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 ~~October~~April 3, ~~2009.~~2010.


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)		95-1492269 (I.R.S. Employer Identification No.)

150 North Orange Grove Boulevard
Pasadena, California		~~91103~~
(Address of principal executive offices)		91103 (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 ~~October 31, 2009: 112,744,662~~May 1, 2010: 110,440,662

AVERY DENNISON CORPORATION

FISCAL ~~THIRD~~FIRST QUARTER ~~2009~~2010 FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS


			Page
PART I. FINANCIAL INFORMATION (UNAUDITED)

Item 1. Financial Statements:
Condensed Consolidated Balance Sheet ~~as of October~~April 3, ~~2009~~2010 and ~~December 27, 2008~~January 2, 2010			3
Consolidated Statement of ~~Operations for the~~Income Three ~~and Nine~~ Months Ended ~~October~~April 3, ~~2009~~2010 and ~~September 27, 2008~~April 4, 2009			4
Condensed Consolidated Statement of Cash Flows ~~for the Nine~~Three Months Ended ~~October~~April 3, ~~2009~~2010 and ~~September 27, 2008~~April 4, 2009			5
Notes to Unaudited Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2217
Definition of Terms			17
~~Forward-looking~~Forward-Looking Statements			17
Overview and Outlook			17
Analysis of Results of Operations for the ~~Third Quarter~~First Three Months			19
Results of Operations by Segment for the ~~Third Quarter~~First Three Months
~~Analysis of Results of Operations for the Nine Months Year-to-Date~~
~~Results of Operations by Segment for the Nine Months Year-to-Date~~			21
Financial Condition			23
Uses and Limitations of Non-GAAP Measures			27
Recent Accounting Requirements			27
Safe Harbor Statement			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			3928
Item 4. Controls and Procedures			3928

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			4130
Item 1A. Risk Factors			4230
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			4230
Item 3. Defaults Upon Senior Securities			4230
Item 4. ~~Submission of Matters to a Vote of Security Holders~~(Reserved)			4230
Item 5. Other Information			4330
Item 6. Exhibits			4330
Signatures			4431
Exhibits
~~EX-3.2~~EX-3.1
EX-10.14
Ex-10.18.2
Ex-10.31.2
EX-12
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Avery Dennison Corporation

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)


(Dollars in millions)	October 3, 2009			December 27, 2008			April 3, 2010			January 2, 2010

Assets
Current assets:
Cash and cash equivalents	$	91.9		$	105.5		$	143.6		$	138.1
Trade accounts receivable, less allowances of $57.4 and $57.3 for 2009 and 2008, respectively		1,008.6			988.9
Trade accounts receivable, less allowances of $58.6 and $56.2 for 2010 and 2009, respectively								963.1			918.6
Inventories, net		511.8			583.6			519.0			477.3
Current deferred and refundable income taxes		108.0			115.6			98.0			103.5
Other current assets		104.0			136.8			103.0			95.7

Total current assets		1,824.3			1,930.4			1,826.7			1,733.2
Property, plant and equipment		3,226.2			3,173.1			3,140.0			3,207.9
Accumulated depreciation		(1,832.9	)		(1,680.1	)		(1,847.1	)		(1,853.2	)

Property, plant and equipment, net		1,393.3			1,493.0			1,292.9			1,354.7
Goodwill		962.2			1,716.7			930.7			950.8
Other intangibles resulting from business acquisitions, net		271.3			303.6			250.2			262.2
Non-current deferred and refundable income taxes		216.8			168.9			226.4			236.6
Other assets		426.7			423.1			465.0			465.3

	$	5,094.6		$	6,035.7		$	4,991.9		$	5,002.8


Liabilities and Shareholders’ Equity
Current liabilities:
Short-term and current portion of long-term debt	$	669.4		$	665.0		$	628.3		$	535.6
Accounts payable		650.5			672.9			695.9			689.8
Current deferred and payable income taxes		54.2			59.6			28.1			40.8
Other current liabilities		614.2			660.5			509.3			601.5

Total current liabilities		1,988.3			2,058.0			1,861.6			1,867.7
Long-term debt		1,115.7			1,544.8			1,073.7			1,088.7
Long-term retirement benefits and other liabilities		556.5			566.5			552.5			556.0
Non-current deferred and payable income taxes		134.1			116.4			122.7			127.8
Commitments and contingencies (see Note 15)
Commitments and contingencies (see Note 14)
Shareholders’ equity:
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
Common stock, $1 par value, authorized - 400,000,000 shares at April 3, 2010 and January 2, 2010; issued - 124,126,624 shares at April 3, 2010 and January 2, 2010; outstanding - 105,557,660 shares and 105,298,317 shares at April 3, 2010 and January 2, 2010, respectively								124.1			124.1
Capital in excess of par value		698.4			642.9			722.9			722.9
Retained earnings		1,472.4			2,381.3			1,532.0			1,499.7
Cost of unallocated ESOP shares		–			(1.2	)
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	)
Employee stock benefit trust, 4,868,002 shares and 6,744,845 shares at April 3, 2010 and January 2, 2010, respectively								(174.1	)		(243.1	)
Treasury stock at cost, 13,685,962 shares and 12,068,462 shares at April 3, 2010 and January 2, 2010, respectively								(652.1	)		(595.8	)
Accumulated other comprehensive loss		(170.8	)		(282.5	)		(171.4	)		(145.2	)

Total shareholders’ equity		1,300.0			1,750.0			1,381.4			1,362.6

	$	5,094.6		$	6,035.7		$	4,991.9		$	5,002.8

See Notes to Unaudited Condensed Consolidated Financial Statements

Avery Dennison Corporation

CONSOLIDATED STATEMENT OF ~~OPERATIONS~~INCOME

(Unaudited)


	Three Months Ended					Nine Months Ended					Three Months Ended
(In millions, except per share amounts)	October 3, 2009			September 27, 2008		October 3, 2009			September 27, 2008		April 3, 2010		April 4, 2009

Net sales	$	1,549.3		$	1,724.8	$	4,430.9		$	5,198.9	$	1,554.7	$	1,426.2
Cost of products sold		1,113.3			1,290.5		3,259.5			3,850.3		1,113.9		1,081.1

Gross profit		436.0			434.3		1,171.4			1,348.6		440.8		345.1
Marketing, general and administrative expense		323.1			325.5		927.4			994.5		340.1		304.2
Goodwill and indefinite-lived intangible asset impairment charges		–			–		832.0			–		–		832.0
Interest expense		19.1			29.0		67.0			87.8		17.5		27.5
Other expense, net		35.5			12.5		162.4			23.9
Other expense												6.3		97.3

Income (loss) before taxes		58.3			67.3		(817.4	)		242.4		76.9		(915.9	)
(Benefit from) provision for income taxes		(4.2	)		4.6		(20.8	)		18.9
Provision for (benefit from) income taxes												22.2		(17.0	)

Net income (loss)	$	62.5		$	62.7	$	(796.6	)	$	223.5	$	54.7	$	(898.9	)


Per share amounts:
Net income (loss) per common share	$	.59		$	.64	$	(7.73	)	$	2.27	$	.52	$	(8.99	)

Net income (loss) per common share, assuming dilution	$	.59		$	.63	$	(7.73	)	$	2.26	$	.51	$	(8.99	)

Dividends	$	.20		$	.41	$	1.02		$	1.23	$	.20	$	.41


Average shares outstanding:
Common shares		105.1			98.5		103.1			98.5		105.4		100.0
Common shares, assuming dilution		106.0			98.9		103.1			98.9		106.4		100.0

Common shares outstanding at period end		105.2			98.3		105.2			98.3		105.6		105.0

See Notes to Unaudited Condensed Consolidated Financial Statements

Avery Dennison Corporation

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)


	Nine Months Ended						Three Months Ended
(In millions)	October 3, 2009			September 27, 2008			April 3, 2010			April 4, 2009

Operating Activities
Net (loss) income	$	(796.6	)	$	223.5
Net income (loss)							$	54.7		$	(898.9	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		138.2			154.8			44.1			49.3
Amortization		55.8			55.7			17.7			21.9
Provision for doubtful accounts		16.3			13.1			9.0			6.1
Goodwill and indefinite-lived intangible asset impairment charges		832.0			–			–			832.0
Asset impairment and net loss on sale and disposal of assets		40.9			16.4			.7			25.3
Loss from debt extinguishment		21.2			–			–			21.2
Stock-based compensation		19.8			24.0			7.5			6.4
Other non-cash expense and loss		16.2			3.2			9.6			5.7
Other non-cash income and gain		(7.2	)		(14.9	)		–			(1.1	)
Changes in assets and liabilities and other adjustments, net of the effect of business acquisitions		(19.7	)		(93.5	)		(171.2	)		(51.9	)

Net cash provided by operating activities		316.9			382.3
Net cash (used in) provided by operating activities								(27.9	)		16.0


Investing Activities
Purchase of property, plant and equipment		(46.7	)		(97.8	)
Purchase of property, plant and equipment, net								(13.7	)		(15.0	)
Purchase of software and other deferred charges		(20.4	)		(49.2	)		(5.5	)		(8.2	)
Payments for acquisitions		–			(130.6	)
Proceeds from sale of investments, net		.3			16.2			.3			.6
Other		(4.0	)		7.0

Net cash used in investing activities		(70.8	)		(254.4	)		(18.9	)		(22.6	)


Financing Activities
Net decrease in borrowings (maturities of 90 days or less)		(58.1	)		(386.3	)
Additional borrowings (maturities longer than 90 days)		–			400.1
Net increase in borrowings (maturities of 90 days or less)								90.5			89.8
Payments of debt (maturities longer than 90 days)		(93.2	)		(.7	)		(15.1	)		(58.1	)
Dividends paid		(112.3	)		(131.4	)		(22.4	)		(43.7	)
Purchase of treasury stock		–			(9.8	)
Proceeds from exercise of stock options, net		–			2.3			1.0			.2
Other		2.0			8.2			(1.5	)		(2.9	)

Net cash used in financing activities		(261.6	)		(117.6	)
Net cash provided by (used in) financing activities								52.5			(14.7	)


Effect of foreign currency translation on cash balances		1.9			(.5	)		(.2	)		(1.2	)

(Decrease) increase in cash and cash equivalents		(13.6	)		9.8
Increase (decrease) in cash and cash equivalents								5.5			(22.5	)
Cash and cash equivalents, beginning of year		105.5			71.5			138.1			105.5

Cash and cash equivalents, end of period	$	91.9		$	81.3		$	143.6		$	83.0

See Notes to Unaudited Condensed Consolidated Financial Statements

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~~2009 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~~2009 Annual Report on Form 10-K.

The ~~Company’s~~first three months of 2010 and 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 third quarters of 2009 and 2008 consisted of thirteen-week and fourteen-week periods ending ~~October~~April 3, 2010 and April 4, 2009, ~~and 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 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)	October 3, 2009			December 27, 2008			April 3, 2010			January 2, 2010

Raw materials	$	235.6		$	256.2		$	233.7		$	217.9
Work-in-progress		122.4			143.4			129.9			119.6
Finished goods		223.3			248.6			219.1			205.2

Inventories at lower of FIFO cost or market (approximates replacement cost)		581.3			648.2			582.7			542.7
Inventory reserves		(69.5	)		(64.6	)		(63.7	)		(65.4	)

Inventories, net	$	511.8		$	583.6		$	519.0		$	477.3

Note 4.3. Goodwill and Other Intangibles Resulting from Business Acquisitions

InGoodwill

Changes 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 testnet carrying amount of goodwill from operations for 2010 and ~~indefinite-lived intangible assets (“goodwill impairment”) in the second quarter of~~ 2009, ~~with no additional impairment charge recorded thereafter.~~by reportable segment, are as follows:

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.


										Other
	Pressure-			Retail			Office and			specialty
	sensitive			Information			Consumer			converting
(In millions)	Materials			Services			Products			businesses			Total

Balance as of December 27, 2008	$	334.4		$	1,211.6		$	167.2		$	3.5		$	1,716.7
Acquisition adjustments⁽¹⁾		–			30.9			–			–			30.9
Goodwill impairment charges		–			(820.0	)		–			–			(820.0	)
Translation adjustments		17.0			.3			5.8			.1			23.2

Balance as of January 2, 2010	$	351.4		$	422.8		$	173.0		$	3.6		$	950.8

Acquisition adjustments⁽²⁾		–			(.3	)		–			–			(.3	)
Translation adjustments		(11.5	)		(1.3	)		(6.9	)		(.1	)		(19.8	)

Balance as of April 3, 2010	$	339.9		$	421.2		$	166.1		$	3.5		$	930.7

Goodwill Summary:
Goodwill	$	339.9		$	1,241.2		$	166.1		$	3.5		$	1,750.7
Accumulated impairment losses		–			(820.0	)		–			–			(820.0	)

Balance as of April 3, 2010	$	339.9		$	421.2		$	166.1		$	3.5		$	930.7

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

~~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.


⁽¹⁾		Acquisition adjustments in 2009 consisted of opening balance sheet adjustments associated with the DM Label Group (“DM Label”) acquisition in April 2008 of $32.6 and other acquisition adjustments of $(1.7).

⁽²⁾		Acquisition adjustments in 2010 consisted of adjustments associated with the Paxar Corporation (“Paxar”) acquisition in June 2007.

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~~three months of 2009, with no additional impairment charge 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
Pressure- Retail Office and specialty
sensitive Information Consumer converting
(In millions) Materials Services Products businesses Total

Balance as of December 29, 2007 $ 354.0 $ 1,137.7 $ 177.6 $ 14.0 $ 1,683.3
Goodwill acquired during the period⁽¹⁾
– 45.1 – – 45.1
Acquisition adjustments⁽²⁾
.3 10.3 – – 10.6
Transfers⁽³⁾
– 10.4 – (10.4 ) –
Translation adjustments (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
Acquisition adjustments⁽⁴⁾
– 29.3 – – 29.3
Goodwill impairment charges – (820.0 ) – – (820.0 )
Translation adjustments 19.4 9.5 7.2 .1 36.2

Balance as of October 3, 2009 $ 353.8 $ 430.4 $ 174.4 $ 3.6 $ 962.2

Goodwill Summary:

Goodwill $ 353.8 $ 1,250.4 $ 174.4 $ 3.6 $ 1,782.2
Accumulated impairment losses – (820.0 ) – – (820.0 )

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 $(1.8).~~

As of 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.2009.

Avery Dennison Corporation

Indefinite-Lived Intangible Assets

In connection with the acquisition of Paxar, the Company acquired approximately $30 million of indefinite-lived 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~~The Company recorded ~~an additional~~a non-cash impairment charge of $12 million related to these indefinite-lived intangible assets in the first ~~quarter~~three months of ~~2009, with no additional impairment charge recorded thereafter.~~2009. The carrying value of these indefinite-lived intangible assets was $17.8 million and ~~$29.5~~$17.9 million at ~~October~~April 3, ~~2009~~2010 and ~~December 27, 2008,~~January 2, 2010, respectively, which ~~include~~included $.2 million and ~~$.5~~$.1 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 ~~October~~April 3, ~~2009~~2010 and ~~December 27, 2008,~~January 2, 2010, which continue to be amortized:


	October 3, 2009						December 27, 2008						April 3, 2010						January 2, 2010
	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	$	296.6	$	88.8	$	207.8	$	295.9	$	67.4	$	228.5	$	288.7	$	98.8	$	189.9	$	295.0	$	94.8	$	200.2
Patents and other acquired technology		53.6		22.4		31.2		53.6		18.8		34.8		53.6		24.7		28.9		53.6		23.5		30.1
Trade names and trademarks⁽¹⁾		47.6		40.3		7.3		45.1		38.1		7.0		44.7		37.6		7.1		47.0		39.8		7.2
Other intangibles		14.0		6.8		7.2		8.8		5.0		3.8		13.8		7.3		6.5		13.9		7.1		6.8

Total	$	411.8	$	158.3	$	253.5	$	403.4	$	129.3	$	274.1	$	400.8	$	168.4	$	232.4	$	409.5	$	165.2	$	244.3


⁽¹⁾		~~Includes a reclassification from “Other assets” of approximately $1.~~

Amortization expense on finite-lived intangible assets resulting from business acquisitions was $8.2 million and ~~$25.2~~$8.6 million for the three ~~and nine~~ months ended ~~October~~April 3, ~~2009, respectively,~~2010 and ~~$8.9 million and $24.7 million for the three and nine months ended September 27, 2008,~~April 4, 2009, respectively. As of ~~October~~April 3, ~~2009,~~2010, the estimated amortization expense for finite-lived intangible assets resulting from completed business acquisitions for ~~this fiscal year and~~ each of the next ~~four~~five fiscal years is expected to be approximately ~~$34 million, $34 million, $34 million, $33 million, and~~ $32 million ~~respectively.~~in 2010, $32 million in 2011, $32 million in 2012, $31 million in 2013, and $27 million in 2014.

The weighted-average amortization periods from the date of acquisition for finite-lived intangible assets resulting from business acquisitions are fourteen years for customer relationships, ~~eleven years for trade names and trademarks,~~ thirteen years for patents and other acquired technology, twelve years for trade names and trademarks, seven years for other intangibles, and thirteen years in total. As of ~~October~~April 3, ~~2009,~~2010, 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, five years for trade names and trademarks, four years for other intangibles, and eight years in total.

Note 5.4. Debt

On ~~January 23, 2009,~~April 13, 2010, subsequent to the end of the first quarter of 2010, the Company ~~entered into~~issued $250 million senior notes bearing 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 5.375% per year, due April 2020. Proceeds from the ~~Revolver~~offering, net of underwriting discount and offering expenses, were approximately $248 million and were used 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,~~repay a ~~wholly-owned subsidiary~~portion of the ~~Company entered into an amendment to~~indebtedness outstanding under 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 increasesof one of the Company’s ~~flexibility for a specified period~~wholly-owned subsidiaries. The outstanding balance of ~~time under~~ the ~~financial covenants to which~~term loan credit facility of $325 million was fully repaid in May 2010 using the ~~Credit Facility is subject and excludes certain restructuring charges~~proceeds from the ~~calculation~~issuance 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%senior notes 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

~~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 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.commercial paper borrowings.

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.units. As a result of this exchange, the Company recorded a debt extinguishment loss of approximately $21 million (included in “Other ~~expense, net”~~expense” in the ~~unaudited~~ Consolidated Statement of ~~Operations),~~Income) in the first quarter of 2009, which included a write-off of $9.6 million related to unamortized debt issuance costs.

As of ~~October~~April 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 from2010, the Company ~~a certain number of common shares~~was in ~~November 2010 (depending on the stock price at the time).~~compliance with its financial covenants.

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 October 3, 2009, the carrying value and~~The fair value of the Company’s total debt, including short-term borrowings, was ~~$1.79~~$1.68 billion at April 3, 2010 and ~~$1.75~~$1.60 billion ~~respectively.~~at January 2, 2010. Fair value amounts were determined primarily based on Level 2 inputs, which are defined as inputs other than quoted prices in active markets that are either directly or indirectly observable.

Avery Dennison Corporation

Note 6.5. Pension and Other Postretirement Benefits

The following table sets forth the components of net periodic benefit cost for the periods shown:

Pension Benefits
Three Months Ended Nine Months Ended
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

Components of net periodic benefit cost:

Service cost $ 4.9 $ 3.0 $ 4.9 $ 3.6 $ 14.9 $ 8.7 $ 14.7 $ 10.7
Interest cost 9.6 6.6 9.0 7.2 28.7 19.0 27.0 21.6
Expected return on plan assets (12.1 ) (6.8 ) (12.7 ) (7.5 ) (36.4 ) (19.7 ) (38.2 ) (22.4 )
Recognized net actuarial loss 2.6 .5 1.5 1.0 7.7 1.5 4.5 2.8
Amortization of prior service cost .2 .1 .2 .1 .6 .3 .8 .4
Amortization of transition asset – (.1 ) – (.1 ) – (.4 ) – (.4 )

Net periodic benefit cost $ 5.2 $ 3.3 $ 2.9 $ 4.3 $ 15.5 $ 9.4 $ 8.8 $ 12.7

~~Avery Dennison Corporation~~


													Pension Benefits												U.S. Postretirement Health Benefits
	U.S. Postretirement Health Benefits												Three Months Ended												Three Months Ended
	Three Months Ended						Nine Months Ended						April 3, 2010						April 4, 2009						April 3, 2010			April 4, 2009
(In millions)	October 3, 2009			September 27, 2008			October 3, 2009			September 27, 2008			U.S.			Int’l			U.S.			Int’l

Components of net periodic benefit cost:
Service cost	$	.2		$	.3		$	.7		$	.8		$	5.4		$	2.5		$	5.4		$	2.8		$	.3		$	.2
Interest cost		.4			.5			1.4			1.4			10.2			6.4			9.8			6.2			.5			.5
Expected return on plan assets														(12.3	)		(6.8	)		(12.2	)		(6.4	)		–			–
Recognized net actuarial loss		.4			.3			1.2			1.1			4.5			.6			3.3			.5			.5			.4
Amortization of prior service cost		(.5	)		(.5	)		(1.5	)		(1.5	)		.2			.1			.2			.1			(.5	)		(.5	)
Amortization of transition asset														–			(.1	)		–			(.1	)		–			–

Net periodic benefit cost	$	.5		$	.6		$	1.8		$	1.8		$	8.0		$	2.7		$	6.5		$	3.1		$	.8		$	.6

The Company contributed ~~$7.8~~$.9 million and ~~$2.7~~$.8 million to its U.S. pension plans during the ~~nine~~three months ended ~~October~~April 3, ~~2009~~2010 and ~~September 27, 2008,~~April 4, 2009, respectively. The Company expects to contribute ~~an additional $.2~~$2.3 million (and may contribute up to an additional $25 million) to its U.S. pension plans ~~prior to~~for the ~~end~~remainder of ~~2009.~~2010. Additionally, the Company contributed ~~$2.2~~$.8 million and ~~$2.4~~$.7 million to its U.S. postretirement health benefit plan during the ~~nine~~three months ended ~~October~~April 3, ~~2009~~2010 and ~~September 27, 2008,~~April 4, 2009, respectively. For the remainder of ~~2009,~~2010, the Company expects to contribute an additional ~~$.6~~$2.3 million to its U.S. postretirement health benefit plan.

The Company contributed ~~approximately $23~~$7.8 million and ~~approximately $11~~$6.4 million to its international pension plans during the ~~nine~~three months ended ~~October~~April 3, 2010 and April 4, 2009, ~~and September 27, 2008,~~ respectively. Contributions made during the nine months ended 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,~~2010, the Company expects to contribute an additional $6$9.8 million to its international pension plans.

During the ~~nine~~three months ended ~~October~~April 3, ~~2009,~~2010, the Company recognized ~~$6.4~~$3.5 million related to ~~its match~~the Company’s matching contribution to participant contributions in the Company’s defined contribution plan. This expense was recorded in “Marketing, general and administrative expense” in the unaudited Consolidated Statement of ~~Operations~~Income and was funded through the issuance of shares from the Company’s Employee Stock Benefit Trust.

Note 7.6. Research and Development

Research and development expense for the three ~~and nine~~ months ended ~~October~~April 3, 2010 and April 4, 2009 was ~~$22.3~~$22.8 million and ~~$67.1~~$23.2 million, respectively. ~~For the three and nine months ended September 27, 2008, research and development expense was $23.8 million and $72.2 million, respectively.~~

Note 8.7. 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 ~~$6.6~~$7.5 million and ~~$19.8~~$6.4 million for the three ~~and nine~~ months ended ~~October~~April 3, ~~2009, respectively,~~2010 and ~~$7.1 million and $24 million for the three and nine months ended September 27, 2008,~~April 4, 2009, respectively. Total stock-based compensation expense was included in “Marketing, general and administrative expense” in the unaudited Consolidated Statement of ~~Operations~~Income 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,~~2010, the Company granted its annual stock-based compensation awards to ~~employees and directors. Such awards~~its employees. Awards granted to retirement-eligible employees are treated as though ~~they~~the awards were immediately vested; as a result, the compensation expense related to these awards ~~(approximately~~of $.6 million and $.9 ~~million) was~~million were recognized during the ~~nine~~three months ended ~~October~~April 3, 2010 and April 4, 2009, respectively, and iswere included in the stock-based compensation expense noted above.

As of ~~October~~April 3, ~~2009,~~2010, the Company had approximately ~~$45~~$68 million of unrecognized compensation ~~expense~~cost 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 ~~periods~~period of ~~approximately two years for PUs and RSUs, and~~ approximately three years for stock options and approximately two years for RSUs, PUs and restricted ~~stock.~~stock, respectively.

~~Avery Dennison Corporation~~

Note 9.8. Cost Reduction Actions

Severance charges recorded under the ~~Company’s~~ restructuring actions below 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. Asset impairments are based on the estimated market value of the assets. Charges below are included in “Other ~~expense, net”~~expense” in the unaudited Consolidated Statement of ~~Operations.~~

Severance, asset impairment, and lease cancellation charges recorded for the three and nine months ended October 3, 2009 and 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.Income.

~~2009~~2010

~~In 2009,~~During the first three months of 2010, the Company continued ~~the implementation of the~~its cost reduction ~~action~~efforts that were initiated in ~~the fourth quarter of~~late 2008, and recorded

Avery Dennison Corporation

charges of ~~$102.2~~$4.9 million, ~~consisting~~which consisted of ~~$69.9~~$4.7 million of severance and other employee costs and $.2 of asset impairment changes. These actions are resulting in ~~the elimination~~a reduction of approximately ~~2,420~~230 positions impacting all segments ~~as well as $29.9 million of asset impairment charges,~~ and ~~$2.4 million of lease cancellation charges.~~geographic regions. As of ~~October~~April 3, ~~2009,~~2010, approximately ~~420~~95 of these employees ~~related to these charges remain with the Company and are expected to leave by 2010. The table below details the accruals recorded in 2009 and the associated payments:~~

Other
Pressure- Retail Office and specialty
sensitive Information Consumer converting
(In millions) 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
July 4, 2009 13.4 4.6 .3 7.5 25.8
October 3, 2009 3.9 21.0 (.2 ) 2.3 27.0
2009 Settlements (11.9 ) (11.7 ) (.6 ) (6.2 ) (30.4 )

Balance at October 3, 2009 $ 13.0 $ 19.7 $ .4 $ 6.4 $ 39.5

Asset Impairment

Machinery and equipment $ 2.3 $ 3.1 $ .2 $ 14.0 $ 19.6
Buildings .4 1.6 3.9 .9 6.8
Patents 1.9 .2 .4 1.0 3.5
Other

Lease cancellations 1.7 .7 – – 2.4

$ 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 October 3, 2009, approximately 10 employees related to these charges remain with the Company and are expected to leave in ~~2009.~~2010. The table below details the accruals ~~recorded~~and payments related to these actions:


									Other
	Pressure-			Retail			Office and		specialty
	sensitive			Information			Consumer		converting
(In millions)	Materials			Services			Products		businesses		Total

Total severance and other employee costs accrued during the period ended:
April 3, 2010	$	1.5		$	2.2		$	.7	$	.3	$	4.7
2010 Settlements		(.9	)		(.7	)		–		–		(1.6	)

Balance at April 3, 2010	$	.6		$	1.5		$	.7	$	.3	$	3.1


Asset Impairment
Machinery and equipment	$	.2		$	–		$	–	$	–	$	.2

	$	.2		$	–		$	–	$	–	$	.2

2009

In 2009, the Company continued its cost reduction efforts that were initiated in late 2008, resulting in a reduction of approximately 3,335 positions, impairment of certain assets, and lease cancellations. At April 3, 2010, approximately 580 of these employees remain with the ~~associated payments:~~Company and are expected to leave in 2010. Pretax charges related to these actions totaled $129.1 million, including severance and related costs of $86.8 million, impairment of fixed assets, buildings, land and patents of $39.9 million, and lease cancellation charges of $2.4 million. The table below details the accruals and payments related to these actions:

Other
Pressure- Retail Office and specialty
sensitive Information Consumer converting
(In millions) 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
June 28, 2008 .2 2.8 4.2 – 7.2
September 27, 2008 2.5 1.4 3.2 1.6 8.7
December 27, 2008 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
2008 Settlements (1.5 ) (4.7 ) (5.2 ) (1.1 ) (12.5 )
2009 Settlements (4.4 ) (4.6 ) (4.8 ) (1.8 ) (15.6 )

Balance at October 3, 2009 $ .8 $ .1 $ .7 $ .1 $ 1.7


	Pressure-			Retail			Office and			Other
	sensitive			Information			Consumer			specialty
	Materials			Services			Products			converting
(In millions)	Segment			Segment			Segment			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
July 4, 2009		13.4			4.6			.3			7.5			25.8
October 3, 2009		3.9			21.0			(.2	)		2.3			27.0
January 2, 2010		2.3			6.3			8.0			.3			16.9

Total expense accrued during 2009		27.2			37.7			9.0			12.9			86.8
2009 Settlements		(19.5	)		(23.6	)		(.3	)		(11.0	)		(54.4	)
2010 Settlements		(5.6	)		(5.4	)		(4.4	)		(1.1	)		(16.5	)

Balance at April 3, 2010	$	2.1		$	8.7		$	4.3		$	.8		$	15.9


Asset Impairments
Machinery and equipment	$	2.7		$	10.6		$	.7		$	14.0		$	28.0
Buildings		.7			2.4			3.9			.9			7.9
Land		.1			–			–			–			.1
Patents		1.9			.2			.4			1.4			3.9
Other
Lease cancellations		1.7			.7			–			–			2.4

	$	7.1		$	13.9		$	5.0		$	16.3		$	42.3

~~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.~~9. 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

Avery Dennison Corporation

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 ~~October~~April 3, ~~2009,~~2010, the U.S. dollar equivalent notional values of the Company’s outstanding commodity contracts and foreign currency contracts were approximately ~~$18~~$14 million and ~~$1.2~~$.9 billion, respectively.

The Company recognizes all derivative instruments as either assets or liabilities at fair value in the statement of financial position. The Company designates commodity forward contracts on forecasted purchases of commodities and foreign currency contracts on forecasted transactions as cash flow hedges and designates foreign currency contracts on existing balance sheet items as fair value hedges.

On April 1, 2010, the Company entered into a contract to lock in the Treasury rate component of the interest rate on its $250 million debt issuance, which is discussed in Note 4, “Debt.” The mark-to-market value of the contract of $1.2 million was recorded as a gain in accumulated other comprehensive loss during the three months ended April 3, 2010. On April 9, 2010, subsequent to the end of the first quarter of 2010, the contract settled at a loss of $.3 million which will be amortized into interest expense over the term of the related debt.

The following table provides the balances and locations of derivatives as of ~~October~~April 3, ~~2009:~~2010:


	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

Foreign exchange contracts	Other current assets	$	10.4	Other current liabilities	$	7.5	Other current assets	$	7.1	Other current liabilities	$	6.1
Commodity contracts	Other current assets		–	Other current liabilities		4.1	Other current assets		.5	Other current liabilities		4.2
Interest rate contract							Other current assets		1.2

		$	10.4		$	11.6		$	8.8		$	10.3

The following table provides the balances and locations of derivatives as of January 2, 2010:


	Asset			Liability
(In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value

Foreign exchange contracts	Other current assets	$	5.0	Other current liabilities	$	6.5
Commodity contracts	Other current assets		.5	Other current liabilities		3.5

		$	5.5		$	10.0

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			Nine Months Ended				Three Months Ended			Three Months Ended
(In millions)	Location of Gain (Loss) in Income	October 3, 2009			October 3, 2009			Location of Gain (Loss) in Income	April 3, 2010			April 4, 2009

Foreign exchange contracts	Cost of products sold	$	(.5	)	$	(2.2	)	Cost of products sold	$	(.8	)	$	(1.1	)
Foreign exchange contracts	Marketing, general and administrative expense		(16.9	)		8.0		Marketing, general and administrative expense		15.9			24.2

		$	(17.4	)	$	5.8			$	15.1		$	23.1

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 accumulated other comprehensive ~~(loss) income~~loss and reclassified into earnings in the same period or periods during

~~Avery Dennison Corporation~~

which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge 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 Nine Months Ended
(In millions) October 3, 2009 October 3, 2009

Foreign exchange contracts $ (1.8 ) $ (5.5 )
Commodity contracts .7 (2.2 )

$ (1.1 ) $ (7.7 )

Avery Dennison Corporation


	Three Months Ended			Three Months Ended
(In millions)	April 3, 2010			April 4, 2009

Foreign exchange contracts	$	(1.0	)	$	(.1	)
Commodity contracts		(2.3	)		(3.3	)
Interest rate contract		1.2			–

	$	(2.1	)	$	(3.4	)

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			Nine Months Ended				Three Months Ended				Three Months Ended
(In millions)	Location of Gain (Loss) in Income	October 3, 2009			October 3, 2009			Location of Gain (Loss) in Income		April 3, 2010				April 4, 2009

Interest rate contracts	Interest expense	$	(1.2	)	$	(6.0	)
Foreign exchange contracts	Cost of products sold		(2.0	)		(1.7	)	Cost of products sold		$	(.7	)		$	2.2
Commodity contracts	Cost of products sold		(1.1	)		(4.2	)	Cost of products sold			(1.6	)			(2.1	)
Interest rate contracts								Interest expense			(1.0	)			(3.9	)

		$	(4.3	)	$	(11.9	)			$	(3.3	)		$	(3.8	)

The aggregate reclassification from other comprehensive income to earnings for settlement or ineffectiveness of hedge activity was a net gain of $.6 million and $1.2 million during the three and nine months ended September 27, 2008, respectively. As of ~~October~~April 3, ~~2009,~~2010, a net loss of approximately $6$7 million is expected to be reclassified from accumulated other comprehensive ~~income~~loss 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. See Note 12, “Comprehensive Income (Loss),” for more information.

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 were not ~~significant.~~significant for the first three months of 2010 and 2009.

Foreign Currency

Transactions in foreign currencies (including receivables, payables and loans denominated in currencies other than the functional currency) decreased net income by $1.1 million and increased net income by ~~$.2 million and decreased net income by $1.6~~$.4 million for the first three months of 2010 and ~~nine months ended October 3,~~ 2009, respectively. Transactions in foreign currencies increased net income by $3.1 million and $14.4 million for the three and nine months ended September 27, 2008, respectively, which included a foreign currency net gain related to certain intercompany transactions of approximately $1 million and $7 million during the three and nine months ended September 27, 2008, respectively. These results exclude the effects of translation of foreign currencies on the Company’s financial statements.

In the first ~~nine~~three months of ~~2009~~2010 and ~~2008,~~2009, no translation gains or losses for hyperinflationary economies were recognized in net income since the Company had no operations in hyperinflationary economies.

Note ~~11.~~10. Taxes Based on Income

The effective tax rate for the first three ~~and nine~~ months ~~ended October 3, 2009~~of 2010 was approximately ~~negative 7% and~~29%. In the first three months of 2009, the effective tax rate of approximately 3%2%, ~~respectively, compared~~which applied to ~~approximately 7% and approximately 8% for the three and nine months ended September 27, 2008, respectively.~~a loss, resulted in a tax benefit. The effective tax rate for the first ~~nine~~three months of ~~2009~~2010 includes a benefit of ~~$31.8~~approximately $3 million from discrete events, primarily the release of certain tax ~~effect of goodwill and indefinite-lived intangible asset impairments,~~contingencies due to statute expirations, statutory tax rate changes and the release of ~~tax contingency reserves, partially offset by the build of~~ certain valuation ~~allowances and other items.~~allowances. The impairment of goodwill and indefinite-lived intangible assets is generally not tax deductible, and was 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%

~~Avery Dennison Corporation~~

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 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.~~2005.

It is reasonably possible that during the next 12 months, the Company may realize a decrease in its gross uncertain tax positions by approximately ~~$52~~$58 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 ~~$17~~$12 million relating to gross uncertain tax positions could be paid within the next 12 months.

Avery Dennison Corporation

Note ~~12.~~11. Net Income (Loss) Per Share

Net income (loss) per common share amounts were computed as follows:

Three Months Ended Nine Months Ended
(In millions, except per share amounts) October 3, 2009 September 27, 2008 October 3, 2009 September 27, 2008

(A) Net income (loss) available to common shareholders $ 62.5 $ 62.7 �� $ (796.6 ) $ 223.5

(B) Weighted-average number of common shares outstanding 105.1 98.5 103.1 98.5
Dilutive shares (additional common shares issuable under
employee stock options, PUs, RSUs and restricted stock) .9 .4 – .4

(C) Weighted-average number of common shares outstanding, assuming dilution 106.0 98.9 103.1 98.9

Net income (loss) per common share (A) ÷ (B) $ .59 $ .64 $ (7.73 ) $ 2.27

Net income (loss) per common share, assuming dilution (A) ÷ (C) $ .59 $ .63 $ (7.73 ) $ 2.26

In the nine months ended 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.


	Three Months Ended
(In millions, except per share amounts)	April 3, 2010		April 4, 2009

(A) Net income (loss) available to common shareholders	$	54.7	$	(898.9	)

(B) Weighted-average number of common shares outstanding		105.4		100.0
Dilutive shares (additional common shares issuable under employee stock-based awards)		1.0		–

(C) Weighted-average number of common shares outstanding, assuming dilution		106.4		100.0

Net income (loss) per common share (A) ÷ (B)	$	.52	$	(8.99	)

Net income (loss) per common share, assuming dilution (A) ÷ (C)	$	.51	$	(8.99	)

Certain employee ~~stock options, PUs, RSUs and shares of restricted stock~~stock-based awards were not included in the computation of net income (loss) per common share, assuming dilution, because they would not have had a dilutive effect. Employee ~~stock options, PUs, RSUs and shares of restricted stock~~stock-based awards excluded from the computation totaled approximately ~~10 million shares and approximately 13~~9 million shares for the three ~~and nine~~ months ended ~~October~~April 3, 2010.

In the first three months of 2009, ~~respectively, and~~the effect of dilutive securities (for example, employee stock-based awards) was not dilutive because the Company generated a net operating loss. Employee stock-based awards excluded from the computation totaled approximately 1012 million shares for the three ~~and nine~~ months ended ~~September 27, 2008, respectively.~~

As further discussed in Note 17, “Recent Accounting Pronouncements,” effective at the beginning of 2009, the Company adopted additional guidance regarding the calculation of earnings per share. This did not have a material impact on net income (loss) per share.April 4, 2009.

Note ~~13.~~12. Comprehensive Income (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 ~~$154.2~~$28.5 million and ~~$(684.9)~~$(942.0) million for the three ~~and nine~~ months ended ~~October~~April 3, 2010 and April 4, 2009, ~~respectively, and $(57.6) million and $213.7 million for the three and nine months ended September 27, 2008,~~ respectively.

~~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)	October 3, 2009			December 27, 2008			April 3, 2010			January 2, 2010

Foreign currency translation adjustment	$	167.2		$	65.8		$	138.4		$	169.2
Net actuarial loss, prior service cost and net transition assets, less amortization		(326.4	)		(332.5	)		(300.0	)		(303.4	)
Net loss on derivative instruments designated as cash flow and firm commitment hedges		(11.6	)		(15.8	)		(9.8	)		(11.0	)

Accumulated other comprehensive loss	$	(170.8	)	$	(282.5	)	$	(171.4	)	$	(145.2	)

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	)

Cash flow and firm commitment hedging instrument activities in other comprehensive loss, net of tax, were as follows:


(In millions)	April 3, 2010			January 2, 2010

Beginning accumulated derivative loss	$	(11.0	)	$	(15.8	)
Net loss reclassified to earnings		3.3			15.2
Net change in the revaluation of hedging transactions		(2.1	)		(10.4	)

Ending accumulated derivative loss	$	(9.8	)	$	(11.0	)

Avery Dennison Corporation

Note ~~14.~~13. Fair Value Measurement

Recurring Fair Value Measurements

The following table provides the assets and liabilities carried at fair value, measured on a recurring basis, as of ~~October~~April 3, ~~2009:~~2010:

Fair Value Measurements Using

Significant

Quoted Prices

Other

Quoted Prices

Other

in Active

Observable

Unobservable

in Active

Observable

Unobservable

Markets

Inputs

Markets

Inputs

(In millions)

Total

(Level 1)

(Level 2)

(Level 3)

Total

(Level 1)

(Level 2)

(Level 3)

Assets:

Available for sale securities

11.9

–

12.0

–

Derivative assets

10.4

–

10.4

–

8.8

8.3

–

Liabilities:

Derivative liabilities

11.6

4.1

7.5

–

10.3

4.2

6.1

–

The following table provides the assets and liabilities carried at fair value, measured on a recurring basis, as of January 2, 2010:

Fair Value Measurements Using

Significant

Quoted Prices

Other

in Active

Observable

Unobservable

Markets

Inputs

(In millions)

Total

(Level 1)

(Level 2)

(Level 3)

Assets:

Available for sale securities

11.9

–

Derivative assets

5.5

5.0

–

Liabilities:

Derivative liabilities

10.0

3.5

6.5

–

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.

Non-recurring Fair Value Measurements

Fair value measurements of assets on a non-recurring basis during the three months ended April 3, 2010 were not significant.

The following table summarizes the fair value measurements of assets ~~measured~~ on a non-recurring basis during the ~~nine~~three months ended ~~October 3,~~April 4, 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		9.6		–		6.6		3.0		(19.5	)		4.0		–		1.1		2.9		(12.4	)

Long-lived assets with carrying amounts totaling ~~$29.1~~$16.4 million were written down to their fair values ~~totaling $9.6~~of $4 million, resulting in an impairment ~~charges~~charge of ~~$4.5~~$12.4 million, ~~and $19.5 million for the three and nine months ended October 3, 2009, respectively. These charges are~~which was included in “Other ~~expense, net”~~expense” in the unaudited Consolidated Statement of ~~Operations.~~Income for the three months ended April 4, 2009.

Goodwill 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 in the first quarter of 2009.~~million. Additionally, certain indefinite-lived assets with a total carrying value of

~~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 in the first quarter of 2009.~~million. These charges are included in “Goodwill and indefinite-lived intangible asset impairment charges” in the unaudited Consolidated Statement of ~~Operations~~Income for the ~~nine~~three months ended ~~October 3,~~April 4, 2009. Refer to Note 4,3, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” for further information.

Avery Dennison Corporation

Note ~~15.~~14. 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 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 on September 17, 2009, the district court issued an order of final approval and judgment, dismissing all claims against the Company 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 Company recorded $2 million in the third quarter of 2009 in respect of the settlement of these claims. The Company intends 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.~~

~~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, inquiries, and ~~inquiries,~~other legal, regulatory and compliance matters, most of which are routine to the nature of the business. Based upon current information, management believes that the impact of the resolution of these ~~other~~ matters ~~will~~is not ~~materially affect~~material to the Company’s financial ~~position.~~position, or is not estimable.

Environmental

As of ~~October~~April 3, ~~2009,~~2010, 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.

~~Avery Dennison Corporation~~

The Company has accrued estimated 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.

The activity for the first ~~nine~~three months of ~~2009~~2010 and full-year ~~2008~~2009 related to environmental liabilities, which include costs associated with compliance and remediation, were as follows:


(In millions)	October 3, 2009			December 27, 2008			April 3, 2010			January 2, 2010

Balance at beginning of year	$	58.5		$	37.8		$	56.5		$	58.5
Purchase price adjustments related to acquisitions		2.1			24.6			–			2.1
Accruals		.8			.9			.1			1.0
Payments		(3.3	)		(4.8	)		(1.2	)		(5.1	)

Balance at end of period	$	58.1		$	58.5		$	55.4		$	56.5

As of ~~October~~April 3, ~~2009,~~2010, approximately ~~$17~~$11 million of the total balance was 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~~changes in the estimated time to complete remediation, changes in laws and regulations affecting remediation requirements, ~~and~~as well as 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 ~~October~~April 3, ~~2009,~~2010, the Company’s product warranty liabilities were approximately $2$1.9 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~~our 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.~~

~~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 ~~October~~April 3, ~~2009,~~2010, the Company had guaranteed approximately ~~$15~~$17 million.

As of ~~October~~April 3, ~~2009,~~2010, the Company guaranteed up to approximately $17 million of certain foreign subsidiaries’ obligations to their suppliers, as well as approximately ~~$498~~$213 million of certain subsidiaries’ lines of credit with various financial institutions.

As of ~~October~~April 3, ~~2009,~~2010, approximately ~~two~~2 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~~dependent upon the stock price at the ~~time). Refer to Note 5, “Debt,” for more information.~~time. Based upon the Company’s share price as of April 3, 2010, the holders would purchase approximately 2 million shares from the Company.

Avery Dennison Corporation

Note ~~16.~~15. 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:~~below. Certain prior year amounts have been restated to reflect a transfer of a business from the Retail Information Services segment to other specialty converting businesses.


	Three Months Ended						Nine Months Ended						Three Months Ended
(In millions)	October 3, 2009			September 27, 2008			October 3, 2009			September 27, 2008			April 3, 2010			April 4, 2009

Net sales to unaffiliated customers:
Pressure-sensitive Materials	$	851.0		$	936.2		$	2,453.4		$	2,835.7		$	897.2		$	808.8
Retail Information Services		325.2			379.1			972.7			1,189.3			344.8			315.2
Office and Consumer Products		242.8			260.4			644.1			710.2			179.9			184.4
Other specialty converting businesses		130.3			149.1			360.7			463.7			132.8			117.8

Net sales to unaffiliated customers	$	1,549.3		$	1,724.8		$	4,430.9		$	5,198.9		$	1,554.7		$	1,426.2

Intersegment sales:
Pressure-sensitive Materials	$	38.3		$	46.1		$	111.7		$	132.7		$	41.4		$	37.4
Retail Information Services		.4			.5			.9			1.8			.7			.3
Office and Consumer Products		.2			.4			.6			1.0			.2			.3
Other specialty converting businesses		5.2			7.0			12.2			21.8			5.8			3.3
Eliminations		(44.1	)		(54.0	)		(125.4	)		(157.3	)		(48.1	)		(41.3	)

Intersegment sales	$	–		$	–		$	–		$	–		$	–		$	–

Income (loss) before taxes:
Pressure-sensitive Materials	$	75.7		$	62.8		$	126.1		$	217.0		$	87.8		$	(.2	)
Retail Information Services		(29.1	)		.5			(888.4	)		17.1			(.5	)		(853.0	)
Office and Consumer Products		41.0			41.5			98.9			104.1			19.4			23.4
Other specialty converting businesses		.9			1.2			(37.0	)		16.5			2.8			(27.9	)
Corporate expense		(11.1	)		(9.7	)		(50.0	)		(24.5	)		(15.1	)		(30.7	)
Interest expense		(19.1	)		(29.0	)		(67.0	)		(87.8	)		(17.5	)		(27.5	)

Income (loss) before taxes	$	58.3	⁽¹⁾	$	67.3	⁽²⁾	$	(817.4	)⁽³⁾	$	242.4	⁽⁴⁾	$	76.9	⁽¹⁾	$	(915.9	)⁽²⁾


⁽¹⁾		Operating income for the ~~third quarter~~first three months of ~~2009~~2010 included “Other ~~expense, net”~~expense” totaling ~~$35.5,~~$6.3, consisting of restructuring costs of ~~$27,~~$4.7, asset impairment charges of ~~$4.7, lease cancellation charges~~$.2, and an accrual for legal settlements of ~~$1.8, and legal settlement costs of $2.~~$1.4. Of the total ~~$35.5,~~$6.3, the Pressure-sensitive Materials segment recorded ~~$8.3,~~$1.9, the Retail Information Services segment recorded ~~$22.3,~~$3.4, the Office and Consumer Products segment recorded ~~$(.2),~~$.7, and the other specialty converting businesses recorded ~~$5.1.~~$.3.

⁽²⁾		Operating income for the third quarter of 2008 included “Other expense, net” totaling $12.5, consisting of restructuring costs of $8.7, asset impairment charges of $3, and lease cancellation charges of $.8. Of the total $12.5, the Pressure-sensitive Materials segment recorded $5.7, the Retail Information Services segment recorded $1.4, the Office and Consumer Products segment recorded $3.9, and the other specialty converting businesses recorded $1.5.

		~~Additionally, operating income for the Retail Information Services segment for the third quarter of 2008 included $5.2 of transition costs associated with the Company’s acquisitions.~~

~~Avery Dennison Corporation~~



⁽³⁾		~~Operating~~ loss for the first ~~nine~~three months of 2009 included “Other ~~expense, net”~~expense” totaling ~~$162.4,~~$97.3, consisting of ~~restructuring costs of $69.9,~~ asset impairment charges of ~~$29.9,~~$21.9, restructuring costs of $17.1, lease cancellation charges of ~~$2.4,~~$.1, an accrual for a legal settlement ~~costs~~ of ~~$39,~~$37, and a loss of $21.2 from debt extinguishment. Of the total ~~$162.4,~~$97.3, the Pressure-sensitive Materials segment recorded ~~$70.2,~~$48.1, the Retail Information Services segment recorded ~~$37,~~$9.6, the Office and Consumer Products segment recorded ~~$5.5,~~$2.7, the other specialty converting businesses recorded ~~$28.5,~~$15.7, and Corporate recorded $21.2.

		Additionally, operating loss for the Retail Information Services segment for the first ~~nine~~three months of 2009 included $832 of goodwill and indefinite-lived intangible asset impairment ~~charges taken in the first quarter of 2009.~~

⁽⁴⁾		Operating income for the first nine months of 2008 included “Other expense, net” totaling $23.9, consisting of restructuring costs of $19.2, asset impairment charges of $7, and lease cancellation charges of $2.2, partially offset by a gain on sale of investments of $(4.5). Of the total $23.9, the Pressure-sensitive Materials segment recorded $10, the Retail Information Services segment recorded $8.5, the Office and Consumer Products segment recorded $8.2, the other specialty converting businesses recorded $1.7 and Corporate recorded $(4.5).

		~~Additionally, operating income for the Retail Information Services segment for the first nine months of 2008 included $17.9 of transition costs associated with the Company’s acquisitions.~~charges.

Note ~~17.~~16. Recent Accounting Requirements

In ~~June 2009,~~January 2010, the Financial Accounting Standards Board (“FASB”) ~~established~~updated accounting guidance regarding fair value measurement disclosure. This guidance requires companies to disclose the ~~FASB Accounting Standards Codification (the “Codification”) as the single source~~amount of ~~authoritative non-governmental U.S. GAAP. The Codification is effective for interim~~significant transfers between Level 1 and ~~annual periods ending after September 15, 2009. The adoption~~Level 2 of the ~~Codification changed~~fair value hierarchy and the ~~manner~~reasons for these transfers and for any transfers in ~~which U.S. GAAP~~or out of Level 3 of the fair value hierarchy. In addition, the guidance ~~is referenced, but~~clarifies certain existing disclosure requirements. This updated guidance was effective at the beginning of 2010 and did not have ~~any~~a material impact on the Company’s ~~financial condition, results of operations, cash flows, or~~ disclosures.

Avery Dennison Corporation

In June 2009, the FASB issued changes to consolidation accounting. Among other items, these changes respond to concerns about the application of certain key provisions of previous accounting standards, including those regarding the transparency of the involvement with variable interest entities. The Company adopted these changes at the beginning of 2010. These changes ~~are effective for calendar year companies beginning on January 1, 2010. The Company does~~did not ~~expect these changes to~~ have a material impact on the Company’s financial condition, results of operations, cash flows, or disclosures.

InThe FASB issued in May 2009, ~~the FASB issued~~and amended in February 2010, a 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.~~issued. This standard was effective for interim and annual periods ending after June 15, 2009. The Company adopted this accounting standard in the second quarter of 2009. ~~Refer to Note 1, “General,” for further information.~~

In April 2009, the FASB issued changes to disclosure requirements regarding fair value of 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. These changes also require 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. These 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 required disclosures in Note 5,4, “Debt.”

The FASB issued in December 2007, and amended in April 2009, a revised accounting standard for business combinations. This standard 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. In general, 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 standard applies prospectively to business

~~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 this standard has not had a material impact on the Company’s financial results of operations and financial condition. ~~There have been no acquisitions since the effective date.~~

In December 2008, the FASB issued changes to disclosure requirements about 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. These changes are effective for financial statements issued for fiscal years ending after December 15, 2009. The adoption of these 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 these changes.

In August 2008, the FASB issued additional accounting guidance regarding defensive intangible assets. This guidance 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). This 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 this 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.

In June 2008, the FASB issued 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. This 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 this guidance did not have a material impact on the Company’s financial results of operations and financial condition.

In April 2008, the FASB issued changes to the method for determining the useful life of intangible 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. These changes were intended to improve the consistency between the useful life of a recognized intangible asset for purposes of determining impairment and the period of expected cash flows used to measure the fair value of the asset in a business combination and other U.S. generally accepted accounting principles. These changes were effective for fiscal years beginning after December 15, 2008. The adoption of these changes did not have a material impact on the Company’s financial results of operations and financial condition.

In March 2008, the FASB issued changes to disclosure requirements regarding derivative instruments and hedging 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. These disclosure requirements apply to all derivative instruments as well as related hedged items, bifurcated derivatives, and non-derivative instruments that are designated and qualify as hedging instruments. Entities with such instruments must provide more robust qualitative disclosures and expanded quantitative disclosures. These 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 required disclosures in Note 10, “Financial Instruments and Foreign Currency.”

In December 2007, the FASB issued a new accounting standard on non-controlling interests. This standard was effective for fiscal years and interim periods, beginning on or after December 15, 2008, with earlier adoption prohibited. This standard 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 statement of operations. This standard also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. The adoption of this standard did not have a material impact on the Company’s financial results of operations and financial condition.

In September 2006, the FASB issued a new accounting standard on fair value measurements, which was effective for fiscal years and interim periods after November 15, 2007. This standard defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This standard 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. This 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. This standard defines fair value based upon an exit price model. The Company applied the provisions of this standard to assets and

2016

Avery Dennison Corporation

liabilities measured on a non-recurring basis as of the beginning of the 2009 fiscal year. The adoption of this standard did not have a significant impact on the Company’s financial results of operations or financial position.

~~Avery Dennison Corporation~~

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			2217
~~Forward-looking~~Forward-Looking Statements			2217
Overview and Outlook			2217
Analysis of Results of Operations for the ~~Third Quarter~~First Three Months			2619
Results of Operations by Segment for the ~~Third Quarter~~First Three Months			27
~~Analysis of Results of Operations for the Nine Months Year-to-Date~~			29
~~Results of Operations by Segment for the Nine Months Year-to-Date~~			3021
Financial Condition			3223
Uses and Limitations of Non-GAAP Measures			3827
Recent Accounting Requirements			3827
Safe Harbor Statement			3828

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~~our 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 net 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 10% and 15% during~~increased 9% in the first three ~~and nine~~ months ~~ended October 3, 2009, respectively,~~of 2010 compared to the same period last ~~year, reflecting continued weakness in market conditions.~~year.


	Three Months Ended						Nine Months Ended						Three Months Ended
Estimated change in sales due to:	October 3, 2009			September 27, 2008			October 3, 2009			September 27, 2008			April 3, 2010			April 4, 2009

Organic sales decline		(6	)%		(2	)%		(11	)%		(2	)%
Organic sales growth (decline)														7	%		(15	)%
Extra week in fiscal year 2009⁽¹⁾		–			–			2			–			(3	)		7
Foreign currency translation		(4	)		5			(6	)		6			5			(6	)
Acquisitions, net of divestitures		–			1			–			9			–			1

Reported sales (decline) growth⁽²⁾		(10	)%		3	%		(15	)%		13	%
Reported sales growth (decline)														9	%		(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.~~ The estimated impact of the extra week on growth rates for each period reflected both the number of days, and the impact of holidays in each quarter.

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Avery Dennison Corporation

Net Income

InNet income increased approximately $954 million in the first ~~nine~~three months of ~~2009, we had a net loss of approximately $797 million~~2010 compared to ~~a net income of approximately $224 million in~~ the same period in ~~2008.~~2009, which included an impairment of goodwill and indefinite-lived intangible assets totaling $832 million.

~~Negative~~Positive factors affecting net income included:

	•		Impairment of goodwill and indefinite-lived intangible assets, which impacted results in the prior year

	•		~~Lower net sales~~

	•		~~Higher restructuring and asset impairment charges related to cost reduction actions~~

	•		~~Legal settlement costs~~

	•		~~Higher raw material and employee-related costs~~

	•		~~Loss 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

	•		~~Changes in pricing to offset the cumulative impact of inflation experienced in 2008~~Higher volume

	•		Lower accrual for legal settlements

	•		Lower restructuring, asset impairment, and lease cancellation charges related to cost reduction actions

	•		Loss on debt extinguishment, which impacted results in the prior year

Negative factors affecting net income included:

	•		Higher tax expense resulting from higher taxable income and a higher tax rate

	•		~~Lower transition~~Investments in growth and infrastructure

	•		Net impact of changes in pricing and raw material 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 recorded thereafter.

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 recorded thereafter.

~~Avery Dennison Corporation~~

~~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 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~~2010 Actions

In the fourth quarter of 2008, we initiated restructuring actions that are ~~now~~ expected to generate approximately ~~$160~~$180 million in annualized savings by the middle of 2010, of which ~~an estimated~~ $75 million, net of transition costs, ~~is expected to benefit 2009.~~was realized in 2009, and an incremental $25 million, net of transition costs, was realized in the first quarter of 2010. We expect to incur approximately ~~$100~~$160 million of ~~cash~~total restructuring charges associated with these actions, ~~with~~of which approximately $110 million represents cash charges.

From the ~~majority to be incurred by the end~~fourth quarter of ~~2009. Additionally, we have incurred approximately $30 million of non-cash charges~~2008 through the end of the ~~third~~first quarter of ~~2009. At the end of the third quarter, we achieved run-rate savings representing nearly 70% of our target.~~

~~During the fourth quarter of 2008 and the first nine months of 2009,~~2010, we recorded ~~$114.5~~approximately $146 million in pretax charges related to these restructuring actions, consisting of severance and related employee costs, asset impairment charges, and lease cancellation costs. Severance and employee-related costs related to approximately ~~3,120~~4,265 positions, impacting all of our segments and geographic regions.

~~Q1 2008 — Q3 2008 Actions~~

~~During~~The remainder of the ~~first three quarters of 2008, we implemented cost reduction~~costs associated with these actions ~~resulting in charges of $22.8 million, including severance and employee-related costs for approximately 645 positions, asset impairment charges, and lease cancellation costs.~~are expected to be incurred during 2010.

Refer to Note 9,8, “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 ~~nine~~three months of 2010 was approximately 29%. In the first three months of 2009, ~~was~~the effective tax rate of approximately 3%2%, ~~compared~~which applied to ~~approximately 8% for the same period~~a loss, resulted in ~~2008.~~a tax benefit. The effective tax rate for the first ~~nine~~three months of ~~2009~~2010 includes a benefit of ~~$31.8~~approximately $3 million from discrete events, primarily the release of certain tax ~~effect of goodwill and indefinite-lived intangible asset impairments~~contingencies due to statute expirations, statutory tax rate changes and the release of ~~tax contingency reserves, partially offset by the build of~~ certain valuation ~~allowances and other items.~~allowances. Refer to Note ~~11,~~10, “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 net 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~~section for further information regarding limitations of this measure.


	Nine Months Ended						Three Months Ended
(In millions)	October 3, 2009			September 27, 2008			April 3, 2010			April 4, 2009

Net cash provided by operating activities	$	316.9		$	382.3
Purchase of property, plant and equipment		(46.7	)		(97.8	)
Net cash (used in) provided by operating activities							$	(27.9	)	$	16.0
Purchase of property, plant and equipment, net								(13.7	)		(15.0	)
Purchase of software and other deferred charges		(20.4	)		(49.2	)		(5.5	)		(8.2	)
Proceeds from sale of investments, net		.3			16.2			.3			.6

Free cash flow	$	250.1		$	251.5		$	(46.8	)	$	(6.6	)

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Avery Dennison Corporation

Free cash flow in the first ~~nine~~three months of ~~2009 remained flat compared~~2010 reflected payments of trade rebates, bonuses and severance and other accrued costs related to various restructuring programs; the ~~same period~~timing of collections of accounts receivable; and higher inventory purchases to support an increase in ~~2008, as lower~~sales. These negative factors were partially offset by higher income from operations ~~was offset by reduced working capital~~ and the timing of payments of accounts payable, as well as lower net spending on property, plant, and equipment, software, and other deferred charges.

See “Analysis of Results of Operations” and “Liquidity” below for more information.

~~Dividend~~

On July 30, 2009 and October 22, 2009, we declared a dividend of $.20 per share, a reduction from our previous dividend of $.41 per 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 and our subsidiaries are ~~a named defendant~~involved in ~~purported class actions in the U.S. seeking treble damages~~various lawsuits, claims, inquiries, and other ~~relief for alleged unlawful competitive practices.~~

~~The Board~~legal, regulatory and compliance matters, most 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,”which are routine to the ~~unaudited Condensed Consolidated Financial Statements for further information.~~

~~We are unable to predict~~nature of the ~~effect~~business. Based upon current information, management believes that the impact of the resolution 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,”~~is not material to ~~the unaudited Condensed Consolidated Financial Statements.~~our financial position, or is not estimable.

2010 Outlook

Certain factors that we believe may contribute to ~~2009~~2010 results are listed below.

~~The effect~~We expect revenue and earnings to increase in 2010, the extent of which is subject, but not limited, to changes in global economic conditions and the ~~fiscal calendar change is anticipated to reduce sales by approximately $50 million in the fourth quarter~~amount 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.~~higher costs that can be offset with productivity measures and/or price increases.

We expect incremental pension ~~and other employee-related expenses and contributions in 2009. In addition, an analysis performed at the end~~expense of ~~the second quarter of 2009 indicates that we will 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.~~approximately $10 million.

We anticipate ~~higher~~restructuring charges ~~related~~of approximately $15 million to $20 million, including the remaining charges associated with the Q4 2008-2010 Actions. We expect to realize an incremental $70 million of restructuring ~~actions in 2009 compared to 2008.~~savings, net of transition costs.

We anticipate lower interest expense ~~in 2009~~(approximately $75 million) due primarily to retirements of certain ~~indebtedness and lower short-term interest rates.~~indebtedness. 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 increased investment in new growth opportunities and infrastructure, including higher spend related to innovation, as well as demand creation in the Office and Consumer Products segment.

We anticipate our capital and software expenditures to be ~~approximately $100~~in the range of $125 million ~~in 2009.~~to $150 million.

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. In the third quarter of 2009, we reduced debt by approximately $140 million.

ANALYSIS OF RESULTS OF OPERATIONS FOR THE FIRST THREE MONTHS

Income (Loss) Before Taxes


(In millions)	2010			2009

Net sales	$	1,554.7		$	1,426.2
Cost of products sold		1,113.9			1,081.1

Gross profit		440.8			345.1
Marketing, general and administrative expense		340.1			304.2
Goodwill and indefinite-lived intangible asset impairment charges		–			832.0
Interest expense		17.5			27.5
Other expense		6.3			97.3

Income (loss) before taxes	$	76.9		$	(915.9	)


As a Percent of Sales:
Gross profit (margin)		28.4	%		24.2	%
Marketing, general and administrative expense		21.9			21.3
Income (loss) before taxes		4.9			(64.2	)

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Avery Dennison Corporation

~~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 10%~~increased 9% in the ~~third quarter~~first three months of ~~2009~~2010 compared to the same period last year, due largely to ~~declines in volume,~~higher sales on an organic basis, partially offset by the ~~effect of changes in pricing to offset the cumulative~~ impact of ~~inflation experienced~~the extra week in ~~2008. Foreign~~the first three months of 2009. In addition, foreign currency translation had ~~an unfavorable~~a favorable impact on the change in sales of approximately ~~$80~~$67 million in the ~~third quarter~~first three months of ~~2009.~~2010.

On an organic basis, sales ~~declined 6%~~increased 7% in the ~~third quarter~~first three months of ~~2009, as continued deterioration in market conditions contributed to volume declines~~2010, reflecting increased demand across all ~~segments. In addition, volume declines were experienced~~major regions, with particular strength in ~~all geographic regions.~~the emerging markets, partially offset by the negative impact of pricing.

Refer to “Results of Operations by Segment” for information by reportable segment.

Gross Profit Margin

Gross profit margin for the ~~third quarter~~first three months of ~~2009~~2010 improved ~~in comparison~~compared to the same period ~~in 2008, as~~last year, reflecting increased volume and the benefits offrom 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.~~initiatives.

Marketing, General and Administrative Expenses

~~Marketing,~~The increase in marketing, general and administrative expense in the ~~third quarter~~first three months of ~~2009 remained flat~~2010 compared to the same period last year ~~as the benefit of restructuring and productivity initiatives and~~primarily reflected the impact of foreign currency translation (approximately $10 million), variable costs associated with higher volume, and investments in growth and infrastructure, partially offset ~~increased spending related~~by savings from restructuring and productivity initiatives.

Goodwill and Indefinite-Lived Intangible Asset Impairment Charges

In the first three months of 2009, we recorded non-cash impairment charges of $832 million for the retail information services reporting unit. Refer to ~~employee costs~~Note 3, “Goodwill and ~~new growth-related initiatives.~~Other Intangibles Resulting from Business Acquisitions,” to the unaudited Condensed Consolidated Financial Statements for more information.

Other Expense ~~net~~


(In millions)	2009		2008		2010		2009

Restructuring costs	$	27.0	$	8.7	$	4.7	$	17.1
Asset impairment charges and lease cancellation costs		6.5		3.8		.2		22.0
Other		2.0		–		1.4		58.2

Other expense, net	$	35.5	$	12.5
Other expense					$	6.3	$	97.3

In the ~~third quarter~~first three months of ~~2009,~~2010, “Other ~~expense, net”~~expense” consisted of ~~restructuring costs including~~charges for severance and other employee-related costs resulting in the reduction in headcount of approximately 230 positions across all segments and geographic regions and asset impairment charges in the Pressure-sensitive Materials segment, as well as accruals for legal settlements.

In the first three months of 2009, “Other expense” consisted of asset impairment and lease cancellation charges, ~~as well as legal settlement costs. Restructuring~~severance and other employee-related costs resulting in the ~~third quarter of 2009 relate to a~~ reduction in headcount of approximately ~~490~~725 positions across all segments and geographic ~~regions.~~

Inregions, as well as an accrual for a legal settlement and a loss from debt extinguishment. For more information regarding the ~~third quarter of 2008, “Other expense, net” consisted of severance~~debt extinguishment, refer to “Financial Condition” and ~~other employee-related costs of $8.7 million and asset impairment and lease cancellation charges of $3.8 million (primarily in~~Note 4, “Debt,” to 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.~~unaudited Condensed Consolidated Financial Statements.

Refer to Note 9,8, “Cost Reduction Actions,” to the unaudited Condensed Consolidated Financial Statements for more information.

Net Income (Loss) and Earnings per Share


(In millions, except per share)	2010		2009

Income (loss) before taxes	$	76.9	$	(915.9	)
Provision for (benefit from) income taxes		22.2		(17.0	)

Net income (loss)	$	54.7	$	(898.9	)

Net income (loss) per common share	$	.52	$	(8.99	)
Net income (loss) per common share, assuming dilution	$	.51	$	(8.99	)

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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


(In millions, except per share)	2010			2009

Net income (loss) as a percent of sales		3.5	%		(63.0	)%


Percent change in:
Net income (loss)		106.1	%		(1,414.2	)%
Net income (loss) per common share		105.8			(1,384.3	)
Net income (loss) per common share, assuming dilution		105.7			(1,402.9	)

~~(Benefit from)~~ Provision for (Benefit from) Income Taxes

~~Our effective tax rate for the third quarter of 2009 was approximately negative 7%, compared with approximately 7% for the same period in 2008.~~ The effective tax rate for the ~~third quarter~~first three months of 2010 was approximately 29%. In the first three months of 2009, the effective tax rate of approximately 2%, which applied to a loss, resulted in a tax benefit. The effective tax rate for the first three months of 2010 includes a benefit of ~~$13.4~~approximately $3 million from discrete events, primarily ~~from~~ the release of certain tax ~~contingency reserves~~contingencies due to statute expirations, statutory tax rate changes and the ~~tax effect~~release of ~~a restructuring event.~~certain valuation allowances. Refer to Note ~~11,~~10, “Taxes Based on Income,” to the unaudited Condensed Consolidated Financial Statements for further information.

RESULTS OF OPERATIONS BY SEGMENT FOR THE ~~THIRD QUARTER~~FIRST THREE MONTHS

Pressure-sensitive Materials Segment


(In millions)	2009			2008			2010			2009

Net sales including intersegment sales	$	889.3		$	982.3		$	938.6		$	846.2
Less intersegment sales		(38.3	)		(46.1	)		(41.4	)		(37.4	)

Net sales	$	851.0		$	936.2		$	897.2		$	808.8
Operating income⁽¹⁾		75.7			62.8
Operating income (loss)⁽¹⁾								87.8			(.2	)


⁽¹⁾ Includes legal settlement costs in 2009, and restructuring costs, asset impairment charges and lease cancellation costs in both years	$	8.3		$	5.7
⁽¹⁾ Includes lease cancellation costs in 2009, and restructuring costs, asset impairment charges, and an accrual for legal settlement in both years							$	1.9		$	48.1

Net Sales

Sales in our Pressure-sensitive Materials segment ~~decreased 9%~~increased 11% in the ~~third quarter~~first three months of ~~2009~~2010 compared to the same period ~~in 2008, which included~~last year, reflecting higher sales on an organic basis and the ~~unfavorable~~favorable impact of foreign currency translation (approximately ~~$56~~$48 million)., partially offset by the impact of the extra week in the first three months of 2009. On an organic basis, sales ~~declined 3% in the third quarter of 2009 primarily due to declines in~~grew 8% resulting from higher volume driven by increased demand, partially offset by the ~~effect of changes in pricing to offset the cumulative~~negative impact of ~~inflation experienced in 2008.~~pricing.

On an organic basis, sales in our roll materials business in the ~~third quarter~~first three months of ~~2009 declined~~2010 increased at a mid single-digit rate in both Europe and ~~a low single-digit rate (excluding intercompany sales) in~~ North America, ~~reflecting continued weakness~~and by a rate greater than twenty percent in ~~end-markets. Combined sales in our~~ emerging markets ~~increased at a mid single-digit rate on an organic basis~~(Asia, Eastern Europe, South America) compared to the same period last year.

On an organic basis, sales in our graphics and reflective business ~~in the third quarter of 2009 declined~~increased at a ~~low~~ double-digit rate, reflecting ~~lower~~a modest increase in promotional spending by businesses in response to ~~weak~~improved market ~~conditions.~~conditions, and new product launches.

Operating Income (Loss)

Increased operating income in the ~~third quarter~~first three months of ~~2009~~2010 reflected ~~lower raw material costs~~higher volume and ~~the effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008, as well as~~ cost savings from restructuring and productivity improvement initiatives, partially offset by the net impact of ~~lower volume.~~changes in pricing and raw material costs. In addition, operating income in the first three months of 2010 included ~~legal settlement costs in 2009,~~lower restructuring and ~~restructuring costs,~~ asset impairment charges and ~~lease cancellation costs in both years.~~a lower accrual for legal settlement compared to the prior year.

Retail Information Services Segment


(In millions)	2009			2008			2010			2009

Net sales including intersegment sales	$	325.6		$	379.6		$	345.5		$	315.5
Less intersegment sales		(.4	)		(.5	)		(.7	)		(.3	)

Net sales	$	325.2		$	379.1		$	344.8		$	315.2
Operating (loss) income^{(1) (2)}		(29.1	)		.5
Operating loss^{(1) (2)}								(.5	)		(853.0	)


⁽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	$	–		$	5.2
⁽¹⁾ Includes an accrual for legal settlement in 2010, asset impairment charges in 2009, and restructuring costs in both years							$	3.4		$	9.6
⁽²⁾ Includes goodwill and indefinite-lived intangible asset impairment charges in 2009							$	–		$	832.0

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Avery Dennison Corporation

Net Sales

Sales in our Retail Information Services segment ~~decreased 14%~~increased 9% in the ~~third quarter~~first three months of ~~2009~~2010 compared to the same period last year, ~~which included~~reflecting higher sales on an organic basis and the ~~unfavorable~~favorable impact of foreign currency translation (approximately ~~$12~~$9 million)., partially offset by the impact of the extra week in the first three months of 2009. On an organic basis, sales ~~declined 11%~~increased 10% due in part to significant inventory reductions by apparel retailers during the ~~third quarter~~first half of 2009, ~~due primarily to lower volume from continued weakness in the apparel markets in the U.S. and Europe.~~as well as improved end-market demand.

Operating ~~(Loss) Income~~Loss

~~Operating~~Decreased operating loss in the ~~third quarter~~first three months of ~~2009~~2010 reflected goodwill and indefinite-lived intangible asset impairment charges in the ~~impact of~~prior year, as well as lower restructuring costs compared to the prior year. The improvement also reflected increased volume ~~changes in pricing,~~ and ~~higher employee-related costs, partially offset by the benefit of~~benefits from 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			2010			2009

Net sales including intersegment sales	$	243.0		$	260.8		$	180.1		$	184.7
Less intersegment sales		(.2	)		(.4	)		(.2	)		(.3	)

Net sales	$	242.8		$	260.4		$	179.9		$	184.4
Operating income⁽¹⁾		41.0			41.5			19.4			23.4


⁽¹⁾ Includes asset impairment charges in 2008, a restructuring accrual adjustment in 2009, and restructuring costs in both years	$	(.2	)	$	3.9
⁽¹⁾ Includes asset impairment charges in 2009 and restructuring costs in both years							$	.7		$	2.7

Net Sales

Sales in our Office and Consumer Products segment decreased 7%2% in the ~~third quarter~~first three months of ~~2009~~2010 compared to the same period last year, ~~which included~~reflecting lower sales on an organic basis and the ~~unfavorable~~impact of the extra week in the first three months of 2009, partially offset by the favorable impact of foreign currency translation (approximately $7$6 million). On an organic basis, sales declined ~~4% in the third quarter of 2009~~2% due primarily to ~~lower volume from~~continued weak end-market demand ~~led by slower corporate purchasing activity,~~and changes in customer programs, partially offset by ~~strong back-to-school sales.~~a reduced rate of inventory destocking in the first quarter of 2010 compared to that in the first quarter of 2009.

Operating Income

Decreased operating income in the ~~third quarter~~first three months of ~~2009~~2010 reflected ~~the impact of~~ lower ~~volume,~~sales and higher investment in consumer promotions and marketing, partially offset by ~~the~~ benefits from restructuring and productivity improvement ~~initiatives. Operating income included asset impairment charges in 2008, a restructuring accrual adjustment in 2009,~~initiatives and lower restructuring costs ~~in both years.~~compared to the prior year.

Other specialty converting businesses


(In millions)	2009			2008			2010			2009

Net sales including intersegment sales	$	135.5		$	156.1		$	138.6		$	121.1
Less intersegment sales		(5.2	)		(7.0	)		(5.8	)		(3.3	)

Net sales	$	130.3		$	149.1		$	132.8		$	117.8
Operating income⁽¹⁾		.9			1.2
Operating income (loss)⁽¹⁾								2.8			(27.9	)


⁽¹⁾ Includes asset impairment charges in 2009, and restructuring costs in both years	$	5.1		$	1.5
⁽¹⁾ Includes asset impairment charges in 2009 and restructuring costs in both years							$	.3		$	15.7

Net Sales

Sales in our other specialty converting businesses ~~decreased~~increased 13% in the ~~third quarter~~first three months of ~~2009~~2010 compared to the same period last year, ~~which included~~reflecting higher sales on an organic basis and the ~~unfavorable~~favorable impact of foreign currency translation (approximately $4 ~~million). On an organic basis, sales declined 10% in the third quarter of 2009, primarily reflecting lower volume in products sold to the housing and construction industries.~~

~~Operating Income~~

Decreased operating income in the third quarter of 2009 reflected lower sales on an organic basis, partially offset by the benefits of restructuring and productivity improvement initiatives. Operating income included asset impairment charges in 2009 and restructuring costs in both years.

~~Avery Dennison Corporation~~

~~ANALYSIS OF RESULTS OF OPERATIONS FOR THE NINE MONTHS YEAR-TO-DATE~~

~~(Loss) Income Before Taxes~~

(In millions) 2009 2008

Net sales $ 4,430.9 $ 5,198.9
Cost of products sold 3,259.5 3,850.3

Gross profit 1,171.4 1,348.6
Marketing, general and administrative expense 927.4 994.5
Goodwill and indefinite-lived intangible asset impairment charges 832.0 –
Interest expense 67.0 87.8
Other expense, net 162.4 23.9

(Loss) income before taxes $ (817.4 ) $ 242.4

As a Percent of Sales:

Gross profit (margin) 26.4 % 25.9 %
Marketing, general and administrative expense 20.9 19.1
(Loss) income before taxes (18.4 ) 4.7

~~Sales~~

Sales decreased 15% in the first nine months of 2009 compared to the same period last year, due largely to declines in 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 $340 million in the first nine months of 2009.

On an organic basis, sales declined 11% in the first nine months of 2009, as continued deterioration in market conditions contributed to volume declines across all segments. In addition, volume declines were experienced in all geographic regions.

~~Refer to “Results of Operations by Segment” for information by reportable segment.~~

~~Gross Profit Margin~~

Gross profit margin for the first nine months of 2009 improved 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.

~~Marketing, General and Administrative Expenses~~

The decrease in marketing, general and administrative expense in the first nine 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. 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

Restructuring costs $ 69.9 $ 19.2
Asset impairment charges and lease cancellation costs 32.3 9.2
Other 60.2 (4.5 )

Other expense, net $ 162.4 $ 23.9

~~In the first nine months of 2009, “Other expense, net” consisted of restructuring costs including severance and other employee-related~~

~~Avery Dennison Corporation~~

costs, asset impairment charges and lease cancellation costs, as well as legal settlement costs ($39 million) and a loss from debt extinguishment (approximately $21 million). Restructuring costs in the first nine months of 2009 relate to a reduction in headcount of approximately 2,420 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 nine months of 2008, “Other expense, net” consisted of severance and other employee-related costs of $19.2 million and asset impairment and lease cancellation charges of $9.2 million, partially offset by $4.5 million related to a gain on sale of investments. Restructuring costs in the first nine months of 2008 relate to a reduction in headcount of approximately 775 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 (Loss) Income and Earnings per Share~~

(In millions, except per share) 2009 2008

(Loss) income before taxes $ (817.4 ) $ 242.4
(Benefit from) provision for income taxes (20.8 ) 18.9

Net (loss) income $ (796.6 ) $ 223.5

Net (loss) income per common share $ (7.73 ) $ 2.27
Net (loss) income per common share, assuming dilution $ (7.73 ) $ 2.26

Net (loss) income as a percent of sales (18.0 )% 4.3 %

Percent change in:
Net (loss) income (456.4 )% (.3 )%
Net (loss) income per common share (440.5 ) (.4 )
Net (loss) income per common share, assuming dilution (442.0 ) (.4 )

~~(Benefit from) Provision for Income Taxes~~

Our effective tax rate for the first nine months of 2009 was approximately 3%, compared to approximately 8% for the same period in 2008. The effective tax rate for the first nine months of 2009 includes a benefit of $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. 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 NINE MONTHS YEAR-TO-DATE~~

~~Pressure-sensitive Materials Segment~~

(In millions) 2009 2008

Net sales including intersegment sales $ 2,565.1 $ 2,968.4
Less intersegment sales (111.7 ) (132.7 )

Net sales $ 2,453.4 $ 2,835.7
Operating income⁽¹⁾
126.1 217.0

⁽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 13% in the first nine months of 2009 compared to the same period in 2008, which included the unfavorable impact of foreign currency translation (approximately $236 million), partially offset by the impact of the extra week in the first ~~quarter~~three months of 2009. On an organic basis, sales ~~declined 8%~~increased 13% due primarily to increased demand for products for automotive applications, which was down significantly in the first ~~nine months~~quarter of ~~2009 primarily due to declines in volume, partially offset by the effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008.~~2009.

~~On an organic basis, sales in our roll materials business~~Operating Income (Loss)

Operating income in the first ~~nine~~three months of ~~2009 declined at a low double-digit rate in Europe, a~~2010 reflected higher volume, the benefit of productivity improvement initiatives, and lower restructuring costs compared to the prior year.

3022

Avery Dennison Corporation

low single-digit rate (excluding intercompany sales) in North America, and a combined low single-digit rate in our emerging markets 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 high-teen rate, reflecting lower promotional spending by businesses in response to weak market conditions.

~~Operating Income~~

Decreased operating income in the first nine months of 2009 reflected legal settlement costs, and higher restructuring costs, asset impairment charges, and lease cancellation costs compared to the same period in 2008. In addition, lower volume and higher raw material costs more than offset the effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008 and cost savings from restructuring and productivity improvement initiatives.

~~Retail Information Services Segment~~

(In millions) 2009 2008

Net sales including intersegment sales $ 973.6 $ 1,191.1
Less intersegment sales (.9 ) (1.8 )

Net sales $ 972.7 $ 1,189.3
Operating (loss) income^{(1) (2)}
(888.4 ) 17.1

⁽¹⁾ Includes restructuring costs, asset impairment charges and lease cancellation costs in both years
$ 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 $ 17.9

~~Net Sales~~

Sales in our Retail Information Services segment decreased 18% in the first nine months of 2009 compared to the same period last year, which included the unfavorable impact of foreign currency translation (approximately $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 nine months 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 first nine 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

Net sales including intersegment sales $ 644.7 $ 711.2
Less intersegment sales (.6 ) (1.0 )

Net sales $ 644.1 $ 710.2
Operating income⁽¹⁾
98.9 104.1

⁽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 9% in the first nine months of 2009 compared to the same period last year, which included the unfavorable impact of foreign currency translation (approximately $30 million), partially offset by the impact of the extra week in the first quarter of 2009. On an organic basis, sales declined 8% in the first nine 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 effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008.

~~Avery Dennison Corporation~~

~~Operating Income~~

Decreased operating income in the first nine months of 2009 reflected the impact of lower volume, partially offset by cost savings from restructuring and productivity improvement 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 both years.

~~Other specialty converting businesses~~

(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 22% in the first nine months of 2009 compared to the same period last year, which included the unfavorable impact of foreign currency translation (approximately $20 million), partially offset by the impact of the extra week in the first quarter of 2009. On an organic basis, sales declined 21% in the first nine 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 nine 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 ~~Nine~~Three Months:


(In millions)	2009			2008			2010			2009

Net (loss) income	$	(796.6	)	$	223.5
Net income (loss)							$	54.7		$	(898.9	)
Depreciation and amortization		194.0			210.5			61.8			71.2
Provision for doubtful accounts		16.3			13.1			9.0			6.1
Goodwill and indefinite-lived intangible asset impairment charges		832.0			–			–			832.0
Asset impairment and net loss on sale and disposal of assets		40.9			16.4			.7			25.3
Loss from debt extinguishment		21.2			–			–			21.2
Stock-based compensation		19.8			24.0			7.5			6.4
Other non-cash expense and loss		16.2			3.2
Other non-cash income and gain		(7.2	)		(14.9	)
Other non-cash items, net								9.6			4.6
Changes in assets and liabilities and other adjustments, net of the effect of business acquisitions		(19.7	)		(93.5	)		(171.2	)		(51.9	)

Net cash provided by operating activities	$	316.9		$	382.3
Net cash (used in) provided by operating activities							$	(27.9	)	$	16.0

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”) below).

In 2010, cash flow from operating activities reflected payments of trade rebates, bonuses and severance and other accrued costs related to various restructuring programs; the timing of collections of accounts receivable; and higher inventory purchases to support an increase in sales. These negative factors were partially offset by higher income from operations and the timing of payments of accounts payable.

In 2009, cash flow ~~provided by~~from operating activities ~~decreased by $65.4 million compared to 2008~~reflected timing of payments of accounts payable and lower inventory purchases, as well as payments of bonuses and trade rebates, and lower income from ~~operations was~~operations. These negative factors were partially offset by ~~reduced working capital.~~

~~Refer to “Analysis~~the timing of ~~Selected Financial Ratios” below for more information.~~collection of accounts receivable.

Cash Flow from Investing Activities for the First ~~Nine~~Three Months:

(In millions) 2009 2008

Purchase of property, plant and equipment $ (46.7 ) $ (97.8 )
Purchase of software and other deferred charges (20.4 ) (49.2 )
Payments for acquisitions – (130.6 )
Proceeds from sale of investments, net .3 16.2
Other (4.0 ) 7.0

Net cash used in investing activities $ (70.8 ) $ (254.4 )

~~Avery Dennison Corporation~~


(In millions)	2010			2009

Purchase of property, plant and equipment, net	$	(13.7	)	$	(15.0	)
Purchase of software and other deferred charges		(5.5	)		(8.2	)
Proceeds from sale of investments, net		.3			.6

Net cash used in investing activities	$	(18.9	)	$	(22.6	)

Capital and Software Spending

During the first ~~nine~~three months of 2010 and 2009, we invested in various small capital projects ~~including~~companywide. We also invested in projects associated with the expansion in ~~Japan. Significant capital projects~~Japan during the first ~~nine months~~three month of ~~2008 included investments for expansion in China and India serving both our materials and retail information services businesses.~~2009.

Information technology projects during the first ~~nine~~three months of ~~2009~~2010 and ~~2008~~2009 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.~~

~~Proceeds from Sale of Investments~~

~~During the first nine 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 ~~Nine~~Three Months:


(In millions)	2009			2008			2010			2009

Net change in borrowings and payments of debt	$	(151.3	)	$	13.1		$	75.4		$	31.7
Dividends paid		(112.3	)		(131.4	)		(22.4	)		(43.7	)
Purchase of treasury stock		–			(9.8	)
Proceeds from exercise of stock options, net		–			2.3			1.0			.2
Other		2.0			8.2			(1.5	)		(2.9	)

Net cash used in financing activities	$	(261.6	)	$	(117.6	)
Net cash provided by (used in) financing activities							$	52.5		$	(14.7	)

Borrowings and Repayment of Debt

On April 13, 2010, subsequent to the end of the first quarter of 2010, we issued $250 million senior notes bearing an interest rate of 5.375% per year, due April 2020. Proceeds from the offering, net of the underwriting discount and offering expenses, were approximately $248 million and were used to repay a portion of the indebtedness outstanding under a term loan credit facility of one of our subsidiaries. The outstanding balance of the term loan credit facility of $325 million was fully repaid in May 2010 using the proceeds from the issuance of the senior notes and commercial paper borrowings.

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), with a book value of approximately $297 million, and the payment of approximately $43 million in cash to

Avery Dennison Corporation

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~~ As of April 3, 2010, 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 us a certain number of common shares in November 2010. The actual number of shares will be dependent upon the stock price at the time. Based upon our ~~subsidiaries entered into a credit agreement for a term loan credit facility with fifteen domestic and foreign banks for a total commitment~~share price as of ~~$400~~April 3, 2010, the holders would purchase approximately 2 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.shares from us.

Refer to Note 5,4, “Debt,” to the unaudited Condensed Consolidated Financial Statements for more information.

~~Shareholders’ Equity~~Dividend Payments

Our shareholders’ equity was approximately $1.3 billion at October 3, 2009 compared to approximately $1.8 billion at 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, 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 ~~decreased~~was $.20 in first three months of 2010 compared to ~~$1.02~~$.41 in the first ~~nine~~three months of 2009, ~~from $1.23~~reflecting our decision to reduce dividend per share in the ~~first nine months~~second half of ~~2008. Refer to “Dividend” in the Overview and 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.~~

~~Avery Dennison Corporation~~2009.

Analysis of Selected Balance Sheet Accounts

Long-lived Assets

Goodwill decreased approximately ~~$755~~$20 million during the first ~~nine~~three months of ~~2009,~~2010, which primarily 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 and the Paxar acquisitions ($29 million) and the impact of foreign currency ~~translation ($36 million).~~translation.

Other intangibles resulting from business acquisitions, net decreased approximately ~~$32~~$12 million during the first ~~nine~~three months of ~~2009,~~2010, which reflected normal amortization expense ($~~25 million) and a non-cash impairment charge associated with our retail information services reporting unit ($12~~8 million), ~~partially offset by an asset reclassification from “Other assets” ($1 million) and~~as well as the impact of foreign currency translation ($4 million).

Refer to Note 4,3, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” to the unaudited Condensed Consolidated Financial Statements for more information.

~~Other assets increased approximately $4 million during~~During the first ~~nine~~three months of ~~2009, which reflected~~2010, other assets decreased due to normal amortization and disposals of software and other deferred charges ($9 million); the impact of foreign currency translation ($2 million); and other ($1 million). These decreases were partially offset by purchases of software and other deferred charges ($206 million), and an increase in cash surrender value of corporate-owned life insurance ($13 million), an increase in third-party loan receivable ($5 million), and the impact of foreign currency translation ($3 million). These increases were partially offset by normal amortization and impairment of software and other deferred charges ($31 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 ($5 million) discussed above in “Borrowings and Repayment of Debt,” as well as an asset reclassification to “Other intangibles resulting from business acquisitions, net” ($16 million).

Other Shareholders’ Equity Accounts

Our shareholders’ equity was approximately $1.38 billion at April 3, 2010 compared to approximately $1.36 billion at January 2, 2010. The increase in our shareholders’ equity was primarily due to an increase in net income, partially offset by dividend payments and the impact of foreign currency translation.

The value of our employee stock benefit ~~trusts increased by $6~~trust decreased $69 million during the first ~~nine~~three months of ~~2009~~2010 due to ~~higher market value~~transfers of common shares ~~held in~~from the ~~trusts~~“Employee stock benefit trust” to “Treasury stock at cost” ($56 million) reflecting the funding of ~~approximately $16 million, partially offset by~~employee benefit obligations, the issuance of shares under our employee stock option and ~~defined contribution~~incentive plans ~~of approximately $10 million.~~

~~Treasury Stock~~

~~During~~($9 million) and a decrease in the ~~first nine months of 2009, we issued approximately 6.5 million shares of common stock with a book~~market value of ~~approximately $297 million~~shares held in ~~connection with~~ the ~~completed exchange of the Corporate HiMEDS units, as discussed above in “Borrowings and Repayment of Debt.”~~trust ($4 million).

Impact of Foreign Currency Translation for the First ~~Nine~~Three Months:


(In millions)	2009			2008		2010		2009

Change in net sales	$	(341	)	$	248	$	67	$	(114	)
Change in net income		(9	)		13		2		(5	)

International operations generated approximately ~~65%~~68% of our net sales in the first ~~nine~~three months of ~~2009.~~2010. 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~~The effect of currency translation on sales in the first ~~nine~~three months of ~~2009~~2010 primarily reflected a ~~negative~~positive impact from ~~sales denominated in Euros, as well as~~ sales in the currencies of ~~Great Britain,~~ Australia, Brazil, Canada and 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 and cash flow exposure to transactions in foreign currencies, we may enter into foreign exchange forward, option and swap contracts, where available and appropriate.

Avery Dennison Corporation

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 deficit (current assets minus current liabilities), as a percent of annualized net sales, ~~decreased~~increased in ~~2009~~2010 primarily due to ~~a decrease in net trade accounts receivable and inventories, partially offset by a decrease in accounts payable and~~ a decrease in short-term and current portion of long-term ~~debt.~~

~~Avery Dennison Corporation~~debt and an increase in net trade accounts receivable, partially offset by an increase in accounts payable and annualized net sales.

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 ~~Nine~~Three Months:


(In millions)	2009			2008			2010			2009

(A) Working capital (current assets minus current liabilities)	$	(164.0	)	$	11.5
(A) Working capital deficit (current assets minus current liabilities)							$	(34.9	)	$	(257.2	)
Reconciling items:
Cash and cash equivalents		(91.9	)		(81.3	)		(143.6	)		(83.0	)
Current deferred and refundable income taxes and other current assets		(212.0	)		(286.2	)		(201.0	)		(208.6	)
Short-term and current portion of long-term debt		669.4			721.6			628.3			812.4
Current deferred and payable income taxes and other current liabilities		668.4			673.2			537.4			584.9

(B) Operational working capital	$	869.9		$	1,038.8		$	786.2		$	848.5

(C) Annualized net sales (year-to-date sales divided by 3, multiplied by 4)	$	5,772.0	⁽¹⁾	$	6,931.9
(C) Annualized net sales (quarterly sales, multiplied by 4)							$	6,218.8		$	5,297.3	⁽¹⁾

Working capital, as a percent of annualized net sales (A)¸ (C)		(2.8	)%		0.2	%
Working capital deficit, as a percent of annualized net sales (A)¸ (C)								(.6	)%		(4.9	)%

Operational working capital, as a percent of annualized net sales (B)¸ (C)		15.1	%		15.0	%		12.6	%		16.0	%


⁽¹⁾		Adjusted for the extra week in the first quarter of 2009

As a percent of annualized sales, operational working capital in the first ~~nine~~three months of ~~2009 remained flat~~2010 decreased compared to the same period in the prior year. ~~This measure reflects the effects of the following ratios, including~~The primary factors contributing to this change, which includes the impact of foreign currency translation, ~~and is~~are discussed below.

Accounts Receivable Ratio

The average number of days sales outstanding was 6056 days in the first ~~nine~~three months of ~~2009~~2010 compared to 6159 days in the first ~~nine~~three months of ~~2008,~~2009, calculated using the ~~three-quarter average~~ trade accounts receivable balance at quarter end divided by the average daily sales for the ~~first nine months of 2009 and 2008, respectively. During the first nine months of 2009,~~quarter. The change from prior year in the average number of days sales outstanding ~~was primarily impacted by the timing of~~reflected an increase in sales and ~~improvement in collections.~~improved collection efforts.

Inventory Ratio

Average inventory turnover was ~~8.1~~8.6 in the first ~~nine~~three months of ~~2009~~2010 compared to ~~7.8~~7.5 in the first ~~nine~~three months of ~~2008,~~2009, calculated using the annualized cost of sales ~~(cost~~(quarterly cost of sales, ~~for the first nine months divided by 3, and~~ multiplied by 4, adjusted for the extra week in the first quarter of 2009) divided by the ~~three-quarter average~~ inventory balance ~~for the first nine months of 2009 and 2008, respectively. During the first nine months of 2009,~~at quarter end. The change from prior year in the average inventory turnover ~~was primarily impacted by improved inventory management, as well as a decrease in~~reflected the timing of inventory purchases asand a ~~result of lower sales.~~continued focus on inventory management.

Accounts Payable Ratio

The average number of days payable outstanding was 5257 days in the first ~~nine~~three months of ~~2009~~2010 compared to 5450 days in the first ~~nine~~three months of ~~2008,~~2009, calculated using the ~~three-quarter average~~ accounts payable balance at quarter end divided by the average daily cost of products sold for the ~~first nine months of 2009 and 2008, respectively. During the first nine months of 2009,~~quarter. The change from prior year in the average number of days payable outstanding ~~was primarily impacted by lower purchases, as well as~~reflected the timing of ~~payments which was impacted by the extra week in the first quarter~~inventory purchases and timing of ~~2009.~~payments.

Capital Resources

Capital resources include cash flows from operations, cash and cash equivalents and debt financing. At ~~October~~April 3, ~~2009,~~2010, we had cash and

Avery Dennison Corporation

cash equivalents of ~~$92~~approximately $144 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 uncommitted bank lines

~~Avery Dennison Corporation~~

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~~increased approximately ~~$425~~$78 million in the first ~~nine~~three months of ~~2009~~2010 to approximately ~~$1.79~~$1.70 billion compared to approximately ~~$2.21~~$1.62 billion at year end ~~2008, primarily~~2009, reflecting an increase in commercial paper borrowings to support operational requirements, partially offset by a decrease in long-term 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. We remain committed to retaining an investment grade rating.

Our Credit Ratings as of ~~October~~April 3, ~~2009:~~2010:

Short-term

Long-term

Outlook

Standard & Poor’s Rating Service (“S&P”)

A-2

BBB

Stable

Moody’s Investors Service (“Moody’s”)

Baa2

Negative

Off-Balance Sheet Arrangements, Contractual Obligations, and Other Matters

Legal Proceedings

~~On April 24, 2003, Sentry Business Products, Inc. filed a purported class action on behalf~~legal, regulatory and compliance matters, most of ~~direct purchasers~~which are routine to the nature 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 includingbusiness. Based upon current information, management believes 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 issueimpact 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 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 on September 17, 2009, the district court issued an order of final approval and judgment, dismissing all claims against us with prejudice. We recorded an accrual of $37 million for this settlement in the first quarter of 2009.

~~Avery Dennison Corporation~~

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~~resolution 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,”~~is not material to ~~the unaudited Condensed Consolidated Financial Statements.~~our financial position, or is not estimable.

Environmental

As of ~~October~~April 3, ~~2009,~~2010, 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.


(In millions)	October 3, 2009			December 27, 2008			April 3, 2010			January 2, 2010

Balance at beginning of year	$	58.5		$	37.8		$	56.5		$	58.5
Purchase price adjustments related to acquisitions		2.1			24.6			—			2.1
Accruals		.8			.9			.1			1.0
Payments		(3.3	)		(4.8	)		(1.2	)		(5.1	)

Balance at end of period	$	58.1		$	58.5		$	55.4		$	56.5

Avery Dennison Corporation

As of ~~October~~April 3, ~~2009,~~2010, approximately ~~$17~~$11 million of the total balance was classified as short-term.

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 ~~October~~April 3, ~~2009,~~2010, our product warranty liabilities were approximately $2$1.9 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

~~Avery Dennison Corporation~~

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 ~~October~~April 3, ~~2009,~~2010, we had guaranteed approximately ~~$15~~$17 million.

As of ~~October~~April 3, ~~2009,~~2010, we guaranteed up to approximately $17 million of certain of our foreign subsidiaries’ obligations to their suppliers, as well as approximately ~~$498~~$213 million of certain of our subsidiaries’ lines of credit with various financial institutions.

As of ~~October~~April 3, ~~2009,~~2010, 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~~us a certain number of ~~common~~ shares in November ~~2010 (depending on~~2010. The actual number of shares will be dependent upon the stock price at the ~~time). Refer to Note 5, “Debt,” to~~time. Based upon our share price as of April 3, 2010, the ~~unaudited Condensed Consolidated Financial Statements for more information.~~holders would purchase approximately 2 million shares from us.

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 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 ~~nine~~three months of ~~2009,~~2010, certain other accounting and financial disclosure requirements by the Financial Accounting Standards Board and the ~~SEC~~Securities and Exchange Commission (“SEC”) were issued. Refer to Note ~~17,~~16, “Recent Accounting Requirements,” to the unaudited Condensed Consolidated Financial Statements for more information.

Avery Dennison Corporation

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,”

~~Avery Dennison Corporation~~

~~“could,~~ “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,~~January 2, 2010, 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; collection of receivables from 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;proceedings; 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 and natural disasters; 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; and (4) the impact of ~~an increase~~changes in ~~costs associated with~~tax laws and regulations throughout the ~~Company’s debt; and (5) the ability of the Company to achieve and sustain targeted cost reductions.~~world.

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.

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.~~January 2, 2010.

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

~~Avery Dennison Corporation~~

procedures as of the end of the quarter covered by this report.

Avery Dennison Corporation

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.

4029

Avery Dennison Corporation

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As of 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 October 3, 2009, the Company’s estimated accrued liability associated with compliance and remediation costs was approximately $58 million, including estimated liabilities related to the Company’s acquisitions. As of October 3, 2009, approximately $17 million of the total balance was 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 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 on September 17, 2009, the district court issued an order of final approval and judgment, dismissing all claims against the Company 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 Company recorded $2 million in the third quarter of 2009 in respect of the settlement of these claims. The Company intends to defend the purported California class action vigorously.

~~Avery Dennison Corporation~~

~~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, inquiries, and ~~inquiries,~~other legal, regulatory and compliance matters, most of which are routine to the nature of the ~~Company’s~~ business. Based upon current information, management believes that the impact of the resolution of these ~~other~~ matters ~~will~~is not ~~materially affect~~material to the Company’s financial ~~position.~~position, or is not estimable.

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.January 2, 2010 .

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 ~~nine~~three months of ~~2009. As of October 3, 2009, the maximum number of shares that may yet be purchased under the Company’s plans was approximately 4 million shares.~~2010.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4. ~~SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~(RESERVED)

Not Applicable

~~Avery Dennison Corporation~~

ITEM 5. OTHER INFORMATION

Not Applicable

ITEM 6. EXHIBITS


Exhibit 3.1		Restated Certification of Incorporation, ~~filed August 2, 2002 with the Office~~as amended as of ~~Delaware Secretary of State, is incorporated by reference to the third quarterly report for 2002 on Form 10-Q, filed November 12, 2002~~April 22, 2010

Exhibit 3.2		By-laws, as amended and restated, are incorporated by reference to the current report on Form 8-K, filed April 27, 2010

Exhibit 10.14		2007 Amendment and Restatement of Avery Dennison Corporation Employee Savings Plan

Exhibit 10.18.2		2005 Directors Variable Deferred Compensation Plan, amended and restated

Exhibit 10.31.2		2005 Executive Variable Deferred Retirement Plan, amended and restated

Exhibit 12		Computation of Ratio of Earnings to Fixed Charges

Exhibit 31.1		D. A. Scarborough Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2		D. R. O’Bryant Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1		D. A. Scarborough Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2		D. R. O’Bryant Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

4330

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) ~~November 11, 2009~~May 12, 2010

4431


															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