UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
   
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 4,October 3, 2009.
OR
   
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                          to                                           
Commission file number: 1-7685
AVERY DENNISON CORPORATION
(Exact name of registrant as specified in its charter)
   
Delaware 95-1492269
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  
   
150 North Orange Grove Boulevard  
Pasadena, California 91103
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (626) 304-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
       
Large accelerated filerþ  Accelerated filero  Non-accelerated filer  o
(Do not check if a smaller reporting company)		 Smaller Reporting Companyo 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
Number of shares of $1 par value common stock outstanding as of August 1,October 31, 2009: 112,744,662
 
 

 

AVERY DENNISON CORPORATION
FISCAL SECONDTHIRD QUARTER 2009 FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
     
   Page 
PART I. FINANCIAL INFORMATION (UNAUDITED)
    
     
Item 1. Financial Statements:
    
Condensed Consolidated Balance Sheet as of July 4,October 3, 2009 and December 27, 2008
  3 
Consolidated Statement of Operations for the Three and SixNine Months Ended July 4,October 3, 2009 and June 28,September 27, 2008
  4 
Condensed Consolidated Statement of Cash Flows for the SixNine Months Ended July 4,October 3, 2009 and June 28,September 27, 2008
  5 
Notes to Unaudited Condensed Consolidated Financial Statements
  6 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
  22 
Definition of Terms
  22 
Forward-looking Statements
  22 
Overview and Outlook
  22 
Analysis of Results of Operations for the SecondThird Quarter
  25 
Results of Operations by Segment for the SecondThird Quarter
  27 
Analysis of Results of Operations for the SixNine Months Year-to-Date
  29 
Results of Operations by Segment for the SixNine Months Year-to-Date
  30 
Financial Condition
  32 
Uses and Limitations of Non-GAAP Measures
  37 
Recent Accounting Requirements
  38 
Safe Harbor Statement
  38 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
  39 
Item 4. Controls and Procedures
  39 
     
PART II. OTHER INFORMATION
    
     
Item 1. Legal Proceedings
  4041 
Item 1A. Risk Factors
  4142 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  4142 
Item 3. Defaults Upon Senior Securities
  4142 
Item 4. Submission of Matters to a Vote of Security Holders
  4142 
Item 5. Other Information
  4243 
Item 6. Exhibits
  43 
Signatures
  44 
Exhibits    
 EX-10.8.3.2
EX-10.8.3.3
EX-10.8.4.1
EX-10.11.1
EX-10.11.2.1
EX-10.11.4.1EX-3.2
 EX-12
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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Avery Dennison Corporation
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
                
(Dollars in millions) July 4, 2009 December 27, 2008  October 3, 2009 December 27, 2008 
Assets
  
Current assets:  
Cash and cash equivalents $91.9 $105.5  $91.9 $105.5 
Trade accounts receivable, less allowances of $55.9 and $57.3 for 2009 and 2008, respectively 975.6 988.9 
Trade accounts receivable, less allowances of $57.4 and $57.3 for 2009 and 2008, respectively 1,008.6 988.9 
Inventories, net 518.4 583.6  511.8 583.6 
Current deferred and refundable income taxes 103.5 115.6  108.0 115.6 
Other current assets 104.7 136.8  104.0 136.8 
Total current assets 1,794.1 1,930.4  1,824.3 1,930.4 
Property, plant and equipment 3,170.1 3,173.1  3,226.2 3,173.1 
Accumulated depreciation  (1,766.1)  (1,680.1)  (1,832.9)  (1,680.1)
Property, plant and equipment, net 1,404.0 1,493.0  1,393.3 1,493.0 
Goodwill 940.0 1,716.7  962.2 1,716.7 
Other intangibles resulting from business acquisitions, net 277.1 303.6  271.3 303.6 
Non-current deferred and refundable income taxes 204.6 168.9  216.8 168.9 
Other assets 423.4 423.1  426.7 423.1 
 $5,043.2 $6,035.7  $5,094.6 $6,035.7 
  
Liabilities and Shareholders’ Equity
  
Current liabilities:  
Short-term and current portion of long-term debt $791.6 $665.0  $669.4 $665.0 
Accounts payable 608.0 672.9  650.5 672.9 
Current deferred and payable income taxes 34.9 59.6  54.2 59.6 
Other current liabilities 581.6 660.5  614.2 660.5 
Total current liabilities 2,016.1 2,058.0  1,988.3 2,058.0 
Long-term debt 1,134.9 1,544.8  1,115.7 1,544.8 
Long-term retirement benefits and other liabilities 551.0 566.5  556.5 566.5 
Non-current deferred and payable income taxes 139.9 116.4  134.1 116.4 
Commitments and contingencies (see Note 15)  
Shareholders’ equity:  
Common stock, $1 par value, authorized - 400,000,000 shares at July 4, 2009 and December 27, 2008; issued - 124,126,624 shares at July 4, 2009 and December 27, 2008; outstanding - 105,094,566 shares and 98,366,621 shares at July 4, 2009 and December 27, 2008, respectively 124.1 124.1 
Common stock, $1 par value, authorized - 400,000,000 shares at October 3, 2009 and December 27, 2008; issued - 124,126,624 shares at October 3, 2009 and December 27, 2008; outstanding - 105,190,851 shares and 98,366,621 shares at October 3, 2009 and December 27, 2008, respectively 124.1 124.1 
Capital in excess of par value 623.1 642.9  698.4 642.9 
Retained earnings 1,432.7 2,381.3  1,472.4 2,381.3 
Cost of unallocated ESOP shares –  (1.2) –  (1.2)
Employee stock benefit trusts, 7,635,096 shares and 7,888,953 shares at July 4, 2009 and December 27, 2008, respectively  (188.3)  (246.9)
Treasury stock at cost, 11,381,962 shares and 17,841,050 shares at July 4, 2009 and December 27, 2008, respectively  (570.8)  (867.7)
Employee stock benefit trusts, 7,538,811 shares and 7,888,953 shares at October 3, 2009 and December 27, 2008, respectively  (253.3)  (246.9)
Treasury stock at cost, 11,381,962 shares and 17,841,050 shares at October 3, 2009 and
December 27, 2008, respectively		  (570.8)  (867.7)
Accumulated other comprehensive loss  (219.5)  (282.5)  (170.8)  (282.5)
Total shareholders’ equity 1,201.3 1,750.0  1,300.0 1,750.0 
 $5,043.2 $6,035.7  $5,094.6 $6,035.7 
See Notes to Unaudited Condensed Consolidated Financial Statements

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Avery Dennison Corporation
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
                                 
 Three Months Ended Six Months Ended Three Months Ended Nine Months Ended
(In millions, except per share amounts) July 4, 2009 June 28, 2008 July 4, 2009 June 28, 2008  October 3, 2009 September 27, 2008 October 3, 2009 September 27, 2008 
Net sales $1,455.4 $1,828.9 $2,881.6 $3,474.1  $1,549.3 $1,724.8 $4,430.9 $5,198.9 
Cost of products sold 1,065.1 1,338.6 2,146.2 2,559.8  1,113.3 1,290.5 3,259.5 3,850.3 
Gross profit 390.3 490.3 735.4 914.3  436.0 434.3 1,171.4 1,348.6 
Marketing, general and administrative expense 300.1 341.0 604.3 669.0  323.1 325.5 927.4 994.5 
Goodwill and indefinite-lived intangible asset impairment charges – – 832.0 –  – – 832.0 – 
Interest expense 20.4 29.3 47.9 58.8  19.1 29.0 67.0 87.8 
Other expense, net 29.6 5.8 126.9 11.4  35.5 12.5 162.4 23.9 
Income (loss) before taxes 40.2 114.2  (875.7) 175.1  58.3 67.3  (817.4) 242.4 
Provision for (benefit from) income taxes .4 21.8  (16.6) 14.3 
(Benefit from) provision for income taxes  (4.2) 4.6  (20.8) 18.9 
Net income (loss) $39.8 $92.4 $(859.1) $160.8  $62.5 $62.7 $(796.6) $223.5 
 
Per share amounts:  
Net income (loss) per common share $.38 $.94 $(8.41) $1.63  $.59 $.64 $(7.73) $2.27 
Net income (loss) per common share, assuming dilution $.38 $.93 $(8.41) $1.62  $.59 $.63 $(7.73) $2.26 
Dividends $.41 $.41 $.82 $.82  $.20 $.41 $1.02 $1.23 
 
Average shares outstanding:  
Common shares 105.0 98.5 102.2 98.5  105.1 98.5 103.1 98.5 
Common shares, assuming dilution 105.7 98.9 102.2 98.9  106.0 98.9 103.1 98.9 
Common shares outstanding at period end 105.1 98.5 105.1 98.5  105.2 98.3 105.2 98.3 
See Notes to Unaudited Condensed Consolidated Financial Statements

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Avery Dennison Corporation
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
                
 Six Months Ended  Nine Months Ended 
(In millions) July 4, 2009 June 28, 2008  October 3, 2009 September 27, 2008 
Operating Activities
  
Net (loss) income $(859.1) $160.8  $(796.6) $223.5 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation 94.0 101.6  138.2 154.8 
Amortization 38.6 37.0  55.8 55.7 
Provision for doubtful accounts 9.5 8.2  16.3 13.1 
Goodwill and indefinite-lived intangible asset impairment charges 832.0 –  832.0 – 
Asset impairment and net loss on sale and disposal of assets 28.0 14.4  40.9 16.4 
Loss from debt extinguishment 21.2 –  21.2 – 
Stock-based compensation 13.2 16.9  19.8 24.0 
Other non-cash expense and loss 12.1 –  16.2 3.2 
Other non-cash income and gain  (7.2)  (17.2)  (7.2)  (14.9)
Changes in assets and liabilities and other adjustments, net of the effect of business acquisitions  (49.5)  (133.0)  (19.7)  (93.5)
Net cash provided by operating activities 132.8 188.7  316.9 382.3 
  
Investing Activities
  
Purchase of property, plant and equipment  (30.5)  (69.1)  (46.7)  (97.8)
Purchase of software and other deferred charges  (14.9)  (33.0)  (20.4)  (49.2)
Payments for acquisitions –  (125.0) –  (130.6)
Proceeds from sale of investments, net .1 13.0  .3 16.2 
Other  (4.2) 5.1   (4.0) 7.0 
Net cash used in investing activities  (49.5)  (209.0)  (70.8)  (254.4)
  
Financing Activities
  
Net increase (decrease) in borrowings (maturities of 90 days or less) 65.4  (285.1)
Net decrease in borrowings (maturities of 90 days or less)  (58.1)  (386.3)
Additional borrowings (maturities longer than 90 days) – 400.1  – 400.1 
Payments of debt (maturities longer than 90 days)  (73.4)  (.3)  (93.2)  (.7)
Dividends paid  (89.6)  (87.6)  (112.3)  (131.4)
Purchase of treasury stock –  (9.8)
Proceeds from exercise of stock options, net .2 1.9  – 2.3 
Other – 5.4  2.0 8.2 
Net cash (used in) provided by financing activities  (97.4) 34.4 
Net cash used in financing activities  (261.6)  (117.6)
  
Effect of foreign currency translation on cash balances .5 1.5  1.9  (.5)
(Decrease) increase in cash and cash equivalents  (13.6) 15.6   (13.6) 9.8 
Cash and cash equivalents, beginning of year 105.5 71.5  105.5 71.5 
Cash and cash equivalents, end of period $91.9 $87.1  $91.9 $81.3 
See Notes to Unaudited Condensed Consolidated Financial Statements

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Avery Dennison Corporation
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. General
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include normal recurring adjustments necessary for a fair statement of Avery Dennison Corporation’s (the “Company’s”) interim results. The unaudited condensed consolidated financial statements and notes in this Form 10-Q are presented as permitted by Article 10 of Regulation S-X. The unaudited condensed consolidated financial statements do not contain certain information included in the Company’s 2008 annual financial statements and notes. This Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in the Company’s 2008 Annual Report on Form 10-K.
The Company’s 2009 fiscal year includes a 53-week period, with the extra week reflected in the first quarter. Normally, each fiscal year consists of 52 weeks, but every fifth or sixth year consists of 53 weeks. The secondthird quarters of 2009 and 2008 consisted of thirteen-week periods ending July 4,October 3, 2009 and June 28,September 27, 2008, respectively.
The interim results of operations are not necessarily indicative of future financial results.
The Company has evaluated subsequent events through the time of filing this Form 10-Q with the Securities and Exchange Commission (“SEC”) on August 12,November 11, 2009.
Financial Presentation
Certain prior year amounts have been reclassified to conform with the current year presentation.
Note 2. Acquisitions
On April 1, 2008, the Company acquired DM Label Group (“DM Label”). DM Label operations are included in the Company’s Retail Information Services segment.
Note 3. Inventories
Inventories consisted of:
                
(In millions) July 4, 2009 December 27, 2008  October 3, 2009 December 27, 2008 
Raw materials $221.0 $256.2  $235.6 $256.2 
Work-in-progress 124.3 143.4  122.4 143.4 
Finished goods 241.3 248.6  223.3 248.6 
Inventories at lower of FIFO cost or market (approximates replacement cost) 586.6 648.2  581.3 648.2 
Inventory reserves  (68.2)  (64.6)  (69.5)  (64.6)
Inventories, net $518.4 $583.6  $511.8 $583.6 
Note 4. Goodwill and Other Intangibles Resulting from Business Acquisitions
In the first quarter of 2009, the Company recorded non-cash impairment charges of $832 million for the retail information services reporting unit, of which $820 million is related to goodwill and $12 million is related to indefinite-lived intangible assets. The Company completed its impairment test of goodwill and indefinite-lived intangible assets (“goodwill impairment”) in the second quarter of 2009, with no additional impairment charge incurred.recorded thereafter.
The Company performs its goodwill impairment test in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets.” In performing the required goodwill impairment test, the Company primarily applies a present value (discounted cash flow) method to determine the fair value of the reporting units with goodwill. The Company’s reporting units, which are composed of either a discrete business or an aggregation of businesses with similar economic characteristics, consist of roll materials; retail information services; office and consumer products; graphics and reflective products; industrial products; and business media.
The Company performs its annual goodwill impairment test during the fourth quarter. However, certain factors may result in the need to perform a goodwill impairment test prior to the fourth quarter, including significant underperformance of the Company’s business relative to expected operating results, significant adverse economic and industry trends, significant decline in the Company’s market

6

Avery Dennison Corporation
capitalization for an extended period of time relative to net book value, or a decision to divest an individual business within a reporting

6

Avery Dennison Corporation
unit. Based upon the Company’s assessment of these factors in connection with the preparation of the Company’s first quarter financial statements, the Company determined that there was a need to initiate an interim goodwill impairment test. The factors considered included both a sustained decline in the Company’s stock price and a decline in the Company’s 2009 revenue projections for the retail information services reporting unit, following lower than expected revenues in March 2009, which continued in April 2009. The peak season for the retail information services reporting unit has traditionally been March through the end of the second quarter.
The Company’s interim impairment analysis indicated that the fair value of each of the Company’s reporting units exceeded its carrying value, except for the Company’s retail information services reporting unit, which had a fair value less than its carrying value. In evaluating the fair value of the retail information services reporting unit, the Company assumed further declines in revenue for 2009 from 2008, reflecting continued and further weakness in the retail apparel market. The Company then assumed that revenues by 2012 would increase to levels comparable with 2007 (including estimated sales for Paxar and DM Label, adjusted for foreign currency translation). The Company also assumed a discount rate of 14.5% reflecting the increased uncertainty of global economic conditions in the first three months of 2009.
The primary factors contributing to the $832 million of non-cash impairment charges relative to the Company’s goodwill impairment test in the fourth quarter of 2008 were the assumed increase in the discount rate, the reduced assumptions for revenue growth through 2013, and the associated cash flow impact from these reduced projections. The change in these factors reflected worsening economic projections and market conditions.
Goodwill
As part of the interim goodwill impairment test completed in the second quarter of 2009, which is discussed above, the Company recorded a non-cash impairment charge of $820 million for the retail information services reporting unit in the first quarter of 2009, with no additional impairment charge in the second quarter of 2009.recorded thereafter. The total amount of goodwill assigned to the retail information services reporting unit prior to impairment charges was approximately $1.2 billion.
Changes in the net carrying amount of goodwill for the periods shown, by reportable segment, are as follows:
                                        
 Other    Other   
 Pressure- Retail Office and specialty    Pressure- Retail Office and specialty   
 sensitive Information Consumer converting    sensitive Information Consumer converting   
(In millions) Materials Services Products businesses Total  Materials Services Products businesses Total 
Balance as of December 29, 2007 $354.0 $1,137.7 $177.6 $14.0 $1,683.3  $354.0 $1,137.7 $177.6 $14.0 $1,683.3 
Goodwill acquired during the period(1)
 – 45.1 – – 45.1  – 45.1 – – 45.1 
Acquisition adjustments(2)
 .3 10.3 – – 10.6  .3 10.3 – – 10.6 
Transfers(3)
 – 10.4 –  (10.4) –  – 10.4 –  (10.4) – 
Translation adjustments  (19.9) 8.1  (10.4)  (.1)  (22.3)  (19.9) 8.1  (10.4)  (.1)  (22.3)
Balance as of December 27, 2008 $334.4 $1,211.6 $167.2 $3.5 $1,716.7  $334.4 $1,211.6 $167.2 $3.5 $1,716.7 
Acquisition adjustments(4)
 – 30.9 – – 30.9  – 29.3 – – 29.3 
Goodwill impairment charges –  (820.0) – –  (820.0) –  (820.0) – –  (820.0)
Translation adjustments 7.3 1.4 3.7 – 12.4  19.4 9.5 7.2 .1 36.2 
Balance as of July 4, 2009 $341.7 $423.9 $170.9 $3.5 $940.0 
Balance as of October 3, 2009 $353.8 $430.4 $174.4 $3.6 $962.2 
Goodwill Summary:
  
Goodwill $341.7 $1,243.9 $170.9 $3.5 $1,760.0  $353.8 $1,250.4 $174.4 $3.6 $1,782.2 
Accumulated impairment losses –  (820.0) – –  (820.0) –  (820.0) – –  (820.0)
Balance as of July 4, 2009 $341.7 $423.9 $170.9 $3.5 $940.0 
Balance as of October 3, 2009 $353.8 $430.4 $174.4 $3.6 $962.2 
 
(1) Goodwill acquired during the period related to the DM Label acquisition in April 2008.
 
(2) Acquisition adjustments in 2008 consisted of opening balance sheet adjustments associated with the acquisition of Paxar Corporation (“Paxar”) in June 2007.
 
(3) Related to the transfer of a business from other specialty converting businesses to Retail Information Services to align with a change in the Company’s internal reporting structure.
 
(4) Acquisition adjustments in 2009 consisted of opening balance sheet adjustments associated with the DM Label acquisition in April 2008 of $31.1 and other acquisition adjustments of $(.2)$(1.8).
As of July 4,October 3, 2009, goodwill and other intangible assets and their related useful lives include the allocations of the purchase price of the DM Label acquisition based on valuations of the acquired assets.

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Indefinite-Lived Intangible Assets
In connection with the acquisition of Paxar, the Company acquired approximately $30 million of intangible assets, consisting of certain trade names and trademarks, which are not subject to amortization because they have an indefinite useful life. As part of the interim goodwill impairment test completed in the second quarter of 2009, which is discussed above, the Company recorded an additional non-cash impairment charge of $12 million related to these indefinite-lived intangible assets in the first quarter of 2009, with no additional impairment charge in the second quarter of 2009.recorded thereafter. The carrying value of these indefinite-lived intangible assets was $17.8 million and $29.5 million at July 4,October 3, 2009 and December 27, 2008, respectively, which include $.2 million and $.5 million of negative currency impact, respectively.
Finite-Lived Intangible Assets
The following table sets forth the Company’s finite-lived intangible assets resulting from business acquisitions at July 4,October 3, 2009 and December 27, 2008, which continue to be amortized:
                                                
 July 4, 2009 December 27, 2008  October 3, 2009 December 27, 2008 
 Gross Net Gross Net  Gross Net Gross Net 
 Carrying Accumulated Carrying Carrying Accumulated Carrying  Carrying Accumulated Carrying Carrying Accumulated Carrying 
(In millions) Amount Amortization Amount Amount Amortization Amount  Amount Amortization Amount Amount Amortization Amount 
     
Customer relationships $297.8 $81.8 $216.0 $295.9 $67.4 $228.5  $296.6 $88.8 $207.8 $295.9 $67.4 $228.5 
Patents and other acquired technology 53.6 21.2 32.4 53.6 18.8 34.8  53.6 22.4 31.2 53.6 18.8 34.8 
Trade names and trademarks(1)
 46.1 38.7 7.4 45.1 38.1 7.0  47.6 40.3 7.3 45.1 38.1 7.0 
Other intangibles 8.8 5.3 3.5 8.8 5.0 3.8  14.0 6.8 7.2 8.8 5.0 3.8 
     
Total $406.3 $147.0 $259.3 $403.4 $129.3 $274.1  $411.8 $158.3 $253.5 $403.4 $129.3 $274.1 
     
 
(1) Includes a reclassification from “Other assets” of approximately $1.
Amortization expense on finite-lived intangible assets resulting from business acquisitions was $8.4$8.2 million and $17$25.2 million for the three and sixnine months ended July 4,October 3, 2009, respectively, and $7.9$8.9 million and $15.8$24.7 million for the three and sixnine months ended June 28,September 27, 2008, respectively. As of July 4,October 3, 2009, the estimated amortization expense for finite-lived intangible assets resulting from completed business acquisitions for this fiscal year and each of the next four fiscal years is expected to be approximately $30$34 million, per year.$34 million, $34 million, $33 million, and $32 million, respectively.
The weighted-average amortization periods from the date of acquisition for finite-lived intangible assets resulting from business acquisitions are thirteenfourteen years for customer relationships, eleven years for trade names and trademarks, thirteen years for patents and other acquired technology, eightseven years for other intangibles and thirteen years in total. As of July 4,October 3, 2009, the weighted-average remaining useful life of acquired finite-lived intangible assets are nine years for customer relationships, five years for trade names and trademarks, seven years for patents and other acquired technology, four years for other intangibles and eight years in total.
Note 5. Debt
On January 23, 2009, the Company entered into an amendment to a credit agreement for a $1 billion revolving credit facility (the “Revolver”) with certain domestic and foreign banks, maturing August 10, 2012. The amendment increases the Company’s flexibility for a specified period of time under the financial covenants to which the Revolver is subject and excludes certain restructuring charges from the calculation of the financial ratios under those covenants. The amendment increases the annual interest rate of the Revolver to the annual rate of, at the Company’s option, either (i) between LIBOR plus 1.8% and LIBOR plus 3.5%, depending on the Company’s debt ratings by either Standard & Poor’s Rating Service (“S&P”) or Moody’s Investor Service (“Moody’s”), or (ii) the higher of (A) the federal funds rate plus 0.50% or (B) the prime rate, plus between 0.8% and 2.5%, depending on the Company’s debt ratings by either S&P or Moody’s. The amendment also provides for an increase in the facility fee payable under the Revolver to the annual rate of between 0.2% and 0.5%, depending on the Company’s debt ratings by either S&P or Moody’s.
On January 23, 2009, a wholly-owned subsidiary of the Company entered into an amendment to a credit agreement for a $400 million term loan credit facility (“Credit Facility”) with certain domestic and foreign banks, maturing February 8, 2011. The subsidiary’s payment and performance under the agreement are guaranteed by the Company. The amendment increases the Company’s flexibility for a specified period of time under the financial covenants to which the Credit Facility is subject and excludes certain restructuring charges from the calculation of the financial ratios under those covenants. The amendment also increases the annual interest rate of the Credit Facility to the annual rate of, at the subsidiary’s option, either (i) between LIBOR plus 2.0% and LIBOR plus 4.0%, depending on the Company’s debt ratings by either S&P or Moody’s, or (ii) the higher of (A) the federal funds rate plus 0.50% or (B) the prime rate, plus between 1.0% and 3.0%, depending on the Company’s debt ratings by either S&P or Moody’s. The amendment requires the partial repayment of the loans under the Credit Facility in $15 million quarterly installments beginning April 2009 through December

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Avery Dennison Corporation
2010, and $280 million payable upon maturity.
The financial covenant ratios permitted under the above-mentioned amendments are as follows:
                                 
                              Fourth 
  First  Second  Third  Fourth  First  Second  Third  Quarter 
  Quarter  Quarter  Quarter  Quarter  Quarter  Quarter  Quarter  2010 and 
  2009  2009  2009  2009  2010  2010  2010  thereafter 
 
Interest Coverage Ratio (Minimum)  2.50   2.25   2.10   2.25   2.60   3.00   3.25   3.50 
Leverage Ratio (Maximum)  4.00   4.25   4.25   4.00   3.75   3.50   3.50   3.50 
 
As of July 4,October 3, 2009, the Company was in compliance with its financial covenants. The non-cash goodwill and indefinite-lived intangible asset impairment charges recognized in the first quarter of 2009 have no adverse impact on the Company’s financial covenants. Refer to Note 4, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” for information regarding the impairments.
On March 10, 2009, the Company completed an exchange of approximately 6.6 million units (or 75.15%) of its HiMEDS units, stated amount $50.00 per unit (the “HiMEDS units”), in the form of Corporate HiMEDS units (the “Corporate HiMEDS units”), comprised of (i) a purchase contract obligating the holder to purchase from the Company its common stock shares, par value $1.00 per share (the “common stock”), and (ii) a 1/20 or 5.0% undivided beneficial interest in a $1,000 aggregate principal amount 5.350% senior note due November 15, 2020 (the “HiMEDS senior notes”), for 0.9756 shares of common stock and $6.50 in cash (which includes the accrued and unpaid contract adjustment payments with respect to the purchase contracts and the accrued and unpaid interest with respect to the HiMEDS senior notes) for each Corporate HiMEDS unit. The Company issued approximately 6.5 million shares of its common stock and paid approximately $43 million in cash for the exchanged HiMEDS units with a carrying value of approximately $331 million. As a result of this exchange, the Company recorded a debt extinguishment loss of approximately $21 million (included in “Other expense, net” in the unaudited Consolidated Statement of Operations), which included a write-off of $9.6 million related to unamortized debt issuance costs.
As of July 4,October 3, 2009, approximately two million HiMEDS units with a carrying value of approximately $109 million remained outstanding. The purchase contracts related to these units obligate the holders to purchase from the Company a certain number of common shares in November 2010 (depending on the stock price at the time).
The fair value of the Company’s debt is estimated based on the discounted amount of future cash flows using the current rates offered to the Company for debt of similar remaining maturities. As of July 4,October 3, 2009, the carrying value and fair value of the Company’s total debt, including short-term borrowings, was $1.93$1.79 billion and $1.85$1.75 billion, respectively.
Note 6. Pension and Other Postretirement Benefits
The following table sets forth the components of net periodic benefit cost for the periods shown:
                                                                
 Pension Benefits  Pension Benefits 
 Three Months Ended Six Months Ended  Three Months Ended Nine Months Ended 
 July 4, 2009 June 28, 2008 July 4, 2009 June 28, 2008  October 3, 2009 September 27, 2008 October 3, 2009 September 27, 2008 
(In millions) U.S. Int’l U.S. Int’l U.S. Int’l U.S. Int’l  U.S. Int’l U.S. Int’l U.S. Int’l U.S. Int’l 
Components of net periodic benefit cost:  
Service cost $4.6 $2.9 $5.1 $3.6 $10.0 $5.7 $9.8 $7.1  $4.9 $3.0 $4.9 $3.6 $14.9 $8.7 $14.7 $10.7 
Interest cost 9.3 6.2 8.7 7.4 19.1 12.4 18.0 14.4  9.6 6.6 9.0 7.2 28.7 19.0 27.0 21.6 
Expected return on plan assets  (12.1)  (6.5)  (12.7)  (7.6)  (24.3)  (12.9)  (25.5)  (14.9)  (12.1)  (6.8)  (12.7)  (7.5)  (36.4)  (19.7)  (38.2)  (22.4)
Recognized net actuarial loss 1.8 .5 1.6 .9 5.1 1.0 3.0 1.8  2.6 .5 1.5 1.0 7.7 1.5 4.5 2.8 
Amortization of prior service cost .2 .1 .3 .2 .4 .2 .6 .3  .2 .1 .2 .1 .6 .3 .8 .4 
Amortization of transition asset –  (.2) –  (.2) –  (.3) –  (.3) –  (.1) –  (.1) –  (.4) –  (.4)
Net periodic benefit cost $3.8 $3.0 $3.0 $4.3 $10.3 $6.1 $5.9 $8.4  $5.2 $3.3 $2.9 $4.3 $15.5 $9.4 $8.8 $12.7 

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 U.S. Postretirement Health Benefits  U.S. Postretirement Health Benefits 
 Three Months Ended Six Months Ended  Three Months Ended Nine Months Ended 
(In millions) July 4, 2009 June 28, 2008 July 4, 2009 June 28, 2008  October 3, 2009 September 27, 2008 October 3, 2009 September 27, 2008 
     
Components of net periodic benefit cost:  
Service cost $.3 $.2 $.5 $.5  $.2 $.3 $.7 $.8 
Interest cost .5 .5 1.0 .9  .4 .5 1.4 1.4 
Recognized net actuarial loss .4 .4 .8 .8  .4 .3 1.2 1.1 
Amortization of prior service cost  (.5)  (.5)  (1.0)  (1.0)  (.5)  (.5)  (1.5)  (1.5)
Net periodic benefit cost $.7 $.6 $1.3 $1.2  $.5 $.6 $1.8 $1.8 
The Company contributed $3.8$7.8 million and $1.8$2.7 million to its U.S. pension plans during the sixnine months ended July 4,October 3, 2009 and June 28,September 27, 2008, respectively. The Company expects to contribute an additional $4.2$.2 million (and may contribute up to an additional $25 million) to its U.S. pension plans forprior to the remainderend of 2009. Additionally, the Company contributed $1.3$2.2 million and $1.7$2.4 million to its U.S. postretirement health benefit plan during the sixnine months ended July 4,October 3, 2009 and June 28,September 27, 2008, respectively. For the remainder of 2009, the Company expects to contribute an additional $1.5$.6 million to its U.S. postretirement health benefit plan.
The Company contributed approximately $20$23 million and approximately $9$11 million to its international pension plans during the sixnine months ended July 4,October 3, 2009 and June 28,September 27, 2008, respectively. Contributions made during the sixnine months ended July 4,October 3, 2009 included approximately $11 million of contributions to the Dutch pension plan made in the form of borrowings payable by the Company (included in “Long-term debt” in the unaudited Condensed Consolidated Balance Sheet) to the pension plan over the next three years. For the remainder of 2009, the Company expects to contribute an additional $9$6 million to its international pension plans.
During the sixnine months ended July 4,October 3, 2009, the Company recognized approximately $4$6.4 million related to its match to participant contributions in the Company’s defined contribution plan. This expense was recorded in marketing,“Marketing, general and administrative expenseexpense” in the unaudited Consolidated Statement of Operations and was funded through the issuance of shares from the Company’s Employee Stock Benefit Trust.
Note 7. Research and Development
Research and development expense for the three and sixnine months ended July 4,October 3, 2009 was $21.6$22.3 million and $44.8$67.1 million, respectively. For the three and sixnine months ended June 28,September 27, 2008, research and development expense was $23.9$23.8 million and $48.4$72.2 million, respectively.
Note 8. Stock-Based Compensation
Net income included stock-based compensation expense related to stock options, performance units (“PUs”), restricted stock units (“RSUs”) and restricted stock of $6.8$6.6 million and $13.2$19.8 million for the three and sixnine months ended July 4,October 3, 2009, respectively, and $8.9$7.1 million and $16.9$24 million for the three and sixnine months ended June 28,September 27, 2008, respectively. Total stock-based compensation expense was included in “Marketing, general and administrative expense” in the unaudited Consolidated Statement of Operations and was recorded in corporate expense and the Company’s operating segments, as appropriate.
During the second quarter of 2008, following the Company’s shareholders’ approval of the amended and restated stock option and incentive plan on April 24, 2008, the Company began granting PUs to certain eligible employees of the Company. These PUs are payable in shares of the Company’s common stock at the end of a three-year cliff vesting period provided that certain performance objective metrics are achieved at the end of the period. The compensation expense related to PUs is included in the stock-based compensation expense noted above.
In February 2009, the Company granted its annual stock-based awards to employees and directors. The provision of SFAS No. 123(R), “Share-Based Payment,” requires that suchSuch awards granted to retirement-eligible employees beare treated as though they were immediately vested; as a result, the compensation expense related to these awards (approximately $.9 million) was recognized during the sixnine months ended July 4,October 3, 2009 and is included in the stock-based compensation expense noted above.
As of July 4,October 3, 2009, the Company had approximately $53$45 million of unrecognized compensation expense related to unvested stock options, PUs, RSUs and restricted stock under the Company’s plans. The total unrecognized compensation expense is expected to be recognized over the remaining weighted-average requisite service periodperiods of approximately two years for PUs and RSUs, and approximately three years for stock options RSUs and restricted stock.

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Note 9. Cost Reduction Actions
Severance charges recorded under the Company’s restructuring actions are included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheet. Severance and other employee costs represent cash paid or to be paid to employees terminated under these actions. Charges below are included in “Other expense, net” in the unaudited Consolidated Statement of Operations.

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Severance, asset impairment, and lease cancellation charges recorded for the three and sixnine months ended July 4,October 3, 2009 and June 28,September 27, 2008 are summarized by reportable segment in Note 16, “Segment Information.”
Beginning in 2009, the Company modified its approach to allocating Corporate costs (including costs associated with restructuring actions) to its operating segments to better reflect the costs required to support operations within segment results. Prior year amounts have been restated to conform with the new methodology.
2009
In 2009, the Company continued the implementation of the cost reduction action initiated in the fourth quarter of 2008, and recorded charges of $68.7$102.2 million, consisting of $42.9$69.9 million of severance and other employee costs resulting in the elimination of approximately 1,9302,420 positions impacting all segments, as well as $25.2$29.9 million of asset impairment charges, and $.6$2.4 million of lease cancellation charges. As of July 4,October 3, 2009, approximately 205420 employees related to these charges remain with the Company and are expected to leave in 2009.by 2010. The table below details the accruals and payments recorded in 2009:2009 and the associated payments:
                                        
 Other    Other   
 Pressure- Retail Office and specialty    Pressure- Retail Office and specialty   
 sensitive Information Consumer converting    sensitive Information Consumer converting   
(In millions) Materials Services Products businesses Total  Materials Services Products businesses Total 
Total severance and other employee costs accrued during the period ended:
  
April 4, 2009 $7.6 $5.8 $.9 $2.8 $17.1  $7.6 $5.8 $.9 $2.8 $17.1 
July 4, 2009 13.4 4.6 .3 7.5 25.8  13.4 4.6 .3 7.5 25.8 
October 3, 2009 3.9 21.0  (.2) 2.3 27.0 
2009 Settlements  (5.8)  (8.5)  (.5)  (3.3)  (18.1)  (11.9)  (11.7)  (.6)  (6.2)  (30.4)
Balance at July 4, 2009 $15.2 $1.9 $.7 $7.0 $24.8 
Balance at October 3, 2009 $13.0 $19.7 $.4 $6.4 $39.5 
  
Asset Impairment
  
Machinery and equipment $1.5 $2.9 $.2 $11.2 $15.8  $2.3 $3.1 $.2 $14.0 $19.6 
Buildings .4 .7 3.9 .9 5.9  .4 1.6 3.9 .9 6.8 
Patents 1.9 .2 .4 1.0 3.5  1.9 .2 .4 1.0 3.5 
Other
  
Lease cancellations .1 .5 – – .6  1.7 .7 – – 2.4 
 $3.9 $4.3 $4.5 $13.1 $25.8  $6.3 $5.6 $4.5 $15.9 $32.3 
2008
In 2008, the Company implemented cost reduction actions, including the cost reduction action initiated in the fourth quarter, resulting in a headcount reduction of approximately 1,475 positions, impairment of certain assets and software, and lease cancellations. Charges related to these actions totaled $40.7 million, including severance and related costs of $29.8 million, impairment of fixed assets and buildings of $7.7 million, lease cancellation charges of $2.3 million and software impairment of $.9 million. At July 4,October 3, 2009, approximately 9010 employees related to these charges remain with the Company and are expected to leave in 2009. The table below details the accruals and payments recorded in 2008:2008 and the associated payments:
                                        
 Other    Other   
 Pressure- Retail Office and specialty    Pressure- Retail Office and specialty   
 sensitive Information Consumer converting    sensitive Information Consumer converting   
(In millions) Materials Services Products businesses Total  Materials Services Products businesses Total 
Total severance and other employee costs accrued during the period ended:
  
March 29, 2008 $1.5 $1.4 $.2 $.2 $3.3  $1.5 $1.4 $.2 $.2 $3.3 
June 28, 2008 .2 2.8 4.2 – 7.2  .2 2.8 4.2 – 7.2 
September 27, 2008 2.5 1.4 3.2 1.6 8.7  2.5 1.4 3.2 1.6 8.7 
December 27, 2008 2.5 3.8 3.1 1.2 10.6  2.5 3.8 3.1 1.2 10.6 
Total expense accrued during 2008 6.7 9.4 10.7 3.0 29.8  6.7 9.4 10.7 3.0 29.8 
2008 Settlements  (1.5)  (4.7)  (5.2)  (1.1)  (12.5)  (1.5)  (4.7)  (5.2)  (1.1)  (12.5)
2009 Settlements  (2.7)  (4.1)  (4.0)  (1.8)  (12.6)  (4.4)  (4.6)  (4.8)  (1.8)  (15.6)
Balance at July 4, 2009 $2.5 $.6 $1.5 $.1 $4.7 
Balance at October 3, 2009 $.8 $.1 $.7 $.1 $1.7 

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Avery Dennison Corporation
                     
              Other    
  Pressure-  Retail  Office and  specialty    
  sensitive  Information  Consumer  converting    
(In millions) Materials  Services  Products  businesses  Total 
 
Asset Impairment
                    
Machinery and equipment $4.9  $1.3  $1.2  $.2  $7.6 
Buildings  –   .1   –   –   .1 
Other
                    
Lease cancellations  .9   1.4   –   –   2.3 
Software impairment  –   –   .9   –   .9 
 
  $5.8  $2.8  $2.1  $.2  $10.9 
 
Note 10. Financial Instruments and Foreign Currency
The Company enters into certain foreign exchange hedge contracts to reduce its exposure to 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 its operations outside the U.S. The Company enters into certain interest rate contracts to help manage its exposure to interest rate fluctuations. The Company also enters into certain natural gas and other commodity futures contracts to hedge price fluctuations for a portion of its anticipated domestic purchases. The maximum length of time in which the Company hedges its exposure to the variability in future cash flows for forecasted transactions is generally 12 to 24 months.
As of July 4,October 3, 2009, the U.S. dollar equivalent notional values of the Company’s outstanding commodity contracts and foreign currency contracts were approximately $19$18 million and $1.1$1.2 billion, respectively.
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, requires companies to recognizeThe Company recognizes all derivative instruments as either assets or liabilities at fair value in the statement of financial position. In accordance with SFAS No. 133, theThe Company designates commodity forward contracts on forecasted purchases of commodities and foreign currency contracts on forecasted transactions as cash flow hedges and foreign currency contracts on existing balance sheet items as fair value hedges.
The following table provides the balances and locations of derivatives as of July 4,October 3, 2009:
                            
 Asset Liability  Asset Liability 
(In millions) Balance Sheet Location Fair Value Balance Sheet Location Fair Value  Balance Sheet Location Fair Value Balance Sheet Location Fair Value 
Derivatives designated as hedging instruments under SFAS No. 133:
 
Foreign exchange contracts Other current assets $6.4 Other current liabilities $5.6  Other current assets $10.4 Other current liabilities $7.5 
Commodity contracts Other current assets – Other current liabilities 5.9  Other current assets – Other current liabilities  4.1 
 $6.4 $11.5    $10.4   $11.6 
Fair Value Hedges
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings, resulting in no net material impact to income.
The following table provides the components of the gain (loss) recognized in income related to fair value hedging contracts. The corresponding gains or losses on the underlying hedged items approximated the net gain on these fair value hedging contracts.
                      
 Three Months Ended Six Months Ended  Three Months Ended Nine Months Ended 
(In millions) Location of Gain (Loss) in Income July 4, 2009 July 4, 2009  Location of Gain (Loss) in Income October 3, 2009 October 3, 2009 
Foreign exchange contracts Cost of products sold $    (.6) $    (1.7) Cost of products sold $    (.5) $    (2.2)
Foreign exchange contracts Marketing, general and administrative expense .7 24.9  Marketing, general and administrative expense  (16.9)  8.0 
 $    .1 $    23.2    $    (17.4) $    5.8 
Cash Flow Hedges
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive (loss) income and reclassified into earnings in the same period or periods during

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which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge

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Avery Dennison Corporation
components excluded from the assessment of effectiveness are recognized in current earnings.
The following table provides the components of the gain (loss) recognized in accumulated other comprehensive loss on derivatives (effective portion) related to cash flow hedging contracts:
                
 Three Months Ended Six Months Ended  Three Months Ended Nine Months Ended 
(In millions) July 4, 2009 July 4, 2009  October 3, 2009 October 3, 2009 
Foreign exchange contracts $    (3.6) $    (3.7) $    (1.8) $    (5.5)
Commodity contracts .4  (2.9) .7  (2.2)
 $    (3.2) $    (6.6) $    (1.1) $    (7.7)
The following table provides the components of the gain (loss) reclassified from accumulated other comprehensive loss (effective portion) related to cash flow hedging contracts:
                        
 Three Months Ended Six Months Ended  Three Months Ended Nine Months Ended 
(In millions) Location of Gain (Loss) in Income July 4, 2009 July 4, 2009  Location of Gain (Loss) in Income October 3, 2009 October 3, 2009 
Interest rate contracts Interest expense $    (.9) $    (4.8) Interest expense $    (1.2) $    (6.0)
Foreign exchange contracts Cost of products sold  (1.9) .3  Cost of products sold  (2.0)  (1.7)
Commodity contracts Cost of products sold  (1.0)  (3.1) Cost of products sold  (1.1)  (4.2)
 $    (3.8) $    (7.6)   $    (4.3) $    (11.9)
The aggregate reclassification from other comprehensive income to earnings for settlement or ineffectiveness of hedge activity was a net gain of $2$.6 million and $.6$1.2 million during the three and sixnine months ended June 28,September 27, 2008, respectively. As of July 4,October 3, 2009, a net loss of approximately $10$6 million is expected to be reclassified from other comprehensive income to earnings within the next 12 months.
Included in the reclassification amount discussed above is the amortization of certain hedge costs of approximately $7 million incurred in connection with the long-term debt issued in 2007 related to the Paxar acquisition. Such costs are being amortized over the life of the related forecasted hedge transactions.
The amount of gain or loss recognized in income related to the ineffective portion of, and the amounts excluded from, effectiveness testing for cash flow hedges and derivatives not designated as hedging instruments under SFAS No. 133 were not significant.
Foreign Currency
Transactions in foreign currencies (including receivables, payables and loans denominated in currencies other than the functional currency) increased net income by $.2 million and decreased net income by $2.2 million and $1.8$1.6 million for the three and sixnine months ended July 4,October 3, 2009, respectively. Transactions in foreign currencies increased net income by $3.6$3.1 million and $11.6$14.4 million for the three and sixnine months ended June 28,September 27, 2008, respectively, which included a foreign currency net gain related to certain intercompany transactions of approximately $2$1 million and $6$7 million during the three and sixnine months ended June 28,September 27, 2008, respectively. These results exclude the effects of translation of foreign currencies on the Company’s financial statements.
In the first sixnine months of 2009 and 2008, no translation gains or losses for hyperinflationary economies were recognized in net income since the Company had no operations in hyperinflationary economies.
Note 11. Taxes Based on Income
The effective tax rate for the three and sixnine months ended July 4,October 3, 2009 was approximately 1%negative 7% and approximately 2%3%, respectively, compared to approximately 19%7% and approximately 8% for the three and sixnine months ended June 28,September 27, 2008, respectively. The effective tax rate for the first sixnine months of 2009 includes a benefit of $18.4$31.8 million from discrete events, primarily the tax effect of goodwill and indefinite-lived intangible asset impairments, and the release of tax contingency reserves, partially offset by the build of certain valuation allowances and other items. The impairment of goodwill and indefinite-lived intangible assets partially offset by certain valuation allowanceis generally not tax deductible, and other items. Thewas the largest factor influencing the effective tax rate for the first nine months of 2009. In addition to these discrete 2009 tax events, on an ongoing basis, the Company’s effective tax rate is lower than the U.S. federal statutory rate of 35%

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due to the Company’s operations outside the U.S. where the statutory tax rates are generally lower. Additional taxes are not provided for most foreign earnings because the Company currently plans to indefinitely reinvest these amounts.
The amount of income taxes the Company pays is subject to ongoing audits by taxing jurisdictions around the world. The Company’s

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estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. The Company believes that it has adequately provided for reasonably foreseeable outcomes related to these matters. However, the Company’s future results may include favorable or unfavorable adjustments to its estimated tax liabilities in the period the assessments are made or resolved, which may impact the Company’s effective tax rate. With some exceptions, the Company and its subsidiaries are no longer subject to income tax examinations by tax authorities for years prior to 2004.
It is reasonably possible that during the next 12 months, the Company may realize a decrease in its gross uncertain tax positions by approximately $46$52 million, primarily as the result of cash payments and closing tax years. The Company anticipates that it is reasonably possible that cash payments of up to $18$17 million relating to gross uncertain tax positions could be paid within the next 12 months.
Note 12. Net Income (Loss) Per Share
Net income (loss) per common share amounts were computed as follows:
                                  
 Three Months Ended Six Months Ended  Three Months Ended Nine Months Ended 
(In millions, except per share amounts) July 4, 2009 June 28, 2008 July 4, 2009 June 28, 2008  October 3, 2009 September 27, 2008 October 3, 2009 September 27, 2008 
(A) Net income (loss) available to common shareholders $39.8 $92.4 $(859.1) $160.8  $62.5 $62.7�� $(796.6) $223.5 
(B) Weighted-average number of common shares outstanding 105.0 98.5 102.2 98.5  105.1 98.5 103.1 98.5 
Dilutive shares (additional common shares issuable under employee stock options, PUs, RSUs and restricted stock) .7 .4 – .4  .9 .4 – .4 
(C) Weighted-average number of common shares outstanding, assuming dilution 105.7 98.9 102.2 98.9  106.0 98.9 103.1 98.9 
Net income (loss) per common share (A) ÷ (B) $.38 $.94 $(8.41) $1.63  $.59 $.64 $(7.73) $2.27 
Net income (loss) per common share, assuming dilution (A) ÷ (C) $.38 $.93 $(8.41) $1.62  $.59 $.63 $(7.73) $2.26 
In the sixnine months ended July 4,October 3, 2009, the effect of dilutive securities (for example, employee stock options, PUs, RSUs and shares of restricted stock) was not dilutive because the Company generated a net operating loss.
Certain employee stock options, PUs, RSUs and shares of restricted stock were not included in the computation of net income per common share, assuming dilution, because they would not have had a dilutive effect. Employee stock options, PUs, RSUs and shares of restricted stock excluded from the computation totaled 11approximately 10 million shares and 12.1approximately 13 million shares for the three and sixnine months ended July 4,October 3, 2009, respectively, and 10.5 million shares and 9.9approximately 10 million shares for the three and sixnine months ended June 28,September 27, 2008, respectively.
As further discussed in Note 17, “Recent Accounting Pronouncements,” effective at the beginning of 2009, the Company adopted provisionsadditional guidance regarding the calculation of FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” whichearnings per share. This did not have a material impact on net income (loss) per share.
Note 13. Comprehensive (Loss) Income
Comprehensive income (loss) includes net income (loss), foreign currency translation adjustment, net actuarial loss, prior service cost and net transition assets, net of tax, and the gains or losses on the effective portion of cash flow and firm commitment hedges, net of tax, that are currently presented as a component of shareholders’ equity. The Company’s total comprehensive income (loss) was $102.9$154.2 million and $(839.1)$(684.9) million for the three and sixnine months ended July 4,October 3, 2009, respectively, and $118.8$(57.6) million and $271.3$213.7 million for the three and sixnine months ended June 28,September 27, 2008, respectively.

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Avery Dennison Corporation
The components of accumulated other comprehensive loss (net of tax, with the exception of the foreign currency translation adjustment) were as follows:
                
(In millions) July 4, 2009 December 27, 2008  October 3, 2009 December 27, 2008 
Foreign currency translation adjustment $123.8 $65.8  $167.2 $65.8 
Net actuarial loss, prior service cost and net transition assets, less amortization  (328.5)  (332.5)  (326.4)  (332.5)
Net loss on derivative instruments designated as cash flow and firm commitment hedges  (14.8)  (15.8)  (11.6)  (15.8)
Accumulated other comprehensive loss $(219.5) $(282.5) $(170.8) $(282.5)
Cash flow and firm commitment hedging instrument activities in other comprehensive loss, net of tax, were as follows:Cash flow and firm commitment hedging instrument activities in other comprehensive loss, net of tax, were as follows:
(In millions) October 3, 2009 December 27, 2008 
Beginning accumulated derivative loss $(15.8) $(16.8)
Net loss (gain) reclassified to earnings 11.9  (2.9)
Net change in the revaluation of hedging transactions  (7.7) 3.9 
Ending accumulated derivative loss $(11.6) $(15.8)

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Avery Dennison Corporation
Cash flow and firm commitment hedging instrument activities in other comprehensive loss, net of tax, were as follows:
         
(In millions) July 4, 2009  December 27, 2008 
 
Beginning accumulated derivative loss $(15.8) $(16.8)
Net loss (gain) reclassified to earnings  7.6   (2.9)
Net change in the revaluation of hedging transactions  (6.6)  3.9 
 
Ending accumulated derivative loss $(14.8) $(15.8)
 
Note 14. Fair Value Measurement
The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of July 4,October 3, 2009:
                                
 Fair Value Measurements Using  Fair Value Measurements Using 
 Significant Significant  Significant Significant 
 Quoted Prices Other Other  Quoted Prices Other Other 
 in Active Observable Unobservable  in Active Observable Unobservable 
 Markets Inputs Inputs  Markets Inputs Inputs 
(In millions) Total (Level 1) (Level 2) (Level 3)  Total (Level 1) (Level 2) (Level 3) 
Assets:
  
Available for sale securities $11.7 $11.7 $– $–  $11.9 $11.9 $– $– 
Derivative assets 6.4 – 6.4 –  10.4 – 10.4 – 
  
Liabilities:
  
Derivative liabilities $11.5 $5.9 $5.6 $–  $11.6 $4.1 $7.5 $– 
Available for sale securities are measured at fair value using quoted prices and classified within Level 1 of the valuation hierarchy. Derivatives that are exchange-traded are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy. Derivatives measured based on inputs that are readily available in public markets are classified within Level 2 of the valuation hierarchy.
The following table summarizes the fair value measurements of assets measured on a non-recurring basis during the sixnine months ended July 4,October 3, 2009:
                                        
 Fair Value Measurements Using  Fair Value Measurements Using   
 Significant Significant    Significant Significant   
 Quoted Prices Other Other    Quoted Prices Other Other   
 in Active Observable Unobservable    in Active Observable Unobservable   
 Markets Inputs Inputs Total  Markets Inputs Inputs Total 
(In millions) Total (Level 1) (Level 2) (Level 3) Gains (Losses)  Total (Level 1) (Level 2) (Level 3) Gains (Losses) 
Goodwill $415.0 $– $– $415.0 $(820.0) $415.0 $– $– $415.0 $(820.0)
Indefinite-lived intangible asset 18.0 – – 18.0  (12.0) 18.0 – – 18.0  (12.0)
Long-lived assets held and used 5.5 – 2.6 2.9  (15.0)
Long-lived assets 9.6 – 6.6 3.0  (19.5)
In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-livedLong-lived assets held and used with carrying amounts totaling $20.5$29.1 million were written down to their fair values totaling $5.5$9.6 million, resulting in impairment charges of $2.6$4.5 million and $15$19.5 million for the three and sixnine months ended July 4,October 3, 2009, respectively. These charges are included in “Other expense, net” in the unaudited Consolidated Statement of Operations.
In accordance with SFAS No. 142, goodwillGoodwill with a carrying amount of $1.2 billion was written down to its estimated implied fair value of $415 million, resulting in a non-cash impairment charge of $820 million.million in the first quarter of 2009. Additionally, certain indefinite-lived assets with a carrying value of

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Avery Dennison Corporation
approximately $30 million were written down to their estimated implied fair value of $18 million, resulting in a non-cash impairment of $12 million.million in the first quarter of 2009. These charges are included in “Goodwill and indefinite-lived intangible asset impairment charges” in the unaudited Consolidated Statement of Operations for the three and sixnine months ended July 4, 2009, respectively.October 3, 2009. Refer to Note 4, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” for further information.

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Avery Dennison Corporation
Note 15. Commitments and Contingencies
Legal Proceedings
On April 24, 2003, Sentry Business Products, Inc. filed a purported class action on behalf of direct purchasers of label stock in the United States District Court for the Northern District of Illinois against the Company, UPM-Kymmene Corporation (“UPM”), Bemis Company Inc. (“Bemis”), and certain of their subsidiaries seeking treble damages and other relief for alleged unlawful competitive practices, with allegations including that the defendants attempted to limit competition among themselves through anticompetitive understandings. Ten similar complaints were filed in various federal district courts. In November 2003, the cases were transferred to the United States District Court for the Middle District of Pennsylvania and consolidated for pretrial purposes. Plaintiffs filed a consolidated complaint on February 16, 2004, which the Company answered on March 31, 2004. On April 14, 2004, the court separated the proceedings as to class certification and merits discovery, and limited the initial phase of discovery to the issue of the appropriateness of class certification. On January 4, 2006, plaintiffs filed an amended complaint. On January 20, 2006, the Company filed an answer to the amended complaint. On August 14, 2006, the plaintiffs moved to certify a proposed class. The court substantively granted class certification on November 19, 2007. On July 22, 2008, the court held a hearing to set a schedule for merits discovery. On May 12, 2009, the Company entered into a settlement agreement with plaintiffs. Without admitting liability, the Company has agreed to pay plaintiffs $36.5 million, plus up to $.5 million related to notice and administration expenses, in two equal installments of $18.5 million, which were paid on May 27, 2009 and July 15, 2009. On June 10, 2009, the district court entered an order preliminarily approving the settlement, and aon September 17, 2009, the district court issued an order of final approval hearing is scheduled for September 17, 2009. If court approval is obtained,and judgment, dismissing all claims against the matter will be dismissedCompany with prejudice. The Company recorded an accrual of $37 million for this settlement in the first quarter of 2009.
On May 21, 2003, The Harman Press filed in the Superior Court for the County of Los Angeles, California, a purported class action on behalf of indirect purchasers of label stock against the Company, UPM and UPM’s subsidiary Raflatac (“Raflatac”), seeking treble damages and other relief for alleged unlawful competitive practices, with allegations including that the defendants attempted to limit competition among themselves through anticompetitive understandings. Three similar complaints were filed in various California courts. In November 2003, on petition from the parties, the California Judicial Council ordered the cases be coordinated for pretrial purposes. The cases were assigned to a coordination trial judge in the Superior Court for the City and County of San Francisco on March 30, 2004. On September 30, 2004, the Harman Press amended its complaint to add Bemis’ subsidiary Morgan Adhesives Company (“MACtac”) as a defendant. On January 21, 2005, American International Distribution Corporation filed a purported class action on behalf of indirect purchasers in the Superior Court for Chittenden County, Vermont. Similar actions were filed by Richard Wrobel, on February 16, 2005, in the District Court of Johnson County, Kansas; and by Chad and Terry Muzzey, on February 16, 2005 in the District Court of Scotts Bluff County, Nebraska. On February 17, 2005, Judy Benson filed a purported multi-state class action on behalf of indirect purchasers in the Circuit Court for Cocke County, Tennessee. Without admitting liability, the Company has agreed to pay plaintiffs $2 million to resolve all claims related to the purported state class actions in the states of Kansas, Nebraska, Tennessee and Vermont. The Nebraska, Kansas and Vermont cases are currently stayed. Defendants’ motion to dismissCompany recorded $2 million in the Tennessee case, filed on March 30, 2006, is pending.third quarter of 2009 in respect of the settlement of these claims. The Company intends to defend these mattersthe purported California class action vigorously.
The Board of Directors created an ad hoc committee comprised of certain independent directors to oversee the foregoing matters.
The Company is unable to predict the effect of these matters at this time, although the effect could be adverse and material.
The Company and its subsidiaries are involved in various other lawsuits, claims and inquiries, most of which are routine to the nature of the business. Based upon current information, management believes that the resolution of these other matters will not materially affect the Company’s financial position.
Environmental
As of July 4,October 3, 2009, the Company has been designated by the U.S. Environmental Protection Agency (“EPA”) and/or other responsible state agencies as a potentially responsible party (“PRP”) at fourteen waste disposal or waste recycling sites, which are the subject of separate investigations or proceedings concerning alleged soil and/or groundwater contamination and for which no settlement of the Company’s liability has been agreed. The Company is participating with other PRPs at such sites, and anticipates that its share of cleanup costs will be determined pursuant to remedial agreements entered into in the normal course of negotiations with the EPA or other governmental authorities.

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The Company has accrued liabilities for these and certain other sites, including sites in which governmental agencies have designated the Company as a PRP, where it is probable that a loss will be incurred and the cost or amount of loss can be reasonably estimated. However, because of the uncertainties associated with environmental assessment and remediation activities, future expense to remediate the currently identified sites and any sites that could be identified in the future for cleanup could be higher than the liability currently accrued.

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Avery Dennison Corporation
The activity for the first sixnine months of 2009 and full-year 2008 related to environmental liabilities, which include costs associated with compliance and remediation, were as follows:
                
(In millions) July 4, 2009 December 27, 2008  October 3, 2009 December 27, 2008 
Balance at beginning of year $58.5 $37.8  $58.5 $37.8 
Purchase price adjustments related to acquisitions 2.1 24.6  2.1 24.6 
Accruals .7 .9  .8 .9 
Payments  (2.1)  (4.8)  (3.3)  (4.8)
Balance at end of period $59.2 $58.5  $58.1 $58.5 
As of July 4,October 3, 2009, approximately $12$17 million of the total balance iswas classified as short-term.
These estimates could change depending on various factors, such as modification of currently planned remedial actions, changes in remediation technologies, changes in site conditions, a change in the estimated time to complete remediation, changes in laws and regulations affecting remediation requirements and other factors.
Product Warranty
The Company provides for an estimate of costs that may be incurred under its basic limited warranty at the time product revenue is recognized. These costs primarily include materials and labor associated with the service or sale of the product. Factors that affect the Company’s warranty liability include the number of units installed or sold, historical and anticipated rate of warranty claims on those units, cost per claim to satisfy the Company’s warranty obligation and availability of insurance coverage. Because these factors are impacted by actual experience and future expectations, the Company assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary. As of July 4,October 3, 2009, the Company’s product warranty liabilities were approximately $2 million.
Other
In 2005, the Company contacted relevant authorities in the U.S. and reported on the results of an internal investigation of potential violations of the U.S. Foreign Corrupt Practices Act. The transactions at issue were carried out by a small number of employees of the Company’s reflective business in China, and involved, among other things, impermissible payments or attempted impermissible payments. The payments or attempted payments and the contracts associated with them appear to have been minor in amount and of limited duration. Sales of the Company’s reflective business in China in 2005 were approximately $7 million. In addition, on or about October 10, 2008, the Company notified relevant authorities that it had discovered questionable payments to certain foreign customs and other regulatory officials by some employees of its recently acquired companies. These payments were not made for the purpose of obtaining business from any governmental entity. Corrective and disciplinary actions have been taken with respect to both internal investigations and the Company has taken remedial measures to comply with the provisions of the U.S. Foreign Corrupt Practices Act. On July 28, 2009, the Company entered into a settlement agreement with the SEC regarding the foregoing actions. Without admitting or denying liability, the Company agreed to disgorge approximately $.3 million and pay a $.2 million civil penalty. On August 10, 2009, the Company was advised by the U. S. Department of Justice that it has declined to take action against the Company in connection with the China reflective matters, which were voluntarily disclosed by the Company.
The Company and its subsidiaries are involved in various other lawsuits, claims and inquiries, most of which are routine to the nature of the Company’s business. Based upon current information, management believes that the resolution of these other matters will not materially affect the Company’s financial position.
On September 9, 2005, the Company completed the lease financing for a commercial facility (the “Facility”) located in Mentor, Ohio, used primarily for the new headquarters and research center for the Company’s roll materials division. The Facility consists generally of land, buildings, equipment and office furnishings. The Company leased the Facility under an operating lease arrangement, which contains a residual value guarantee of $33.4 million. The Company does not expect the residual value of the Facility to be less than the amount guaranteed.

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Avery Dennison Corporation
The Company participates in international receivable financing programs with several financial institutions whereby advances may be requested from these financial institutions. Such advances are guaranteed by the Company. At July 4,October 3, 2009, the Company had guaranteed approximately $13$15 million.
As of July 4,October 3, 2009, the Company guaranteed up to approximately $22$17 million of certain foreign subsidiaries’ obligations to their suppliers, as well as approximately $505$498 million of certain subsidiaries’ lines of credit with various financial institutions.

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Avery Dennison Corporation
As of July 4,October 3, 2009, approximately two million HiMEDS units with a carrying value of approximately $109 million remained outstanding. The purchase contracts related to these units obligate the holders to purchase from the Company a certain number of common shares in November 2010 (depending on the stock price at the time). Refer to Note 5, “Debt,” for more information.
Note 16. Segment Information
As discussed in Note 2, “Acquisitions,” the Company completed the acquisition of DM Label during the second quarter of 2008. The operating results for DM Label are included in the Retail Information Services segment.
Beginning in 2009, the Company modified its approach to allocating Corporate costs to its operating segments to better reflect the costs required to support operations within segment results. Prior year amounts have been restated to conform with the new methodology.
Financial information by reportable segment and other businesses is set forth below:
                                
 Three Months Ended Six Months Ended  Three Months Ended Nine Months Ended 
(In millions) July 4, 2009 June 28, 2008 July 4, 2009 June 28, 2008  October 3, 2009 September 27, 2008 October 3, 2009 September 27, 2008 
Net sales to unaffiliated customers:
  
Pressure-sensitive Materials $793.6 $979.9 $1,602.4 $1,899.5  $851.0 $936.2 $2,453.4 $2,835.7 
Retail Information Services 331.5 438.2 647.5 810.2  325.2 379.1 972.7 1,189.3 
Office and Consumer Products 216.9 255.4 401.3 449.8  242.8 260.4 644.1 710.2 
Other specialty converting businesses 113.4 155.4 230.4 314.6  130.3 149.1 360.7 463.7 
Net sales to unaffiliated customers $1,455.4 $1,828.9 $2,881.6 $3,474.1  $1,549.3 $1,724.8 $4,430.9 $5,198.9 
Intersegment sales:
  
Pressure-sensitive Materials $36.0 $45.8 $73.4 $86.6  $38.3 $46.1 $111.7 $132.7 
Retail Information Services .2 .1 .5 1.3  .4 .5 .9 1.8 
Office and Consumer Products .1 .3 .4 .6  .2 .4 .6 1.0 
Other specialty converting businesses 3.7 8.0 7.0 14.8  5.2 7.0 12.2 21.8 
Eliminations  (40.0)  (54.2)  (81.3)  (103.3)  (44.1)  (54.0)  (125.4)  (157.3)
Intersegment sales $– $– $– $–  $– $– $– $– 
Income (loss) before taxes:
  
Pressure-sensitive Materials $50.6 $82.4 $50.4 $154.2  $75.7 $62.8 $126.1 $217.0 
Retail Information Services  (5.9) 20.3  (859.3) 16.6   (29.1) .5  (888.4) 17.1 
Office and Consumer Products 34.5 40.7 57.9 62.6  41.0 41.5 98.9 104.1 
Other specialty converting businesses  (10.4) 5.8  (37.9) 15.3  .9 1.2  (37.0) 16.5 
Corporate expense  (8.2)  (5.7)  (38.9)  (14.8)  (11.1)  (9.7)  (50.0)  (24.5)
Interest expense  (20.4)  (29.3)  (47.9)  (58.8)  (19.1)  (29.0)  (67.0)  (87.8)
Income (loss) before taxes $40.2(1) $114.2(2) $(875.7)(3) $175.1(4) $58.3(1) $67.3(2) $(817.4)(3) $242.4(4)
 
(1) Operating income for the secondthird quarter of 2009 included “Other expense, net” totaling $29.6,$35.5, consisting of restructuring costs of $25.8,$27, asset impairment charges of $3.3, and$4.7, lease cancellation charges of $.5.$1.8, and legal settlement costs of $2. Of the total $29.6,$35.5, the Pressure-sensitive Materials segment recorded $13.8,$8.3, the Retail Information Services segment recorded $5.1,$22.3, the Office and Consumer Products segment recorded $3,$(.2), and the other specialty converting businesses recorded $7.7.$5.1.
 
(2) Operating income for the secondthird quarter of 2008 included “Other expense, net” totaling $5.8,$12.5, consisting of restructuring costs of $7.2,$8.7, asset impairment charges of $1.7,$3, and lease cancellation charges of $1.4, partially offset by a gain on sale of investments of $(4.5).$.8. Of the total $5.8,$12.5, the Pressure-sensitive Materials segment recorded $.5,$5.7, the Retail Information Services segment recorded $5.6,$1.4, the Office and Consumer Products segment recorded $4.2,$3.9, and Corporatethe other specialty converting businesses recorded $(4.5).$1.5.
 
  Additionally, operating income for the Retail Information Services segment for the secondthird quarter of 2008 included $5.7$5.2 of transition costs associated with the Company’s acquisitions.

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(3) Operating loss for the first sixnine months of 2009 included “Other expense, net” totaling $126.9,$162.4, consisting of restructuring costs of $42.9,$69.9, asset impairment charges of $25.2,$29.9, lease cancellation charges of $.6,$2.4, legal settlement costs of $37,$39, and a loss of $21.2 from debt extinguishment. Of the total $126.9,$162.4, the Pressure-sensitive Materials segment recorded $61.9,$70.2, the Retail Information Services segment recorded $14.7,$37, the Office and Consumer Products segment recorded $5.7,$5.5, the other specialty converting businesses recorded $23.4,$28.5, and Corporate recorded $21.2.
 
  Additionally, operating loss for the Retail Information Services segment for the first sixnine months of 2009 included $832 of goodwill and indefinite-lived intangible asset impairment charges.charges taken in the first quarter of 2009.
 
(4) Operating income for the first sixnine months of 2008 included “Other expense, net” totaling $11.4,$23.9, consisting of restructuring costs of $10.5,$19.2, asset impairment charges of $4,$7, and lease cancellation charges of $1.4,$2.2, partially offset by a gain on sale of investments of $(4.5). Of the total $11.4,$23.9, the Pressure-sensitive Materials segment recorded $4.3,$10, the Retail Information Services segment recorded $7.1,$8.5, the Office and Consumer Products segment recorded $4.3,$8.2, the other specialty converting businesses recorded $.2,$1.7 and Corporate recorded $(4.5).
 
  Additionally, operating income for the Retail Information Services segment for the first sixnine months of 2008 included $12.7$17.9 of transition costs associated with the Company’s acquisitions.
Note 17. Recent Accounting Requirements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 168 establishesestablished the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative non-governmental U.S. GAAP. The Codification is effective for interim and annual periods ending after September 15, 2009. The adoption of this standard willthe Codification changed the manner in which U.S. GAAP guidance is referenced, but did not have a materialany impact on the Company’s financial condition, results of operations, cash flows, or disclosures.
In June 2009, the FASB issued SFAS No. 167, “Amendmentschanges to FASB Interpretation No. 46(R).”consolidation accounting. Among other items, SFAS No. 167 respondsthese changes respond to concerns about the application of certain key provisions of FIN 46(R),previous accounting standards, including those regarding the transparency of the involvement with variable interest entities. SFAS No. 167 isThese changes are effective for calendar year companies beginning on January 1, 2010. The adoption of this standard willCompany does not expect these changes to have a material impact on the Company’s financial condition, results of operations, cash flows, or disclosures.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” SFAS No. 165a new accounting standard on subsequent events. This standard defines what qualifies as a subsequent event—those events or transactions that occur following the balance sheet date, but before the financial statements are issued, or are available to be issued—and requires companies to disclose the date through which it has evaluated subsequent events and the basis for determining that date. SFAS No. 165 isThis standard was effective for interim and annual periods ending after June 15, 2009. The Company adopted the provisions of SFAS No. 165this accounting standard in the second quarter of 2009. Refer to Note 1, “General,” for further information.
In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB28-1, “Interim Disclosures about Fair Valuechanges to disclosure requirements regarding fair value of Financial Instruments,”financial instruments, which require disclosure about fair value of financial instruments, whether recognized or not recognized in the statement of financial position, in interim financial information. This issueThese changes also requiresrequire fair value information to be presented together with the related carrying amount and disclosure regarding the methods and significant assumptions used to estimate fair value. This issue isThese changes were effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company has included the disclosures required under this issuedisclosures in Note 5, “Debt.”
The FASB issued in December 2007, and amended in April 2009, SFAS No. 141(R), “Business Combinations.”a revised accounting standard for business combinations. This Statement replaces SFAS No. 141, “Business Combinations,” andstandard defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This Statement’s scope is broader than that of SFAS No. 141, which applied only to business combinations in which control was obtained by transferring consideration. In general, SFAS No. 141(R)this standard requires the acquiring entity in a business combination to recognize the fair value of all the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date as the fair value measurement point; and modifies the disclosure requirements. This Statementstandard applies prospectively to business

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Avery Dennison Corporation
combinations for which the acquisition date is on or after the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS No. 141(R) didthis standard has not havehad a material impact on the Company’s financial results of operations and financial condition.

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Avery Dennison Corporation There have been no acquisitions since the effective date.
In December 2008, the FASB issued FSP 132(R)-1, “Employers Disclosureschanges to disclosure requirements about Postretirement Benefit Plan Assets,”postretirement benefit plan assets, which provides additional guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This interpretation isThese changes are effective for financial statements issued for fiscal years ending after December 15, 2009. The adoption of this interpretationthese changes will increase the disclosures in the financial statements related to the assets of the Company’s pension and postretirement benefits plans. The Company is currently evaluating the disclosure implications of this Statement.these changes.
In August 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) 08-07, “Accounting for Defensive Intangible Assets.”additional accounting guidance regarding defensive intangible assets. This issueguidance clarifies that a defensive intangible asset should be accounted for as a separate unit of accounting. This applies to all intangible assets acquired, including intangible assets acquired in a business combination, in situations in which the acquirer does not intend to actively use the asset but intends to hold (lock up) the asset to prevent its competitors from obtaining access to the asset (defensive assets). FSP-EITF 08-07 isThis guidance was effective for intangible assets acquired on or after the beginning of the first annual reporting period beginning on December 15, 2008. The adoption of FSP-EITF 08-07this guidance did not have an impact on the Company’s financial results of operations and financial condition because there have been no acquisitions since the effective date of this issue.date.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under this issue,additional accounting guidance regarding the effect of share-based payments transactions on the computation of earnings per share. This guidance clarifies that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP-EITF 03-6-1This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years and requires retrospective application. The adoption of FSP-EITF 03-6-1this guidance did not have a material impact on the Company’s financial results of operations and financial condition.
In MayApril 2008, the FASB issued SFAS No. 162, “The Hierarchychanges to the method for determining the useful life of Generally Accepted Accounting Principles.” SFAS No. 162 identifies a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities (the “Hierarchy”). The Hierarchy within SFAS No. 162 is consistent with that previously defined in the AICPA Statement on Auditing Standards (“SAS”) No. 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The adoption of SFAS No. 162 did not have a material effect on the Company’s financial statements because the Company has utilized the guidance within SAS No. 69.
In April 2008, the FASB directed the FASB Staff to issue FSP No. 142-3, “Determination of the Useful Life of Intangible Assets.” FSP No. 142-3 amends theintangible assets. These changes modified factors that should be considered in developing renewal or extension assumptions used for purposes of determining the useful life of a recognized intangible asset under SFAS No. 142. FSP FAS No. 142-3 isasset. These changes were intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142for purposes of determining impairment and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R)in a business combination and other U.S. generally accepted accounting principles. FSP No. 142-3 isThese changes were effective for fiscal years beginning after December 15, 2008. Earlier application is not permitted. The adoption of FSP No.142-3these changes did not have a material impact on the Company’s financial results of operations and financial condition.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instrumentschanges to disclosure requirements regarding derivative instruments and Hedging Activities, an amendment of FASB Statement No. 133.” This Statement ishedging activities. These changes were intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS No. 161 appliesThese disclosure requirements apply to all derivative instruments within the scope of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as well as related hedged items, bifurcated derivatives, and non-derivative instruments that are designated and qualify as hedging instruments. Entities with such instruments subject to SFAS No. 161 must provide more robust qualitative disclosures and expanded quantitative disclosures. SFAS No. 161 isThese changes are effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company has included the disclosures required under SFAS No. 161disclosures in Note 10, “Financial Instruments and Foreign Currency.”
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements—an amendment of Accounting Review Board (“ARB”) No. 51.”a new accounting standard on non-controlling interests. This Statement isstandard was effective for fiscal years and interim periods, beginning on or after December 15, 2008, with earlier adoption prohibited. This Statementstandard requires the recognition of a non-controlling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the non-controlling interest will be included in consolidated net income on the income statement. It also amends certainstatement of ARB No. 51’s consolidation procedures for consistency with the requirements of SFAS No. 141(R).operations. This Statementstandard also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. The adoption of SFAS No. 160this standard did not have a material impact on the Company’s financial results of operations and financial condition.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”a new accounting standard on fair value measurements, which iswas effective for fiscal years and interim periods

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Avery Dennison Corporation
after November 15, 2007. This statementstandard defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This statementstandard applies to all financial assets and liabilities and to all non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The statementThis standard indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS No. 157This standard defines fair value based upon an exit price model. In connection with the issuance of SFAS No. 157, the FASB issued FSP Nos. 157-1 and 157-2. FSP No. 157-1 amends SFAS No. 157 to exclude SFAS No. 13, “Accounting for Leases,” and its related interpretive accounting pronouncements that address leasing transactions. As allowed for under FSP No. 157-2, theThe Company applied the provisions of SFAS No. 157this standard to assets and

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liabilities measured on a non-recurring basis as of the beginning of the 2009 fiscal year. The adoption of SFAS No. 157this standard did not have a significant impact on the Company’s financial results of operations or financial position.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ORGANIZATION OF INFORMATION
Management’s Discussion and Analysis provides a narrative concerning our financial performance and condition that should be read in conjunction with the accompanying financial statements. It includes the following sections:
     
Definition of Terms  22 
Forward-looking Statements  22 
Overview and Outlook  22 
Analysis of Results of Operations for the SecondThird Quarter  2526 
Results of Operations by Segment for the SecondThird Quarter  27 
Analysis of Results of Operations for the SixNine Months Year-to-Date  29 
Results of Operations by Segment for the SixNine Months Year-to-Date  30 
Financial Condition  32 
Uses and Limitations of Non-GAAP Measures  3738 
Recent Accounting Requirements  38 
Safe Harbor Statement  38 
DEFINITION OF TERMS
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP. Our discussion of financial results includes several non-GAAP measures to provide additional information concerning Avery Dennison Corporation’s (the “Company’s”) performance. These non-GAAP financial measures are not in accordance with, nor are they a substitute for, GAAP financial measures. These non-GAAP financial measures are intended to supplement the presentation of our financial results that are prepared in accordance with GAAP. Refer to “Uses and Limitations of Non-GAAP Measures.”
We use the following terms:
• Organic sales growth (decline)refers to the change in sales excluding the estimated impact of currency translation, acquisitions and divestitures, and the extra week in fiscal year 2009;
• Segment operating income (loss)refers to income (loss) before interest and taxes;
• Free cash flowrefers to cash flow from operations and net proceeds from sale of investments, less payments for capital expenditures, software and other deferred charges;
• Operational working capitalrefers to trade accounts receivable and inventories, net of accounts payable.
FORWARD-LOOKING STATEMENTS
Certain statements contained in Management’s Discussion and Analysis are “forward-looking statements” and are subject to certain risks and uncertainties. Refer to our “Safe Harbor Statement” contained elsewhere in this report.
OVERVIEW AND OUTLOOK
Overview
Sales
Our sales decreased 20%10% and 17% in15% during the first three and sixnine months ofended October 3, 2009, respectively, compared to the same period last year.year, reflecting continued weakness in market conditions.
                         
 Three Months Ended Six Months Ended Three Months Ended Nine Months Ended
Estimated change in sales due to: July 4, 2009 June 28, 2008 July 4, 2009 June 28, 2008 October 3, 2009 September 27, 2008 October 3, 2009 September 27, 2008
Organic sales decline  (14)%  (1)%  (14)%  (1)%  (6)%  (2)%  (11)%  (2)%
Extra week in fiscal year 2009(1)
 – – 4 –  – – 2 – 
Foreign currency translation  (7) 7  (7) 7   (4) 5  (6) 6 
Acquisitions, net of divestitures – 14 – 14  – 1 – 9 
Reported sales (decline) growth(2)
  (20)%  20%  (17)%  19%  (10)%  3%  (15)%  13%
(1) Our 2009 fiscal year includes a 53-week period, with the extra week reflected in the first quarter. Normally, each fiscal year consists of 52 weeks, but every fifth or sixth year consists of 53 weeks.
 
(2) Totals may not sum due to rounding.

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Net Income
In the first sixnine months of 2009, we had a net loss of approximately $860$797 million compared to a net income of approximately $161$224 million in the same period in 2008.
Negative factors affecting net income included:
 • Impairment of goodwill and indefinite-lived intangible assets
 
 • Lower net sales
 
 • Higher restructuring and asset impairment charges related to cost reduction actions
 
 • Legal settlement costs
 
 • Loss on debt extinguishmentHigher raw material and employee-related costs
 
 • Higher raw material and employee-related costsLoss on debt extinguishment
 
 • Unfavorable impact of foreign currency translation
Positive factors affecting net income included:
 • Cost savings from productivity improvement initiatives, including savings from restructuring actions
 
 • PricingChanges in pricing to offset the cumulative impact of inflation experienced in 2008
 
 • Lower tax rate resulting in a tax benefit for the first six months of 2009
 
 • Lower transition costs related to acquisition integrations
Impairment of Goodwill and Indefinite-Lived Intangible Assets
In the first quarter of 2009, we recorded non-cash impairment charges of $832 million for the retail information services reporting unit, of which $820 million is related to goodwill and $12 million is related to indefinite-lived intangible assets. We completed our impairment test of goodwill and indefinite-lived intangible assets (“goodwill impairment”) in the second quarter of 2009, with no additional impairment charge incurred.recorded thereafter.
We perform our goodwill impairment test in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets.” In performing the required goodwill impairment test, we primarily apply a present value (discounted cash flow) method to determine the fair value of the reporting units with goodwill. Our reporting units, which are composed of either a discrete business or an aggregation of businesses with similar economic characteristics, consist of roll materials; retail information services; office and consumer products; graphics and reflective products; industrial products; and business media.
We perform our annual goodwill impairment test during the fourth quarter. However, certain factors may result in the need to perform a goodwill impairment test prior to the fourth quarter, including significant underperformance of our 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 an individual business within a reporting unit. Based upon our assessment of these factors in connection with the preparation of our first quarter financial statements, we determined that there was a need to initiate an interim goodwill impairment test. The factors considered included both a sustained decline in our stock price and a decline in our 2009 revenue projections for the retail information services reporting unit, following lower than expected revenues in March 2009, which continued in April 2009. The peak season for the retail information services reporting unit has traditionally been March through the end of the second quarter.
Our interim impairment analysis indicated that the fair value of each of our reporting units exceeded its carrying value, except for our retail information services reporting unit, which had a fair value less than its carrying value. Refer to Note 4, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” to the unaudited Condensed Consolidated Financial Statements for further information.
Goodwill
As part of the interim goodwill impairment test completed in the second quarter of 2009, which is discussed above, we recorded a non-cash impairment charge of $820 million for the retail information services reporting unit in the first quarter of 2009, with no additional impairment charge in the second quarter of 2009.recorded thereafter.

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Indefinite-Lived Intangible Assets
In connection with the acquisition of Paxar Corporation (“Paxar”), we acquired approximately $30 million of intangible assets, consisting of certain trade names and trademarks, which are not subject to amortization because they have an indefinite useful life. As part of the interim goodwill impairment test completed in the second quarter of 2009, which is discussed above, we recorded an additional non-cash impairment charge of $12 million related to these indefinite-lived intangible assets in the first quarter of 2009, with no additional impairment charge in the second quarter of 2009.recorded thereafter.
Acquisitions
We completed the acquisition of DM Label Group (“DM Label”) on April 1, 2008. DM Label operations are included in our Retail Information Services segment. See also Note 2, “Acquisitions,” to the unaudited Condensed Consolidated Financial Statements.
Cost Reduction Actions
Q4 2008 — 2009 Actions
In the fourth quarter of 2008, we initiated restructuring actions that are now expected to generate overapproximately $160 million in annualized savings by the middle of 2010, of which an estimated $75 million, net of transition costs, is expected to benefit 2009. We expect to incur approximately $100 million to $110 million of cash restructuring charges associated with these actions, with the majority to be incurred inby the end of 2009. Additionally, we have incurred approximately $30 million of non-cash charges through the end of the third quarter of 2009. At the end of the secondthird quarter, we achieved run-rate savings representing approximately 50%nearly 70% of our target.
During the fourth quarter of 2008 and the first sixnine months of 2009, we recorded $81$114.5 million in charges related to these restructuring actions, consisting of severance and related employee costs, asset impairment charges, and lease cancellation costs. Severance and employee relatedemployee-related costs related to approximately 2,6003,120 positions, impacting all of our segments and geographic regions.
Q1 2008 — Q3 2008 Actions
During the first three quarters of 2008, we implemented cost reduction actions resulting in charges of $22.8 million, including severance and employee relatedemployee-related costs for approximately 645 positions, asset impairment charges, and lease cancellation costs.
Refer to Note 9, “Cost Reduction Actions,” to the unaudited Condensed Consolidated Financial Statements for further detail.
Effective Rate of Taxes on Income
The effective tax rate for the first sixnine months of 2009 was approximately 2%3%, compared withto approximately 8% for the same period in 2008. The effective tax rate for the first sixnine months of 2009 includes a benefit of $18.4$31.8 million from discrete events, primarily the tax effect of impairments of goodwill and indefinite-lived intangible assets,asset impairments and the release of tax contingency reserves, partially offset by the build of certain valuation allowances and other items. Refer to Note 11, “Taxes Based on Income,” to the unaudited Condensed Consolidated Financial Statements for further information.
Free Cash Flow
Free cash flow, which is a non-GAAP measure, refers to cash flow from operating activities and net proceeds from sale of investments less spending on property, plant, equipment, software and other deferred charges. We use free cash flow as a measure of funds available for other corporate purposes, such as dividends, debt reduction, acquisitions, and repurchases of common stock. Management believes that this measure provides meaningful supplemental information to our investors to assist them in their financial analysis of the Company. This measure is not intended to represent the residual cash available for discretionary purposes. Refer to the discussion under “Uses and Limitations of Non-GAAP Measures” elsewhere in this report for further information regarding limitations of this measure.
                
 Six Months Ended Nine Months Ended 
(In millions) July 4, 2009 June 28, 2008  October 3, 2009 September 27, 2008 
Net cash provided by operating activities $132.8 $188.7  $316.9 $382.3 
Purchase of property, plant and equipment  (30.5)  (69.1)  (46.7)  (97.8)
Purchase of software and other deferred charges  (14.9)  (33.0)  (20.4)  (49.2)
Proceeds from sale of investments, net .1 13.0  .3 16.2 
Free cash flow $87.5 $99.6  $250.1 $251.5 

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Free cash flow in the first sixnine months of 2009 declined by $12.1 millionremained flat compared to the same period in 2008, due toas lower income from operations partiallywas offset by reduced working capital and lower spending on property, plant, and equipment, software, and other deferred charges.

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Avery Dennison Corporation
See “Analysis of Results of Operations” and “Liquidity” below for more information.
Dividend
On July 30, 2009 and October 22, 2009, we declared a third-quarter dividend of $.20 per share, a reduction from our previous dividend of $.41 per share.share in the same periods in 2008. This precautionary action was taken in response to the possibility of continued poor market conditions beyond 2009, to focus on reducing debt and to plan for increased pension funding requirements.
Legal Proceedings
We are a named defendant in purported class actions in the U.S. seeking treble damages and other relief for alleged unlawful competitive practices.
The Board of Directors created an ad hoc committee comprised of certain independent directors to oversee the foregoing matters.
As previously disclosed and reported to authorities in the U.S., we have discovered instances of conduct by certain employees that potentially violate the U.S. Foreign Corrupt Practices Act. We reported that conduct to authorities in the U.S. and have entered into a settlement agreement with the SEC in this regard. Refer to Note 15, “Commitments and Contingencies,” to the unaudited Condensed Consolidated Financial Statements for further information.
We are unable to predict the effect of these matters at this time, although the effect could be adverse and material. These and other matters are reported in Note 15, “Commitments and Contingencies,” to the unaudited Condensed Consolidated Financial Statements.
Outlook
Certain factors that we believe may contribute to 2009 results are listed below.
The effect of the fiscal calendar change is anticipated to reduce sales by approximately $50 million in the fourth quarter of 2009 compared to the third quarter of 2009.
If current exchange rate trends continue, they would have an unfavorable effect on earnings for 2009.
We expect incremental pension and other employee-related expenses and contributions in 2009. In addition, an analysis performed at the end of the second quarter of 2009 indicates that we currently expect increasedwill be required to make pension contributions in the range of $200 million to $300 million from the end of the second quarter of 2009 through 2013.
We anticipate higher charges related to restructuring actions in 2009 compared to 2008.
We anticipate lower interest expense in 2009 due primarily to retirements of certain indebtedness.indebtedness and lower short-term interest rates. Our assumptions on interest expense are subject to changes in market rates through the remainder of the year.
The 2009 effective and adjusted tax rates are expected to be in the low single-digits and low double-digits, respectively. The annual effective tax rate will be impacted by future events including changes in tax laws, geographic income mix, tax audits, closure of tax years, legal entity restructuring, and release of, or accrual for, valuation allowances on deferred tax assets. The effective tax rate can potentially have wide variances from quarter to quarter, resulting from interim reporting requirements and the recognition of discrete events.
We anticipate our capital and software expenditures to be in the range of $115 million to $130approximately $100 million in 2009, including increased investment in new business opportunities to drive future growth and profitability.2009.
We are targeting a reduction of debt of at least $350 million from the end of the second quarter of 2009 through the end of 2010.
ANALYSIS OF RESULTS OF OPERATIONS FOR THE SECOND QUARTER
Income Before Taxes
         
(In millions) 2009  2008 
 
Net sales $1,455.4  $1,828.9 
Cost of products sold  1,065.1   1,338.6 
 
Gross profit  390.3   490.3 
         
(In millions) 2009  2008 
 
Marketing, general and administrative expense  300.1   341.0 
Interest expense  20.4   29.3 
Other expense, net  29.6   5.8 
 
Income before taxes $40.2  $114.2 
 
         
As a Percent of Sales:
        
Gross profit (margin)  26.8%  26.8%
Marketing, general and administrative expense  20.6   18.6 
Income before taxes  2.8   6.2 
 
 In the third quarter of 2009, we reduced debt by approximately $140 million.

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ANALYSIS OF RESULTS OF OPERATIONS FOR THE THIRD QUARTER
Income Before Taxes
         
(In millions) 2009  2008 
 
Net sales $1,549.3  $1,724.8 
Cost of products sold  1,113.3   1,290.5 
 
Gross profit  436.0   434.3 
Marketing, general and administrative expense  323.1   325.5 
Interest expense  19.1   29.0 
Other expense, net  35.5   12.5 
 
Income before taxes $58.3  $67.3 
 
         
As a Percent of Sales:
        
Gross profit (margin)  28.1%  25.2%
Marketing, general and administrative expense  20.9   18.9 
Income before taxes  3.8   3.9 
 
Sales
Sales decreased 20%10% in the secondthird quarter of 2009 compared to the same period last year, due largely to the declinedeclines in volume, partially offset by the benefit from pricing.effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008. Foreign currency translation had an unfavorable impact on the change in sales of approximately $147$80 million in the secondthird quarter of 2009.
On an organic basis, sales declined 14%6% in the secondthird quarter of 2009, as continued deterioration in the global macroeconomic environmentmarket conditions contributed to volume declines across all segments andsegments. In addition, volume declines were experienced in all geographic regions, except Asia.regions.
Refer to “Results of Operations by Segment” for information by reportable segment.
Gross Profit Margin
Gross profit margin for the secondthird quarter of 2009 improved in comparison to the same period in 2008, as the benefits of restructuring and productivity improvement initiatives, lower raw material costs, and the effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008, more than offset reduced fixed-cost leverage.
Marketing, General and Administrative Expenses
Marketing, general and administrative expense in the third quarter of 2009 remained flat compared to the same period in 2008, as reduced fixed-cost leverage was offset by benefits from pricing, productivity improvement initiatives, and restructuring.
Marketing, General and Administrative Expenses
The decrease in marketing, general and administrative expense in the second quarter of 2009 compared to the same period last year, primarily reflected cost reductionsas the benefit of restructuring and benefits from productivity initiatives and the impact of foreign currency translation.translation offset increased spending related to employee costs and new growth-related initiatives.
Other Expense, net
                
(In millions) 2009 2008  2009 2008 
Restructuring costs $25.8 $7.2  $27.0 $8.7 
Asset impairment charges and lease cancellation costs 3.8 3.1  6.5 3.8 
Other –  (4.5) 2.0 – 
Other expense, net $29.6 $5.8  $35.5 $12.5 
In the secondthird quarter of 2009, “Other expense, net” consisted of restructuring costs including severance and other employee-related costs, as well as asset impairment and lease cancellation charges. Restructuring costs in the second quarter of 2009 relate to a reduction in headcount of approximately 1,205 positions across all segments and geographic regions.
In the second quarter of 2008, “Other expense, net” consisted of restructuring costs including severance and other employee-related costs, asset impairment and lease cancellation charges, (primarily in the Retail Information Services segment), and a gain on sale of investments.as well as legal settlement costs. Restructuring costs in the secondthird quarter of 2009 relate to a reduction in headcount of approximately 490 positions across all segments and geographic regions.
In the third quarter of 2008, “Other expense, net” consisted of severance and other employee-related costs of $8.7 million and asset impairment and lease cancellation charges of $3.8 million (primarily in the Pressure-sensitive Materials segment). Restructuring costs in the third quarter of 2008 relate to a reduction in headcount of approximately 310 positions across all segments and geographic regions.
Refer to Note 9, “Cost Reduction Actions,” to the unaudited Condensed Consolidated Financial Statements for more information.
Net Income and Earnings per Share
         
(In millions, except per share) 2009  2008 
 
Income before taxes $40.2  $114.2 
Provision for income taxes  .4   21.8 
 
Net income $39.8  $92.4 
 
Net income per common share $.38  $.94 
Net income per common share, assuming dilution $.38  $.93 
 
         
Net income as a percent of sales  2.7%  5.1%
 
         
(In millions, except per share) 2009  2008 
 
Percent change in:        
Net income  (56.9)%  7.2%
Net income per common share  (59.6)  6.8 
Net income per common share, assuming dilution  (59.1)  6.9 
 

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Net Income and Earnings per Share
         
(In millions, except per share) 2009  2008 
 
Income before taxes $58.3  $67.3 
(Benefit from) provision for income taxes  (4.2)  4.6 
 
Net income $62.5  $62.7 
 
Net income per common share $.59  $.64 
Net income per common share, assuming dilution $.59  $.63 
 
         
Net income as a percent of sales  4.0%  3.6%
 
         
Percent change in:        
Net income  (.3)%  6.6%
Net income per common share  (7.8)  6.7 
Net income per common share, assuming dilution  (6.3)  6.8 
 
(Benefit from) Provision for Income Taxes
Our effective tax rate for the secondthird quarter of 2009 was approximately 1%negative 7%, compared with approximately 19%7% for the same period in 2008. The effective tax rate for the secondthird quarter of 2009 includes a benefit of $.6$13.4 million from discrete events, primarily the impact of tax law changes and the build of certain valuation allowances, partially offset byfrom the release of certain tax contingencies.contingency reserves and the tax effect of a restructuring event. Refer to Note 11, “Taxes Based on Income,” to the unaudited Condensed Consolidated Financial Statements for further information.
RESULTS OF OPERATIONS BY SEGMENT FOR THE SECONDTHIRD QUARTER
Pressure-sensitive Materials Segment
                
(In millions) 2009 2008  2009 2008 
Net sales including intersegment sales $829.6 $1,025.7  $889.3 $982.3 
Less intersegment sales  (36.0)  (45.8)  (38.3)  (46.1)
Net sales $793.6 $979.9  $851.0 $936.2 
Operating income(1)
 50.6 82.4  75.7 62.8 
  
(1) Includes lease cancellation costs in 2009, and restructuring costs and asset impairment charges in both years
 $13.8 $.5 
(1) Includes legal settlement costs in 2009, and restructuring costs, asset impairment charges and lease cancellation costs in both years
 $8.3 $5.7 
Net Sales
Sales in our Pressure-sensitive Materials segment decreased 19%9% in the secondthird quarter of 2009 compared to the same period in 2008, which included the unfavorable impact of foreign currency translation (approximately $102$56 million). On an organic basis, sales declined 10%3% in the secondthird quarter of 2009 as the benefits from pricing were more thanprimarily due to declines in volume, partially offset by the declineeffect of changes in volume.pricing to offset the cumulative impact of inflation experienced in 2008.
On an organic basis, sales in our roll materials business in the secondthird quarter of 2009 declined at a low double-digitmid single-digit rate in Europe and a midlow single-digit rate (excluding intercompany sales) in North America, andreflecting continued weakness in end-markets. Combined sales in our emerging markets increased at a lowmid single-digit rate in emerging markets (mid single-digit decline in Eastern Europe and South America, partially offset by mid single-digit increase in Asia)on an organic basis compared to the same period last year. These declines reflected continued weakness in end-markets.
On an organic basis, sales in our graphics and reflective business in the third quarter of 2009 declined at a low double-digit rate, reflecting lower promotional spending by businesses in response to weak market conditions.
Operating Income
DecreasedIncreased operating income in the secondthird quarter of 2009 reflected lower raw material costs and the effect of changes in pricing to offset the cumulative impact of lower volume, partially offset by the benefits from pricing andinflation experienced in 2008, as well as cost savings from restructuring and productivity improvement initiatives.initiatives, partially offset by the impact of lower volume. In addition, operating income included legal settlement costs in 2009, includedand restructuring costs, asset impairment charges and lease cancellation costs and higher restructuring and asset impairment charges compared to the same period in 2008.both years.
Retail Information Services Segment
                
(In millions) 2009 2008  2009 2008 
Net sales including intersegment sales $331.7 $438.3  $325.6 $379.6 
Less intersegment sales  (.2)  (.1)  (.4)  (.5)
Net sales $331.5 $438.2  $325.2 $379.1 
Operating (loss) income(1) (2)
  (5.9) 20.3   (29.1) .5 
 
(1) Includes asset impairment charges in 2008, and restructuring and lease cancellation costs in both years
 $5.1 $5.6 
(1) Includes asset impairment charges and lease cancellation costs in 2009, and restructuring costs in both years
 $22.3 $1.4 
(2) Includes transition costs related to acquisition integrations in 2008
 $– $5.7  $– $5.2 

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Net Sales
Sales in our Retail Information Services segment decreased 24%14% in the second quarter of 2009 compared to the same period last year,

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Avery Dennison Corporation
which included the unfavorable impact of foreign currency translation (approximately $23 million). On an organic basis, sales declined 20% in the second quarter of 2009 due primarily to lower volume from continued weakness of the retail apparel market in the U.S. and Europe.
Operating (Loss) Income
Operating loss in the second quarter of 2009 reflected the impact of lower volume, partially offset by the benefit of restructuring and productivity improvement initiatives. Operating (loss) income included asset impairment charges and transition costs related to acquisition integrations in 2008, and restructuring and lease cancellation costs in both years.
Office and Consumer Products Segment
         
(In millions) 2009  2008 
 
Net sales including intersegment sales $217.0  $255.7 
Less intersegment sales  (.1)  (.3)
 
Net sales $216.9  $255.4 
Operating income(1)
  34.5   40.7 
 
         
(1) Includes asset impairment charges in 2009 and restructuring costs in both years
 $3.0  $4.2 
 
Net Sales
Sales in our Office and Consumer Products segment decreased 15% in the secondthird quarter of 2009 compared to the same period last year, which included the unfavorable impact of foreign currency translation (approximately $13$12 million). On an organic basis, sales declined 11% in the secondthird quarter of 2009 due primarily to lower volume from continued weakness in the apparel markets in the U.S. and Europe.
Operating (Loss) Income
Operating loss in the third quarter of 2009 reflected the impact of lower volume, changes in pricing, and higher employee-related costs, partially offset by the benefit of restructuring and productivity improvement initiatives. Operating (loss) income included asset impairment charges and lease cancellation costs in 2009, transition costs related to acquisition integrations in 2008, and restructuring costs in both years.
Office and Consumer Products Segment
         
(In millions) 2009  2008 
 
Net sales including intersegment sales $243.0  $260.8 
Less intersegment sales  (.2)  (.4)
 
Net sales $242.8  $260.4 
Operating income(1)
  41.0   41.5 
 
         
(1) Includes asset impairment charges in 2008, a restructuring accrual adjustment in 2009, and restructuring costs in both years
 $(.2) $3.9 
 
Net Sales
Sales in our Office and Consumer Products segment decreased 7% in the third quarter of 2009 compared to the same period last year, which included the unfavorable impact of foreign currency translation (approximately $7 million). On an organic basis, sales declined 4% in the third quarter of 2009 due primarily to lower volume from weak end-market demand led by slower corporate purchasing activity, partially offset by the benefit from pricing.strong back-to-school sales.
Operating Income
Decreased operating income in the secondthird quarter of 2009 reflected the impact of lower volume, partially offset by the benefits from pricing, restructuring and productivity improvement initiatives. Operating income included asset impairment charges in 2008, a restructuring accrual adjustment in 2009, and restructuring costs in both years.
Other specialty converting businesses
                
(In millions) 2009 2008  2009 2008 
Net sales including intersegment sales $117.1 $163.4  $135.5 $156.1 
Less intersegment sales  (3.7)  (8.0)  (5.2)  (7.0)
Net sales $113.4 $155.4  $130.3 $149.1 
Operating (loss) income(1)
  (10.4) 5.8 
Operating income(1)
 .9 1.2 
  
(1) Includes restructuring costs and asset impairment charges in 2009
 $7.7 $– 
(1) Includes asset impairment charges in 2009, and restructuring costs in both years
 $5.1 $1.5 
Net Sales
Sales in our other specialty converting businesses decreased 27%13% in the secondthird quarter of 2009 compared to the same period last year, which included the unfavorable impact of foreign currency translation (approximately $9$4 million). On an organic basis, sales declined 22%10% in the secondthird quarter of 2009, primarily reflecting lower volume in products sold to the automotive, housing and construction industries.
Operating (Loss) Income
Operating lossDecreased operating income in the secondthird quarter of 2009 reflected lower sales on an organic basis, partially offset by the benefits of restructuring and productivity improvement initiatives. Operating lossincome included asset impairment charges in 2009 includedand restructuring costs and asset impairment charges.in both years.

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ANALYSIS OF RESULTS OF OPERATIONS FOR THE SIXNINE MONTHS YEAR-TO-DATE
(Loss) Income Before Taxes
         
(In millions) 2009  2008 
 
Net sales $2,881.6  $3,474.1 
Cost of products sold  2,146.2   2,559.8 
 
                
(In millions) 2009 2008  2009 2008 
Net sales $4,430.9 $5,198.9 
Cost of products sold 3,259.5 3,850.3 
 
Gross profit 735.4 914.3  1,171.4 1,348.6 
Marketing, general and administrative expense 604.3 669.0  927.4 994.5 
Goodwill and indefinite-lived intangible asset impairment charges 832.0 –  832.0 – 
Interest expense 47.9 58.8  67.0 87.8 
Other expense, net 126.9 11.4  162.4 23.9 
(Loss) income before taxes $(875.7) $175.1  $(817.4) $242.4 
  
As a Percent of Sales:
  
Gross profit (margin)  25.5%  26.3%  26.4%  25.9%
Marketing, general and administrative expense 21.0 19.3  20.9 19.1 
(Loss) income before taxes  (30.4) 5.0   (18.4) 4.7 
Sales
Sales decreased 17%15% in the first sixnine months of 2009 compared to the same period last year, due largely to the declinedeclines in sales on an organic basis,volume, partially offset by the effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008, incremental sales from the DM Label acquisition (approximately $9 million), and the impact of the extra week in the first quarter of 2009. Foreign currency translation had an unfavorable impact on the change in sales of approximately $261$340 million in the first sixnine months of 2009.
On an organic basis, sales declined 14%11% in the first sixnine months of 2009, as continued deterioration in the global macroeconomic environmentmarket conditions contributed to volume declines across all segments andsegments. In addition, volume declines were experienced in all geographic regions, except Asia.regions.
Refer to “Results of Operations by Segment” for information by reportable segment.
Gross Profit Margin
Gross profit margin for the first sixnine months of 2009 declined comparedimproved in comparison to the same period in 2008, reflecting the benefits from restructuring and productivity improvement initiatives, and the effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008. These benefits were partially offset by reduced fixed-cost leverage due to lower sales on an organic basis, and higher raw material costs, partially offset by benefits from pricing, productivity improvement initiatives, and restructuring.costs.
Marketing, General and Administrative Expenses
The decrease in marketing, general and administrative expense in the first sixnine months of 2009 compared to the same period last year primarily reflected cost reductions, the benefits from restructuring and productivity initiatives, and the impact of foreign currency translation,translation. These benefits were partially offset by increased spending related to employee costs and costs associated with the extra week.
Goodwill and Indefinite-Lived Intangible Asset Impairment Charges
In the first quarter of 2009, we recorded non-cash estimated impairment charges of $832 million for the retail information services reporting unit. Refer to Note 4, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” to the unaudited Condensed Consolidated Financial Statements for more information.
Other Expense, net
                
(In millions) 2009 2008  2009 2008 
Restructuring costs $42.9 $10.5  $69.9 $19.2 
Asset impairment charges and lease cancellation costs 25.8 5.4  32.3 9.2 
Other 58.2  (4.5) 60.2  (4.5)
Other expense, net $126.9 $11.4  $162.4 $23.9 
In the first sixnine months of 2009, “Other expense, net” consisted of restructuring costs including severance and other employee-related

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costs, asset impairment charges and lease cancellation costs, as well as legal settlement costs ($3739 million) and a loss from debt extinguishment (approximately $21 million). Restructuring costs in the first sixnine months of 2009 relate to a reduction in headcount of approximately 1,9302,420 positions across all segments and geographic regions. For more information regarding the debt extinguishment, refer to “Financial Condition” in this report and Note 5, “Debt,” to the unaudited Condensed Consolidated Financial Statements. For more information regarding the legal settlement, refer to Note 15, “Commitments and Contingencies,” to the unaudited Condensed Consolidated Financial Statements.
In the first sixnine months of 2008, “Other expense, net” consisted of restructuring costs including severance and other employee-related costs of $19.2 million and asset impairment and lease cancellation charges (in the Pressure-sensitive Materials and Retail Information Services segments), andof $9.2 million, partially offset by $4.5 million related to a gain on sale of investments. Restructuring costs in the first sixnine months of 2008 relate to a reduction in headcount of approximately 465775 positions across all segments and geographic regions.

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Refer to Note 9, “Cost Reduction Actions,” to the unaudited Condensed Consolidated Financial Statements for more information.
Net (Loss) Income and Earnings per Share
                
(In millions, except per share) 2009 2008  2009 2008 
(Loss) income before taxes $(875.7) $175.1  $(817.4) $242.4 
(Benefit from) provision for income taxes  (16.6) 14.3   (20.8) 18.9 
Net (loss) income $(859.1) $160.8  $(796.6) $223.5 
Net (loss) income per common share $(8.41) $1.63  $(7.73) $2.27 
Net (loss) income per common share, assuming dilution $(8.41) $1.62  $(7.73) $2.26 
  
Net (loss) income as a percent of sales  (29.8)%  4.6%  (18.0)%  4.3%
  
Percent change in:  
Net (loss) income  (634.3)%  (2.7)%  (456.4)%  (.3)%
Net (loss) income per common share  (616.0)  (3.6)  (440.5)  (.4)
Net (loss) income per common share, assuming dilution  (619.1)  (3.0)  (442.0)  (.4)
(Benefit from) Provision for Income Taxes
Our effective tax rate for the first sixnine months of 2009 was approximately 2%3%, compared withto approximately 8% for the same period in 2008. The effective tax rate for the first sixnine months of 2009 includes a benefit of $18.4$31.8 million from discrete events, primarily the tax effect of impairments of goodwill and indefinite-lived intangible assets,asset impairments and the release of tax contingency reserves, partially offset by the build of certain valuation allowances and other items. Refer to Note 11, “Taxes Based on Income,” to the unaudited Condensed Consolidated Financial Statements for further information.
RESULTS OF OPERATIONS BY SEGMENT FOR THE SIXNINE MONTHS YEAR-TO-DATE
Pressure-sensitive Materials Segment
                
(In millions) 2009 2008  2009 2008 
Net sales including intersegment sales $1,675.8 $1,986.1  $2,565.1 $2,968.4 
Less intersegment sales  (73.4)  (86.6)  (111.7)  (132.7)
Net sales $1,602.4 $1,899.5  $2,453.4 $2,835.7 
Operating income(1)
 50.4 154.2  126.1 217.0 
  
(1) Includes legal settlement and lease cancellation costs in 2009, and restructuring costs and asset impairment charges in both years
 $61.9 $4.3 
(1) Includes legal settlement costs in 2009, and restructuring costs, asset impairment charges and lease cancellation costs in both years
 $70.2 $10.0 
Net Sales
Sales in our Pressure-sensitive Materials segment decreased 16%13% in the first sixnine months of 2009 compared to the same period in 2008, which included the unfavorable impact of foreign currency translation (approximately $180$236 million), partially offset by the impact of the extra week in the first quarter of 2009. On an organic basis, sales declined 7%8% in the first sixnine months of 2009 as the benefits from pricing were more thanprimarily due to declines in volume, partially offset by the declineeffect of changes in volume.pricing to offset the cumulative impact of inflation experienced in 2008.
On an organic basis, sales in our roll materials business in the first sixnine months of 2009 declined at a low double-digit rate in Europe, a mid

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low single-digit rate (excluding intercompany sales) in North America, and a midcombined low single-digit rate in our emerging markets (Asia, Eastern Europe, South America) compared to the same period last year. These declines reflected continued weakness in end-markets.
On an organic basis, sales in our graphics and reflective business in the first nine months of 2009 declined at a double-digithigh-teen rate, reflecting lower promotional spending by businesses in response to weak market conditions.
Operating Income
Decreased operating income in the first sixnine months of 2009 reflected legal settlement costs, lease cancellation costs, and higher restructuring andcosts, asset impairment charges, and lease cancellation costs compared to the same period in 2008. In addition, lower volume and the effects ofhigher raw material inflationcosts more than offset the benefits fromeffect of changes in pricing to offset the cumulative impact of inflation experienced in 2008 and cost savings from restructuring and productivity improvement initiatives.

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Retail Information Services Segment
                
(In millions) 2009 2008  2009 2008 
Net sales including intersegment sales $648.0 $811.5  $973.6 $1,191.1 
Less intersegment sales  (.5)  (1.3)  (.9)  (1.8)
Net sales $647.5 $810.2  $972.7 $1,189.3 
Operating (loss) income(1) (2)
  (859.3) 16.6   (888.4) 17.1 
  
(1) Includes restructuring costs, asset impairment charges and lease cancellation costs in both years
 $14.7 $7.1  $37.0 $8.5 
(2) Includes goodwill and indefinite-lived intangible asset impairment charges in 2009 and transition costs related to acquisition integrations in 2008
 $832.0 $12.7  $832.0 $17.9 
Net Sales
Sales in our Retail Information Services segment decreased 20%18% in the first sixnine months of 2009 compared to the same period last year, which included the unfavorable impact of foreign currency translation (approximately $42$54 million), partially offset by the impact of the extra week in the first quarter of 2009 and incremental sales from the DM Label acquisition (approximately $9 million). On an organic basis, sales declined 17% in the first sixnine months of 2009 due primarily to lower volume from continued weakness ofin the retail apparel marketmarkets in the U.S. and Europe.
Operating (Loss) Income
Operating loss in the first sixnine months of 2009 reflected goodwill and indefinite-lived intangible asset impairment charges, lease cancellation costs, and higher restructuring and asset impairment charges, partially offset by transition costs related to acquisition integrations in 2008. In addition, incremental savings from integration actions and the benefit of restructuring and productivity improvement initiatives were more than offset by lower volume, changes in pricing, and higher employee-related and raw material cost inflation.
Office and Consumer Products Segment
                
(In millions) 2009 2008  2009 2008 
Net sales including intersegment sales $401.7 $450.4  $644.7 $711.2 
Less intersegment sales  (.4)  (.6)  (.6)  (1.0)
Net sales $401.3 $449.8  $644.1 $710.2 
Operating income(1)
 57.9 62.6  98.9 104.1 
  
(1) Includes asset impairment charges in 2009 and restructuring costs in both years
 $5.7 $4.3 
(1) Includes restructuring costs and asset impairment charges in both years
 $5.5 $8.2 
Net Sales
Sales in our Office and Consumer Products segment decreased 11%9% in the first sixnine months of 2009 compared to the same period last year, which included the unfavorable impact of foreign currency translation (approximately $23$30 million), partially offset by the impact of the extra week in the first quarter of 2009. On an organic basis, sales declined 6%8% in the first sixnine months of 2009 due primarily to lower volume from weak end-market demand led by slower corporate purchasing activity, partially offset by strong back-to-school sales and the benefit from pricing.effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008.

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Operating Income
Decreased operating income in the first sixnine months of 2009 reflected the impact of lower volume, partially offset by the benefitscost savings from pricing, restructuring and productivity improvement initiatives.initiatives and the effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008. Operating income included restructuring costs and asset impairment charges in 2009 and restructuring costs in both years.
Other specialty converting businesses
         
(In millions) 2009  2008 
 
Net sales including intersegment sales $237.4  $329.4 
Less intersegment sales  (7.0)  (14.8)
 
Net sales $230.4  $314.6 
Operating (loss) income(1)
  (37.9)  15.3 
 
         
(1) Includes asset impairment charges in 2009 and restructuring costs in both years
 $23.4  $.2 
 

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Avery Dennison Corporation
         
(In millions) 2009  2008 
 
Net sales including intersegment sales $372.9  $485.5 
Less intersegment sales  (12.2)  (21.8)
 
Net sales $360.7  $463.7 
Operating (loss) income(1)
  (37.0)  16.5 
 
         
(1) Includes asset impairment charges in 2009 and restructuring costs in both years
 $28.5  $1.7 
 
Net Sales
Sales in our other specialty converting businesses decreased 27%22% in the first sixnine months of 2009 compared to the same period last year, which included the unfavorable impact of foreign currency translation (approximately $16$20 million), partially offset by the impact of the extra week in the first quarter of 2009. On an organic basis, sales declined 23%21% in the first sixnine months of 2009, primarily reflecting lower volume in products sold to the automotive, housing, and construction industries.
Operating (Loss) Income
Operating loss in the first sixnine months of 2009 reflected lower sales on an organic basis, partially offset by the benefit of restructuring and productivity improvement initiatives. Operating (loss) income included asset impairment charges in 2009 and restructuring costs in both years.
FINANCIAL CONDITION
Liquidity
Cash Flow from Operating Activities for the First SixNine Months:
                
(In millions) 2009 2008  2009 2008 
Net (loss) income $(859.1) $160.8  $(796.6) $223.5 
Depreciation and amortization 132.6 138.6  194.0 210.5 
Provision for doubtful accounts 9.5 8.2  16.3 13.1 
Goodwill and indefinite-lived intangible asset impairment charges 832.0 –  832.0 – 
Asset impairment and net loss on sale and disposal of assets 28.0 14.4  40.9 16.4 
Loss from debt extinguishment 21.2 –  21.2 – 
Stock-based compensation 13.2 16.9  19.8 24.0 
Other non-cash expense and loss 12.1 –  16.2 3.2 
Other non-cash income and gain  (7.2)  (17.2)  (7.2)  (14.9)
Changes in assets and liabilities and other adjustments, net of the effect of business acquisitions  (49.5)  (133.0)  (19.7)  (93.5)
Net cash provided by operating activities $132.8 $188.7  $316.9 $382.3 
For cash flow purposes, changes in assets and liabilities and other adjustments, net of the effect of business acquisitions, exclude the impact of foreign currency translation (discussed below in “Analysis of Selected Balance Sheet Accounts”).
In 2009, cash flow provided by operating activities decreased by $55.9$65.4 million compared to 2008 as lower income from operations was partially offset by reduced working capital.
Refer to “Analysis of Selected Financial Ratios” below for more information.
Cash Flow from Investing Activities for the First SixNine Months:
                
(In millions) 2009 2008  2009 2008 
Purchase of property, plant and equipment $(30.5) $(69.1) $(46.7) $(97.8)
Purchase of software and other deferred charges  (14.9)  (33.0)  (20.4)  (49.2)
Payments for acquisitions –  (125.0) –  (130.6)
Proceeds from sale of investments, net .1 13.0  .3 16.2 
Other  (4.2) 5.1   (4.0) 7.0 
Net cash used in investing activities $(49.5) $(209.0) $(70.8) $(254.4)

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Avery Dennison Corporation
Capital and Software Spending
During the first sixnine months of 2009, we invested in various small capital projects, including projects associated with the expansion in Japan. Significant capital projects during the first sixnine months of 2008 included investments for expansion in China and India serving both our materials and retail information services businesses.
Information technology projects during the first sixnine months of 2009 and 2008 included customer service and standardization initiatives.
Payments for Acquisitions
On April 1, 2008, we completed the acquisition of DM Label, which is included in our Retail Information Services segment.

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Avery Dennison Corporation
Proceeds from Sale of Investments
During the first sixnine months of 2009 and 2008, net proceeds from sale of investments consist of the sale of securities held by our captive insurance company.
Cash Flow from Financing Activities for the First SixNine Months:
                
(In millions) 2009 2008  2009 2008 
Net change in borrowings and payments of debt $(8.0) $114.7  $(151.3) $13.1 
Dividends paid  (89.6)  (87.6)  (112.3)  (131.4)
Purchase of treasury stock –  (9.8)
Proceeds from exercise of stock options, net .2 1.9  – 2.3 
Other – 5.4  2.0 8.2 
Net cash (used in) provided by financing activities $(97.4) $34.4 
Net cash used in financing activities $(261.6) $(117.6)
Borrowings and Repayment of Debt
In March 2009, we completed an exchange of approximately 6.6 million of our Corporate HiMEDS units, or approximately 75.15% of the outstanding Corporate HiMEDS units. In aggregate, the exchange resulted in the extinguishment of approximately $331 million of senior notes that are part of the Corporate HiMEDS units, the issuance of approximately 6.5 million shares of Avery Dennison’s common stock (par value $1.00 per share), and the payment of approximately $43 million in cash to participating holders who validly tendered their Corporate HiMEDS units. As a result of this exchange, we recorded a debt extinguishment loss of approximately $21 million, which included a write-off of $9.6 million related to unamortized debt issuance costs.
In February 2008, one of our subsidiaries entered into a credit agreement for a term loan credit facility with fifteen domestic and foreign banks for a total commitment of $400 million, which we guaranteed, maturing February 8, 2011. We used the term loan credit facility to reduce commercial paper borrowings previously issued to fund the Paxar acquisition. The term loan credit facility is subject to financial covenants, including a maximum leverage ratio and a minimum interest coverage ratio, which were amended in January 2009.
Refer to Note 5, “Debt,” to the unaudited Condensed Consolidated Financial Statements for more information.
Shareholders’ Equity
Our shareholders’ equity was approximately $1.2$1.3 billion at July 4,October 3, 2009 compared to approximately $2.2$1.8 billion at June 28,December 27, 2008. The decrease in our shareholders’ equity was primarily due to the non-cash impairment charges of $832 million in the first quarter of 2009.2009, partially offset by the issuance of common stock shares associated with the extinguishment of senior notes associated with the Corporate HiMEDS units, as well as the impact of foreign currency translation. Refer to Note 4, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” to the unaudited Condensed Consolidated Financial Statements and the “Borrowings and Repayment of Debt” section above for more information. Our dividend per share was $.82decreased to $1.02 in both the first sixnine months of 2009 from $1.23 in the first nine months of 2008. Refer to “Dividend” in the Overview and 2008.Outlook section above for further information.
Share Repurchases
During the first nine months of 2008, we repurchased approximately .2 million shares totaling $9.8 million.

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Avery Dennison Corporation
Analysis of Selected Balance Sheet Accounts
Long-lived Assets
Goodwill decreased approximately $777$755 million during the first sixnine months of 2009, which reflected a non-cash impairment charge associated with our retail information services reporting unit ($820 million), partially offset by net purchase price adjustments associated with the DM Label acquisitionand the Paxar acquisitions ($3129 million) and the impact of foreign currency translation ($1236 million).
Other intangibles resulting from business acquisitions, net decreased approximately $27$32 million during the first sixnine months of 2009, which reflected normal amortization expense ($25 million) and a non-cash impairment charge associated with our retail information services reporting unit ($12 million), normal amortization expense ($17 million), partially offset by an asset reclassification from “Other assets” ($1 million) and the impact of foreign currency translation ($14 million).
Refer to Note 4, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” to the unaudited Condensed Consolidated Financial Statements for more information.
DuringOther assets increased approximately $4 million during the first sixnine months of 2009, which reflected purchases of software and other assets reflecteddeferred charges ($20 million), an increase in cash surrender value of corporate-owned life insurance ($8.713 million), an increase in third-party loan receivable ($5 million), and the impact of foreign currency translation ($.8 million), as well as software and other deferred charges purchases ($14.9 million), and other additions ($13 million). These increases were partially offset by normal amortization and impairment of software and other deferred charges ($24.531 million), the write-off of unamortized debt issuance costs associated with the exchange of the HiMEDS units, net of additional financing costs related to the covenant amendments ($4.55 million) discussed above in “Borrowings and Repayment of Debt,” as well as an asset reclassification to “Other intangibles resulting from business acquisitions, net” ($1 million).

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Other Shareholders’ Equity Accounts
The value of our employee stock benefit trusts increased by $59$6 million during the first sixnine months of 2009 due to higher market value of shares held in the trusts of approximately $52$16 million, andpartially offset by the issuance of shares under our employee stock option and defined contribution plans of approximately $7$10 million.
Treasury Stock
During the first sixnine months of 2009, we issued approximately 6.5 million shares of common stock with a book value of approximately $297 million in connection with the completed exchange of the Corporate HiMEDS units, as discussed above in “Borrowings and Repayment of Debt.”
Impact of Foreign Currency Translation for the First SixNine Months:
                
(In millions) 2009 2008  2009 2008 
Change in net sales $(261) $172  $(341) $248 
Change in net income  (9) 10   (9) 13 
International operations generated approximately 65% of our net sales in the first sixnine months of 2009. Our future results are subject to changes in political and economic conditions and the impact of fluctuations in foreign currency exchange and interest rates.
Sales from currency translation in the first sixnine months of 2009 primarily reflected a negative impact from sales denominated in Euros, as well as sales in the currencies of Great Britain, Australia and Brazil, partially offset by a benefit from sales in the currency of China.South Korea.
Effect of Foreign Currency Transactions
The impact on net income from transactions denominated in foreign currencies may be 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 statement and cash flow exposure to transactions in foreign currencies, we may enter into foreign exchange forward, option and swap contracts, where available and appropriate.
Analysis of Selected Financial Ratios
We utilize certain financial ratios to assess our financial condition and operating performance, as discussed below.
Operational Working Capital Ratio
Working capital (current assets minus current liabilities), as a percent of annualized net sales, decreased in 2009 primarily due to a decrease in net trade accounts receivable and inventories, partially offset by a decrease in accounts payable.payable and a decrease in short-term and current portion of long-term debt.

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Operational working capital, as a percent of annualized net sales, is a non-GAAP measure and is shown below. We use this non-GAAP measure as a tool to assess our working capital requirements because it excludes the impact of fluctuations attributable to our financing and other activities (that affect cash and cash equivalents, deferred taxes and other current assets and other current liabilities) that tend to be disparate in amount and timing, and therefore, may increase the volatility of the working capital ratio from period to period. Additionally, the items excluded from this measure are not necessarily indicative of the underlying trends of our operations and are not significantly influenced by the day-to-day activities that are managed at the operating level. Refer to “Uses and Limitations of Non-GAAP Measures.” Our objective is to minimize our investment in operational working capital, as a percentage of sales, by reducing this ratio to maximize cash flow and return on investment.
Operational Working Capital for the First SixNine Months:
                
(In millions) 2009 2008  2009 2008 
(A) Working capital (current assets minus current liabilities) $(222.0) $(8.3) $(164.0) $11.5 
Reconciling items:  
Cash and cash equivalents  (91.9)  (87.1)  (91.9)  (81.3)
Current deferred and refundable income taxes and other current assets  (208.2)  (302.0)  (212.0)  (286.2)
Short-term and current portion of long-term debt 791.6 825.8  669.4 721.6 
Current deferred and payable income taxes and other current liabilities 616.5 685.7  668.4 673.2 
(B) Operational working capital $886.0 $1,114.1  $869.9 $1,038.8 
(C) Annualized net sales (year-to-date sales, multiplied by 2) $5,549.7(1) $6,948.2 
(C) Annualized net sales (year-to-date sales divided by 3, multiplied by 4) $5,772.0(1) $6,931.9 
Working capital, as a percent of annualized net sales (A)¸ (C)
  (4.0)%  (.1)%  (2.8)%  0.2%
Operational working capital, as a percent of annualized net sales (B)¸ (C)
  16.0%  16.0%  15.1%  15.0%
 
(1) Adjusted for the extra week in the first quarter of 2009

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As a percent of annualized sales, operational working capital in the first sixnine months of 2009 was unchangedremained flat compared to the same period in the prior year. This measure reflects the effects of the following ratios, including the impact of foreign currency translation, and is discussed below.
Accounts Receivable Ratio
The average number of days sales outstanding was 60 days in the first nine months of 2009 compared to 61 days in the first six months of 2009 compared to 62 days in the first sixnine months of 2008, calculated using the two-quarterthree-quarter average trade accounts receivable balance divided by the average daily sales for the first sixnine months of 2009 and 2008, respectively. During the first sixnine months of 2009, the average number of days sales outstanding was primarily impacted by the timing of sales and improvement in collections.
Inventory Ratio
Average inventory turnover was 7.98.1 in the first sixnine months of 2009 compared to 7.77.8 in the first sixnine months of 2008, calculated using the annualized cost of sales (cost of sales for the first sixnine months divided by 3, and multiplied by two,4, adjusted for the extra week in the first quarter of 2009) divided by the two-quarterthree-quarter average inventory balance for the first sixnine months of 2009 and 2008, respectively. During the first sixnine months of 2009, the average inventory turnover was primarily impacted by improved inventory management, as well as a decrease in inventory purchases as a result of lower sales.
Accounts Payable Ratio
The average number of days payable outstanding was 5152 days in the first sixnine months of 2009 compared to 5554 days in the first sixnine months of 2008, calculated using the two-quarterthree-quarter average accounts payable balance divided by the average daily cost of products sold for the first sixnine months of 2009 and 2008, respectively. During the first sixnine months of 2009, the average number of days payable outstanding was primarily impacted by lower purchases, as well as the timing of payments which was impacted by the extra week in the first quarter of 2009.
Capital Resources
Capital resources include cash flows from operations, cash and cash equivalents and debt financing. At July 4,October 3, 2009, we had cash and cash equivalentequivalents of $92 million held in accounts managed by third-party financial institutions. To date, we have experienced no loss or lack of access to our invested cash or cash equivalents; however, there is no assurance that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets.
Our $1 billion revolving credit facility, which supports our commercial paper programs in the U.S. and Europe, matures in 2012. Based upon our current outlook for our business and market conditions, we believe that this facility, in addition to the committed and uncommitted bank lines

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of credit maintained in the countries in which we operate, provide the liquidity to fund our current operations. During the recent turmoil in the financial markets, we did not experience interruptions in our access to funding.
Refer to Note 5, “Debt,” to the unaudited Condensed Consolidated Financial Statements for more information.
We are exposed to financial market risk resulting from changes in interest and foreign currency rates, and to possible liquidity and credit risks of our counterparties.
Capital from Debt
Our total debt decreased approximately $283$425 million in the first sixnine months of 2009 to approximately $1.93$1.79 billion compared to approximately $2.21 billion at year end 2008, primarily reflecting a decrease in long-term borrowings, partially offset by an increase in commercial paper borrowings. Refer to “Borrowings and Repayment of Debt” above for further information.
Credit ratings are a significant factor in our ability to raise short-term and long-term financing. The credit ratings assigned to us also impact the interest rates paid and our access to commercial paper and other borrowings. A downgrade of our short-term credit ratings below the current “A-2” and “P2” levels would impact our ability to access the commercial paper markets. If our access to commercial paper markets is limited, our revolving credit facility and other credit facilities are available to meet our short-term funding requirements, if necessary. When determining a credit rating, the rating agencies place significant weight on our competitive position, business outlook, consistency of cash flows, debt level and liquidity, geographic dispersion and management team.

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Our Credit Ratings as of July 4,October 3, 2009:
             
  Short-term  Long-term Outlook
 
Standard & Poor’s Rating Service  A-2  BBB Stable
Moody’s Investors Service P2  Baa2 Negative
 
Off-Balance Sheet Arrangements, Contractual Obligations, and Other Matters
Legal Proceedings
We are a named defendant in purported class actions in the U.S. seeking treble damages and other relief for alleged unlawful competitive practices.
On April 24, 2003, Sentry Business Products, Inc. filed a purported class action on behalf of direct purchasers of label stock in the United States District Court for the Northern District of Illinois against us, UPM-Kymmene Corporation (“UPM”), Bemis Company, Inc. (“Bemis”), and certain of their subsidiaries seeking treble damages and other relief for alleged unlawful competitive practices, with allegations including that the defendants attempted to limit competition among themselves through anticompetitive understandings. Ten similar complaints were filed in various federal district courts. In November 2003, the cases were transferred to the United States District Court for the Middle District of Pennsylvania and consolidated for pretrial purposes. Plaintiffs filed a consolidated complaint on February 16, 2004, which we answered on March 31, 2004. On April 14, 2004, the court separated the proceedings as to class certification and merits discovery, and limited the initial phase of discovery to the issue of the appropriateness of class certification. On January 4, 2006, plaintiffs filed an amended complaint. On January 20, 2006, we filed an answer to the amended complaint. On August 14, 2006, the plaintiffs moved to certify a proposed class. The court substantively granted class certification on November 19, 2007. On July 22, 2008, the court held a hearing to set a schedule for merits discovery. On May 12, 2009, we entered into a settlement agreement with plaintiffs. Without admitting liability, we have agreed to pay plaintiffs $36.5 million, plus up to $.5 million related to notice and administration expenses, in two equal installments of $18.5 million, which were paid on May 27, 2009 and July 15, 2009. On June 10, 2009, the district court entered an order preliminarily approving the settlement, and aon September 17, 2009, the district court issued an order of final approval hearing is scheduled for September 17, 2009. If court approval is obtained, the matter will be dismissedand judgment, dismissing all claims against us with prejudice. We recorded an accrual of $37 million for this settlement in the first quarter of 2009.
On May 21, 2003, The Harman Press filed in the Superior Court for the County of Los Angeles, California, a purported class action on behalf of indirect purchasers of label stock against us, UPM and UPM’s subsidiary Raflatac (“Raflatac”), seeking treble damages and other relief for alleged unlawful competitive practices, with allegations including that the defendants attempted to limit competition between themselves through anticompetitive understandings. Three similar complaints were filed in various California courts. In November 2003, on petition from the parties, the California Judicial Council ordered the cases be coordinated for pretrial purposes. The cases were assigned to a coordination trial judge in the Superior Court for the City and County of San Francisco on March 30, 2004. On September 30, 2004, the Harman Press amended its complaint to add Bemis’ subsidiary Morgan Adhesives Company (“MACtac”) as a defendant. On January 21, 2005, American International Distribution Corporation filed a purported class action on behalf of indirect purchasers in the Superior Court for Chittenden County, Vermont. Similar actions were filed by Richard Wrobel, on February 16, 2005,

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in the District Court of Johnson County, Kansas; and by Chad and Terry Muzzey, on February 16, 2005 in the District Court of Scotts Bluff County, Nebraska. On February 17, 2005, Judy Benson filed a purported multi-state class action on behalf of indirect purchasers in the Circuit Court for Cocke County, Tennessee. Without admitting liability, we have agreed to pay plaintiffs $2 million to resolve all claims related to the purported state class actions in the states of Kansas, Nebraska, Tennessee and Vermont. We recorded $2 million in the third quarter of 2009 in respect of the settlement of these claims. We intend to defend the purported California class action vigorously.
The Board of Directors created an ad hoc committee comprised of certain independent directors to oversee the foregoing matters.
We are unable to predict the effect of these matters at this time, although the effect could be adverse and material. These and other matters are reported in Note 15, “Commitments and Contingencies,” to the unaudited Condensed Consolidated Financial Statements.
Environmental
As of July 4,October 3, 2009, we have been designated by the U.S. Environmental Protection Agency (“EPA”) and/or other responsible state agencies as a potentially responsible party (“PRP”) at fourteen waste disposal or waste recycling sites, which are the subject of separate investigations or proceedings concerning alleged soil and/or groundwater contamination and for which no settlement of our liability has been agreed upon. We are participating with other PRPs at such sites, and anticipate that our share of cleanup costs will be determined pursuant to remedial agreements to be entered into in the normal course of negotiations with the EPA or other governmental authorities.
We have accrued liabilities for these and certain other sites, including sites in which governmental agencies have designated us as a PRP, where it is probable that a loss will be incurred and the cost or amount of loss can be reasonably estimated. However, because of the uncertainties associated with environmental assessment and remediation activities, future expense to remediate the currently identified sites and any sites that could be identified in the future for cleanup could be higher than the liability currently accrued.
The activity for the first sixnine months of 2009 and full-year 2008 related to environmental liabilities, which include costs associated with compliance and remediation, were as follows:
                
(In millions) July 4, 2009 December 27, 2008  October 3, 2009 December 27, 2008 
Balance at beginning of year $58.5 $37.8  $58.5 $37.8 
Purchase price adjustments related to acquisitions 2.1 24.6  2.1 24.6 
Accruals .7 .9  .8 .9 
Payments  (2.1)  (4.8)  (3.3)  (4.8)
Balance at end of period $59.2 $58.5  $58.1 $58.5 
As of July 4,October 3, 2009, approximately $12$17 million of the total balance iswas classified as short-term.
These estimates could change depending on various factors, such as modification of currently planned remedial actions, changes in

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remediation technologies, changes in site conditions, a change in the estimated time to complete remediation, changes in laws and regulations affecting remediation requirements and other factors.
Product Warranty
We provide for an estimate of costs that may be incurred under our basic limited warranty at the time product revenue is recognized. These costs primarily include materials and labor associated with the service or sale of products. Factors that affect our warranty liability include the number of units installed or sold, historical and anticipated rate of warranty claims on those units, cost per claim to satisfy our warranty obligation and availability of insurance coverage. Because these factors are impacted by actual experience and future expectations, we assess the adequacy of the recorded warranty liability and adjust the amounts as necessary. As of July 4,October 3, 2009, our product warranty liabilities were approximately $2 million.
Other
In 2005, we contacted relevant authorities in the U.S. and reported on the results of an internal investigation of potential violations of the U.S. Foreign Corrupt Practices Act. The transactions at issue were carried out by a small number of employees of our reflective business in China, and involved, among other things, impermissible payments or attempted impermissible payments. The payments or attempted payments and the contracts associated with them appear to have been minor in amount and of limited duration. Sales of our reflective business in China in 2005 were approximately $7 million. In addition, on or about October 10, 2008, we notified relevant authorities that we had discovered questionable payments to certain foreign customs and other regulatory officials by some employees of our recently acquired companies. These payments were not made for the purpose of obtaining business from any governmental entity. Corrective and disciplinary actions have been taken with respect to both internal investigations and we have taken remedial

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measures to comply with the provisions of the U.S. Foreign Corrupt Practices Act. On July 28, 2009, we entered into a settlement agreement with the SEC regarding the foregoing actions. Without admitting or denying liability, we agreed to disgorge approximately $.3 million and pay a $.2 million civil penalty. On August 10, 2009, we were advised by the U. S. Department of Justice that it has declined to take action against us in connection with the China reflective matters, which were voluntarily disclosed by us.
We and our subsidiaries are involved in various other lawsuits, claims and inquiries, most of which are routine to the nature of our business. Based upon current information, we believe that the resolution of these other matters will not materially affect us.
On September 9, 2005, we completed the lease financing for a commercial facility (the “Facility”) located in Mentor, Ohio, used primarily for the new headquarters and research center for our roll materials division. The Facility consists generally of land, buildings, equipment and office furnishings. We have leased the Facility under an operating lease arrangement, which contains a residual value guarantee of $33.4 million. We do not expect the residual value of the Facility to be less than the amount guaranteed.
We participate in international receivable financing programs with several financial institutions whereby advances may be requested from these financial institutions. Such advances are guaranteed by us. At July 4,October 3, 2009, we had guaranteed approximately $13$15 million.
As of July 4,October 3, 2009, we guaranteed up to approximately $22$17 million of certain of our foreign subsidiaries’ obligations to their suppliers, as well as approximately $505$498 million of certain of our subsidiaries’ lines of credit with various financial institutions.
As of July 4,October 3, 2009, approximately two million HiMEDS units with a carrying value of approximately $109 million remained outstanding. The purchase contracts related to these units obligate the holders to purchase from the Company a certain number of common shares in November 2010 (depending on the stock price at the time). Refer to Note 5, “Debt,” to the unaudited Condensed Consolidated Financial Statements for more information.
USES AND LIMITATIONS OF NON-GAAP MEASURES
We use certain non-GAAP financial measures that 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 measures, may make it difficult to assess the underlying performance of the Company in a single period. By excluding certain accounting effects, both positive and negative (e.g. gains on sales of assets, restructuring charges, asset impairments, etc.), from certain of our GAAP measures, management believes that it is providing meaningful supplemental information to facilitate an understanding of the Company’s “core” or “underlying” operating results. These non-GAAP measures are used internally to evaluate trends in our underlying business, as well as to facilitate comparison to the results of competitors for a single period.
Limitations associated with the use of our non-GAAP measures include (1) the exclusion of foreign currency translation, the impact of acquisitions and divestitures, and the impact of the extra week in fiscal year 2009 from the calculation of organic sales growth; (2) the exclusion of mandatory debt service requirements, as well as the exclusion of other uses of the cash generated by operating activities

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Avery Dennison Corporation
that do not directly or immediately support the underlying business (such as discretionary debt reductions, dividends, share repurchases, acquisitions, etc.) for calculation of free cash flow; and (3) the exclusion of cash and cash equivalents, short-term debt, deferred taxes, and other current assets and other current liabilities, as well as current assets and current liabilities of held-for-sale businesses, for the calculation of operational working capital. While some of the items the Company excludes from GAAP measures recur, these items tend to be disparate in amount and timing. Based upon feedback from investors and financial analysts, we believe that supplemental non-GAAP measures provide information that is useful to the assessment of the Company’s performance and operating trends.
RECENT ACCOUNTING REQUIREMENTS
During the first sixnine months of 2009, certain other accounting and financial disclosure requirements by the Financial Accounting Standards Board and the SEC were issued. Refer to Note 17, “Recent Accounting Requirements,” to the unaudited Condensed Consolidated Financial Statements for more information.
SAFE HARBOR STATEMENT
The matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which are not statements of historical fact, may contain estimates, assumptions, projections and/or expectations regarding future events, which may or may not occur. Words such as “aim,” “anticipate,” “assume,” “believe,” “continue,” “could,

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Avery Dennison Corporation
“could,” “estimate,” “expect,” “guidance,” “intend,” “may,” “might,” “objective,” “plan,” “potential,” “project,” “seek,” “shall,” “should,” “target,” “will,” “would,” or variations thereof and other expressions, which refer to future events and trends, identify forward-looking statements. Such forward-looking statements, and financial or other business targets, are subject to certain risks and uncertainties, which could cause actual results to differ materially from expected results, performance or achievements of the Company expressed or implied by such forward-looking statements.
Certain of such risks and uncertainties are discussed in more detail in Part I, Item 1A, “Risk Factors,” to the Company’s Annual Report on Form 10-K for the year ended December 27, 2008, and include, but are not limited to, risks and uncertainties relating to investment in development activities and new production facilities; fluctuations in cost and availability of raw materials; ability of the Company to achieve and sustain targeted cost reductions; ability of the Company to generate sustained productivity improvement; successful integration of acquisitions; successful implementation of new manufacturing technologies and installation of manufacturing equipment; the financial condition and inventory strategies of customers; customer and supplier concentrations; changes in customer order patterns; loss of significant contract(s) or customer(s); timely development and market acceptance of new products; fluctuations in demand affecting sales to customers; impact of competitive products and pricing; selling prices; business mix shift; volatility of capital and credit markets; impairment of capitalized assets, including goodwill and other intangibles; credit risks; ability of the Company to obtain adequate financing arrangements and to maintain access to capital; fluctuations in interest and tax rates; fluctuations in pension, insurance and employee benefit costs; impact of legal proceedings, including a previous government investigation into industry competitive practices, and any related proceedings or lawsuits pertaining thereto or to the subject matter thereof related to the concluded investigation by the U.S. Department of Justice (“DOJ”) (including purported class actions seeking treble damages for alleged unlawful competitive practices, which were filed after the announcement of the DOJ investigation), as well as the impact of potential violations of the U.S. Foreign Corrupt Practices Act; changes in tax laws and regulations; changes in governmental regulations; changes in political conditions; fluctuations in foreign currency exchange rates and other risks associated with foreign operations; worldwide and local economic conditions; impact of epidemiological events on the economy and the Company’s customers and suppliers; acts of war, terrorism, natural disasters; impairment of capitalized assets, including goodwill and other intangibles; and other factors.
The Company believes that the most significant risk factors that could affect its financial performance in the near-term include (1) the impact of economic conditions on underlying demand for the Company’s products and on the carrying value of its assets; (2) the impact of competitors’ actions, including pricing, expansion in key markets, and product offerings; (3) the degree to which higher costs can be offset with productivity measures and/or passed on to customers through selling price increases, without a significant loss of volume; (4) the impact of an increase in costs associated with the Company’s debt; and (5) the ability of the Company to achieve and sustain targeted cost reductions.
The Company’s forward-looking statements represent judgment only on the dates such statements were made. By making such forward-looking statements, the Company assumes no duty to update them to reflect new, changed or unanticipated events or circumstances, other than as may be required by law.

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ITEM 3.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes in the information provided in Part II, Item 7A of the Company’s Form 10-K for the fiscal year ended December 27, 2008.
ITEM 4.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(f)) that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports 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 the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure.
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgement in evaluating the cost-benefit relationship of possible controls and procedures.
The Company’s disclosure controls system is based upon a global chain of financial and general business reporting lines that converge in the Company’s headquarters in Pasadena, California. As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and

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Avery Dennison Corporation
procedures as of the end of the quarter covered by this report.
Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to provide 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 the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure.
The Company periodically assesses its overall control environment, including the control environment of acquired businesses.
There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION
ITEM 1.
ITEM 1. LEGAL PROCEEDINGS
As of July 4,October 3, 2009, the Company has been designated by the U.S. Environmental Protection Agency (“EPA”) and/or other responsible state agencies as a potentially responsible party (“PRP”) at fourteen waste disposal or waste recycling sites which are the subject of separate investigations or proceedings concerning alleged soil and/or groundwater contamination and for which no settlement of the Company’s liability has been agreed. The Company is participating with other PRPs at such sites, and anticipates that its share of cleanup costs will be determined pursuant to remedial agreements entered into in the normal course of negotiations with the EPA or other governmental authorities.
The Company has accrued liabilities for these and certain other sites, including sites in which governmental agencies have designated the Company as a PRP, where it is probable that a loss will be incurred and the cost or amount of loss can be reasonably estimated. However, because of the uncertainties associated with environmental assessment and remediation activities, future expense to remediate the currently identified sites and any sites that could be identified in the future for cleanup could be higher than the liability currently accrued.
As of July 4,October 3, 2009, the Company’s estimated accrued liability associated with compliance and remediation costs was approximately $59$58 million, including estimated liabilities related to the Company’s acquisitions. As of July 4,October 3, 2009, approximately $12$17 million of the total balance iswas classified as short-term. These estimates could change depending on various factors, such as modification of currently planned remedial actions, changes in remediation technologies, changes in site conditions, a change in the estimated time to complete remediation, changes in laws and regulations affecting remediation requirements and other factors.
On April 24, 2003, Sentry Business Products, Inc. filed a purported class action on behalf of direct purchasers of label stock in the United States District Court for the Northern District of Illinois against the Company, UPM-Kymmene Corporation (“UPM”), Bemis Company, Inc. (“Bemis”), and certain of their subsidiaries seeking treble damages and other relief for alleged unlawful competitive practices, with allegations including that the defendants attempted to limit competition between themselves through anticompetitive understandings. Ten similar complaints were filed in various federal district courts. In November 2003, the cases were transferred to the United States District Court for the Middle District of Pennsylvania and consolidated for pretrial purposes. Plaintiffs filed a consolidated complaint on February 16, 2004, which the Company answered on March 31, 2004. On April 14, 2004, the court separated the proceedings as to class certification and merits discovery, and limited the initial phase of discovery to the issue of the appropriateness of class certification. On January 4, 2006, plaintiffs filed an amended complaint. On January 20, 2006, the Company filed an answer to the amended complaint. On August 14, 2006, the plaintiffs moved to certify a proposed class. The court substantively granted class certification on November 19, 2007. On July 22, 2008, the court held a hearing to set a schedule for merits discovery. On May 12, 2009, the Company entered into a settlement agreement with plaintiffs. Without admitting liability, the Company has agreed to pay plaintiffs $36.5 million, plus up to $.5 million related to notice and administration expenses, in two equal installments of $18.5 million, which were paid on May 27, 2009 and July 15, 2009. On June 10, 2009, the district court entered an order preliminarily approving the settlement, and aon September 17, 2009, the district court issued an order of final approval hearing is scheduled for September 17, 2009. If court approval is obtained,and judgment, dismissing all claims against the matter will be dismissedCompany with prejudice. The Company recorded an accrual of $37 million for this settlement in the first quarter of 2009.
On May 21, 2003, The Harman Press filed in the Superior Court for the County of Los Angeles, California, a purported class action on behalf of indirect purchasers of label stock against the Company, UPM and UPM’s subsidiary Raflatac (“Raflatac”), seeking treble damages and other relief for alleged unlawful competitive practices, with allegations including that the defendants attempted to limit competition between themselves through anticompetitive understandings. Three similar complaints were filed in various California courts. In November 2003, on petition from the parties, the California Judicial Council ordered the cases be coordinated for pretrial purposes. The cases were assigned to a coordination trial judge in the Superior Court for the City and County of San Francisco on March 30, 2004. On September 30, 2004, the Harman Press amended its complaint to add Bemis’ subsidiary Morgan Adhesives Company (“MACtac”) as a defendant. On January 21, 2005, American International Distribution Corporation filed a purported class action on behalf of indirect purchasers in the Superior Court for Chittenden County, Vermont. Similar actions were filed by Richard Wrobel, on February 16, 2005, in the District Court of Johnson County, Kansas; and by Chad and Terry Muzzey, on February 16, 2005 in the District Court of Scotts Bluff County, Nebraska. On February 17, 2005, Judy Benson filed a purported multi-state class action on behalf of indirect purchasers in the Circuit Court for Cocke County, Tennessee. Without admitting liability, the Company has agreed to pay plaintiffs $2 million to resolve all claims related to the purported state class actions in the states of Kansas, Nebraska, Tennessee and Vermont. The Nebraska, Kansas and Vermont cases are currently stayed. Defendants’ motion to dismissCompany recorded $2 million in the Tennessee case, filed on March 30, 2006, is pending.third quarter of 2009 in respect of the settlement of these claims. The Company intends to defend these mattersthe purported California class action vigorously.

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The Board of Directors created an ad hoc committee comprised of certain independent directors to oversee the foregoing matters.

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The Company is unable to predict the effect of these matters at this time, although the effect could be adverse and material.
In 2005, the Company contacted relevant authorities in the U.S. and reported on the results of an internal investigation of potential violations of the U.S. Foreign Corrupt Practices Act. The transactions at issue were carried out by a small number of employees of the Company’s reflective business in China, and involved, among other things, impermissible payments or attempted impermissible payments. The payments or attempted payments and the contracts associated with them appear to have been minor in amount and of limited duration. Sales of the Company’s reflective business in China in 2005 were approximately $7 million. In addition, on or about October 10, 2008, the Company notified relevant authorities that it had discovered questionable payments to certain foreign customs and other regulatory officials by some employees of its recently acquired companies. These payments were not made for the purpose of obtaining business from any governmental entity. Corrective and disciplinary actions have been taken with respect to both internal investigations and the Company has taken remedial measures to comply with the provisions of the U.S. Foreign Corrupt Practices Act. On July 28, 2009, the Company entered into a settlement agreement with the SEC regarding the foregoing actions. Without admitting or denying liability, the Company agreed to disgorge approximately $.3 million and pay a $.2 million civil penalty. On August 10, 2009, the Company was advised by the U. S. Department of Justice that it has declined to take action against the Company in connection with the China reflective matters, which were voluntarily disclosed by the Company.
The Company and its subsidiaries are involved in various other lawsuits, claims and inquiries, most of which are routine to the nature of the Company’s business. Based upon current information, management believes that the resolution of these other matters will not materially affect the Company’s financial position.
ITEM 1A.
ITEM 1A. RISK FACTORS
Our ability to attain our goals and objectives is materially dependent on numerous factors and risks, including but not limited to matters described in Part I, Item 1A, of the Company’s Form 10-K for the fiscal year ended December 27, 2008. Set forth below is an update to such risk factors.
Proposed changes in U.S. tax legislation could materially impact our results.
Currently, the majority of our revenues is generated from customers located outside of the U.S., and a substantial portion of our assets, including employees, are located outside of the U.S. We have not accrued income taxes and foreign withholding taxes on undistributed earnings for most non-U.S. subsidiaries, because such earnings are intended to be indefinitely reinvested in the operations of those subsidiaries. Certain recently announced proposals could substantially increase our tax expense, which would result in a negative impact on our financial position and results of operations.
ITEM 2.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not Applicable
(b) Not Applicable
(c) Purchases of Equity Securities by Issuer
The Board of Directors has authorized the repurchase of shares of the Company’s outstanding common stock. Repurchased shares may be reissued under the Company’s stock option and incentive plans or used for other corporate purposes. The Company did not repurchase any registered equity securities in the first sixnine months of 2009. As of July 4,October 3, 2009, the maximum number of shares that may yet be purchased under the Company’s plans was approximately 4 million shares.
ITEM 3.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information called for in this Item during the period is incorporated by reference to Part II, Item 4 in the Company’s Form 10-Q filed on May 14, 2009.Not Applicable

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ITEM 5.
ITEM 5. OTHER INFORMATION
On August 10, 2009, the form of employment agreement for certain executive officers of Avery Dennison Corporation (the “Company”) was amended, effective January 1, 2008, with the intention to provide that the employment arrangements and the payments thereunder either comply with or are exempt from Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the Department of Treasury regulations and other guidance issued thereunder (“Section 409A”). The amendments modify the definitions of “change of control” and “good reason” and add a new section to the employment agreements entitled “Compliance with Code Section 409A.” This section states the intention that the payment of any compensation or benefits that constitute “nonqualified deferred compensation” subject to the requirements of Section 409A is intended to comply with Section 409A and that the agreements should be so interpreted. Among other things, the section also provides that the payment of any compensation or benefits that constitute “nonqualified deferred compensation” subject to the requirements of Section 409A will be delayed for a six-month period following the date of termination of employment, if the terminated executive is deemed to be a “specified employee” (within the meaning of Section 409A) as of such date. The amendment also provides that any payment related to excise taxes imposed under Section 4999 of the Code shall be paid in compliance with Section 409A. The amendments do not materially modify or otherwise affect the economic terms of the employment agreements. The foregoing description of the amendments is qualified in its entirety by reference to the form of Amendment to Employment Agreement, which is filed as Exhibit 10.8.3.2 to this report and is incorporated herein by reference.
On August 11, 2009, the form of employment agreement between the Company and certain executive officers was further amended, effective as of January 1, 2008, for compliance with Section 409A. The amendments clarify the timing of the payment of certain bonuses, certain payments upon termination of employment and the reimbursement of attorneys fees and provide that the pro-rata bonus payment payable with respect to certain terminations of employment shall be based on the highest bonus payment in the prior three annual bonus payment periods. The amendments do not otherwise materially modify or affect the economic terms of the employment agreements. The foregoing description of the amendments is qualified in its entirety by reference to the form of Second Amendment to Employment Agreement, which is filed as Exhibit 10.8.3.3 to this report and is incorporated herein by reference.
On August 11, 2009, the retention agreement between the Company and Daniel R. O’Bryant, the Company’s Executive Vice President, Finance and Chief Financial Officer, was amended, effective as of January 1, 2008, with the intention to provide that the payments thereunder either comply with or are exempt from Section 409A. The amendment provides for alternate “vesting event” and “payment event” definitions for a “change in control” and adds a new section entitled “Compliance with Code Section 409A.” This section states the intention that the payment of any compensation or benefits which constitute “nonqualified deferred compensation” subject to the requirements of Section 409A is intended to comply with Section 409A and that the agreement should be so interpreted. Among other things, the section also provides that the payment of any compensation or benefits which constitute “nonqualified deferred compensation” subject to the requirements of Section 409A will be delayed for a six-month period following Mr. O’Bryant’s date of termination of employment if he is deemed to be a “specified employee” (within the meaning of Section 409A) as of such date. The amendment also provides that any payment related to excise taxes imposed under Section 4999 of the Code shall be paid in compliance with Section 409A. The amendment also clarifies the timing of certain stock option grants. The amendment does not materially modify or otherwise affect the economic terms of the retention agreement. The foregoing description of the amendment is qualified in its entirety by reference to the Amendment to Retention Agreement, dated as of August 11, 2009, between the Company and Mr. O’Bryant, which is filed as Exhibit 10.8.4.1 to this report and is incorporated herein by reference.
On August 11, 2009, the Compensation and Executive Personnel Committee (the “Committee”) of the Company’s Board of Directors (the “Board”) approved the Company’s Amended and Restated Avery Dennison Corporation Supplemental Executive Retirement Plan (the “SERP”), which was amended and restated, effective January 1, 2009, with the intention to provide that benefits or payments granted thereunder either comply with or are exempt from Section 409A. The definition of “good reason” was modified and the SERP was amended to further modify existing Section 409A provisions by clarifying the timing and form of payment thereunder upon a participant’s death following another payment event or during the “specified employee” six-month delay period under Section 409A and to provide that the SERP can be further amended as needed to comply with the provisions of Section 409A. The foregoing description is qualified in its entirety by reference to the SERP, which is filed as Exhibit 10.11.1 to this report and is incorporated herein by reference.
On August 11, 2009, the Committee approved the Letter of Grant under the Company’s SERP between the Company and Dean A. Scarborough, the Company’s President and Chief Executive Officer, which was amended and restated, effective as of January 1, 2009, to incorporate the provisions of the amended SERP and with the intent that the SERP benefit payable under the Letter of Grant would either comply with or be exempt from Section 409A. Certain actuarial calculations in the Projected Account Balance exhibit were updated, and the Letter of Grant was further amended to provide for benefits upon an early retirement, beginning at age 60. The foregoing description is qualified in its entirety by reference to the Letter of Grant, which is filed as Exhibit 10.11.2.1 to this report and is incorporated herein by reference.

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Avery Dennison Corporation
On August 11, 2009, the Committee approved the Letter of Grant under the Company’s SERP between the Company and Daniel R. O’Bryant, the Company’s Executive Vice President, Finance and Chief Financial Officer, which was amended and restated, effective as of January 1, 2009, to incorporate the provisions of the amended SERP, including the provisions relating to a participant’s death during the “specified employee” six-month delay period under Section 409A, and with the intent that the SERP benefit payable under the Letter of Grant would either comply with or be exempt from Section 409A. Certain actuarial calculations in the Projected Account Balance exhibit were updated. The foregoing description is qualified in its entirety by reference to the Letter of Grant, which is filed as Exhibit 10.11.4.1 to this report and is incorporated herein by reference.Not Applicable
ITEM 6.
ITEM 6. EXHIBITS
   
Exhibit 10.8.3.2:3.1 Restated Certification of Incorporation, filed August 2, 2002 with the Office of Delaware Secretary of State, is incorporated by reference to the third quarterly report for 2002 on Form of Amendment to Employment Agreement10-Q, filed November 12, 2002
   
Exhibit 10.8.3.3:3.2 Form of Second Amendment to Employee AgreementBy-laws, as amended and restated
   
Exhibit 10.8.4.1:Amendment of Retention Agreement
Exhibit 10.11.1:Supplemental Executive Retirement Plan, amended and restated (“SERP”)
Exhibit 10.11.2.1:Letter of Grant to D.A. Scarborough under SERP
Exhibit 10.11.4.1:Letter of Grant to D.R. O’Bryant under SERP
Exhibit 12:12 Computation of Ratio of Earnings to Fixed Charges
   
Exhibit 31.1:31.1 D. A. Scarborough Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
Exhibit 31.2:31.2 D. R. O’Bryant Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
Exhibit 32.1:32.1 D. A. Scarborough Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
Exhibit 32.2:32.2 D. R. O’Bryant Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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Avery Dennison Corporation
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
     
 AVERY DENNISON CORPORATION
(Registrant)
 		 
 /s/ Daniel R. O’Bryant   
 Daniel R. O’Bryant  
 Executive Vice President, Finance, and
Chief Financial Officer
(Principal Financial Officer) 		 
 
   
 /s/ Mitchell R. Butier   
 Mitchell R. Butier  
 Corporate Vice President, Global Finance, and
Chief Accounting Officer
(Principal Accounting Officer)

August 12,November 11, 2009 
 

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