þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Exact name of registrant as specified in its charter)

Delaware		95-1492269
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
150 North Orange Grove Boulevard
Pasadena, California		91103
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (626) 304-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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). Yes o No o

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 filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Number of shares of $1 par value common stock outstanding as of August 1, 2009: 112,744,662

 

 

			Page
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet as of July 4, 2009 and December 27, 2008			3
Consolidated Statement of Operations for the Three and Six Months Ended July 4, 2009 and June 28, 2008			4
Condensed Consolidated Statement of Cash Flows for the Six Months Ended July 4, 2009 and June 28, 2008			5
Notes to Unaudited Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Definition of Terms			22
Forward-looking Statements			22
Overview and Outlook			22
Analysis of Results of Operations for the Second Quarter			25
Results of Operations by Segment for the Second Quarter			27
Analysis of Results of Operations for the Six Months Year-to-Date			29
Results of Operations by Segment for the Six Months Year-to-Date			30
Financial Condition			32
Uses and Limitations of Non-GAAP Measures			37
Recent Accounting Requirements			38
Safe Harbor Statement			38
Item 3. Quantitative and Qualitative Disclosures About Market Risk			39
Item 4. Controls and Procedures			39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			40
Item 1A. Risk Factors			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 3. Defaults Upon Senior Securities			41
Item 4. Submission of Matters to a Vote of Security Holders			41
Item 5. Other Information			42
Item 6. Exhibits			43
Signatures			44
Exhibits
EX-10.8.3.2
EX-10.8.3.3
EX-10.8.4.1
EX-10.11.1
EX-10.11.2.1
EX-10.11.4.1
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)		July 4, 2009				December 27, 2008
Assets
Current assets:
Cash and cash equivalents		$	91.9			$	105.5
Trade accounts receivable, less allowances of $55.9 and $57.3 for 2009 and 2008, respectively			975.6				988.9
Inventories, net			518.4				583.6
Current deferred and refundable income taxes			103.5				115.6
Other current assets			104.7				136.8
Total current assets			1,794.1				1,930.4
Property, plant and equipment			3,170.1				3,173.1
Accumulated depreciation			(1,766.1	)			(1,680.1	)
Property, plant and equipment, net			1,404.0				1,493.0
Goodwill			940.0				1,716.7
Other intangibles resulting from business acquisitions, net			277.1				303.6
Non-current deferred and refundable income taxes			204.6				168.9
Other assets			423.4				423.1
		$	5,043.2			$	6,035.7
Liabilities and Shareholders’ Equity
Current liabilities:
Short-term and current portion of long-term debt		$	791.6			$	665.0
Accounts payable			608.0				672.9
Current deferred and payable income taxes			34.9				59.6
Other current liabilities			581.6				660.5
Total current liabilities			2,016.1				2,058.0
Long-term debt			1,134.9				1,544.8
Long-term retirement benefits and other liabilities			551.0				566.5
Non-current deferred and payable income taxes			139.9				116.4
Commitments and contingencies (see Note 15)
Shareholders’ equity:
Common stock, $1 par value, authorized - 400,000,000 shares at July 4, 2009 and December 27, 2008; issued - 124,126,624 shares at July 4, 2009 and December 27, 2008; outstanding - 105,094,566 shares and 98,366,621 shares at July 4, 2009 and December 27, 2008, respectively			124.1				124.1
Capital in excess of par value			623.1				642.9
Retained earnings			1,432.7				2,381.3
Cost of unallocated ESOP shares			–				(1.2	)
Employee stock benefit trusts, 7,635,096 shares and 7,888,953 shares at July 4, 2009 and December 27, 2008, respectively			(188.3	)			(246.9	)
Treasury stock at cost, 11,381,962 shares and 17,841,050 shares at July 4, 2009 and December 27, 2008, respectively			(570.8	)			(867.7	)
Accumulated other comprehensive loss			(219.5	)			(282.5	)
Total shareholders’ equity			1,201.3				1,750.0
		$	5,043.2			$	6,035.7

See Notes to Unaudited Condensed Consolidated Financial Statements

Avery Dennison Corporation

CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)

		Three Months Ended								Six Months Ended
(In millions, except per share amounts)		July 4, 2009				June 28, 2008				July 4, 2009				June 28, 2008
Net sales		$	1,455.4			$	1,828.9			$	2,881.6			$	3,474.1
Cost of products sold			1,065.1				1,338.6				2,146.2				2,559.8
Gross profit			390.3				490.3				735.4				914.3
Marketing, general and administrative expense			300.1				341.0				604.3				669.0
Goodwill and indefinite-lived intangible asset impairment charges			–				–				832.0				–
Interest expense			20.4				29.3				47.9				58.8
Other expense, net			29.6				5.8				126.9				11.4
Income (loss) before taxes			40.2				114.2				(875.7	)			175.1
Provision for (benefit from) income taxes			.4				21.8				(16.6	)			14.3
Net income (loss)		$	39.8			$	92.4			$	(859.1	)		$	160.8
Per share amounts:
Net income (loss) per common share		$	.38			$	.94			$	(8.41	)		$	1.63
Net income (loss) per common share, assuming dilution		$	.38			$	.93			$	(8.41	)		$	1.62
Dividends		$	.41			$	.41			$	.82			$	.82
Average shares outstanding:
Common shares			105.0				98.5				102.2				98.5
Common shares, assuming dilution			105.7				98.9				102.2				98.9
Common shares outstanding at period end			105.1				98.5				105.1				98.5

See Notes to Unaudited Condensed Consolidated Financial Statements

Avery Dennison Corporation

		Six Months Ended
(In millions)		July 4, 2009				June 28, 2008
Operating Activities
Net (loss) income		$	(859.1	)		$	160.8
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			94.0				101.6
Amortization			38.6				37.0
Provision for doubtful accounts			9.5				8.2
Goodwill and indefinite-lived intangible asset impairment charges			832.0				–
Asset impairment and net loss on sale and disposal of assets			28.0				14.4
Loss from debt extinguishment			21.2				–
Stock-based compensation			13.2				16.9
Other non-cash expense and loss			12.1				–
Other non-cash income and gain			(7.2	)			(17.2	)
Changes in assets and liabilities and other adjustments, net of the effect of business acquisitions			(49.5	)			(133.0	)
Net cash provided by operating activities			132.8				188.7
Investing Activities
Purchase of property, plant and equipment			(30.5	)			(69.1	)
Purchase of software and other deferred charges			(14.9	)			(33.0	)
Payments for acquisitions			–				(125.0	)
Proceeds from sale of investments, net			.1				13.0
Other			(4.2	)			5.1
Net cash used in investing activities			(49.5	)			(209.0	)
Financing Activities
Net increase (decrease) in borrowings (maturities of 90 days or less)			65.4				(285.1	)
Additional borrowings (maturities longer than 90 days)			–				400.1
Payments of debt (maturities longer than 90 days)			(73.4	)			(.3	)
Dividends paid			(89.6	)			(87.6	)
Proceeds from exercise of stock options, net			.2				1.9
Other			–				5.4
Net cash (used in) provided by financing activities			(97.4	)			34.4
Effect of foreign currency translation on cash balances			.5				1.5
(Decrease) increase in cash and cash equivalents			(13.6	)			15.6
Cash and cash equivalents, beginning of year			105.5				71.5
Cash and cash equivalents, end of period		$	91.9			$	87.1

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 annual financial statements and notes. This Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in the Company’s 2008 Annual Report on Form 10-K.

The Company’s 2009 fiscal year includes a 53-week period, with the extra week reflected in the first quarter. Normally, each fiscal year consists of 52 weeks, but every fifth or sixth year consists of 53 weeks. The second quarters of 2009 and 2008 consisted of thirteen-week periods ending July 4, 2009 and June 28, 2008, respectively.

The interim results of operations are not necessarily indicative of future financial results.

The Company has evaluated subsequent events through the time of filing this Form 10-Q with the Securities and Exchange Commission (“SEC”) on August 12, 2009.

Financial Presentation

Certain prior year amounts have been reclassified to conform with the current year presentation.

Note 2. Acquisitions

On April 1, 2008, the Company acquired DM Label Group (“DM Label”). DM Label operations are included in the Company’s Retail Information Services segment.

Note 3. Inventories

Inventories consisted of:

(In millions)		July 4, 2009				December 27, 2008
Raw materials		$	221.0			$	256.2
Work-in-progress			124.3				143.4
Finished goods			241.3				248.6
Inventories at lower of FIFO cost or market (approximates replacement cost)			586.6				648.2
Inventory reserves			(68.2	)			(64.6	)
Inventories, net		$	518.4			$	583.6

Note 4. Goodwill and Other Intangibles Resulting from Business Acquisitions

In the first quarter of 2009, the Company recorded non-cash impairment charges of $832 million for the retail information services reporting unit, of which $820 million is related to goodwill and $12 million is related to indefinite-lived intangible assets. The Company completed its impairment test of goodwill and indefinite-lived intangible assets (“goodwill impairment”) in the second quarter of 2009, with no additional impairment charge incurred.

The Company performs its goodwill impairment test in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets.” In performing the required goodwill impairment test, the Company primarily applies a present value (discounted cash flow) method to determine the fair value of the reporting units with goodwill. The Company’s reporting units, which are composed of either a discrete business or an aggregation of businesses with similar economic characteristics, consist of roll materials; retail information services; office and consumer products; graphics and reflective products; industrial products; and business media.

The Company performs its annual goodwill impairment test during the fourth quarter. However, certain factors may result in the need to perform a goodwill impairment test prior to the fourth quarter, including significant underperformance of the Company’s business relative to expected operating results, significant adverse economic and industry trends, significant decline in the Company’s market

Avery Dennison Corporation

capitalization for an extended period of time relative to net book value, or a decision to divest an individual business within a reporting unit. Based upon the Company’s assessment of these factors in connection with the preparation of the Company’s first quarter financial statements, the Company determined that there was a need to initiate an interim goodwill impairment test. The factors considered included both a sustained decline in the Company’s stock price and a decline in the Company’s 2009 revenue projections for the retail information services reporting unit, following lower than expected revenues in March 2009, which continued in April 2009. The peak season for the retail information services reporting unit has traditionally been March through the end of the second quarter.

The Company’s interim impairment analysis indicated that the fair value of each of the Company’s reporting units exceeded its carrying value, except for the Company’s retail information services reporting unit, which had a fair value less than its carrying value. In evaluating the fair value of the retail information services reporting unit, the Company assumed further declines in revenue for 2009 from 2008, reflecting continued and further weakness in the retail apparel market. The Company then assumed that revenues by 2012 would increase to levels comparable with 2007 (including estimated sales for Paxar and DM Label, adjusted for foreign currency translation). The Company also assumed a discount rate of 14.5% reflecting the increased uncertainty of global economic conditions in the first three months of 2009.

The primary factors contributing to the $832 million of non-cash impairment charges relative to the Company’s goodwill impairment test in the fourth quarter of 2008 were the assumed increase in the discount rate, the reduced assumptions for revenue growth through 2013, and the associated cash flow impact from these reduced projections. The change in these factors reflected worsening economic projections and market conditions.

As part of the interim goodwill impairment test completed in the second quarter of 2009, which is discussed above, the Company recorded a non-cash impairment charge of $820 million for the retail information services reporting unit in the first quarter of 2009, with no additional impairment charge in the second quarter of 2009. 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)			–				30.9				–				–				30.9
Goodwill impairment charges			–				(820.0	)			–				–				(820.0	)
Translation adjustments			7.3				1.4				3.7				–				12.4
Balance as of July 4, 2009		$	341.7			$	423.9			$	170.9			$	3.5			$	940.0
Goodwill Summary:
Goodwill		$	341.7			$	1,243.9			$	170.9			$	3.5			$	1,760.0
Accumulated impairment losses			–				(820.0	)			–				–				(820.0	)
Balance as of July 4, 2009		$	341.7			$	423.9			$	170.9			$	3.5			$	940.0

As of July 4, 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.

Avery Dennison Corporation

In connection with the acquisition of Paxar, the Company acquired approximately $30 million of intangible assets, consisting of certain trade names and trademarks, which are not subject to amortization because they have an indefinite useful life. As part of the interim goodwill impairment test completed in the second quarter of 2009, which is discussed above, the Company recorded an additional non-cash impairment charge of $12 million related to these indefinite-lived intangible assets in the first quarter of 2009, with no additional impairment charge in the second quarter of 2009. The carrying value of these indefinite-lived intangible assets was $17.8 million and $29.5 million at July 4, 2009 and December 27, 2008, respectively, which include $.2 million and $.5 million of negative currency impact, respectively.

The following table sets forth the Company’s finite-lived intangible assets resulting from business acquisitions at July 4, 2009 and December 27, 2008, which continue to be amortized:

		July 4, 2009												December 27, 2008
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
(In millions)		Amount				Amortization				Amount				Amount				Amortization				Amount
Customer relationships		$	297.8			$	81.8			$	216.0			$	295.9			$	67.4			$	228.5
Patents and other acquired technology			53.6				21.2				32.4				53.6				18.8				34.8
Trade names and trademarks (1)			46.1				38.7				7.4				45.1				38.1				7.0
Other intangibles			8.8				5.3				3.5				8.8				5.0				3.8
Total		$	406.3			$	147.0			$	259.3			$	403.4			$	129.3			$	274.1

Amortization expense on finite-lived intangible assets resulting from business acquisitions was $8.4 million and $17 million for the three and six months ended July 4, 2009, respectively, and $7.9 million and $15.8 million for the three and six months ended June 28, 2008, respectively. As of July 4, 2009, the estimated amortization expense for finite-lived intangible assets resulting from completed business acquisitions for this fiscal year and each of the next four fiscal years is expected to be approximately $30 million per year.

The weighted-average amortization periods from the date of acquisition for finite-lived intangible assets resulting from business acquisitions are thirteen years for customer relationships, eleven years for trade names and trademarks, thirteen years for patents and other acquired technology, eight years for other intangibles and thirteen years in total. As of July 4, 2009, the weighted-average remaining useful life of acquired finite-lived intangible assets are nine years for customer relationships, five years for trade names and trademarks, seven years for patents and other acquired technology, four years for other intangibles and eight years in total.

On January 23, 2009, the Company entered into an amendment to a credit agreement for a $1 billion revolving credit facility (the “Revolver”) with certain domestic and foreign banks, maturing August 10, 2012. The amendment increases the Company’s flexibility for a specified period of time under the financial covenants to which the Revolver is subject and excludes certain restructuring charges from the calculation of the financial ratios under those covenants. The amendment increases the annual interest rate of the Revolver to the annual rate of, at the Company’s option, either (i) between LIBOR plus 1.8% and LIBOR plus 3.5%, depending on the Company’s debt ratings by either Standard & Poor’s Rating Service (“S&P”) or Moody’s Investor Service (“Moody’s”), or (ii) the higher of (A) the federal funds rate plus 0.50% or (B) the prime rate, plus between 0.8% and 2.5%, depending on the Company’s debt ratings by either S&P or Moody’s. The amendment also provides for an increase in the facility fee payable under the Revolver to the annual rate of between 0.2% and 0.5%, depending on the Company’s debt ratings by either S&P or Moody’s.

On January 23, 2009, a wholly-owned subsidiary of the Company entered into an amendment to a credit agreement for a $400 million term loan credit facility (“Credit Facility”) with certain domestic and foreign banks, maturing February 8, 2011. The subsidiary’s payment and performance under the agreement are guaranteed by the Company. The amendment increases the Company’s flexibility for a specified period of time under the financial covenants to which the Credit Facility is subject and excludes certain restructuring charges from the calculation of the financial ratios under those covenants. The amendment also increases the annual interest rate of the Credit Facility to the annual rate of, at the subsidiary’s option, either (i) between LIBOR plus 2.0% and LIBOR plus 4.0%, depending on the Company’s debt ratings by either S&P or Moody’s, or (ii) the higher of (A) the federal funds rate plus 0.50% or (B) the prime rate, plus between 1.0% and 3.0%, depending on the Company’s debt ratings by either S&P or Moody’s. The amendment requires the partial repayment of the loans under the Credit Facility in $15 million quarterly installments beginning April 2009 through December

Avery Dennison Corporation

2010, and $280 million payable upon maturity.

The financial covenant ratios permitted under the above-mentioned amendments are as follows:

																														Fourth
		First				Second				Third				Fourth				First				Second				Third				Quarter
		Quarter				Quarter				Quarter				Quarter				Quarter				Quarter				Quarter				2010 and
		2009				2009				2009				2009				2010				2010				2010				thereafter
Interest Coverage Ratio (Minimum)			2.50				2.25				2.10				2.25				2.60				3.00				3.25				3.50
Leverage Ratio (Maximum)			4.00				4.25				4.25				4.00				3.75				3.50				3.50				3.50

As of July 4, 2009, the Company was in compliance with its financial covenants. The non-cash goodwill and indefinite-lived intangible asset impairment charges recognized in the first quarter of 2009 have no adverse impact on the Company’s financial covenants. Refer to Note 4, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” for information regarding the impairments.

On March 10, 2009, the Company completed an exchange of approximately 6.6 million units (or 75.15%) of its HiMEDS units, stated amount $50.00 per unit (the “HiMEDS units”), in the form of Corporate HiMEDS units (the “Corporate HiMEDS units”), comprised of (i) a purchase contract obligating the holder to purchase from the Company its common stock shares, par value $1.00 per share (the “common stock”), and (ii) a 1/20 or 5.0% undivided beneficial interest in a $1,000 aggregate principal amount 5.350% senior note due November 15, 2020 (the “HiMEDS senior notes”), for 0.9756 shares of common stock and $6.50 in cash (which includes the accrued and unpaid contract adjustment payments with respect to the purchase contracts and the accrued and unpaid interest with respect to the HiMEDS senior notes) for each Corporate HiMEDS unit. The Company issued approximately 6.5 million shares of its common stock and paid approximately $43 million in cash for the exchanged HiMEDS units with a carrying value of approximately $331 million. As a result of this exchange, the Company recorded a debt extinguishment loss of approximately $21 million (included in “Other expense, net” in the unaudited Consolidated Statement of Operations), which included a write-off of $9.6 million related to unamortized debt issuance costs.

As of July 4, 2009, approximately two million HiMEDS units with a carrying value of approximately $109 million remained outstanding. The purchase contracts related to these units obligate the holders to purchase from the Company a certain number of shares in 2010 (depending on the stock price at the time).

The fair value of the Company’s debt is estimated based on the discounted amount of future cash flows using the current rates offered to the Company for debt of similar remaining maturities. As of July 4, 2009, the carrying value and fair value of the Company’s total debt, including short-term borrowings, was $1.93 billion and $1.85 billion, respectively.

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

		Pension Benefits
		Three Months Ended																Six Months Ended
		July 4, 2009								June 28, 2008								July 4, 2009								June 28, 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		$	4.6			$	2.9			$	5.1			$	3.6			$	10.0			$	5.7			$	9.8			$	7.1
Interest cost			9.3				6.2				8.7				7.4				19.1				12.4				18.0				14.4
Expected return on plan assets			(12.1	)			(6.5	)			(12.7	)			(7.6	)			(24.3	)			(12.9	)			(25.5	)			(14.9	)
Recognized net actuarial loss			1.8				.5				1.6				.9				5.1				1.0				3.0				1.8
Amortization of prior service cost			.2				.1				.3				.2				.4				.2				.6				.3
Amortization of transition asset			–				(.2	)			–				(.2	)			–				(.3	)			–				(.3	)
Net periodic benefit cost		$	3.8			$	3.0			$	3.0			$	4.3			$	10.3			$	6.1			$	5.9			$	8.4

Avery Dennison Corporation

		U.S. Postretirement Health Benefits
		Three Months Ended								Six Months Ended
(In millions)		July 4, 2009				June 28, 2008				July 4, 2009				June 28, 2008
Components of net periodic benefit cost:
Service cost		$	.3			$	.2			$	.5			$	.5
Interest cost			.5				.5				1.0				.9
Recognized net actuarial loss			.4				.4				.8				.8
Amortization of prior service cost			(.5	)			(.5	)			(1.0	)			(1.0	)
Net periodic benefit cost		$	.7			$	.6			$	1.3			$	1.2

The Company contributed $3.8 million and $1.8 million to its U.S. pension plans during the six months ended July 4, 2009 and June 28, 2008, respectively. The Company expects to contribute an additional $4.2 million to its U.S. pension plans for the remainder of 2009. Additionally, the Company contributed $1.3 million and $1.7 million to its U.S. postretirement health benefit plan during the six months ended July 4, 2009 and June 28, 2008, respectively. For the remainder of 2009, the Company expects to contribute an additional $1.5 million to its U.S. postretirement health benefit plan.

The Company contributed approximately $20 million and approximately $9 million to its international pension plans during the six months ended July 4, 2009 and June 28, 2008, respectively. Contributions made during the six months ended July 4, 2009 included $11 million of contributions to the Dutch pension plan made in the form of borrowings payable by the Company (included in “Long-term debt” in the unaudited Condensed Consolidated Balance Sheet) to the pension plan over the next three years. For the remainder of 2009, the Company expects to contribute an additional $9 million to its international pension plans.

During the six months ended July 4, 2009, the Company recognized approximately $4 million related to its match to participant contributions in the Company’s defined contribution plan. This expense was recorded in marketing, general and administrative expense and was funded through the issuance of shares from the Company’s Employee Stock Benefit Trust.

Note 7. Research and Development

Research and development expense for the three and six months ended July 4, 2009 was $21.6 million and $44.8 million, respectively. For the three and six months ended June 28, 2008, research and development expense was $23.9 million and $48.4 million, respectively.

Note 8. Stock-Based Compensation

Net income included stock-based compensation expense related to stock options, performance units (“PUs”), restricted stock units (“RSUs”) and restricted stock of $6.8 million and $13.2 million for the three and six months ended July 4, 2009, respectively, and $8.9 million and $16.9 million for the three and six months ended June 28, 2008, respectively. Total stock-based compensation expense was included in “Marketing, general and administrative expense” and was recorded in corporate expense and the Company’s operating segments, as appropriate.

During the second quarter of 2008, following the Company’s shareholders’ approval of the amended and restated stock option and incentive plan on April 24, 2008, the Company began granting PUs to certain eligible employees of the Company. These PUs are payable in shares of the Company’s common stock at the end of a three-year cliff vesting period provided that certain performance objective metrics are achieved at the end of the period. The compensation expense related to PUs is included in the stock-based compensation expense noted above.

In February 2009, the Company granted its annual stock-based awards to employees and directors. The provision of SFAS No. 123(R), “Share-Based Payment,” requires that such awards granted to retirement-eligible employees be treated as though they were immediately vested; as a result, the compensation expense related to these awards (approximately $.9 million) was recognized during the six months ended July 4, 2009 and is included in the stock-based compensation expense noted above.

As of July 4, 2009, the Company had approximately $53 million of unrecognized compensation expense related to unvested stock options, PUs, RSUs and restricted stock under the Company’s plans. The total unrecognized compensation expense is expected to be recognized over the remaining weighted-average requisite service period of approximately two years for PUs, and approximately three years for stock options, RSUs and restricted stock.

Note 9. Cost Reduction Actions

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

Avery Dennison Corporation

Severance, asset impairment, and lease cancellation charges recorded for the three and six months ended July 4, 2009 and June 28, 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.

In 2009, the Company continued the implementation of the cost reduction action initiated in the fourth quarter of 2008, and recorded charges of $68.7 million consisting of $42.9 million of severance and other employee costs resulting in the elimination of approximately 1,930 positions impacting all segments, as well as $25.2 million of asset impairment charges, and $.6 million of lease cancellation charges. As of July 4, 2009, approximately 205 employees related to these charges remain with the Company, and are expected to leave in 2009. The table below details the accruals and payments recorded in 2009:

														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
2009 Settlements			(5.8	)			(8.5	)			(.5	)			(3.3	)			(18.1	)
Balance at July 4, 2009		$	15.2			$	1.9			$	.7			$	7.0			$	24.8
Asset Impairment
Machinery and equipment		$	1.5			$	2.9			$	.2			$	11.2			$	15.8
Buildings			.4				.7				3.9				.9				5.9
Patents			1.9				.2				.4				1.0				3.5
Other
Lease cancellations			.1				.5				–				–				.6
		$	3.9			$	4.3			$	4.5			$	13.1			$	25.8

In 2008, the Company implemented cost reduction actions, including the cost reduction action initiated in the fourth quarter, resulting in a headcount reduction of approximately 1,475 positions, impairment of certain assets and software, and lease cancellations. Charges related to these actions totaled $40.7 million, including severance and related costs of $29.8 million, impairment of fixed assets and buildings of $7.7 million, lease cancellation charges of $2.3 million and software impairment of $.9 million. At July 4, 2009, approximately 90 employees related to these charges remain with the Company, and are expected to leave in 2009. The table below details the accruals and payments recorded in 2008:

														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			(2.7	)			(4.1	)			(4.0	)			(1.8	)			(12.6	)
Balance at July 4, 2009		$	2.5			$	.6			$	1.5			$	.1			$	4.7

Avery Dennison Corporation

														Other
		Pressure-				Retail				Office and				specialty
		sensitive				Information				Consumer				converting
(In millions)		Materials				Services				Products				businesses				Total
Asset Impairment
Machinery and equipment		$	4.9			$	1.3			$	1.2			$	.2			$	7.6
Buildings			–				.1				–				–				.1
Other
Lease cancellations			.9				1.4				–				–				2.3
Software impairment			–				–				.9				–				.9
		$	5.8			$	2.8			$	2.1			$	.2			$	10.9

Note 10. Financial Instruments and Foreign Currency

The Company enters into certain foreign exchange hedge contracts to reduce its exposure to risk from exchange rate fluctuations associated with receivables, payables, loans and firm commitments denominated in certain foreign currencies that arise primarily as a result of its operations outside the U.S. The Company enters into certain interest rate contracts to help manage its exposure to interest rate fluctuations. The Company also enters into certain natural gas and other commodity futures contracts to hedge price fluctuations for a portion of its anticipated domestic purchases. The maximum length of time in which the Company hedges its exposure to the variability in future cash flows for forecasted transactions is generally 12 to 24 months.

As of July 4, 2009, the U.S. dollar equivalent notional values of the Company’s outstanding commodity contracts and foreign currency contracts were approximately $19 million and $1.1 billion, respectively.

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position. In accordance with SFAS No. 133, the Company designates commodity forward contracts on forecasted purchases of commodities and foreign currency contracts on forecasted transactions as cash flow hedges and foreign currency contracts on existing balance sheet items as fair value hedges.

The following table provides the balances and locations of derivatives as of July 4, 2009:

Asset

Liability

(In millions)

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivatives designated as hedging instruments under SFAS No. 133:

Foreign exchange contracts

Other current assets

$

6.4

Other current liabilities

$

5.6

Commodity contracts

Other current assets

–

Other current liabilities

5.9

$

6.4

$

11.5

Fair Value Hedges

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings, resulting in no net material impact to income.

The following table provides the components of the gain (loss) recognized in income related to fair value hedging contracts. The corresponding gains or losses on the underlying hedged items approximated the net gain on these fair value hedging contracts.

						Three Months Ended				Six Months Ended
(In millions)		Location of Gain (Loss) in Income				July 4, 2009				July 4, 2009
Foreign exchange contracts		Cost of products sold				$	(.6	)		$	(1.7	)
Foreign exchange contracts		Marketing, general and administrative expense					.7				24.9
						$	.1			$	23.2

Cash Flow Hedges

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive (loss) income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge

Avery Dennison Corporation

components excluded from the assessment of effectiveness are recognized in current earnings.

The following table provides the components of the gain (loss) recognized in accumulated other comprehensive loss on derivatives (effective portion) related to cash flow hedging contracts:

		Three Months Ended				Six Months Ended
(In millions)		July 4, 2009				July 4, 2009
Foreign exchange contracts		$	(3.6	)		$	(3.7	)
Commodity contracts			.4				(2.9	)
		$	(3.2	)		$	(6.6	)

The following table provides the components of the gain (loss) reclassified from accumulated other comprehensive loss (effective portion) related to cash flow hedging contracts:

						Three Months Ended				Six Months Ended
(In millions)		Location of Gain (Loss) in Income				July 4, 2009				July 4, 2009
Interest rate contracts		Interest expense				$	(.9	)		$	(4.8	)
Foreign exchange contracts		Cost of products sold					(1.9	)			.3
Commodity contracts		Cost of products sold					(1.0	)			(3.1	)
						$	(3.8	)		$	(7.6	)

The aggregate reclassification from other comprehensive income to earnings for settlement or ineffectiveness of hedge activity was a net gain of $2 million and $.6 million during the three and six months ended June 28, 2008, respectively. As of July 4, 2009, a net loss of approximately $10 million is expected to be reclassified from other comprehensive income to earnings within the next 12 months.

Included in the reclassification amount discussed above is the amortization of certain hedge costs of approximately $7 million incurred in connection with the long-term debt issued in 2007 related to the Paxar acquisition. Such costs are being amortized over the life of the related forecasted hedge transactions.

The amount of gain or loss recognized in income related to the ineffective portion of, and the amounts excluded from, effectiveness testing for cash flow hedges and derivatives not designated as hedging instruments under SFAS No. 133 were not significant.

Foreign Currency

Transactions in foreign currencies (including receivables, payables and loans denominated in currencies other than the functional currency) decreased net income by $2.2 million and $1.8 million for the three and six months ended July 4, 2009, respectively. Transactions in foreign currencies increased net income by $3.6 million and $11.6 million for the three and six months ended June 28, 2008, respectively, which included a foreign currency net gain related to certain intercompany transactions of approximately $2 million and $6 million during the three and six months ended June 28, 2008, respectively. These results exclude the effects of translation of foreign currencies on the Company’s financial statements.

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

Note 11. Taxes Based on Income

The effective tax rate for the three and six months ended July 4, 2009 was approximately 1% and approximately 2%, respectively, compared to approximately 19% and approximately 8% for the three and six months ended June 28, 2008, respectively. The effective tax rate for the first six months of 2009 includes a benefit of $18.4 million from discrete events, primarily the tax effect of impairments of goodwill and indefinite-lived intangible assets, partially offset by certain valuation allowance and other items. The Company’s effective tax rate is lower than the U.S. federal statutory rate of 35% 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

Avery Dennison Corporation

estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. The Company believes that it has adequately provided for reasonably foreseeable outcomes related to these matters. However, the Company’s future results may include favorable or unfavorable adjustments to its estimated tax liabilities in the period the assessments are made or resolved, which may impact the Company’s effective tax rate. With some exceptions, the Company and its subsidiaries are no longer subject to income tax examinations by tax authorities for years prior to 2004.

It is reasonably possible that during the next 12 months, the Company may realize a decrease in its gross uncertain tax positions by approximately $46 million, primarily as the result of cash payments and closing tax years. The Company anticipates that it is reasonably possible that cash payments of up to $18 million relating to gross uncertain tax positions could be paid within the next 12 months.

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

		Three Months Ended								Six Months Ended
(In millions, except per share amounts)		July 4, 2009				June 28, 2008				July 4, 2009				June 28, 2008
(A) Net income (loss) available to common shareholders		$	39.8			$	92.4			$	(859.1	)		$	160.8
(B) Weighted-average number of common shares outstanding			105.0				98.5				102.2				98.5
Dilutive shares (additional common shares issuable under employee stock options, PUs, RSUs and restricted stock)			.7				.4				–				.4
(C) Weighted-average number of common shares outstanding, assuming dilution			105.7				98.9				102.2				98.9
Net income (loss) per common share (A) ÷ (B)		$	.38			$	.94			$	(8.41	)		$	1.63
Net income (loss) per common share, assuming dilution (A) ÷ (C)		$	.38			$	.93			$	(8.41	)		$	1.62

In the six months ended July 4, 2009, the effect of dilutive securities (for example, employee stock options, PUs, RSUs and shares of restricted stock) was not dilutive because the Company generated a net operating loss.

Certain employee stock options, PUs, RSUs and shares of restricted stock were not included in the computation of net income per common share, assuming dilution, because they would not have had a dilutive effect. Employee stock options, PUs, RSUs and shares of restricted stock excluded from the computation totaled 11 million shares and 12.1 million shares for the three and six months ended July 4, 2009, respectively, and 10.5 million shares and 9.9 million shares for the three and six months ended June 28, 2008, respectively.

As further discussed in Note 17, “Recent Accounting Pronouncements,” effective at the beginning of 2009, the Company adopted provisions of FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” which did not have a material impact on net income (loss) per share.

Comprehensive income (loss) includes net income (loss), foreign currency translation adjustment, net actuarial loss, prior service cost and net transition assets, net of tax, and the gains or losses on the effective portion of cash flow and firm commitment hedges, net of tax, that are currently presented as a component of shareholders’ equity. The Company’s total comprehensive income (loss) was $102.9 million and $(839.1) million for the three and six months ended July 4, 2009, respectively, and $118.8 million and $271.3 million for the three and six months ended June 28, 2008, respectively.

The components of accumulated other comprehensive loss (net of tax, with the exception of the foreign currency translation adjustment) were as follows:

(In millions)		July 4, 2009				December 27, 2008
Foreign currency translation adjustment		$	123.8			$	65.8
Net actuarial loss, prior service cost and net transition assets, less amortization			(328.5	)			(332.5	)
Net loss on derivative instruments designated as cash flow and firm commitment hedges			(14.8	)			(15.8	)
Accumulated other comprehensive loss		$	(219.5	)		$	(282.5	)

Avery Dennison Corporation

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

(In millions)		July 4, 2009				December 27, 2008
Beginning accumulated derivative loss		$	(15.8	)		$	(16.8	)
Net loss (gain) reclassified to earnings			7.6				(2.9	)
Net change in the revaluation of hedging transactions			(6.6	)			3.9
Ending accumulated derivative loss		$	(14.8	)		$	(15.8	)

Note 14. Fair Value Measurement

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of July 4, 2009:

Fair Value Measurements Using

Significant

Significant

Quoted Prices

Other

Other

in Active

Observable

Unobservable

Markets

Inputs

Inputs

(In millions)

Total

(Level 1)

(Level 2)

(Level 3)

Assets:

Available for sale securities

$

11.7

$

11.7

$

–

$

–

Derivative assets

6.4

–

6.4

–

Liabilities:

Derivative liabilities

$

11.5

$

5.9

$

5.6

$

–

Available for sale securities are measured at fair value using quoted prices and classified within Level 1 of the valuation hierarchy. Derivatives that are exchange-traded are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy. Derivatives measured based on inputs that are readily available in public markets are classified within Level 2 of the valuation hierarchy.

The following table summarizes the fair value measurements of assets measured on a non-recurring basis during the six months ended July 4, 2009:

						Fair Value Measurements Using
										Significant				Significant
						Quoted Prices				Other				Other
						in Active				Observable				Unobservable
						Markets				Inputs				Inputs				Total
(In millions)		Total				(Level 1)				(Level 2)				(Level 3)				Gains (Losses)
Goodwill		$	415.0			$	–			$	–			$	415.0			$	(820.0	)
Indefinite-lived intangible asset			18.0				–				–				18.0				(12.0	)
Long-lived assets held and used			5.5				–				2.6				2.9				(15.0	)

In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets held and used with carrying amounts totaling $20.5 million were written down to their fair values totaling $5.5 million, resulting in impairment charges of $2.6 million and $15 million for the three and six months ended July 4, 2009, respectively. These charges are included in “Other expense, net” in the unaudited Consolidated Statement of Operations.

In accordance with SFAS No. 142, 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. Additionally, certain indefinite-lived assets with a carrying value of approximately $30 million were written down to their estimated implied fair value of $18 million, resulting in a non-cash impairment of $12 million. These charges are included in “Goodwill and indefinite-lived intangible asset impairment charges” in the unaudited Consolidated Statement of Operations for the three and six months ended July 4, 2009, respectively. Refer to Note 4, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” for further information.

Avery Dennison Corporation

Note 15. Commitments and Contingencies

Legal Proceedings

On April 24, 2003, Sentry Business Products, Inc. filed a purported class action on behalf of direct purchasers of label stock in the United States District Court for the Northern District of Illinois against the Company, UPM-Kymmene Corporation (“UPM”), Bemis Company Inc. (“Bemis”), and certain of their subsidiaries seeking treble damages and other relief for alleged unlawful competitive practices, with allegations including that the defendants attempted to limit competition among themselves through anticompetitive understandings. Ten similar complaints were filed in various federal district courts. In November 2003, the cases were transferred to the United States District Court for the Middle District of Pennsylvania and consolidated for pretrial purposes. Plaintiffs filed a consolidated complaint on February 16, 2004, which the Company answered on March 31, 2004. On April 14, 2004, the court separated the proceedings as to class certification and merits discovery, and limited the initial phase of discovery to the issue of the appropriateness of class certification. On January 4, 2006, plaintiffs filed an amended complaint. On January 20, 2006, the Company filed an answer to the amended complaint. On August 14, 2006, the plaintiffs moved to certify a proposed class. The court substantively granted class certification on November 19, 2007. On July 22, 2008, the court held a hearing to set a schedule for merits discovery. On May 12, 2009, the Company entered into a settlement agreement with plaintiffs. Without admitting liability, the Company has agreed to pay plaintiffs $36.5 million, plus up to $.5 million related to notice and administration expenses, in two equal installments of $18.5 million, which were paid on May 27, 2009 and July 15, 2009. On June 10, 2009, the district court entered an order preliminarily approving the settlement, and a final approval hearing is scheduled for September 17, 2009. If court approval is obtained, the matter will be dismissed 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. The Nebraska, Kansas and Vermont cases are currently stayed. Defendants’ motion to dismiss the Tennessee case, filed on March 30, 2006, is pending. The Company intends to defend these matters vigorously.

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

The Company is unable to predict the effect of these matters at this time, although the effect could be adverse and material.

The Company and its subsidiaries are involved in various other lawsuits, claims and inquiries, most of which are routine to the nature of the business. Based upon current information, management believes that the resolution of these other matters will not materially affect the Company’s financial position.

Environmental

As of July 4, 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.

Avery Dennison Corporation

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

(In millions)		July 4, 2009				December 27, 2008
Balance at beginning of year		$	58.5			$	37.8
Purchase price adjustments related to acquisitions			2.1				24.6
Accruals			.7				.9
Payments			(2.1	)			(4.8	)
Balance at end of period		$	59.2			$	58.5

As of July 4, 2009, approximately $12 million of the total balance is classified as short-term.

These estimates could change depending on various factors, such as modification of currently planned remedial actions, changes in remediation technologies, changes in site conditions, a change in the estimated time to complete remediation, changes in laws and regulations affecting remediation requirements and other factors.

Product Warranty

The Company provides for an estimate of costs that may be incurred under its basic limited warranty at the time product revenue is recognized. These costs primarily include materials and labor associated with the service or sale of the product. Factors that affect the Company’s warranty liability include the number of units installed or sold, historical and anticipated rate of warranty claims on those units, cost per claim to satisfy the Company’s warranty obligation and availability of insurance coverage. Because these factors are impacted by actual experience and future expectations, the Company assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary. As of July 4, 2009, the Company’s product warranty liabilities were approximately $2 million.

Other

In 2005, the Company contacted relevant authorities in the U.S. and reported on the results of an internal investigation of potential violations of the U.S. Foreign Corrupt Practices Act. The transactions at issue were carried out by a small number of employees of the Company’s reflective business in China, and involved, among other things, impermissible payments or attempted impermissible payments. The payments or attempted payments and the contracts associated with them appear to have been minor in amount and of limited duration. Sales of the Company’s reflective business in China in 2005 were approximately $7 million. In addition, on or about October 10, 2008, the Company notified relevant authorities that it had discovered questionable payments to certain foreign customs and other regulatory officials by some employees of its recently acquired companies. These payments were not made for the purpose of obtaining business from any governmental entity. Corrective and disciplinary actions have been taken with respect to both internal investigations and the Company has taken remedial measures to comply with the provisions of the U.S. Foreign Corrupt Practices Act. On July 28, 2009, the Company entered into a settlement agreement with the SEC regarding the foregoing actions. Without admitting or denying liability, the Company agreed to disgorge approximately $.3 million and pay a $.2 million civil penalty. On August 10, 2009, the Company was advised by the U. S. Department of Justice that it has declined to take action against the Company in connection with the China reflective matters, which were voluntarily disclosed by the Company.

The Company and its subsidiaries are involved in various other lawsuits, claims and inquiries, most of which are routine to the nature of the Company’s business. Based upon current information, management believes that the resolution of these other matters will not materially affect the Company’s financial position.

On September 9, 2005, the Company completed the lease financing for a commercial facility (the “Facility”) located in Mentor, Ohio, used primarily for the new headquarters and research center for the Company’s roll materials division. The Facility consists generally of land, buildings, equipment and office furnishings. The Company leased the Facility under an operating lease arrangement, which contains a residual value guarantee of $33.4 million. The Company does not expect the residual value of the Facility to be less than the amount guaranteed.

The Company participates in international receivable financing programs with several financial institutions whereby advances may be requested from these financial institutions. Such advances are guaranteed by the Company. At July 4, 2009, the Company had guaranteed approximately $13 million.

As of July 4, 2009, the Company guaranteed up to approximately $22 million of certain foreign subsidiaries’ obligations to their suppliers, as well as approximately $505 million of certain subsidiaries’ lines of credit with various financial institutions.

Avery Dennison Corporation

As of July 4, 2009, approximately two million HiMEDS units with a carrying value of approximately $109 million remained outstanding. The purchase contracts related to these units obligate the holders to purchase from the Company a certain number of shares in 2010 (depending on the stock price at the time). Refer to Note 5, “Debt,” for more information.

Note 16. Segment Information

As discussed in Note 2, “Acquisitions,” the Company completed the acquisition of DM Label during the second quarter of 2008. The operating results for DM Label are included in the Retail Information Services segment.

Beginning in 2009, the Company modified its approach to allocating Corporate costs to its operating segments to better reflect the costs required to support operations within segment results. Prior year amounts have been restated to conform with the new methodology.

Financial information by reportable segment and other businesses is set forth below:

		Three Months Ended								Six Months Ended
(In millions)		July 4, 2009				June 28, 2008				July 4, 2009				June 28, 2008
Net sales to unaffiliated customers:
Pressure-sensitive Materials		$	793.6			$	979.9			$	1,602.4			$	1,899.5
Retail Information Services			331.5				438.2				647.5				810.2
Office and Consumer Products			216.9				255.4				401.3				449.8
Other specialty converting businesses			113.4				155.4				230.4				314.6
Net sales to unaffiliated customers		$	1,455.4			$	1,828.9			$	2,881.6			$	3,474.1
Intersegment sales:
Pressure-sensitive Materials		$	36.0			$	45.8			$	73.4			$	86.6
Retail Information Services			.2				.1				.5				1.3
Office and Consumer Products			.1				.3				.4				.6
Other specialty converting businesses			3.7				8.0				7.0				14.8
Eliminations			(40.0	)			(54.2	)			(81.3	)			(103.3	)
Intersegment sales		$	–			$	–			$	–			$	–
Income (loss) before taxes:
Pressure-sensitive Materials		$	50.6			$	82.4			$	50.4			$	154.2
Retail Information Services			(5.9	)			20.3				(859.3	)			16.6
Office and Consumer Products			34.5				40.7				57.9				62.6
Other specialty converting businesses			(10.4	)			5.8				(37.9	)			15.3
Corporate expense			(8.2	)			(5.7	)			(38.9	)			(14.8	)
Interest expense			(20.4	)			(29.3	)			(47.9	)			(58.8	)
Income (loss) before taxes		$	40.2	(1)		$	114.2	(2)		$	(875.7	) (3)		$	175.1	(4)

Avery Dennison Corporation

Note 17. Recent Accounting Requirements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 168 establishes the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative non-governmental U.S. GAAP. The Codification is effective for interim and annual periods ending after September 15, 2009. The adoption of this standard will not have a material impact on the Company’s financial condition, results of operations, cash flows, or disclosures.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” Among other items, SFAS No. 167 responds to concerns about the application of certain key provisions of FIN 46(R), including those regarding the transparency of the involvement with variable interest entities. SFAS No. 167 is effective for calendar year companies beginning on January 1, 2010. The adoption of this standard will not have a material impact on the Company’s financial condition, results of operations, cash flows, or disclosures.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” SFAS No. 165 defines what qualifies as a subsequent event—those events or transactions that occur following the balance sheet date, but before the financial statements are issued, or are available to be issued—and requires companies to disclose the date through which it has evaluated subsequent events and the basis for determining that date. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009. The Company adopted the provisions of SFAS No. 165 in the second quarter of 2009. Refer to Note 1, “General,” for further information.

In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB28-1, “Interim Disclosures about Fair 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. This issue also requires fair value information to be presented together with the related carrying amount and disclosure regarding the methods and significant assumptions used to estimate fair value. This issue is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company has included the disclosures required under this issue in Note 5, “Debt.”

The FASB issued in December 2007, and amended in April 2009, SFAS No. 141(R), “Business Combinations.” This Statement replaces SFAS No. 141, “Business Combinations,” and defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This Statement’s scope is broader than that of SFAS No. 141, which applied only to business combinations in which control was obtained by transferring consideration. In general, SFAS No. 141(R) 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 Statement applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS No. 141(R) did not have a material impact on the Company’s financial results of operations and financial condition.

Avery Dennison Corporation

In December 2008, the FASB issued FSP 132(R)-1, “Employers Disclosures 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. This interpretation is effective for financial statements issued for fiscal years ending after December 15, 2009. The adoption of this interpretation will increase the disclosures in the financial statements related to the assets of the Company’s pension and postretirement benefits plans. The Company is currently evaluating the disclosure implications of this Statement.

In August 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) 08-07, “Accounting for Defensive Intangible Assets.” This issue clarifies that a defensive intangible asset should be accounted for as a separate unit of accounting. This applies to all intangible assets acquired, including intangible assets acquired in a business combination, in situations in which the acquirer does not intend to actively use the asset but intends to hold (lock up) the asset to prevent its competitors from obtaining access to the asset (defensive assets). FSP-EITF 08-07 is effective for intangible assets acquired on or after the beginning of the first annual reporting period beginning on December 15, 2008. The adoption of FSP-EITF 08-07 did not have an impact on the Company’s financial results of operations and financial condition because there have been no acquisitions since the effective date of this issue.

In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under this issue, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP-EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years and requires retrospective application. The adoption of FSP-EITF 03-6-1 did not have a material impact on the Company’s financial results of operations and financial condition.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities (the “Hierarchy”). The Hierarchy within SFAS No. 162 is consistent with that previously defined in the AICPA Statement on Auditing Standards (“SAS”) No. 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The adoption of SFAS No. 162 did not have a material effect on the Company’s financial statements because the Company has utilized the guidance within SAS No. 69.

In April 2008, the FASB directed the FASB Staff to issue FSP No. 142-3, “Determination of the Useful Life of Intangible Assets.” FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used for purposes of determining the useful life of a recognized intangible asset under SFAS No. 142. FSP FAS No. 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other U.S. generally accepted accounting principles. FSP No. 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier application is not permitted. The adoption of FSP No.142-3 did not have a material impact on the Company’s financial results of operations and financial condition.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” This Statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS No. 161 applies to all derivative instruments within the scope of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as well as related hedged items, bifurcated derivatives, and non-derivative instruments that are designated and qualify as hedging instruments. Entities with instruments subject to SFAS No. 161 must provide more robust qualitative disclosures and expanded quantitative disclosures. SFAS No. 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company has included the disclosures required under SFAS No. 161 in Note 10, “Financial Instruments and Foreign Currency.”

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements—an amendment of Accounting Review Board (“ARB”) No. 51.” This Statement is effective for fiscal years and interim periods, beginning on or after December 15, 2008, with earlier adoption prohibited. This Statement requires the recognition of a non-controlling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the non-controlling interest will be included in consolidated net income on the income statement. It also amends certain of ARB No. 51’s consolidation procedures for consistency with the requirements of SFAS No. 141(R). This Statement also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. The adoption of SFAS No. 160 did not have a material impact on the Company’s financial results of operations and financial condition.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which is effective for fiscal years and interim periods

Avery Dennison Corporation

after November 15, 2007. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This statement applies to all financial assets and liabilities and to all non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS No. 157 defines fair value based upon an exit price model. In connection with the issuance of SFAS No. 157, the FASB issued FSP Nos. 157-1 and 157-2. FSP No. 157-1 amends SFAS No. 157 to exclude SFAS No. 13, “Accounting for Leases,” and its related interpretive accounting pronouncements that address leasing transactions. As allowed for under FSP No. 157-2, the Company applied the provisions of SFAS No. 157 to assets and liabilities measured on a non-recurring basis as of the beginning of the 2009 fiscal year. The adoption of SFAS No. 157 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			22
Forward-looking Statements			22
Overview and Outlook			22
Analysis of Results of Operations for the Second Quarter			25
Results of Operations by Segment for the Second Quarter			27
Analysis of Results of Operations for the Six Months Year-to-Date			29
Results of Operations by Segment for the Six Months Year-to-Date			30
Financial Condition			32
Uses and Limitations of Non-GAAP Measures			37
Recent Accounting Requirements			38
Safe Harbor Statement			38

DEFINITION OF TERMS

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP. Our discussion of financial results includes several non-GAAP measures to provide additional information concerning Avery Dennison Corporation’s (the “Company’s”) performance. These non-GAAP financial measures are not in accordance with, nor are they a substitute for, GAAP financial measures. These non-GAAP financial measures are intended to supplement the presentation of our financial results that are prepared in accordance with GAAP. Refer to “Uses and Limitations of Non-GAAP Measures.”

We use the following terms:

•		Organic sales growth (decline) refers to the change in sales excluding the estimated impact of currency translation, acquisitions and divestitures, and the extra week in fiscal year 2009;
•		Segment operating income (loss) refers to income (loss) before interest and taxes;
•		Free cash flow refers to cash flow from operations and net proceeds from sale of investments, less payments for capital expenditures, software and other deferred charges;
•		Operational working capital refers to trade accounts receivable and inventories, net of accounts payable.

FORWARD-LOOKING STATEMENTS

Certain statements contained in Management’s Discussion and Analysis are “forward-looking statements” and are subject to certain risks and uncertainties. Refer to our “Safe Harbor Statement” contained elsewhere in this report.

OVERVIEW AND OUTLOOK

Overview

Sales

Our sales decreased 20% and 17% in the first three and six months of 2009, respectively, compared to the same period last year.

		Three Months Ended								Six Months Ended
Estimated change in sales due to:		July 4, 2009				June 28, 2008				July 4, 2009				June 28, 2008
Organic sales decline			(14	)%			(1	)%			(14	)%			(1	)%
Extra week in fiscal year 2009 (1)			–				–				4				–
Foreign currency translation			(7	)			7				(7	)			7
Acquisitions, net of divestitures			–				14				–				14
Reported sales (decline) growth (2)			(20	)%			20	%			(17	)%			19	%

Avery Dennison Corporation

Net Income

In the first six months of 2009, we had a net loss of approximately $860 million compared to a net income of approximately $161 million in the same period in 2008.

Negative factors affecting net income included:

	•		Impairment of goodwill and indefinite-lived intangible assets
	•		Lower net sales
	•		Higher restructuring and asset impairment charges related to cost reduction actions
	•		Legal settlement costs
	•		Loss on debt extinguishment
	•		Higher raw material and employee-related costs
	•		Unfavorable impact of foreign currency translation

Positive factors affecting net income included:

	•		Cost savings from productivity improvement initiatives, including savings from restructuring actions
	•		Pricing
	•		Lower tax rate, resulting in a tax benefit for the first six months of 2009
	•		Lower transition costs related to acquisition integrations

Impairment of Goodwill and Indefinite-Lived Intangible Assets

In the first quarter of 2009, we recorded non-cash impairment charges of $832 million for the retail information services reporting unit, of which $820 million is related to goodwill and $12 million is related to indefinite-lived intangible assets. We completed our impairment test of goodwill and indefinite-lived intangible assets (“goodwill impairment”) in the second quarter of 2009, with no additional impairment charge incurred.

We perform our goodwill impairment test in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets.” In performing the required goodwill impairment test, we primarily apply a present value (discounted cash flow) method to determine the fair value of the reporting units with goodwill. Our reporting units, which are composed of either a discrete business or an aggregation of businesses with similar economic characteristics, consist of roll materials; retail information services; office and consumer products; graphics and reflective products; industrial products; and business media.

We perform our annual goodwill impairment test during the fourth quarter. However, certain factors may result in the need to perform a goodwill impairment test prior to the fourth quarter, including significant underperformance of our business relative to expected operating results, significant adverse economic and industry trends, significant decline in our market capitalization for an extended period of time relative to net book value, or a decision to divest an individual business within a reporting unit. Based upon our assessment of these factors in connection with the preparation of our first quarter financial statements, we determined that there was a need to initiate an interim goodwill impairment test. The factors considered included both a sustained decline in our stock price and a decline in our 2009 revenue projections for the retail information services reporting unit, following lower than expected revenues in March 2009, which continued in April 2009. The peak season for the retail information services reporting unit has traditionally been March through the end of the second quarter.

Our interim impairment analysis indicated that the fair value of each of our reporting units exceeded its carrying value, except for our retail information services reporting unit, which had a fair value less than its carrying value. Refer to Note 4, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” to the unaudited Condensed Consolidated Financial Statements for further information.

Goodwill

As part of the interim goodwill impairment test completed in the second quarter of 2009, which is discussed above, we recorded a non-cash impairment charge of $820 million for the retail information services reporting unit in the first quarter of 2009, with no additional impairment charge in the second quarter of 2009.

Avery Dennison Corporation

Indefinite-Lived Intangible Assets

In connection with the acquisition of Paxar, we acquired approximately $30 million of intangible assets, consisting of certain trade names and trademarks, which are not subject to amortization because they have an indefinite useful life. As part of the interim goodwill impairment test completed in the second quarter of 2009, which is discussed above, we recorded an additional non-cash impairment charge of $12 million related to these indefinite-lived intangible assets in the first quarter of 2009, with no additional impairment charge in the second quarter of 2009.

Acquisitions

We completed the acquisition of DM Label Group (“DM Label”) on April 1, 2008. DM Label operations are included in our Retail Information Services segment. See also Note 2, “Acquisitions,” to the unaudited Condensed Consolidated Financial Statements.

Cost Reduction Actions

Q4 2008 — 2009 Actions

In the fourth quarter of 2008, we initiated restructuring actions that are now expected to generate over $160 million in annualized savings by the middle of 2010, of which an estimated $75 million, net of transition costs, is expected to benefit 2009. We expect to incur approximately $100 million to $110 million of cash restructuring charges associated with these actions, with the majority to be incurred in 2009. At the end of the second quarter, we achieved run-rate savings representing approximately 50% of our target.

During the fourth quarter of 2008 and the first six months of 2009, we recorded $81 million in charges related to these restructuring actions, consisting of severance and related employee costs, asset impairment charges, and lease cancellation costs. Severance and employee related costs related to approximately 2,600 positions, impacting all of our segments and geographic regions.

Q1 2008 — Q3 2008 Actions

During the first three quarters of 2008, we implemented cost reduction actions resulting in charges of $22.8 million, including severance and employee related costs for approximately 645 positions, asset impairment charges, and lease cancellation costs.

Refer to Note 9, “Cost Reduction Actions,” to the unaudited Condensed Consolidated Financial Statements for further detail.

Effective Rate of Taxes on Income

The effective tax rate for the first six months of 2009 was approximately 2%, compared with approximately 8% for the same period in 2008. The effective tax rate for the first six months of 2009 includes a benefit of $18.4 million from discrete events, primarily the tax effect of impairments of goodwill and indefinite-lived intangible assets, partially offset by the build of certain valuation allowances and other items. Refer to Note 11, “Taxes Based on Income,” to the unaudited Condensed Consolidated Financial Statements for further information.

Free Cash Flow

Free cash flow, which is a non-GAAP measure, refers to cash flow from operating activities and net proceeds from sale of investments less spending on property, plant, equipment, software and other deferred charges. We use free cash flow as a measure of funds available for other corporate purposes, such as dividends, debt reduction, acquisitions, and repurchases of common stock. Management believes that this measure provides meaningful supplemental information to our investors to assist them in their financial analysis of the Company. This measure is not intended to represent the residual cash available for discretionary purposes. Refer to the discussion under “Uses and Limitations of Non-GAAP Measures” elsewhere in this report for further information regarding limitations of this measure.

		Six Months Ended
(In millions)		July 4, 2009				June 28, 2008
Net cash provided by operating activities		$	132.8			$	188.7
Purchase of property, plant and equipment			(30.5	)			(69.1	)
Purchase of software and other deferred charges			(14.9	)			(33.0	)
Proceeds from sale of investments, net			.1				13.0
Free cash flow		$	87.5			$	99.6

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

Avery Dennison Corporation

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

Dividend

On July 30, 2009, we declared a third-quarter dividend of $.20 per share, a reduction from our previous dividend of $.41 per share. This precautionary action was taken in response to the possibility of continued poor market conditions beyond 2009, to focus on reducing debt and to plan for increased pension funding requirements.

Legal Proceedings

We are a named defendant in purported class actions in the U.S. seeking treble damages and other relief for alleged unlawful competitive practices.

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

As previously disclosed and reported to authorities in the U.S., we have discovered instances of conduct by certain employees that potentially violate the U.S. Foreign Corrupt Practices Act. We reported that conduct to authorities in the U.S. and have entered into a settlement agreement with the SEC in this regard. Refer to Note 15, “Commitments and Contingencies,” to the unaudited Condensed Consolidated Financial Statements for further information.

We are unable to predict the effect of these matters at this time, although the effect could be adverse and material. These and other matters are reported in Note 15, “Commitments and Contingencies,” to the unaudited Condensed Consolidated Financial Statements.

Outlook

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

If current exchange rate trends continue, they would have an unfavorable effect on earnings for 2009.

We expect incremental pension and other employee-related expenses and contributions in 2009. In addition, we currently expect increased pension contributions in the range of $200 million to $300 million from the end of the second quarter of 2009 through 2013.

We anticipate higher charges related to restructuring actions in 2009 compared to 2008.

We anticipate lower interest expense in 2009 due primarily to retirements of certain indebtedness. Our assumptions on interest expense are subject to changes in market rates through the remainder of the year.

The annual effective tax rate will be impacted by future events including changes in tax laws, geographic income mix, tax audits, closure of tax years, legal entity restructuring, and release of, or accrual for, valuation allowances on deferred tax assets. The effective tax rate can potentially have wide variances from quarter to quarter, resulting from interim reporting requirements and the recognition of discrete events.

We anticipate our capital and software expenditures to be in the range of $115 million to $130 million in 2009, including increased investment in new business opportunities to drive future growth and profitability.

We are targeting a reduction of debt of at least $350 million from the end of the second quarter of 2009 through 2010.

ANALYSIS OF RESULTS OF OPERATIONS FOR THE SECOND QUARTER

Income Before Taxes

(In millions)		2009				2008
Net sales		$	1,455.4			$	1,828.9
Cost of products sold			1,065.1				1,338.6
Gross profit			390.3				490.3

(In millions)		2009				2008
Marketing, general and administrative expense			300.1				341.0
Interest expense			20.4				29.3
Other expense, net			29.6				5.8
Income before taxes		$	40.2			$	114.2
As a Percent of Sales:
Gross profit (margin)			26.8	%			26.8	%
Marketing, general and administrative expense			20.6				18.6
Income before taxes			2.8				6.2

Avery Dennison Corporation

Sales

Sales decreased 20% in the second quarter of 2009 compared to the same period last year, due largely to the decline in volume, partially offset by the benefit from pricing. Foreign currency translation had an unfavorable impact on the change in sales of approximately $147 million in the second quarter of 2009.

On an organic basis, sales declined 14% in the second quarter of 2009, as continued deterioration in the global macroeconomic environment contributed to volume declines across all segments and geographic regions, except Asia.

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

Gross Profit Margin

Gross profit margin for the second quarter of 2009 remained flat compared to the same period in 2008, as reduced fixed-cost leverage was offset by benefits from pricing, productivity improvement initiatives, and restructuring.

Marketing, General and Administrative Expenses

The decrease in marketing, general and administrative expense in the second quarter of 2009 compared to the same period last year primarily reflected cost reductions and benefits from productivity and the impact of currency translation.

Other Expense, net

(In millions)		2009				2008
Restructuring costs		$	25.8			$	7.2
Asset impairment charges and lease cancellation costs			3.8				3.1
Other			–				(4.5	)
Other expense, net		$	29.6			$	5.8

In the second quarter of 2009, “Other expense, net” consisted of restructuring costs including severance and other employee-related costs, as well as asset impairment and lease cancellation charges. Restructuring costs in the second quarter of 2009 relate to a reduction in headcount of approximately 1,205 positions across all segments and geographic regions.

In the second quarter of 2008, “Other expense, net” consisted of restructuring costs including severance and other employee-related costs, asset impairment and lease cancellation charges (primarily in the Retail Information Services segment), and a gain on sale of investments. Restructuring costs in the second quarter of 2008 relate to a reduction in headcount of approximately 310 positions across all segments and geographic regions.

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

Net Income and Earnings per Share

(In millions, except per share)		2009				2008
Income before taxes		$	40.2			$	114.2
Provision for income taxes			.4				21.8
Net income		$	39.8			$	92.4
Net income per common share		$	.38			$	.94
Net income per common share, assuming dilution		$	.38			$	.93
Net income as a percent of sales			2.7	%			5.1	%

(In millions, except per share)		2009				2008
Percent change in:
Net income			(56.9	)%			7.2	%
Net income per common share			(59.6	)			6.8
Net income per common share, assuming dilution			(59.1	)			6.9

Avery Dennison Corporation

Provision for Income Taxes

Our effective tax rate for the second quarter of 2009 was approximately 1%, compared with approximately 19% for the same period in 2008. The effective tax rate for the second quarter of 2009 includes a benefit of $.6 million from discrete events, primarily the impact of tax law changes and the build of certain valuation allowances, partially offset by the release of certain tax contingencies. 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 SECOND QUARTER

Pressure-sensitive Materials Segment

(In millions)		2009				2008
Net sales including intersegment sales		$	829.6			$	1,025.7
Less intersegment sales			(36.0	)			(45.8	)
Net sales		$	793.6			$	979.9
Operating income (1)			50.6				82.4
(1) Includes lease cancellation costs in 2009, and restructuring costs and asset impairment charges in both years		$	13.8			$	.5

Net Sales

Sales in our Pressure-sensitive Materials segment decreased 19% in the second quarter of 2009 compared to the same period in 2008, which included the unfavorable impact of foreign currency translation (approximately $102 million). On an organic basis, sales declined 10% in the second quarter of 2009, as the benefits from pricing were more than offset by the decline in volume.

On an organic basis, sales in our roll materials business in the second quarter of 2009 declined at a low double-digit rate in Europe, a mid single-digit rate (excluding intercompany sales) in North America, and a low single-digit rate in emerging markets (mid single-digit decline in Eastern Europe and South America, partially offset by mid single-digit increase in Asia) 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 declined at a double-digit rate, reflecting lower promotional spending by businesses in response to weak market conditions.

Operating Income

Decreased operating income in the second quarter of 2009 reflected the impact of lower volume, partially offset by the benefits from pricing and cost savings from restructuring and productivity improvement initiatives. In addition, operating income in 2009 included lease cancellation costs and higher restructuring and asset impairment charges compared to the same period in 2008.

Retail Information Services Segment

(In millions)		2009				2008
Net sales including intersegment sales		$	331.7			$	438.3
Less intersegment sales			(.2	)			(.1	)
Net sales		$	331.5			$	438.2
Operating (loss) income (1) (2)			(5.9	)			20.3
(1) Includes asset impairment charges in 2008, and restructuring and lease cancellation costs in both years		$	5.1			$	5.6
(2) Includes transition costs related to acquisition integrations in 2008		$	–			$	5.7

Net Sales

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