Summary of AVERY DENNISON CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ORGANIZATION OF INFORMATION
Management's Discussion and Analysis provides a narrative concerning our
financial performance and condition that should be read in conjunction with the
accompanying financial statements. It includes the following sections:

    Definition of Terms                                                    22
    Forward-looking Statements                                             22
    Overview and Outlook                                                   22
    Analysis of Results of Operations for the Third Quarter                26
    Results of Operations by Segment for the Third Quarter                 27
    Analysis of Results of Operations for the Nine Months Year-to-Date     29
    Results of Operations by Segment for the Nine Months Year-to-Date      30
    Financial Condition                                                    32
    Uses and Limitations of Non-GAAP Measures                              38
    Recent Accounting Requirements                                         38
    Safe Harbor Statement                                                  38

DEFINITION OF TERMS
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP. Our discussion of financial results includes several non-GAAP measures to provide additional information concerning Avery Dennison Corporation's (the "Company's") performance. These non-GAAP financial measures are not in accordance with, nor are they a substitute for, GAAP financial measures. These non-GAAP financial measures are intended to supplement the presentation of our financial results that are prepared in accordance with GAAP. Refer to "Uses and Limitations of Non-GAAP Measures."
We use the following terms:
• Organic sales growth (decline) refers to the change in sales excluding the estimated impact of currency translation, acquisitions and divestitures, and the extra week in fiscal year 2009;

• Segment operating income (loss) refers to income (loss) before interest and taxes;

• Free cash flow refers to cash flow from operations and net proceeds from sale of investments, less payments for capital expenditures, software and other deferred charges;

• Operational working capital refers to trade accounts receivable and inventories, net of accounts payable.

FORWARD-LOOKING STATEMENTS
Certain statements contained in Management's Discussion and Analysis are
"forward-looking statements" and are subject to certain risks and uncertainties.
Refer to our "Safe Harbor Statement" contained elsewhere in this report.
OVERVIEW AND OUTLOOK
Overview
Sales
Our sales decreased 10% and 15% during the three and nine months ended
October 3, 2009, respectively, compared to the same period last year, reflecting
continued weakness in market conditions.

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

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

Reported sales (decline) growth (2)                  (10 )%                      3 %                       (15 )%                      13 %

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

(2) Totals may not sum due to rounding.

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Avery Dennison Corporation Net Income
In the first nine months of 2009, we had a net loss of approximately $797 million compared to a net income of approximately $224 million in the same period in 2008.
Negative factors affecting net income included:
• Impairment of goodwill and indefinite-lived intangible assets

• Lower net sales

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

• Legal settlement costs

• Higher raw material and employee-related costs

• Loss on debt extinguishment

• Unfavorable impact of foreign currency translation

Positive factors affecting net income included:
• Cost savings from productivity improvement initiatives, including savings from restructuring actions

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

• Lower tax rate

• Lower transition costs related to acquisition integrations

Impairment of Goodwill and Indefinite-Lived Intangible Assets In the first quarter of 2009, we recorded non-cash impairment charges of $832 million for the retail information services reporting unit, of which $820 million is related to goodwill and $12 million is related to indefinite-lived intangible assets. We completed our impairment test of goodwill and indefinite-lived intangible assets ("goodwill impairment") in the second quarter of 2009, with no additional impairment charge recorded thereafter. In performing the required goodwill impairment test, we primarily apply a present value (discounted cash flow) method to determine the fair value of the reporting units with goodwill. Our reporting units, which are composed of either a discrete business or an aggregation of businesses with similar economic characteristics, consist of roll materials; retail information services; office and consumer products; graphics and reflective products; industrial products; and business media.
We perform our annual goodwill impairment test during the fourth quarter. However, certain factors may result in the need to perform a goodwill impairment test prior to the fourth quarter, including significant underperformance of our business relative to expected operating results, significant adverse economic and industry trends, significant decline in our market capitalization for an extended period of time relative to net book value, or a decision to divest an individual business within a reporting unit. Based upon our assessment of these factors in connection with the preparation of our first quarter financial statements, we determined that there was a need to initiate an interim goodwill impairment test. The factors considered included both a sustained decline in our stock price and a decline in our 2009 revenue projections for the retail information services reporting unit, following lower than expected revenues in March 2009, which continued in April 2009. The peak season for the retail information services reporting unit has traditionally been March through the end of the second quarter.
Our interim impairment analysis indicated that the fair value of each of our reporting units exceeded its carrying value, except for our retail information services reporting unit, which had a fair value less than its carrying value. Refer to Note 4, "Goodwill and Other Intangibles Resulting from Business Acquisitions," to the unaudited Condensed Consolidated Financial Statements for further information.
Goodwill
As part of the interim goodwill impairment test completed in the second quarter of 2009, which is discussed above, we recorded a non-cash impairment charge of $820 million for the retail information services reporting unit in the first quarter of 2009, with no additional impairment charge recorded thereafter.

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

                                                                               Nine Months Ended
(In millions)                                                       October 3, 2009         September 27, 2008

Net cash provided by operating activities                         $           316.9        $             382.3
Purchase of property, plant and equipment                                     (46.7 )                    (97.8 )
Purchase of software and other deferred charges                               (20.4 )                    (49.2 )
Proceeds from sale of investments, net                                           .3                       16.2

Free cash flow                                                    $           250.1        $             251.5

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Avery Dennison Corporation Free cash flow in the first nine months of 2009 remained flat compared to the same period in 2008, as lower income from operations was offset by reduced working capital and lower spending on property, plant, and equipment, software, and other deferred charges.
See "Analysis of Results of Operations" and "Liquidity" below for more information.
Dividend
On July 30, 2009 and October 22, 2009, we declared a dividend of $.20 per share, a reduction from our previous dividend of $.41 per share in the same periods in 2008. This precautionary action was taken in response to the possibility of continued poor market conditions beyond 2009, to focus on reducing debt and to plan for increased pension funding requirements. Legal Proceedings
We are a named defendant in purported class actions in the U.S. seeking treble damages and other relief for alleged unlawful competitive practices. The Board of Directors created an ad hoc committee comprised of certain independent directors to oversee the foregoing matters.
As previously disclosed and reported to authorities in the U.S., we have discovered instances of conduct by certain employees that potentially violate the U.S. Foreign Corrupt Practices Act. We reported that conduct to authorities in the U.S. and have entered into a settlement agreement with the SEC in this regard. Refer to Note 15, "Commitments and Contingencies," to the unaudited Condensed Consolidated Financial Statements for further information. We are unable to predict the effect of these matters at this time, although the effect could be adverse and material. These and other matters are reported in Note 15, "Commitments and Contingencies," to the unaudited Condensed Consolidated Financial Statements.
Outlook
Certain factors that we believe may contribute to 2009 results are listed below. The effect of the fiscal calendar change is anticipated to reduce sales by approximately $50 million in the fourth quarter of 2009 compared to the third quarter of 2009.
If current exchange rate trends continue, they would have an unfavorable effect on earnings for 2009.
We expect incremental pension and other employee-related expenses and contributions in 2009. In addition, an analysis performed at the end of the second quarter of 2009 indicates that we will be required to make pension contributions in the range of $200 million to $300 million from the end of the second quarter of 2009 through 2013.
We anticipate higher charges related to restructuring actions in 2009 compared to 2008.
We anticipate lower interest expense in 2009 due primarily to retirements of certain indebtedness and lower short-term interest rates. Our assumptions on interest expense are subject to changes in market rates through the remainder of the year.
The 2009 effective and adjusted tax rates are expected to be in the low single-digits and low double-digits, respectively. The annual effective tax rate will be impacted by future events including changes in tax laws, geographic income mix, tax audits, closure of tax years, legal entity restructuring, and release of, or accrual for, valuation allowances on deferred tax assets. The effective tax rate can potentially have wide variances from quarter to quarter, resulting from interim reporting requirements and the recognition of discrete events.
We anticipate our capital and software expenditures to be approximately $100 million in 2009.
We are targeting a reduction of debt of at least $350 million from the end of the second quarter of 2009 through the end of 2010. In the third quarter of 2009, we reduced debt by approximately $140 million.

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                                                      Avery Dennison Corporation
ANALYSIS OF RESULTS OF OPERATIONS FOR THE THIRD QUARTER
Income Before Taxes

       (In millions)                                        2009          2008

       Net sales                                       $ 1,549.3     $ 1,724.8
       Cost of products sold                             1,113.3       1,290.5

       Gross profit                                        436.0         434.3
       Marketing, general and administrative expense       323.1         325.5
       Interest expense                                     19.1          29.0
       Other expense, net                                   35.5          12.5

       Income before taxes                             $    58.3     $    67.3


       As a Percent of Sales:
       Gross profit (margin)                                28.1 %        25.2 %
       Marketing, general and administrative expense        20.9          18.9
       Income before taxes                                   3.8           3.9

Sales
Sales decreased 10% in the third quarter of 2009 compared to the same period last year, due largely to declines in volume, partially offset by the effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008. Foreign currency translation had an unfavorable impact on the change in sales of approximately $80 million in the third quarter of 2009. On an organic basis, sales declined 6% in the third quarter of 2009, as continued deterioration in market conditions contributed to volume declines across all segments. In addition, volume declines were experienced in all geographic regions.
Refer to "Results of Operations by Segment" for information by reportable segment.
Gross Profit Margin
Gross profit margin for the third quarter of 2009 improved in comparison to the same period in 2008, as the benefits of restructuring and productivity improvement initiatives, lower raw material costs, and the effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008, more than offset reduced fixed-cost leverage. Marketing, General and Administrative Expenses Marketing, general and administrative expense in the third quarter of 2009 remained flat compared to the same period last year, as the benefit of restructuring and productivity initiatives and the impact of foreign currency translation offset increased spending related to employee costs and new growth-related initiatives.

Other Expense, net

      (In millions)                                             2009       2008

      Restructuring costs                                     $ 27.0     $  8.7
      Asset impairment charges and lease cancellation costs      6.5        3.8
      Other                                                      2.0          -

      Other expense, net                                      $ 35.5     $ 12.5

In the third quarter of 2009, "Other expense, net" consisted of restructuring costs including severance and other employee-related costs, asset impairment and lease cancellation charges, as well as legal settlement costs. Restructuring costs in the third quarter of 2009 relate to a reduction in headcount of approximately 490 positions across all segments and geographic regions. In the third quarter of 2008, "Other expense, net" consisted of severance and other employee-related costs of $8.7 million and asset impairment and lease cancellation charges of $3.8 million (primarily in the Pressure-sensitive Materials segment). Restructuring costs in the third quarter of 2008 relate to a reduction in headcount of approximately 310 positions across all segments and geographic regions.
Refer to Note 9, "Cost Reduction Actions," to the unaudited Condensed Consolidated Financial Statements for more information.

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                                                      Avery Dennison Corporation
Net Income and Earnings per Share

         (In millions, except per share)                    2009        2008

         Income before taxes                              $ 58.3      $ 67.3
         (Benefit from) provision for income taxes          (4.2 )       4.6

         Net income                                       $ 62.5      $ 62.7

         Net income per common share                      $  .59      $  .64
         Net income per common share, assuming dilution   $  .59      $  .63


         Net income as a percent of sales                    4.0 %       3.6 %


         Percent change in:
         Net income                                          (.3 )%      6.6 %
         Net income per common share                        (7.8 )       6.7
         Net income per common share, assuming dilution     (6.3 )       6.8

(Benefit from) Provision for Income Taxes Our effective tax rate for the third quarter of 2009 was approximately negative 7%, compared with approximately 7% for the same period in 2008. The effective tax rate for the third quarter of 2009 includes a benefit of $13.4 million from discrete events, primarily from the release of tax contingency reserves and the tax effect of a restructuring event. Refer to Note 11, "Taxes Based on Income," to the unaudited Condensed Consolidated Financial Statements for further information.

RESULTS OF OPERATIONS BY SEGMENT FOR THE THIRD QUARTER
Pressure-sensitive Materials Segment

(In millions)                                                        2009           2008

Net sales including intersegment sales                            $ 889.3        $ 982.3
Less intersegment sales                                             (38.3 )        (46.1 )

Net sales                                                         $ 851.0        $ 936.2
Operating income (1)                                                 75.7           62.8


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

Net Sales
Sales in our Pressure-sensitive Materials segment decreased 9% in the third quarter of 2009 compared to the same period in 2008, which included the unfavorable impact of foreign currency translation (approximately $56 million). On an organic basis, sales declined 3% in the third quarter of 2009 primarily due to declines in volume, partially offset by the effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008.
On an organic basis, sales in our roll materials business in the third quarter of 2009 declined at a mid single-digit rate in Europe and a low single-digit rate (excluding intercompany sales) in North America, reflecting continued weakness in end-markets. Combined sales in our emerging markets increased at a mid single-digit rate on an organic basis compared to the same period last year. On an organic basis, sales in our graphics and reflective business in the third quarter of 2009 declined at a low double-digit rate, reflecting lower promotional spending by businesses in response to weak market conditions. Operating Income
Increased operating income in the third quarter of 2009 reflected lower raw material costs and the effect of changes in pricing to offset the cumulative impact of inflation experienced in 2008, as well as cost savings from restructuring and productivity improvement initiatives, partially offset by the impact of lower volume. In addition, operating income included legal settlement costs in 2009, and restructuring costs, asset impairment charges and lease cancellation costs in both years.

Retail Information Services Segment

(In millions)                                                        2009           2008

Net sales including intersegment sales                            $ 325.6        $ 379.6
Less intersegment sales                                               (.4 )          (.5 )

Net sales                                                         $ 325.2        $ 379.1
Operating (loss) income (1) (2)                                     (29.1 )           .5


(1) Includes asset impairment charges and lease cancellation
costs in 2009, and restructuring costs in both years              $  22.3        $   1.4
(2) Includes transition costs related to acquisition
integrations in 2008                                              $     -        $   5.2

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Avery Dennison Corporation Net Sales
Sales in our Retail Information Services segment decreased 14% in the third quarter of 2009 compared to the same period last year, which included the unfavorable impact of foreign currency translation (approximately $12 million). On an organic basis, sales declined 11% in the third quarter of 2009 due primarily to lower volume from continued weakness in the apparel markets in the U.S. and Europe.
Operating (Loss) Income
Operating loss in the third quarter of 2009 reflected the impact of lower volume, changes in pricing, and higher employee-related costs, partially offset by the benefit of restructuring and productivity improvement initiatives. Operating (loss) income included asset impairment charges and lease cancellation costs in 2009, transition costs related to acquisition integrations in 2008, and restructuring costs in both years.

Office and Consumer Products Segment

(In millions)                                                        2009           2008

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

Net sales                                                         $ 242.8        $ 260.4
Operating income (1)                                                 41.0           41.5


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

Net Sales
Sales in our Office and Consumer Products segment decreased 7% in the third quarter of 2009 compared to the same period last year, which included the unfavorable impact of foreign currency translation (approximately $7 million). On an organic basis, sales declined 4% in the third quarter of 2009 due primarily to lower volume from weak end-market demand led by slower corporate purchasing activity, partially offset by strong back-to-school sales. Operating Income . . .