | | | | | | | | | | |
(In millions) | | Operating Leases | | Finance Leases |
2024 | | $ | 50.3 | | | $ | 6.9 | |
2025 | | 41.0 | | | 3.5 | |
2026 | | 32.4 | | | 1.9 | |
2027 | | 23.0 | | | 1.3 | |
2028 | | 15.1 | | | .6 | |
2029 and thereafter | | 69.5 | | | .6 | |
Total lease payments | | 231.3 | | | 14.8 | |
Less: imputed interest | | (33.6) | | | (1.5) | |
Present value of lease liabilities | | $ | 197.7 | | | $ | 13.3 | |
As of December 30, 2023, we had no significant operating or finance leases that had not yet commenced.
NOTE 8. CONTINGENCIES
Legal Proceedings
We are involved in various lawsuits, claims, inquiries and other regulatory and compliance matters, most of which are routine to the nature of our business. When it is probable that a loss will be incurred and where a range of the loss can be reasonably estimated, the best estimate within the range is accrued. When the best estimate within the range cannot be determined, the low end of the range is accrued. The ultimate resolution of these claims could affect future results of operations should our exposure be materially different from our estimates or should we incur liabilities that were not previously accrued. Potential insurance reimbursements are not offset against potential liabilities.
We are currently party to a litigation in which ADASA Inc. (“Adasa”), an unrelated third party, alleged that certain of our RFID products within our Solutions Group reportable segment infringed its patent. The case was filed on October 24, 2017 in the United States District Court in the District of Oregon (Eugene Division) and is captioned ADASA Inc. v. Avery Dennison Corporation. We recorded a contingent liability in the amount of $26.6 million related to this matter in the second quarter of 2021 based on a jury verdict issued on May 14, 2021.
During the fourth quarter of 2021, the first instance judgment associated with the jury verdict was issued. This resulted in additional potential liability for the RFID tags sold during the period from the jury verdict to the issuance of the first instance judgment, a higher royalty imposed by the judge applicable to tags sold after the judgment and a royalty on additional late-disclosed tags, as well as sanctions, prejudgment interest, costs, and attorneys’ fees. In addition, Adasa was awarded an ongoing royalty on in-scope tags sold after October 14, 2021. On October 22, 2021, we appealed the judgment to the United States Court of Appeals for the Federal Circuit ("CAFC").
During the fourth quarter of 2022, the CAFC issued its opinion, reversing the grant of summary judgment of validity as to anticipation and obviousness, vacating the sanctions ruling, and remanding the case for retrial with respect to validity for anticipation and obviousness over the prior art. The CAFC affirmed subject-matter eligibility and damages if liability is determined on retrial. On remand, the trial court was required to reconsider the amount of sanctions consistent with the CAFC's instruction to limit sanctions to the late-disclosed tags. With continued evaluation of the matter and our defenses, as well as consultation with our outside counsel, we believed that Adasa’s patent was invalid and that the sanctions sought by Adasa were unreasonable. In addition, we believed that there were appealable grounds in the CAFC’s decision; as a result, we sought U.S. Supreme Court review on February 27, 2023.
After the U.S. Supreme Court denied our writ of certiorari petition on May 30, 2023, the trial court’s retrial began on July 10, 2023. On July 18, 2023, the jury in the retrial issued a verdict that Adasa’s patent is valid. Although the court had not issued its judgment, including its decision on sanctions, we increased our contingent liability to reflect our best estimate of
the anticipated judgment to $80.4 million as of July 1, 2023, with an expectation to continue adjusting our accrual quarterly, as appropriate. As of December 30, 2023 our contingent liability was $82.9 million. We have grounds to appeal and plan to appeal any judgment based on the jury verdict; therefore, we classified the total contingent liability as non-current due to the time expected for this matter to be fully resolved.
A hearing took place on October 24, 2023 before the district court on the pending sanctions decision and certain post-trial motions. We determined that no additional adjustment to our accrual was required as a result of the hearing.
On January 23, 2024, the district court issued two orders relating to Adasa’s original and supplemental bill of taxable costs, which did not have an impact on the liability we recorded as of December 30, 2023. On January 25, 2024, the district court issued a revised sanction order lowering the sanction against us from approximately $20 million to approximately $5.2 million, based on a royalty of $0.0025/late-reported tag, which was consistent with the amount we had accrued. In February 2024, the district court issued decisions denying our motion for judgment as a matter of law and our motion for a new trial. We plan to appeal these recent decisions.
We have largely completed our migration to alternative encoding methods for our RFID tags.
Because of the uncertainties associated with claims resolution and litigation, future expenses to resolve legal proceedings could be higher than the liabilities we have accrued; however, we are unable to reasonably estimate a range of potential expenses. If information were to become available that allowed us to reasonably estimate a range of potential expenses determined to be probable in an amount higher or lower than what we have accrued, we would adjust our accrued liabilities accordingly. Additional lawsuits, claims, inquiries, and other regulatory and compliance matters could arise in the future. The range of expenses for resolving any future matters would be assessed as they arise; until then, a range of potential expenses for their resolution cannot be determined. Based upon current information, we believe that the impact of the resolution of legal proceedings would not be, individually or in the aggregate, material to our financial position, results of operations or cash flows.
Environmental Expenditures
Environmental expenditures are generally expensed. When it is probable that a loss will be incurred and where a range of the loss can be reasonably estimated, the best estimate within the range is accrued. When the best estimate within the range cannot be determined, the low end of the range is accrued. The ultimate resolution of these matters could affect future results of operations should our exposure be materially different from our estimates or should we incur liabilities that were not previously accrued. Potential insurance reimbursements are not offset against potential liabilities. We review our estimates of the costs of complying with environmental laws related to remediation and cleanup of various sites, including sites in which governmental agencies have designated us as a potentially responsible party (“PRP”). However, environmental expenditures for newly acquired assets and those that extend or improve the economic useful life of existing assets are capitalized and amortized over the shorter of the estimated useful life of the acquired asset or the remaining life of the existing asset.
As of December 30, 2023, we have been designated by the U.S. Environmental Protection Agency (“EPA”) and/or other responsible state agencies as a PRP at eleven waste disposal or waste recycling sites that are the subject of separate investigations or proceedings concerning alleged soil and/or groundwater contamination. No settlement of our liability related to any of these sites has been agreed upon. We are participating with other PRPs at these sites and anticipate that our share of remediation costs will be determined pursuant to agreements that we negotiate with the EPA or other governmental authorities.
These estimates could change as a result of changes in planned remedial actions, remediation technologies, site conditions, the estimated time to complete remediation, environmental laws and regulations, and other factors. Because of the uncertainties associated with environmental assessment and remediation activities, our future expenses to remediate these sites could be higher than the liabilities we have accrued; however, we are unable to reasonably estimate a range of potential expenses determined to be probable. If information were to become available that allowed us to reasonably estimate a range of potential expenses in an amount higher or lower than what we have accrued, we would adjust our environmental liabilities accordingly. In addition, we may be identified as a PRP at additional sites in the future. The range of expenses for remediation of any future-identified sites would be addressed as they arise; until then, a range of expenses for their remediation cannot be determined.
The activity related to our environmental liabilities in 2023 and 2022 is shown below:
| | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 |
Balance at beginning of year | | $ | 24.3 | | | $ | 21.9 | |
Charges, net of reversals | | 2.5 | | | 4.4 | |
Payments | | (2.3) | | | (2.0) | |
Balance at end of year | | $ | 24.5 | | | $ | 24.3 | |
Approximately $11 million and $9 million, respectively, of this balance was classified as short-term and included in “Other current liabilities” in the Consolidated Balance Sheets as of December 30, 2023 and December 31, 2022.
NOTE 9. FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
Assets and liabilities carried at fair value, measured on a recurring basis, as of December 30, 2023, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
(In millions) | | Total | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Other Unobservable Inputs (Level 3) |
Assets | | | | | | | | |
Investments | | $ | 37.8 | | | $ | 19.6 | | | $ | 18.2 | | | $ | — | |
Derivative assets | | 6.3 | | | — | | | 6.3 | | | — | |
Bank drafts | | 5.3 | | | 5.3 | | | — | | | — | |
Cross-currency swap | | 2.3 | | | — | | | 2.3 | | | — | |
Liabilities | | | | | | | | |
Derivative liabilities | | $ | 7.6 | | | $ | 1.6 | | | $ | 6.0 | | | $ | — | |
Contingent consideration liabilities | | 10.0 | | | — | | | — | | | 10.0 | |
Assets and liabilities carried at fair value, measured on a recurring basis, as of December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
(In millions) | | Total | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Other Unobservable Inputs (Level 3) |
Assets | | | | | | | | |
Investments | | $ | 31.3 | | | $ | 22.6 | | | $ | 8.7 | | | $ | — | |
Derivative assets | | 4.3 | | | — | | | 4.3 | | | — | |
Bank drafts | | 3.2 | | | 3.2 | | | — | | | — | |
Cross-currency swap | | 15.5 | | | — | | | 15.5 | | | — | |
Liabilities | | | | | | | | |
Derivative liabilities | | $ | 12.2 | | | $ | .3 | | | $ | 11.9 | | | $ | — | |
Contingent consideration liabilities | | 6.0 | | | — | | | — | | | 6.0 | |
Investments included fixed income securities (primarily U.S. government and corporate debt securities) measured at fair value using quoted prices/bids and a money market fund measured at fair value using NAV. As of December 30, 2023, investments of $2.7 million and $35.1 million were included in “Cash and cash equivalents” and “Other current assets,” respectively, in the Consolidated Balance Sheets. As of December 31, 2022, investments of $0.7 million and $30.6 million were included in “Cash and cash equivalents” and “Other current assets,” respectively, in the Consolidated Balance Sheets. Derivatives that are exchange-traded are measured at fair value using quoted market prices and classified within Level 1 of the valuation hierarchy. Derivatives measured based on foreign exchange rate inputs that are readily available in public markets are classified within Level 2 of the valuation hierarchy. Bank drafts (maturities greater than three months) are valued at face value due to their short-term nature and were included in “Other current assets” in the Consolidated Balance Sheets.
Contingent consideration liabilities relate to estimated earn-out payments associated with certain acquisitions completed in 2023, 2022 and 2021, which are subject to the acquired companies achieving certain post-acquisition performance targets. These liabilities were recorded based on the expected payments and have been classified as Level 3. Activity related to contingent consideration in 2023 and 2022 was immaterial.
In addition to the investments described above, we hold venture investments that had a total carrying value of approximately $71 million and $70 million as of December 30, 2023 and December 31, 2022, respectively, which was included in “Other assets” in the Consolidated Balance Sheets. We recognized no net gains or losses on these investments in 2023 and recognized net gains of $13.5 million and $23.0 million in 2022 and 2021, respectively, in “Other expense (income), net” in the Consolidated Statements of Income.
NOTE 10. NET INCOME PER COMMON SHARE
Net income per common share was computed as follows:
| | | | | | | | | | | | | | | | | | | | |
(In millions, except per share amounts) | | 2023 | | 2022 | | 2021 |
(A) Net income | | $ | 503.0 | | | $ | 757.1 | | | $ | 740.1 | |
(B) Weighted average number of common shares outstanding | | 80.7 | | | 81.6 | | | 82.9 | |
Dilutive shares (additional common shares issuable under stock-based awards) | | .4 | | | .6 | | | .9 | |
(C) Weighted average number of common shares outstanding, assuming dilution | | 81.1 | | | 82.2 | | | 83.8 | |
Net income per common share (A) ÷ (B) | | $ | 6.23 | | | $ | 9.28 | | | $ | 8.93 | |
Net income per common share, assuming dilution (A) ÷ (C) | | $ | 6.20 | | | $ | 9.21 | | | $ | 8.83 | |
Certain stock-based compensation awards were excluded from the computation of net income per common share, assuming dilution, because they would not have had a dilutive effect. Stock-based compensation awards excluded from the computation totaled 0.1 million shares for 2023 and were not significant in 2022 or 2021.
NOTE 11. SUPPLEMENTAL EQUITY AND COMPREHENSIVE INCOME INFORMATION
Common Stock and Share Repurchase Program
Our Amended and Restated Certificate of Incorporation authorizes five million shares of $1 par value preferred stock (of which no shares are outstanding), with respect to which our Board may fix the series and terms of issuance, and 400 million shares of $1 par value voting common stock.
From time to time, our Board authorizes the repurchase of shares of our outstanding common stock. Repurchased shares may be reissued under our long-term incentive plan or used for other corporate purposes. In 2023, we repurchased approximately 0.8 million shares of our common stock at an aggregate cost of $137.5 million. In 2022, we repurchased approximately 2.2 million shares of our common stock at an aggregate cost of $379.5 million.
In April 2022, our Board authorized the repurchase of shares of our common stock with a fair market value of up to $750 million, excluding any fees, commissions or other expenses related to such purchases and in addition to any amount outstanding under our previous Board authorization. Shares of our common stock in the aggregate amount of $592.8 million as of December 30, 2023 remained authorized for repurchase under this Board authorization. Board authorizations remain in effect until shares in the amount authorized thereunder have been repurchased.
Treasury Shares Reissuance
We fund a portion of our employee-related costs using shares of our common stock held in treasury. We reduce capital in excess of par value based on the grant date fair value of vesting awards and record net gains or losses associated with using treasury shares to retained earnings.
Accumulated Other Comprehensive Loss
The changes in “Accumulated other comprehensive loss” (net of tax) for 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | Foreign Currency Translation | | Pension and Other Postretirement Benefits | | Cash Flow Hedges | | Total |
Balance as of January 1, 2022 | | $ | (217.4) | | | $ | (60.4) | | | $ | (5.1) | | | $ | (282.9) | |
Other comprehensive income (loss) before reclassifications, net of tax | | (96.6) | | | 6.3 | | | 4.9 | | | (85.4) | |
Reclassifications to net income, net of tax | | — | | | 2.8 | | | 1.5 | | | 4.3 | |
Net current-period other comprehensive income (loss), net of tax | | (96.6) | | | 9.1 | | | 6.4 | | | (81.1) | |
Balance as of December 31, 2022 | | $ | (314.0) | | | $ | (51.3) | | | $ | 1.3 | | | $ | (364.0) | |
Other comprehensive income (loss) before reclassifications, net of tax | | (14.6) | | | (25.2) | | | (7.0) | | | (46.8) | |
Reclassifications to net income, net of tax | | — | | | (1.0) | | | 3.7 | | | 2.7 | |
Net current-period other comprehensive income (loss), net of tax | | (14.6) | | | (26.2) | | | (3.3) | | | (44.1) | |
Balance as of December 30, 2023 | | $ | (328.6) | | | $ | (77.5) | | | $ | (2.0) | | | $ | (408.1) | |
The following table sets forth the income tax (benefit) expense allocated to each component of other comprehensive income (loss):
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Foreign currency translation: | | | | | | |
Translation gain (loss) | | $ | 1.2 | | | $ | (7.0) | | | $ | (23.2) | |
Pension and other postretirement benefits: | | | | | | |
Net gain (loss) recognized from actuarial gain/loss and prior service cost/credit | | (8.2) | | | .5 | | | 8.5 | |
Reclassifications to net income | | (.3) | | | 1.1 | | | 1.6 | |
Cash flow hedges: | | | | | | |
Gain (loss) recognized on cash flow hedges | | (2.2) | | | 1.6 | | | 1.7 | |
Reclassifications to net income | | 1.2 | | | .4 | | | (.5) | |
Income tax (benefit) expense allocated to components of other comprehensive income (loss) | | $ | (8.3) | | | $ | (3.4) | | | $ | (11.9) | |
NOTE 12. LONG-TERM INCENTIVE COMPENSATION
Stock-Based Awards
Stock-Based Compensation
We grant our annual stock-based compensation awards to eligible employees in March and non-employee directors in May. Certain awards granted to retirement-eligible employees one year or more before their retirement date vest upon retirement; these awards are accounted for as fully vested one year from the date of grant.
Our 2017 Incentive Award Plan (the “Equity Plan”), a long-term incentive plan for employees and non-employee directors, allows us to grant stock-based compensation awards – including stock options, RSUs, PUs, MSUs and DSUs – or a combination of these and other awards. Under the Equity Plan, 5.4 million shares are available for issuance, and each full value award is counted as 1.5 shares for purposes of the number of shares authorized for issuance. Full value awards include RSUs, PUs and MSUs.
Stock-based compensation expense and the related recognized tax benefit were as follows:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Stock-based compensation expense | | $ | 22.3 | | | $ | 47.4 | | | $ | 37.2 | |
Tax benefit | | 2.4 | | | 6.7 | | | 4.6 | |
This expense was included in “Marketing, general and administrative expense” in the Consolidated Statements of Income.
As of December 30, 2023, we had approximately $35 million of unrecognized compensation expense related to unvested stock-based awards, which is expected to be recognized over the remaining weighted average requisite service period of approximately two years.
Stock Options
Stock options may be granted to employees and non-employee directors at no less than 100% of the fair market value of our common stock on the date of the grant and generally vest over a four-year period. Options expire ten years from the date of grant.
The fair value of stock options is estimated as of the date of grant using the Black-Scholes option-pricing model. This model requires input assumptions for our expected dividend yield, expected stock price volatility, risk-free interest rate and the expected option term. The following assumptions are used in estimating the fair value of granted stock options:
Risk-free interest rate is based on the 52-week average of the Treasury-Bond rate that has a term corresponding to the expected option term. For 2023, it was 3.84%.
Expected stock price volatility represents an average of the implied and historical volatility. For 2023, it was 23.90%.
Expected dividend yield is based on the current annual dividend divided by the 12-month average of our monthly stock price prior to grant. For 2023, it was 1.84%.
Expected option term is determined based on historical experience under our stock option and incentive plans. For 2023, it was 6.31 years.
The weighted average grant date fair value per share for stock options granted in 2023 was $47.65. No stock options were granted in fiscal years 2022 or 2021.
The following table summarizes information related to stock options:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of options (in thousands) | | Weighted average exercise price | | Weighted average remaining contractual life (in years) | | Aggregate intrinsic value (in millions) |
Outstanding at December 31, 2022 | | 141.1 | | | $ | 73.96 | | | 3.42 | | $ | 15.1 | |
Granted | | 63.0 | | | 190.54 | | | | | |
| | | | | | | | |
Outstanding at December 30, 2023 | | 204.1 | | | $ | 109.92 | | | 4.36 | | $ | 18.7 | |
Options vested and expected to vest at December 30, 2023 | | 192.6 | | | 105.10 | | | 4.36 | | 18.7 | |
Options exercisable at December 30, 2023 | | 141.1 | | | $ | 73.96 | | | 2.42 | | $ | 18.1 | |
The total intrinsic value of stock options exercised was $3.5 million in 2021. We received approximately $1 million in 2021 from the exercise of stock options, and the tax benefit associated with these exercised options was $0.9 million. The stock option exercises in 2022 were immaterial and there were no stock option exercises in 2023. The intrinsic value of a stock option is based on the amount by which the market value of our stock exceeds the exercise price of the option.
Performance Units (“PUs”)
PUs are performance-based awards granted to eligible employees under the Equity Plan. PUs are payable in shares of our common stock at the end of a three- or four-year cliff vesting period provided that the designated performance objectives are achieved at the end of the period. Over the performance period, the estimated number of shares of our common stock issuable upon vesting is adjusted upward or downward based on the probability of achieving the performance objectives established for the award. The actual number of shares issued generally ranges from 0% to 200% of the target shares at the time of grant; however the shares issued for certain special PU awards can range up to 300% of the target shares at time of grant. The weighted average grant date fair value for PUs was $180.12, $163.97 and $191.86 in 2023, 2022 and 2021, respectively.
The following table summarizes information related to awarded PUs:
| | | | | | | | | | | | | | |
| | Number of PUs (in thousands) | | Weighted average grant-date fair value |
Unvested at December 31, 2022 | | 372.7 | | | $ | 147.45 | |
Granted at target | | 85.0 | | | 180.12 | |
Adjustment for above-target performance(1) | | 58.2 | | | 112.51 | |
Vested | | (201.9) | | | 112.51 | |
Forfeited/cancelled | | (13.3) | | | 174.50 | |
Unvested at December 30, 2023 | | 300.7 | | | $ | 174.54 | |
(1)Reflects adjustments for the vesting of PUs based on above-target performance for the 2020-2022 performance period.
The fair value of vested PUs was $22.7 million in 2023, $20.2 million in 2022 and $19.2 million in 2021.
Market-Leveraged Stock Units (“MSUs”)
MSUs are performance-based awards granted to eligible employees under our equity plans. MSUs are payable in shares of our common stock over a four-year period provided that the designated performance objective is achieved as of the end of each vesting period. MSUs accrue dividend equivalents during the vesting period, which are earned and paid only at vesting provided that, at a minimum, threshold-level performance is achieved. The number of shares earned is based upon our absolute total shareholder return at each vesting date and can range from 0% to 200% of the target amount of MSUs subject to vesting. Each of the four vesting periods represents one tranche of MSUs and the fair value of each of these four tranches was determined using the Monte-Carlo simulation model, which utilizes multiple input variables, including expected stock price volatility and other assumptions, to estimate the probability of achieving the performance objective established for the award. The weighted average grant date fair value for MSUs was $192.53, $141.80 and $216.06 in 2023, 2022 and 2021, respectively.
The following table summarizes information related to awarded MSUs:
| | | | | | | | | | | | | | |
| | Number of MSUs (in thousands) | | Weighted average grant- date fair value |
Unvested at December 31, 2022 | | 208.5 | | | $ | 145.86 | |
Granted at target | | 82.3 | | | 192.53 | |
Adjustments for above-target performance(1) | | 35.9 | | | 125.18 | |
Vested | | (118.9) | | | 135.77 | |
Forfeited/cancelled | | (12.3) | | | 166.45 | |
Unvested at December 30, 2023 | | 195.5 | | | $ | 167.16 | |
(1)Reflects adjustments for the vesting of MSUs based on above-target performance for each of the tranches of awards vesting in 2023.
The fair value of vested MSUs was $16.1 million in 2023, $19.9 million in 2022 and $17.8 million in 2021.
Restricted Stock Units (“RSUs”)
RSUs are service-based awards granted to eligible employees and non-employee directors under our equity plans. RSUs granted to employees generally vest ratably over a period of three or four years. RSUs granted to non-employee directors generally vest in one year. The vesting of RSUs is subject to continued service through the applicable vesting date. If that condition is not met, unvested RSUs are generally forfeited. The weighted average grant date fair value for RSUs was $175.88, $168.34 and $196.26 in 2023, 2022 and 2021, respectively.
The following table summarizes information related to awarded RSUs:
| | | | | | | | | | | | | | |
| | Number of RSUs (in thousands) | | Weighted average grant-date fair value |
Unvested at December 31, 2022 | | 59.8 | | | $ | 159.23 | |
Granted | | 38.1 | | | 175.88 | |
Vested | | (18.1) | | | 148.26 | |
Forfeited/cancelled | | (13.3) | | | 159.43 | |
Unvested at December 30, 2023 | | 66.5 | | | $ | 171.68 | |
The fair value of vested RSUs was $2.7 million, $2.8 million and $2.7 million in 2023, 2022 and 2021, respectively.
Cash-Based Awards
Long-Term Incentive Units (“LTI Units”)
LTI Units are cash-based awards granted to employees under our long-term incentive unit plan. LTI Units are service-based awards that generally vest ratably over a four-year period. The settlement value equals the number of vested LTI Units multiplied by the average of the high and low market prices of our common stock on the vesting date. The compensation expense related to these awards is amortized on a straight-line basis and the fair value is remeasured using the estimated percentage of units expected to be earned multiplied by the average of the high and low market prices of our common stock at each quarter-end.
We also grant cash-based awards in the form of performance and market-leveraged LTI Units to eligible employees. Performance LTI Units are payable in cash at the end of a three-year cliff vesting period provided that certain performance objectives are achieved at the end of the performance period. Market-leveraged LTI Units are payable in cash and vest ratably over a period of four years. The number of performance and market-leveraged LTI Units earned at vesting is adjusted upward or downward based upon the probability of achieving the performance objectives established for the respective award and the actual number of units issued can range from 0% to 200% of the designated target units subject to vesting. Performance and market-leveraged LTI Units are remeasured using the estimated percentage of units expected to be earned multiplied by the average of the high and low market prices of our common stock at each quarter-end over their respective performance periods. The compensation expense related to performance LTI Units is amortized on a straight-line basis over their respective performance periods. The compensation expense related to market-leveraged LTI Units is amortized on a graded-vesting basis over their respective performance periods.
The compensation expense related to LTI Units was $16.3 million in 2023, $11.5 million in 2022 and $21.3 million in 2021. This expense was included in “Marketing, general and administrative expense” in the Consolidated Statements of Income. The total recognized tax benefit related to LTI Units was $3.9 million in 2023, $2.7 million in 2022 and $5.1 million in 2021.
NOTE 13. COST REDUCTION ACTIONS
Restructuring Charges
We have plans that provide eligible employees with severance benefits in the event of an involuntary termination. We calculate severance using the benefit formulas under the applicable plans. We record restructuring charges from qualifying cost reduction actions for severance and other exit costs (including asset impairment charges and lease and other contract cancellation costs) when they are probable and estimable.
2023 Actions
In the third quarter of 2023, we approved a restructuring plan (the "2023 Plan") to further optimize the European footprint of our Materials Group reportable segment by reducing operations in a manufacturing facility in Belgium. The cumulative charges associated with the 2023 Plan consisted of severance and related costs for the reduction of approximately 210 positions as well as asset impairment charges. During 2023 we recorded $30.4 million in restructuring charges related to the 2023 Plan. The activities related to the 2023 Plan are expected to be substantially completed by mid-2025.
We recorded $49.0 million in restructuring charges, net of reversals, related to other 2023 actions (collectively with the 2023 Plan, "2023 Actions"). These charges consisted of severance and related costs for the reduction of approximately 1,450 positions and asset impairment charges at numerous locations across our company.
2019/2020 Actions
During 2022, we recorded $7.3 million in restructuring charges, net of reversals, related to our 2019/2020 actions. These charges consisted of severance and related costs for the reduction of approximately 830 positions and asset impairment charges at numerous locations across our company, reflecting actions in both our reportable segments. The actions in our Materials Group reportable segment were primarily associated with consolidations of its operations in North America and its graphics business in Europe, in part in response to the pandemic. The actions in our Solutions Group reportable segment were primarily related to global headcount and footprint reduction, with some actions accelerated and expanded in response to the pandemic. Our activities related to our 2019/2020 actions began in the fourth quarter of fiscal year 2019 and continued through fiscal year 2022.
Accruals for severance and related costs and lease cancellation costs were included in “Other current liabilities” and "Long-term retirement benefits and other liabilities" in the Consolidated Balance Sheets. Asset impairment charges were based on the estimated market value of the assets, less selling costs, if applicable. Restructuring charges were included in “Other expense (income), net” in the Consolidated Statements of Income.
During 2023, restructuring charges and payments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | Accrual at December 31, 2022 | | Charges, Net of Reversals | | Cash Payments | | Non-cash Impairment | | Foreign Currency Translation | | Accrual at December 30, 2023 |
2023 Actions | | | | | | | | | | | | |
Severance and related costs | | $ | — | | | $ | 72.1 | | | $ | (45.1) | | | $ | — | | | $ | .7 | | | $ | 27.7 | |
Asset impairment charges | | — | | | 8.3 | | | — | | | (8.3) | | | — | | | — | |
| | | | | | | | | | | | |
2019/2020 Actions | | | | | | | | | | | | |
Severance and related costs | | 5.1 | | | (1.0) | | | (4.1) | | | — | | | — | | | — | |
Total | | $ | 5.1 | | | $ | 79.4 | | | $ | (49.2) | | | $ | (8.3) | | | $ | .7 | | | $ | 27.7 | |
During 2022, restructuring charges and payments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | Accrual at January 1, 2022 | | Charges, Net of Reversals | | Cash Payments | | Non-cash Impairment | | Foreign Currency Translation | | Accrual at December 31, 2022 |
2019/2020 Actions | | | | | | | | | | | | |
Severance and related costs | | $ | 11.5 | | | $ | 7.2 | | | $ | (13.4) | | | $ | — | | | $ | (.2) | | | $ | 5.1 | |
Asset impairment charges | | — | | | .1 | | | — | | | (.1) | | | — | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total | | $ | 11.5 | | | $ | 7.3 | | | $ | (13.4) | | | $ | (.1) | | | $ | (.2) | | | $ | 5.1 | |
The table below shows the total amount of restructuring charges incurred by reportable segment and Corporate.
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Restructuring charges by reportable segment and Corporate | | | | | | |
Materials Group | | $ | 52.4 | | | $ | (1.0) | | | $ | 5.0 | |
Solutions Group | | 23.2 | | | 7.9 | | | 7.6 | |
Corporate | | 3.8 | | | .8 | | | 1.0 | |
Total | | $ | 79.4 | | | $ | 7.7 | | | $ | 13.6 | |
NOTE 14. TAXES BASED ON INCOME
Taxes based on income were as follows:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Current: | | | | | | |
U.S. federal tax | | $ | 42.5 | | | $ | 29.4 | | | $ | 7.3 | |
State taxes | | 9.0 | | | 8.8 | | | 5.3 | |
Foreign taxes | | 160.8 | | | 177.7 | | | 229.9 | |
| | 212.3 | | | 215.9 | | | 242.5 | |
Deferred: | | | | | | |
U.S. federal tax | | (29.0) | | | 5.8 | | | (1.1) | |
State taxes | | (3.5) | | | .9 | | | (5.3) | |
Foreign taxes | | 11.9 | | | 19.6 | | | 12.5 | |
| | (20.6) | | | 26.3 | | | 6.1 | |
Provision for income taxes | | $ | 191.7 | | | $ | 242.2 | | | $ | 248.6 | |
The principal items accounting for the difference between taxes computed at U.S. federal statutory rate and taxes recorded were as follows:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Tax provision computed at U.S. federal statutory rate(1) | | $ | 145.9 | | | $ | 209.9 | | | $ | 208.5 | |
Increase (decrease) in taxes resulting from: | | | | | | |
State taxes, net of federal tax benefit | | 2.6 | | | 11.8 | | | 4.5 | |
Foreign earnings taxed at different rates(1) | | 50.4 | | | 51.7 | | | 72.7 | |
GILTI high-tax exclusion election, net(2) | | (10.0) | | | (11.9) | | | (22.8) | |
Valuation allowance | | 2.6 | | | (5.0) | | | (4.8) | |
U.S. federal research and development tax credits | | (8.3) | | | (6.5) | | | (6.2) | |
Tax contingencies and audit settlements | | 11.9 | | | (4.3) | | | 3.9 | |
Other items, net | | (3.4) | | | (3.5) | | | (7.2) | |
Provision for income taxes | | $ | 191.7 | | | $ | 242.2 | | | $ | 248.6 | |
| | | | | |
(1) | In 2023, we recognized $4.4 million from our current year GILTI exclusion election and $5.6 million related to the election made on our 2022 U.S. federal tax return. In 2022, we recognized $11.9 million of benefit related to a GILTI exclusion election made on our 2021 U.S. federal tax return. In 2021, we recognized $14.1 million and $8.7 million of benefit related to GILTI exclusion elections made on our amended 2018 and originally filed 2020 U.S. federal tax returns, respectively. |
(2) | |
Income before taxes from our U.S. and foreign operations was as follows:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
U.S. | | $ | 187.2 | | | $ | 232.4 | | | $ | 88.0 | |
Foreign | | 507.5 | | | 766.9 | | | 904.6 | |
Income before taxes | | $ | 694.7 | | | $ | 999.3 | | | $ | 992.6 | |
Our effective tax rate was 27.6%, 24.2% and 25.0% for fiscal years 2023, 2022 and 2021, respectively.
Our 2023 provision for income taxes included (i) $16.4 million of net tax charge related to the tax on global intangible low-taxed income ("GILTI") of our foreign subsidiaries after benefiting from our current year exclusion election, as well as the recognition of foreign withholding taxes on current year earnings, partially offset by the benefit from foreign-derived intangible income (“FDII”); (ii) $14.7 million of return-to-provision benefit primarily related to our GILTI exclusion election and benefits from additional foreign tax credits recognized under temporary relief granted by the Internal Revenue Service ("IRS") in July 2023, upon completion of our 2022 U.S. federal tax return, (iii) $10.5 million of tax charge related to non-deductible expenses resulting from the impact of the Argentine peso remeasurement loss; and (iv) $9.5 million of net tax charge primarily from the recognition of uncertain tax positions in certain foreign jurisdictions, partially offset by decreases in certain tax reserves as a result of closing tax years.
Our 2022 provision for income taxes included (i) $18.8 million of net tax charge related to the tax on GILTI of our foreign subsidiaries and the recognition of foreign withholding taxes on current year earnings, partially offset by the benefit from FDII; (ii) $17.3 million of return-to-provision benefit, including $11.9 million related to a GILTI exclusion election and a lower net tax charge from other international inclusion items upon completion of our 2021 U.S. federal tax return, and (iii) $4.3 million of net tax benefit primarily from decreases in certain tax reserves, including interest and penalties, as a result of closing tax years and the settlement of certain foreign tax audits.
Our 2021 provision for income taxes included (i) $28.5 million of net tax charge related to the tax on GILTI of our foreign subsidiaries and the recognition of foreign withholding taxes on current year earnings, partially offset by the benefit from FDII; (ii) $14.1 million of return-to-provision benefit related to a GILTI exclusion election made on our amended 2018 U.S. federal tax return; and (iii) $11.3 million of return-to-provision benefit, including $8.7 million related to a GILTI exclusion election and a higher FDII deduction on our 2020 U.S. federal tax return.
Deferred Taxes
Deferred taxes reflect the temporary differences between the amounts at which assets and liabilities are recorded for financial reporting purposes and the amounts utilized for tax purposes. The primary components of the temporary differences that gave rise to our deferred tax assets and liabilities were as follows:
| | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 |
Accrued expenses not currently deductible | | $ | 44.5 | | | $ | 32.3 | |
Net operating loss carryforwards | | 138.9 | | | 137.2 | |
Tax credit carryforwards | | 9.0 | | | 9.7 | |
Capitalized research expenses | | 59.9 | | | 38.6 | |
Stock-based compensation | | 10.9 | | | 15.4 | |
Pension and other postretirement benefits | | 34.2 | | | 31.5 | |
Inventory reserve | | 16.4 | | | 15.6 | |
Lease liabilities | | 43.3 | | | 33.2 | |
Other assets | | 27.9 | | | 21.3 | |
Valuation allowance | | (62.0) | | | (59.4) | |
Total deferred tax assets(1) | | 323.0 | | | 275.4 | |
Depreciation and amortization | | (317.2) | | | (296.6) | |
Repatriation accrual | | (24.5) | | | (12.0) | |
Foreign operating loss recapture | | (3.4) | | | (3.2) | |
Lease assets | | (43.4) | | | (33.8) | |
Total deferred tax liabilities(1) | | (388.5) | | | (345.6) | |
Total net deferred tax assets (liabilities) | | $ | (65.5) | | | $ | (70.2) | |
(1)Reflect gross amounts before jurisdictional netting of deferred tax assets and liabilities.
We assess the available positive and negative evidence to estimate if sufficient future taxable income is expected to be generated to use existing deferred tax assets. On the basis of our assessment, we record valuation allowances only with respect to the portion of the deferred tax asset that is not more-likely-than-not to be realized. Our assessment of the future realizability of our deferred tax assets relies heavily on our forecasted earnings in certain jurisdictions determined by the manner in which we operate our business and the relevant carryforward periods. Any changes to our operations may affect our assessment of deferred tax assets considered realizable if the positive evidence no longer outweighs the negative evidence.
Net operating loss carryforwards of foreign subsidiaries at December 30, 2023 and December 31, 2022 were $481 million and $463 million, respectively. Tax credit carryforwards of both domestic and foreign subsidiaries at December 30, 2023 and December 31, 2022 totaled $9 million and $10 million, respectively. If unused, foreign net operating losses and tax credit carryforwards will expire as follows:
| | | | | | | | | | | | | | |
(In millions) | | Net Operating Losses(1) | | Tax Credits |
Year of Expiry | | | | |
2024 | | $ | 2.7 | | | $ | .1 | |
2025 | | 2.8 | | | .2 | |
2026 | | 2.9 | | | .3 | |
2027 | | 3.7 | | | .3 | |
2028 | | 12.6 | | | 1.2 | |
2029-2043 | | 16.4 | | | 5.2 | |
Indefinite life/no expiry | | 439.5 | | | 1.7 | |
Total | | $ | 480.6 | | | $ | 9.0 | |
(1)Net operating losses are presented before tax effects and valuation allowance.
Certain indefinite-lived foreign net operating losses may require decades to be fully utilized under our current business model.
At December 30, 2023, we had net operating loss carryforwards in certain states of $429 million before tax effects. Based on our estimates of future state taxable income, it is more-likely-than-not that the majority of these carryforwards will not be realized before they expire. Accordingly, a valuation allowance has been recorded on $402 million of these carryforwards.
As of December 30, 2023, our provision for income taxes did not materially benefit from applicable tax holidays in foreign jurisdictions.
Unrecognized Tax Benefits
As of December 30, 2023, our unrecognized tax benefits totaled $88 million, $75 million of which, if recognized, would reduce our annual effective income tax rate. As of December 31, 2022, our unrecognized tax benefits totaled $70 million, $65 million of which, if recognized, would reduce our annual effective income tax rate.
Where applicable, we accrue potential interest and penalties related to unrecognized tax benefits in income tax expense. The interest and penalties we recognized during fiscal years 2023, 2022 and 2021 were not material, individually or in aggregate, to the Consolidated Statements of Income. We have $16 million of accrued interest and penalties, net of tax benefit, in the Consolidated Balance Sheets at December 30, 2023 and December 31, 2022.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is set forth below.
| | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 |
Balance at beginning of year | | $ | 69.5 | | | $ | 74.0 | |
Additions for tax positions of current year | | 15.4 | | | 6.6 | |
Additions (reductions) for tax positions of prior years, net | | 8.0 | | | (2.2) | |
Settlements with tax authorities | | (1.8) | | | (1.1) | |
Expirations of statutes of limitations | | (3.9) | | | (4.8) | |
Changes due to translation of foreign currencies | | .8 | | | (3.0) | |
Balance at end of year | | $ | 88.0 | | | $ | 69.5 | |
It is reasonably possible that, during the next 12 months, we may realize a decrease in our uncertain tax positions, including interest and penalties, of approximately $6 million, primarily as a result of closing tax years.
The amount of income taxes we pay is subject to ongoing audits by taxing jurisdictions around the world. Our estimate of the potential outcome of any uncertain tax issue is subject to our assessment of the relevant risks, facts, and circumstances existing at the time. We believe we have adequately provided for reasonably foreseeable outcomes related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, which may impact our effective tax rate. The final determination of tax audits and any related legal proceedings could materially differ from amounts reflected in our tax provision for income taxes and the related liabilities. To date, we and our U.S. subsidiaries have completed the IRS’ Compliance Assurance Process through 2021. With limited exceptions, we are no longer subject to income tax examinations by tax authorities for years prior to 2010.
NOTE 15. SEGMENT AND DISAGGREGATED REVENUE INFORMATION
Segment Reporting
We have the following reportable segments:
•Materials Group – manufactures and sells pressure-sensitive label materials, films for graphic and reflective products, performance tapes and other adhesive products for industrial, medical and other applications, as well as fastener solutions.
•Solutions Group – designs, manufactures and sells a wide variety of branding and information solutions, including brand and price tickets, tags and labels (including RFID inlays), and related services, supplies and equipment.
Intersegment sales are recorded at or near market prices and are eliminated in determining consolidated sales. We evaluate our performance based on income from operations before interest expense and taxes. Corporate expense is excluded from the computation of income from operations for the segments.
We do not disclose total assets by reportable segment since we neither generate nor review that information internally. As our reporting structure is neither organized nor reviewed internally by country, results by individual country are not provided.
Disaggregated Revenue Information
Disaggregated revenue information is shown below in the manner that best reflects how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Revenue from our Materials Group reportable segment is attributed to geographic areas based on the location from which products are shipped. Revenue from our Solutions Group reportable segment is shown by product group.
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Net sales to unaffiliated customers | | | | | | |
Materials Group: | | | | | | |
U.S. | | $ | 1,687.8 | | | $ | 1,892.1 | | | $ | 1,736.4 | |
Europe, the Middle East and North Africa | | 2,007.1 | | | 2,396.2 | | | 2,261.1 | |
Asia | | 1,315.2 | | | 1,390.3 | | | 1,471.1 | |
Latin America | | 474.2 | | | 470.1 | | | 408.6 | |
Other | | 327.0 | | | 346.4 | | | 329.3 | |
Total Materials Group | | 5,811.3 | | | 6,495.1 | | | 6,206.5 | |
Solutions Group: | | | | | | |
Apparel | | 1,661.4 | | | 1,851.2 | | | 1,839.1 | |
Identification Solutions and Vestcom | | 891.6 | | | 693.0 | | | 362.7 | |
Total Solutions Group | | 2,553.0 | | | 2,544.2 | | | 2,201.8 | |
Net sales to unaffiliated customers | | $ | 8,364.3 | | | $ | 9,039.3 | | | $ | 8,408.3 | |
Revenue from our Materials Group reportable segment by product group is shown below.
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Net sales to unaffiliated customers | | | | | | |
Materials Group: | | | | | | |
Labels, graphics and reflectives | | $ | 5,076.8 | | | $ | 5,725.7 | | | $ | 5,430.4 | |
Tapes and adhesives | | 665.3 | | | 696.3 | | | 703.4 | |
Other | | 69.2 | | | 73.1 | | | 72.7 | |
Total Materials Group | | $ | 5,811.3 | | | $ | 6,495.1 | | | $ | 6,206.5 | |
Our total company revenue by geographic area is shown below. Revenue is attributed to geographic areas based on the location from which products are shipped.
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Net sales to unaffiliated customers | | | | | | |
U.S. | | $ | 2,578.3 | | | $ | 2,565.9 | | | $ | 2,065.2 | |
Europe, the Middle East and North Africa | | 2,306.7 | | | 2,683.6 | | | 2,541.4 | |
Asia | | 2,545.2 | | | 2,817.2 | | | 2,914.5 | |
Latin America | | 582.3 | | | 605.7 | | | 537.6 | |
Other | | 351.8 | | | 366.9 | | | 349.6 | |
Net sales to unaffiliated customers | | $ | 8,364.3 | | | $ | 9,039.3 | | | $ | 8,408.3 | |
Net sales to unaffiliated customers in Asia included sales in China (including Hong Kong) of $1.30 billion in 2023, $1.50 billion in 2022 and $1.68 billion in 2021.
No single customer represented 10% or more of our net sales in year-end 2023, 2022 or 2021. Our ten largest customers by net sales in the aggregate represented approximately 16% of our net sales during 2023, 2022 and 2021.
Additional Segment Information
Additional financial information by reportable segment and Corporate is shown below.
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Intersegment sales | | | | | | |
Materials Group | | $ | 157.1 | | | $ | 137.1 | | | $ | 105.8 | |
Solutions Group | | 35.5 | | | 37.4 | | | 37.3 | |
| | | | | | |
Intersegment sales | | $ | 192.6 | | | $ | 174.5 | | | $ | 143.1 | |
Income before taxes | | | | | | |
Materials Group | | $ | 700.9 | | | $ | 859.3 | | | $ | 883.3 | |
Solutions Group | | 165.7 | | | 302.3 | | | 257.2 | |
| | | | | | |
Corporate expense | | (83.7) | | | (87.6) | | | (81.8) | |
Interest expense | | (119.0) | | | (84.1) | | | (70.2) | |
Other non-operating expense (income), net | | 30.8 | | | 9.4 | | | 4.1 | |
Income before taxes | | $ | 694.7 | | | $ | 999.3 | | | $ | 992.6 | |
Capital expenditures(1)(2) | | | | | | |
Materials Group | | $ | 117.8 | | | $ | 153.5 | | | $ | 170.3 | |
Solutions Group | | 148.7 | | | 144.0 | | | 96.3 | |
| | | | | | |
Capital expenditures | | $ | 266.5 | | | $ | 297.5 | | | $ | 266.6 | |
Depreciation and amortization expense(1) | | | | | | |
Materials Group | | $ | 127.8 | | | $ | 135.8 | | | $ | 141.9 | |
Solutions Group | | 170.6 | | | 154.9 | | | 102.2 | |
| | | | | | |
Depreciation and amortization expense | | $ | 298.4 | | | $ | 290.7 | | | $ | 244.1 | |
Other expense (income), net by reportable segment | | | | | | |
Materials Group | | $ | 88.3 | | | $ | (13.4) | | | $ | (25.7) | |
Solutions Group | | 86.3 | | | 7.8 | | | 36.6 | |
| | | | | | |
Corporate | | 6.3 | | | 5.0 | | | (5.3) | |
Other expense (income), net | | $ | 180.9 | | | $ | (.6) | | | $ | 5.6 | |
| | | | | |
(1) | Corporate capital expenditures and depreciation and amortization expense are allocated to the reportable segments based on their percentage of consolidated net sales. |
(2) | Capital expenditures for property, plant and equipment included accruals. |
Other expense (income), net by type were as follows:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Other expense (income), net by type | | | | | | |
Restructuring charges: | | | | | | |
Severance and related costs | | $ | 70.8 | | | $ | 7.6 | | | $ | 10.5 | |
Asset impairment charges and lease cancellation costs | | 8.6 | | | .1 | | | 3.1 | |
Other items: | | | | | | |
Outcomes of legal proceedings, net(1) | | 64.3 | | | 6.3 | | | (.4) | |
Argentine peso remeasurement loss(2) | | 29.9 | | | — | | | — | |
Transaction and related costs | | 5.3 | | | .3 | | | 20.9 | |
(Gain) loss on venture investments | | 1.5 | | | (13.5) | | | (23.0) | |
(Gain) loss on sales of assets | | .5 | | | (1.4) | | | .2 | |
Gain on sale of product line | | — | | | — | | | (5.7) | |
Other expense (income), net | | $ | 180.9 | | | $ | (.6) | | | $ | 5.6 | |
| | | | | |
(1) | Amount for 2023 included an additional contingent liability related to the Adasa litigation in the amount of $56.3 million. Refer to Note 8, “Contingencies” for more information regarding the Adasa litigation. Amount for 2021 included an indirect tax credit based on a Brazilian Federal Supreme Court ruling in the amount of $29.1 million, partially offset by a contingent liability related to the Adasa litigation in the amount of $26.6 million. Refer to Note 8, “Contingencies” for more information regarding the Adasa litigation. |
(2) | The impact of the Argentine peso remeasurement loss prior to the third quarter of 2023 was not material. |
Property, plant and equipment, net, in our U.S. and non-U.S. operations were as follows:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Property, plant and equipment, net | | | | | | |
U.S. | | $ | 621.2 | | | $ | 589.0 | | | $ | 524.0 | |
Non-U.S. | | 1,004.6 | | | 951.2 | | | 953.7 | |
Property, plant and equipment, net | | $ | 1,625.8 | | | $ | 1,540.2 | | | $ | 1,477.7 | |
Property, plant and equipment, net, located in China (including Hong Kong) was approximately $247 million in 2023, $259 million in 2022 and $290 million in 2021.
NOTE 16. SUPPLEMENTAL FINANCIAL INFORMATION
Inventories
Inventories at year-end were as follows:
| | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 |
Raw materials | | $ | 415.4 | | | $ | 457.6 | |
Work-in-progress | | 238.2 | | | 255.1 | |
Finished goods | | 267.1 | | | 297.2 | |
Inventories | | $ | 920.7 | | | $ | 1,009.9 | |
Property, Plant and Equipment, Net
Major classes of property, plant and equipment, stated at cost, at year-end were as follows:
| | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 |
Land | | $ | 35.9 | | | $ | 29.3 | |
Buildings and improvements | | 817.9 | | | 781.0 | |
Machinery and equipment | | 2,799.5 | | | 2,667.8 | |
Construction-in-progress | | 317.1 | | | 269.6 | |
Property, plant and equipment | | 3,970.4 | | | 3,747.7 | |
Accumulated depreciation | | (2,344.6) | | | (2,207.5) | |
Property, plant and equipment, net | | $ | 1,625.8 | | | $ | 1,540.2 | |
Software
Capitalized software costs at year-end were as follows:
| | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 |
Cost | | $ | 362.4 | | | $ | 390.6 | |
Accumulated amortization | | (257.9) | | | (282.3) | |
Software, net | | $ | 104.5 | | | $ | 108.3 | |
Software amortization expense was $23.4 million in 2023, $29.5 million in 2022 and $30.1 million in 2021.
Allowance for Credit Losses
Given the short-term nature of trade receivables, our allowance for credit losses is based on the financial condition of customers, the aging of receivable balances, our historical collections experience, and current and expected future macroeconomic and market conditions. Balances are written off in the period in which they are determined to be uncollectible.
The activity related to our allowance for credit losses was as follows:
| | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 |
Balance at beginning of year | | $ | 34.4 | | | $ | 33.0 | |
Provision for credit losses | | 4.4 | | | 6.9 | |
Amounts written off | | (6.3) | | | (4.3) | |
Other, including foreign currency translation | | 1.9 | | | (1.2) | |
Balance at end of year | | $ | 34.4 | | | $ | 34.4 | |
The reversal of credit losses was $4.7 million in 2021.
Research and Development
Research and development expense, which was included in “Marketing, general and administrative expense” in the Consolidated Statements of Income, was as follows:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Research and development expense | | $ | 135.8 | | | $ | 136.1 | | | $ | 136.6 | |
Supplemental Cash Flow Information
Cash paid for interest and income taxes was as follows:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2023 | | 2022 | | 2021 |
Interest | | $ | 109.9 | | | $ | 80.9 | | | $ | 62.8 | |
Income taxes, net of refunds | | 234.9 | | | 204.8 | | | 253.4 | |
Foreign Currency Effects
Gains and losses resulting from foreign currency transactions are included in income in the period incurred. Transactions in foreign currencies (including receivables, payables and loans denominated in currencies other than the functional currency), including hedging impacts, were not material in 2023, 2022 or 2021.
Deferred Revenue
Deferred revenue primarily relates to constrained variable consideration on supply agreements for sales of products, as well as to payments received in advance of performance under a contract. Deferred revenue is recognized as revenue as or when we perform under a contract.
The following table shows the amounts and balance sheet locations of deferred revenue as of December 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
(In millions) | | December 30, 2023 | | December 31, 2022 |
Other current liabilities | | $ | 18.1 | | | $ | 22.2 | |
Long-term retirement benefits and other liabilities | | 1.3 | | | 2.1 | |
Total deferred revenue | | $ | 19.4 | | | $ | 24.3 | |
Revenue recognized from amounts included in deferred revenue as of December 31, 2022 was $21.0 million in 2023. Revenue recognized from amounts included in deferred revenue as of January 1, 2022 was $23.5 million in 2022. Revenue recognized from amounts included in deferred revenue as of January 2, 2021 was $18.4 million in 2021. This revenue was included in “Net sales” in the Consolidated Statements of Income.
Supplier Finance Programs
We have agreements with third-party financial institutions to facilitate payments to suppliers. These third-party financial institutions offer voluntary supply chain finance programs that enable certain of our suppliers, at the supplier’s sole discretion, to sell our payment obligations to a financial institution on terms directly negotiated with the financial institution. Participating suppliers decide which payment obligations are sold to the financial institution and we have no economic interest in a supplier’s decision to sell these payment obligations. We make payments to the financial institution on the invoice due date, regardless of whether an individual invoice is sold by the supplier to the financial institution. Our obligations to our suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers' decisions to sell amounts under these arrangements. Amounts due under our supply chain finance programs are included in accounts payable on our Consolidated Balance Sheets and activities related to these programs are presented as operating activities in our Consolidated Statements of Cash Flows. As of December 30, 2023 and December 31, 2022, the amounts due to financial institutions for suppliers that participate in these programs were $397.4 million and $430.1 million, respectively.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule13a-15(e)
and15d-15(e)
of the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in providing reasonable assurance that information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer as appropriate, to allow for timely decisions regarding required disclosure.