Avery Dennison Corporation (AVY, NYSE)
Industry: Packaging & Containers
Annual report, fiscal year 2009


2009
Annual Report

# We
identify
your world.



This printed edition of our annual report has been produced in black and white on environmentally certified paper, with a goal of conserving resources while providing a convenient printed option for our audiences.

2 ___
3 ___
6 ___
14 ___
16 ___
17 ___
Financial results
Letter to shareholders
We identify your world
Our businesses at a glance
Directors and officers
Financial information



We encourage you to visit www.averydennison.com/annualreport to experience the interactive story of Avery Dennison in 2009.
Every day, in thousands of places, and in millions of moments, Avery Dennison makes products more enjoyable, brands more competitive, inventories more productive and the environments in which we live and work more understandable. That's our focus, and our future: to make brands more inspiring and the world more intelligent.



## Financial Results



Net sales of $6.0 billion declined 11 percent from $6.7 billion in 2008.

$6.0

## Net Income (Loss) in millions

## $(746.7)

A net loss of $746.7 million, or $7.21 per share, was due primarily to non-cash charges for goodwill and indefinite-lived intangible asset impairment. Net income for 2008 was $266.1 million, or $2.70 per share.

Dividends per common share

## $1.22

The Company returned a total of $134.9 million to shareholders through dividends in 2009.

## Sales by Segment



Free Cash Flow dollars in millions



Record free cash flow of $465.7 million, compared with $365.3 million in 2008, helped the Company reduce debt and pay dividends.

Free cash flow is a non-GAAP measure that refers to cash flow from operating activities and net (purchases) proceeds from sale of investments, less payments for capital expenditures, software and other deferred charges.

## $465.7



Dear Fellow Shareholders,

In our letter last year, we told you Avery Dennison was prepared to endure a protracted economic downturn and emerge from it a stronger business. The recession turned out to be worse than we anticipated, but the outcome for your Company was better than we expected. We completed 2009 well on the way to transforming Avery Dennison from a supplier of basic materials into a trusted partner who makes every brand more inspiring and the world more intelligent.

Sales volumes dropped during the first half of the year as customers substantially reduced inventories and recovered only modestly later in the year. We focused on three strategic imperatives: reducing our fixed costs, accelerating free cash flow, and continuing to invest in growth so we will be stronger when recovery comes. As expected, the decline in volumes reduced our sales and profits for the year, but in certain key measures our results were strong. Rigorous cost controls, disciplined pricing, and our restructuring and productivity improvements helped us generate record free cash flow and expand gross profit margins. We improved working capital to the most efficient level in several years. We made a difficult decision to reduce the dividend and pay down debt to ensure that we could survive a protracted downturn. In short, we played excellent defense.

At the same time, we played strong offense. We maintained share leadership in our key markets. We earned new business, directly and through our partners, from leading companies including Wal-Mart, Procter & Gamble, Korean food producer Pulmuone, Mexico's Novamex, and auto makers including Ford, BMW and China's Great Wall Motor Company. Gerry Weber Group, a major German fashion company, chose us to deploy "item-level" RFID (Radio Frequency Identification) technologies to help them manage inventory, speed up their supply chain and increase in-store security. We accelerated our product development process and launched Avery \( ^{\circledR} \)  NoteTabs \( ^{™} \)  and Avery \( ^{\circledR} \)  Label Pads; \( ^{™} \)  which solve everyday labeling and organizing problems in new ways. We continued to grow sales in China. We maintained our investments in promising opportunities in new pressure-sensitive materials, Japan and healthcare.

We enter 2010 well positioned for a wide range of business environments. Avery Dennison has well-established leading market share in three sectors: Pressure-sensitive Materials, Retail Information Services, and Office and Consumer Products. We deliver higher returns than most of our competitors in each sector thanks to our strong brands, differentiated products and best-in-class service in every major world market. This year we will continue to focus on disciplined operations and free cash flow, but we will also focus on realizing the promise of our investments in profitable growth.



## Inspired Brands, Intelligent World

We have learned from several thousand meetings with “end customers”; companies that use our materials for the labels on their products, that we play a key role in making brands distinctive and attractive—in a word, inspiring. We help make products stand out on store shelves and move shoppers to choose them.

At the same time, our products convey information those shoppers need to purchase and use a broad spectrum of industrial and consumer products, including packaged consumer goods, clothing, food and beverages, pharmaceuticals and healthcare products, electronic components and automobiles. We also provide information that makes supply chains more efficient and more accurate and responsive to customers—that is, more intelligent.

Our Pressure-sensitive Materials businesses are targeting market segments that can benefit from our expertise in packaging materials and global scale. Roll Materials, our largest business, is moving from being just a substrate provider to a developer of innovative packaging solutions based on end-customer needs and insights. A key element in this move is to expand the use of pressure-sensitive labels in key market segments, such as food and beverage, where they enhance brands and lift sales more successfully, and at a lower total cost, than traditional wet-glue labels or other decorating technologies. Our other pressure-sensitive business, Graphics and Reflective Products, has identified and developed new, easy-to-apply cast films that are used by transportation equipment manufacturers and for fleet graphics, architectural marking and signage.

The global market in which Retail Information Services (RIS) competes is well over $15 billion; even as a leader it has less than 10 percent market share, and thus has substantial growth opportunities. RIS has all the elements in place to fulfill its new vision of “intelligent, creative, sustainable solutions that elevate brands and accelerate performance in the retail supply chain.” RIS serves retailers and brand owners, who are based primarily in the U.S. and Europe, but it also has a presence in more than 40 apparel-manufacturing countries and can serve customers at all points in their supply chains. With this global scale, RIS ensures that packaging produced on five continents consistently represents a brand image as well as the information needed to move items quickly and securely from the point of manufacture to the point of sale thousands of miles away.

Office and Consumer Products is finding new customers and consumers in segments where the Avery brand’s long-standing leadership in professional organization is highly relevant, including personal organization and identification, “on the go” applications and education. The business has revitalized its process for developing new solutions, as evidenced by Avery \( ^{®} \)  NoteTabs \( ^{™} \)  and Avery \( ^{®} \)  Label Pads \( ^{™} \) , which have received rave reviews from consumers.

Other specialty converting businesses is a diverse group of smaller businesses, including Specialty Tape, which serves several distinct industrial fabricating and bonding markets. We have formed a new medical division to more rapidly grow our medical tapes and wound care business.

## Accelerating Performance

During 2009, we used Enterprise Lean Sigma (ELS) to reduce costs and improve service and quality in our supply chain. Thousands of employees worked in teams to implement our cost-out program, and we increased our mid-2010 target for annual savings from $160 million to $180 million. These teams also achieved record-low levels of operational working capital in our businesses and improved service in almost every business as well. In 2010, we’ll continue to use ELS principles to drive supply chain excellence, and we’ll expand the use of these powerful tools to improve the efficiency and effectiveness of our human resources, information technology, and finance and accounting functions.

## The Next 75 Years

The year 2010 marks Avery Dennison’s 75th anniversary as a company. Throughout our history we have followed the lead of our founder, Stan Avery, who saw the self-adhesive die-cut label not only as a solution to the everyday business problem of marking prices, but also as a way to help people. Our new vision—to make every brand more inspiring and the world more intelligent—is firmly anchored in Stan Avery’s sense of purpose as well as his inventive spirit.



## Transitions

We would like to welcome Debra L. Reed, the chairperson, president and CEO of the regulated utilities of Sempra Energy, to the Avery Dennison board of directors. And we would like to thank Richard M. Ferry, who is retiring from the board as of the Company’s annual meeting on April 22, 2010. Richard has been a member of our board for 24 years. He has provided wise and incisive counsel in every one of those years, and we wish him all the best.

This brings the co-authors of this letter to the awkward task of thanking and congratulating each other.

Kent Kresa has been a director since 1999 and chairman of the board since 2005, and he, too, is retiring as of the annual meeting. As chairman, Kent has guided the board through some of the Company’s most difficult challenges. On behalf of the board, Dean would like to thank him for everything he has done for Avery Dennison. In turn, Kent would like to congratulate Dean on his election as chairman of the board.

And finally, we thank every member of the Avery Dennison team. During one of the toughest years in Company history, they stayed positive and delivered excellent service, kept the franchise strong and, through their attention to customers, pointed the way to our future.





Dean A. Scarborough
President and Chief Executive Officer



Kent Kresa
Chairman of the Board

MARCH 11, 2010



01.

Aisle after aisle, Avery Dennison helps consumer brands come to life in the grocery store. By integrating technology, materials and design, we lead consumers to the best choices for quality and freshness, and lead our end customers—household product, food and beverage companies—to greater efficiency and profitability.



# We
identify
distinction.



MAKING BRANDS MORE INSPIRING

At Avery Dennison, everything we do helps consumer products become household brand names. Our labeling and packaging solutions invite consumers worldwide to pick a product, enjoy it and remain loyal to it for years.

With the majority of purchasing decisions made by consumers in the store—on average within 20 seconds, while standing just 30 inches away from the shelf—the way a brand tells its story is critical to a product’s success. Our labeling and identification solutions make those product stories compelling.
MAKING THE WORLD MORE INTELLIGENT



Food packaging

## Cool solution

When increasingly quality-conscious shoppers in South Korea began to reject egg cartons with peeling labels, Avery Dennison solved the problem for perishable foods retailer Pulmuone with pressure-sensitive labels. Now, our cold-resistant pressure-sensitive materials are used on packaging for nearly 30 egg products in Korea.



Clear-on-clear packaging

## Revealing dressing

The creamy goodness of Kraft \( ^{®} \)  dressing comes through to consumers with our Fasson \( ^{®} \)  clear-on-clear pressure-sensitive material, part of a packaging redesign that helped generate a nearly 16 percent jump in sales in a 12-month period.

## Leading brand owners turn to Avery Dennison to help their products perform, from adding efficiency in the manufacturing process to ensuring taste and consistency on the family table.

For virtually every major industry—food and beverage, household products, health and beauty, industrial and healthcare—our technologies and applications speed consumer products from manufacturing to checkout and inform shoppers about ingredients and freshness.



Pharmaceutical and healthcare



Wine and spirits

## The perfect prescription

Next-generation Avery Dennison \( ^{®} \)  RFID label technology equips hospitals and pharmacies with security, inventory management, patient compliance and billing efficiency for prescribed medications.

## Brand attachment

Leading French vintner Duval-Leroy uses an innovative Fasson \( ^{®} \)  custom labelstock with a special coating that keeps its champagne labels (and brand) pristine during serving —even after hours in ice buckets.



02.

Every retailer looks for a competitive edge. Avery Dennison gives it to them. Our solutions for retail environments are engaging for customers and enlightening for retailers, combining beauty, technology and information to drive sales.



# We
identify
opportunity.



MAKING BRANDS MORE INSPIRING

Often the only place on a garment where a brand appears is on the label. With facilities close to apparel manufacturers in 40-plus countries, Avery Dennison consistently delivers high-quality solutions that visually unify that brand.

With retail customers increasingly valuing a combination of product comfort, convenience, environmental responsibility and style, our solutions to identification, inventory and security problems make the shopping experience more convenient and pleasurable.
MAKING THE WORLD MORE INTELLIGENT



Permanent branding

A faster Decathlon
Water-based ECO Stretch Heat Transfers for tag-free garment branding meet leading French sportswear retailer Decathlon's rigorous standards for performance, quality and consistency. Our transfers apply in six seconds—precious speed and efficiency for manufacturing.



In-store information solutions

## Smart fashion

Gerry Weber Group is the first German fashion company to use Avery Dennison \( ^{®} \)  RFID technology that combines two solutions—item-level identification and electronic article surveillance—in one label inlay. More than 25 million GERRY WEBER \( ^{®} \)  garments a year will receive RFID-equipped labels to help reduce theft and enhance inventory control, customer service and profitability.
In real time, Avery Dennison retail customers can identify their stores' top-selling colors, styles and features, and redeploy inventory to satisfy eager consumers. This intelligence is made possible by our RFID (Radio Frequency Identification) technology, inlaid in price tags and packaging.

With a current, complete picture of their sales, retailers can re-stock store shelves, speed the right products to the right markets, and accelerate profitability—plus develop the kind of market intelligence that can forecast the success of future products.



Manufacturing solutions



Sustainable solutions

## Connecting to consumers

The speed and flexibility of the industry-standard Avery Dennison \( ^{®} \)  Plastic Staple \( ^{®} \)  System, with its subtle, secure and easy-to-remove fasteners, leads to fewer soft goods returns, fewer lost tickets and higher customer satisfaction.

## Eco-friendly impact

Innovation in sustainable solutions is in the details, including simple apparel fasteners. Each roll of Avery Dennison \( ^{®} \)  EcoFriendly System 1000 \( ^{™} \)  Fasteners comes from two recycled plastic beverage bottles. We also produce a variety of eco-friendly tags, labels, heat transfers and packaging.



## 03.

From the home office to the business environment, our Avery \( ^{®} \)  brand is an essential part of the workspace. Avery \( ^{®} \)  products help you organize the working world, whether in the next room or downtown, and put your personal stamp on it—more engaging, efficient and understandable.



# We
identify
individuality.



MAKING BRANDS MORE INSPIRING

Offices aren’t just professional spaces. They’re personal spaces too. So when we innovate products for home or business settings, we design customization into them, along with the power to stand out.

Avery \( ^{®} \)  office products put branding power at the fingertips of consumers around the world, capturing their do-it-yourself desire for self-expression, distinctiveness and fun.
MAKING THE WORLD MORE INTELLIGENT

Avery \( ^{®} \)  products and software are more than innovative materials and technologies—they’re designed to accelerate productivity and add organization to busy lives.

We design Avery \( ^{®} \)  binders, labels, printing systems and markers with flexibility and ease of use in mind, providing smarter choices for consumers everywhere.



Self-adhesive postage



Sustainable solutions



Organizing solutions



Personal wall décor

## Stamp of approval

Post Danmark, the Danish postal service, responded to consumer demand in 2009 and began switching from traditional gummed paper to Avery Dennison’s self-adhesive materials for better-looking, peel-and-press stamps. In 2009, Avery Dennison supplied European postal services with enough self-adhesive materials to create more than 6 billion stamps.

## A material difference

Avery \( ^{®} \)  PVC-Free \( ^{™} \)  Binders are made of polypropylene, a more sustainable material than polyvinyl chloride (PVC). We’re seeking to reduce our dependence on PVC-based products over time as part of our overall sustainability effort.

## Labeled with sensitivity

Avery \( ^{®} \)  EcoFriendly Labels work for consumers and the environment. The label paper and packaging are made of 100 percent recycled material, and are available in address, return address, shipping and filing labels and name badges.

## Instant identification

Avery \( ^{®} \)  NoteTabs \( ^{™} \)  debuted in 2009, giving consumers a fresh, colorful and flexible solution for everyday labeling needs. Avery \( ^{®} \)  NoteTabs \( ^{™} \)  have earned rave reviews for solving consumers’ need for durable, writable, repositionable sticky tabs.

## Your walls, your way

Avery Dennison’s deep experience in imaging media and technologies is now going up on the wall with Vizzon,” our new wallcovering design software. Vizzon™ tools enable online customers of Totally Custom Wallpaper (www.totallycustomwallpaper.com) to express themselves floor to ceiling.



04.

From marketing messages to street signs, Avery Dennison provides the substance behind the image in street-scapes the world over. Our products create innovative marketing possibilities for brands to capture the attention – and imaginations–of consumers, and provide information essential to making one’s way through every-day life.

# We
identify
life.



MAKING BRANDS MORE INSPIRING

In the busy, often overwhelming world of today’s consumer, Avery Dennison helps marketing leaders cut through the clutter. Our graphics products become vehicles for image-building, consumer awareness and break-through communications.

Our high-performance materials and production capabilities create unexpected and intriguing points of contact that help fulfill our customers' farthest-reaching brand- and business-building ambitions.
MAKING THE WORLD MORE INTELLIGENT

Clearer direction, better information, smarter decisions—they’re all made possible by images and messages that help us make sense of the world. And those are made possible by Avery Dennison.

In the office, on the street or at the airport, we’re a visible—and powerful—part of nearly every environment. Our materials and technologies form the basis for signage that enhances safety, improves efficiency and guides individual choices.



Vehicle wraps



Durable solutions



Reflective street signage



Automotive films

## Moving image

The Bangkok public transit system chose Avery Dennison for its sophisticated graphic designs and easily removable materials. The color and impact of Avery Graphics \( ^{™} \)  products transform billboards, vehicles and entire buildings, enabling them to perform as large-scale promotional venues and adding aesthetic appeal.

## Making solar stick

Solar panels need to perform in demanding environments, and Avery Dennison is up to the challenge. BP Solar, one of the world’s largest solar panel manufacturers, chose one of our durable, high-performance pressure-sensitive materials for a new application to list product and installation specifications on each solar panel.

## Street smarts

Avery Dennison helps set high industry standards, as we did for street signage throughout South Korea, where we worked with a government agency to improve reflectivity for visibility and safety.

## Subtle strength

Avery Dennison’s blackout film is used to trim door edges and roof pillars on the best-selling Ford \( ^{®} \)  Fiesta, \( ^{™} \)  matching exacting specifications with outstanding performance. Leading automotive manufacturers select Avery Dennison to ensure that vital information is present on critical components such as airbags and batteries.



## Our Businesses at a Glance





SEGMENT

## Pressure-sensitive Materials

BUSINESSES

+ Roll Materials

+ Graphics and Reflective Products

SALES IN MILLIONS

$3,300

PERCENTAGE OF TOTAL SALES

56%

GLOBAL BRANDS

Fasson \( ^{®} \) , Avery Graphics \( ^{®} \) , Avery Dennison \( ^{®} \) 

PRODUCTS

Pressure-sensitive roll materials, flexible packaging, roll-fed shrink film, water- and solvent-based performance polymer adhesives and engineered films, graphic imaging media and reflective materials

## MARKETS

Home and personal care, food, beverages, wine and spirits, beer, pharmaceutical and healthcare, durables, variable information, fleets, architecture, traffic, safety and transportation original equipment manufacturing

## CUSTOMERS

Global label converters, brand owners, consumer products package designers, packaging engineers and manufacturers, industrial manufacturers, printers, designers, government agencies, sign manufacturers and graphic vendors

## LEADERS

Donald A. Nolan, Group Vice President
Timothy S. Clyde, Group Vice President



## Retail Information Services

+ Information and Brand Management

+ Printer Systems

+ Fastener

$1,323

22%

Avery Dennison \( ^{®} \) , Monarch \( ^{®} \) 

Solutions throughout the retail supply chain, including manufacturing, supply chain, in-store information, permanent branding and point-of-sale branding products

Retail brand owners and manufacturers, apparel and hard goods retail stores and supply chains, food service stores and supply chains, logistics, pharmaceuticals, automotive and other manufacturers

Global retailers and brand owners, apparel and consumer goods manufacturers, restaurant and food service chains, grocery and drug store chains, and a variety of other industries

R. Shawn Neville, Group Vice President




SEGMENT

## Office and Consumer
Products

BUSINESSES

+ Office Products

SALES IN MILLIONS

$849

PERCENTAGE OF TOTAL SALES

14%

GLOBAL BRANDS

Avery \( ^{®} \) 

PRODUCTS

Self-adhesive labels, binders, sheet protectors, dividers, online templates and printing, writing instruments, T-shirt transfers and do-it-yourself card products

MARKETS

Professional, personal and on-the-go organization and identification, education

CUSTOMERS

Office products superstores, major retailers, office professionals, school administrators, small business owners and consumers

LEADERS

Timothy G. Bond, Group Vice President



## Other specialty
converting businesses

+ Specialty Tape

+ Radio Frequency Identification (RFID)

+ Industrial and Automotive Products

+ Performance Films

+ Business Media

+ Security Printing

$480

8%

Avery Dennison \( ^{®} \) 

Specialty tapes, industrial adhesives, architectural and engineered films, automotive exterior films and labels, functional packaging labels, point-of-purchase and display tags, metallized pigments, self-adhesive postage stamps, RFID inlays and durable tags

Architectural, apparel, automotive, building and construction, consumer, durables, electronics, graphic arts, industrial, logistics, medical and healthcare, retail point of purchase, and security printing

Industrial and original equipment manufacturers, medical products and device manufacturers, converters, packagers and consumer products companies

Timothy S. Clyde, Group Vice President



## Directors and Officers

## BOARD OF DIRECTORS

## Kent Kresa \( ^{2,4} \) 

Chairman of the Board,
Avery Dennison Corporation
Chairman Emeritus,
Northrop Grumman Corporation,
a defense systems manufacturer
Board member since 1999

## Dean A. Scarborough

President and
Chief Executive Officer,
Avery Dennison Corporation
Board member since 2000

## Richard M. Ferry 1,2,5

Founder Chairman,
Korn/Ferry International,
an international executive
search firm
Board member since 1985

## Peter W. Mullin \( ^{3} \) 

Chairman Emeritus,
MullinTBG,
an executive compensation,
benefit planning and corporate
insurance consulting firm
Board member since 1988

## David E. I. Pyott \( ^{1,5} \) 

Chairman of the Board and
Chief Executive Officer,
Allergan, Inc.,
a global healthcare company
Board member since 1999

## Peter K. Barker \( ^{2,3} \) 

Chairman of California,
JP Morgan Chase & Co.,
a global financial services firm
Board member since 2003

## Julia A. Stewart \( ^{1,4,5} \) 

Chairman of the Board and
Chief Executive Officer,
DineEquity, Inc.,
a full-service restaurant company
Board member since 2003

## John T. Cardis \( ^{2,3,4} \) 

Retired Partner,
Deloitte & Touche USA LLP,
an audit, tax, consulting and
financial advisory services firm
Board member since 2004

## Rolf Börjesson \( ^{3,4,5} \) 

Retired Chairman,
Rexam PLC,
a global consumer
packaging company
Board member since 2005

## Patrick T. Siewert 3,4

Managing Director,
The Carlyle Group,
a private global investment firm
Board member since 2005

## Ken C. Hicks 2,5

Chairman of the Board, President and Chief Executive Officer, Foot Locker, Inc., a specialty athletic retailer Board member since 2007

## Debra L. Reed \( ^{1,2} \) 

Chairperson, President and Chief Executive Officer, Southern California Gas Co. and San Diego Gas & Electric Co., the regulated utilities of Sempra Energy Board member since 2009

## DIRECTORS EMERITI

(non-voting)

## Charles D. Miller

Retired Chairman and
Chief Executive Officer,
Avery Dennison Corporation

## H. Russell Smith

Retired Chairman of the
Executive Committee,
Avery Dennison Corporation

1 Member of Compensation and Executive Personnel Committee

2 Member of Audit Committee

3 Member of Finance Committee

4 Member of Ethics and Conflict of Interest Committee

5 Member of Nominating and Governance Committee

## COMPANY LEADERSHIP

## Dean A. Scarborough

President and
Chief Executive Officer

## Daniel R. O'Bryant

Executive Vice President,
Finance, and
Chief Financial Officer

## Donald A. Nolan

Group Vice President,
Roll Materials

## Timothy S. Clyde

Group Vice President,
Specialty Materials
and Converting

## R. Shawn Neville

Group Vice President,
Retail Information Services

## Timothy G. Bond

Group Vice President,
Office Products

## Anne Hill

Senior Vice President and
Chief Human Resources Officer

## Susan C. Miller

Senior Vice President,
General Counsel and Secretary

## Robert M. Malchione

Senior Vice President,
Corporate Strategy
and Technology

## Diane B. Dixon

Senior Vice President,
Communications and
Corporate Affairs

## John M. Sallay

Senior Vice President,
New Growth Platforms

## Richard W. Hoffman

Senior Vice President and
Chief Information Officer

## Gregory E. Temple

Vice President,
Global Operations and
Enterprise Lean Sigma

## Mitchell R. Butier

Corporate Vice President,
Global Finance, and
Chief Accounting Officer

## David N. Edwards

Vice President and
Chief Technology Officer

## Karyn E. Rodriguez

Vice President and Treasurer



## 2009 Financial Information



## Five-year Summary

<table><tr><td rowspan="2">(Dollars in millions, except % and per share amounts)</td><td rowspan="2">5-Year Compound Growth Rate</td><td colspan="2">2009(1)</td><td colspan="2">2008</td><td colspan="2">2007</td><td colspan="2">2006</td><td colspan="2">2005</td></tr><tr><td>Dollars</td><td>%</td><td>Dollars</td><td>%</td><td>Dollars</td><td>%</td><td>DollARS</td><td>%</td><td>Dollars</td><td>%</td></tr><tr><td>For the Year</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net sales</td><td>2.3%</td><td>$5,952.7</td><td>100.0</td><td>$6,710.4</td><td>100.0</td><td>$6,307.8</td><td>100.0</td><td>$5,575.9</td><td>100.0</td><td>$5,473.5</td><td>100.0</td></tr><tr><td>Gross profit</td><td>2.2</td><td>1,586.5</td><td>26.7</td><td>1,727.0</td><td>25.7</td><td>1,722.4</td><td>27.3</td><td>1,538.0</td><td>27.6</td><td>1,476.9</td><td>27.0</td></tr><tr><td>Marketing, general and administrative expense</td><td>5.8</td><td>1,268.8</td><td>21.3</td><td>1,304.3</td><td>19.4</td><td>1,182.5</td><td>18.7</td><td>1,011.1</td><td>18.1</td><td>987.9</td><td>18.0</td></tr><tr><td>Goodwill and indefinite-lived intangible asset impairment charges</td><td>N/A</td><td>832.0</td><td>14.0</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>&lt;nl&gt;</td></tr><tr><td>Interest expense</td><td>7.8</td><td>85.3</td><td>1.4</td><td>115.9</td><td>1.7</td><td>105.2</td><td>1.7</td><td>55.5</td><td>1.0</td><td>57.9</td><td>1.1</td></tr><tr><td>Other expense, net(2)</td><td>40.3</td><td>191.3</td><td>3.2</td><td>36.2</td><td>0.5</td><td>59.4</td><td>0.9</td><td>36.2</td><td>0.6</td><td>63.6</td><td>1.2</td></tr><tr><td>Income (loss) from continuing operations before taxes</td><td>(216.1)</td><td>(790.9)</td><td>(13.3)</td><td>270.6</td><td>4.0</td><td>375.3</td><td>5.9</td><td>435.2</td><td>7.8</td><td>367.5</td><td>6.7</td></tr><tr><td>(Benefit from) provision for income taxes</td><td>(186.0)</td><td>(44.2)</td><td>(0.7)</td><td>4.5</td><td>0.1</td><td>71.8</td><td>1.1</td><td>76.7</td><td>1.4</td><td>75.3</td><td>1.4</td></tr><tr><td>Income (loss) from continuing operations</td><td>(221.6)</td><td>(746.7)</td><td>(12.5)</td><td>266.1</td><td>4.0</td><td>303.5</td><td>4.8</td><td>358.5</td><td>6.4</td><td>292.2</td><td>5.3</td></tr><tr><td>Income (loss) from discontinued operations, net of tax(3)</td><td>N/A</td><td>-</td><td>N/A</td><td>-</td><td>N/A</td><td>-</td><td>N/A</td><td>14.7</td><td>N/A</td><td>(65.4)</td><td>N/A</td></tr><tr><td>Net income (loss)</td><td>(221.8)</td><td>(746.7)</td><td>(12.5)</td><td>266.1</td><td>4.0</td><td>303.5</td><td>4.8</td><td>373.2</td><td>6.7</td><td>226.8</td><td>4.1</td></tr><tr><td></td><td></td><td>2009</td><td></td><td>2008</td><td></td><td>2007</td><td></td><td>2006</td><td></td><td>2005</td><td></td></tr><tr><td>Per Share Information</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Income (loss) per common share from continuing operations</td><td>(220.7)%</td><td>(7.21)</td><td></td><td>(7.21)</td><td></td><td>(7.21)</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Income (loss) per common share from continuing operations, assuming dilution</td><td>(220.9)</td><td>(7.21)</td><td></td><td>2.70</td><td></td><td>3.07</td><td></td><td>3.57</td><td></td><td>2.91</td><td></td></tr><tr><td>Net income (loss) per common share</td><td>(220.9)</td><td>(7.21)</td><td></td><td>2.70</td><td></td><td>3.09</td><td></td><td>3.74</td><td></td><td>2.27</td><td></td></tr><tr><td>Net income (loss) per common share, assuming dilution</td><td>(221.0)</td><td>(7.21)</td><td></td><td>2.70</td><td></td><td>3.07</td><td></td><td>3.72</td><td></td><td>2.26</td><td></td></tr><tr><td>Dividends per common share</td><td>(3.9)</td><td>1.22</td><td></td><td>1.64</td><td></td><td>1.61</td><td></td><td>1.57</td><td></td><td>1.53</td><td></td></tr><tr><td>Weighted-average common shares outstanding (in millions)</td><td>0.7</td><td>103.6</td><td></td><td>98.4</td><td></td><td>98.1</td><td></td><td>99.8</td><td></td><td>100.1</td><td></td></tr><tr><td>Weighted-average common shares outstanding, assuming dilution (in millions)</td><td>0.6</td><td>103.6</td><td></td><td>98.7</td><td></td><td>98.9</td><td></td><td>100.4</td><td></td><td>100.5</td><td></td></tr><tr><td>Book value per share at fiscal year end</td><td>(3.6)</td><td>(12.94)</td><td></td><td>(17.78)</td><td></td><td>(20.22)</td><td></td><td>(17.26)</td><td></td><td>(15.26)</td><td></td></tr><tr><td>Market price per share at fiscal year end</td><td>(9.5)</td><td>36.49</td><td></td><td>31.53</td><td></td><td>53.41</td><td></td><td>67.93</td><td></td><td>55.27</td><td></td></tr><tr><td>Market price per share range</td><td></td><td>17.26 to 40.02</td><td></td><td>25.02 to 53.14</td><td></td><td>49.69 to 69.67</td><td></td><td>55.09 to 69.11</td><td></td><td>50.30 to 62.53</td><td></td></tr><tr><td>At End of Year</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Working capital (deficit)</td><td></td><td>(134.5)</td><td></td><td>(127.6)</td><td></td><td>(419.3)</td><td></td><td>(12.1)</td><td></td><td>(56.0)</td><td></td></tr><tr><td>Property, plant and equipment, net</td><td></td><td>1,354.7</td><td></td><td>1,493.0</td><td></td><td>1,591.4</td><td></td><td>1,309.4</td><td></td><td>1,295.7</td><td></td></tr><tr><td>Total assets</td><td></td><td>5,002.8</td><td></td><td>6,035.7</td><td></td><td>6,244.8</td><td></td><td>4,324.9</td><td></td><td>4,228.9</td><td></td></tr><tr><td>Long-term debt</td><td></td><td>1,088.7</td><td></td><td>1,544.8</td><td></td><td>1,145.0</td><td></td><td>501.6</td><td></td><td>723.0</td><td></td></tr><tr><td>Total debt</td><td></td><td>1,624.3</td><td></td><td>2,209.8</td><td></td><td>2,255.8</td><td></td><td>968.0</td><td></td><td>1,087.7</td><td></td></tr><tr><td>Shareholders&#x27; equity</td><td></td><td>1,362.6</td><td></td><td>1,750.0</td><td></td><td>1,989.4</td><td></td><td>1,696.2</td><td></td><td>1,521.6</td><td></td></tr><tr><td>Number of employees</td><td></td><td>31,300</td><td></td><td>35,700</td><td></td><td>37,300</td><td></td><td>22,700</td><td></td><td>22,600</td><td></td></tr><tr><td>Other Information</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Depreciation expense(4)</td><td></td><td>(187.6)</td><td></td><td>(204.6)</td><td></td><td>(184.1)</td><td></td><td>(153.8)</td><td></td><td>(154.2)</td><td></td></tr><tr><td>Research and development expense(4)</td><td></td><td>90.7</td><td></td><td>94.0</td><td></td><td>95.5</td><td></td><td>87.9</td><td></td><td>85.4</td><td></td></tr><tr><td>Effective tax rate(4)</td><td></td><td>5.6%</td><td></td><td>1.7%</td><td></td><td>19.1%</td><td></td><td>17.6%</td><td></td><td>20.5%</td><td></td></tr><tr><td>Return on average shareholders&#x27; equity (percent)</td><td></td><td>(55.7)</td><td></td><td>13.1</td><td></td><td>16.5</td><td></td><td>22.7</td><td></td><td>14.5</td><td></td></tr><tr><td>Return on average total capital (percent)</td><td></td><td>(20.6)</td><td></td><td>8.8</td><td></td><td>10.6</td><td></td><td>15.7</td><td></td><td>10.0</td><td></td></tr></table>

(1) Results for 2009 reflect a 53-week period.

(2) 2009 includes pretax charges of $191.3 for restructuring costs, asset impairment and lease cancellation charges and other items.

2008 includes net pretax charges of $36.2 for restructuring costs, asset impairment and lease cancellation charges and other items.

2007 includes net pretax charges of $59.4 for asset impairment charges, restructuring costs, lease cancellation charges and other items.

2006 includes net pretax charges of $36.2 for restructuring costs, asset impairment and lease cancellation charges, environmental remediation and other items, partially offset by gain on sale of investment and assets.

2005 includes net pretax charge of $63.6 for restructuring costs, asset impairment and lease cancellation charges and legal accrual related to a lawsuit, partially offset by gain on sale of assets.

(3) Results for 2006 include a tax benefit of $14.9 due to capital losses arising from the sale of discontinued operations and a pretax gain on the sale of discontinued operations of $1.3.

Results for 2005 include impairment charges for goodwill and finite-lived intangible assets of $74.4 associated with the expected divestiture of a business.

(4) 2005 and 2006 amounts related to continuing operations.



## Stockholder Return Performance

The following graph compares the Company’s cumulative stockholder return on its common stock, including the reinvestment of dividends, with the return on the Standard & Poor’s 500 Stock Index (the “S&P 500 Index”) and the average return, weighted by market capitalization, of the peer group set forth below (“Peer Group”) for the five-year period ending December 31, 2009. The Company has also included the median return of the Peer Group in the graph as an additional comparison. The Peer Group consists of 50 publicly-traded U.S. companies selected on the basis of market diversity, international focus and investment, market volatility, and product line mix.

The Peer Group is comprised of Air Products & Chemicals Inc., ArvinMeritor Inc., Baker-Hughes Incorporated, Ball Corporation, Bemis Company, Inc., Black & Decker Corporation, Cabot Corporation, Cooper Tire & Rubber Co., Crane Company, Crown Holdings Inc., Cummins Inc., Dana Holding Corporation, Danaher Corporation, Dover Corporation, Eaton Corporation, Ecolab Incorporated, Ferro Corporation, FMC Corporation, Fuller (H. B.) Company, Goodrich Corporation, Grace (W R) & Company, Harley-Davidson Inc., Harris Corporation, Harsco Corporation, Illinois Tool Works Incorporated, Ingersoll-Rand Company, MASCO Corporation, MeadWestvaco Corporation, NACCO Industries, Newell Rubbermaid Incorporated, Olin Corporation, Owens-Illinois, Inc., PACCAR Inc., Parker-Hannifin Corporation, Pentair Inc., Pitney Bowes Incorporated, PolyOne Corporation, Potlatch Corporation, P.P.G. Industries Incorporated, The Sherwin-Williams Company, Smurfit-Stone Container Corporation, Snap-On Incorporated, Sonoco Products Company, Stanley Works, Tecumseh Products Company, Temple-Inland Inc., Thermo Fisher Scientific Inc., Thomas & Betts Corporation, Timken Company and Trinity Industries.

Comparison of Five-Year Cumulative Total Return

As of December 31, 2009



<table><tr><td colspan="7">Total Return Analysis(1)</td></tr><tr><td></td><td>12/31/04</td><td>12/31/05</td><td>12/31/06</td><td>12/31/07</td><td>12/31/08</td><td>12/31/09</td></tr><tr><td>Avery Dennison Corp</td><td>$100.00</td><td>$ 94.75</td><td>$119.47</td><td>$ 95.97</td><td>$61.43</td><td>$ 71.70</td></tr><tr><td>S&amp;P 500 Index</td><td>100.00</td><td>104.91</td><td>121.46</td><td>128.13</td><td>80.73</td><td>102.11</td></tr><tr><td>Market Basket (Weighted Average)(2)</td><td>100.00</td><td>102.48</td><td>124.24</td><td>154.38</td><td>91.59</td><td>127.55</td></tr><tr><td>Market Basket (Median)</td><td>100.00</td><td>99.05</td><td>121.69</td><td>122.97</td><td>77.88</td><td>115.22</td></tr></table>

(1) Assumes $100 invested on December 31, 2004, and the reinvestment of dividends; chart reflects performance on a calendar year basis.

(2) Weighted average is weighted by market capitalization.

Stock price performance reflected in the above graph is not necessarily indicative of future price performance.



# Management’s Discussion and Analysis of Results of Operations and Financial Condition

## 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.....20
Forward-looking Statements.....20
Overview and Outlook.....20
Analysis of Results of Operations.....22
Results of Operations by Segment.....24
Financial Condition.....26
Uses and Limitations of Non-GAAP Measures.....32
Transactions with Related Persons.....32
Critical Accounting Policies and Estimates.....32
Recent Accounting Requirements.....35
Safe Harbor Statement.....35
Market-Sensitive Instruments and Risk Management.....36

## 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 estimated impact of 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 (purchases) proceeds from sale of investments, less payments for capital expenditures, software and other deferred charges; and

• 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 from operations declined 11% in 2009 compared to a growth of 6% in 2008, reflecting weakness in market conditions.

<table><tr><td>Estimated change in sales due to:</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Organic sales growth (decline)</td><td>(9)%</td><td>(3)%</td><td>1%</td></tr><tr><td>Extra week in fiscal year \( ^{(1)} \)</td><td>1</td><td>-</td><td>-</td></tr><tr><td>Foreign currency translation</td><td>(4)</td><td>3</td><td>5</td></tr><tr><td>Acquisitions, net of divestitures</td><td>-</td><td>7</td><td>8</td></tr><tr><td>Reported sales growth (decline) \( ^{(2)} \)</td><td>(11)%</td><td>6%</td><td>13%</td></tr></table>

(1) Our 2009 fiscal year consisted of a 53-week period, with the extra week reflected in the first quarter. Normally, each fiscal year consists of 52 weeks, but every fifth or sixth year consists of 53 weeks.

(2) Totals may not sum due to rounding.

## Net Income

In 2009, we had a net loss of approximately $747 million, compared to a net income of approximately $266 million in 2008.

Negative factors affecting the change in 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

• Higher employee-related costs

• Higher legal settlement costs

• Investment in growth initiatives

• Loss on debt extinguishment

Positive factors affecting the change in net income included:

- Cost savings from productivity improvement initiatives, including savings from restructuring actions, and cost reductions consistent with a recessionary environment

- Changes in pricing to offset the cumulative impact of inflation experienced in 2008

• Lower transition costs related to acquisition integrations

• Lower raw material and energy costs

## Impairment of Goodwill and Indefinite-Lived Intangible Assets

We perform our annual impairment test of goodwill and indefinite-lived intangible assets ("goodwill impairment") 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.

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.

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 interim goodwill impairment test in the second quarter of 2009, with no additional impairment charge recorded thereafter. Results from our annual impairment test in the fourth quarter of 2009 indicated that no impairment had occurred.

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

## Acquisitions

We completed the acquisition of Paxar Corporation (“Paxar”) on June 15, 2007. The combination of the Paxar business into our Retail Information Services segment increases our presence in the retail information and brand identification market, combines complementary strengths and broadens the range of our product and service capabilities, improves our ability to meet customer demands for product innovation and improved quality of service, and facilitates expansion into new product and geographic segments. See “Paxar Acquisition-related Actions” below for information on costs incurred and cost synergies achieved during integration.

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 Note 2, “Acquisitions,” to the Consolidated Financial Statements for further information.

## Paxar Acquisition-related Actions

From June 2007 through 2008, actions to integrate Paxar resulted in pretax charges of $99.7 million, including severance and employee-related costs, asset impairment charges, and lease cancellation costs in our Retail Information Services segment.

Incremental cost synergies resulting from the integration were approximately $12 million in 2009, approximately $88 million in 2008, and approximately $20 million in 2007.

## Cost Reduction Actions

## Q4 2008 – 2010 Actions

In the fourth quarter of 2008, we initiated restructuring actions that are now expected to generate approximately $180 million in annualized savings by the middle of 2010, of which $75 million, net of transition costs, was realized in 2009. We expect to incur approximately $160 million of total restructuring charges associated with these actions, of which approximately $110 million represents cash charges. At the end of 2009, we achieved run-rate savings representing approximately 75% of our target.

From the fourth quarter of 2008 through the end of 2009, we recorded approximately $141 million in pretax charges related to these restructuring actions, consisting of severance and related employee costs, asset impairment charges, and lease cancellation costs. Severance and employee-related costs related to approximately 4,035 positions, impacting all of our segments and geographic regions.

The remainder of the costs associated with this action is expected to be incurred in the first half of 2010.

## Q1 2008 – Q3 2008 Actions

During the first three quarters of 2008, we implemented cost reduction actions resulting in pretax charges of $22.8 million, including severance and employee-related costs for approximately 645 positions, asset impairment charges, and lease cancellation costs. We achieved annualized savings of approximately $20 million (most of which benefited 2009) as a result of these actions.

## Q4 2006 – 2007 Actions

We incurred $31.4 million in pretax charges related to cost reduction actions initiated from late 2006 through the end of 2007, including severance and employee related costs for approximately 555 positions, asset impairment charges, and lease cancellation costs. Savings from these restructuring actions, net of transition costs, were approximately $8 million in 2009, $32 million in 2008 and $5 million in 2007.

Refer to Note 10, “Cost Reduction Actions,” to the 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 (purchases) proceeds from sale of investments, less payments for capital expenditures, 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.



<table><tr><td>(In millions)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Net cash provided by operating activities</td><td>$569.0</td><td>$539.7</td><td>$499.4</td></tr><tr><td>Purchase of property, plant and equipment</td><td>(72.2)</td><td>(128.5)</td><td>(190.5)</td></tr><tr><td>Purchase of software and other deferred charges</td><td>(30.6)</td><td>(63.1)</td><td>(64.3)</td></tr><tr><td>(Purchases) proceeds from sale of investments, net \( ^{(1)} \)</td><td>(.5)</td><td>17.2</td><td>-</td></tr><tr><td>Free cash flow</td><td>$465.7</td><td>$365.3</td><td>$244.6</td></tr></table>

(1) Net (purchases) proceeds from sale of investments relate to net purchasing/sales activities of securities held by our captive insurance company in 2009 and 2008, and sales of other investments in 2008.

The increase in free cash flow in 2009 of $100.4 million is primarily due to operational working capital productivity in inventory and collection of trade accounts receivables, as well as lower spending on capital expenditures, software and other deferred charges, partially offset by lower income from operations.

The increase in free cash flow in 2008 of $120.7 million is primarily due to increased cash flow provided by operating activities and reduced capital spending, partially offset by lower income from operations.

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

## Dividend

On July 30, 2009 and October 22, 2009, we declared a dividend of $.20 per share, a reduction from our previous dividend of $.41 per share in the same periods in 2008. This action was taken in response to the possibility of continued poor market conditions beyond 2009, to focus on reducing debt, and to meet 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 Securities and Exchange Commission ("SEC") in this regard. Refer to Note 8, "Contingencies," to the 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 8, "Contingencies," to the Consolidated Financial Statements.

## Outlook

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

The effect of the fiscal calendar change (extra week in 2009) is anticipated to reduce sales in 2010 by approximately $50 million compared to 2009.
We expect incremental pension expense of approximately $10 million in 2010. At year end 2009, actuarial projections indicate that we will be required to make total pension contributions in the range of $200 million to $300 million from 2009 through 2013.

We anticipate restructuring charges of approximately $15 million to $20 million in 2010. We expect to realize an incremental $70 million of restructuring savings, net of transition costs, in 2010.

We anticipate lower interest expense in 2010 due primarily to retirements and repayments of certain indebtedness. Our assumptions on interest expense are subject to changes in market rates throughout 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 increased investment in new growth opportunities and infrastructure.

We anticipate our capital and software expenditures to be in the range of $125 million to $150 million in 2010.

We are targeting a reduction of debt of at least $350 million from the end of the second quarter of 2009 through the end of 2010. In the second half of 2009, we reduced debt by approximately $300 million.

## ANALYSIS OF RESULTS OF OPERATIONS

<table><tr><td>Income Before Taxes:</td><td></td><td></td><td></td></tr><tr><td>(In millions)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Net sales</td><td>$5,952.7</td><td>$6,710.4</td><td>$6,307.8</td></tr><tr><td>Cost of products sold</td><td>4,366.2</td><td>4,983.4</td><td>4,585.4</td></tr><tr><td>Gross profit</td><td>1,586.5</td><td>1,727.0</td><td>1,722.4</td></tr><tr><td>Marketing, general and administrative expense</td><td>1,268.8</td><td>1,304.3</td><td>1,182.5</td></tr><tr><td>Goodwill and indefinite-lived intangible asset impairment charges</td><td>832.0</td><td>-</td><td>-</td></tr><tr><td>Interest expense</td><td>85.3</td><td>115.9</td><td>105.2</td></tr><tr><td>Other expense, net</td><td>191.3</td><td>36.2</td><td>59.4</td></tr><tr><td>Income (loss) before taxes</td><td>$ (790.9)</td><td>$ 270.6</td><td>$ 375.3</td></tr><tr><td></td><td></td><td></td><td></td></tr><tr><td>As a Percent of Sales:</td><td>%</td><td>%</td><td>%</td></tr><tr><td>Gross profit (margin)</td><td>26.7</td><td>25.7</td><td>27.3</td></tr><tr><td>Marketing, general and administrative expense</td><td>21.3</td><td>19.4</td><td>18.7</td></tr><tr><td>Income (loss) before taxes</td><td>(13.3)</td><td>4.0</td><td>5.9</td></tr></table>

## Sales

Sales decreased 11% in 2009 and increased 6% in 2008.

The decrease in 2009 reflected lower sales on an organic basis, partially offset by incremental sales from the DM Label acquisition (approximately $9 million) and the estimated impact of the extra week in the first quarter of 2009. In addition, foreign currency translation had an unfavorable impact on the change in sales of approximately $269 million. On an



organic basis, sales declined 9% in 2009, as continued deterioration in market conditions contributed to volume declines, partially offset by the effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008.

The increase in 2008 was driven primarily by acquisitions and the effect of currency translation. The acquisitions of Paxar and DM Label increased sales by an estimated $450 million in 2008. Foreign currency translation had a favorable impact on the change in sales of approximately $167 million. On an organic basis, sales declined 3% in 2008, which reflected worsening global economic conditions in 2008, which were experienced first in the U.S., then in Western Europe, and then in our emerging markets.

Organic sales growth or decline by our major regions of operation was as follows:

<table><tr><td></td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>U.S.</td><td>(9)%</td><td>(7)%</td><td>(4)%</td></tr><tr><td>Europe</td><td>(12)%</td><td>(1)%</td><td>3%</td></tr><tr><td>Asia</td><td>(3)%</td><td>1%</td><td>9%</td></tr><tr><td>Latin America</td><td>(2)%</td><td>1%</td><td>4%</td></tr></table>

Refer to “Results of Operations by Segment” for information on segments.

## Gross Profit Margin

Gross profit margin in 2009 increased from 2008, primarily due to benefits from restructuring and productivity improvement initiatives, the effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008, and lower raw material and energy costs. These benefits were partially offset by reduced fixed-cost leverage due to lower volume, unfavorable segment mix, and higher employee costs.

Gross profit margin in 2008 decreased from 2007 as higher gross profit margin associated with sales from the Paxar business and savings from restructuring actions and other sources of productivity were more than offset by the carryover effect of prior year price competition in the roll materials business, higher raw material and other cost inflation, negative product mix shifts (lower sales of higher gross profit margin products), as well as reduced fixed-cost leverage on an organic basis.

## Marketing, General and Administrative Expense

Marketing, general and administrative expense in 2009 decreased from 2008, as cost reductions consistent with a recessionary environment, benefits from restructuring and productivity initiatives, and the impact of foreign currency translation (approximately $40 million) were partially offset by:

• Higher employee costs

• Investment in growth initiatives

• Estimated costs associated with the extra week

Marketing, general and administrative expense in 2008 increased from 2007, as benefits from productivity improvement initiatives and lower net transition costs related to the Paxar and DM Label acquisitions were more than offset by:

• Costs associated with the acquired businesses (totaling approximately $123 million, including $15 million in incremental amortization of intangibles)
• The negative impact of fluctuations in foreign currency (approximately $13 million)

• Higher employee costs

## Interest Expense

In 2009, interest expense decreased 26%, or approximately $31 million, due to retirements and repayments of certain indebtedness and lower interest rates on short-term borrowings.

In 2008, interest expense increased 10%, or approximately $11 million, due to an increase in borrowings to fund the Paxar and DM Label acquisitions, partially offset by the benefit of lower interest rates.

<table><tr><td>Other Expense, net (In millions, pretax)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Restructuring costs</td><td>$ 86.8</td><td>$29.8</td><td>$21.6</td></tr><tr><td>Asset impairment and lease cancellation charges</td><td>42.3</td><td>10.9</td><td>17.5</td></tr><tr><td>Asset impairment — integration related</td><td>-</td><td>-</td><td>18.4</td></tr><tr><td>Other items</td><td>62.2</td><td>(4.5)</td><td>1.9</td></tr><tr><td>Other expense, net</td><td>$191.3</td><td>$36.2</td><td>$59.4</td></tr></table>

For all three years presented, “Other expense, net” consisted of charges for restructuring, including severance and other employee-related costs, asset impairment charges, and lease cancellation costs, as described above in “Cost Reduction Actions.” Refer also to Note 10, “Cost Reduction Actions,” to the Consolidated Financial Statements for more information.

In 2009, other items included in “Other expense, net” included:

• Legal settlement costs ($41 million)

• A loss from debt extinguishment ($21.2 million)

For more information regarding the debt extinguishment, refer to “Financial Condition” in this report and Note 4, “Debt,” to the Consolidated Financial Statements. For more information regarding the legal settlement costs, refer to Note 8, “Contingencies,” to the Consolidated Financial Statements.

In 2008, other items included in “Other expense, net” consisted of a gain on sale of investments ($4.5 million).

In 2007, other items included in “Other expense, net” included:

• Cash flow hedge loss ($4.8 million)

• Expenses related to a divestiture ($.3 million)

• Reversal of accrual related to a lawsuit ($3.2 million)

Net Income and Earnings per Share:

<table><tr><td>(In millions, except per share amounts)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Income (loss) before taxes</td><td>$ (790.9)</td><td>$ 270.6</td><td>$ 375.3</td></tr><tr><td>(Benefit from) provision for income taxes</td><td>(44.2)</td><td>4.5</td><td>71.8</td></tr><tr><td>Net income (loss)</td><td>$ (746.7)</td><td>$ 266.1</td><td>$ 303.5</td></tr><tr><td>Net income (loss) per common share</td><td>$ (7.21)</td><td>$ 2.70</td><td>$ 3.09</td></tr><tr><td>Net income (loss) per common share, assuming dilution</td><td>$ (7.21)</td><td>$ 2.70</td><td>$ 3.07</td></tr><tr><td>Net income (loss) as a percent of sales</td><td>(12.5)%</td><td>4.0%</td><td>4.8%</td></tr><tr><td>Effective tax rate</td><td>5.6%</td><td>1.7%</td><td>19.1%</td></tr></table>



## (Benefit from) Provision for Income Taxes

The effective tax rate was approximately 6% for 2009 compared with approximately 2% for 2008. The 2009 effective tax rate is most significantly influenced by the non-cash goodwill and indefinite-lived intangible asset impairment charges, as these expenses are largely not tax deductible, and from one-time benefits from tax planning actions, partially offset by increases to our tax reserves.

The effective tax rate was approximately 2% for 2008 compared with approximately 19% for 2007. Our 2008 effective tax rate reflects $45.3 million of benefit from changes in the valuation allowance against certain deferred tax assets, favorable geographic income mix, and a $24.8 million detriment from accruals for uncertain tax positions.

Refer to Note 11, “Taxes on Income,” for more information.

## RESULTS OF OPERATIONS BY SEGMENT

<table><tr><td colspan="4">Pressure-sensitive Materials Segment</td></tr><tr><td>(In millions)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Net sales including intersegment sales</td><td>$3,448.9</td><td>$3,816.2</td><td>$3,662.6</td></tr><tr><td>Less intersegment sales</td><td>(148.9)</td><td>(172.4)</td><td>(164.9)</td></tr><tr><td>Net sales</td><td>$3,300.0</td><td>$3,643.8</td><td>$3,497.7</td></tr><tr><td>Operating income(1)</td><td>184.7</td><td>257.2</td><td>322.3</td></tr><tr><td>(1) Includes restructuring costs, asset impairment and lease cancellation charges for all years presented, and other items in 2009 and 2007</td><td>$ 75.3</td><td>$ 12.6</td><td>$ 14.3</td></tr></table>

## Net Sales

Sales in our Pressure-sensitive Materials segment decreased 9% in 2009 and increased 4% in 2008.

In 2009, the decrease in reported sales reflected lower sales on an organic basis and the unfavorable impact of foreign currency translation (approximately $186 million), partially offset by the estimated impact of the extra week in the first quarter of 2009. On an organic basis, sales declined 6% in 2009 primarily due to declines in volume, partially offset by the effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008.

On an organic basis, sales in our roll materials business in 2009 declined at a high single-digit rate in Europe, a mid single-digit rate (excluding intercompany sales) in North America, and a low single-digit rate in Latin America, reflecting continued weakness in end markets. These declines were partially offset by mid-single digit growth in Asia. On an organic basis, sales in our emerging markets (Asia, Latin America, and Eastern Europe) remained flat in 2009 compared to 2008.

On an organic basis, sales in our graphics and reflective business in 2009 declined at a mid-teen rate, reflecting lower promotional spending by businesses in response to weak market conditions.

In 2008, the increase in reported sales included a favorable impact of foreign currency translation of approximately $132 million in 2008. On an organic basis, sales grew 1% in 2008.

The organic sales growth in 2008 reflected growth in our roll materials business in Asia, Latin America and Europe, partially offset by declines in our North American roll materials businesses. On an organic basis, sales in our roll materials business in 2008 experienced high single-digit growth in Asia and low single-digit growth in Europe and Latin America. In our North American roll materials business, slow market conditions in 2008 resulted in a low single-digit decline in sales on an organic basis.
In our graphics and reflective business, sales declined on an organic basis at a mid single-digit rate in 2008, as growth in Asia and Latin America was more than offset by declines in the U.S. and Europe. The decline primarily reflected lower promotional spending on graphic products by businesses in response to weak market conditions.

## Operating Income

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

Decreased operating income in 2008 reflected the negative effects of raw material and other cost inflation, prior year price reductions (which more than offset the benefits of price increases in 2008), and negative product mix. In addition, operating income in 2007 included the reversal of an accrual related to a lawsuit. These negative factors were partially offset by higher volume and cost savings from restructuring and productivity improvement initiatives.

Retail Information Services Segment

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Net sales including intersegment sales</td><td>$1,324.8</td><td>$1,550.8</td><td>$1,177.5</td></tr><tr><td>Less intersegment sales</td><td>(1.6)</td><td>(2.1)</td><td>(2.1)</td></tr><tr><td>Net sales</td><td>$1,323.2</td><td>$1,548.7</td><td>$1,175.4</td></tr><tr><td>Operating income (loss) \( ^{(1)(2)} \)</td><td>(900.4)</td><td>11.3</td><td>(4.6)</td></tr><tr><td>(1) Includes restructuring costs, asset impairment and lease cancellation charges for all years presented</td><td>$ 51.6</td><td>$ 12.2</td><td>$ 31.3</td></tr><tr><td>(2) Includes goodwill and indefinite-lived intangible asset impairment charges in 2009 and transition costs associated with acquisition integrations in 2008 and 2007</td><td>$ 832.0</td><td>$ 24.1</td><td>$ 43.0</td></tr></table>

## Net Sales

Sales in our Retail Information Services segment decreased 15% in 2009, and increased 32% in 2008.

In 2009, the decrease in reported sales reflected lower sales on an organic basis and the unfavorable impact of foreign currency translation (approximately $46 million), partially offset by the estimated impact of the extra week in the first quarter of 2009 and incremental sales from the DM Label acquisition (approximately $9 million). On an organic basis, sales declined 14% in 2009 due primarily to lower volume from continued weakness in the apparel markets in the U.S. and Europe, and tighter inventory controls by retailers and brand owners.

In 2008, the increase in reported sales reflected an estimated $450 million in sales from the Paxar and DM Label acquisitions and the favorable impact of foreign currency translation (approximately $7 million). On an organic basis, sales declined 6% in 2008 reflecting continued weakness in the domestic retail apparel markets and weakness experienced in the European retail markets.



## Operating Income (Loss)

Operating loss in 2009 reflected goodwill and indefinite-lived intangible asset impairment charges and higher restructuring, asset impairment and lease cancellation charges, partially offset by reduced transition costs related to acquisition integrations in 2009. In addition, incremental savings from integration actions and the benefit of restructuring and productivity improvement initiatives were more than offset by lower volume, changes in pricing, and higher employee costs.

Increased operating income in 2008 reflected higher sales, lower restructuring, asset impairment and lease cancellation charges, incremental synergies and lower transition costs related to the Paxar integration, and savings from restructuring and productivity improvement initiatives, partially offset by raw material and other cost inflation, and incremental amortization of acquisition intangibles.

<table><tr><td colspan="5">Office and Consumer Products Segment</td></tr><tr><td>(In millions)</td><td>2009</td><td>2008</td><td>2007</td><td></td></tr><tr><td>Net sales including intersegment sales</td><td>$850.0</td><td>$937.0</td><td>$1,017.8</td><td></td></tr><tr><td>Less intersegment sales</td><td>(.7)</td><td>(1.2)</td><td>(1.6)</td><td></td></tr><tr><td>Net sales</td><td>$849.3</td><td>$935.8</td><td>$1,016.2</td><td></td></tr><tr><td>Operating income \( ^{(1)} \)</td><td>118.1</td><td>145.7</td><td>174.6</td><td></td></tr><tr><td>(1) Includes restructuring costs for all years, asset impairment charges in 2009 and 2008, lease cancellation costs and other items in 2007</td><td>$ 14.0</td><td>$ 12.7</td><td>$ 4.8</td><td></td></tr></table>

## Net Sales

Sales in our Office and Consumer Products segment decreased 9% in 2009 and 8% in 2008.

In 2009, the decrease in reported sales reflected lower sales on an organic basis and the unfavorable impact of foreign currency translation (approximately $22 million), partially offset by the estimated impact of the extra week in the first quarter of 2009. On an organic basis, sales declined 8% in 2009 due primarily to lower volume from weak end market demand led by slower corporate purchasing activity, partially offset by strong back-to-school sales and the effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008.

In 2008, the decrease in reported sales reflected lower sales on an organic basis, partially offset by the favorable impact of foreign currency translation (approximately $12 million). On an organic basis, sales declined approximately 9% in 2008 due primarily to a combination of weak end market demand and tighter inventory controls by customers.

## Operating Income

Decreased operating income in 2009 reflected the impact of lower volume, higher employee costs, and increased marketing and product development spending, partially offset by cost savings from restructuring and productivity improvement initiatives and the effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008.

Decreased operating income in 2008 reflected lower sales and cost inflation, partially offset by price increases and savings from restructuring actions and other productivity improvement initiatives.

Restructuring costs were incurred in all three years and asset impairment charges were incurred in 2009 and 2008. Operating income in 2007 included lease cancellation costs and expense related to a divestiture.

<table><tr><td colspan="4">Other specialty converting businesses</td></tr><tr><td>(In millions)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Net sales including intersegment sales</td><td>$496.4</td><td>$608.5</td><td>$638.4</td></tr><tr><td>Less intersegment sales</td><td>(16.2)</td><td>(26.4)</td><td>(19.9)</td></tr><tr><td>Net sales</td><td>$480.2</td><td>$582.1</td><td>$618.5</td></tr><tr><td>Operating income (loss) \( ^{(1)} \)</td><td>(42.7)</td><td>7.4</td><td>27.7</td></tr><tr><td>(1) Includes restructuring and asset impairment charges for all years presented</td><td>$ 29.2</td><td>$ 3.2</td><td>$ 4.2</td></tr></table>

## Net Sales

Sales in our other specialty converting businesses decreased 18% in 2009 and 6% in 2008.

In 2009, the decrease in reported sales reflected lower sales on an organic basis and the unfavorable impact of foreign currency translation (approximately $15 million), partially offset by the estimated impact of the extra week in the first quarter of 2009. On an organic basis, sales declined 16% in 2009, primarily reflecting lower volume in products sold to the automotive, housing, and construction industries.

In 2008, the decrease in reported sales reflected lower sales on an organic basis, partially offset by the favorable impact of foreign currency translation (approximately $17 million). On an organic basis, sales declined 8% in 2008, reflecting lower volume in products sold to the automotive, housing, and construction industries, and the negative effect of exiting certain low-margin products in our specialty tape business, partially offset by growth in our radio-frequency identification (“RFID”) division.

## Operating Income (Loss)

Operating loss for these businesses in 2009 reflected lower volume and higher restructuring and asset impairment charges, partially offset by the benefit of restructuring and productivity improvement initiatives.

Decreased operating income for these businesses in 2008 reflected lower sales and cost inflation, partially offset by the benefit of productivity improvement initiatives, lower restructuring and asset impairment charges, and a reduction in operating loss in our RFID division.



## FINANCIAL CONDITION

## Liquidity

Cash Flow from Operating Activities:

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Net income (loss)</td><td>$(746.7)</td><td>$266.1</td><td>$303.5</td></tr><tr><td>Depreciation and amortization</td><td>267.3</td><td>278.4</td><td>237.3</td></tr><tr><td>Provision for doubtful accounts</td><td>19.3</td><td>17.7</td><td>18.7</td></tr><tr><td>Goodwill and indefinite-lived intangible asset impairment charges</td><td>832.0</td><td>-</td><td>-</td></tr><tr><td>Asset impairment and net loss on sale and disposal of assets</td><td>48.0</td><td>16.8</td><td>44.0</td></tr><tr><td>Loss from debt extinguishment</td><td>21.2</td><td>-</td><td>-</td></tr><tr><td>Stock-based compensation</td><td>25.8</td><td>29.0</td><td>21.6</td></tr><tr><td>Other non-cash expense and loss</td><td>22.0</td><td>11.3</td><td>-</td></tr><tr><td>Other non-cash income and gain</td><td>(8.7)</td><td>(12.4)</td><td>(1.0)</td></tr><tr><td>Trade accounts receivable</td><td>95.7</td><td>57.7</td><td>(17.7)</td></tr><tr><td>Inventories</td><td>133.3</td><td>16.5</td><td>(5.3)</td></tr><tr><td>Other current assets</td><td>40.6</td><td>(30.0)</td><td>18.8</td></tr><tr><td>Accounts payable and accrued liabilities</td><td>(52.4)</td><td>(15.8)</td><td>(87.1)</td></tr><tr><td>Income taxes (deferred and accrued)</td><td>(90.7)</td><td>(79.9)</td><td>(31.4)</td></tr><tr><td>Other assets</td><td>2.3</td><td>20.8</td><td>(17.1)</td></tr><tr><td>Long-term retirement benefits and other liabilities</td><td>(40.0)</td><td>(36.5)</td><td>15.1</td></tr><tr><td>Net cash provided by operating activities</td><td>$569.0</td><td>$539.7</td><td>$499.4</td></tr></table>

For cash flow purposes, changes in assets and liabilities and other adjustments, net of the effect of business acquisitions, exclude the impact of foreign currency translation (discussed below in “Analysis of Selected Balance Sheet Accounts”).

In 2009, cash flow provided by operating activities improved compared to 2008 due to operational working capital productivity in inventory and collection of trade accounts receivables, partially offset by lower income from operations.

In 2008, cash flow provided by operating activities improved compared to 2007 due to improved collection of trade accounts receivable; extended payment terms on accounts payable; decreased purchases and better management of inventory; lower rebate payments; and lower income tax payments, net of refunds. These positive factors were partially offset by higher payments for interest and higher material costs.

## Cash Flow from Investing Activities:

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Purchase of property, plant and equipment</td><td>$ (72.2)</td><td>$ (128.5)</td><td>$ (190.5)</td></tr><tr><td>Purchase of software and other deferred charges</td><td>(30.6)</td><td>(63.1)</td><td>(64.3)</td></tr><tr><td>Payments for acquisitions</td><td>-</td><td>(131.2)</td><td>(1,291.9)</td></tr><tr><td>(Purchases) proceeds from sale of investments, net</td><td>(.5)</td><td>17.2</td><td>-</td></tr><tr><td>Other</td><td>(2.5)</td><td>12.1</td><td>3.5</td></tr><tr><td>Net cash used in investing activities</td><td>$ (105.8)</td><td>$ (293.5)</td><td>$ (1,543.2)</td></tr></table>

## Capital and Software Spending

In 2009, we invested in various small capital projects, including projects associated with an expansion in Japan. Significant capital projects in 2008 included investments for expansion in China and India serving both our materials and retail information services businesses.

Significant information technology projects in 2009 and 2008 included customer service and standardization initiatives.

## Payments for acquisitions

On April 1, 2008, we completed the acquisition of DM Label.

On June 15, 2007, we completed the acquisition of Paxar.

Refer to Note 2, “Acquisitions,” to the Consolidated Financial Statements for more information.

Payments for acquisitions during 2007 also included buy-outs of minority interest shareholders associated with certain subsidiaries of RVL Packaging, Inc. and Paxar of approximately $4 million.

## Proceeds from Sale of Investments

In 2008, net proceeds from sale of investments consist of the sale of securities primarily held by our captive insurance company.

## Cash Flow from Financing Activities:

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Net change in borrowings and payments of debt</td><td>$ (300.6)</td><td>$ (40.7)</td><td>$1,259.0</td></tr><tr><td>Dividends paid</td><td>(134.9)</td><td>(175.0)</td><td>(171.8)</td></tr><tr><td>Purchase of treasury stock</td><td>-</td><td>(9.8)</td><td>(63.2)</td></tr><tr><td>Proceeds from exercise of stock options, net</td><td>.6</td><td>2.7</td><td>38.1</td></tr><tr><td>Other</td><td>2.2</td><td>14.3</td><td>(6.7)</td></tr><tr><td>Net cash (used in) provided by financing activities</td><td>$ (432.7)</td><td>$ (208.5)</td><td>$1,055.4</td></tr></table>

## Borrowings and Repayment of Debt

At year end 2009, our borrowings outstanding under foreign short-term lines of credit were approximately $60 million (weighted-average interest rate of 12.8%), compared to approximately $106 million at year end 2008 (weighted-average interest rate of 6.9%).

Short-term variable rate domestic borrowings were $415 million at January 2, 2010 (weighted-average interest rate of 0.2%), compared to $558 million at December 27, 2008 (weighted-average interest rate of 0.9%). At January 2, 2010, short-term variable rate domestic borrowings were from commercial paper issuance.

The change in outstanding commercial paper reflects positive cash flow from improved operational working capital, as well as reduced capital spending and a reduced quarterly dividend from $4.41 per share to $2.20 per share during the second half of the year. During 2007, we increased our short-term borrowings to initially fund the Paxar acquisition, as well as to support share repurchases.

We had medium-term notes of $50 million outstanding at both year end 2009 and 2008. In 2008, medium-term notes of $50 million were paid on maturity.

In March 2009, we completed an exchange of approximately 6.6 million of our Corporate HiMEDS units, or approximately 75.15% of the outstanding Corporate HiMEDS units. In aggregate, the exchange



resulted in the extinguishment of approximately $331 million of senior notes that are part of the Corporate HiMEDS units.

In February 2008, one of our subsidiaries entered into a credit agreement for a term loan credit facility with fifteen domestic and foreign banks for a total commitment of $400 million, which we guaranteed, maturing February 8, 2011. In 2009, we reduced the outstanding balance of this term loan by approximately $60 million.

Refer to “Capital Resources” below for further information on the 2009 and 2008 borrowings and repayment of debt.

## Dividend Payments

Our annual dividend per share decreased to $1.22 in 2009 from $1.64 in 2008. Refer to “Dividend” in the Overview and Outlook section above for further information.

## Share Repurchases

On October 26, 2006, the Board of Directors authorized the Company to purchase an additional 5 million shares of the Company's stock under our existing stock repurchase program, resulting in a total authorization of approximately 7.4 million shares of the Company's stock at that date. In 2008, we repurchased approximately .2 million shares totaling approximately $10 million. As of January 2, 2010, approximately 3.9 million shares were available for repurchase under the Board of Directors' authorization.

## Analysis of Selected Balance Sheet Accounts

## Long-lived Assets

Goodwill decreased approximately $766 million during 2009, which reflected a non-cash impairment charge associated with our retail information services reporting unit ($820 million), partially offset by net purchase price adjustments associated with the DM Label and the Paxar acquisitions ($31 million) and the impact of foreign currency translation ($23 million).

Other intangibles resulting from business acquisitions, net decreased approximately $41 million during 2009, which reflected normal amortization expense ($33 million) and a non-cash impairment charge associated with our retail information services reporting unit ($12 million), partially offset by the impact of foreign currency translation ($3 million) and a reclassification of trade names from “Other assets” ($1 million).

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

Other assets increased approximately $42 million during 2009, which reflected an increase in long-term pension assets ($43 million), an increase in software and other deferred charges ($41 million), an increase in third-party loan receivable ($5 million), and the impact of foreign currency translation ($3 million). These increases were partially offset by normal amortization and impairment of software and other deferred charges ($44 million), the write-off of unamortized debt issuance costs associated with the exchange of the HiMEDS units, net of additional financing costs, related to the covenant amendments discussed below in “Capital Resources” ($5 million), and a reclassification of trade names to “Other intangibles resulting from business acquisitions, net” ($1 million).

## Other Shareholders' Equity Accounts

Our shareholders' equity was approximately $1.36 billion at year end 2009, compared to approximately $1.75 billion at year end 2008. The decrease in our shareholders' equity was primarily due to the non-cash impairment charges of $832 million in the first quarter of 2009, partially offset by the issuance of common stock shares associated with the extinguishment of senior notes related to the Corporate HiMEDS units, as well as the impact of foreign currency translation. Refer to Note 3, "Goodwill and Other Intangibles Resulting from Business Acquisitions," to the Consolidated Financial Statements and "Capital Resources" below for more information.

The value of our employee stock benefit trust decreased $4 million in 2009 due to a transfer of common shares from “Employee stock benefit trust” to “Treasury stock at cost” ($25 million) and the issuance of shares under our employee stock option and incentive plans ($15 million), partially offset by an increase in the market value of shares held in the trust ($36 million).

Accumulated other comprehensive loss decreased by $137 million during 2009 due primarily to an increase in the value of pension assets, partially offset by current year recognition and amortization of net pension transition obligation, prior service cost, and net actuarial losses in our U.S. and international pension and other postretirement plans ($29 million), change in foreign currency translation ($103 million), as well as a net gain on derivative instruments designated as cash flow and firm commitment hedges ($5 million).

Impact of Foreign Currency Translation:

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Change in net sales</td><td>($269)</td><td>$168</td><td>$232</td></tr><tr><td>Change in net income</td><td>(6)</td><td>8</td><td>13</td></tr></table>

In 2009, international operations generated approximately 66% of our net sales. Our future results are subject to changes in political and economic conditions and the impact of fluctuations in foreign currency exchange and interest rates.

The effect of currency translation on sales in 2009 primarily reflected a negative impact from sales in the currencies of Great Britain, Mexico, South Korea and Turkey, partially offset by a positive impact from sales denominated in Euros.

Translation gains and losses for operations in hyperinflationary economies, if any, are included in net income in the period incurred. Operations are treated as being in a hyperinflationary economy based on the cumulative inflation rate over the past three years. In 2009, 2008 and 2007, we had no operations in hyperinflationary economies.

## Effect of Foreign Currency Transactions

The impact on net income from transactions denominated in foreign currencies may be mitigated because the costs of our products are generally denominated in the same currencies in which they are sold. In addition, to reduce our income and cash flow exposure to transactions in foreign currencies, we may enter into foreign exchange forward, option and swap contracts, where available and appropriate.

## Analysis of Selected Financial Ratios

We utilize certain financial ratios to assess our financial condition and operating performance, as discussed below.



## Operational Working Capital Ratio

Working capital (current assets minus current liabilities) as a percent of net sales decreased in 2009 primarily due to a decrease in inventories and net trade accounts receivables, partially offset by a decrease in short-term debt.

Operational working capital, as a percent of net sales, is a non-GAAP measure and is shown below. We use this non-GAAP measure as a tool to assess our working capital requirements because it excludes the impact of fluctuations due to our financing and other activities (that affect cash and cash equivalents, deferred taxes, and other current assets and other current liabilities) that tend to be disparate in amount and timing and therefore, may increase the volatility of the working capital ratio from period to period. Additionally, the items excluded from this measure are not necessarily indicative of the underlying trends of our operations and are not significantly influenced by the day-to-day activities that are managed at the operating level. Refer to “Uses and Limitations of Non-GAAP Measures.” Our objective is to minimize our investment in operational working capital as a percentage of sales by reducing this ratio to maximize cash flow and return on investment.

## Operational Working Capital:

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td></tr><tr><td>(A) Working capital deficit (current assets minus current liabilities)</td><td>$ (134.5)</td><td>$ (127.6)</td></tr><tr><td>Reconciling items:</td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>(138.1)</td><td>(105.5)</td></tr><tr><td>Current deferred and refundable income taxes and other current assets</td><td>(199.2)</td><td>(252.4)</td></tr><tr><td>Short-term and current portion of long-term debt</td><td>535.6</td><td>665.0</td></tr><tr><td>Current deferred and payable income taxes and other current liabilities</td><td>642.3</td><td>720.1</td></tr><tr><td>(B) Operational working capital</td><td>$ 706.1</td><td>$ 899.6</td></tr><tr><td>(C) Net sales</td><td>$5,850.8^{(1)}</td><td>$6,710.4</td></tr><tr><td>Working capital deficit, as a percent of net sales (A) ÷ (C)</td><td>(2.3)%</td><td>(1.9)%</td></tr><tr><td>Operational working capital, as a percent of net sales (B) ÷ (C)</td><td>12.1%</td><td>13.4%</td></tr></table>

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

As a percent of net sales, operational working capital in 2009 decreased compared to 2008. This measure reflects the effects of the following ratios, including the impact of foreign currency translation, and is discussed below.

## Accounts Receivable Ratio

The average number of days sales outstanding was 59 days in 2009 compared to 61 days in 2008, calculated using a four-quarter average accounts receivable balance divided by the average daily sales for the year. The current year average number of days sales outstanding was primarily impacted by the timing of sales in relation to collections, as well as improvement in collection.

## Inventory Ratio

Average inventory turnover was 8.4 in 2009 compared to 7.8 in 2008, calculated using the annual cost of sales divided by a four-quarter average inventory balance. The current year average inventory turnover reflected greater focus on inventory management.

## Accounts Payable Ratio

The average number of days payable outstanding was 53 days in 2009 compared to 54 days in 2008, calculated using a four-quarter average accounts payable balance divided by the average daily cost of products sold for the year. The current year average number of days payable outstanding was primarily due to lower inventory purchases and the timing of purchases in the fourth quarter of 2009 compared to the fourth quarter of 2008, partially offset by improved payment terms with our suppliers.

## Financial Covenants

Our various loan agreements in effect at year end require that we maintain specified financial covenant ratios on total debt and interest expense in relation to certain measures of income. As of January 2, 2010, we were in compliance with these financial covenants. The non-cash goodwill and indefinite-lived intangible asset impairment charges recognized in the first quarter of 2009 had no adverse impact on our financial covenants. Refer to Note 4, "Debt," and Note 3, "Goodwill and Other Intangibles Resulting from Business Acquisitions," to the Consolidated Financial Statements for information regarding the financial covenant ratios and impairment charges, respectively. In January 2009, we amended the covenants included in the revolving credit agreement and term loan agreement to exclude certain restructuring charges and to adjust covenant levels. The adjusted covenant levels change quarterly and revert back to the pre-amendment levels during 2010. The amendments also reflect increased pricing levels for borrowings under both agreements, consistent with the then current pricing environment. Refer to Note 4, "Debt," to the Consolidated Financial Statements for further information.

The fair value of our debt is estimated based on the discounted amount of future cash flows using the current rates offered to us for debt of the same remaining maturities. At year end, the fair value of our total debt, including short-term borrowings, was $1.66 billion in 2009 and $1.94 billion in 2008. Fair value amounts were determined primarily based on Level 2 inputs, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable. Refer to Note 1, "Summary of Significant Accounting Policies" to the Consolidated Financial Statements for further information.

<table><tr><td>Shareholders’ Equity Ratios</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Return on average shareholders’ equity</td><td>(55.7)%</td><td>13.1%</td><td>16.5%</td></tr><tr><td>Return on average total capital</td><td>(20.6)</td><td>8.8</td><td>10.6</td></tr></table>

Decreases in these ratios in 2009 compared to 2008 were primarily due to current year operating loss, partially offset by lower yearly average of total debt outstanding and shareholders' equity. These ratios include in the numerator an actual net income (loss) and a five-quarter average of equity and total debt accounts in the denominator.



## Capital Resources

Capital resources include cash flows from operations, cash and cash equivalents and debt financing. At year end 2009, we had cash and cash equivalents of $138.1 million held in accounts at third-party financial institutions. To date, we have experienced no loss or lack of access to our invested cash or cash equivalents; however, there is no assurance that access to our cash and cash equivalents will not be impacted by adverse conditions in the financial markets.

Our $1 billion revolving credit facility, which supports our commercial paper programs in the U.S. and Europe, matures in 2012. Based upon our current outlook for our business and market conditions, we believe that this facility, in addition to the uncommitted bank lines of credit maintained in the countries in which we operate, provide the liquidity to fund our operations. During the turmoil in the financial markets, we did not experience interruptions in our access to funding.

We have $60.5 million of debt maturities due in 2010.

We are exposed to financial market risk resulting from changes in interest and foreign currency rates, and to possible liquidity and credit risks of our counterparties.

Our total debt decreased by approximately $586 million in 2009 to $1.62 billion compared to $2.21 billion at year end 2008, reflecting decreases in long-term and short-term borrowings. Refer to “Borrowings and Repayment of Debt” in the “Cash Flow from Financing Activities” above for more information.

In March 2009, we completed an exchange of approximately 6.6 million of our Corporate HiMEDS units, or approximately 75.15% of the outstanding Corporate HiMEDS units. In aggregate, the exchange resulted in the extinguishment of approximately $331 million of senior notes that are part of the Corporate HiMEDS units, the issuance of approximately 6.5 million shares of Avery Dennison's common stock (par value $1.00 per share), and the payment of approximately $43 million in cash to participating holders who validly tendered their Corporate HiMEDS units. As a result of this exchange, we recorded a debt extinguishment loss of approximately $21 million, which included a write-off of $9.6 million related to unamortized debt issuance costs. The net proceeds from the offering completed in the fourth quarter of 2007 were approximately $427 million, which were used to reduce commercial paper borrowings initially used to finance the Paxar acquisition. As of January 2, 2010, approximately two million HiMEDS units with a carrying value of approximately $109 million remained outstanding. The purchase contracts related to these units obligate the holders to purchase from us a certain number of common shares in November 2010 (depending on the stock price at the time).

In August 2007, we amended our existing revolving credit agreement, increasing commitments from $525 million to $1 billion and extending the maturity to August 2012. Commitments were provided by twelve domestic and foreign banks. Financing available under the agreement will be used as a commercial paper back-up facility and is also available to finance other corporate requirements. In January 2009, we amended the covenants related to this issuance as described above. Refer to Note 4, "Debt," to the Consolidated Financial Statements for further information.
In September 2007, one of our subsidiaries issued $250 million 10-year senior notes, which we guaranteed, bearing interest at a rate of 6.625% per year, due October 2017. The net proceeds from the offering were approximately $247 million and were used to pay down current long-term debt maturities of $150 million and reduce commercial paper borrowings of $97 million initially used to finance the Paxar acquisition.

In the fourth quarter of 2007, we filed a shelf registration statement with the SEC to permit the issuance of debt and equity securities. Proceeds from the shelf offering may be used for general corporate purposes, including repaying, redeeming or repurchasing existing debt, and for working capital, capital expenditures and acquisitions. This shelf registration replaced the shelf registration statement filed in 2004.

In February 2008, one of our subsidiaries entered into a credit agreement for a term loan credit facility with fifteen domestic and foreign banks for a total commitment of $400 million, which we guaranteed, maturing February 8, 2011. We used the term loan credit facility to reduce commercial paper borrowings previously issued to fund the Paxar acquisition. The term loan credit facility is subject to financial covenants, including a maximum leverage ratio and a minimum interest coverage ratio, which were amended in January 2009. Refer to Note 4, "Debt," to the Consolidated Financial Statements for further information.

In February 2008, we terminated our bridge revolving credit agreement, dated June 13, 2007, with five domestic and foreign banks.

In addition, we had a 364-day revolving credit facility in which a foreign bank provided us up to Euro 30 million ($42.2 million) in borrowings through March 5, 2009. Included in the balance at December 27, 2008 was $42.2 million of debt outstanding under this agreement.

We had standby letters of credit outstanding of $52.5 million at the end of 2009. The aggregate contract amount of outstanding standby letters of credit approximated fair value.

Our uncommitted lines of credit were approximately $357 million at year end 2009. Our uncommitted lines of credit have no commitment expiration date and may be cancelled by the banks or us at any time.

Credit ratings are a significant factor in our ability to raise short-term and long-term financing. The credit ratings assigned to us also impact the interest rates paid and our access to commercial paper and other borrowings. A downgrade of our short-term credit ratings below the current “A-2” and “P2” levels would impact our ability to access the commercial paper markets. If our access to commercial paper markets is limited, our revolving credit facility and other credit facilities are available to meet our short-term funding requirements, if necessary. When determining a credit rating, the rating agencies place significant weight on our competitive position, business outlook, consistency of cash flows, debt level and liquidity, geographic dispersion and management team. We remain committed to retaining an investment grade rating.

## Our Credit Ratings as of Year End 2009:

<table><tr><td></td><td>Short-term</td><td>Long-term</td><td>Outlook</td></tr><tr><td>Standard &amp; Poor&#x27;s Rating Service (&quot;S&amp;P&quot;)</td><td>A-2</td><td>BBB</td><td>Stable</td></tr><tr><td>Moody&#x27;s Investors Service (&quot;Moody&#x27;s&quot;)</td><td>P2</td><td>Baa2</td><td>Negative</td></tr></table>



## Contractual Obligations, Commitments and Off-balance Sheet Arrangements

Contractual Obligations at End of Year 2009:

<table><tr><td rowspan="2">(In millions)</td><td colspan="8">Payments Due by Period</td></tr><tr><td>Total</td><td>2010</td><td>2011</td><td>2012</td><td>2013</td><td>2014</td><td>Thereafter</td><td></td></tr><tr><td>Short-term lines of credit</td><td>$ 475.1</td><td>$475.1</td><td>$ -</td><td>$ -</td><td>$ -</td><td>$ -</td><td>$ -</td><td>$ -</td></tr><tr><td>Long-term debt and capital leases</td><td>1,149.2</td><td>60.5</td><td>280.2</td><td>-</td><td>250.0</td><td>-</td><td>558.5</td><td></td></tr><tr><td>Interest on long-term debt \( ^{(1)} \)</td><td>513.9</td><td>49.8</td><td>49.8</td><td>49.8</td><td>38.0</td><td>37.5</td><td>289.0</td><td></td></tr><tr><td>Operating leases</td><td>239.7</td><td>66.0</td><td>53.0</td><td>39.4</td><td>27.0</td><td>21.1</td><td>33.2</td><td></td></tr><tr><td>Pension and postretirement benefit contributions</td><td>23.9</td><td>23.9</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td></td></tr><tr><td>Total contractual obligations</td><td>$2,401.8</td><td>$675.3</td><td>$383.0</td><td>$89.2</td><td>$315.0</td><td>$58.6</td><td>$880.7</td><td></td></tr></table>

(1) Interest on floating rate debt was estimated using the index rate in effect as of January 2, 2010.

We enter into operating leases primarily for office and warehouse space and equipment for electronic data processing and transportation. The terms of our leases do not impose significant restrictions or unusual obligations, except for the facility in Mentor, Ohio as noted below. The table above includes minimum annual rental commitments on operating leases having initial or remaining non-cancelable lease terms of one year or more.

On September 9, 2005, we completed the lease financing for a commercial facility (the "Facility") located in Mentor, Ohio, used primarily for the new headquarters and research center for our roll materials division. The Facility consists generally of land, buildings, equipment and office furnishings. We have leased the Facility under an operating lease arrangement, which contains a residual value guarantee of $33.4 million.

We did not include purchase obligations or open purchase orders at year end 2009 in the table of contractual obligations above, because it is impracticable for us to either obtain such information or provide a reasonable estimate due to the decentralized nature of our purchasing systems.

The table above does not reflect unrecognized tax benefit reserves of approximately $182 million, of which $16 million may become payable during 2010. The resolution of the balance, including the timing of payments, is contingent upon various unknown factors, and cannot be reasonably estimated. Refer to Note 11, "Taxes Based on Income," to the Consolidated Financial Statements for further information on unrecognized tax benefits.

## Legal Proceedings

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

On April 24, 2003, Sentry Business Products, Inc. filed a purported class action on behalf of direct purchasers of label stock in the United States District Court for the Northern District of Illinois against us, UPM-Kymmene Corporation ("UPM"), Bemis Company, Inc. ("Bemis"), and certain of their subsidiaries seeking treble damages and other relief for alleged unlawful competitive practices, with allegations including that the defendants attempted to limit competition among themselves through anticompetitive understandings. Ten similar complaints were filed in various federal district courts. In November 2003, the cases were transferred to the United States District Court for the Middle District of Pennsylvania and consolidated for pretrial purposes. Plaintiffs filed a consolidated complaint on February 16, 2004, which we answered on March 31, 2004. On April 14, 2004, the court separated the proceedings as to class certification and merits discovery, and limited the initial phase of discovery to the issue of the appropriateness of class certification. On January 4, 2006, plaintiffs filed an amended complaint. On January 20, 2006, we filed an answer to the amended complaint. On August 14, 2006, the plaintiffs moved to certify a proposed class. The court substantively granted class certification on November 19, 2007. On July 22, 2008, the court held a hearing to set a schedule for merits discovery. On May 12, 2009, we entered into a settlement agreement with plaintiffs. Without admitting liability, we agreed to pay plaintiffs $36.5 million, plus up to $5.5 million related to notice and administration expenses, in two equal installments of $18.5 million, which were paid on May 27, 2009 and July 15, 2009. On June 10, 2009, the district court entered an order preliminarily approving the settlement, and on September 17, 2009, the district court issued an order of final approval and judgment, dismissing all claims against us with prejudice. We recorded an accrual of $37 million for this settlement in the first quarter of 2009.

On May 21, 2003, The Harman Press filed in the Superior Court for the County of Los Angeles, California, a purported class action on behalf of indirect purchasers of label stock against us, UPM and UPM's subsidiary Raflatac ("Raflatac"), seeking treble damages and other relief for alleged unlawful competitive practices, with allegations including that the defendants attempted to limit competition between themselves through anticompetitive understandings. Three similar complaints were filed in various California courts. In November 2003, on petition from the parties, the California Judicial Council ordered the cases be coordinated for pretrial purposes. The cases were assigned to a coordination trial judge in the Superior Court for the City and County of San Francisco on March 30, 2004. On September 30, 2004, the Harman Press amended its complaint to add Bemis' subsidiary Morgan Adhesives Company ("MACtac") as a defendant. On January 21, 2005, American International Distribution Corporation filed a purported class action on behalf of indirect purchasers in the Superior Court for Chittenden County, Vermont. Similar actions were filed by Richard Wrobel, on February 16, 2005, in the District Court of Johnson County, Kansas; and by Chad and Terry Muzzey, on February 16, 2005 in the District Court of Scotts Bluff County, Nebraska. On February 17, 2005, Judy Benson filed a purported multi-state class action on behalf of indirect purchasers in the Circuit Court for Cocke County, Tennessee. Without admitting liability, we have agreed to pay plaintiffs $2 million to resolve all claims related to the purported state class actions in the states of Kansas, Nebraska, Tennessee and Vermont, which was paid on December 28, 2009. These settlements remain subject to court approval, and a hearing in their regard is set for March 10, 2010. We recorded $2 million in the third quarter of 2009 in respect of the settlement of these claims. We intend to defend the purported California class action vigorously.

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



We are unable to predict the effect of these matters at this time, although the effect could be adverse and material. These and other matters are reported in Note 8, “Contingencies,” to the Consolidated Financial Statements.

## Environmental

As of January 2, 2010, we have been designated by the U.S. Environmental Protection Agency (“EPA”) and/or other responsible state agencies as a potentially responsible party (“PRP”) at fourteen waste disposal or waste recycling sites, which are the subject of separate investigations or proceedings concerning alleged soil and/or groundwater contamination and for which no settlement of our liability has been agreed upon. We are participating with other PRPs at such sites, and anticipate that our share of cleanup costs will be determined pursuant to remedial agreements to be entered into in the normal course of negotiations with the EPA or other governmental authorities.

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

The activity in 2009 and 2008 related to environmental liabilities, which includes costs associated with compliance and remediation, was as follows:

<table><tr><td>(In millions)</td><td>January 2, 2010</td><td>December 27, 2008</td></tr><tr><td>Balance at beginning of year</td><td>$58.5</td><td>$37.8</td></tr><tr><td>Purchase price adjustments related to acquisitions</td><td>2.1</td><td>24.6</td></tr><tr><td>Accruals</td><td>1.0</td><td>.9</td></tr><tr><td>Payments</td><td>(5.1)</td><td>(4.8)</td></tr><tr><td>Balance at end of year</td><td>$56.5</td><td>$58.5</td></tr></table>

As of January 2, 2010, approximately $11 million of the total balance was classified as short-term.

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

## Asset Retirement Obligations

We have recognized a liability for the fair value of conditional asset retirement obligations based on estimates determined through present value techniques. An asset retirement is ‘conditional’ when the timing and (or) method of settlement of the retirement obligation is conditional upon a future event that may or may not be within our control. Our asset retirement obligations primarily relate to lease restoration costs. Certain potential obligations have not been included in our estimate, because the range of time over which we may settle the obligation or the method of settlement is unknown or cannot be reasonably estimated. Our estimated liability associated with asset retirement obligations was $7.9 million and $1.6 million at year end 2009 and 2008, respectively.

## Product Warranty

We provide for an estimate of costs that may be incurred under our basic limited warranty at the time product revenue is recognized. These costs primarily include materials and labor associated with the service or sale of products. Factors that affect our warranty liability include the number of units installed or sold, historical and anticipated rate of warranty claims on those units, cost per claim to satisfy our warranty obligation and availability of insurance coverage. Because these factors are impacted by actual experience and future expectations, we assess the adequacy of the recorded warranty liability and adjust the amounts as necessary. Our product warranty liabilities were $2 million and $1.9 million at year end 2009 and 2008, respectively.

## Other

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

We and our subsidiaries are involved in various other lawsuits, claims, inquiries, and other regulatory and compliance matters, most of which are routine to the nature of our business. Based upon current information, we believe that the impact of the resolution of these other matters is not expected to be material, or is not estimable.

We participate in international receivable financing programs with several financial institutions whereby advances may be requested from these financial institutions. Such advances are guaranteed by us. At January 2, 2010, we had guaranteed approximately $16 million.

As of January 2, 2010, we guaranteed up to approximately $17 million of certain of our foreign subsidiaries' obligations to their suppliers, as well as approximately $442 million of certain of our subsidiaries' lines of credit with various financial institutions.

As of January 2, 2010, approximately two million HiMEDS units with a carrying value of approximately $109 million remained outstanding. The purchase contracts related to these units obligate the holders to purchase from us a certain number of common shares in November 2010



(depending on the stock price at the time). Refer to “Capital Resources” above for further information.

## USES AND LIMITATIONS OF NON-GAAP MEASURES

We use certain non-GAAP financial measures that exclude the impact of certain events, activities or strategic decisions. The accounting effects of these events, activities or decisions, which are included in the GAAP measures, may make it difficult to assess the underlying performance of the Company in a single period. By excluding certain accounting effects, both positive and negative (e.g. restructuring charges, asset impairments, legal settlement costs, certain effects of acquisitions and related integration costs, loss from debt extinguishment, gains on sales of assets, etc.), from certain of our GAAP measures, management believes that it is providing meaningful supplemental information to facilitate an understanding of the Company's "core" or "underlying" operating results. These non-GAAP measures are used internally to evaluate trends in our underlying business, as well as to facilitate comparison to the results of competitors for a single period.

Limitations associated with the use of our non-GAAP measures include (1) the exclusion of foreign currency translation and the impact of acquisitions and divestitures, and the estimated impact of the extra week in fiscal year 2009 from the calculation of organic sales growth; (2) the exclusion of mandatory debt service requirements, as well as the exclusion of other uses of the cash generated by operating activities that do not directly or immediately support the underlying business (such as discretionary debt reductions, dividends, share repurchases, acquisitions, etc.) for calculation of free cash flow; and (3) the exclusion of cash and cash equivalents, short-term debt, deferred taxes, and other current assets and other current liabilities, as well as current assets and current liabilities of held-for-sale businesses, for the calculation of operational working capital. While some of the items the Company excludes from GAAP measures recur, these items tend to be disparate in amount and timing. Based upon feedback from investors and financial analysts, we believe that supplemental non-GAAP measures provide information that is useful to the assessment of the Company's performance and operating trends.

## TRANSACTIONS WITH RELATED PERSONS

From time to time, we enter into transactions in the normal course of business with related persons. We believe that such transactions are at arm's length and for terms that would have been obtained from unaffiliated third persons.

One of our directors, Peter W. Mullin, is the chairman, chief executive officer and majority stockholder in various entities (collectively referred to as the "Mullin Companies"), which previously provided executive compensation, benefit consulting and insurance agency services. In October 2008, the above described operations of the Mullin Companies were sold to a subsidiary of Prudential Financial, Inc. ("Prudential"). During 2009, we paid premiums to insurance carriers for life insurance originally placed by the Mullin Companies in connection with our various employee benefit plans (however, the interests of the Mullin Companies in this insurance were sold to Prudential in October 2008). Prudential has advised us that it earned commissions from such insurance carriers in an aggregate amount of approximately $.4 million, $.6 million, and $.4 million in 2009, 2008, and 2007, respectively, for the placement and renewal of this insurance, in which Mr. Mullin had an interest of approximately $.09 million, $.3 million, and $.3 million in 2009, 2008, and 2007, respectively. Mr. Mullin's interest in the 2009 commissions was determined in accordance with the terms of a commission sharing agreement entered into between Mr. Mullin and Prudential at the time of the sale.

The Mullin Companies own a minority interest in M Financial Holdings, Inc. (“MFH”). Substantially all of the life insurance policies, which we originally placed through the Mullin Companies, are issued by insurance carriers that participate in reinsurance agreements entered into between these insurance carriers and M Life Insurance Company (“M Life”), a wholly-owned subsidiary of MFH. Reinsurance returns earned by M Life are determined annually by the insurance carriers and can be negative or positive, depending upon the results of M Life’s aggregate reinsurance pool, which consists of the insured lives reinsured by M Life. The Mullin Companies have advised that in 2009, they did not receive any distributions of net reinsurance gains (either in the form of gains subject to or without risk of forfeiture) ascribed by M Life to our life insurance policies referred to above. Such gains in 2008 and 2007 were not material.

## CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions for the reporting period and as of the financial statement date. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenue and expense. Actual results could differ from those estimates.

Critical accounting policies are those that are important to the portrayal of our financial condition and results, and which require us to make difficult, subjective and/or complex judgments. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. We believe that critical accounting policies include accounting for revenue recognition, sales returns and allowances, accounts receivable allowances, inventory and inventory reserves, long-lived asset impairments, goodwill, fair value measurements, pension and postretirement benefits, income taxes, stock-based compensation, restructuring and severance costs, litigation and environmental matters, and business combinations.

## Revenue Recognition

Sales are recognized when persuasive evidence of an arrangement exists, pricing is determinable, delivery has occurred based on applicable sales terms, and collection is reasonably assured. Sales terms are generally f.o.b. (free on board) shipping point or f.o.b. destination, depending upon local business customs. For most regions in which we operate, f.o.b. shipping point terms are utilized and sales are recorded at the time of shipment, because this is when title and risk of loss are transferred. In certain regions, notably in Europe, f.o.b. destination terms are generally utilized and sales are recorded when the products are delivered to the customer's delivery site, because this is when title and risk of loss are transferred. Furthermore, sales, provisions for estimated returns, and the cost of products sold are recorded at the time title transfers to customers and when the customers assume the risks and rewards of ownership.



Actual product returns are charged against estimated sales return allowances.

Sales rebates and discounts are common practice in the industries in which we operate. Volume, promotional, price, cash and other discounts and customer incentives are accounted for as a reduction to gross sales. Rebates and discounts are recorded based upon estimates at the time products are sold. These estimates are based upon historical experience for similar programs and products. We review such rebates and discounts on an ongoing basis and accruals for rebates and discounts are adjusted, if necessary, as additional information becomes available.

## Sales Returns and Allowances

Sales returns and allowances represent credits we grant to our customers (both affiliated and non-affiliated) for the return of unsatisfactory product or a negotiated allowance in lieu of return. We accrue for returns and allowances based upon the gross price of the products sold and historical experience for such products. We record these allowances based on the following factors: (i) customer specific allowances; and (ii) an estimated amount, based on our historical experience, for issues not yet identified.

## Accounts Receivable Allowances

We are required to make judgments as to the collectibility of accounts receivable based on established aging policy, historical experience and future expectations. The allowances for doubtful accounts represent allowances for customer trade accounts receivable that are estimated to be partially or entirely uncollectible. These allowances are used to reduce gross trade receivables to their net realizable value. We record these allowances based on estimates related to the following factors: (i) customer specific allowances; (ii) amounts based upon an aging schedule; and (iii) an estimated amount, based on our historical experience, for issues not yet identified. No single customer represented 10% or more of our net sales or trade receivables at year end 2009 and 2008. However, our ten largest customers at year end 2009 represented approximately 13% of trade accounts receivable, and consisted of six customers of our Office and Consumer Products segment and four customers of our Pressure-sensitive Materials segment. The financial position and operations of these customers are monitored on an ongoing basis.

## Inventory and Inventory Reserves

Inventories are stated at the lower-of-cost-or-market value and are categorized as raw materials, work-in-progress or finished goods. Cost is determined using the first-in, first-out (“FIFO”) method. Inventory reserves are recorded for matters such as damaged, obsolete, excess and slow-moving inventory. We use estimates to record these reserves. Slow-moving inventory is reviewed by category and may be partially or fully reserved for depending on the type of product and the length of time the product has been included in inventory.

## Long-lived Asset Impairments

We record impairment charges when the carrying amounts of long-lived assets are determined not to be recoverable. Impairment is measured by assessing the usefulness of an asset or by comparing the carrying value of an asset to its fair value. Fair value is typically determined using quoted market prices, if available, or an estimate of undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The key estimates applied when preparing cash flow projections relate to revenues, gross margins, economic life of assets, overheads, taxation and discount rates. The amount of impairment loss is calculated as the excess of the carrying value over the fair value. Changes in market conditions and management strategy have historically caused us to reassess the carrying amount of our long-lived assets.

## Goodwill

Our reporting units for the purpose of performing the impairment tests for goodwill consist of roll materials; retail information services; office and consumer products; graphics and reflective products; industrial products; and business media. For the purpose of performing the required impairment tests, we primarily apply a present value (discounted cash flow) method to determine the fair value of the reporting units with goodwill. We perform our annual impairment test of goodwill during the fourth quarter.

Our reporting units are composed of either a discrete business or an aggregation of businesses with similar economic characteristics. Certain factors may result in the need to perform an 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 decision to divest an individual business within a reporting unit.

Goodwill impairment is determined using a two-step process. The first step is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any.

The second step, if necessary, compares the implied fair value of goodwill with the carrying amount of goodwill. If the implied fair value of goodwill exceeds the carrying amount, then goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.

We estimate the fair value of our reporting units, using various valuation techniques, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various judgmental assumptions about sales, operating margins, growth rates and discount rates. Assumptions about discount rates are based on a weighted-average cost of capital for comparable companies. Assumptions about sales, operating margins, and growth rates are based on our forecasts, business plans, economic projections, anticipated future cash flows and marketplace data. Assumptions are also made for varying perpetual growth rates for periods beyond the long-term business plan period.

## Fair Value Measurements

We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or



assumptions that market participants would use in pricing the asset or liability.

We determine fair value based on a three-tier fair value hierarchy, which we use to prioritize the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions to determine the best estimate of fair value.

## Pension and Postretirement Benefits

Assumptions used in determining projected benefit obligations and the fair value of plan assets for our pension plan and other postretirement benefit plans are evaluated by management in consultation with outside actuaries. In the event we determine that changes are warranted in the assumptions used, such as the discount rate, expected long-term rate of return, or health care costs, future pension and postretirement benefit expenses could increase or decrease. Due to changing market conditions or changes in the participant population, the actuarial assumptions we use may differ from actual results, which could have a significant impact on our pension and postretirement liability and related cost.

## Discount Rate

We, in consultation with our actuaries, annually review and determine the discount rates to be used in connection with our postretirement obligations. The assumed discount rate for each pension plan reflects market rates for high quality corporate bonds currently available. In the U.S., our discount rate is determined by evaluating several yield curves consisting of large populations of high quality corporate bonds. The projected pension benefit payment streams are then matched with the bond portfolios to determine a rate that reflects the liability duration unique to our plans.

## Long-term Return on Assets

We determine the long-term rate of return assumption for plan assets by reviewing the historical and expected returns of both the equity and fixed income markets, taking into consideration that assets with higher volatility typically generate a greater return over the long run. Additionally, current market conditions, such as interest rates, are evaluated and peer data is reviewed to check for reasonability and appropriateness.

## Healthcare Cost Trend Rate

Our practice is to fund the cost of postretirement benefits on a cash basis. For measurement purposes, a 9% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2010. This rate is expected to decrease to approximately 5% by 2014.

## Income Taxes

Deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. Such amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce our deferred tax assets to the amount that is more likely than not to be realized. Changes in tax laws or accounting standards and methods may affect recorded deferred taxes in future periods.
Income taxes have not been provided on certain undistributed earnings of international subsidiaries because such earnings are considered to be indefinitely reinvested.

When establishing a valuation allowance, we consider future sources of taxable income such as “future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards” and “tax planning strategies.” A tax planning strategy as “an action that: is prudent and feasible; an enterprise ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused; and would result in realization of deferred tax assets.” In the event we determine the deferred tax assets will not be realized in the future, the valuation adjustment to the deferred tax assets will be charged to earnings in the period in which we make such a determination. We have also acquired certain net deferred tax assets with existing valuation allowances. If it is later determined that it is more likely than not that the deferred tax assets will be realized, we will release the valuation allowance to current earnings or adjust the purchase price allocation.

We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.

The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities. Our 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. We use a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We record a liability for the difference between the benefit recognized and measured and tax position taken or expected to be taken on our tax return. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. We report tax-related interest and penalties as a component of income tax expense.

We do not believe there is a reasonable likelihood that there will be a material change in the tax related balances or valuation allowance balances. However, due to the complexity of some of these uncertainties, the ultimate resolution may be materially different from the current estimate.

## Stock-Based Compensation

## Valuation of Stock Options

Our stock-based compensation expense is the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period. The fair value of each of our stock option awards is estimated as of the date of grant using the Black-Scholes option-pricing model. This model requires input assumptions for our expected dividend yield, expected stock price volatility, risk-free interest rate and the expected option term.

Risk-free interest rate was based on the 52-week average of the Treasury-Bond rate that has a term corresponding to the expected option term.

Expected stock price volatility for options was determined based on an average of implied and historical volatility.

Expected dividend yield was based on the current annual dividend divided by the 12-month average of our monthly stock price prior to grant.

Expected option term was determined based on historical experience under our stock option plans.



Forfeiture rate assumption was determined based on historical data of our stock option forfeitures.

Certain of the assumptions used above are based on management’s estimates. As such, if factors change and such factors require us to change our assumptions and estimates, our stock-based compensation expense could be significantly different in the future.

The fair value of certain stock-based awards that are subject to performance metrics based on market conditions is determined using the Monte-Carlo simulation model, which utilizes multiple input variables, including expected volatility assumptions and other assumptions appropriate for determining fair value to estimate the probability of satisfying the market condition target stipulated in the award.

We have not capitalized costs associated with stock-based compensation.

## Accounting for Income Taxes for Stock-based Compensation

We elected to use the short-cut method to calculate the historical pool of windfall tax benefits related to employee stock-based compensation awards. In addition, we elected to follow the tax ordering laws to determine the sequence in which deductions and net operating loss carryforwards are utilized, as well as the direct-only approach to calculating the amount of windfall or shortfall tax benefits.

## Restructuring and Severance Costs

In the U.S., we have a severance pay plan (“Pay Plan”), which provides eligible employees with severance payments in the event of an involuntary termination due to qualifying cost reduction actions. We calculate severance pay using the severance benefit formula under the Pay Plan. Accordingly, we record provisions for such amounts and other related exit costs when they are probable and estimable. In the absence of a Pay Plan or established local practices for overseas jurisdictions, liability for severance and other employee-related costs is recognized when the liability is incurred.

## Litigation and Environmental Matters

We are currently involved in various lawsuits, claims, inquiries and other regulatory and compliance matters, most of which are routine to the nature of our business. When it is probable that obligations have been incurred and where a range of the cost of compliance or remediation can be estimated, the best estimate within the range, or if the most likely amount cannot be determined, the low end of the range is accrued. The ultimate resolution of these claims could affect future results of operations should our exposure be materially different from our earlier estimates or should liabilities be incurred that were not previously accrued.

Environmental expenditures are generally expensed. However, environmental expenditures for newly acquired assets and those which extend or improve the economic useful life of existing assets are capitalized and amortized over the remaining asset life. During each annual reporting period, we review our estimates of costs of compliance with environmental laws related to remediation and cleanup of various sites, including sites in which governmental agencies have designated us a potentially responsible party. When it is probable that obligations have been incurred and where a range of the cost of compliance or remediation can be estimated, the best estimate within the range is accrued. When the best estimate within the range cannot be determined, the low end of the range is accrued. Potential insurance reimbursements are not offset against potential liabilities, and such liabilities are not discounted.

## Business Combinations

We record the assets acquired and liabilities assumed from acquired businesses at fair value, and we make estimates and assumptions to determine such fair values.

We utilize a variety of assumptions and estimates that are believed to be reasonable in determining fair value for assets acquired and liabilities assumed. These assumptions and estimates include discounted cash flow analysis, growth rates, discount rates, current replacement cost for similar capacity for certain assets, market rate assumptions for certain obligations and certain potential costs of compliance with environmental laws related to remediation and cleanup of acquired properties. We also utilize information obtained from management of the acquired businesses and our own historical experience from previous acquisitions.

We apply significant assumptions and estimates in determining certain intangible assets resulting from the acquisitions (such as customer relationships, patents and other acquired technology, and trademarks and trade names and related applicable useful lives), property, plant and equipment, receivables, inventories, investments, tax accounts, environmental liabilities, stock option awards, lease commitments and restructuring and integration costs. Unanticipated events and circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results. As such, increases to estimates are recorded as an adjustment to goodwill during the purchase price allocation period (generally within one year of the acquisition date) and as operating expenses thereafter.

## RECENT ACCOUNTING REQUIREMENTS

During 2009, we adopted certain accounting and financial disclosure requirements of the Financial Accounting Standards Board (“FASB”), none of which had a significant impact on our financial results of operations and financial position. Refer to Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements for more information.

## SAFE HARBOR STATEMENT

The matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual Report contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which are not statements of historical fact, may contain estimates, assumptions, projections and/or expectations regarding future events, which may or may not occur. Words such as “aim,” “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “guidance,” “intend,” “may,” “might,” “objective,” “plan,” “potential,” “project,” “seek,” “shall,” “should,” “target,” “will,” “would,” or variations thereof and other expressions, which refer to future events and trends, identify forward-looking statements. Such forward-looking statements, and financial or other business targets, are subject to certain risks and uncertainties, which could cause actual results to differ materially from expected results, performance or achievements of the Company expressed or implied by such forward-looking statements.



Certain of such risks and uncertainties are discussed in more detail in Part I, Item 1A, "Risk Factors," to the Company's Annual Report on Form 10-K for the year ended January 2, 2010, and include, but are not limited to, risks and uncertainties relating to investment in development activities and new production facilities; fluctuations in cost and availability of raw materials; ability of the Company to achieve and sustain targeted cost reductions; ability of the Company to generate sustained productivity improvement; successful integration of acquisitions; successful implementation of new manufacturing technologies and installation of manufacturing equipment; the financial condition and inventory strategies of customers; customer and supplier concentrations; changes in customer order patterns; loss of significant contract(s) or customer(s); timely development and market acceptance of new products; fluctuations in demand affecting sales to customers; collection of receivables from customers; impact of competitive products and pricing; selling prices; business mix shift; volatility of capital and credit markets; impairment of capitalized assets, including goodwill and other intangibles; credit risks; ability of the Company to obtain adequate financing arrangements and to maintain access to capital; fluctuations in interest and tax rates; fluctuations in pension, insurance and employee benefit costs; impact of legal proceedings, including a previous government investigation into industry competitive practices, and any related proceedings or lawsuits pertaining thereto or to the subject matter thereof related to the concluded investigation by the U.S. Department of Justice ("DOJ") (including purported class actions seeking treble damages for alleged unlawful competitive practices, which were filed after the announcement of the DOJ investigation), as well as the impact of potential violations of the U.S. Foreign Corrupt Practices Act; changes in tax laws and regulations; changes in governmental regulations; changes in political conditions; fluctuations in foreign currency exchange rates and other risks associated with foreign operations; worldwide and local economic conditions; impact of epidemiological events on the economy and the Company's customers and suppliers; acts of war, terrorism, and natural disasters; and other factors.

The Company believes that the most significant risk factors that could affect its financial performance in the near-term include (1) the impact of economic conditions on underlying demand for the Company's products and on the carrying value of its assets; (2) the impact of competitors' actions, including pricing, expansion in key markets, and product offerings; and (3) the degree to which higher costs can be offset with productivity measures and/or passed on to customers through selling price increases, without a significant loss of volume.

The Company’s forward-looking statements represent judgment only on the dates such statements were made. By making such forward-looking statements, the Company assumes no duty to update them to reflect new, changed or unanticipated events or circumstances, other than as may be required by law.

## MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT

## Risk Management

We are exposed to the impact of changes in interest rates and foreign currency exchange rates.

Our policy is not to purchase or hold foreign currency, interest rate or commodity contracts for trading purposes.

Our objective in managing the exposure to foreign currency changes is to reduce the risk to our earnings and cash flow associated with foreign exchange rate changes. As a result, we enter into foreign exchange forward, option and swap contracts to reduce risks associated with the value of our existing foreign currency assets, liabilities, firm commitments and anticipated foreign revenues and costs, when available and appropriate. The gains and losses on these contracts are intended to offset changes in the related exposures. We do not hedge our foreign currency exposure in a manner that would entirely eliminate the effects of changes in foreign exchange rates on our consolidated net income.

Our objective in managing our exposure to interest rate changes is to reduce the impact of interest rate changes on earnings and cash flows. To achieve our objectives, we may periodically use interest rate contracts to manage the exposure to interest rate changes related to our borrowings.

Additionally, we enter into certain natural gas futures contracts to reduce the risks associated with anticipated domestic natural gas used in manufacturing and operations. These amounts are not material to our financial statements.

In the normal course of operations, we also face other risks that are either nonfinancial or nonquantifiable. Such risks principally include changes in economic or political conditions, other risks associated with foreign operations, commodity price risk and litigation risk, which are not represented in the analyses that follow.

## Foreign Exchange Value-At-Risk

We use a Value-At-Risk (“VAR”) model to determine the estimated maximum potential one-day loss in earnings associated with both our foreign exchange positions and contracts. This approach assumes that market rates or prices for foreign exchange positions and contracts are normally distributed. The VAR model estimates were made assuming normal market conditions. Firm commitments, accounts receivable and accounts payable denominated in foreign currencies, which certain of these instruments are intended to hedge, were included in the model. Forecasted transactions, which certain of these instruments are intended to hedge, were excluded from the model. The VAR was estimated using a variance-covariance methodology based on historical volatility for each currency. The volatility and correlation used in the calculation were based on two-year historical data obtained from one of our domestic banks. A 95% confidence level was used for a one-day time horizon.

The VAR model is a risk analysis tool and does not purport to represent actual losses in fair value that could be incurred by us, nor does it consider the potential effect of favorable changes in market factors.

The estimated maximum potential one-day loss in earnings for our foreign exchange positions and contracts was approximately $1 million and $1.7 million at year end 2009 and 2008, respectively.

## Interest Rate Sensitivity

An assumed 25 basis point move in interest rates (10% of our weighted-average interest rate on floating rate debt) affecting our variable-rate borrowings would have had an estimated $3 million effect on our 2009 earnings.

An assumed 30 basis point move in interest rates (10% of our weighted-average interest rate on floating rate debt) affecting our variable-rate borrowings would have had an estimated $4 million effect on our 2008 earnings.



<table><tr><td>(Dollars in millions)</td><td>2009</td><td>2008</td></tr><tr><td>Assets</td><td></td><td></td></tr><tr><td>Current assets:</td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 138.1</td><td>$ 105.5</td></tr><tr><td>Trade accounts receivable, less allowances of $56.2 and $57.3 at end of year 2009 and 2008, respectively</td><td>918.6</td><td>988.9</td></tr><tr><td>Inventories, net</td><td>477.3</td><td>583.6</td></tr><tr><td>Current deferred and refundable income taxes</td><td>103.5</td><td>115.6</td></tr><tr><td>Other current assets</td><td>95.7</td><td>136.8</td></tr><tr><td>Total current assets</td><td>1,733.2</td><td>1,930.4</td></tr><tr><td>Property, plant and equipment, net</td><td>1,354.7</td><td>1,493.0</td></tr><tr><td>Goodwill</td><td>950.8</td><td>1,716.7</td></tr><tr><td>Other intangibles resulting from business acquisitions, net</td><td>262.2</td><td>303.6</td></tr><tr><td>Non-current deferred and refundable income taxes</td><td>236.6</td><td>168.9</td></tr><tr><td>Other assets</td><td>465.3</td><td>423.1</td></tr><tr><td></td><td>$5,002.8</td><td>$6,035.7</td></tr><tr><td>Liabilities and Shareholders&#x27; Equity</td><td></td><td></td></tr><tr><td>Current liabilities:</td><td></td><td></td></tr><tr><td>Short-term and current portion of long-term debt</td><td>$ 535.6</td><td>$ 665.0</td></tr><tr><td>Accounts payable</td><td>689.8</td><td>672.9</td></tr><tr><td>Accrued payroll and employee benefits</td><td>223.0</td><td>205.7</td></tr><tr><td>Accrued trade rebates</td><td>115.1</td><td>122.6</td></tr><tr><td>Current deferred and payable income taxes</td><td>40.8</td><td>59.6</td></tr><tr><td>Other accrued liabilities</td><td>263.4</td><td>332.2</td></tr><tr><td>Total current liabilities</td><td>1,867.7</td><td>2,058.0</td></tr><tr><td>Long-term debt</td><td>1,088.7</td><td>1,544.8</td></tr><tr><td>Long-term retirement benefits and other liabilities</td><td>556.0</td><td>566.5</td></tr><tr><td>Non-current deferred and payable income taxes</td><td>127.8</td><td>116.4</td></tr><tr><td>Commitments and contingencies (see Notes 7 and 8)</td><td></td><td></td></tr><tr><td>Shareholders&#x27; equity:</td><td></td><td></td></tr><tr><td>Common stock, $1 par value, authorized - 400,000,000 shares at end of year 2009 and 2008; issued - 124,126,624 shares at end of year 2009 and 2008; outstanding - 105,298,317 shares and 98,366,621 shares at end of year 2009 and 2008, respectively</td><td>124.1</td><td>124.1</td></tr><tr><td>Capital in excess of par value</td><td>722.9</td><td>642.9</td></tr><tr><td>Retained earnings</td><td>1,499.7</td><td>2,381.3</td></tr><tr><td>Cost of unallocated ESOP shares</td><td>-</td><td>(1.2)</td></tr><tr><td>Employee stock benefit trust, 6,744,845 shares and 7,888,953 shares at end of year 2009 and 2008, respectively</td><td>(243.1)</td><td>(246.9)</td></tr><tr><td>Treasury stock at cost, 12,068,462 shares and 17,841,050 shares at end of year 2009 and 2008, respectively</td><td>(595.8)</td><td>(867.7)</td></tr><tr><td>Accumulated other comprehensive loss</td><td>(145.2)</td><td>(282.5)</td></tr><tr><td>Total shareholders&#x27; equity</td><td>1,362.6</td><td>1,750.0</td></tr><tr><td></td><td>$5,002.8</td><td>$6,035.7</td></tr></table>

See Notes to Consolidated Financial Statements



## CONSOLIDATED STATEMENT OF OPERATIONS

<table><tr><td>(In millions, except per share amounts)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Net sales</td><td>$5,952.7</td><td>$6,710.4</td><td>$6,307.8</td></tr><tr><td>Cost of products sold</td><td>4,366.2</td><td>4,983.4</td><td>4,585.4</td></tr><tr><td>Gross profit</td><td>1,586.5</td><td>1,727.0</td><td>1,722.4</td></tr><tr><td>Marketing, general and administrative expense</td><td>1,268.8</td><td>1,304.3</td><td>1,182.5</td></tr><tr><td>Goodwill and indefinite-lived intangible asset impairment charges</td><td>832.0</td><td>-</td><td>-</td></tr><tr><td>Interest expense</td><td>85.3</td><td>115.9</td><td>105.2</td></tr><tr><td>Other expense, net</td><td>191.3</td><td>36.2</td><td>59.4</td></tr><tr><td>Income (loss) before taxes</td><td>(790.9)</td><td>270.6</td><td>375.3</td></tr><tr><td>(Benefit from) provision for income taxes</td><td>(44.2)</td><td>4.5</td><td>71.8</td></tr><tr><td>Net income (loss)</td><td>$ (746.7)</td><td>$ 266.1</td><td>$ 303.5</td></tr><tr><td>Per share amounts:</td><td></td><td></td><td></td></tr><tr><td>Net income (loss) per common share</td><td>$ (7.21)</td><td>$ 2.70</td><td>$ 3.09</td></tr><tr><td>Net income (loss) per common share, assuming dilution</td><td>$ (7.21)</td><td>$ 2.70</td><td>$ 3.07</td></tr><tr><td>Dividends</td><td>$ 1.22</td><td>$ 1.64</td><td>$ 1.61</td></tr><tr><td>Average shares outstanding:</td><td></td><td></td><td></td></tr><tr><td>Common shares</td><td>103.6</td><td>98.4</td><td>98.1</td></tr><tr><td>Common shares, assuming dilution</td><td>103.6</td><td>98.7</td><td>98.9</td></tr><tr><td>Common shares outstanding at end of year</td><td>105.3</td><td>98.4</td><td>98.4</td></tr></table>

See Notes to Consolidated Financial Statements



<table><tr><td>(Dollars in millions, except per share amounts)</td><td>Common stock, $1 par value</td><td>Capital in excess of par value</td><td>Retained earnings</td><td>Cost of unallocated ESOP shares</td><td>Employee stock benefit trust</td><td>Treasury stock</td><td>Accumulated other comprehensive income (loss)</td><td>Total</td></tr><tr><td>Fiscal year ended 2006</td><td>$124.1</td><td>$81.5</td><td>$2,155.6</td><td>$ (5.7)</td><td>$ (602.5)</td><td>$ (806.7)</td><td>$ (50.1)</td><td>$1,696.2</td></tr><tr><td>Comprehensive income:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net income</td><td></td><td></td><td>303.5</td><td></td><td></td><td></td><td></td><td>303.5</td></tr><tr><td>Other comprehensive income:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Foreign currency translation adjustment</td><td></td><td></td><td></td><td></td><td></td><td></td><td>105.5</td><td>105.5</td></tr><tr><td>Effective portion of gains or losses on cash flow hedges, net of tax of (1)</td><td></td><td></td><td></td><td></td><td></td><td></td><td>.2</td><td>.2</td></tr><tr><td>Net actuarial loss, prior service cost and net transition asset, net of tax of (10)</td><td></td><td></td><td></td><td></td><td></td><td></td><td>29.2</td><td>29.2</td></tr><tr><td>Other comprehensive income</td><td></td><td></td><td></td><td></td><td></td><td></td><td>134.9</td><td>134.9</td></tr><tr><td>Total comprehensive income</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td>438.4</td></tr><tr><td>Effects of change in accounting for income taxes</td><td></td><td></td><td>2.9</td><td></td><td></td><td></td><td></td><td>2.9</td></tr><tr><td>Repurchase of 758,781 shares for treasury, net of shares issued</td><td></td><td></td><td></td><td></td><td></td><td>(51.5)</td><td></td><td>(51.5)</td></tr><tr><td>Stock issued under option plans, including $19.3 of tax and dividends paid on stock held in stock trust</td><td></td><td>19.3</td><td></td><td></td><td>54.0</td><td></td><td></td><td>73.3</td></tr><tr><td>Dividends: $1.61 per share</td><td></td><td></td><td>(171.8)</td><td></td><td></td><td></td><td></td><td>(171.8)</td></tr><tr><td>ESOP transactions, net</td><td></td><td></td><td></td><td>1.9</td><td></td><td></td><td></td><td>1.9</td></tr><tr><td>Employee stock benefit trust market value adjustment</td><td></td><td>(119.7)</td><td></td><td></td><td>119.7</td><td></td><td></td><td>-</td></tr><tr><td>Fiscal year ended 2007</td><td>124.1</td><td>781.1</td><td>2,290.2</td><td>(3.8)</td><td>(428.8)</td><td>(858.2)</td><td>84.8</td><td>1,989.4</td></tr><tr><td>Comprehensive income:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net income</td><td></td><td></td><td>266.1</td><td></td><td></td><td></td><td></td><td>266.1</td></tr><tr><td>Other comprehensive income (loss):</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Foreign currency translation adjustment</td><td></td><td></td><td></td><td></td><td></td><td></td><td>(177.3)</td><td>(177.3)</td></tr><tr><td>Effective portion of gains or losses on cash flow hedges, net of tax of (6)</td><td></td><td></td><td></td><td></td><td></td><td></td><td>1.0</td><td>1.0</td></tr><tr><td>Net actuarial loss, prior service cost and net transition asset, net of tax of (103.5)</td><td></td><td></td><td></td><td></td><td></td><td></td><td>(191.0)</td><td>(191.0)</td></tr><tr><td>Other comprehensive loss</td><td></td><td></td><td></td><td></td><td></td><td></td><td>(367.3)</td><td>(367.3)</td></tr><tr><td>Total comprehensive loss</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td>(101.2)</td></tr><tr><td>Repurchase of 195,221 shares for treasury, net of shares issued</td><td></td><td></td><td></td><td></td><td></td><td>(9.5)</td><td></td><td>(9.5)</td></tr><tr><td>Stock issued under option plans, including $13.4 of tax and dividends paid on stock held in stock trust</td><td></td><td>36.2</td><td></td><td></td><td>7.5</td><td></td><td></td><td>43.7</td></tr><tr><td>Dividends: $1.64 per share</td><td></td><td></td><td>(175.0)</td><td></td><td></td><td></td><td></td><td>(175.0)</td></tr><tr><td>ESOP transactions, net</td><td></td><td></td><td></td><td>2.6</td><td></td><td></td><td></td><td>2.6</td></tr><tr><td>Employee stock benefit trust market value adjustment</td><td></td><td>(174.4)</td><td></td><td></td><td>174.4</td><td></td><td></td><td>-</td></tr><tr><td>Fiscal year ended 2008</td><td>124.1</td><td>642.9</td><td>2,381.3</td><td>(1.2)</td><td>(246.9)</td><td>(867.7)</td><td>(282.5)</td><td>1,750.0</td></tr><tr><td>Comprehensive income:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net loss</td><td></td><td></td><td>(746.7)</td><td></td><td></td><td></td><td></td><td>(746.7)</td></tr><tr><td>Other comprehensive income (loss):</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Foreign currency translation adjustment</td><td></td><td></td><td></td><td></td><td></td><td></td><td>103.4</td><td>103.4</td></tr><tr><td>Effective portion of gains or losses on cash flow hedges, net of tax of (2.9)</td><td></td><td></td><td></td><td></td><td></td><td></td><td>4.8</td><td>4.8</td></tr><tr><td>Net actuarial loss, prior service cost and net transition asset, net of tax of (6.2)</td><td></td><td></td><td></td><td></td><td></td><td></td><td>29.1</td><td>29.1</td></tr><tr><td>Other comprehensive income</td><td></td><td></td><td></td><td></td><td></td><td></td><td>137.3</td><td>137.3</td></tr><tr><td>Total comprehensive loss</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td>(609.4)</td></tr><tr><td>Issuance of 6,459,088 shares for treasury in conjunction with HiMEDS conversion</td><td></td><td>16.0</td><td></td><td></td><td></td><td>296.9</td><td></td><td>312.9</td></tr><tr><td>Employee stock benefit trust transfer of 686,500 shares to treasury</td><td></td><td></td><td></td><td></td><td></td><td>25.0</td><td>(25.0)</td><td>-</td></tr><tr><td>Stock issued under option plans, including (8.2 of tax and dividends paid on stock held in stock trust</td><td></td><td>28.1</td><td></td><td></td><td>14.7</td><td></td><td></td><td>42.8</td></tr><tr><td>Dividends: (1.22 per share</td><td></td><td></td><td></td><td>1.2</td><td></td><td></td><td></td><td>(134.9)</td></tr><tr><td>ESOP transactions, net</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td>1.2</td></tr><tr><td>Employee stock benefit trust market value adjustment</td><td></td><td>35.9</td><td></td><td></td><td>(35.9)</td><td></td><td></td><td>-</td></tr><tr><td>Fiscal year ended 2009</td><td>$124.1</td><td>$722.9</td><td>$1,499.7</td><td>$ -</td><td>$(243.1)</td><td>$(595.8)</td><td>$(145.2)</td><td>$1,362.6</td></tr></table>

See Notes to Consolidated Financial Statements



<table><tr><td>(In millions)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Operating Activities</td><td></td><td></td><td></td></tr><tr><td>Net income (loss)</td><td>$(746.7)</td><td>$ 266.1</td><td>$ 303.5</td></tr><tr><td>Adjustments to reconcile net income (loss) to net cash provided by operating activities:</td><td></td><td></td><td></td></tr><tr><td>Depreciation</td><td>187.6</td><td>204.6</td><td>184.1</td></tr><tr><td>Amortization</td><td>79.7</td><td>73.8</td><td>53.2</td></tr><tr><td>Provision for doubtful accounts</td><td>19.3</td><td>17.7</td><td>18.7</td></tr><tr><td>Goodwill and indefinite-lived intangible asset impairment charges</td><td>832.0</td><td>-</td><td>-</td></tr><tr><td>Asset impairment and net loss on sale and disposal of assets of $9.4, $6.5, and $10.9 in 2009, 2008, and 2007, respectively</td><td>48.0</td><td>16.8</td><td>44.0</td></tr><tr><td>Loss from debt extinguishment</td><td>21.2</td><td>-</td><td>-</td></tr><tr><td>Stock-based compensation</td><td>25.8</td><td>29.0</td><td>21.6</td></tr><tr><td>Other non-cash expense and loss</td><td>22.0</td><td>11.3</td><td>-</td></tr><tr><td>Other non-cash income and gain</td><td>(8.7)</td><td>(12.4)</td><td>(1.0)</td></tr><tr><td>Changes in assets and liabilities and other adjustments, net of the effect of business acquisitions:</td><td></td><td></td><td></td></tr><tr><td>Trade accounts receivable</td><td>95.7</td><td>57.7</td><td>(17.7)</td></tr><tr><td>Inventories</td><td>133.3</td><td>16.5</td><td>(5.3)</td></tr><tr><td>Other current assets</td><td>40.6</td><td>(30.0)</td><td>18.8</td></tr><tr><td>Accounts payable and accrued liabilities</td><td>(52.4)</td><td>(15.8)</td><td>(87.1)</td></tr><tr><td>Taxes on income</td><td>.3</td><td>34.3</td><td>6.1</td></tr><tr><td>Deferred taxes</td><td>(91.0)</td><td>(114.2)</td><td>(37.5)</td></tr><tr><td>Other assets</td><td>2.3</td><td>20.8</td><td>(17.1)</td></tr><tr><td>Long-term retirement benefits and other liabilities</td><td>(40.0)</td><td>(36.5)</td><td>15.1</td></tr><tr><td>Net cash provided by operating activities</td><td>569.0</td><td>539.7</td><td>499.4</td></tr><tr><td>Investing Activities</td><td></td><td></td><td></td></tr><tr><td>Purchase of property, plant and equipment</td><td>(72.2)</td><td>(128.5)</td><td>(190.5)</td></tr><tr><td>Purchase of software and other deferred charges</td><td>(30.6)</td><td>(63.1)</td><td>(64.3)</td></tr><tr><td>Payments for acquisitions</td><td>-</td><td>(131.2)</td><td>(1,291.9)</td></tr><tr><td>(Purchases) proceeds from sale of investments, net</td><td>(.5)</td><td>17.2</td><td>-</td></tr><tr><td>Other</td><td>(2.5)</td><td>12.1</td><td>3.5</td></tr><tr><td>Net cash used in investing activities</td><td>(105.8)</td><td>(293.5)</td><td>(1,543.2)</td></tr><tr><td>Financing Activities</td><td></td><td></td><td></td></tr><tr><td>Net (decrease) increase in borrowings (maturities of 90 days or less)</td><td>(192.3)</td><td>(390.1)</td><td>792.2</td></tr><tr><td>Additional borrowings (maturities longer than 90 days)</td><td>-</td><td>400.1</td><td>688.8</td></tr><tr><td>Payments of debt (maturities longer than 90 days)</td><td>(108.3)</td><td>(50.7)</td><td>(222.0)</td></tr><tr><td>Dividends paid</td><td>(134.9)</td><td>(175.0)</td><td>(171.8)</td></tr><tr><td>Purchase of treasury stock</td><td>-</td><td>(9.8)</td><td>(63.2)</td></tr><tr><td>Proceeds from exercise of stock options, net</td><td>.6</td><td>2.7</td><td>38.1</td></tr><tr><td>Other</td><td>2.2</td><td>14.3</td><td>(6.7)</td></tr><tr><td>Net cash (used in) provided by financing activities</td><td>(432.7)</td><td>(208.5)</td><td>1,055.4</td></tr><tr><td>Effect of foreign currency translation on cash balances</td><td>2.1</td><td>(3.7)</td><td>1.4</td></tr><tr><td>Increase in cash and cash equivalents</td><td>32.6</td><td>34.0</td><td>13.0</td></tr><tr><td>Cash and cash equivalents, beginning of year</td><td>105.5</td><td>71.5</td><td>58.5</td></tr><tr><td>Cash and cash equivalents, end of year</td><td>$ 138.1</td><td>$ 105.5</td><td>$ 71.5</td></tr></table>

See Notes to Consolidated Financial Statements



# Notes to Consolidated Financial Statements

## NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

## Nature of Operations

Avery Dennison Corporation (the “Company”) is an industry leader that develops innovative identification and decorative solutions for businesses and consumers worldwide. The Company’s products include pressure-sensitive labeling materials; graphics imaging media; retail apparel ticketing and branding systems; RFID inlays and tags; office products; specialty tapes; and a variety of specialized labels for automotive, industrial and durable goods applications.

## Principles of Consolidation

The consolidated financial statements include the accounts of majority-owned subsidiaries. Intercompany accounts, transactions and profits are eliminated in consolidation. Investments in certain affiliates (20% to 50% ownership) are accounted for by the equity method of accounting. Investments representing less than 20% ownership are accounted for by the cost method of accounting.

## Financial Presentation

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

## Segment Reporting

The Company has determined that it has three reportable segments for financial reporting purposes:

- Pressure-sensitive Materials — manufactures and sells pressure-sensitive roll label materials, films for graphic and reflective applications, performance polymers (largely adhesives used to manufacture pressure-sensitive materials), and extruded films

- Retail Information Services — designs, manufactures and sells a wide variety of price marking and brand identification products, including tickets, tags and labels, and related services, supplies and equipment

- Office and Consumer Products — manufactures and sells a variety of office and consumer products, including labels, binders, dividers, sheet protectors, and writing instruments

Certain operating segments are aggregated or combined based on materiality, quantitative factors, and similar qualitative economic characteristics, including primary products, production processes, customers, and distribution methods. Operating segments that do not exceed the quantitative thresholds or are not considered for aggregation are reported in a category entitled “other specialty converting businesses,” which is comprised of several businesses that produce specialty tapes and highly engineered labels, including radio-frequency identification (“RFID”) inlays and other converted products.

In 2009, the Pressure-sensitive Materials segment contributed approximately 56% of the Company's total sales, while the Retail Information Services segment and the Office and Consumer Products segment contributed approximately 22% and 14%, respectively, of the Company's total sales. The other specialty converting businesses contributed the remaining 8% of the Company's total sales. International and domestic operations generated approximately 66% and 34%, respectively, of the Company's total sales in 2009. Refer to Note 12, "Segment Information," for further information.

## Fiscal Year

The Company’s 2009 fiscal year consisted of a 53-week period ending January 2, 2010, with the extra week reflected in the first quarter. The Company’s 2008 and 2007 fiscal years consisted of 52-week periods ending December 27, 2008 and December 29, 2007, respectively. Normally, each fiscal year consists of 52 weeks, but every fifth or sixth fiscal year consists of 53 weeks.

## Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions for the reporting period and as of the financial statement date. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenue and expense. Actual results could differ from these estimates.

## Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, deposits in banks, and short-term investments with maturities of three months or less when purchased. The carrying value of these assets approximates fair value due to the short maturity of the instruments. Cash paid for interest and income taxes was as follows:

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Interest, net of capitalized amounts</td><td>$78.3</td><td>$114.6</td><td>$ 93.6</td></tr><tr><td>Income taxes, net of refunds</td><td>47.5</td><td>77.0</td><td>106.2</td></tr></table>

In 2009, 2008 and 2007, non-cash activities included accruals for capital expenditures of approximately $8 million, $5 million and $14 million, respectively, due to the timing of payments. In 2009, the Company transferred approximately 687,000 common shares, totaling $25 million from "Employee stock benefit trust" to "Treasury stock at cost" related to the funding of employee benefit obligations.

## Accounts Receivable

The Company records trade accounts receivable at the invoiced amount. The allowance for doubtful accounts represents allowances for trade accounts receivable that are estimated to be partially or entirely uncollectible. The customer complaint reserve represents estimated sales returns and allowances. These allowances are used to reduce gross trade receivables to their net realizable values. The Company records these allowances based on estimates related to the following factors:

• Customer-specific allowances

• Amounts based upon an aging schedule

• An estimated amount, based on the Company’s historical experience

No single customer represented 10% or more of the Company’s net sales or trade receivables at year end 2009 and 2008. However, the ten largest customers at year end 2009 represented approximately 13% of trade accounts receivable and consisted of six customers of the Company’s Office and Consumer Products segment and four customers of the Pressure-sensitive Materials segment. The Company does not generally require its customers to provide collateral.



## Inventories

Inventories are stated at the lower-of-cost-or-market value and are categorized as raw materials, work-in-progress or finished goods. Cost is determined using the first-in, first-out ("FIFO") method. Inventory reserves are recorded for matters such as damaged, obsolete, excess and slow-moving inventory. The Company uses estimates to record these reserves. Slow-moving inventory is reviewed by category and may be partially or fully reserved for depending on the type of product and the length of time the product has been included in inventory.

Inventories at end of year were as follows:

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td></tr><tr><td>Raw materials</td><td>$ 217.9</td><td>$ 256.2</td></tr><tr><td>Work-in-progress</td><td>119.6</td><td>143.4</td></tr><tr><td>Finished goods</td><td>205.2</td><td>248.6</td></tr><tr><td>Inventories at lower of cost or market (approximates replacement cost)</td><td>542.7</td><td>648.2</td></tr><tr><td>Inventory reserves</td><td>(65.4)</td><td>(64.6)</td></tr><tr><td>Inventories, net</td><td>$ 477.3</td><td>$ 583.6</td></tr></table>

## Property, Plant and Equipment

Major classes of property, plant and equipment are stated at cost and were as follows:

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td></tr><tr><td>Land</td><td>$ 68.4</td><td>$ 68.4</td></tr><tr><td>Buildings and improvements</td><td>764.1</td><td>745.5</td></tr><tr><td>Machinery and equipment</td><td>2,334.8</td><td>2,301.5</td></tr><tr><td>Construction-in-progress</td><td>40.6</td><td>57.7</td></tr><tr><td>Property, plant and equipment</td><td>3,207.9</td><td>3,173.1</td></tr><tr><td>Accumulated depreciation</td><td>(1,853.2)</td><td>(1,680.1)</td></tr><tr><td>Property, plant and equipment, net</td><td>$ 1,354.7</td><td>$ 1,493.0</td></tr></table>

Depreciation is generally computed using the straight-line method over the estimated useful lives of the assets ranging from five to forty-seven years for buildings and improvements and two to fifteen years for machinery and equipment. Leasehold improvements are depreciated over the shorter of the useful life of the asset or the term of the associated leases. Maintenance and repair costs are expensed as incurred; renewals and betterments are capitalized. Upon the sale or retirement of assets, the accounts are relieved of the cost and the related accumulated depreciation, with any resulting gain or loss included in net income.

## Software

The Company capitalizes internal and external software costs that are incurred during the application development stage of the software development, including costs incurred for the design, coding, installation to hardware, testing, and upgrades and enhancements that provide additional functionalities and capabilities to the software and hardware of the chosen path. Internal and external software costs during the preliminary project stage are expensed, as well as those costs during the post-implementation and/or operation stage are expensed, including internal and external training costs and maintenance costs.

Capitalized software, which is included in “Other assets” in the Consolidated Balance Sheet, is amortized on a straight-line basis over the estimated useful life of the software, ranging from two to ten years. Capitalized software costs were as follows:

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td></tr><tr><td>Cost</td><td>$ 364.0</td><td>$ 335.5</td></tr><tr><td>Accumulated amortization</td><td>(214.1)</td><td>(188.0)</td></tr><tr><td></td><td>$ 149.9</td><td>$ 147.5</td></tr></table>

## Impairment of Long-lived Assets

Impairment charges are recorded when the carrying amounts of long-lived assets are determined not to be recoverable. Impairment is measured by assessing the usefulness of an asset or by comparing the carrying value of an asset to its fair value. Fair value is typically determined using quoted market prices, if available, or an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. Historically, changes in market conditions and management strategy have caused the Company to reassess the carrying amount of its long-lived assets.

## Goodwill and Other Intangibles Resulting from Business Acquisitions

Business combinations are accounted for by the purchase method, and the excess of the acquisition cost over the fair value of net tangible assets and identified intangible assets acquired is considered goodwill. As a result, the Company discloses goodwill separately from other intangible assets. Other identifiable intangibles include customer relationships, patents and other acquired technology, trade names and trademarks, and other intangibles.

The Company’s reporting units for the purpose of performing the impairment tests for goodwill consist of roll materials; retail information services; office and consumer products; graphics and reflective products; industrial products; and business media. In performing the required impairment tests, the Company primarily applies a present value (discounted cash flow) method to determine the fair value of the reporting units with goodwill. The Company performs its annual impairment test of goodwill during the fourth quarter.

Certain factors may result in the need to perform an impairment test prior to the fourth quarter, including significant underperformance of the Company’s business relative to expected operating results, significant adverse economic and industry trends, significant decline in the Company’s market capitalization for an extended period of time relative to net book value, or a decision to divest an individual business within a reporting unit.

The Company estimates the fair value of its reporting units, using various valuation techniques, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires the Company to make various judgmental assumptions about sales, operating margins, growth rates and discount rates. Assumptions about discount rates are based on a weighted-average cost of capital for comparable companies. Assumptions about sales, operating margins, and growth rates are based on the Company's forecasts, business plans, economic projections, anticipated future cash flows and marketplace data. Assumptions are also made for varying perpetual growth rates for periods beyond the long-term business plan period.

Goodwill impairment is determined using a two-step process. The first step is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the



fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any.

The second step, if necessary, compares the implied fair value of goodwill with the carrying amount of goodwill. If the implied fair value of goodwill exceeds the carrying amount, then goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.

See also Note 3, “Goodwill and Other Intangibles Resulting from Business Acquisitions.”

## Foreign Currency

Asset and liability accounts of international operations are translated into U.S. dollars at current rates. Revenues and expenses are translated at the weighted-average currency rate for the fiscal year. Translation gains and losses of subsidiaries operating in hyperinflationary economies, if any, are included in net income in the period incurred. Gains and losses resulting from foreign currency transactions are included in income in the period incurred. Gains and losses resulting from hedging the value of investments in certain international operations and from translation of balance sheet accounts are recorded directly as a component of other comprehensive income.

Transactions in foreign currencies (including receivables, payables and loans denominated in currencies other than the functional currency) decreased net income by $2.8 million in 2009, and increased net income by $16.1 million in 2008 and $1.4 million in 2007. In 2008, transactions in foreign currencies included a foreign currency net gain related to certain intercompany transactions of approximately $9 million. These results exclude the effects of translation of foreign currencies on the Company's financial statements.

The Company had no operations in hyperinflationary economies in fiscal years 2009, 2008 and 2007.

## Financial Instruments

The Company enters into certain foreign exchange hedge contracts to reduce its 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.

On the date the Company enters into a derivative contract, it determines whether the derivative will be designated as a hedge. Those derivatives not designated as hedges are recorded on the balance sheet at fair value, with changes in the fair value recognized in earnings. Those derivatives designated as hedges are classified as either (1) a hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (a "fair value" hedge); or (2) a hedge of a forecasted transaction or the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a "cash flow" hedge). The Company generally does not purchase or hold any foreign currency, interest rate or commodity contracts for trading purposes.

The Company assesses, both at the inception of the hedge and on an ongoing basis, whether hedges are highly effective. If it is determined that a hedge is not highly effective, the Company prospectively discontinues hedge accounting. For cash flow hedges, the effective portion of the related gains and losses is recorded as a component of other comprehensive income, and the ineffective portion is reported in earnings. Amounts in accumulated other comprehensive income (loss) are reclassified into earnings in the same period during which the hedged forecasted transaction is consummated. In the event the anticipated transaction is no longer likely to occur, the Company recognizes the change in fair value of the instrument in current period earnings. Changes in fair value hedges are recognized in current period earnings. Changes in the fair value of underlying hedged items (such as recognized assets or liabilities) are also recognized in current period earnings and offset the changes in the fair value of the derivative.

In the Statement of Cash Flows, hedge transactions are classified in the same category as the item hedged, primarily in operating activities.

See also Note 5, “Financial Instruments.”

## Fair Value Measurements

The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability.

The Company determines fair value based on a three-tier fair value hierarchy, which it uses to prioritize the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions to determine the best estimate of fair value.

## Revenue Recognition

Sales are recognized when persuasive evidence of an arrangement exists, pricing is determinable, delivery has occurred based on applicable sales terms, and collection is reasonably assured. Sales terms are generally f.o.b. (free on board) shipping point or f.o.b. destination, depending upon local business customs. For most regions in which the Company operates, f.o.b. shipping point terms are utilized and sales are recorded at the time of shipment, because this is when title and risk of loss are transferred. In certain regions, notably in Europe, f.o.b. destination terms are generally utilized and sales are recorded when the products are delivered to the customer's "normal place of delivery," because this is when title and risk of loss are transferred. Furthermore, sales, provisions for estimated returns, and the cost of products sold are recorded at the time title transfers to customers and when the customers assume the risks and rewards of ownership. Actual product returns are charged against estimated sales return allowances.



Sales rebates and discounts are common practice in the industries in which the Company operates. Volume, promotional, price, cash and other discounts and customer incentives are accounted for as a reduction to gross sales. Rebates and discounts are recorded based upon estimates at the time products are sold. These estimates are based upon historical experience for similar programs and products. The Company reviews such rebates and discounts on an ongoing basis and accruals for rebates and discounts are adjusted, if necessary, as additional information becomes available.

## Advertising Costs

Advertising costs included in “Marketing, general and administrative expense” were $23.7 million in 2009, $22.6 million in 2008, and $31 million in 2007. The Company’s policy is to expense advertising costs as incurred.

## Research and Development

Research and development costs are related to research, design and testing of new products and applications and are expensed as incurred. Research and development expense was $90.7 million in 2009, $94 million in 2008, and $95.5 million in 2007.

## Pension and Postretirement Benefits

Assumptions used in determining projected benefit obligations and the fair value of plan assets for the Company’s pension plans and other postretirement benefit plans are evaluated by management in consultation with outside actuaries. In the event that the Company determines that changes are warranted in the assumptions used, such as the discount rate, expected long-term rate of return, or health care costs, future pension and postretirement benefit expenses could increase or decrease. Due to changing market conditions or changes in the participant population, the actuarial assumptions that the Company uses may differ from actual results, which could have a significant impact on the Company’s pension and postretirement liability and related cost. Refer to Note 6, “Pension and Other Postretirement Benefits,” for further information on such assumptions.

## 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. As 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. The Company’s liability associated with product warranty was $2 million and $1.9 million at year end 2009 and 2008, respectively.

## Stock-Based Compensation

The Company’s stock-based compensation expense is the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period. The fair value of the Company’s stock option awards is estimated as of the date of grant using the Black-Scholes option-pricing model. This model requires input assumptions for the Company’s expected dividend yield, expected stock price volatility, risk-free interest rate and the expected option term.

The fair value of certain stock-based awards that are subject to performance metrics based on market conditions is determined using the Monte-Carlo simulation model, which utilizes multiple input variables, including expected volatility assumptions and other assumptions to estimate the probability of satisfying the market condition target stipulated in the award.

The Company uses the short-cut method to calculate the historical pool of windfall tax benefits related to employee stock-based compensation awards. In addition, the Company elected to follow the tax ordering laws to determine the sequence in which deductions and net operating loss carryforwards are utilized, as well as the direct-only approach to calculating the amount of windfall or shortfall tax benefits.

See also Note 9, “Shareholders’ Equity and Stock-Based Compensation.”

## Environmental Expenditures

Environmental expenditures are generally expensed. However, environmental expenditures for newly acquired assets and those which extend or improve the economic useful life of existing assets are capitalized and amortized over the remaining asset life. During each annual reporting period, the Company reviews its estimates of costs of compliance with environmental laws related to remediation and cleanup of various sites, including sites in which governmental agencies have designated the Company as a potentially responsible party. When it is probable that obligations have been incurred and where a range of the cost of compliance or remediation can be estimated, the best estimate within the range is accrued. When the best estimate within the range cannot be determined, the low end of the range is accrued. Potential insurance reimbursements are not offset against potential liabilities, and such liabilities are not discounted. Refer to Note 8, “Contingencies,” for further information.

## Asset Retirement Obligations

The Company recognizes a liability for the fair value of conditional asset retirement obligations based on estimates determined through present value techniques. An asset retirement is ‘conditional’ when the timing and (or) method of settlement of the retirement obligation is conditional upon a future event that may or may not be within the control of the Company. The Company’s asset retirement obligations primarily relate to lease restoration costs. Certain potential obligations have not been included in the Company’s estimate, because the range of time over which the Company may settle the obligation or the method of settlement is unknown or cannot be reasonably estimated. The Company’s estimated liability associated with asset retirement obligations was $7.9 million and $1.6 million at year end 2009 and 2008, respectively.

## Restructuring and Severance Costs

In the U.S., the Company has a severance pay plan (“Pay Plan”), which provides eligible employees with severance payments in the event of an involuntary termination due to qualifying cost reduction actions. Severance pay is calculated by using a severance benefit formula under the Pay Plan. Accordingly, the provisions for such amounts and other related exit costs are recorded when they are probable and estimable. In the absence of a Pay Plan or established local practices for overseas jurisdictions, liability for



severance and other employee-related costs is recognized when the liability is incurred. See also Note 10, “Cost Reduction Actions.”

## Taxes on Income

Deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. Such amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce the Company’s deferred tax assets to the amount that is more likely than not to be realized.

When establishing a valuation allowance, the Company considers future sources of taxable income such as “future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards” and “tax planning strategies.” A tax planning strategy is defined as “an action that: is prudent and feasible; an enterprise ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused; and would result in realization of deferred tax assets.” In the event the Company determines that the deferred tax assets will not be realized in the future, the valuation adjustment to the deferred tax assets is charged to earnings in the period in which the Company makes such a determination. The Company has also acquired certain net deferred tax assets with existing valuation allowances. If it is later determined that it is more likely than not that the deferred tax assets will be realized, the Company will release the valuation allowance to current earnings or adjust the purchase price allocation.

The Company calculates its current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.

The amount of income taxes the Company pays is subject to ongoing audits by federal, state and foreign tax authorities. The Company’s estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. The Company applies a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company records a liability for the difference between the benefit recognized and measured and the tax position taken or expected to be taken on the tax return. To the extent that the Company’s assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The Company reports tax-related interest and penalties as a component of income tax expense.

Investment tax credits are accounted for in the period earned in accordance with the flow-through method.

At the beginning of the first quarter of 2007 (December 31, 2006), the Company changed the manner in which it accounts for income taxes and recognized a decrease of $2.9 million in the liability for unrecognized tax benefits, which was accounted for as an increase to the beginning balance of retained earnings.

See also Note 11, “Taxes Based on Income.”

## Net Income Per Share

Net income per common share amounts were computed as follows:

<table><tr><td>(In millions, except per share amounts)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>(A) Net income (loss) available to common shareholders</td><td>($746.7)</td><td>$266.1</td><td>$303.5</td></tr><tr><td>(B) Weighted-average number of common shares outstanding</td><td>103.6</td><td>98.4</td><td>98.1</td></tr><tr><td>Dilutive shares (additional common shares issuable under employee stock options, performance units, restricted stock units and restricted stock)</td><td>—</td><td>.3</td><td>.8</td></tr><tr><td>(C) Weighted-average number of common shares outstanding, assuming dilution</td><td>103.6</td><td>98.7</td><td>98.9</td></tr><tr><td>Net income (loss) per common share (A) ÷ (B)</td><td>$ (7.21)</td><td>$ 2.70</td><td>$ 3.09</td></tr><tr><td>Net income (loss) per common share, assuming dilution (A) ÷ (C)</td><td>$ (7.21)</td><td>$ 2.70</td><td>$ 3.07</td></tr></table>

In 2009, the effect of dilutive securities (for example, employee stock options, performance units ("PUs"), restricted stock units ("RSUs") and shares of restricted stock) was not dilutive because the Company generated a net operating loss. Employee stock options, PUs, RSUs and shares of restricted stock excluded from the computation totaled approximately 11 million shares in 2009.

In 2008 and 2007, 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 approximately 10 million shares in 2008 and 4 million shares in 2007.

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

## Comprehensive Income (Loss)

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

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td></tr><tr><td>Foreign currency translation adjustment</td><td>$ 169.2</td><td>$ 65.8</td></tr><tr><td>Net actuarial loss, prior service cost and net transition assets, less amortization, net of tax benefits of $146.7 and $155.1 at year end 2009 and 2008, respectively</td><td>(303.4)</td><td>(332.5)</td></tr><tr><td>Net loss on derivative instruments designated as cash flow and firm commitment hedges, net of tax benefits of $6.6 and $9.5 at year end 2009 and 2008, respectively</td><td>(11.0)</td><td>(15.8)</td></tr><tr><td>Accumulated other comprehensive loss</td><td>$(145.2)</td><td>$(282.5)</td></tr></table>

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

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td></tr><tr><td>Beginning accumulated derivative loss</td><td>$ (15.8)</td><td>$ (16.8)</td></tr><tr><td>Net loss (gain) reclassified to earnings</td><td>15.2</td><td>(2.9)</td></tr><tr><td>Net change in the revaluation of hedging transactions</td><td>(10.4)</td><td>3.9</td></tr><tr><td>Ending accumulated derivative loss</td><td>$ (11.0)</td><td>$ (15.8)</td></tr></table>

## Business Combinations

The Company records the assets acquired and liabilities assumed from acquired businesses at fair value, and the Company makes estimates and assumptions to determine such fair values.

The Company utilizes a variety of assumptions and estimates that are believed to be reasonable in determining fair value for assets acquired and liabilities assumed. These assumptions and estimates include estimated future cash flows, growth rates, current replacement cost for similar capacity for certain assets, market rate assumptions for certain obligations and certain potential costs of compliance with environmental laws related to remediation and cleanup of acquired properties. The Company also utilizes information obtained from management of the acquired businesses and its historical experience from previous acquisitions.

The Company applies significant assumptions and estimates in determining certain intangible assets resulting from the acquisitions (such as customer relationships, patents and other acquired technology, and trade-marks and trade names and related applicable useful lives), property, plant and equipment, receivables, inventories, investments, tax accounts, environmental liabilities, stock option awards, lease commitments and restructuring and integration costs. Unanticipated events and circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results. As such, decreases to fair value of assets acquired and liabilities assumed (including cost estimates for certain obligations and liabilities) are recorded as an adjustment to goodwill indefinitely, whereas increases to the estimates are recorded as an adjustment to goodwill during the purchase price allocation period (generally within one year of the acquisition date) and as operating expenses thereafter.

## Recent Accounting Requirements

In June 2009, the Financial Accounting Standards Board (“FASB”) established 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 the Codification changed the manner in which U.S. GAAP guidance is referenced, but did not have any impact on the Company’s financial condition, results of operations, cash flows, or disclosures.

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

The FASB issued in May 2009, and amended in February 2010, a new accounting standard on subsequent events. This standard defines what qualifies as a subsequent event – those events or transactions that occur following the balance sheet date, but before the financial statements are issued, or are available to be issued. This standard was effective for interim and annual periods ending after June 15, 2009. The Company adopted this accounting standard in the second quarter of 2009.

In April 2009, the FASB issued changes to disclosure requirements regarding fair value of financial instruments, which require disclosure about fair value of financial instruments, whether recognized or not recognized in the statement of financial position, in interim financial information. These changes also require fair value information to be presented together with the related carrying amount and disclosure regarding the methods and significant assumptions used to estimate fair value. These changes were effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company has included the required disclosures in Note 4, "Debt."

The FASB issued in December 2007, and amended in April 2009, a revised accounting standard for business combinations. This standard defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. In general, this standard requires the acquiring entity in a business combination to recognize the fair value of all the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date as the fair value measurement point; and modifies the disclosure requirements. This standard applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after December 15, 2008. The adoption of this standard has not had a material impact on the Company's financial results of operations and financial condition. There have been no acquisitions since the effective date.

In December 2008, the FASB issued changes to disclosure requirements about postretirement benefit plan assets, which provides additional guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. These changes were effective for financial statements issued for fiscal years ending after December 15, 2009. These changes increased the disclosures in the financial statements related to the assets of the Company’s pension and postretirement benefits plans. These disclosures are included in Note 6, “Pension and Other Postretirement Benefits.”



In August 2008, the FASB issued additional accounting guidance regarding defensive intangible assets. This guidance clarifies that a defensive intangible asset should be accounted for as a separate unit of accounting. This applies to all intangible assets acquired, including intangible assets acquired in a business combination, in situations in which the acquirer does not intend to actively use the asset but intends to hold (lock up) the asset to prevent its competitors from obtaining access to the asset (defensive assets). This guidance was effective for intangible assets acquired on or after the beginning of the first annual reporting period beginning on December 15, 2008. The adoption of this guidance did not have an impact on the Company's financial results of operations and financial condition because there have been no acquisitions since the effective date.

In June 2008, the FASB issued additional accounting guidance regarding the effect of share-based payments transactions on the computation of earnings per share. This guidance clarifies that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years and requires retrospective application. The adoption of this guidance did not have a material impact on the Company's financial results of operations and financial condition.

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

In March 2008, the FASB issued changes to disclosure requirements regarding derivative instruments and hedging activities. These changes were intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity's derivative instruments and hedging activities and their effects on the entity's financial position, financial performance, and cash flows. These disclosure requirements apply to all derivative instruments as well as related hedged items, bifurcated derivatives, and non-derivative instruments that are designated and qualify as hedging instruments. Entities with such instruments must provide more robust qualitative disclosures and expanded quantitative disclosures. These changes are effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company has included the required disclosures in Note 5, "Financial Instruments."

In December 2007, the FASB issued a new accounting standard on non-controlling interests. This standard was effective for fiscal years and interim periods, beginning on or after December 15, 2008, with earlier adoption prohibited. This standard requires the recognition of a non-controlling interest (minority interest) as equity in the consolidated financial statements and separate from the parent's equity. The amount of net income attributable to the non-controlling interest will be included in consolidated net income on the statement of operations. This standard also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. The adoption of this standard did not have a material impact on the Company's financial results of operations and financial condition.

In September 2006, the FASB issued a new accounting standard on fair value measurements, which was effective for fiscal years and interim periods after November 15, 2007. This standard defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This standard applies to all financial assets and liabilities and to all non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. This standard indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. This standard defines fair value based upon an exit price model. The Company applied the provisions of this standard to assets and liabilities measured on a non-recurring basis as of the beginning of the 2009 fiscal year. The adoption of this standard did not have a significant impact on the Company's financial results of operations or financial position.

## Transactions with Related Persons

From time to time, the Company enters into transactions in the normal course of business with related persons. Management believes that such transactions are at arm's length and for terms that would have been obtained from unaffiliated third persons.

One of the Company’s directors, Peter W. Mullin, is the chairman, chief executive officer and majority stockholder in various entities (collectively referred to as the “Mullin Companies”), which previously provided executive compensation, benefit consulting and insurance agency services. In October 2008, the above described operations of the Mullin Companies were sold to a subsidiary of Prudential Financial, Inc. (“Prudential”). During 2009, the Company paid premiums to insurance carriers for life insurance originally placed by the Mullin Companies in connection with various Company employee benefit plans (however, the interests of the Mullin Companies in this insurance were sold to Prudential in October 2008). Prudential has advised the Company that it earned commissions from such insurance carriers in an aggregate amount of approximately $4.4 million, $6 million, and $4 million in 2009, 2008, and 2007, respectively, for the placement and renewal of this insurance, in which Mr. Mullin had an interest of approximately $9.09 million, $3 million, and $3 million in 2009, 2008, and 2007, respectively. Mr. Mullin’s interest in the 2009 commissions was determined in accordance with the terms of a commission sharing agreement entered into between Mr. Mullin and Prudential at the time of the sale.

The Mullin Companies own a minority interest in M Financial Holdings, Inc. (“MFH”). Substantially all of the life insurance policies, which the Company originally placed through the Mullin Companies, are issued by insurance carriers that participate in reinsurance agreements entered into between these insurance carriers and M Life Insurance Company (“M Life”), a wholly-owned subsidiary of MFH. Reinsurance returns earned by M Life are determined annually by the insurance carriers and can be negative or positive, depending upon the results of M Life’s aggregate reinsurance pool, which consists of the insured lives reinsured by M Life. The Mullin Companies have advised that in 2009, they did not receive any



distributions of net reinsurance gains (either in the form of gains subject to or without risk of forfeiture) ascribed by M Life to the Company’s life insurance policies referred to above. Such gains in 2008 and 2007 were not material.

## NOTE 2. ACQUISITIONS

On June 15, 2007, the Company completed the acquisition of Paxar Corporation (“Paxar”), a global leader in retail tag, ticketing, and branding systems. In accordance with the terms of the acquisition agreement, each outstanding share of Paxar common stock, par value $0.10, was converted into the right to receive $30.50 in cash. The total purchase price was approximately $1.33 billion for the outstanding shares of Paxar, including transaction costs of approximately $15 million. At June 15, 2007, outstanding options to purchase Paxar common stock, shares of Paxar restricted stock and Paxar performance share awards were converted into weight-adjusted options to purchase the Company’s common stock, shares of the Company’s restricted stock and, at the Company’s election, shares of the Company’s restricted stock or the Company’s restricted stock units, respectively. Since the date of acquisition, certain of these equity awards have vested on an accelerated basis.

The Paxar operations are included in the Company’s Retail Information Services segment. The combination of the Paxar business into the Retail Information Services segment increases the Company’s presence in the retail information and brand identification market, combines complementary strengths and broadens the range of the Company’s product and service capabilities, improves the Company’s ability to meet customer demands for product innovation and improved quality of service, and facilitates expansion into new product and geographic segments. The integration of the acquisition into the Company’s operations has resulted in significant cost synergies.

## Employee-related Items

New employment agreements for certain key executives retained by the Company provided for approximately $8 million to be accrued over their requisite service periods, of which $5 million was recorded during 2007 and $2.8 million was recorded during 2008 in the Consolidated Statement of Operations.

## Pro Forma Results of Operations

The following table represents the unaudited pro forma results of operations for the Company as though the acquisition of Paxar had occurred at the beginning of 2007. The pro forma results include estimated interest expense associated with commercial paper borrowings to fund the acquisition; amortization of intangible assets that have been acquired; adjustment to income tax provision using the worldwide combined effective tax rates of both the Company and Paxar; elimination of intercompany sales and profit in inventory; fair value adjustments to inventory; and additional depreciation resulting from fair value amounts allocated to real and personal property over the estimated useful lives. The pro forma results of operations have been prepared based on the allocation of the purchase price. This pro forma information is for comparison purposes only, and is not necessarily indicative of the results that would have occurred had the acquisition been completed at the beginning of 2007, nor is it necessarily indicative of future results.

<table><tr><td>(In millions, except per share amounts)</td><td>2007 \( ^{(1)} \)</td></tr><tr><td>Net sales</td><td>$6,722.3</td></tr><tr><td>Net income</td><td>278.4</td></tr><tr><td>Net income per common share</td><td>2.84</td></tr><tr><td>Net income per common share, assuming dilution</td><td>2.81</td></tr></table>

(1) The pro forma results of operations for fiscal year 2007 include the Company's restructuring costs and other charges discussed in Note 12, "Segment Information."

Prior to the acquisition, the Company sold certain roll materials products to Paxar. The Company’s net sales to Paxar prior to the acquisition were approximately $8 million during 2007.

## Other 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. GOODWILL AND OTHER INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS

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 impairment test of goodwill and indefinite-lived intangible assets “goodwill impairment.” 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.

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 interim goodwill impairment test in the second quarter of 2009, with no additional impairment charge recorded thereafter. Results from the Company's annual impairment test in the fourth quarter of 2009 indicated that no impairment had occurred.

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



## Goodwill

As part of the interim goodwill impairment test completed in the second quarter of 2009, which is discussed above, the Company recorded a non-cash impairment charge of $820 million for the retail information services reporting unit in the first quarter of 2009, with no additional impairment charge recorded thereafter. The total amount of goodwill assigned to the retail information services reporting unit prior to impairment charges was approximately $1.2 billion.

Changes in the net carrying amount of goodwill from operations for 2009 and 2008, by reportable segment, are as follows:

<table><tr><td>(In millions)</td><td>Pressure-sensitive Materials</td><td>Retail Information Services</td><td>Office and Consumer Products</td><td>Other specialty converting businesses</td><td>Total</td></tr><tr><td>Balance as of December 29, 2007</td><td>$354.0</td><td>$1,137.7</td><td>$177.6</td><td>$14.0</td><td>$1,683.3</td></tr><tr><td>Goodwill acquired during the period \( ^{(1)} \)</td><td>-</td><td>45.1</td><td>-</td><td>-</td><td>45.1</td></tr><tr><td>Acquisition adjustments \( ^{(2)} \)</td><td>.3</td><td>10.3</td><td>-</td><td>-</td><td>10.6</td></tr><tr><td>Transfers \( ^{(3)} \)</td><td>-</td><td>10.4</td><td>-</td><td>(10.4)</td><td>-</td></tr><tr><td>Translation adjustments</td><td>(19.9)</td><td>8.1</td><td>(10.4)</td><td>(.1)</td><td>(22.3)</td></tr><tr><td>Balance as of December 27, 2008</td><td>$334.4</td><td>$1,211.6</td><td>$167.2</td><td>$ 3.5</td><td>$1,716.7</td></tr><tr><td>Acquisition adjustments \( ^{(4)} \)</td><td>-</td><td>30.9</td><td>-</td><td>-</td><td>30.9</td></tr><tr><td>Goodwill impairment charges</td><td>-</td><td>(820.0)</td><td>-</td><td>-</td><td>(820.0)</td></tr><tr><td>Translation adjustments</td><td>17.0</td><td>.3</td><td>5.8</td><td>.1</td><td>23.2</td></tr><tr><td>Balance as of January 2, 2010</td><td>$351.4</td><td>$ 422.8</td><td>$173.0</td><td>$ 3.6</td><td>$ 950.8</td></tr><tr><td>Goodwill Summary:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Goodwill</td><td>$351.4</td><td>$1,242.8</td><td>$173.0</td><td>$ 3.6</td><td>$1,770.8</td></tr><tr><td>Accumulated impairment losses</td><td>-</td><td>(820.0)</td><td>-</td><td>-</td><td>(820.0)</td></tr><tr><td>Balance as of January 2, 2010</td><td>$351.4</td><td>$ 422.8</td><td>$173.0</td><td>$ 3.6</td><td>$ 950.8</td></tr></table>

(1) Goodwill acquired during the period related to the DM Label acquisition in April 2008.

(2) Acquisition adjustments in 2008 consisted of opening balance sheet adjustments associated with the Paxar acquisition in June 2007.

(3) Related to the transfer of a business from other specialty converting businesses to Retail Information Services to align with a change in the Company's internal reporting structure.

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

## Indefinite-Lived Intangible Assets

In connection with the acquisition of Paxar, the Company acquired approximately $30 million of indefinite-lived intangible assets, consisting of certain trade names and trademarks, which are not subject to amortization because they have an indefinite useful life. As part of the interim goodwill impairment test completed in the second quarter of 2009, which is discussed above, the Company recorded non-cash impairment charge of $12 million related to these indefinite-lived intangible assets in the first quarter of 2009, with no additional impairment charge recorded thereafter. The carrying value of these indefinite-lived intangible assets was $17.9 million and $29.5 million at January 2, 2010 and December 27, 2008, respectively, which included $.1 million and $.5 million of negative currency impact, respectively.

## Finite-Lived Intangible Assets

The following table sets forth the Company’s finite-lived intangible assets resulting from business acquisitions at January 2, 2010 and December 27, 2008, which continue to be amortized:

<table><tr><td rowspan="2"></td><td colspan="3">2009</td><td colspan="3">2008</td></tr><tr><td>Gross Carrying Amount</td><td>Accumulated Amortization</td><td>Net Carrying Amount</td><td>Gross Carrying Amount</td><td>Accumulated Amortization</td><td>Net Carrying Amount</td></tr><tr><td>(In millions)</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Customer relationships</td><td>$295.0</td><td>$ 94.8</td><td>$200.2</td><td>$295.9</td><td>$ 67.4</td><td>$228.5</td></tr><tr><td>Patents and other acquired technology</td><td>53.6</td><td>23.5</td><td>30.1</td><td>53.6</td><td>18.8</td><td>34.8</td></tr><tr><td>Trade names and trademarks \( ^{(1)} \)</td><td>47.0</td><td>39.8</td><td>7.2</td><td>45.1</td><td>38.1</td><td>7.0</td></tr><tr><td>Other intangibles</td><td>13.9</td><td>7.1</td><td>6.8</td><td>8.8</td><td>5.0</td><td>3.8</td></tr><tr><td>Total</td><td>$409.5</td><td>$165.2</td><td>$244.3</td><td>$403.4</td><td>$129.3</td><td>$274.1</td></tr></table>

(1) Includes a reclassification from “Other assets” of approximately $1 during fiscal year 2009.



Amortization expense on finite-lived intangible assets resulting from business acquisitions was $33.5 million for 2009, $32.8 million for 2008, and $19.9 million for 2007. The estimated amortization expense for finite-lived intangible assets resulting from completed business acquisitions for each of the next five fiscal years is expected to be approximately $33 million in 2010, $33 million in 2011, $33 million in 2012, $31 million in 2013, and $28 million in 2014.

The weighted-average amortization periods from the date of acquisition for finite-lived intangible assets resulting from business acquisitions are fourteen years for customer relationships, thirteen years for patents and other acquired technology, eleven years for trade names and trademarks, seven years for other intangibles and thirteen years in total. As of January 2, 2010, the weighted-average remaining useful life of acquired finite-lived intangible assets are nine years for customer relationships, seven years for patents and other acquired technology, five years for trade names and trademarks, four years for other intangibles and eight years in total.

## NOTE 4. DEBT

At January 2, 2010, short-term variable rate borrowings were $415 million (weighted-average interest rate of 0.2%) and were from commercial paper issuance. At December 27, 2008, short-term variable rate borrowings were $558 million at December 27, 2008 (weighted-average interest rate of 0.9%), and were from a mix of commercial paper issuance and the revolving credit agreement.

The Company had $60.1 million (weighted-average interest rate of 12.8%) and $106.4 million (weighted-average interest rate of 6.9%) of borrowings outstanding under foreign short-term lines of credit at January 2, 2010 and December 27, 2008, respectively. Included in the balance at December 27, 2008 was $42.2 million of debt outstanding under an agreement for a 364-day revolving credit facility in which a foreign bank provides the Company up to Euro 30 million ($42.2 million) in borrowings through March 5, 2009.

Uncommitted lines of credit were approximately $357 million at January 2, 2010. The Company's uncommitted lines of credit have no commitment expiration date, and may be cancelled at any time by the Company or the banks.

Available short-term financing arrangements totaled approximately $882 million at January 2, 2010.

Commitment fees related to the Company’s committed lines of credit in 2009, 2008, and 2007 were $2.3 million, $8 million, and $1 million, respectively.

Long-term debt and its respective weighted-average interest rates at January 2, 2010 consisted of the following:

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td></tr><tr><td>Medium-term notes:</td><td></td><td></td></tr><tr><td>Series 1995 at 7.5% — due 2015 through 2025</td><td>$ 50.0</td><td>$ 50.0</td></tr><tr><td>Long-term notes:</td><td></td><td></td></tr><tr><td>Senior notes due 2013 at 4.9%</td><td>250.0</td><td>250.0</td></tr><tr><td>Senior notes due 2033 at 6.0%</td><td>150.0</td><td>150.0</td></tr><tr><td>Bank term loan due 2011 at a floating rate of 2.7%</td><td>340.0</td><td>400.0</td></tr><tr><td>Senior notes due 2017 at 6.6%</td><td>249.0</td><td>249.0</td></tr><tr><td>Senior notes due 2020 at 7.9%</td><td>109.4</td><td>440.0</td></tr><tr><td>Other long-term borrowings</td><td>.8</td><td>6.3</td></tr><tr><td>Less: Amount classified as current</td><td>(60.5)</td><td>(.5)</td></tr><tr><td>Total long-term debt</td><td>$1,088.7</td><td>$1,544.8</td></tr></table>

The Company’s medium-term notes have maturities from 2015 through 2025 and accrue interest at fixed rates.

Maturities of long-term debt during the years 2010 through 2014 are $60.5 million (classified as current), $280.2 million, $0 million, $250 million and $0 million, respectively, with $558.5 million maturing in 2015 and thereafter.
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 1/2 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 included 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 Consolidated Statement of Operations) in the first quarter of 2009, which included a write-off of $9.6 million related to unamortized debt issuance costs. These HiMEDS units were originally issued under a shelf registration statement filed with the SEC in the fourth quarter of 2007. The net proceeds from the offering were approximately $427 million, which were used to reduce commercial paper borrowings initially used to finance the Paxar acquisition. As of January 2, 2010, approximately two million HiMEDS units with a carrying value of approximately $109 million remained outstanding. The purchase contracts related to these units obligate the holders to purchase from the Company a certain number of common shares in November 2010 (depending on the stock price at the time).

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. The Company previously amended the Revolver in August 2007, whereby commitments were increased from $525 million to $1 billion.



and the maturity date was extended from July 2009 to August 2012. Financing available under the agreement was used as a commercial paper back-up facility and to finance other corporate requirements.

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. Financing available under the agreement was permitted to be used for working capital and other general corporate purposes. The Company used the term loan credit facility to reduce commercial paper borrowings previously issued to fund the acquisition of Paxar. 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 2010, and $280 million payable upon maturity.

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

<table><tr><td></td><td>First Quarter 2009</td><td>Second Quarter 2009</td><td>Third Quarter 2009</td><td>Fourth Quarter 2009</td><td>First Quarter 2010</td><td>Second Quarter 2010</td><td>Third Quarter 2010</td><td>Fourth Quarter 2010</td></tr><tr><td>Interest Coverage Ratio (Minimum)</td><td>2.50</td><td>2.25</td><td>2.10</td><td>2.25</td><td>2.60</td><td>3.00</td><td>3.25</td><td>3.50</td></tr><tr><td>Leverage Ratio (Maximum)</td><td>4.00</td><td>4.25</td><td>4.25</td><td>4.00</td><td>3.75</td><td>3.50</td><td>3.50</td><td>3.50</td></tr></table>

As of January 2, 2010, 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 had no adverse impact on the Company's financial covenants. Refer to Note 3, "Goodwill and Other Intangibles Resulting from Business Acquisitions," for information regarding the impairments.

In February 2008, the Company terminated its bridge revolving credit agreement, dated June 13, 2007, with five domestic and foreign banks.

In the fourth quarter of 2007, the Company filed a shelf registration statement with the SEC to permit the issuance of debt and equity securities. Proceeds from the shelf offering may be used for general corporate purposes, including repaying, redeeming or repurchasing existing debt, and for working capital, capital expenditures and acquisitions. This shelf registration replaced the shelf registration statement filed in 2004.

In September 2007, a subsidiary of the Company issued $250 million 10-year senior notes (guaranteed by the Company) bearing interest at a rate of 6.625% per year, due October 2017. The net proceeds from the offering were approximately $247 million and were used to pay down current long-term debt maturities of $150 million and reduce commercial paper borrowings of $97 million initially used to finance the Paxar acquisition.

The Company’s total interest costs in 2009, 2008 and 2007 were $89.5 million, $122.1 million and $111.1 million, respectively, of which $4.2 million, $6.2 million and $5.9 million, respectively, were capitalized as part of the cost of assets.

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 the same remaining maturities. The fair value of the Company’s total debt, including short-term borrowings, was $1.60 billion at January 2, 2010 and $1.94 billion at December 27, 2008. Fair value amounts were determined primarily based on Level 2 inputs. Refer to Note 1, “Summary of Significant Accounting Policies.”

The Company had standby letters of credit outstanding of $52.5 million at January 2, 2010. The aggregate contract amount of outstanding standby letters of credit approximated fair value.

## NOTE 5. FINANCIAL INSTRUMENTS

As of January 2, 2010, the U.S. dollar equivalent notional values of the Company's outstanding commodity contracts and foreign exchange contracts were approximately $17 million and $1.1 billion, respectively.

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

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

<table><tr><td rowspan="2">(In millions)</td><td colspan="2">Asset</td><td colspan="2">Liability</td></tr><tr><td>Balance Sheet Location</td><td>Fair Value</td><td>Balance Sheet Location</td><td>Fair Value</td></tr><tr><td>Foreign exchange contracts</td><td>Other current assets</td><td>$5.0</td><td>Other current liabilities</td><td>$ 6.5</td></tr><tr><td>Commodity contracts</td><td>Other current assets</td><td>.5</td><td>Other current liabilities</td><td>3.5</td></tr><tr><td></td><td></td><td>$5.5</td><td></td><td>$10.0</td></tr></table>



## 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.

<table><tr><td>(In millions)</td><td>Location of Gain (Loss) in Income</td><td>2009</td></tr><tr><td>Foreign exchange contracts</td><td>Cost of products sold</td><td>$ (2.8)</td></tr><tr><td>Foreign exchange contracts</td><td>Marketing, general and administrative expense</td><td>15.3</td></tr><tr><td></td><td></td><td>$12.5</td></tr></table>

## 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 income (loss) 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 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 during 2009:

<table><tr><td>(In millions)</td><td>2009</td></tr><tr><td>Foreign exchange contracts</td><td>$ (7.7)</td></tr><tr><td>Commodity contracts</td><td>(2.7)</td></tr><tr><td></td><td>$(10.4)</td></tr></table>

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

<table><tr><td>(In millions)</td><td>Location of Gain (Loss) in Income</td><td>2009</td></tr><tr><td>Interest rate contracts</td><td>Interest expense</td><td>$ (6.9)</td></tr><tr><td>Foreign exchange contracts</td><td>Cost of products sold</td><td>(2.5)</td></tr><tr><td>Commodity contracts</td><td>Cost of products sold</td><td>(5.8)</td></tr><tr><td></td><td></td><td>$(15.2)</td></tr></table>

The amount of gain or loss recognized in income related to the ineffective portion of, and the amounts excluded from, effectiveness testing for cash flow hedges and derivatives not designated as hedging instruments were not significant in 2009.

The aggregate reclassification from other comprehensive income to earnings for settlement or ineffectiveness of hedge activity was a net gain of $2.9 million and a net loss of $10.5 million during 2008 and 2007, respectively. The effect of the settlement of currency hedges included in this reclassification is offset by the currency impact of the underlying hedged activity. A net loss of approximately $6 million is expected to be reclassified from other comprehensive income to earnings within the next 12 months.
In 2007, the Company entered into certain interest rate option contracts to hedge its exposure related to interest rate increases in connection with anticipated long-term debt issuances. Such debt issuances were intended to replace short-term borrowings initially used to finance the Paxar acquisition, as well as pay down current long-term debt maturities. In connection with these transactions, the Company paid $11.5 million as option premiums, of which $4.8 million was recognized as a cash flow hedge loss in the Consolidated Statement of Operations in 2007, and $6.7 million is being amortized over the life of the related forecasted hedged transactions.

The counterparties to foreign exchange and natural gas forward, option and swap contracts consist primarily of major international financial institutions. The Company centrally monitors its positions and the financial strength of its counterparties. Therefore, although the Company may be exposed to losses in the event of nonperformance by these counterparties, it does not anticipate such losses. During 2009, the Company did not experience any such losses.

## NOTE 6. PENSION AND OTHER POSTRETIREMENT BENEFITS

## Defined Benefit Plans

The Company sponsors a number of defined benefit plans covering eligible U.S. employees and employees in certain other countries. It is the Company's policy to make contributions that are sufficient to meet the minimum funding requirements of applicable laws and regulations, plus additional amounts, if any, that management determines to be appropriate, to these plans. Benefits payable to employees are based primarily on years of service and employees' pay during their employment with the Company. Certain benefits provided by one of the Company's U.S. defined benefit plans may be paid, in part, from an employee stock ownership plan. While the Company has not expressed any intent to terminate these plans, the Company may do so at any time.

The Company’s U.S. defined benefit pension plans and early retiree medical plan were closed to employees hired after December 31, 2008. Employees who participated in these plans before December 31, 2008 continued to participate and accrue pension benefits after satisfying the eligibility requirements of these plans. In connection with these closures, the Avery Dennison Corporation Employee Savings Plan (“Savings Plan” — a 401(k) savings plan covering its U.S. employees) increased the Company’s maximum matching contribution. This enhancement is only available to employees who are not eligible to participate in the Company’s defined benefit pension plans and early retiree medical plan.

## Plan Assets

Assets of the Company’s U.S. defined benefit pension plans are invested in a diversified portfolio that consists primarily of equity and fixed income securities. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, including growth, value, and both small and large capitalization stocks. The Company’s target plan asset investment allocation in the U.S. is 75% in equity securities and 25% in fixed income securities and cash, subject to periodic fluctuations in these respective asset classes. The investment objective of the plans are to maximize the total rate of return (income and appreciation) within the limits of prudent risk-taking and Section 404 of ERISA. The plans are diversified across asset classes, striving to achieve an optimal balance between risk and return and between income and capital appreciation. Because many of the pension liabilities are long-term, the investment horizon is also long-term,



but the investment plan must also ensure adequate near-term liquidity to meet benefit payments.

Assets of the Company’s international plans are invested in accordance with local accepted practice and include equity securities, fixed income securities, insurance contracts, real estate and cash. Asset allocations and investments vary by country and plan. The Company’s target plan asset investment allocation for its international plans combined is 49% in equity securities, 38% in fixed income securities and cash, and 13% in insurance contracts and real estate funds, subject to periodic fluctuations in these respective asset classes.

The weighted-average asset allocations for the Company’s defined benefit pension plans at end of year 2009 and 2008, by asset category, are as follows:

<table><tr><td></td><td colspan="2">2009</td><td colspan="2">2008</td></tr><tr><td></td><td>U.S.</td><td>Int&#x27;l</td><td>U.S.</td><td>Int&#x27;l</td></tr><tr><td>Equity securities</td><td>71%</td><td>42%</td><td>60%</td><td>43%</td></tr><tr><td>Fixed income securities and cash</td><td>29</td><td>47</td><td>40</td><td>49</td></tr><tr><td>Insurance contracts and real estate funds</td><td>-</td><td>11</td><td>-</td><td>8</td></tr><tr><td>Total</td><td>100%</td><td>100%</td><td>100%</td><td>100%</td></tr></table>

## Fair Value Measurements

The following is a description of the valuation methodologies used for assets measured at fair value at year end 2009:

• Cash is valued at nominal value.

• Money market funds are valued at a net asset value (“NAV”).

- Mutual funds are valued at fair value as determined by quoted market prices, based upon the NAV of shares held by the plans at year end.

• Commingled/pooled funds are comprised of shares or units in commingled funds that are not publically traded and are valued at net unit value, as determined by the fund’s trustees based on the underlying securities in the trust. Real estate commingled/pooled funds are funds with a direct investment in a pool of real estate properties and are valued based on valuation of the underlying investments, which include inputs such as cost, discounted future cash flows, independent appraisals and market-based comparable data.

• Common stock is valued at the closing price reported on the active market on which the individual securities are traded.

• Real estate investment trusts are valued based on quoted prices in active markets.

• Bonds and debentures consist primarily of government bonds, corporate bonds, and financial debentures. Government bonds are issued directly by government-sponsored enterprises. Corporate bonds and financial debentures consist of fixed income securities issued by corporations and financial institutions. These assets are valued at average price provided by independent pricing companies.

• Insurance contracts are valued at book value, which approximates fair value, and is calculated using the prior year balance plus or minus investment returns and changes in cash flows.

• Multi-asset common trust funds are invested in equity securities, fixed income securities, cash, and real estate funds. Multi-asset common trust funds are valued at the net asset value per share multiplied by the number of shares held as of the measurement date.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the plans believe its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The following table sets forth, by level within the fair value hierarchy, the U.S. plans’ assets at fair value as of year end 2009:

<table><tr><td rowspan="2"></td><td colspan="5">Fair Value Measurements Using</td></tr><tr><td>Total</td><td>Quoted Prices in Active Markets (Level 1)</td><td>Significant Other Observable Inputs (Level 2)</td><td>Significant Other Unobservable Inputs (Level 3)</td><td></td></tr><tr><td>Cash</td><td>$ .3</td><td>$ .3</td><td>$ -</td><td>$ -</td><td></td></tr><tr><td>Fixed income securities</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Money market funds</td><td>40.5</td><td>-</td><td>40.5</td><td>-</td><td></td></tr><tr><td>Commingled/pooled funds</td><td>97.8</td><td>-</td><td>97.8</td><td>-</td><td></td></tr><tr><td>Total fixed income securities</td><td>138.3</td><td>-</td><td>138.3</td><td>-</td><td></td></tr><tr><td>Equity securities</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Common stock</td><td>174.9</td><td>174.9</td><td>-</td><td>-</td><td></td></tr><tr><td>Mutual funds</td><td>15.2</td><td>15.2</td><td>-</td><td>-</td><td></td></tr><tr><td>Commingled/pooled funds</td><td>137.3</td><td>-</td><td>137.3</td><td>-</td><td></td></tr><tr><td>Total equity securities</td><td>327.4</td><td>190.1</td><td>137.3</td><td>-</td><td></td></tr><tr><td>Real estate investment trusts</td><td>1.9</td><td>1.9</td><td>-</td><td>-</td><td></td></tr><tr><td>Total U.S. plan assets at fair value</td><td>$467.9</td><td>$192.3</td><td>$275.6</td><td>$ -</td><td></td></tr><tr><td>Other assets \( ^{(1)} \)</td><td colspan="5">(.2)</td></tr><tr><td>Total U.S. plan assets</td><td colspan="5">$467.7</td></tr></table>

(1) Includes accrued receivables and pending broker settlements at year end 2009.



The following table sets forth, by level within the fair value hierarchy, the international plans' assets at fair value as of year end 2009:

<table><tr><td rowspan="2"></td><td rowspan="2">Total</td><td colspan="4">Fair Value Measurements Using</td></tr><tr><td>Quoted Prices in Active Markets (Level 1)</td><td>Significant Other Observable Inputs (Level 2)</td><td>Significant Other Unobservable Inputs (Level 3)</td><td></td></tr><tr><td>(In millions)</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Cash</td><td>$ 4.7</td><td>$4.7</td><td>$ -</td><td>$ -</td><td></td></tr><tr><td>Fixed income securities</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Mutual funds</td><td>.2</td><td>.2</td><td>-</td><td>-</td><td></td></tr><tr><td>Bonds and debentures</td><td>1.0</td><td>-</td><td>1.0</td><td>-</td><td></td></tr><tr><td>Commingled/pooled funds</td><td>179.8</td><td>-</td><td>179.8</td><td>-</td><td></td></tr><tr><td>Total fixed income securities</td><td>181.0</td><td>.2</td><td>180.8</td><td>-</td><td></td></tr><tr><td>Equity commingled/pooled funds</td><td>163.9</td><td>-</td><td>163.9</td><td>-</td><td></td></tr><tr><td>Insurance contracts</td><td>26.9</td><td>-</td><td>-</td><td>26.9</td><td></td></tr><tr><td>Real estate commingled/pooled funds</td><td>18.2</td><td>-</td><td>18.2</td><td>-</td><td></td></tr><tr><td>Multi-asset common trust funds</td><td>7.0</td><td>-</td><td>7.0</td><td>-</td><td></td></tr><tr><td>Total international plan assets at fair value</td><td>$401.7</td><td>$4.9</td><td>$369.9</td><td>$26.9</td><td></td></tr><tr><td>Other assets \( ^{(1)} \)</td><td>.4</td><td></td><td></td><td></td><td></td></tr><tr><td>Total international plan assets</td><td>$402.1</td><td></td><td></td><td></td><td></td></tr></table>

(1) Includes accrued receivables and pending broker settlements at year end 2009.

The following table presents a reconciliation of Level 3 assets held during the year ended January 2, 2010:

<table><tr><td rowspan="2">(In millions)</td><td>Level 3 assets</td></tr><tr><td>Insurance Contracts</td></tr><tr><td>Beginning balance at December 27, 2008</td><td>$23.0</td></tr><tr><td>Net realized and unrealized gain (loss)</td><td>.9</td></tr><tr><td>Net purchases, issuances and settlements</td><td>1.8</td></tr><tr><td>Net transfers in (out) of Level 3</td><td>-</td></tr><tr><td>Impact of changes in foreign currency exchange rates</td><td>1.2</td></tr><tr><td>Ending balance at January 2, 2010</td><td>$26.9</td></tr></table>

## Postretirement Health Benefits

The Company provides postretirement health benefits to certain U.S. retired employees up to the age of 65 under a cost-sharing arrangement, and provides supplemental Medicare benefits to certain U.S. retirees over the age of 65. The Company's policy is to fund the cost of the postretirement benefits on a cash basis. While the Company has not expressed any intent to terminate postretirement health benefits, the Company may do so at any time.

## Plan Assumptions

## Discount Rate

The Company, in consultation with its actuaries, annually reviews and determines the discount rates to be used in connection with its postretirement obligations. The assumed discount rate for each pension plan reflects market rates for high quality corporate bonds currently available. In the U.S., the Company's discount rate was determined by evaluating several yield curves consisting of large populations of high quality corporate bonds. The projected pension benefit payment streams were then matched with the bond portfolios to determine a rate that reflected the liability duration unique to the Company's plans.

## Long-term Return on Assets

The Company determines the long-term rate of return assumption for plan assets by reviewing the historical and expected returns of both the equity and fixed income markets, taking into consideration that assets with higher volatility typically generate a greater return over the long run. Additionally, current market conditions, such as interest rates, are evaluated and peer data is reviewed to check for reasonability and appropriateness.

## Healthcare Cost Trend Rate

For measurement purposes, a 9% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2010. This rate is expected to decrease to approximately 5% by 2014.

A one-percentage-point change in assumed health care cost trend rates would have the following effects:

<table><tr><td>(In millions)</td><td>One-percentage-point increase</td><td>One-percentage-point decrease</td></tr><tr><td>Effect on total of service and interest cost components</td><td>$ .30</td><td>$ (.27)</td></tr><tr><td>Effect on postretirement benefit obligation</td><td>2.47</td><td>(2.21)</td></tr></table>



## Plan Balance Sheet Reconciliations

The following provides a reconciliation of benefit obligations, plan assets, funded status of the plans and accumulated other comprehensive income:

Plan Benefit Obligations

<table><tr><td rowspan="2"></td><td colspan="4">Pension Benefits</td><td colspan="2">U.S. Postretirement Health Benefits</td></tr><tr><td>2009
U.S.</td><td>Int&#x27;l</td><td>2008
U.S.</td><td>Int&#x27;l</td><td>2009</td><td>2008</td></tr><tr><td>(In millions)</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Change in projected benefit obligation:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Projected benefit obligation at beginning of year</td><td>$611.9</td><td>$449.9</td><td>$581.7</td><td>$515.7</td><td>$31.8</td><td>$29.7</td></tr><tr><td>Service cost</td><td>18.9</td><td>11.8</td><td>19.5</td><td>14.1</td><td>1.0</td><td>1.0</td></tr><tr><td>Interest cost</td><td>38.8</td><td>25.8</td><td>36.1</td><td>28.1</td><td>1.9</td><td>1.8</td></tr><tr><td>Participant contribution</td><td>-</td><td>4.3</td><td>-</td><td>4.0</td><td>1.8</td><td>1.9</td></tr><tr><td>Amendments</td><td>-</td><td>(.3)</td><td>-</td><td>.8</td><td>-</td><td>-</td></tr><tr><td>Actuarial loss (gain)</td><td>63.2</td><td>(25.0)</td><td>8.1</td><td>(45.7)</td><td>5.3</td><td>2.4</td></tr><tr><td>Plan transfer \( ^{(1)} \)</td><td>2.0</td><td>-</td><td>1.9</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Benefits paid</td><td>(41.2)</td><td>(20.1)</td><td>(35.4)</td><td>(18.7)</td><td>(4.8)</td><td>(5.0)</td></tr><tr><td>Net transfer in \( ^{(2)} \)</td><td>-</td><td>.3</td><td>-</td><td>6.5</td><td>-</td><td>-</td></tr><tr><td>Pension curtailment</td><td>-</td><td>-</td><td>-</td><td>(.2)</td><td>-</td><td>-</td></tr><tr><td>Pension settlements</td><td>-</td><td>(.8)</td><td>-</td><td>(.8)</td><td>-</td><td>-</td></tr><tr><td>Foreign currency translation</td><td>-</td><td>19.9</td><td>-</td><td>(53.9)</td><td>-</td><td>-</td></tr><tr><td>Projected benefit obligation at end of year</td><td>$693.6</td><td>$465.8</td><td>$611.9</td><td>$449.9</td><td>$37.0</td><td>$31.8</td></tr></table>

(1) Plan transfer represents transfer from the Company's savings plan.

(2) Net transfer in represents certain retirement plans assumed from DM Label in 2008.

Plan Assets

<table><tr><td rowspan="2"></td><td colspan="4">Pension Benefits</td><td colspan="2">U.S. Postretirement Health Benefits</td></tr><tr><td>2009
U.S.</td><td>Int&#x27;l</td><td>2008
U.S.</td><td>Int&#x27;l</td><td>2009</td><td>2008</td></tr><tr><td>(ln millions)</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Change in plan assets:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Fair value of plan assets at beginning of year</td><td>$386.6</td><td>$325.0</td><td>$601.1</td><td>$461.6</td><td>$ -</td><td>$ -</td></tr><tr><td>Actual return on plan assets</td><td>86.7</td><td>60.8</td><td>(184.5)</td><td>(100.5)</td><td>-</td><td>-</td></tr><tr><td>Plan transfer \( ^{(1)} \)</td><td>2.0</td><td>-</td><td>1.9</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Employer contribution</td><td>33.5</td><td>16.5</td><td>3.5</td><td>16.6</td><td>3.0</td><td>3.1</td></tr><tr><td>Participant contribution</td><td>-</td><td>4.3</td><td>-</td><td>4.0</td><td>1.8</td><td>1.9</td></tr><tr><td>Benefits paid</td><td>(41.1)</td><td>(20.1)</td><td>(35.4)</td><td>(18.7)</td><td>(4.8)</td><td>(5.0)</td></tr><tr><td>Net transfer in \( ^{(2)} \)</td><td>-</td><td>-</td><td>-</td><td>(.3)</td><td>-</td><td>-</td></tr><tr><td>Pension settlements</td><td>-</td><td>(.8)</td><td>-</td><td>(.8)</td><td>-</td><td>-</td></tr><tr><td>Adjustment \( ^{(3)} \)</td><td>-</td><td>.7</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Foreign currency translation</td><td>-</td><td>15.7</td><td>-</td><td>(36.9)</td><td>-</td><td>-</td></tr></table>

(1) Plan transfer represents transfer from the Company's savings plan.

(2) Net transfer in represents valuation of additional pension plans.

(3) Adjustment represents additional plan assets related to a German pension plan.



<table><tr><td rowspan="2"></td><td colspan="4">Pension Benefits</td><td colspan="3">U.S. Postretirement Health Benefits</td></tr><tr><td colspan="2">2009</td><td colspan="2">2008</td><td colspan="2">2009</td><td>2008</td></tr><tr><td>(In millions)</td><td>U.S.</td><td>Int&#x27;l</td><td>U.S.</td><td>Int&#x27;l</td><td></td><td></td><td></td></tr><tr><td>Funded status of the plans:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Noncurrent assets</td><td>$ -</td><td>$ 45.7</td><td>$ -</td><td>$ .8</td><td>$ -</td><td>$ -</td><td></td></tr><tr><td>Current liabilities</td><td>(3.1)</td><td>(2.4)</td><td>(7.7)</td><td>(2.4)</td><td>(3.0)</td><td>(2.7)</td><td></td></tr><tr><td>Noncurrent liabilities</td><td>(222.8)</td><td>(107.0)</td><td>(217.6)</td><td>(123.3)</td><td>(34.0)</td><td>(29.1)</td><td></td></tr><tr><td>Plan assets less than benefit obligations</td><td>(225.9)</td><td>(63.7)</td><td>(225.3)</td><td>(124.9)</td><td>(37.0)</td><td>(31.8)</td><td></td></tr><tr><td rowspan="2"></td><td colspan="4">Pension Benefits</td><td colspan="3">U.S. Postretirement Health Benefits</td></tr><tr><td colspan="2">2009</td><td colspan="2">2008</td><td colspan="2">2009</td><td>2008</td></tr><tr><td></td><td>U.S.</td><td>Int&#x27;l</td><td>U.S.</td><td>Int&#x27;l</td><td></td><td></td><td></td></tr><tr><td>Weighted-average assumptions used for determining year end obligations:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Discount rate</td><td>6.00%</td><td>5.72%</td><td>6.60%</td><td>5.74%</td><td>6.55%</td><td>5.53%</td><td>5.50%</td></tr><tr><td>Rate of increase in future compensation levels</td><td>3.59</td><td>2.99</td><td>3.59</td><td>2.59</td><td>3.59</td><td>2.66</td><td>-</td></tr></table>

For U.S. and international plans combined, the projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $952.2 million and $616.9 million, respectively, at year end 2009 and $1,057.9 million and $706.9 million, respectively, at year end 2008.

For U.S. and international plans combined, the accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $897.8 million and $609.5 million, respectively, at year end 2009 and $797.4 million and $498.9 million, respectively, at year end 2008.

The amount in non-current pension assets represents the net assets of the Company’s overfunded plans, which consist of a few international plans. The amounts in current and non-current pension liabilities represent the net obligation of the Company’s underfunded plans, which consist of all U.S. and several international plans.

## Accumulated Other Comprehensive Income ("AOCI")

The pretax amounts recognized in “Accumulated other comprehensive income (loss)” in the Consolidated Balance Sheet:

<table><tr><td rowspan="2"></td><td colspan="4">Pension Benefits</td><td colspan="3">U.S. Postretirement Health Benefits</td></tr><tr><td colspan="2">2009</td><td colspan="2">2008</td><td colspan="2">2009</td><td>2008</td></tr><tr><td>(In millions)</td><td>U.S.</td><td>Int&#x27;l</td><td>U.S.</td><td>Int&#x27;l</td><td></td><td></td><td></td></tr><tr><td>Net actuarial loss (gain)</td><td>$359.3</td><td>$ (1.3)</td><td>$344.3</td><td>$ (1.8)</td><td></td><td>$25.6</td><td>$21.8</td></tr><tr><td>Prior service cost (credit)</td><td>4.7</td><td>4.1</td><td>5.6</td><td>4.8</td><td></td><td>(18.5)</td><td>(20.5)</td></tr><tr><td>Net transition obligation</td><td>-</td><td>78.9</td><td>-</td><td>133.9</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Net amount recognized in AOCI</td><td>$364.0</td><td>$81.7</td><td>$349.9</td><td>$136.9</td><td>$ 7.1</td><td>$ 1.3</td><td></td></tr></table>

The after-tax amounts and reconciliation of AOCI components as of January 2, 2010 are as follows:

<table><tr><td rowspan="2">(In millions)</td><td colspan="4">Pension Benefits</td><td colspan="3">U.S. Postretirement Health Benefits</td></tr><tr><td>Before-Tax Amounts U.S.</td><td>Before-Tax Amounts Int&#x27;l</td><td>Tax Effect</td><td>Net-of-Tax Amount</td><td>Before-Tax Amount</td><td>Tax Effect</td><td>Net-of-Tax Amount</td></tr><tr><td>AOCI at December 27, 2008</td><td>$349.9</td><td>$136.9</td><td>$(155.1)</td><td>$331.7</td><td>$1.3</td><td>$ (.5)</td><td>$ .8</td></tr><tr><td>Less: Amortization</td><td>(11.0)</td><td>(2.2)</td><td>4.6</td><td>(8.6)</td><td>.5</td><td>(.2)</td><td>.3</td></tr><tr><td>Net AOCI</td><td>338.9</td><td>134.7</td><td>(150.5)</td><td>323.1</td><td>1.8</td><td>(.7)</td><td>1.1</td></tr><tr><td>Net actuarial loss (gain)</td><td>25.1</td><td>(52.7) \( ^{(1)} \)</td><td>3.7</td><td>(23.9)</td><td>5.3</td><td>(2.0)</td><td>3.3</td></tr><tr><td>Prior service cost (credit)</td><td>-</td><td>(.3)</td><td>.1</td><td>(.2)</td><td>-</td><td>-</td><td>-</td></tr><tr><td>AOCI at January 2, 2010</td><td>$364.0</td><td>$ 81.7</td><td>$(146.7)</td><td>$299.0</td><td>$7.1</td><td>$(2.7)</td><td>$4.4</td></tr></table>

(1) Net of foreign currency translation loss of $6.2.



## Plan Income Statement Reconciliations

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

<table><tr><td rowspan="2"></td><td colspan="6">Pension Benefits</td><td colspan="3">U.S. Postretirement Health Benefits</td></tr><tr><td colspan="2">2009</td><td colspan="2">2008</td><td colspan="2">2007</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>(In millions)</td><td>U.S.</td><td>Int&#x27;l</td><td>U.S.</td><td>Int&#x27;l</td><td>U.S.</td><td>U.S.</td><td>Int&#x27;l</td><td></td><td></td></tr><tr><td>Components of net periodic benefit cost:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Service cost</td><td>$ 18.9</td><td>$ 11.8</td><td>$ 19.5</td><td>$ 14.1</td><td>$ 18.5</td><td>$ 14.4</td><td>$ 1.0</td><td>$ 1.0</td><td>$ 1.0</td></tr><tr><td>Interest cost</td><td>38.8</td><td>25.8</td><td>36.1</td><td>28.1</td><td>34.1</td><td>24.1</td><td>1.9</td><td>1.8</td><td>1.6</td></tr><tr><td>Expected return on plan assets</td><td>(48.6)</td><td>(26.8)</td><td>(50.9)</td><td>(29.0)</td><td>(48.9)</td><td>(24.4)</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Recognized net actuarial loss</td><td>9.3</td><td>2.1</td><td>6.0</td><td>3.6</td><td>9.6</td><td>8.0</td><td>1.5</td><td>1.5</td><td>1.3</td></tr><tr><td>Amortization of prior service cost</td><td>.8</td><td>.5</td><td>1.1</td><td>1.4</td><td>1.9</td><td>.7</td><td>(2.0)</td><td>(2.0)</td><td>(2.0)</td></tr><tr><td>Amortization of transition obligation (asset)</td><td>-</td><td>(.6)</td><td>-</td><td>(.6)</td><td>-</td><td>(1.1)</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Recognized loss (gain) on curtailment and settlement of obligation</td><td>.9</td><td>.2</td><td>-</td><td>(.1)</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Net periodic benefit cost</td><td>$ 20.1</td><td>$ 13.0</td><td>$ 11.8</td><td>$ 17.5</td><td>$ 15.2</td><td>$ 21.7</td><td>$ 2.4</td><td>$ 2.3</td><td>$ 1.9</td></tr></table>

<table><tr><td rowspan="2"></td><td colspan="6">Pension Benefits</td><td colspan="3">U.S. Postretirement Health Benefits</td></tr><tr><td colspan="2">2009</td><td colspan="2">2008</td><td colspan="2">2007</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td></td><td>U.S.</td><td>Int&#x27;l</td><td>U.S.</td><td>Int&#x27;l</td><td>U.S.</td><td>U.S.</td><td>Int&#x27;l</td><td></td><td></td></tr><tr><td>Weighted-average assumptions used for determining net periodic cost:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Discount rate</td><td>6.60%</td><td>5.74%</td><td>6.55%</td><td>5.53%</td><td>5.90%</td><td>4.67%</td><td>6.60%</td><td>6.30%</td><td>5.75%</td></tr><tr><td>Expected long-term rate of return on plan assets</td><td>8.75</td><td>6.51</td><td>8.75</td><td>6.66</td><td>8.75</td><td>6.30</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Rate of increase in future compensation levels</td><td>3.59</td><td>2.59</td><td>3.59</td><td>2.66</td><td>3.59</td><td>2.90</td><td>-</td><td>-</td><td>-</td></tr></table>

## Plan Contributions

In 2010, the Company expects to contribute approximately $3.2 million (and may contribute up to an additional $25 million) to its U.S. pension plans, a minimum of $17.6 million to its international pension plans, and approximately $3.1 million to its postretirement benefit plan.

## Future Benefit Payments

Benefit payments, which reflect expected future service, are as follows:

<table><tr><td rowspan="2"></td><td colspan="2">Pension Benefits</td></tr><tr><td>U.S.</td><td>Int&#x27;l</td></tr><tr><td>2010</td><td>$ 37.5</td><td>$ 19.2</td></tr><tr><td>2011</td><td>38.6</td><td>18.6</td></tr><tr><td>2012</td><td>39.7</td><td>20.4</td></tr><tr><td>2013</td><td>41.0</td><td>21.1</td></tr><tr><td>2014</td><td>42.4</td><td>22.5</td></tr><tr><td>2015 - 2019</td><td>250.7</td><td>136.3</td></tr></table>

## Estimated Amortization Amounts in Accumulated Other Comprehensive Income

The Company’s estimates of fiscal year 2010 amortization of amounts included in accumulated other comprehensive income are as follows:

<table><tr><td rowspan="2"></td><td colspan="2">Pension Benefits</td><td rowspan="2">U.S. Postretirement Health Benefits</td></tr><tr><td>U.S.</td><td>Int&#x27;l</td></tr><tr><td>Net actuarial loss</td><td>$18.2</td><td>$2.5</td><td></td></tr><tr><td>Prior service cost (credit)</td><td>.8</td><td>.5</td><td>(2.0)</td></tr><tr><td>Net transition obligation (asset)</td><td>-</td><td>(.6)</td><td>-</td></tr><tr><td>Net amount to be recognized</td><td>$19.0</td><td>$2.4</td><td>$ -</td></tr></table>

## Defined Contribution Plans

The Company sponsors various defined contribution plans worldwide, with the largest plan being the Savings Plan. The Company matches participant contributions to the Savings Plan based on a formula within the plan. Beginning March 2009, the Company’s match to the Savings Plan was funded by shares in the Company’s Employee Stock Benefit Trust (“ESBT”). During 2009, the Company expensed $9.2 million related to its match to participant contributions in the Company’s defined contribution plan. This amount was recorded in “Marketing, general and administrative expense” in the Consolidated Statement of Operations. See Note 9, “Shareholders’ Equity and Stock-based Compensation,” for more information.

## Employee Stock Ownership Plan (“ESOP”)

The Savings Plan had a leveraged ESOP feature, which allowed the plan to borrow funds to purchase shares of the Company’s common stock at market prices. Savings Plan expense consisted primarily of stock contributions from the ESOP to participant accounts. As of March 2009, the shares in the ESOP were fully allocated to participants.

ESOP expense is accounted for under the cost of shares allocated method. Net ESOP expense for 2009, 2008 and 2007 was $1.2 million, $1 million, and $2 million, respectively. Company contributions to pay interest or principal on ESOP borrowings were $2.2 million, $3.7 million, and $2.4 million, in 2009, 2008 and 2007, respectively.

In 2009, interest costs incurred by the ESOP and dividends on unallocated ESOP shares used for debt service were not significant. Interest costs incurred by the ESOP were $3.3 million in 2008 and $6.6 million in 2007. Dividends on unallocated ESOP shares used for debt service were $4 million in 2008 and $7 million in 2007.

The cost of shares allocated to the ESOP for 2009, 2008 and 2007 was $1.3 million, $2.8 million, and $2.1 million, respectively. Of the total



shares held by the ESOP at year end 2008, .8 million shares were allocated and .1 million shares were unallocated.

## Other Retirement Plans

The Company has deferred compensation plans which permit eligible employees and directors to defer a portion of their compensation. The deferred compensation, together with certain Company contributions, earns specified and variable rates of return. As of year end 2009 and 2008, the Company had accrued $128.4 million and $131.7 million, respectively, for its obligations under these plans. These obligations are funded by corporate-owned life insurance contracts and standby letters of credit. As of year end 2009 and 2008, these obligations were secured by standby letters of credit of $24 million and $28 million, respectively. To assist in the funding of these plans, the Company has purchased corporate-owned life insurance contracts. Proceeds from the insurance policies are payable to the Company upon the death of covered participants. The cash surrender value of these policies, net of outstanding loans, included in "Other assets" in the Consolidated Balance Sheet, was $170 million and $165.4 million at year end 2009 and 2008, respectively.

The Company’s expense, which includes Company contributions and interest expense, was $7 million, $9.5 million, and $3.1 million for 2009, 2008 and 2007, respectively. A portion of the interest on certain Company contributions may be forfeited by participants if employment is terminated before age 55 other than by reason of death, disability or retirement.

## NOTE 7. COMMITMENTS

Minimum annual rental commitments on operating leases having initial or remaining noncancellable lease terms of one year or more are as follows:

<table><tr><td>Year</td><td>(In millions)</td></tr><tr><td>2010</td><td>$ 66.0</td></tr><tr><td>2011</td><td>53.0</td></tr><tr><td>2012</td><td>39.4</td></tr><tr><td>2013</td><td>27.0</td></tr><tr><td>2014</td><td>21.1</td></tr><tr><td>2015 and thereafter</td><td>33.2</td></tr><tr><td>Total minimum lease payments</td><td>$239.7</td></tr></table>

Operating leases relate primarily to office and warehouse space, and equipment for electronic data processing and transportation. The terms of these leases do not impose significant restrictions or unusual obligations, except as noted below. There were no significant capital lease obligations as of January 2, 2010.

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 group. The Facility consists generally of land, buildings, equipment and office furnishings. The Company has leased the Facility under an operating lease arrangement, which contains a residual value guarantee of $33.4 million.

Rent expense for operating leases, which includes maintenance and insurance costs and property taxes, was approximately $100 million in 2009, approximately $105 million in 2008 and approximately $95 million in 2007.

## NOTE 8. CONTINGENCIES

## Legal Proceedings

On April 24, 2003, Sentry Business Products, Inc. filed a purported class action on behalf of direct purchasers of label stock in the United States District Court for the Northern District of Illinois against the Company, UPM-Kymmene Corporation ("UPM"), Bemis Company Inc. ("Bemis"), and certain of their subsidiaries seeking treble damages and other relief for alleged unlawful competitive practices, with allegations including that the defendants attempted to limit competition among themselves through anticompetitive understandings. Ten similar complaints were filed in various federal district courts. In November 2003, the cases were transferred to the United States District Court for the Middle District of Pennsylvania and consolidated for pretrial purposes. Plaintiffs filed a consolidated complaint on February 16, 2004, which the Company answered on March 31, 2004. On April 14, 2004, the court separated the proceedings as to class certification and merits discovery, and limited the initial phase of discovery to the issue of the appropriateness of class certification. On January 4, 2006, plaintiffs filed an amended complaint. On January 20, 2006, the Company filed an answer to the amended complaint. On August 14, 2006, the plaintiffs moved to certify a proposed class. The court substantively granted class certification on November 19, 2007. On July 22, 2008, the court held a hearing to set a schedule for merits discovery. On May 12, 2009, the Company entered into a settlement agreement with plaintiffs. Without admitting liability, the Company agreed to pay plaintiffs $36.5 million, plus up to $5 million related to notice and administration expenses, in two equal installments of $18.5 million, which were paid on May 27, 2009 and July 15, 2009. On June 10, 2009, the district court entered an order preliminarily approving the settlement, and on September 17, 2009, the district court issued an order of final approval and judgment, dismissing all claims against the Company with prejudice. The Company recorded an accrual of $37 million for this settlement in the first quarter of 2009.

On May 21, 2003, The Harman Press filed in the Superior Court for the County of Los Angeles, California, a purported class action on behalf of indirect purchasers of label stock against the Company, UPM and UPM's subsidiary Raflata ( \( ^{*} \) Raflata \( ^{*} \) ), seeking treble damages and other relief for alleged unlawful competitive practices, with allegations including that the defendants attempted to limit competition among themselves through anticompetitive understandings. Three similar complaints were filed in various California courts. In November 2003, on petition from the parties, the California Judicial Council ordered the cases be coordinated for pretrial purposes. The cases were assigned to a coordination trial judge in the Superior Court for the City and County of San Francisco on March 30, 2004. On September 30, 2004, the Harman Press amended its complaint to add Bemis' subsidiary Morgan Adhesives Company ("MACTac") as a defendant. On January 21, 2005, American International Distribution Corporation filed a purported class action on behalf of indirect purchasers in the Superior Court for Chittenden County, Vermont. Similar actions were filed by Richard Wrobel, on February 16, 2005, in the District Court of Johnson County, Kansas; and by Chad and Terry Muzzey, on February 16, 2005, in the District Court of Scotts Bluff County, Nebraska. On February 17, 2005, Judy Benson filed a purported multi-state class action on behalf of indirect purchasers in the Circuit Court for Cocke County, Tennessee. Without admitting liability, the Company has agreed to pay plaintiffs 2 million to resolve all claims related to the purported state class actions in the states of Kansas, Nebraska, Tennessee and Vermont, which



was paid on December 28, 2009. These settlements remain subject to court approval, and a hearing in their regard is set for March 10, 2010. The Company recorded $2 million in the third quarter of 2009 in respect of the settlement of these claims. The Company intends to defend the purported California class action vigorously.

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

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

The Company and its subsidiaries are involved in claims, inquiries, and other regulatory and compliance matters, most of which are routine to the nature of the business. Based upon current information, management believes that the impact of the resolution of these other matters is not material to the Company’s financial position, or is not estimable.

## Environmental Matters

As of January 2, 2010, the Company has been designated by the U.S. Environmental Protection Agency (“EPA”) and/or other responsible state agencies as a potentially responsible party (“PRP”) at fourteen waste disposal or waste recycling sites, which are the subject of separate investigations or proceedings concerning alleged soil and/or groundwater contamination and for which no settlement of the Company’s liability has been agreed. The Company is participating with other PRPs at such sites, and anticipates that its share of cleanup costs will be determined pursuant to remedial agreements entered into in the normal course of negotiations with the EPA or other governmental authorities.

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.

The activity in 2009 and 2008 related to environmental liabilities, which includes costs associated with compliance and remediation, was as follows:

<table><tr><td>(In millions)</td><td>January 2, 2010</td><td>December 27, 2008</td></tr><tr><td>Balance at beginning of year</td><td>$58.5</td><td>$37.8</td></tr><tr><td>Purchase price adjustments related to acquisitions</td><td>2.1</td><td>24.6</td></tr><tr><td>Accruals</td><td>1.0</td><td>.9</td></tr><tr><td>Payments</td><td>(5.1)</td><td>(4.8)</td></tr><tr><td>Balance at end of year</td><td>$56.5</td><td>$58.5</td></tr></table>

As of January 2, 2010, approximately $11 million of the total balance was classified as short-term.

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

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

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 January 2, 2010, the Company had guaranteed approximately $16 million.

As of January 2, 2010, the Company guaranteed up to approximately $17 million of certain foreign subsidiaries' obligations to their suppliers, as well as approximately $442 million of certain subsidiaries' lines of credit with various financial institutions.

As of January 2, 2010, approximately two million HiMEDS units with a carrying value of approximately $109 million remained outstanding. The purchase contracts related to these units obligate the holders to purchase from the Company a certain number of common shares in November 2010 (depending on the stock price at the time). Refer to Note 4, "Debt," for more information.

## NOTE 9. SHAREHOLDERS' EQUITY AND STOCK-BASED COMPENSATION

## Common Stock and Common Stock Repurchase Program

The Company’s Certificate of Incorporation authorizes five million shares of $1 par value preferred stock (none outstanding), with respect to which the Board of Directors may fix the series and terms of issuance, and 400 million shares of $1 par value voting common stock.

The Board of Directors previously authorized the issuance of up to 18 million shares to be used for the issuance of stock options and the funding of other Company obligations arising from various employee



benefit plans. As of January 2, 2010, the remaining shares available of approximately 7 million are held in the ESBT. The ESBT common stock is carried at market value with changes in share price from prior reporting periods reflected as an adjustment to capital in excess of par value.

On October 26, 2006, the Board of Directors authorized the repurchase of an additional 5 million shares of the Company's outstanding common stock, resulting in a total authorization of approximately 7.4 million shares at that date. The repurchased shares may be reissued under the Company's stock option and incentive plans or used for other corporate purposes. At January 2, 2010, approximately 3.9 million shares were available for repurchase under the Board of Directors' authorization.

## Stock Option and Incentive Plans

The Company maintains various stock option and incentive plans. Under these plans, stock options granted to directors and employees may be granted at no less than 100% of the fair market value of the Company's common stock on the date of the grant. Options generally vest ratably over a two-year period for directors and over a four-year period for employees. Unexercised options expire ten years from the date of grant. All stock options granted under these plans had an exercise price equal to the fair market value of the underlying common stock on the date of grant.

The Company’s stock-based compensation expense is the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period. The fair value of the Company’s stock option awards is estimated as of the date of grant using the Black-Scholes option-pricing model. This model requires input assumptions for the Company’s expected dividend yield, expected stock price volatility, risk-free interest rate and the expected option term. The following describes the assumptions used in estimating fair value of granted stock-options.

Risk-free interest rate was based on the 52-week average of the Treasury-Bond rate that has a term corresponding to the expected option term.
Expected stock price volatility for options represents an average of implied and historical volatility.

Expected dividend yield was based on the current annual dividend divided by the 12-month average of the Company’s monthly stock price prior to grant.

Expected option term was determined based on historical experience under the Company’s stock option plan.

Forfeiture rate of 5% was determined based on historical data of the Company’s stock option forfeitures.

The weighted-average fair value per share of options granted during 2009 was $6.57 compared to $13.82 for the year ended 2008, and $15.07 for the year ended 2007.

The underlying assumptions used were as follows:

<table><tr><td></td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Risk-free interest rate</td><td>2.76%</td><td>4.15%</td><td>4.68%</td></tr><tr><td>Expected stock price volatility</td><td>41.51</td><td>29.86</td><td>24.75</td></tr><tr><td>Expected dividend yield</td><td>3.83</td><td>2.76</td><td>2.53</td></tr><tr><td>Expected option term</td><td>6.1 years</td><td>6 years</td><td>5.8 years</td></tr></table>

Net income for 2009, 2008 and 2007 included pretax stock-based compensation expense, which related to stock-options, PUs, RSUs and restricted stock, of $25.8 million, $29 million, and $21.6 million, respectively. These expenses were included in “Marketing, general and administrative expense” and were recorded in corporate expense and the Company’s operating segments, as appropriate. The total recognized tax benefit related to these stock-based compensation expenses for 2009, 2008 and 2007 was $8.5 million, $9.7 million, and $7.2 million, respectively. No stock-based compensation cost was capitalized for the years ended 2009, 2008 and 2007, respectively.

The following table sets forth stock option information related to the Company’s stock option plans during 2009:

<table><tr><td></td><td>Number of options (in thousands)</td><td>Weighted-average exercise price</td><td>Weighted-average remaining contractual life (in years)</td><td>Aggregate intrinsic value (in millions)</td></tr><tr><td>Outstanding at December 27, 2008</td><td>10,835.7</td><td>$56.67</td><td>5.88</td><td>$ 1.7</td></tr><tr><td>Granted</td><td>2,213.1</td><td>22.59</td><td></td><td></td></tr><tr><td>Exercised</td><td>(26.7)</td><td>21.50</td><td></td><td></td></tr><tr><td>Forfeited or expired</td><td>(2,261.9)</td><td>56.80</td><td></td><td></td></tr><tr><td>Outstanding at January 2, 2010</td><td>10,760.2</td><td>$49.72</td><td>5.87</td><td>$34.0</td></tr><tr><td>Options vested and expected to vest at January 2, 2010</td><td>10,529.4</td><td>50.07</td><td>5.81</td><td>32.0</td></tr><tr><td>Options exercisable at January 2, 2010</td><td>7,193.9</td><td>$56.51</td><td>4.56</td><td>$ 4.3</td></tr></table>

The total intrinsic value of stock options exercised was $2 million in 2009, $1.9 million in 2008 and $15.4 million in 2007. Cash received by the Company from the exercise of these stock options was approximately $6 million in 2009, $3 million in 2008 and $38 million in 2007. The tax deduction associated with these options exercised was $1 million in 2009, $6 million in 2008 and $5 million in 2007. The intrinsic value of the stock options is based on the amount by which the market value of the underlying stock exceeds the exercise price of the option.



The following table provides a summary of the Company’s stock option plans for the last three years:

<table><tr><td rowspan="2"></td><td colspan="2">2009</td><td colspan="2">2008</td><td colspan="2">2007</td></tr><tr><td>Number of options (in thousands)</td><td>Weighted-average exercise price</td><td>Number of options (in thousands)</td><td>Weighted-average exercise price</td><td>Number of option (in thousands)</td><td>Weighted-average exercise price</td></tr><tr><td>Outstanding at beginning of year</td><td>10,835.7</td><td>$56.67</td><td>9,619.2</td><td>$57.29</td><td>10,188.4</td><td>$58.47</td></tr><tr><td>Granted</td><td>2,213.1</td><td>22.59</td><td>2,167.8</td><td>51.42</td><td>52.5</td><td>61.62</td></tr><tr><td>Converted from Paxar</td><td>-</td><td>-</td><td>-</td><td>-</td><td>955.4</td><td>31.82</td></tr><tr><td>Exercised</td><td>(26.7)</td><td>21.50</td><td>(182.4)</td><td>36.66</td><td>(1,011.5)</td><td>48.91</td></tr><tr><td>Forfeited or expired</td><td>(2,261.9)</td><td>56.80</td><td>(768.9)</td><td>54.37</td><td>(565.6)</td><td>53.87</td></tr><tr><td>Outstanding at end of year</td><td>10,760.2</td><td>$49.72</td><td>10,835.7</td><td>$56.67</td><td>9,619.2</td><td>$57.29</td></tr></table>

The Company generally grants its annual stock option awards to employees and directors. The Company recognizes stock-based compensation awards granted to retirement-eligible employees be treated as though they were immediately vested; as a result, the pretax compensation expense related to stock options granted to retirement-eligible of approximately $.5 million and $3 million were recognized during 2009 and 2008, respectively, and are included in the stock option expense noted below. During 2007, the recognized pretax compensation expense related to stock options granted to retirement-eligible employees was not significant, as the Company did not grant its annual stock option awards to employees and directors.

Net income for 2009, 2008 and 2007 included pretax stock option expense of $17 million, $18.6 million, and $15.8 million, respectively.
The following table summarizes the Company’s unvested stock options during 2009:

<table><tr><td></td><td>Number of options (in thousands)</td><td>Weighted-average exercise price</td></tr><tr><td>Unvested options outstanding at December 27, 2008</td><td>2,838.5</td><td>$55.50</td></tr><tr><td>Granted</td><td>2,213.1</td><td>22.59</td></tr><tr><td>Vested</td><td>(1,179.6)</td><td>53.44</td></tr><tr><td>Forfeited</td><td>(305.7)</td><td>52.57</td></tr><tr><td>Unvested options outstanding at January 2, 2010</td><td>3,566.3</td><td>$36.01</td></tr></table>

As of January 2, 2010, the Company had approximately $26 million of unrecognized compensation cost related to unvested stock option awards granted under the Company's plans. This cost is expected to be recognized over the weighted-average remaining requisite service period of approximately 3 years.

The following table summarizes information on stock options outstanding and exercisable at January 2, 2010:

<table><tr><td rowspan="2"></td><td colspan="2">Options outstanding</td><td colspan="2">Options exercisable</td></tr><tr><td>Number outstanding (in thousands)</td><td>Weighted-average remaining contractual life (in years)</td><td>Weighted-average exercise price</td><td>Number exercisable (in thousands)</td></tr><tr><td>Range of exercise prices</td><td></td><td></td><td></td><td></td></tr><tr><td>$19.20 to 28.63</td><td>2,145.3</td><td>8.65</td><td>$21.49</td><td>242.2</td></tr><tr><td>30.05 to 45.53</td><td>532.7</td><td>5.79</td><td>35.49</td><td>355.7</td></tr><tr><td>49.44 to 57.96</td><td>3,640.7</td><td>5.34</td><td>53.27</td><td>2,412.6</td></tr><tr><td>58.72 to 67.80</td><td>4,441.5</td><td>4.97</td><td>62.15</td><td>4,183.4</td></tr><tr><td>$19.20 to 67.80</td><td>10,760.2</td><td>5.87</td><td>$49.72</td><td>7,193.9</td></tr></table>



The following section presents the same information as above, but excludes the impact of Paxar converted stock options.

## Stock Option Awards Excluding Paxar Converted Stock Options

The following table sets forth stock option information relative to the Company’s stock option plans, excluding Paxar converted stock options, during 2009:

<table><tr><td></td><td>Number of options (in thousands)</td><td>Weighted-average exercise price</td><td>Weighted-average remaining contractual life (in years)</td><td>Aggregate intrinsic value (in millions)</td></tr><tr><td>Outstanding at December 27, 2008</td><td>10,296.1</td><td>$58.02</td><td>5.97</td><td>$ .1</td></tr><tr><td>Granted</td><td>2,213.1</td><td>22.59</td><td></td><td></td></tr><tr><td>Exercised</td><td>-</td><td>-</td><td></td><td></td></tr><tr><td>Forfeited or expired</td><td>(2,204.6)</td><td>57.40</td><td></td><td></td></tr><tr><td>Outstanding at January 2, 2010</td><td>10,304.6</td><td>$50.54</td><td>5.99</td><td>$31.2</td></tr><tr><td>Options vested and expected to vest at January 2, 2010</td><td>10,073.7</td><td>50.93</td><td>5.93</td><td>29.1</td></tr><tr><td>Options exercisable at January 2, 2010</td><td>6,738.3</td><td>$58.23</td><td>4.65</td><td>$ 1.4</td></tr></table>

Excluding Paxar converted stock option exercises, there were no stock options exercised in 2009. The total intrinsic value of stock options exercised was $.3 million in 2008 and $13.4 million in 2007. Cash received by the Company from the exercise of these stock options was $.2 million in 2008 and $36.2 million in 2007. The tax deduction associated with these options exercised was $.1 million in 2008 and $4.7 million in 2007. The intrinsic value of the stock options is based on the amount by which the market value of the underlying stock exceeds the exercise price of the option.

The pretax compensation expense related to stock options granted to retirement-eligible of approximately $.5 million and $3 million were recognized during 2009 and 2008, respectively, and are included in the stock option expense noted below. During 2007, the recognized pretax compensation expense related to stock options granted to retirement-eligible employees was not significant, as the Company did not grant its annual stock option awards to employees and directors.

Net income for 2009, 2008 and 2007 included pretax stock option expense of $16.8 million, $18 million, and $14.7 million, respectively.

The following table provides a summary of the Company’s stock option plans, excluding Paxar converted stock options, for the last three years:

<table><tr><td rowspan="2"></td><td colspan="2">2009</td><td colspan="2">2008</td><td colspan="2">2007</td></tr><tr><td>Number of options (in thousands)</td><td>Weighted-average exercise price</td><td>Number of options (in thousands)</td><td>Weighted-average exercise price</td><td>Number of option (in thousands)</td><td>Weighted-average exercise price</td></tr><tr><td>Outstanding at beginning of year</td><td>10,296.1</td><td>$58.02</td><td>8,974.3</td><td>$59.20</td><td>10,188.4</td><td>$58.47</td></tr><tr><td>Granted</td><td>2,213.1</td><td>22.59</td><td>2,167.8</td><td>51.42</td><td>52.5</td><td>61.62</td></tr><tr><td>Exercised</td><td>-</td><td>-</td><td>(81.7)</td><td>45.19</td><td>(940.4)</td><td>50.33</td></tr><tr><td>Forfeited or expired</td><td>(2,204.6)</td><td>57.40</td><td>(764.3)</td><td>54.49</td><td>(326.2)</td><td>61.80</td></tr><tr><td>Outstanding at end of year</td><td>10,304.6</td><td>$50.54</td><td>10,296.1</td><td>$58.02</td><td>8,974.3</td><td>$59.20</td></tr></table>

The following table summarizes the Company’s unvested stock options, excluding Paxar converted stock options, during 2009:

<table><tr><td></td><td>Number of options (in thousands)</td><td>Weighted-average exercise price</td></tr><tr><td>Unvested options outstanding at December 27, 2008</td><td>2,824.0</td><td>$55.59</td></tr><tr><td>Granted</td><td>2,213.1</td><td>22.59</td></tr><tr><td>Vested</td><td>(1,166.0)</td><td>53.62</td></tr><tr><td>Forfeited</td><td>(304.8)</td><td>52.61</td></tr><tr><td>Unvested options outstanding at January 2, 2010</td><td>3,566.3</td><td>$36.01</td></tr></table>

As of January 2, 2010, the Company had approximately $26 million of unrecognized compensation cost related to unvested stock option awards granted under the Company’s plans. This cost is expected to be recognized over the weighted-average remaining requisite service period of approximately 3 years.



The following table summarizes information on stock options outstanding and exercisable, excluding Paxar converted stock options, at January 2, 2010:

<table><tr><td rowspan="2"></td><td colspan="3">Options outstanding</td><td colspan="2">Options exercisable</td></tr><tr><td>Number outstanding (in thousands)</td><td>Weighted-average remaining contractual life (in years)</td><td>Weighted-average exercise price</td><td>Number exercisable (in thousands)</td><td>Weighted-average exercise price</td></tr><tr><td>Range of exercise prices</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>$19.20 to 28.63</td><td>2,030.8</td><td>9.08</td><td>$21.49</td><td>127.7</td><td>$21.23</td></tr><tr><td>30.53 to 45.53</td><td>191.6</td><td>9.18</td><td>37.58</td><td>14.6</td><td>45.53</td></tr><tr><td>49.44 to 57.96</td><td>3,640.7</td><td>5.34</td><td>53.27</td><td>2,412.6</td><td>54.05</td></tr><tr><td>58.72 to 67.80</td><td>4,441.5</td><td>4.97</td><td>62.15</td><td>4,183.4</td><td>61.82</td></tr><tr><td>$19.20 to 67.80</td><td>10,304.6</td><td>5.99</td><td>$50.54</td><td>6,738.3</td><td>$58.23</td></tr></table>

## Performance Units

Since 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 has granted 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 metrics are achieved at the end of each respective performance period. The pretax compensation expense related to PUs was $3.1 million and $1.2 million for the years ended 2009 and 2008, respectively. As of January 2, 2010, the Company had approximately $4 million of unrecognized compensation cost related to these PUs, which reflects the Company’s current expectation of meeting certain performance metrics. This cost is expected to be recognized over the weighted-average remaining requisite service period of approximately 2 years.

The following table summarizes information about awarded PUs:

<table><tr><td></td><td>Number of PUs (in thousands)</td><td>Weighted-average grant-date fair value</td></tr><tr><td>Unvested at December 27, 2008</td><td>254.8</td><td>43.94</td></tr><tr><td>Granted</td><td>474.7</td><td>12.06</td></tr><tr><td>Vested</td><td>(15.8)</td><td>35.98</td></tr><tr><td>Forfeited</td><td>(62.5)</td><td>31.28</td></tr><tr><td>Unvested at January 2, 2010 \( ^{(1)} \)</td><td>651.2</td><td>22.12</td></tr></table>

(1) At the end of each respective performance period, the actual number of shares issued can range from 0% to 200% of the target shares granted.

## Restricted Stock Units and Restricted Stock

In December 2005, the Compensation and Executive Personnel Committee of the Board of Directors approved the award of RSUs, which were issued under the Company's stock option and incentive plan. RSUs are granted to two groups of employees as described below. Certain RSUs include dividend equivalents in the form of additional RSUs, which are equivalent to the amount of the dividend paid or property distributed on a single share of common stock multiplied by the number of RSUs in the employee's account. Vesting for the two groups of RSUs is as follows:

• A vesting period of 3 years provided that a certain performance objective is met at the end of the third year after the year of the award. If the performance objective is not achieved at the end of the third year, the same unvested RSUs will be subject to meeting the performance objective at the end of the fourth year, and if not achieved at the end of the fourth year, then the fifth year following the year of grant, or

• A vesting period of 1 to 5 years provided that employment continues for 1 to 5 years after the date of the award.

For both groups, if the above vesting conditions are not met, the RSUs will be forfeited.

The following table summarizes information about awarded RSUs:

<table><tr><td></td><td>Number of RSUs (in thousands)</td><td>Weighted-average grant-date fair value</td></tr><tr><td>Unvested at December 27, 2008</td><td>423.8</td><td>$57.53</td></tr><tr><td>Granted</td><td>543.4</td><td>17.47</td></tr><tr><td>Vested</td><td>(114.9)</td><td>51.42</td></tr><tr><td>Forfeited</td><td>(69.0)</td><td>39.25</td></tr><tr><td>Unvested at January 2, 2010</td><td>783.3</td><td>$32.24</td></tr></table>

The total compensation expense related to RSUs and restricted stock is amortized on a straight-line basis over the requisite service period.

The pretax compensation expense related to RSUs was $5.5 million, $7.8 million and $4.3 million for the years ended 2009, 2008 and 2007, respectively. The tax deduction associated with the vesting of RSUs and the related issuance of common stock was approximately $1.5 million in 2009, $8 million in 2008 and $1.1 million in 2007.

During 2005, the Company also awarded 30,000 shares of restricted stock, which vest in two equal increments, the first vested in 2009 and the second will vest in 2012. Pretax compensation expense for this award was approximately $1 million in 2009, and $3 million each in 2008 and 2007, respectively.

The Company recognizes stock-based compensation awards granted to retirement-eligible employees as though they were immediately vested; as a result, the pretax compensation expense related to RSUs granted to retirement-eligible employees was recognized and included in the compensation expense noted above.

As of January 2, 2010, the Company had approximately $12 million of unrecognized compensation cost related to unvested RSUs and restricted stock. This cost is expected to be recognized over the remaining requisite service period (weighted-average remaining service period of approximately 2 years for RSUs and 3 years for restricted stock).



## Paxar Converted Stock Option Awards

In connection with the Paxar acquisition in 2007, the Company converted Paxar's stock options based on the acquisition price of $30.50 per share divided by the Company's twenty-day average stock price prior to the acquisition date, which was $64.82. The total number of stock options resulting from this conversion was approximately 955,000 shares, of which approximately 234,000 shares were associated with change-in-control provisions. The total equity compensation recorded in "Capital in excess of par value" in the Shareholders' equity section of the Consolidated Balance Sheet was approximately $24 million for Paxar's converted stock options. This amount was reduced by approximately $2 million related to unvested stock options.

The Company’s stock-based compensation expense associated with Paxar converted stock options was based on the estimated fair value as of June 15, 2007, using the Black-Scholes option-pricing model, amortized on a straight-line basis over the remaining requisite service period. The Black-Scholes assumptions used were consistent with those used by the Company during the second quarter of 2007.

The following table sets forth stock option information relative to Paxar converted stock option plans during 2009:

<table><tr><td></td><td>Number of options (in thousands)</td><td>Weighted-average exercise price</td><td>Weighted-average remaining contractual life (in years)</td><td>Aggregate intrinsic value (in millions)</td></tr><tr><td>Outstanding at December 27, 2008</td><td>539.6</td><td>$30.93</td><td>4.07</td><td>$1.6</td></tr><tr><td>Exercised</td><td>(26.7)</td><td>21.50</td><td></td><td></td></tr><tr><td>Forfeited or expired</td><td>(57.3)</td><td>33.94</td><td></td><td></td></tr><tr><td>Outstanding at January 2, 2010</td><td>455.6</td><td>$31.10</td><td>3.16</td><td>$2.8</td></tr><tr><td>Options vested and exercisable at January 2, 2010</td><td>455.6</td><td>$31.10</td><td>3.16</td><td>$2.8</td></tr></table>

The total intrinsic value of Paxar converted stock options exercised was $2.2 million in 2009, $1.6 million in 2008 and $2 million in 2007. Cash received by the Company from the exercise of these stock options was $6.6 million in 2009, $2.5 million in 2008 and $1.9 million in 2007. The tax deduction associated with these exercised options was $1.1 million in 2009, $5.5 million in 2008 and $2.2 million in 2007. The intrinsic value of the stock options is based on the amount by which the market value of the underlying stock exceeds the exercise price of the option.

The following table summarizes Paxar converted unvested stock options during 2009:

<table><tr><td></td><td>Number of options (in thousands)</td><td>Weighted-average exercise price</td></tr><tr><td>Unvested options outstanding at December 27, 2008</td><td>14.5</td><td>$38.07</td></tr><tr><td>Vested</td><td>(13.6)</td><td>38.07</td></tr><tr><td>Forfeited</td><td>(.9)</td><td>38.07</td></tr><tr><td>Unvested options outstanding at January 2, 2010</td><td>-</td><td>$ -</td></tr></table>

The pretax compensation expense related to Paxar converted stock options was approximately $2.2 million in 2009, $6.6 million in 2008 and $1 million in 2007. As of January 2, 2010, the Company had no additional unrecognized compensation cost related to unvested Paxar converted stock option awards.

The following table summarizes information on the Paxar converted stock options outstanding and exercisable at January 2, 2010:

<table><tr><td rowspan="2"></td><td colspan="3">Options outstanding</td><td colspan="2">Options exercisable</td></tr><tr><td>Number outstanding (in thousands)</td><td>Weighted-average remaining contractual life (in years)</td><td>Weighted-average exercise price</td><td>Number exercisable (in thousands)</td><td>Weighted-average exercise price</td></tr><tr><td>Range of exercise prices</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>$19.80 to 24.68</td><td>114.5</td><td>1.00</td><td>$21.52</td><td>114.5</td><td>$21.52</td></tr><tr><td>30.05 to 43.25</td><td>341.1</td><td>3.88</td><td>34.32</td><td>341.1</td><td>34.32</td></tr><tr><td>$19.80 to 43.25</td><td>455.6</td><td>3.16</td><td>$31.10</td><td>455.6</td><td>$31.10</td></tr></table>

## Paxar Converted Performance Share Awards

Additionally, the Company converted Paxar’s performance share awards into approximately 80,000 shares of the Company’s common stock, based on the acquisition price of $30.50 per share divided by the Company’s twenty-day average stock price prior to the acquisition date, which was $64.82. The total equity compensation of approximately $5 million for vested and unvested performance share awards, recorded in “Capital in excess of par value” in the Shareholders’ equity section of



the Consolidated Balance Sheet was calculated using the Company's ending stock price at June 15, 2007 of $66.69. This amount was reduced by approximately $3 million related to unvested performance share awards.

The pretax compensation expense related to Paxar converted performance share awards was $1.1 million in 2009, $1.1 million in 2008 and $9.9 million in 2007. The tax deduction associated with the vesting of performance shares and the related issuance of common stock was $4.4 million in 2009 and $2.2 million in 2008.

As of January 2, 2010, the Company had no additional unrecognized compensation cost related to unvested converted Paxar performance share awards.

## 2009

In 2009, the Company continued its cost reduction efforts that were initiated in late 2008, resulting in a reduction of approximately 3,335 positions, impairment of certain assets, and lease cancellations. At January 2, 2010, approximately 1,020 employees impacted by these actions remain with the Company, and are expected to leave in 2010. Pretax charges related to these actions totaled $129.1 million, including severance and related costs of $86.8 million, impairment of fixed assets, buildings, land and patents of $39.9 million, and lease cancellation charges of $2.4 million. The table below details the accruals and payments related to these actions:

<table><tr><td>(In millions)</td><td>Pressure-sensitive Materials Segment</td><td>Retail Information Services Segment</td><td>Office and Consumer Products Segment</td><td>Other specialty converting businesses</td><td>Total</td></tr><tr><td>Total severance and other employee costs accrued during the period ended</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>April 4, 2009</td><td>$ 7.6</td><td>$ 5.8</td><td>$ .9</td><td>$ 2.8</td><td>$ 17.1</td></tr><tr><td>July 4, 2009</td><td>13.4</td><td>4.6</td><td>.3</td><td>7.5</td><td>25.8</td></tr><tr><td>October 3, 2009</td><td>3.9</td><td>21.0</td><td>(.2)</td><td>2.3</td><td>27.0</td></tr><tr><td>January 2, 2010</td><td>2.3</td><td>6.3</td><td>8.0</td><td>.3</td><td>16.9</td></tr><tr><td>Total expense accrued during 2009</td><td>27.2</td><td>37.7</td><td>9.0</td><td>12.9</td><td>86.8</td></tr><tr><td>2009 Settlements</td><td>(19.5)</td><td>(23.6)</td><td>(.3)</td><td>(11.0)</td><td>(54.4)</td></tr><tr><td>Balance at January 2, 2010</td><td>$ 7.7</td><td>$ 14.1</td><td>$8.7</td><td>$ 1.9</td><td>$ 32.4</td></tr><tr><td>Asset Impairments</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Machinery and equipment</td><td>$ 2.7</td><td>$ 10.6</td><td>$ .7</td><td>$ 14.0</td><td>$ 28.0</td></tr><tr><td>Buildings</td><td>.7</td><td>2.4</td><td>3.9</td><td>.9</td><td>7.9</td></tr><tr><td>Land</td><td>.1</td><td>-</td><td>-</td><td>-</td><td>.1</td></tr><tr><td>Patents</td><td>1.9</td><td>.2</td><td>.4</td><td>1.4</td><td>3.9</td></tr><tr><td>Other</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Lease cancellations</td><td>1.7</td><td>.7</td><td>-</td><td>-</td><td>2.4</td></tr><tr><td></td><td>$ 7.1</td><td>$ 13.9</td><td>$5.0</td><td>$ 16.3</td><td>$ 42.3</td></tr></table>

## 2008

In 2008, the Company implemented cost reduction actions, including the new action initiated in the fourth quarter, resulting in a reduction of approximately 1,475 positions, impairment of certain assets and software, as well as lease cancellations. At January 2, 2010, approximately 5 employees impacted by these actions remain with the Company, and are expected to leave in 2010. Pretax 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. The table below details the accruals and payments related to these actions:

<table><tr><td>(In millions)</td><td>Pressure-sensitive Materials Segment</td><td>Retail Information Services Segment</td><td>Office and Consumer Products Segment</td><td>Other specialty converting businesses</td><td>Total</td></tr><tr><td>Total severance and other employee costs accrued during the period ended</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>March 29, 2008</td><td>$ 1.5</td><td>$ 1.4</td><td>$ .2</td><td>$ .2</td><td>$ 3.3</td></tr><tr><td>June 28, 2008</td><td>.2</td><td>2.8</td><td>4.2</td><td>-</td><td>7.2</td></tr><tr><td>September 27, 2008</td><td>2.5</td><td>1.4</td><td>3.2</td><td>1.6</td><td>8.7</td></tr><tr><td>December 27, 2008</td><td>2.5</td><td>3.8</td><td>3.1</td><td>1.2</td><td>10.6</td></tr><tr><td>Total expense accrued during 2008</td><td>6.7</td><td>9.4</td><td>10.7</td><td>3.0</td><td>29.8</td></tr><tr><td>2008 Settlements</td><td>(1.5)</td><td>(4.7)</td><td>(5.2)</td><td>(1.1)</td><td>(12.5)</td></tr><tr><td>2009 Settlements</td><td>(5.0)</td><td>(4.6)</td><td>(4.8)</td><td>(1.8)</td><td>(16.2)</td></tr><tr><td>Balance at January 2, 2010</td><td>$ .2</td><td>$ .1</td><td>$ .7</td><td>$ .1</td><td>$ 1.1</td></tr><tr><td>Asset Impairments</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Machinery and equipment</td><td>$ 4.9</td><td>$ 1.3</td><td>$ 1.2</td><td>$ .2</td><td>$ 7.6</td></tr><tr><td>Buildings</td><td>-</td><td>.1</td><td>-</td><td>-</td><td>.1</td></tr><tr><td>Other</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Lease cancellations</td><td>.9</td><td>1.4</td><td>-</td><td>-</td><td>2.3</td></tr><tr><td>Software impairment</td><td>-</td><td>-</td><td>.9</td><td>-</td><td>.9</td></tr><tr><td></td><td>$ 5.8</td><td>$ 2.8</td><td>$ 2.1</td><td>$ .2</td><td>$ 10.9</td></tr></table>

## 2007

In 2007, the Company continued its cost reduction efforts that were initiated in late 2006 and implemented additional actions resulting in a reduction of approximately 615 positions, impairment of certain assets and software, as well as lease cancellations. At January 2, 2010, no employees impacted by these actions remain with the Company. Pretax charges related to these actions totaled $57.5 million, including severance and other employee costs of $21.6 million, impairment of fixed assets and buildings of $17.4 million, software impairment of $17.1 million and lease cancellation charges of $1.4 million.

## NOTE 11. TAXES BASED ON INCOME

Taxes based on income (loss) were as follows:

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Current:</td><td></td><td></td><td></td></tr><tr><td>U.S. federal tax</td><td>$ (15.6)</td><td>$ 34.1</td><td>$ 23.9</td></tr><tr><td>State taxes</td><td>1.8</td><td>4.2</td><td>1.3</td></tr><tr><td>International taxes</td><td>61.3</td><td>96.6</td><td>80.8</td></tr><tr><td></td><td>47.5</td><td>134.9</td><td>106.0</td></tr><tr><td>Deferred:</td><td></td><td></td><td></td></tr><tr><td>U.S. federal tax</td><td>(39.2)</td><td>(36.5)</td><td>(15.4)</td></tr><tr><td>State taxes</td><td>(7.6)</td><td>2.3</td><td>(1.7)</td></tr><tr><td>International taxes</td><td>(44.9)</td><td>(96.2)</td><td>(17.1)</td></tr><tr><td></td><td>(91.7)</td><td>(130.4)</td><td>(34.2)</td></tr><tr><td>(Benefit from) provision for income taxes</td><td>$ (44.2)</td><td>$ 4.5</td><td>$ 71.8</td></tr></table>

The principal items accounting for the difference in taxes as computed at the U.S. statutory rate, and as recorded, were as follows:

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Computed tax at 35% of income (loss) before taxes</td><td>$ (276.8)</td><td>$ 94.7</td><td>$ 131.4</td></tr><tr><td>Increase (decrease) in taxes resulting from:</td><td></td><td></td><td></td></tr><tr><td>State taxes, net of federal tax benefit</td><td>(7.9)</td><td>3.5</td><td>(1.2)</td></tr><tr><td>Foreign earnings taxed at different rates</td><td>(5.9)</td><td>(62.2)</td><td>(117.0)</td></tr><tr><td>Valuation allowance</td><td>4.0</td><td>(45.3)</td><td>59.9</td></tr><tr><td>Goodwill and indefinite-lived intangible asset impairment</td><td>276.4</td><td>-</td><td>-</td></tr><tr><td>Deferred compensation assets</td><td>(30.5)</td><td>-</td><td>-</td></tr><tr><td>U.S. federal tax credits (R&amp;D and low-income housing)</td><td>(2.8)</td><td>(5.2)</td><td>(4.4)</td></tr><tr><td>Tax contingencies and audit settlements</td><td>7.2</td><td>24.8</td><td>0.8</td></tr><tr><td>Other items, net</td><td>(7.9)</td><td>(5.8)</td><td>2.3</td></tr><tr><td>(Benefit from) provision for income taxes</td><td>$ (44.2)</td><td>$ 4.5</td><td>$ 71.8</td></tr></table>



Consolidated income (loss) before taxes for U.S. and international operations was as follows:

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>U.S.</td><td>$ (412.6)</td><td>$ (14.2)</td><td>$ 19.8</td></tr><tr><td>International</td><td>(378.3)</td><td>284.8</td><td>355.5</td></tr><tr><td>Income (loss) before taxes</td><td>$ (790.9)</td><td>$ 270.6</td><td>$ 375.3</td></tr></table>

The effective tax rate was approximately 6% for the full year 2009 compared with approximately 2% for the full year 2008. The 2009 effective tax rate is most significantly influenced by the non-cash goodwill and indefinite-lived intangible asset impairment charges, as these expenses are largely not tax deductible, and from one-time benefits from tax planning actions, partially offset by increases to the Company's tax reserves.

Income taxes have not been provided on certain undistributed earnings of foreign subsidiaries of approximately $1.23 billion and $1.63 billion at years ended 2009 and 2008, respectively, because such earnings are considered to be indefinitely reinvested. It is not practicable to estimate the amount of tax that would be payable upon distribution of these earnings. Deferred taxes have been accrued for earnings that are not considered indefinitely reinvested. The repatriation accrual for 2009 and 2008 is $21.7 million and $12.5 million, respectively.

Deferred income taxes reflect the temporary differences between the amounts at which assets and liabilities are recorded for financial reporting purposes and the amounts utilized for tax purposes. The primary components of the temporary differences that gave rise to the Company's deferred tax assets and liabilities were as follows:

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td></tr><tr><td>Accrued expenses not currently deductible</td><td>$ 65.8</td><td>$ 59.4</td></tr><tr><td>Net operating losses</td><td>214.7</td><td>235.5</td></tr><tr><td>Tax credit carryforwards</td><td>101.8</td><td>70.5</td></tr><tr><td>Capital loss carryforward</td><td>14.1</td><td>14.5</td></tr><tr><td>Postretirement and postemployment benefits</td><td>94.8</td><td>57.7</td></tr><tr><td>Pension costs</td><td>107.3</td><td>114.9</td></tr><tr><td>Inventory reserves</td><td>11.3</td><td>10.6</td></tr><tr><td>Other assets</td><td>1.7</td><td>11.3</td></tr><tr><td>Valuation allowance</td><td>(115.4)</td><td>(109.2)</td></tr><tr><td>Total deferred tax assets \( ^{(1)} \)</td><td>496.1</td><td>465.2</td></tr><tr><td>Depreciation and amortization</td><td>(184.3)</td><td>(222.1)</td></tr><tr><td>Repatriation accrual</td><td>(21.7)</td><td>(12.5)</td></tr><tr><td>Foreign operating loss recapture</td><td>-</td><td>(39.1)</td></tr><tr><td>Other liabilities</td><td>(13.0)</td><td>(11.1)</td></tr><tr><td>Total deferred tax liabilities \( ^{(1)} \)</td><td>(219.0)</td><td>(284.8)</td></tr><tr><td>Total net deferred tax assets (liabilities) from operations</td><td>$ 277.1</td><td>$ 180.4</td></tr></table>

(1) Reflects gross amount before jurisdictional netting of deferred tax assets and liabilities.

A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized. When establishing a valuation allowance, the Company considers future sources of taxable income such as “future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards” and “tax planning strategies.”
Net operating loss carryforwards of foreign subsidiaries for 2009 and 2008 were $709.6 million and $762.6 million, respectively. The decrease in 2009 is attributable to certain European statutory investment value increases, partially offset by net operating losses generated in 2009. If unused, foreign net operating losses of $37.1 million will expire between 2010 and 2013, and $101.9 million will expire after 2013. Net operating losses of $570.6 million can be carried forward indefinitely. Tax credit carryforwards of both domestic and foreign subsidiaries for 2009 and 2008 totaled $101.8 million and $70.5 million, respectively. If unused, tax credit carryforwards of $3.8 million will expire between 2010 and 2012, $22.6 million will expire between 2013 and 2017, and $66.6 million will expire after 2017. Tax credit carryforwards of $8.8 million can be carried forward indefinitely. The Company has established a valuation allowance for the net operating loss and credit carryforwards not expected to be utilized. The valuation allowance for 2009 and 2008 is $115.4 million and $109.2 million, respectively. Similar to prior years, the Company has reorganized some of its operations and intercompany financing which results in current or future year profits in jurisdictions that previously had recognized losses. These profits allow realization of net operating loss deferred assets, and as such the Company has released valuation allowances.

The Company has been granted tax holidays in several jurisdictions including Bangladesh, China, Thailand and Vietnam. The tax holidays expire between 2010 and 2017. These tax holidays benefit the Company’s consolidated effective tax rate on operations by less than 1%.

## Tax Benefit Reserve

On January 2, 2010, the Company's unrecognized tax benefits totaled $182.0 million, including $121.8 million of unrecognized tax benefits which, if recognized, would reduce the annual effective income tax rate. As of December 27, 2008, the Company's unrecognized tax benefits totaled $163.7 million, including $97.0 million of unrecognized tax benefits which, if recognized, would reduce the annual effective income tax rate.

Where applicable, the Company recognizes potential accrued interest and penalties related to unrecognized tax benefits from its global operations in income tax expense. The Company recognized $1.1 million, $7.6 million and $.7 million of interest and penalties in the Consolidated Statement of Operations in 2009, 2008 and 2007, respectively. The Company has accrued for $23.4 million and $15.4 million of interest and penalties in the Consolidated Balance Sheet in 2009 and 2008, respectively.



A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td></tr><tr><td>Balance at beginning of year</td><td>$142.9</td><td>$114.5</td></tr><tr><td>Acquired balance</td><td>8.0</td><td>-</td></tr><tr><td>Additions based on tax positions related to the current year</td><td>32.0</td><td>23.1</td></tr><tr><td>Additions for tax position of prior years</td><td>9.8</td><td>37.8</td></tr><tr><td>Reductions for tax positions of prior years:</td><td></td><td></td></tr><tr><td>Changes in judgment</td><td>(1.8)</td><td>(0.2)</td></tr><tr><td>Settlements</td><td>(2.1)</td><td>(2.5)</td></tr><tr><td>Lapses of applicable statute</td><td>(41.9)</td><td>(23.0)</td></tr><tr><td>Changes due to translation of foreign currencies</td><td>4.8</td><td>(6.8)</td></tr><tr><td>Balance at end of year (excluding interest and penalties)</td><td>151.7</td><td>142.9</td></tr><tr><td>Interest and penalties associated with uncertain tax positions</td><td>30.3</td><td>20.8</td></tr><tr><td>Balance at end of year (including interest and penalties)</td><td>$182.0</td><td>$163.7</td></tr></table>

The amount of income taxes the Company pays is subject to ongoing audits by taxing jurisdictions around the world. The Company's estimate of the potential outcome of any uncertain tax issue is subject to management's assessment of relevant risks, facts, and circumstances existing at that time. The Company believes that it has adequately provided for reasonably foreseeable outcomes related to these matters. However, the Company's future results may include favorable or unfavorable adjustments to its estimated tax liabilities in the period the assessments are made or resolved, which may impact the Company's effective tax rate. With some exceptions, the Company and its subsidiaries are no longer subject to income tax examinations by tax authorities for years prior to 2005.

It is reasonably possible that during the next 12 months, the Company may realize a decrease in its gross uncertain tax positions by approximately $63 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 $16 million relating to gross uncertain tax positions could be paid within the next 12 months.

## NOTE 12. SEGMENT INFORMATION

The accounting policies of the segments are described in Note 1, "Summary of Significant Accounting Policies." Intersegment sales are recorded at or near market prices and are eliminated in determining consolidated sales. The Company evaluates performance based on income from operations before interest expense and taxes. General corporate expenses are also excluded from the computation of income from operations for the segments.

The Company does not disclose total assets by reportable segment since the Company does not produce and review such information internally. The Company does not disclose revenues from external customers for each product because it is impracticable to do so. As the Company's reporting structure is not organized by country, results by individual country are not provided because it is impracticable to do so.
Financial information by reportable segment and other businesses from operations is set forth below. Beginning in 2009, the Company modified its approach to allocating Corporate costs to its reportable 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.

<table><tr><td>(In millions)</td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Net sales to unaffiliated customers:</td><td></td><td></td><td></td></tr><tr><td>Pressure-sensitive Materials</td><td>$3,300.0</td><td>$3,643.8</td><td>$3,497.7</td></tr><tr><td>Retail Information Services</td><td>1,323.2</td><td>1,548.7</td><td>1,175.4</td></tr><tr><td>Office and Consumer Products</td><td>849.3</td><td>935.8</td><td>1,016.2</td></tr><tr><td>Other specialty converting businesses</td><td>480.2</td><td>582.1</td><td>618.5</td></tr><tr><td>Net sales to unaffiliated customers</td><td>$5,952.7</td><td>$6,710.4</td><td>$6,307.8</td></tr></table>

<table><tr><td colspan="4">Intersegment sales:</td></tr><tr><td>Pressure-sensitive Materials</td><td>$ 148.9</td><td>$ 172.4</td><td>$ 164.9</td></tr><tr><td>Retail Information Services</td><td>1.6</td><td>2.1</td><td>2.1</td></tr><tr><td>Office and Consumer Products</td><td>.7</td><td>1.2</td><td>1.6</td></tr><tr><td>Other specialty converting businesses</td><td>16.2</td><td>26.4</td><td>19.9</td></tr><tr><td>Eliminations</td><td>(167.4)</td><td>(202.1)</td><td>(188.5)</td></tr><tr><td>Intersegment sales</td><td>$ -</td><td>$ -</td><td>$ -</td></tr></table>

<table><tr><td colspan="4">Income (loss) before taxes:</td></tr><tr><td>Pressure-sensitive Materials</td><td>$ 184.7</td><td>$ 257.2</td><td>$ 322.3</td></tr><tr><td>Retail Information Services</td><td>(900.4)</td><td>11.3</td><td>(4.6)</td></tr><tr><td>Office and Consumer Products</td><td>118.1</td><td>145.7</td><td>174.6</td></tr><tr><td>Other specialty converting businesses</td><td>(42.7)</td><td>7.4</td><td>27.7</td></tr><tr><td>Corporate expense</td><td>(65.3)</td><td>(35.1)</td><td>(39.5)</td></tr><tr><td>Interest expense \( ^{(4)} \)</td><td>(85.3)</td><td>(115.9)</td><td>(105.2)</td></tr><tr><td>Income (loss) before taxes</td><td>$ (790.9) \( ^{(1)} \)</td><td>$ 270.6 \)  \( ^{(2)} \)</td><td>$ 375.3 \)  \( ^{(3)} \)</td></tr></table>

<table><tr><td colspan="4">Capital expenditures:</td></tr><tr><td>Pressure-sensitive Materials</td><td>$ 41.5</td><td>$ 50.1</td><td>$ 78.3</td></tr><tr><td>Retail Information Services</td><td>19.6</td><td>45.0</td><td>43.2</td></tr><tr><td>Office and Consumer Products</td><td>5.6</td><td>6.1</td><td>17.1</td></tr><tr><td>Other specialty converting businesses</td><td>7.6</td><td>16.6</td><td>46.2</td></tr><tr><td>Corporate</td><td>1.3</td><td>1.4</td><td>1.5</td></tr><tr><td>Capital expenditures \( ^{(5)} \)</td><td>$ 75.6</td><td>$ 119.2</td><td>$ 186.3</td></tr></table>

<table><tr><td colspan="4">Depreciation expense:</td></tr><tr><td>Pressure-sensitive Materials</td><td>$ 86.2</td><td>$ 91.7</td><td>$ 91.2</td></tr><tr><td>Retail Information Services</td><td>58.3</td><td>65.6</td><td>42.5</td></tr><tr><td>Office and Consumer Products</td><td>13.6</td><td>17.0</td><td>21.8</td></tr><tr><td>Other specialty converting businesses</td><td>25.6</td><td>26.3</td><td>24.6</td></tr><tr><td>Corporate</td><td>3.9</td><td>4.0</td><td>4.0</td></tr><tr><td>Depreciation expense</td><td>$ 187.6</td><td>$ 204.6</td><td>$ 184.1</td></tr></table>

(1) Results for 2009 included “Other expense, net” totaling $191.3, consisting of restructuring costs, asset impairment charges and lease cancellation costs of $129.1, legal settlement costs of $41, and a loss of $21.2 from debt extinguishment. Of the total $191.3, the Pressure-sensitive Materials segment recorded $75.3, the Retail Information Services segment recorded $51.6, the



Office and Consumer Products segment recorded $14, the other specialty converting business recorded $29.2 and Corporate recorded $21.2.

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

(2) Results for 2008 included “Other expense, net” totaling $36.2, consisting of restructuring costs, asset impairment charges and lease cancellation costs of $40.7, partially offset by a gain on sale of investments of $4.5. Of the total $36.2, the Pressure-sensitive Materials segment recorded $12.6, the Retail Information Services segment recorded $12.2, the Office and Consumer Products segment recorded $12.7, the other specialty converting businesses recorded $3.2 and Corporate recorded $4.5.

Additionally, 2008 operating income for the Retail Information Services segment included $24.1 of transition costs associated with the Paxar and DM Label acquisitions.

(3) Results for 2007 included “Other expense, net” totaling $59.4, consisting of asset impairment charges, restructuring costs and lease cancellation charges of $7.5, a cash flow hedge loss of $4.8, and expenses related to a divestiture of $3, partially offset by a reversal related to a lawsuit of $3.2. Of the total $59.4, the Pressure-sensitive Materials segment recorded $14.3, the Retail Information Services segment recorded $31.3, the Office and Consumer Products segment recorded $4.8, the other specialty converting businesses recorded $4.2 and Corporate recorded $4.8.

Additionally, 2007 operating income for the Retail Information Services segment included $43 of transition costs associated with the Paxar acquisition.

(4) Interest expense during 2009, 2008 and 2007 included $42, $65.5 and $40.8, respectively, of interest associated with borrowings to fund the Paxar and DM Label acquisitions.

(5) Includes capital expenditures accrued but not paid of approximately $8 in 2009, approximately $5 in 2008 and approximately $14 in 2007. Capital expenditures refer to purchases of property, plant and equipment.

## NOTE 13. QUARTERLY FINANCIAL INFORMATION (Unaudited)

<table><tr><td>(In millions, except per share data)</td><td>First Quarter \( ^{(1)} \)</td><td>Second Quarter \( ^{(2)} \)</td><td>Third Quarter \( ^{(3)} \)</td><td>Fourth Quarter \( ^{(4)} \)</td></tr><tr><td>2009</td><td></td><td></td><td></td><td></td></tr><tr><td>Net sales</td><td>1,426.2</td><td>1,455.4</td><td>1,549.3</td><td>1,521.8</td></tr><tr><td>Gross profit</td><td>345.1</td><td>390.3</td><td>436.0</td><td>415.1</td></tr><tr><td>Net income (loss)</td><td>(898.9)</td><td>39.8</td><td>62.5</td><td>49.9</td></tr><tr><td>Net income (loss) per common share</td><td>(8.99)</td><td>.38</td><td>.59</td><td>.47</td></tr><tr><td>Net income (loss) per common share, assuming dilution</td><td>(8.99)</td><td>.38</td><td>.59</td><td>.47</td></tr><tr><td>2008</td><td></td><td></td><td></td><td></td></tr><tr><td>Net sales</td><td>1,645.2</td><td>1,828.9</td><td>1,724.8</td><td>1,511.5</td></tr><tr><td>Gross profit</td><td>424.0</td><td>490.3</td><td>434.3</td><td>378.4</td></tr><tr><td>Net income</td><td>68.4</td><td>92.4</td><td>62.7</td><td>42.6</td></tr><tr><td>Net income per common share</td><td>.70</td><td>.94</td><td>.64</td><td>.43</td></tr><tr><td>Net income per common share, assuming dilution</td><td>.69</td><td>.93</td><td>.63</td><td>.43</td></tr></table>

(1) Results in the first quarter of 2009 included pretax “Other expense, net” totaling $97.3 consisting of asset impairment charges of $21.9, restructuring costs of $17.1, lease cancellation charges of $1.1, an accrual for a legal settlement of $37, and a loss of $21.2 from debt extinguishment. Additionally, results included goodwill and indefinite-lived intangible asset impairment charges of $832.

Results in the first quarter of 2008 included pretax “Other expense, net” totaling $5.6 consisting of restructuring costs of $3.3 and asset impairment charges of $2.3. Additionally, results included transition costs associated with acquisition integrations of $7.

(2) Results in the second quarter of 2009 included pretax “Other expense, net” totaling $29.6 consisting of restructuring costs of $25.8 asset impairment charges of $3.3, and lease cancellation charges of $5.

Results in the second quarter of 2008 included pretax “Other expense, net” totaling $5.8 consisting of restructuring costs of $7.2 and asset impairment charges of $1.7, and lease cancellation charges of $1.4, partially offset by a gain on sale of investments of $(4.5). Additionally, results included transition costs associated with acquisition integrations of $5.7.

(3) Results in the third quarter of 2009 included pretax “Other expense, net” totaling $35.5 consisting of restructuring costs of $27 and asset impairment charges of $4.7, lease cancellation charges of $1.8, and legal settlement charges of $2.

Results in the third quarter of 2008 included pretax “Other expense, net” totaling $12.5 consisting of restructuring costs of $8.7 and asset impairment charges of $3, and lease cancellation charges of $8. Additionally, results included transition costs associated with acquisition integrations of $5.2.

(4) Results in the fourth quarter of 2009 included pretax “Other expense, net” totaling $28.9 consisting of restructuring costs of $16.9, asset impairment charges of $9.9, lease cancellation charges of $1, and legal settlement charges of $2. Additionally, results included out-of-period adjustments related to deferred compensation assets of $4.9 and a deferred tax asset of $1, which decreased net income by $5.9.

Results in the fourth quarter of 2008 included pretax “Other expense, net” totaling $12.3 consisting of restructuring costs of $10.6, and asset impairment charges of $1.7. Additionally, results included transition costs associated with acquisition integrations of $6.2.



## NOTE 14. FAIR VALUE MEASUREMENTS

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

<table><tr><td rowspan="2"></td><td rowspan="2">Total</td><td colspan="3">Fair Value Measurements Using</td></tr><tr><td>Quoted Prices in Active Markets (Level 1)</td><td>Significant Other Observable Inputs (Level 2)</td><td>Significant Other Unobservable Inputs (Level 3)</td></tr><tr><td>(In millions)</td><td></td><td></td><td></td><td></td></tr><tr><td>Assets:</td><td></td><td></td><td></td><td></td></tr><tr><td>Available for sale securities</td><td>$11.9</td><td>$11.9</td><td>$ -</td><td>$ -</td></tr><tr><td>Derivative assets</td><td>5.5</td><td>.5</td><td>5.0</td><td>-</td></tr><tr><td>Liabilities:</td><td></td><td></td><td></td><td></td></tr><tr><td>Derivative liabilities</td><td>$10.0</td><td>$ 3.5</td><td>$6.5</td><td>$ -</td></tr></table>

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 2009:

<table><tr><td rowspan="2"></td><td rowspan="2">Total</td><td colspan="3">Fair Value Measurements Using</td></tr><tr><td>Quoted Prices in Active Markets (Level 1)</td><td>Significant Other Observable Inputs (Level 2)</td><td>Significant Other Unobservable Inputs (Level 3)</td></tr><tr><td>(In millions)</td><td></td><td></td><td></td><td></td></tr><tr><td>Goodwill</td><td>$415.0</td><td>$ -</td><td>$ -</td><td>$415.0</td></tr><tr><td>Indefinite-lived intangible assets</td><td>18.0</td><td>-</td><td>-</td><td>18.0</td></tr><tr><td>Long-lived assets</td><td>11.0</td><td>-</td><td>8.0</td><td>3.0</td></tr></table>

Long-lived assets with carrying amounts totaling $31.3 million were written down to their fair values totaling $11 million, resulting in impairment charges of $20.3 million during 2009. These charges are included in “Other expense, net” in the Consolidated Statement of Operations.

Goodwill with a carrying amount of $1.2 billion was written down to its estimated implied fair value of $415 million, resulting in a non-cash impairment charge of $820 million in the first quarter of 2009. 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 charge of $12 million in the first quarter of 2009. These charges are included in “Goodwill and indefinite-lived intangible asset impairment charges” in the Consolidated Statement of Operations. Refer to Note 3, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” for further information.



## STATEMENT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS

The consolidated financial statements and accompanying information were prepared by and are the responsibility of management. The statements were prepared in conformity with accounting principles generally accepted in the United States of America and, as such, include amounts that are based on management's best estimates and judgments.

Oversight of management’s financial reporting and internal accounting control responsibilities is exercised by the Board of Directors, through an Audit Committee, which consists solely of outside directors. The Committee meets periodically with financial management, internal auditors and the independent registered public accounting firm to obtain reasonable assurance that each is meeting its responsibilities and to discuss matters concerning auditing, internal accounting control and financial reporting. The independent registered public accounting firm and the Company’s internal audit department have free access to meet with the Audit Committee without management’s presence.

## MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including the chief executive officer and chief financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company's evaluation under the framework in Internal Control — Integrated Framework, management has concluded that internal control over financial reporting was effective as of January 2, 2010. Management's assessment of the effectiveness of internal control over financial reporting as of January 2, 2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.



Dean A. Scarborough
President and
Chief Executive Officer



Daniel R. O'Bryant
Executive Vice President, Finance
and Chief Financial Officer



## To the Board of Directors and Shareholders of Avery Dennison Corporation:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity, and cash flows present fairly, in all material respects, the financial position of Avery Dennison Corporation and its subsidiaries at January 2, 2010 and December 27, 2008, and the results of their operations and their cash flows for each of the three years in the period ended January 2, 2010 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 2, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying "Management's Report on Internal Control over Financial Reporting." Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 1, the Company changed the manner in which it accounts for income taxes in 2007.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Newhouse Coopers LLP

PricewaterhouseCoopers LLP

Los Angeles, California

February 26, 2010



# Corporate Information

## Counsel

Latham & Watkins LLP

Los Angeles, California

## Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP

Los Angeles, California

## Transfer Agent – Registrar

Computershare Trust Co., N.A.

P. O. Box 43078

Providence, RI 02940-3078

(877) 498-8861

(800) 952-9245 (hearing impaired number)

www.computershare.com/investor

## Annual Meeting

The Annual Meeting of Shareholders will be held at 1:30 p.m. on April 22, 2010 in the Conference Center of the Avery Dennison Miller Corporate Center, 150 North Orange Grove Boulevard, Pasadena, California.

## The DirectSERVICE™ Investment Program

Shareholders of record may reinvest their cash dividends in additional shares of Avery Dennison common stock at market price. Investors may also invest optional cash payments of up to $12,500 per month in Avery Dennison common stock at market price. Avery Dennison investors not yet participating in the program, as well as brokers and custodians who hold Avery Dennison common stock for clients, may obtain a copy of the program by writing to The DirectSERVICE \( ^{™} \)  Investment Program, c/o Computershare (include a reference to Avery Dennison in the correspondence), P.O. Box 43078, Providence, RI 02940-3078, or calling (877) 498-8861, or logging onto their web site at http://www.computershare.com/investor.

## Direct Deposit of Dividends

Avery Dennison shareholders may deposit quarterly dividend checks directly into their checking or savings accounts. For more information, call Avery Dennison's transfer agent and registrar, Computershare Trust Co., Inc., at (877) 498-8861.

## Other Information

The Company is including, as Exhibits 31.1 and 31.2 to its Annual Report on Form 10-K for fiscal year 2009 filing with the Securities and Exchange Commission ("SEC"), certificates of the Chief Executive Officer and Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, and the Company submitted to the New York Stock Exchange ("NYSE"), the Company's annual written affirmation on April 30, 2009, along with the Chief Executive Officer's certificate that he is not aware of any violation by the Company of NYSE's Corporate Governance listing standards.

A copy of the Company’s Annual Report on Form 10-K, as filed with the SEC, will be furnished to shareholders and interested investors free of charge upon written request to the Secretary of the Corporation. Copies may also be obtained from the Company’s web site, www.averydennison.com, in the “Investors” section.

## Corporate Headquarters

Avery Dennison Corporation
Miller Corporate Center
150 North Orange Grove Boulevard
Pasadena, California 91103
Phone: (626) 304-2000
Fax: (626) 792-7312

## Mailing Address:

P.O. Box 7090
Pasadena, California 91109-7090

## Stock and Dividend Data

Common shares of Avery Dennison are listed on the NYSE.
Ticker symbol: AVY

<table><tr><td rowspan="2"></td><td colspan="2">2009</td><td colspan="2">2008</td></tr><tr><td>High</td><td>Low</td><td>High</td><td>Low</td></tr><tr><td>Market Price \( ^{(1)} \)</td><td></td><td></td><td></td><td></td></tr><tr><td>First Quarter</td><td>$33.61</td><td>$17.26</td><td>$53.14</td><td>$45.66</td></tr><tr><td>Second Quarter</td><td>29.76</td><td>23.94</td><td>53.07</td><td>43.61</td></tr><tr><td>Third Quarter</td><td>36.56</td><td>24.23</td><td>50.00</td><td>41.35</td></tr><tr><td>Fourth Quarter</td><td>40.02</td><td>34.81</td><td>44.49</td><td>25.02</td></tr></table>

<table><tr><td></td><td>2009</td><td>2008</td></tr><tr><td>Dividends Per Common Share</td><td></td><td></td></tr><tr><td>First Quarter</td><td>$ .41</td><td>$ .41</td></tr><tr><td>Second Quarter</td><td>.41</td><td>.41</td></tr><tr><td>Third Quarter</td><td>.20</td><td>.41</td></tr><tr><td>Fourth Quarter</td><td>.20</td><td>.41</td></tr><tr><td>Total</td><td>$ 1.22</td><td>$ 1.64</td></tr><tr><td>Number of shareholders of record as of year end</td><td>8,180</td><td>8,584</td></tr></table>

©2010 Avery Dennison Corporation. All rights reserved. Avery Dennison, Avery, Avery PVC-Free, Avery EcoFriendly, Avery Graphics, Fasson, Monarch, NoteTabs, Plastic Staple, System 1000 and Vizzon are trademarks of Avery Dennison Corporation. All other brands and product names are trademarks of their respective owners.



NOTES:



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## Investor Information

Obtain stock quotes and annual reports at
www.investors.averydennison.com
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## Career Opportunities

Learn more about the Avery Dennison difference at www.averydennison.com/careers

## Other Company Web sites include:

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www.avery.com

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Avery Dennison Corporation
Miller Corporate Center
150 North Orange Grove Boulevard
Pasadena, California 91103
www.averydennison.com