UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2004
------------------
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to _____________
Commission File Number: 1-9493
------
Paxar Corporation
-----------------
(Exact name of registrant as specified in its charter)
New York 13-5670050
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Corporate Park Drive
White Plains, New York 10604
--------------------------- -----
(Address of principal executive offices) (Zip Code)
914-697-6800
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). |X| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.10 par value: 39,644,756 shares outstanding as
of November 5, 2004
PART I FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared by
Paxar Corporation (the "Company"), without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. While certain information
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations, the Company
believes that the disclosures made herein are adequate to make the information
presented not misleading. It is recommended that these financial statements be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2003.
1
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Sales............................................. $ 194.2 $ 170.7 $ 597.0 $ 517.3
Cost of sales..................................... 119.1 106.0 365.6 321.5
-------- -------- -------- --------
Gross profit................................. 75.1 64.7 231.4 195.8
Selling, general and administrative expenses...... 59.2 52.6 178.2 160.6
Integration/restructuring and other costs......... -- 4.1 -- 10.8
-------- -------- -------- --------
Operating income............................. 15.9 8.0 53.2 24.4
Interest expense, net............................. 2.6 2.9 8.1 8.4
-------- -------- -------- --------
Income before taxes.......................... 13.3 5.1 45.1 16.0
Taxes on income................................... 3.1 1.2 10.4 3.7
-------- -------- -------- --------
Net income................................... $ 10.2 $ 3.9 $ 34.7 $ 12.3
======== ======== ======== ========
Basic earnings per share.......................... $ 0.26 $ 0.10 $ 0.88 $ 0.32
======== ======== ======== ========
Diluted earnings per share........................ $ 0.25 $ 0.10 $ 0.86 $ 0.31
======== ======== ======== ========
Weighted average shares outstanding:
Basic........................................... 39.6 39.0 39.5 39.0
Diluted......................................... 40.9 39.5 40.4 39.5
The accompanying notes are an integral part of the financial statements.
2
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
September 30, December 31,
2004 2003
--------------- --------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 84.8 $ 64.4
Accounts receivable, net of allowances of $10.9 and $10.0 at
September 30, 2004 and December 31, 2003, respectively.......... 125.8 127.0
Inventories........................................................ 100.6 94.1
Deferred income taxes.............................................. 11.9 11.8
Other current assets............................................... 19.3 16.0
-------- --------
Total current assets..................................... 342.4 313.3
-------- --------
Property, plant and equipment, net................................. 164.5 163.8
Goodwill and other intangible, net................................. 216.7 213.6
Other assets....................................................... 24.4 24.2
-------- --------
Total assets....................................................... $ 748.0 $ 714.9
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to banks....................................................... $ 4.9 $ 4.3
Accounts payable and accrued liabilities........................... 118.5 103.1
Accrued taxes on income............................................ 16.6 11.8
-------- --------
Total current liabilities................................ 140.0 119.2
------- --------
Long-term debt..................................................... 163.1 190.3
Deferred income taxes.............................................. 12.4 11.9
Other liabilities.................................................. 18.3 16.2
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized
and none issued................................................. -- --
Common stock, $0.10 par value, 200,000,000 shares authorized,
39,644,756 and 39,148,055 shares issued and outstanding at
September 30, 2004 and December 31, 2003, respectively.......... 4.0 3.9
Paid-in capital.................................................... 14.4 10.3
Retained earnings.................................................. 380.2 345.5
Accumulated other comprehensive income............................. 15.6 17.6
-------- --------
Total shareholders' equity............................... 414.2 377.3
-------- --------
Total liabilities and shareholders' equity......................... $ 748.0 $ 714.9
======== ========
The accompanying notes are an integral part of the financial statements.
3
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
Nine Months Ended
September 30,
---------------------
2004 2003
-------- -------
OPERATING ACTIVITIES
Net income.................................................... $ 34.7 $ 12.3
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.............................. 23.3 22.3
Deferred income taxes...................................... 0.4 --
Gain on sale of property and equipment, net................ (0.3) (0.1)
Write-off of property and equipment........................ 1.2 4.9
Changes in assets and liabilities, net of businesses acquired:
Accounts receivable........................................ 0.4 (7.2)
Inventories................................................ (8.4) (8.1)
Other current assets....................................... (3.3) (5.8)
Accounts payable and accrued liabilities................... 14.6 3.3
Accrued taxes on income.................................... 4.8 0.7
Other, net................................................. (1.5) 7.0
-------- --------
Net cash provided by operating activities.................. 65.9 29.3
-------- --------
INVESTING ACTIVITIES
Purchases of property and equipment........................... (25.1) (23.9)
Proceeds from sale of property and equipment.................. 0.6 0.2
Acquisitions, net of cash acquired............................ (0.1) (28.4)
Other......................................................... 1.3 --
-------- --------
Net cash used in investing activities...................... (23.3) (52.1)
-------- --------
FINANCING ACTIVITIES
Net increase in short-term debt............................... 0.7 2.3
Additions to long-term debt................................... 44.3 201.2
Reductions in long-term debt.................................. (71.5) (167.5)
Purchase of common stock...................................... -- (5.1)
Proceeds from common stock issued under employee
stock option and stock purchase plans....................... 4.2 3.5
-------- --------
Net cash (used in)/provided by financing activities........ (22.3) 34.4
-------- --------
Effect of exchange rate changes on cash flows.................. 0.1 0.9
-------- --------
Increase in cash and cash equivalents...................... 20.4 12.5
Cash and cash equivalents at beginning of year................. 64.4 49.6
-------- --------
Cash and cash equivalents at end of period................. $ 84.8 $ 62.1
======== ========
The accompanying notes are an integral part of the financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except employee headcount, share and per share data)
NOTE 1: GENERAL
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial statements and the instructions for Form
10-Q. The interim financial statements are unaudited. In the opinion of
management, all adjustments (which consist only of normal recurring adjustments)
necessary to present fairly the results of operations and financial condition
for the interim periods presented have been made.
Certain reclassifications have been made to the prior periods' consolidated
financial statements and related note disclosures to conform to the presentation
used in the current period.
NOTE 2: STOCK-BASED COMPENSATION EFFECT ON NET INCOME
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," provides for a fair-value based method of
accounting for employee options and measures compensation expense using an
option valuation model that takes into account, as of the grant date, the
exercise price and expected life of the option, the current price of the
underlying stock and its expected volatility, expected dividends on the stock,
and the risk-free interest rate for the expected term of the option. The Company
has elected to continue accounting for employee stock-based compensation under
Accounting Principles Board ("APB") Opinion 25. Under APB Opinion 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. The following table presents pro forma net income and earnings per
share had the Company elected to adopt SFAS No. 123:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2004 2003 2004 2003
------- ------- ------- -------
Net income, as reported........................... $ 10.2 $ 3.9 $ 34.7 $ 12.3
Deduct: Stock-based employee compensation
expense determined under fair value based
method for all awards granted, net of related
tax effects....................................... -- -- (3.9) (4.4)
------- ------- ------- -------
Pro forma net income.............................. $ 10.2 $ 3.9 $ 30.8 $ 7.9
======= ======= ======= =======
Earnings per share:
Basic - as reported........................... $ 0.26 $ 0.10 $ 0.88 $ 0.32
Basic - pro forma............................. $ 0.26 $ 0.10 $ 0.78 $ 0.20
Diluted - as reported......................... $ 0.25 $ 0.10 $ 0.86 $ 0.31
Diluted - pro forma........................... $ 0.25 $ 0.10 $ 0.76 $ 0.20
For the nine months ended September 30, 2004 and 2003, the Company received
proceeds of $3.8 and $2.2, respectively, from 514,000 and 227,000 common shares
issued upon the exercise of options granted to employees and directors.
NOTE 3: RECENT ACCOUNTING PRONOUNCEMENT
In December 2003, the Financial Accounting Standards Board ("FASB") reissued
FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities
- an Interpretation of ARB No. 51." FIN No. 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity risk for the
entity to finance its activities without additional subordinated financial
support. The provisions of FIN No. 46 are effective for the Company for the
interim periods ending after March 15, 2004. The adoption of FIN No. 46 did not
have an impact on the Company's results of operations or financial condition.
5
NOTE 4: FINANCIAL INSTRUMENTS AND DERIVATIVES
The Company applies the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of SFAS No. 133," SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," and SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
These statements outline the accounting treatment for all derivative activities
and require that an entity recognize all derivative instruments as either assets
or liabilities on its balance sheet at their fair value. Gains and losses
resulting from changes in the fair value of derivatives are recorded each period
in current or comprehensive earnings, depending on whether a derivative is
designated as part of an effective hedge transaction and the resulting type of
hedge transaction. Gains and losses on derivative instruments reported in
comprehensive earnings will be reclassified to earnings in the period in which
earnings are affected by the hedged item.
The Company manages a foreign currency hedging program to hedge against
fluctuations in foreign currency-denominated trade liabilities by periodically
entering into forward foreign exchange contracts. The aggregate notional value
of forward foreign exchange contracts the Company entered into amounted to $29
and $15 for the three months ended September 30, 2004 and 2003, respectively,
and $94 and $41 for the nine months ended September 30, 2004 and 2003.
The Company formally designates and documents the hedging relationship and
risk management objective for undertaking the hedge. The documentation describes
the hedging instrument, the item being hedged, the nature of the risk being
hedged and the Company's assessment of the hedging instrument's effectiveness in
offsetting the exposure to changes in the hedged item's fair value.
The fair value of outstanding forward foreign exchange contracts at
September 30, 2004 and December 31, 2003, for delivery of various currencies at
various future dates and the changes in fair value recorded in income during the
three and nine months ended September 30, 2004, were not material. The notional
value of outstanding forward foreign exchange contracts at September 30, 2004
and December 31, 2003, was $9 and $19, respectively.
All financial instruments of the Company, with the exception of hedge
instruments, are carried at cost, which approximates fair value.
NOTE 5: INVENTORIES, NET
Inventories are stated at the lower of cost or market. The value of net
inventories determined using the last-in, first-out method was $13.0 and $14.3
as of September 30, 2004 and December 31, 2003, respectively. The value of all
other net inventories determined using the first-in, first-out method was $87.6
and $79.8 as of September 30, 2004 and December 31, 2003, respectively.
The components of net inventories are as follows:
September 30, December 31,
2004 2003
----------- ------------
Raw materials...................................................... $ 48.0 $ 44.5
Work-in-process.................................................... 9.7 7.8
Finished goods..................................................... 61.7 58.1
----------- -----------
119.4 110.4
Allowance for obsolescence......................................... (18.8) (16.3)
----------- -----------
$ 100.6 $ 94.1
=========== ===========
6
NOTE 6: GOODWILL AND OTHER INTANGIBLE, NET
The Company applies the provisions of SFAS No. 141, "Business Combinations,"
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires
that all business combinations be accounted for using the purchase method of
accounting and that certain intangible assets acquired in a business combination
be recognized as assets apart from goodwill. Under SFAS No. 142, goodwill is not
amortized. Instead, the Company is required to test goodwill for impairment at
least annually using a fair value approach, at the reporting unit level. In
addition, the Company evaluates goodwill for impairment if an event occurs or
circumstances change, which could result in the carrying value of a reporting
unit exceeding its fair value. Factors the Company considers important which
could indicate impairment include the following: (1) significant
under-performance relative to historical or projected future operating results;
(2) significant changes in the manner of the Company's use of the acquired
assets or the strategy for the Company's overall business; (3) significant
negative industry or economic trends; (4) significant decline in the Company's
stock price for a sustained period; and (5) the Company's market capitalization
relative to net book value.
In accordance with SFAS No. 142, the Company completed its annual goodwill
impairment assessment during the fourth quarter of 2003, and based on a
comparison of the implied fair values of its reporting units with their
respective carrying amounts, including goodwill, the Company determined that no
impairment of goodwill existed at October 31, 2003, and there have been no
indicators of impairment since that date. A subsequent determination that this
goodwill is impaired, however, could have a significant adverse impact on the
Company's results of operations or financial condition.
The changes in the carrying amounts of goodwill for the nine months ended
September 30, 2004, are as follows:
Americas EMEA Asia Pacific Total
--------- ------- ------------ ---------
Balance, January 1, 2004..................... $ 119.2 $ 75.0 $ 18.3 $ 212.5
Acquisitions................................. 3.7 -- 0.1 3.8
Translation adjustments...................... -- (0.4) -- (0.4)
--------- ------- -------- ---------
Balance, September 30, 2004.................. $ 122.9 $ 74.6 $ 18.4 $ 215.9
========= ======= ======== =========
In 2004, the Company recorded goodwill of $3.7 pertaining to its acquisition
of the business and assets of Alkahn Labels, Inc. in September 2003, based on
its final allocation of the purchase price to the acquired assets and
liabilities.
The Company's other intangible is as follows:
September 30, December 31,
2004 2003
------------ -----------
Noncompete agreement............................................... $ 1.7 $ 1.7
Accumulated amortization........................................... (0.9) (0.6)
------------ -----------
$ 0.8 $ 1.1
============ ===========
NOTE 7: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
A summary of accounts payable and accrued liabilities is as follows:
September 30, December 31,
2004 2003
----------- -----------
Accounts payable..................................................... $ 48.4 $ 45.3
Accrued payroll costs................................................ 21.4 13.0
Accrued interest..................................................... 1.6 4.1
Advance service contracts............................................ 4.8 4.6
Customer incentives.................................................. 2.5 2.1
Other accrued liabilities............................................ 39.8 34.0
----------- -----------
$ 118.5 $ 103.1
=========== ===========
7
NOTE 8: LONG-TERM DEBT
A summary of long-term debt is as follows:
September 30, December 31,
2004 2003
----------- -----------
6.74% Senior Notes................................................. $ 150.0 $ 150.0
Economic Development Revenue Bonds due 2011 and 2019............... 13.0 13.0
Revolving credit................................................... -- 27.2
Other.............................................................. 0.1 0.1
----------- -----------
$ 163.1 $ 190.3
=========== ===========
During 2004, the Company paid off the $27.2 balance under its revolving
credit agreement outstanding at December 31, 2003.
NOTE 9: SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes is as follows:
Nine Months Ended
September 30,
---------------------
2004 2003
-------- --------
Interest........................................................................... $ 10.8 $ 11.4
======== ========
Income taxes....................................................................... $ 5.1 $ 4.1
======== ========
NOTE 10: COMPREHENSIVE INCOME
Comprehensive income for the periods presented below includes foreign
currency translation items. There was no tax expense or tax benefit associated
with the foreign currency translation items.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
2004 2003 2004 2003
-------- --------
Net income............................................ $ 10.2 $ 3.9 $ 34.7 $ 12.3
Foreign currency translation adjustments.............. 3.3 1.0 (2.0) 15.8
-------- -------- -------- --------
Comprehensive income.................................. $ 13.5 $ 4.9 $ 32.7 $ 28.1
======== ======== ======== ========
NOTE 11: EARNINGS PER SHARE
The reconciliation of basic and diluted weighted average common shares
outstanding is as follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Weighted average common shares (basic)................ 39.6 39.0 39.5 39.0
Options............................................... 1.3 0.5 0.9 0.5
-------- -------- -------- --------
Adjusted weighted average common shares (diluted)..... 40.9 39.5 40.4 39.5
======== ======== ======== ========
Options to purchase 42,000 and 2,508,000 shares of common stock outstanding
at September 30, 2004 and 2003, respectively, were not included in the
computation of diluted earnings per share because the effect of their inclusion
would be antidilutive.
8
NOTE 12: SEGMENT INFORMATION
The Company develops, manufactures and markets apparel identification
products and bar code and pricing solutions products to customers primarily in
the retail and apparel manufacturing industries. In addition, the sales of the
Company's products often result in the ongoing sales of supplies, replacement
parts and services. The Company's products are sold worldwide through a direct
sales force, through non-exclusive manufacturers' representatives, and through
international and export distributors and commission agents.
The Company has organized its operations into three geographic segments
consisting of the following:
(1) The Company's operations principally in North America and Latin
America ("Americas");
(2) Europe, the Middle East and Africa ("EMEA"); and
(3) The Asia Pacific region ("Asia Pacific")
Each of the three geographic segments develops, manufactures and markets the
Company's products and services. The results from the three geographic segments
are regularly reviewed by the Company's Chief Executive Officer to make
decisions about resources to be allocated to each segment and assess its
performance. Information regarding the operations of the Company in different
geographic segments is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- --------- --------
Sales to unaffiliated customers:
Americas.......................................... $ 89.5 $ 82.6 $ 266.1 $ 244.4
EMEA.............................................. 48.3 45.7 162.7 144.8
Asia Pacific...................................... 56.4 42.4 168.2 128.1
-------- -------- -------- --------
Total................................... $ 194.2 $ 170.7 $ 597.0 $ 517.3
======== ======== ======== ========
Intersegment sales:
Americas.......................................... $ 15.9 $ 12.0 $ 45.7 $ 42.5
EMEA.............................................. 11.8 10.9 36.7 30.4
Asia Pacific...................................... 5.5 3.2 14.1 9.7
Eliminations...................................... (33.2) (26.1) (96.5) (82.6)
-------- -------- -------- --------
Total................................... $ -- $ -- $ -- $ --
======== ======== ======== ========
Income before taxes (a):
Americas (b)...................................... $ 12.3 $ 3.8 $ 30.3 $ 12.4
EMEA (b).......................................... 3.6 0.9 13.6 4.0
Asia Pacific...................................... 7.7 7.6 29.2 24.7
-------- -------- -------- --------
23.6 12.3 73.1 41.1
Corporate expenses (b)............................ (7.6) (4.2) (19.6) (16.4)
Amortization of other intangible.................. (0.1) (0.1) (0.3) (0.3)
-------- -------- -------- --------
Operating income........................ 15.9 8.0 53.2 24.4
Interest expense, net............................. (2.6) (2.9) (8.1) (8.4)
-------- -------- -------- --------
Total................................... $ 13.3 $ 5.1 $ 45.1 $ 16.0
======== ======== ======== ========
(a) Certain reclassifications have been made to prior periods' income
before taxes to conform to the presentation used in the current
period.
(b) Americas, EMEA and Asia Pacific included integration/restructuring
and other costs of $3.9, $0.1 and $0.1, respectively, for the three
months ended September 30, 2003, and $7.6, $1.5 and $0.1 for the nine
months ended September 30, 2003. In addition, Corporate expenses
included integration/restructuring and other costs of $1.6 for the
nine months ended September 30, 2003.
Depreciation and amortization:
Americas.......................................... $ 3.5 $ 3.5 $ 10.4 $ 10.0
EMEA.............................................. 2.4 2.3 6.7 6.8
Asia Pacific...................................... 1.9 1.2 5.0 3.3
-------- -------- -------- --------
7.8 7.0 22.1 20.1
Corporate......................................... 0.4 1.5 1.2 2.2
-------- -------- -------- --------
Total................................... $ 8.2 $ 8.5 $ 23.3 $ 22.3
======== ======== ======== ========
9
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- --------- --------
Capital expenditures:
Americas.......................................... $ 1.3 $ 1.6 $ 4.8 $ 7.0
EMEA.............................................. 2.5 2.1 6.1 8.2
Asia Pacific...................................... 6.1 4.6 14.1 8.0
-------- -------- -------- --------
9.9 8.3 25.0 23.2
Corporate......................................... -- -- 0.1 0.7
-------- -------- -------- --------
Total................................... $ 9.9 $ 8.3 $ 25.1 $ 23.9
======== ======== ======== ========
September 30, December 31,
2004 2003
------------- ---------
Long-lived assets:
Americas.......................................... $ 196.5 $ 199.9
EMEA.............................................. 123.6 125.0
Asia Pacific...................................... 56.8 47.3
-------- --------
376.9 372.2
Corporate......................................... 4.3 5.2
-------- --------
Total................................... $ 381.2 $ 377.4
======== ========
Total assets:
Americas.......................................... $ 303.5 $ 313.2
EMEA.............................................. 230.9 228.5
Asia Pacific...................................... 144.3 116.6
-------- --------
678.7 658.3
Corporate......................................... 69.3 56.6
-------- --------
Total................................... $ 748.0 $ 714.9
======== ========
The following table presents sales by product:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
2004 2003 2004 2003
-------- -------- ------- --------
Apparel Identification Products................... $ 134.8 $ 112.5 $ 423.3 $ 347.5
Bar Code and Pricing Solutions.................... 59.4 58.2 173.7 169.8
-------- -------- -------- --------
Total................................... $ 194.2 $ 170.7 $ 597.0 $ 517.3
======== ======== ======== ========
The Company derived sales in the US of $66.9 and $203.1 for the three and
nine months ended September 30, 2004, respectively, and $64.2 and $189.5 for the
three and nine months ended September 30, 2003. In addition, the Company's
long-lived assets in the US as of September 30, 2004 and December 31, 2003,
amounted to $164.1 and $167.1, respectively.
No one customer accounted for more than 10% of the Company's revenues or
accounts receivable for the three and nine months ended September 30, 2004 or
2003.
NOTE 13: INTEGRATION/RESTRUCTURING AND OTHER COSTS
In 2003, the Company incurred $20.4 of integration/restructuring and other
costs. Of this amount, $11.4 primarily pertained to: (1) the closing of several
manufacturing plants in the US and the UK, areas which have experienced a
migration of apparel manufacturing to the lower-production-cost countries; and
(2) headcount reductions, which resulted in a reduction of 320 manufacturing
positions and 160 managerial and administrative personnel primarily in the US
and the UK. In addition, the Company recorded $1.3 of integration/restructuring
and other costs in connection with the severance payment made to its former
Chief Executive Officer. Lastly, the Company recognized non-cash charges of $7.7
to write off the remaining net book value of an Enterprise Resource Planning
system and certain other fixed assets no longer in use.
10
The following table presents the changes in accruals pertaining to the
Company's restructuring and related initiatives for the nine months ended
September 30, 2004:
Beginning Balance Ending Balance
January 1, 2004 Payments September 30, 2004
----------------- -------- ------------------
Severance...................... $ 1.4 $ (1.4) $ --
Termination of leases.......... 1.1 (0.5) 0.6
------ ------- ------
$ 2.5 $ (1.9) $ 0.6
====== ======= ======
11
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations for the Three and Nine Months Ended September 30, 2004
All amounts in the following discussion are stated in millions, except share
and per share data.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management has identified the following policies and estimates as critical
to the Company's business operations and the understanding of the Company's
results of operations. Note that the preparation of this Quarterly Report on
Form 10-Q requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the Company's financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates and the differences could be material.
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment
and includes freight billed to customers. In addition, in accordance with Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition, revised and updated,"
the Company recognizes revenues from fixed price service contracts on a pro-rata
basis over the life of the contract as they are generally performed evenly over
the contract period. Revenues derived from other service contracts are
recognized when the services are performed.
SAB No. 101, "Revenue Recognition in Financial Statements," requires that
four basic criteria be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred or services have
been rendered; (3) the fee is fixed or determinable; and (4) collectibility is
reasonably assured. Determination of criteria (3) and (4) are based on
management's judgments regarding the fixed nature of the fee charged for
products delivered and services rendered and the collectibility of those fees.
Should changes in conditions cause management to determine that these criteria
are not met for certain future transactions, revenue recognized for a reporting
period could be adversely affected.
The Company periodically enters into multiple element arrangements whereby
it may provide a combination of products and services. Revenue from each element
is recorded when the following conditions exist: (1) the product or service
provided represents a separate earnings process; (2) the fair value of each
element can be determined separately; and (3) the undelivered elements are not
essential to the functionality of a delivered element. If the conditions for
each element described above do not exist, revenue is recognized as earned using
revenue recognition principles applicable to those elements as if it were one
arrangement, generally on a straight-line basis. In November 2002, the Emerging
Issues Task Force ("EITF") reached a consensus on EITF No. 00-21, "Accounting
for Revenue Arrangements with Multiple Element Deliverables." EITF No. 00-21
addresses how to account for arrangements that may involve the delivery or
performance of multiple products, services and/or rights to use assets. Revenue
arrangements with multiple deliverables should be divided into separate units of
accounting if the deliverables in the arrangement meet certain criteria.
Arrangement consideration should be allocated among the separate units of
accounting based on their relative fair values.
Sales Returns and Allowances
Management must make estimates of potential future product returns, billing
adjustments and allowances related to current period product revenues. In
establishing a provision for sales returns and allowances, management relies
principally on the Company's history of product return rates as well as customer
service billing adjustments and allowances, each of which is regularly analyzed.
Management also considers (1) current economic trends, (2) changes in customer
demand for the Company's products and (3) acceptance of the Company's products
in the marketplace when evaluating the adequacy of the Company's provision for
sales returns and allowances. Historically, the Company has not experienced a
significant change in its product return rates resulting from these factors and
its product return rates have been relatively stable. For the three and nine
months ended September 30, 2004 and 2003, the provision for sales returns and
allowances accounted for as a reduction to gross sales was not material.
12
Allowance for Doubtful Accounts
Management is required to make judgments, based on established aging policy,
historical experience and future expectations, as to the collectibility of the
Company's accounts receivable and establish an allowance for doubtful accounts.
The allowance for doubtful accounts is used to reduce gross trade receivables to
their net realizable value. When evaluating the adequacy of the allowance for
doubtful accounts, management specifically analyzes customer specific
allowances, amounts based upon an aging schedule, historical bad debt
experience, customer concentrations, customer creditworthiness and current
trends. The Company's accounts receivable balances were $125.8, net of
allowances of $10.9, at September 30, 2004, and $127.0, net of allowances of
$10.0, at December 31, 2003.
Inventories
Inventories are stated at the lower of cost or market value and are
categorized as raw materials, work-in-process or finished goods. The value of
inventories determined using the last-in, first-out method was $13.0 and $14.3
as of September 30, 2004 and December 31, 2003, respectively. The value of all
other inventories determined using the first-in, first-out method was $87.6 and
$79.8 as of September 30, 2004 and December 31, 2003, respectively.
On an ongoing basis, the Company evaluates the composition of its
inventories and the adequacy of its reserve for damaged, obsolete, excess and
slow-turning products. Market value of aged inventory is determined based on
historical sales trends, current market conditions, changes in customer demand,
acceptance of the Company's products, and current sales activities for this type
of inventory.
Goodwill
The Company evaluates goodwill for impairment annually using a fair value
approach, at the reporting unit level. In addition, the Company evaluates
goodwill for impairment if a significant event occurs or circumstances change,
which could result in the carrying value of a reporting unit exceeding its fair
value. Factors the Company considers important which could indicate impairment
include the following: (1) significant under-performance relative to historical
or projected future operating results; (2) significant changes in the manner of
the Company's use of the acquired assets or the strategy for the Company's
overall business; (3) significant negative industry or economic trends; (4)
significant decline in the Company's stock price for a sustained period; and (5)
the Company's market capitalization relative to net book value. The Company
assesses the existence of impairment by comparing the implied fair values of its
reporting units with their respective carrying amounts, including goodwill.
During the fourth quarter of 2003, the Company completed its annual goodwill
impairment assessment, and based on the results, the Company determined that no
impairment of goodwill existed at October 31, 2003, and there have been no
indicators of impairment since that date. A subsequent determination that this
goodwill is impaired, however, could have a significant adverse impact on the
Company's results of operations or financial condition.
Impairment of Long-Lived Assets
The Company periodically reviews its long-lived assets for impairment by
comparing the carrying values of the assets with their estimated future
undiscounted cash flows. If it is determined that an impairment loss has
occurred, the loss is recognized during that period. The impairment loss is
calculated as the difference between asset carrying values and fair value as
determined by prices of similar items and other valuation techniques (discounted
cash flow analysis), giving consideration to recent operating performance and
pricing trends. There were no significant impairment losses related to
long-lived assets for the three and nine months ended September 30, 2004 and
2003.
Accounting for Income Taxes
As part of the process of preparing the consolidated financial statements,
management is required to estimate the income taxes in each jurisdiction in
which the Company operates. This process involves estimating the actual current
tax liabilities together with assessing temporary differences resulting from the
differing treatment of items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included in the
consolidated balance sheet. Management must then assess the likelihood that the
deferred tax assets will be recovered, and to the extent that management
believes that recovery is not more than likely, the Company must establish a
valuation allowance. If a valuation allowance is established or increased during
any period, the Company must include this amount as an expense within the tax
provision in the consolidated statement of income. Significant management
judgment is required in determining the Company's provision for income taxes,
13
deferred tax assets and liabilities and any valuation allowance recognized
against net deferred assets. The valuation allowance is based on management's
estimates of the taxable income in the jurisdictions in which the Company
operates and the period over which the deferred tax assets will be recoverable.
Deferred taxes are not provided on the portion of undistributed earnings of
non-US subsidiaries, which is considered to be permanently reinvested. In the
event that management changes its consideration on permanently reinvesting the
undistributed earnings of its non-US subsidiaries, circumstances change in
future periods, or there is a change in accounting principles generally accepted
in the US, the Company may need to establish an additional income tax provision
for the US and other taxes arising from repatriation, which could materially
impact its results of operations.
RESULTS OF OPERATIONS
Overview
In order to better serve a customer base consisting predominantly of
retailers and apparel manufacturers, the Company has organized its operations
into three geographic segments consisting of the following:
(1) The Company's operations principally in North America and Latin
America ("Americas");
(2) Europe, the Middle East and Africa ("EMEA"); and
(3) The Asia Pacific region ("Asia Pacific")
The Company's results of operations for the three and nine months ended
September 30, 2004 and 2003, in dollars and as a percent of sales are presented
below:
Three Months Ended Nine Months Ended
-------------------------------------------- -----------------------------------------
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
------------------- ------------------ ------------------ ------------------
Sales.......................... $ 194.2 100.0% $ 170.7 100.0% $ 597.0 100.0% $ 517.3 100.0%
Cost of sales.................. 119.1 61.3 106.0 62.1 365.6 61.2 321.5 62.1
-------- ------- -------- ------- -------- ------- -------- -------
Gross profit............... 75.1 38.7 64.7 37.9 231.4 38.8 195.8 37.9
Selling, general and
administrative expenses...... 59.2 30.5 52.6 30.8 178.2 29.8 160.6 31.0
Integration/restructuring and
other costs.................. -- -- 4.1 2.4 -- -- 10.8 2.1
-------- ------- -------- ------- -------- ------- -------- -------
Operating income........... 15.9 8.2 8.0 4.7 53.2 9.0 24.4 4.8
Interest expense, net.......... 2.6 1.4 2.9 1.7 8.1 1.4 8.4 1.7
-------- ------- -------- ------- -------- ------- -------- -------
Income before taxes........ 13.3 6.8 5.1 3.0 45.1 7.6 16.0 3.1
Taxes on income................ 3.1 1.5 1.2 0.7 10.4 1.8 3.7 0.7
-------- ------- -------- ------- -------- ------- -------- -------
Net income................. $ 10.2 5.3% $ 3.9 2.3% $ 34.7 5.8% $ 12.3 2.4%
======== ======= ======== ======= ======== ======= ======== =======
Building upon strong momentum, which began in the first quarter of 2004, the
Company posted better-than-expected results of operations in the third quarter.
For the three months ended September 30, 2004, the Company's sales increased
$23.5, or 13.8%, to $194.2, compared with $170.7 for the three months ended
September 30, 2003. Of the total increase, $16.1 was attributable to organic
sales growth, which excludes acquisitions and the impact of changes in foreign
exchange rates. These comparable year-over-year results reflect the combination
of increased customer demand across the entire range of the Company's products,
strong growth in the Company's core Asia Pacific operations and increased
penetration of the Company's operations in the emerging markets of Latin
America, EMEA and Asia Pacific. In addition, $3.6 of the increase was
attributable to the September 2003 acquisition of Alkahn Labels, Inc. ("Alkahn")
and $3.8 of the increase was attributable to the favorable impact of changes in
foreign exchange rates. For the nine months ended September 30, 2004, the
Company's sales increased $79.7, or 15.4%, to $597.0, compared with $517.3 for
the nine months ended September 30, 2003. The sales increase was attributable to
organic sales growth of $42.5, incremental sales contributed by the Alkahn
acquisition of $22.3, and the favorable impact of changes in foreign exchange
rates of $14.9.
Management believes that the Company was able to deliver sales growth over
the prior year period through a more concentrated emphasis on thinking and
executing as an unified global operating company, maintaining balance and
diversification throughout its markets, seeking leadership in niche markets and
continuing to focus on providing customers with value-added products and
solutions, outstanding service, consistent quality and on-time deliveries. In
addition, with the Alkahn acquisition, the Company continued to successfully
execute on its longstanding strategy of striving for long-term sustainable
14
growth through acquisitions. Management believes that the Company's investments
in new product development, upgraded manufacturing equipment, new technology,
innovative programs and sales and marketing initiatives have positioned the
Company to continue to compete successfully.
Operating income was $15.9 and $53.2 for the three and nine months ended
September 30, 2004, respectively, compared with $8.0 and $24.4 for the three and
nine months ended September 30, 2003. As a percent of sales, operating income
was 8.2% and 9.0% for the three and nine months ended September 30, 2004,
respectively, and 4.7% and 4.8% for the three and nine months ended September
30, 2003. The operating results for the three and nine months ended September
30, 2003 included integration/restructuring and other costs of $4.1 and $10.8,
respectively.
Sales
The following table presents sales by geographic operating segment:
Three Months Ended Nine Months Ended
------------------------------------------- -----------------------------------------
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
------------------ ------------------- -----------------------------------------
Americas.................. $ 89.5 46.1% $ 82.6 48.4% $ 266.1 44.6% $ 244.4 47.2%
EMEA...................... 48.3 24.9 45.7 26.8 162.7 27.2 144.8 28.0
Asia Pacific.............. 56.4 29.0 42.4 24.8 168.2 28.2 128.1 24.8
-------- ------- -------- ------- -------- ------- -------- -------
Total.................. $ 194.2 100.0% $ 170.7 100.0% $ 597.0 100.0% $ 517.3 100.0%
======== ======= ======== ======= ======== ======= ======== =======
Americas sales include sales delivered through the Company's operations
principally in North America and Latin America. Sales increased $6.9, or 8.4%,
to $89.5 for the three months ended September 30, 2004, compared with $82.6 for
the three months ended September 30, 2003. The increase was attributable to
organic sales growth of $5.2, the impact of the Alkahn acquisition of $1.5 and
the favorable impact of changes in foreign exchange rates of $0.2. For the nine
months ended September 30, 2004, sales increased $21.7, or 8.9%, to $266.1,
compared with $244.4 for the nine months ended September 30, 2003. The increase
was attributable to organic sales growth of $6.9, the impact of the Alkahn
acquisition of $13.5 and the favorable impact of changes in foreign exchange
rates of $1.3. Management notes that organic sales gains in apparel
identification products were largely driven by the Company's operations in Latin
America and to a lesser degree by an improved economic environment in the US.
The economic improvement also benefited sales of bar code and pricing solutions
products. In addition, many of the Company's customers continued to move their
production outside the US where they have realized labor cost and operating
performance efficiencies. This has resulted in a shift in sales mix primarily to
Latin America and the Asia Pacific region.
EMEA's sales, which include sales delivered through the Company's operations
in 12 European countries, the Middle East and Africa, increased $2.6, or 5.7%,
to $48.3 for the three months ended September 30, 2004, compared with $45.7 for
the three months ended September 30, 2003. The increase was attributable to the
favorable impact of changes in foreign exchange rates of $3.6, offset by a $1.0
decline in organic sales. For the nine months ended September 30, 2004, sales
increased $17.9, or 12.4%, to $162.7, compared with $144.8 for the nine months
ended September 30, 2003. The increase was attributable to organic sales growth
of $4.3 and the favorable impact of changes in foreign exchange rates of $13.6.
Management notes that the Company's operations in Turkey, Italy and Norway
posted solid volume gains. In addition, the Company's recently established
operations in Romania, Morocco, Mauritius, Portugal and United Arab Emirates
contributed to EMEA's sales growth.
Asia Pacific consists of the Company's operations in Hong Kong, China,
Singapore, Sri Lanka, Korea, Bangladesh, Indonesia, Vietnam and India. Sales
increased $14.0, or 33.0%, to $56.4 for the three months ended September 30,
2004, compared with $42.4 for the three months ended September 30, 2003. The
increase was attributable to organic sales growth of $11.9 and the impact of the
Alkahn acquisition of $2.1. For the nine months ended September 30, 2004, sales
increased $40.1, or 31.3%, to $168.2, compared with $128.1 for the nine months
ended September 30, 2003. The increase was attributable to organic sales growth
of $31.3 and the impact of the Alkahn acquisition of $8.8. The Company's
operations in this region have significantly benefited from the steady and
continued migration of many of the Company's customers who have moved their
production outside the US and Western Europe to minimize labor cost and maximize
operating performance efficiencies. In addition, the Company believes that sales
increases in Asia Pacific have resulted from strong gains in market share.
15
Gross Profit
Gross profit, as a percent of sales, increased to 38.7% and 38.8% for the
three and nine months ended September 30, 2004, compared with 37.9% for the
three and nine months ended September 30, 2003. The higher gross margin was
directly attributable to the Company's efforts to reduce manufacturing costs and
improving operating efficiencies in existing facilities. In addition, gross
margin continues to benefit as a result of the Company's consolidating capacity
in certain of its production sites in the US and the UK. Since 2001,
management's ongoing strategy has included implementing process improvements to
reduce costs in all of the Company's manufacturing facilities, efficiently
re-deploying assets to manage production capacity and expanding production in
new and emerging markets in order to maximize labor and production efficiencies.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses were $59.2 and $178.2 for the three and nine months ended
September 30, 2004, compared with $52.6 and $160.6 for the three and nine months
ended September 30, 2003. As a percent of sales, SG&A expenses were 30.5% and
29.8% for the three and nine months ended September 30, 2004, compared with
30.8% and 31.0% for the three and nine months ended September 30, 2003. The
increases in spending were primarily attributable to (i) sales- and
growth-related expenses, including expenditures made in connection with the
development and innovation of solutions for Radio Frequency Identification
(RFID) supply-chain applications; (ii) incremental costs incurred as a result of
regulatory requirements under the Sarbanes-Oxley Act of 2002; (iii) the negative
impact of changes in foreign exchange rates; and (iv) the acquisition of Alkahn.
These were partially offset by the benefits captured through a series of cost
reduction initiatives in 2003 and continued fixed cost containment.
Integration/Restructuring and Other Costs
The Company did not incur any integration/restructuring charges for the nine
months ended September 30, 2004, and does not expect to incur any
integration/restructuring charges during the remainder of 2004.
For the nine months ended September 30, 2003, the Company recognized a
pre-tax charge of $10.8 in connection with the consolidation of certain
operations, headcount reductions, a severance payment to the Company's former
Chief Executive Officer, and a write-off of an Enterprise Resource Planning
system no longer in use.
Operating Income
Operating income was $15.9 and $53.2 for the three and nine months ended
September 30, 2004, compared with $8.0 and $24.4 for the three and nine months
ended September 30, 2003. As a percent of sales, operating income was 8.2% and
9.0% for the three and nine months ended September 30, 2004, and 4.7% and 4.8%
for the three and nine months ended September 30, 2003. The operating results
for the three and nine months ended September 30, 2003 included
integration/restructuring and other costs of $4.1 and $10.8.
On a reportable segment basis, exclusive of corporate expenses and
amortization of other intangible, operating income, as a percent of sales, was
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
2004 2003 2004 2003
------- ------- ------- ------
Americas.......................................... 13.7% 4.6% 11.4% 5.1%
EMEA.............................................. 7.5 2.0 8.4 2.8
Asia Pacific...................................... 13.7 17.9 17.4 19.3
For the three and nine months ended September 30, 2004, the decreases in
Asia Pacific's operating income, as a percent of sales, resulted from the
increased charge-backs of certain global program development costs by the
Americas and EMEA, incurred on behalf of the Asia Pacific region.
In addition, Americas, EMEA and Asia Pacific included the
integration/restructuring and other costs, as a percent of sales, of 4.7%, 0.2%
and 0.2% for the three months ended September 30, 2003, and 3.1%, 1.0% and 0.1%
for the nine months ended September 30, 2003.
16
Interest Expense, Net
Interest expense, net of interest income on invested cash, was $2.6 and $8.1
for the three and nine months ended September 30, 2004, compared with $2.9 and
$8.4 for the three and nine months ended September 30, 2003. The decrease was
primarily attributable to lower average borrowings and higher interest income on
invested cash, offset by higher interest expense on outstanding bank overdraft
amounts.
Taxes on Income
The effective tax rate for each of the nine months ended September 30, 2004
and 2003 was 23%. The rate is based on management's estimates of the geographic
mix of projected pre-tax income, the timing and amounts of foreign dividends and
state and local taxes. In the event that actual results differ from these
estimates or these estimates change in future periods, the Company may need to
adjust the rate, which could materially impact its results of operations.
Liquidity and Capital Resources
The following table presents summary cash flow information for the periods
indicated:
Nine Months Ended
September 30,
----------------------
2004 2003
-------- --------
Net cash provided by operating activities............. $ 65.9 $ 29.3
Net cash used in investing activities................. (23.3) (52.1)
Net cash (used in)/provided by financing activities... (22.3) 34.4
-------- --------
Total change in cash and cash equivalents (a) $ 20.3 $ 11.6
======== ========
----------
(a) Before the effect of exchange rate changes on cash flows.
Operating Activities
Cash provided by operating activities is a primary source of funds to
finance the Company's operating needs and growth opportunities. Effective August
4, 2004, at the Company's request, its revolving credit agreement ("Credit
Agreement") was amended to reduce the total commitment under the facility from
$150 to $50. In the event of an additional financing need, the Company believes
that the Credit Agreement can be amended to increase the total commitment up to
$150. The Credit Agreement is available to provide additional liquidity for
capital and other specific-purpose expenditures. Net cash provided by operating
activities was $65.9 for the nine months ended September 30, 2004, compared with
$29.3 for the nine months ended September 30, 2003. Management believes that the
Company will continue to generate cash from its operating activities for the
foreseeable future supplemented by availability under its Credit Agreement to
fund its working capital needs, strengthen its balance sheet and support its
growth strategy of expanding its geographic reach and product offerings.
Working capital and the corresponding current ratio were $202.4 and 2.4:1
and $194.1 and 2.6:1 at September 30, 2004 and December 31, 2003, respectively.
The increase in working capital primarily resulted from increases in cash and
cash equivalents, inventories and other current assets, offset by increases in
accounts payable, accrued liabilities, and accrued taxes on income.
Investing Activities
For the nine months ended September 30, 2004 and 2003, the Company incurred
$25.1 and $23.9, respectively, of capital expenditures to acquire production
machinery, to install system upgrades and to continue with its growth and
expansion of Company operations in the emerging markets of Latin America, EMEA
and Asia Pacific. In addition, during 2004, the Company received proceeds of
$1.0 from the sale of its 10% equity interest in Disc Graphics, Inc., a
diversified manufacturer and printer of specialty paperboard packaging.
During the third quarter of 2003, the Company acquired the business and
assets of Alkahn, a manufacturer of woven labels, for $25.0.
17
Financing Activities
The components of total capital as of September 30, 2004 and December 31,
2003, respectively, are presented below:
September 30, December 31,
2004 2003
---------- --------
Due to banks....................................................... $ 4.9 $ 4.3
Long-term debt..................................................... 163.1 190.3
---------- --------
Total debt..................................................... 168.0 194.6
Shareholders' equity............................................... 414.2 377.3
---------- --------
Total capital.................................................. $ 582.2 $ 571.9
========== ========
Total debt as a percent of total capital........................... 28.9% 34.0%
========== ========
Management believes that for the foreseeable future, borrowings available
under the Company's Credit Agreement provide sufficient liquidity to supplement
the Company's operating cash flow. For the nine months ended September 30, 2004
and 2003, net (repayments)/ borrowings of the Company's outstanding debt were
$(26.5) and $36.0, respectively.
The Company has a stock repurchase plan with an authorization from its Board
of Directors to use up to $150 for the repurchase of its shares. The shares may
be purchased from time to time at prevailing prices in the open-market or by
block purchases. The Company did not repurchase any shares for the nine months
ended September 30, 2004. For the nine months ended September 30, 2003, the
Company repurchased 469,000 shares for an aggregate price of $5.1, or $10.80 per
share. Since the inception of the stock repurchase program, the Company has
repurchased 12,293,000 of its shares for an aggregate price of $122.0, or an
average of $9.92 per share. The Company immediately retired the repurchased
shares. As of September 30, 2004, the Company had $28.0 available under its $150
stock repurchase program authorization. The Company may continue to repurchase
its shares under the existing authorization, depending on market conditions and
cash availability. The Company believes that funds from future operating cash
flows and funds available under its Credit Agreement are adequate to allow it to
continue to repurchase its shares under the stock repurchase plan.
The Company has various stock-based compensation plans, including two stock
option plans, a long-term incentive plan, and an employee stock purchase plan.
For the nine months ended September 30, 2004 and 2003, the Company received
proceeds of $4.2 and $3.5, respectively, from common stock issued under its
employee stock option and stock purchase plans.
In the fourth quarter of 2003, the Company reconsidered its accounting and
reporting matters related to its obligations to purchase redeemable common
shares under a Stock Repurchase Agreement (the "Repurchase Agreement"), dated
July 11, 2001 with its Chairman and Chief Executive Officer ("Chairman"). In
accordance with Rule 5-02.28 of Regulation S-X, or Accounting Series Release No.
268, "Redeemable Preferred Stocks," (issued by the Securities and Exchange
Commission ("SEC") on July 27, 1979), as interpreted by EITF Topic D-98,
"Classification and Measurement of Redeemable Securities," (issued by the
Financial Accounting Standards Board on July 19, 2001), securities that are
redeemable for cash or other assets must be classified outside of shareholders'
equity, if they are redeemable at the option of the holder, as were the
redeemable common shares owned by the Chairman. The Company concluded that Rule
5-02.28, as interpreted by EITF Topic D-98, applied to the redeemable common
shares because the redemption features were not solely within its control. While
Rule 5-02.28 specifically addressed redeemable preferred stocks, EITF Topic D-98
makes it clear that redeemable preferred stock is analogous to other equity
instruments, including common shares. Accordingly, the Company determined that
the redeemable common shares should have been classified as temporary equity in
its financial statements for periods ended after July 11, 2001 until the
Repurchase Agreement was terminated on November 17, 2003. However, the Company
was unable to have the reclassification adjustments pertaining to its 2001
financial statements audited. Consequently, the Company was unable to include
three years of audited financial information in its 2003 Annual Report on Form
10-K as required under Rules 3-01 and 3-02 of Regulation S-X.
Because the Company does not have three years of audited financial
information on file with the SEC, the Company's reports filed under the
Securities Exchange Act of 1934 (the "Exchange Act") are not in full compliance
with the requirements of the Exchange Act. As a result, the effectiveness of the
Company's Registration Statements on Form S-8 (Nos. 333-38923, 333-43694, and
333-43696) have been suspended, and the Company is unable to issue shares under
its employee stock purchase and stock option plans. Additionally, during any
period when the Company is not current in its SEC reports, neither affiliates of
the Company nor any person that purchased shares from the Company in a private
offering during the preceding two years will be able to sell their shares in
public markets pursuant to Rule 144 under the Securities Act of 1933. The
Company expects that it will again have three years of audited financial
information on file with the SEC and its Exchange Act reports will comply with
SEC requirements when the Company files its 2004 audited financial statements
with its 2004 Annual Report on Form 10-K.
18
Financing Arrangement - Credit Agreement
In September 2002, the Company entered into a three-year, $150 Credit
Agreement with a group of five domestic and international banks. Effective
August 4, 2004, at the Company's request, the Credit Agreement was amended to
reduce the total commitment under the facility from $150 to $50. The Company
intends to enter into a new financing arrangement on or prior to the expiration
of the Credit Agreement in September 2005, to finance the Company's operating
needs and growth opportunities.
Under the Credit Agreement, the Company pays a facility fee determined by
reference to the ratio of debt to earnings before interest, taxes, depreciation
and amortization ("EBITDA"). The applicable percentage for the facility fee at
September 30, 2004 was 0.275%. Borrowings under the Credit Agreement bear
interest at rates referenced to the London Interbank Offered Rate with
applicable margins varying in accordance with the Company's attainment of
specified debt to EBITDA thresholds or, at the Company's option, rates
competitively bid among the participating banks or the Prime Rate, as defined
(4.75% at September 30, 2004 and 4.00% at December 31, 2003), and are guaranteed
by certain domestic subsidiaries of the Company.
The Credit Agreement, among other things, limits the Company's ability to
change the nature of its businesses, incur indebtedness, create liens, sell
assets, engage in mergers and make investments in certain subsidiaries. In
addition, it contains certain customary events of default, which generally give
the banks the right to accelerate payments of outstanding debt. These events
include:
o Failure to maintain required financial covenant ratios, as described
below;
o Failure to make a payment of principal, interest or fees within two
days of its due date;
o Default, beyond any applicable grace period, on any aggregate
indebtedness of the Company exceeding $0.5;
o Judgment or order involving a liability in excess of $0.5; and
o Occurrence of certain events constituting a change of control of the
Company.
Additionally, the Company must maintain at all times an excess of
consolidated total assets over total liabilities of not less than the sum of
$274 plus 35% of consolidated net income for the period after July 1, 2002 plus
100% of the net cash proceeds received by the Company from the sale or issuance
of its common stock on and after July 1, 2002. The Company's maximum allowable
debt to EBITDA ratio, as defined, is as follows:
Prior to January 1, 2004................................... 3.0 to 1
From January 1, 2004 to September 30, 2004................. 3.5 to 1
After September 30, 2004................................... 3.0 to 1
The Company's minimum allowable fixed charge coverage ratio, as defined, is
as follows:
Prior to October 1, 2003................................... 1.5 to 1
From October 1, 2003 to September 30, 2004................. 1.25 to 1
After September 30, 2004................................... 1.5 to 1
The Credit Agreement defines debt as including all obligations to purchase,
redeem, retire or otherwise make any payment in respect of any capital stock.
Accordingly, the Company should have reflected in its quarterly debt covenant
compliance reports provided to its banks and certain other lending institutions
its obligation to purchase common stock from its Chairman under the July 11,
2001 Repurchase Agreement. Since the obligation had been omitted from the
Company's compliance reports, the Company was in technical default under the
terms of the Credit Agreement. The Company obtained permanent waivers for this
technical default from the lenders during the first quarter of 2004. As the
Repurchase Agreement was terminated on November 17, 2003, the Company no longer
has the obligation to purchase or redeem any of its common stock.
The Company is in compliance with all debt covenants. The Company discloses
the details of the compliance calculation to its banks and certain other lending
institutions in a timely manner.
19
Off Balance Sheet Arrangements
The Company has no material transactions, arrangements, obligations
(including contingent obligations) or other relationships with unconsolidated
entities or other persons that have or are reasonably likely to have a material
current or future impact on its financial condition, changes in financial
condition, results of operations, liquidity, capital expenditures, capital
resources or significant components of revenues or expenses.
Market Risk
In the normal course of business, the Company is exposed to foreign currency
exchange rate and interest rate risks that could impact its results of
operations.
The Company at times reduces its market risk exposures by creating
offsetting positions through the use of derivative financial instruments. All of
the Company's derivatives have high correlation with the underlying exposures.
Accordingly, changes in fair value of derivatives are expected to be offset by
changes in value of the underlying exposures. The Company does not use
derivative financial instruments for trading purposes.
The Company manages a foreign currency hedging program to hedge against
fluctuations in foreign currency-denominated trade liabilities by periodically
entering into forward foreign exchange contracts. The aggregate notional value
of forward foreign exchange contracts the Company entered into amounted to $29
and $15 for the three months ended September 30, 2004 and 2003, respectively,
and $94 and $41 for the nine months ended September 30, 2004 and 2003.
The following table summarizes as of September 30, 2004, the Company's
forward foreign exchange contracts by currency. All of the Company's forward
foreign exchange contracts mature within a year. Contract amounts are
representative of the expected payments to be made under these instruments:
Contract Amounts (in thousands)
------------------------------------ Fair Value
Receive Pay (US$ 000's)
---------------- ---------------- -----------
Contracts to receive US$/pay Euro ("EUR")....................... US$ 347 (EUR) 284 $ (5)
Contract to receive US$/pay British Pounds ("GBP").............. US$ 5,359 (GBP) 2,977 $ (25)
Contract to receive US$/pay Moroccan Dirham ("MAD")............. US$ 136 (MAD) 1,237 $ (3)
Contracts to receive GBP/pay US$................................ (GBP) 90 US$ 160 $ 2
Contracts to receive GBP/pay EUR................................ (GBP) 313 (EUR) 459 $ (5)
Contract to receive GBP/pay MAD................................. (GBP) 611 (MAD) 9,917 $ (10)
Contracts to receive EUR/pay US$................................ (EUR) 1,025 US$ 1,248 $ 26
Contract to receive EUR/pay MAD................................. (EUR) 330 (MAD) 3,640 $ --
Contract to receive HK$/pay EUR................................. (HK$) 709 (EUR) 74 $ (1)
A 10% change in interest rates affecting the Company's floating rate debt
instruments would have an immaterial impact on the Company's pre-tax earnings
and cash flows over the next fiscal year. Such a move in interest rates would
have no effect on the fair value of the Company's floating rate debt
instruments.
The Company sells its products worldwide and a substantial portion of its
net sales, cost of sales and operating expenses are denominated in foreign
currencies. This exposes the Company to risks associated with changes in foreign
currency exchange rates that can adversely impact revenues, net income and cash
flow. In addition, the Company is potentially subject to concentrations of
credit risk, principally in accounts receivable. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.
The Company's major customers are retailers and global apparel manufacturers
that have historically paid their balances with the Company.
There were no significant changes in the Company's exposure to market risk
for the three and nine months ended September 30, 2004 and 2003.
20
Cautionary Statement pursuant to "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
Except for historical information, the Company's reports to the SEC on Form
10-K, Form 10-Q and Form 8-K and periodic press releases, as well as other
public documents and statements, contain "forward-looking statements" concerning
the Company's objectives and expectations with respect to gross profit,
expenses, operating performance, capital expenditures and cash flows. The
Company's success in achieving the objectives and expectations is subject to
risks and uncertainties that could cause actual results to differ materially
from those expressed or implied by the statements. Among others the risks and
uncertainties include:
o Worldwide economic and other business conditions that could affect
demand for the Company's products in the US or international markets;
o Rate of migration of garment manufacturing industry moving from the US
and Western Europe;
o The mix of products sold and the profit margins thereon;
o Order cancellation or a reduction in orders from customers;
o Competitive product offerings and pricing actions;
o The availability and pricing of key raw materials;
o The level of manufacturing productivity; and
o Dependence on key members of management.
Additionally, the Company's forward-looking statements are predicated upon
the following assumptions, among others, that are specific to the Company and/or
the markets in which it operates:
o There are no substantial adverse changes in the exchange relationship
between the British Pound or the Euro and the US Dollar;
o Low or negative economic growth, particularly in the US, the UK or
Europe, will not occur and affect consumer spending in those countries;
o There will continue to be adequate supply of the Company's raw
materials and components at economic terms;
o The Company's new Enterprise Resource Planning systems can be
successfully integrated into the Company's operations;
o There are no changes that would require the Company to establish an
additional income tax provision for the US and other taxes arising from
repatriation of the undistributed earnings of non-US subsidiaries;
o The Company can continue to expand its manufacturing and distribution
capacity in developing markets; and
o There are no substantial adverse changes in the political climates of
developing and other countries in which the Company has operations and
countries in which the Company will endeavor to establish operations in
concert with its major customers' migrations to lower-production-cost
countries.
Readers are cautioned not to place undue reliance on forward-looking
statements. The Company undertakes no obligation to republish or revise
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrences of unanticipated events.
Item 3: Quantitative and Qualitative Disclosure About Market Risk
The information called for by this item is set forth under the heading
"Market Risk" in Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in Item 2 above, which information is hereby
incorporated by reference.
21
Item 4: Controls and Procedures
Under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Principal Financial
Officer, the Company conducted an evaluation of the effectiveness of the design
and operation of its disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this report (the "Evaluation Date"). Based on this
evaluation, the Company's Chief Executive Officer and Principal Financial
Officer concluded as of the Evaluation Date that its disclosure controls and
procedures were effective such that the information relating to the Company
required to be disclosed in its SEC reports (i) is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms, and (ii) is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Principal Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
PART II OTHER INFORMATION
Item 6: Exhibits
Exhibit 10.1 Employment Agreement, dated as of October 1, 2004, between
Paxar Corporation and Arthur Hershaft.
Exhibit 31.1 Certification of the Chief Executive Officer required by Rule
13a-14(a) or Rule 15d-14(a).
Exhibit 31.2 Certification of the Principal Financial Officer required by
Rule 13a-14(a) or Rule 15d-14(a).
Exhibit 32.1 Certification of the Chief Executive Officer required by Rule
13a-14(b) or 18 U.S.C. 1350.
Exhibit 32.2 Certification of the Principal Financial Officer required by
Rule 13a-14(b) or 18 U.S.C. 1350.
22
PAXAR CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Paxar Corporation
------------------------------
Registrant
By: /s/ Larry M. Segall
-------------------------------
Vice President and Controller
(Principal Financial Officer)
November 5, 2004
-------------------------------
Date
23