ORGANIZATION OF INFORMATION

Management's Discussion and Analysis of Financial Condition and Results of Operations, or "MD&A," provides a narrative concerning our financial performance and condition, and should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto. It includes the following sections:

  Non-GAAP Financial Measures                                                 19
  Forward-Looking Statements                                                  19
  Overview and Outlook                                                        20
  Analysis of Results of Operations for the Third Quarter                     22
  Results of Operations by Reportable Segment for the Third Quarter           23
  Analysis of Results of Operations for the Nine Months Year-to-Date          25
  Results of Operations by Reportable Segment for the Nine Months
Year-to-Date                                                                  26
  Financial Condition                                                         28
  Recent Accounting Requirements                                              31

NON-GAAP FINANCIAL MEASURES

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 financial measures to provide additional information concerning our operating performance and liquidity measures. These non-GAAP financial measures are not in accordance with, nor are they a substitute for or superior to, the comparable 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. Based upon feedback from our investors and financial analysts, we believe that supplemental non-GAAP financial measures provide information that is useful to the assessment of our performance and operating trends, as well as liquidity. These measures may not be comparable to similarly named non-GAAP measures used by other companies.

Our non-GAAP financial measures 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 financial measures, may make it difficult to assess our underlying performance in a single period. By excluding certain accounting effects, both positive and negative, of certain items, we believe that we are providing meaningful supplemental information to facilitate an understanding of our core operating results and liquidity measures. These non-GAAP financial 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. While some of the items we exclude from GAAP financial measures recur, they tend to be disparate in amount, frequency, and timing.

We use the following non-GAAP financial measures in the MD&A:

† Organic sales change refers to the increase or decrease in sales excluding the estimated impact of foreign currency translation, acquisitions and divestitures, as applicable. The estimated impact of foreign currency translation is calculated on a constant currency basis, with prior-period results translated at current period average exchange rates to remove the effect of foreign currency fluctuations.

† Free cash flow refers to cash flow from operations, less net payments for property, plant, and equipment, software and other deferred charges, plus
(minus) net proceeds from sales (purchases) of investments. Free cash flow excludes mandatory debt service requirements and other uses of cash that do not directly or immediately support the underlying business (such as discretionary debt reductions, dividends, share repurchases, and certain effects of acquisitions and divestitures).

† Operational working capital refers to trade accounts receivable and inventories, net of accounts payable. This non-GAAP financial measure excludes cash and cash equivalents, short-term borrowings, deferred taxes, other current assets and other current liabilities, as well as current assets and current liabilities of held-for-sale businesses.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this discussion are "forward-looking statements" and are subject to certain risks and uncertainties. Refer to our "Safe Harbor Statement" at the beginning of this report.

OVERVIEW AND OUTLOOK

Overview

Divestitures

In December 2011, we signed a definitive agreement to sell our Office and Consumer Products ("OCP") business to 3M Company ("3M") for gross cash proceeds of $550 million, subject to adjustment in accordance with the terms of the agreement. This business comprises substantially all of our previously reported OCP segment. On October 3, 2012, we and 3M mutually agreed to terminate this agreement. We continue to pursue the divestiture of the OCP business.

We have classified the operating results of this business, together with certain costs associated with the divestiture transaction, as discontinued operations in the unaudited Consolidated Statements of Income for the three and nine months ended September 29, 2012 and October 1, 2011. Assets and liabilities of this business are classified as "held for sale" in the unaudited Condensed Consolidated Balance Sheets at September 29, 2012 and December 31, 2011. The discontinued operations, which comprised substantially all of our previously reported OCP segment, had sales of approximately $213 million and $549 million for the three and nine months ended September 29, 2012, respectively, and approximately $219 million and $577 million for the three and nine months ended October 1, 2011, respectively.

Exit of Product Lines

In the third quarter of 2012, we exited the product lines in the retained portion of the previously reported OCP segment, incurring exit costs of $2.1 million (included in "Other expense, net" in the unaudited Consolidated Statements of Income). The operating results of these product lines, which are not significant, are included in other specialty converting businesses for all periods presented.

Sales

Our sales decreased 1% in both the third quarter and first nine months of 2012
compared to the same periods in 2011.



                                         Three Months Ended                             Nine Months Ended
                               September 29, 2012        October 1, 2011      September 29, 2012       October 1, 2011
Estimated change in
sales due to
Organic sales change                  6 %                    (1 )%                   3 %                        2 %
Foreign currency
translation                          (6 )                     6                     (4 )                        4
Reported sales change
(1)                                  (1 )%                    5 %                   (1 )%                       6 %

(1) Totals may not sum due to rounding.

Income from Continuing Operations

Income from continuing operations increased approximately $3 million and $10 million in the third quarter and first nine months of 2012, respectively, compared to the same periods in 2011.

Major factors affecting changes in income from continuing operations in the first nine months of 2012 compared to the same period last year included:

Positive factors:

† Benefit from productivity initiatives, including savings from restructuring actions

† Higher volume

† Lower effective tax rate

Negative factors:

†          Higher employee-related costs

†          Changes in product mix

†          Impact of foreign currency translation

†          Higher restructuring costs

†          Investments in growth

The net impact of pricing and changes in raw material input costs was modest as commodity costs were relatively stable during the period.

Cost Reduction Actions

2012 Program

During the first nine months of 2012, we recorded $38.1 million in restructuring charges, consisting of severance and related costs for the reduction of approximately 770 positions and asset impairment charges. The majority of these charges related to the 2012 program that we expect to complete in 2013 and from which we anticipate over $100 million in annualized savings, with approximately $20 million (net of transition costs) expected to be realized in 2012 and the remainder to be primarily realized in 2013. In connection with this program, we expect to incur approximately $55 million in restructuring costs in 2012 and approximately $25 million in restructuring costs in 2013.

2011 Actions

In 2011, the Company recorded approximately $45 million in restructuring charges, consisting of severance and related costs for the reduction of approximately 910 positions, asset impairment charges, and lease cancellation costs. We anticipate approximately $55 million in annualized savings from these restructuring actions to be realized by the end of 2012.

Refer to Note 9, "Cost Reduction Actions," to the unaudited Condensed Consolidated Financial Statements for further information.

Free Cash Flow

Free cash flow refers to funds available for uses of cash that do not directly or immediately support our underlying businesses, such as dividends, debt reductions, acquisitions, and share repurchases. We believe that this non-GAAP financial measure provides meaningful supplemental information to assist investors in their financial analysis of our company.

                                                              Nine Months Ended
(In millions)                                       September 29, 2012    October 1, 2011
Net cash provided by operating activities                      $ 214.1           $  120.0
Purchases of property, plant and equipment, net                  (56.9 )            (76.1 )
Purchases of software and other deferred charges                 (35.9 )            (19.1 )
Proceeds from sales (purchases) of investments,
net (1)                                                            4.6               (1.0 )
Free cash flow                                                 $ 125.9           $   23.8

(1) Net proceeds from sales (purchases) of investments relate to net sales/purchases of securities held by our captive insurance company.

Free cash flow in the first nine months of 2012 improved compared to the same period last year due to lower bonus payments and increased focus on working capital management. See "Analysis of Results of Operations" and "Liquidity" below for more information.

2012 Outlook

Certain factors that we believe may contribute to results for 2012 are listed below.

We expect sales on an organic basis and earnings from continuing operations to increase in 2012 compared to 2011.

We expect contributions to our pension plans (both domestic and international) of approximately $75 million in 2012.

We anticipate restructuring costs to continue in the next few years as we continue our cost reduction initiatives. For 2012, we estimate restructuring costs and other items of approximately $55 million.

Our annual effective tax rate may be impacted by events including changes in tax laws, geographic income mix, repatriation of cash, tax audits, closure of tax years, legal entity restructuring, and changes in valuation allowances on deferred tax assets. Our 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 in 2012 to be up to $150 million.

                                                      Avery Dennison Corporation



ANALYSIS OF RESULTS OF OPERATIONS FOR THE THIRD QUARTER



Income from Continuing Operations Before Taxes



                                                                   Three Months Ended
(In millions)                                            September 29, 2012          October 1, 2011
Net sales                                                  $        1,487.8         $        1,500.4
Cost of products sold                                               1,095.8                  1,133.5
Gross profit                                                          392.0                    366.9
Marketing, general and administrative expense                         293.9                    285.0
Interest expense                                                       18.0                     17.7
Other expense, net                                                     21.9                     18.1
Income from continuing operations before taxes             $           58.2         $           46.1

As a Percent of Net Sales:
Gross profit                                                           26.3 %                   24.5 %
Marketing, general and administrative expense                          19.8                     19.0
Income from continuing operations before taxes                          3.9                      3.1

Net Sales

Sales in the third quarter of 2012 declined approximately 1% compared to the same period last year, as higher sales on an organic basis were more than offset by the unfavorable impact of foreign currency translation. On an organic basis, sales grew 6%, driven primarily by increased demand in the Pressure-sensitive Materials and Retail Branding and Information Solutions segments.

Refer to "Results of Operations by Reportable Segment for the Third Quarter" for further information.

Gross Profit Margin

Gross profit margin for the third quarter of 2012 improved compared to the same period last year, reflecting benefits from productivity initiatives and higher volume, partially offset by changes in product mix and higher employee-related costs. The net impact of pricing and changes in raw material input costs was modest as commodity costs were relatively stable during the period.

Marketing, General and Administrative Expense

The increase in marketing, general and administrative expense in the third quarter of 2012 compared to the same period last year primarily reflected higher employee-related costs, partially offset by the impact of favorable foreign currency translation and savings from restructuring.

Other Expense, net



                                                                       Three Months Ended
(In millions)                                                 September 29, 2012         October 1, 2011
Other expense, net by type
Restructuring costs:
Severance and related costs                                     $           17.6          $         14.7
Asset impairment charges and lease cancellation costs                        1.5                      .3
Other items:
Legal settlement                                                               -                      .4
OCP divestiture-related costs                                                 .7                     2.7
Costs associated with exiting product lines                                  2.1                       -
Other expense, net                                              $           21.9          $         18.1

Refer to Note 9, "Cost Reduction Actions," to the unaudited Condensed Consolidated Financial Statements for more information regarding costs associated with restructuring.

                                                      Avery Dennison Corporation



Net Income and Earnings per Share



                                                                   Three Months Ended
(In millions, except per share amounts)                   September 29, 2012        October 1, 2011
Income from continuing operations before taxes              $           58.2         $         46.1
Provision for income taxes                                              20.1                   10.7
Income from continuing operations                                       38.1                   35.4
Income from discontinued operations, net of tax                         20.2                   14.4
Net income                                                  $           58.3         $         49.8
Net income per common share                                 $            .58         $          .47
Net income per common share, assuming dilution              $            .57         $          .47
Net income as a percent of sales                                         3.9 %                  3.3 %

Percent change (as compared to the same period in
prior year) in:
Net income                                                              17.1 %                (22.4 )%
Net income per common share                                             23.4                  (23.0 )
Net income per common share, assuming dilution                          21.3                  (21.7 )

Provision for Income Taxes

The effective tax rate for continuing operations was 34.5% for the third quarter ended September 29, 2012 compared to 23.2% for the same period in 2011. The effective tax rate for the third quarter of 2012 included a discrete tax expense of $3.9 million for adjustments to domestic income taxes and increases in certain tax reserves. The effective tax rate for the third quarter of 2011 included a discrete tax benefit of $6.4 million for releases of certain tax reserves due to lapses of applicable statutory periods. Refer to Note 11, "Taxes Based on Income," to the unaudited Condensed Consolidated Financial Statements for further information.

RESULTS OF OPERATIONS BY REPORTABLE SEGMENT FOR THE THIRD QUARTER

Operating income refers to income from continuing operations before interest and taxes.

Pressure-sensitive Materials Segment



                                                                 Three Months Ended
                                                           September 29,          October 1,
(In millions)                                                       2012                2011
Net sales including intersegment sales                     $     1,004.5         $   1,016.9
Less intersegment sales                                            (21.6 )             (21.4 )
Net sales                                                  $       982.9         $     995.5
Operating income (1)                                                73.2                76.8
(1) Included costs associated with restructuring in
both years, and legal settlement costs in 2011             $        12.6         $       5.4

Net Sales

Sales in our Pressure-sensitive Materials segment declined 1% in the third quarter of 2012 compared to the same period last year, as the unfavorable impact of foreign currency translation offset higher sales on an organic basis. On an organic basis, sales grew 7%, primarily as a result of higher volume.

On an organic basis, sales in our Label and Packaging Materials business in the third quarter of 2012 increased at a high single-digit rate compared to the same period last year, primarily due to higher volume in all regions.

On an organic basis, sales in our Graphics and Reflective Solutions business in the third quarter of 2012 increased at a mid single-digit rate compared to the same period last year, primarily due to higher volume.

Operating Income

Lower operating income in the third quarter of 2012 primarily reflected higher employee-related costs, the impact of changes in product mix, higher restructuring costs, and the unfavorable impact of foreign currency translation, partially offset by higher volume and the

benefit from productivity initiatives and restructuring savings. The net impact of pricing and changes in raw material input costs was negligible as commodity costs were relatively stable during the period.

Retail Branding and Information Solutions Segment



                                                                 Three Months Ended
                                                            September 29,          October 1,
(In millions)                                                        2012                2011
Net sales including intersegment sales                      $       374.9          $    361.3
Less intersegment sales                                               (.7 )               (.6 )
Net sales                                                   $       374.2          $    360.7
Operating income (1)                                                 10.3                 2.6
(1) Included costs associated with restructuring in
both years                                                  $         5.6          $      9.3

Net Sales

Sales in our Retail Branding and Information Solutions segment increased 4% in the third quarter of 2012 compared to the same period last year due to higher sales on an organic basis, partially offset by the unfavorable impact of foreign currency translation. On an organic basis, sales grew 7%, primarily due to higher volume from increased demand from U.S. and European retailers and brands, including their accelerating radio-frequency identification ("RFID") adoption.

Operating Income

Higher operating income in the third quarter of 2012 primarily reflected the benefit of productivity initiatives and restructuring savings, higher volume, and lower restructuring costs, partially offset by higher employee-related costs and the impact of changes in product mix.

Other specialty converting businesses

                                                                  Three Months Ended
                                                             September 29,          October 1,
(In millions)                                                         2012                2011
Net sales including intersegment sales                       $       151.2          $    152.9
Less intersegment sales                                              (20.5 )              (8.7 )
Net sales                                                    $       130.7          $    144.2
Operating income (loss) (1)                                            2.5                (1.8 )
(1) Included costs associated with restructuring in
both years, and costs associated with exiting product
lines in 2012                                                $         3.0          $       .7

Net Sales

Sales in our other specialty converting businesses decreased 9% in the third quarter of 2012 compared to the same period last year, reflecting the unfavorable impact of foreign currency translation, the impact of a product line divestiture in the fourth quarter of 2011, and lower sales on an organic basis. On an organic basis, sales declined 1%.

Operating Income (Loss)

Higher operating income in the third quarter of 2012 reflected the benefits from increased profitability in the RFID business and productivity initiatives, partially offset by costs associated with exiting product lines in 2012. The profitability in our RFID business is primarily from sales of RFID inlays to our Retail Branding and Information Solutions segment. External sales of RFID labels are reflected in the Retail Branding and Information Solutions segment.

                                                      Avery Dennison Corporation



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



Income from Continuing Operations Before Taxes



                                                       Nine Months Ended
                                                   September 29,     October 1,
(In millions)                                               2012           2011
Net sales                                         $      4,503.4    $   4,571.7
Cost of products sold                                    3,324.0        3,408.9
Gross profit                                             1,179.4        1,162.8
Marketing, general and administrative expense              883.1          883.2
Interest expense                                            54.9           53.1
Other expense, net                                          41.1           30.7
Income from continuing operations before taxes    $        200.3    $     195.8

As a Percent of Net Sales:
Gross profit                                                26.2 %         25.4 %
Marketing, general and administrative expense               19.6           19.3
Income from continuing operations before taxes               4.4            4.3

Net Sales

Sales decreased 1% in the first nine months of 2012 compared to the same period last year, reflecting the unfavorable impact of foreign currency translation, partially offset by higher sales on an organic basis. On an organic basis, sales grew 3%, reflecting increased demand in both segments and our other specialty converting businesses.

Refer to "Results of Operations by Reportable Segment for the Nine Months Year-to-Date" for further information.

Gross Profit Margin

Gross profit margin for the first nine months of 2012 improved compared to the same period last year, as the benefits from productivity initiatives and higher volume were partially offset by higher employee-related costs and changes in product mix. The net impact of pricing and changes in raw material input costs was negligible as commodity costs were relatively stable during the period.

Marketing, General and Administrative Expense

Marketing, general and administrative expense in the first nine months of 2012 was approximately the same as in the same period last year, as the benefits from restructuring savings and productivity initiatives and the favorable impact of foreign currency translation were offset by higher employee-related costs and investments in growth.

Other Expense, net



. . .