Edgar Filing: PAXAR CORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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Form 10-Q

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(Mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007
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

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Paxar Corporation
(Exact name of registrant as specified in its charter)

New York 13-5670050
(State of Incorporation) (I.R.S. Employer
Identification No.)

105 Corporate Park Drive
White Plains, New York 10604
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code:
(914) 697-6800

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

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|

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

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: 41,682,126 shares outstanding as of May 8, 2007

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 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/A for the year ended
December 31, 2006.

PAXAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
(unaudited)

Three Months Ended
March 31,
--------------------------
2007 2006
--------- --------

Sales............................................ $215.1 $ 199.6
Cost of sales.................................... 138.5 125.4
--------- ---------
Gross profit................................ 76.6 74.2
Selling, general and administrative expenses..... 67.5 63.4
Integration/restructuring and other costs........ 1.8 3.0
Merger-related costs............................. 1.5 -
--------- ---------
Operating income............................ 5.8 7.8
Other income, net................................ 0.4 0.4
Interest expense, net............................ 0.5 1.2
--------- ---------
Income before taxes......................... 5.7 7.0
Taxes on income.................................. 1.6 1.8
--------- ---------
Net income.................................. $ 4.1 $ 5.2
========= =========

Basic earnings per share......................... $ 0.10 $ 0.13
========= =========

Diluted earnings per share....................... $ 0.10 $ 0.13
========= =========

Weighted average shares outstanding:
Basic.......................................... 41.3 40.7
Diluted........................................ 42.2 41.5

The accompanying notes are an integral part of the financial statements.

PAXAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)

March 31, December 31,
2007 2006
-------- --------
(unaudited)
ASSETS

Current assets:
Cash and cash equivalents........................................ $ 34.7 $ 40.2
Accounts receivable, net of allowances of $12.5 and $12.3 at
March 31, 2007 and December 31, 2006, respectively............ 143.0 146.4
Inventories...................................................... 122.1 119.5
Deferred income taxes............................................ 12.9 12.7
Other current assets............................................. 20.4 21.4
-------- --------
Total current assets................................... 333.1 340.2
-------- --------

Property, plant and equipment, net............................... 183.8 179.7
Goodwill and other intangible, net............................... 235.4 234.1
Other assets..................................................... 16.9 17.0
-------- --------

Total assets..................................................... $ 769.2 $ 771.0
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to banks..................................................... $ 1.4 $ 1.3
Current maturities of long-term debt............................. 8.0 8.0
Accounts payable and accrued liabilities......................... 130.6 134.8
Accrued taxes on income.......................................... 2.7 13.4
-------- --------
Total current liabilities.............................. 142.7 157.5
------- -------

Long-term debt................................................... 26.3 35.4
Deferred income taxes............................................ 12.3 12.1
Other liabilities................................................ 37.7 21.5

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,
41,580,739 and 41,352,432 shares issued and outstanding at
March 31, 2007 and December 31, 2006, respectively............ 4.2 4.1
Paid-in capital.................................................. 49.7 45.0
Retained earnings................................................ 470.5 472.7
Accumulated other comprehensive income........................... 25.8 22.7
-------- --------
Total shareholders' equity............................. 550.2 544.5
-------- --------

Total liabilities and shareholders' equity....................... $ 769.2 $ 771.0
======== ========

The accompanying notes are an integral part of the financial statements.

PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)

Three Months
Ended
March 31,
-----------------------
2007 2006
---------- ----------
OPERATING ACTIVITIES
Net income............................................. $ 4.1 $ 5.2
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization....................... 8.5 8.4
Stock-based compensation............................ 1.7 1.2
Deferred income taxes............................... (0.2) (0.5)
Gain on sale of property and equipment, net ........ - (0.1)
Write-off of property and equipment................. 0.3 -
Changes in assets and liabilities, net of
businesses acquired:
Accounts receivable................................. 3.4 (4.3)
Inventories......................................... (2.6) (10.2)
Other current assets................................ (1.0) (1.9)
Accounts payable and accrued liabilities............ (4.3) 4.8
Accrued taxes on income............................. (1.5) (1.6)
Other, net.......................................... 2.1 (0.7)
---------- ----------

Net cash provided by operating activities........... 10.5 0.3
---------- ----------

INVESTING ACTIVITIES
Purchases of property and equipment.................... (10.6) (6.9)
Acquisitions, net of cash acquired..................... - (3.3)
Proceeds from sale of property and equipment........... - 0.1
Other.................................................. - -
---------- ----------

Net cash used in investing activities............... (10.6) (10.1)
---------- ----------

FINANCING ACTIVITIES
Net increase in short-term debt........................ 0.2 0.1
Additions to long-term debt............................ - 9.9
Reductions in long-term debt........................... (9.0) -
Proceeds from common stock issued under employee
stock option and stock purchase plans................ 3.1 3.5
---------- ----------

Net cash (used in) provided by financing activities. (5.7) 13.5
---------- ----------

Effect of exchange rate changes on cash flows........... 0.3 0.3
---------- ----------

(Decrease) increase in cash and cash equivalents.... (5.5) 4.0
Cash and cash equivalents at beginning of year.......... 40.2 48.2
---------- ----------
Cash and cash equivalents at end of period.............. $ 34.7 $ 52.2
========== ==========

The accompanying notes are an integral part of the financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except 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. 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: MERGER AGREEMENT WITH AVERY DENNISON

On March 22, 2007, Paxar entered into an Agreement and Plan of Merger
("Merger Agreement") among the Company, Avery Dennison Corporation ("Avery") and
Alpha Acquisition Corporation ("Sub"), a wholly-owned subsidiary of Avery,
pursuant to which it is proposed that Paxar will merge with and into the Sub,
with the Company continuing as the surviving corporation and as a wholly owned
subsidiary of Avery (the "Merger"). Pursuant to the terms of the Merger
Agreement, each share of common stock, par value $0.10, of Paxar (other than
shares owned by Avery, Sub or Paxar) will be converted into the right to receive
$30.50 in cash for a total value of approximately $1.34 billion. At the
effective time and as a result of the Merger, each outstanding option to
purchase Paxar common stock, shares of Paxar restricted stock and Paxar
performance share awards will be converted into weight-adjusted options to
purchase Avery common stock, shares of Avery restricted stock or Avery
restricted stock units, respectively. The occurrence of certain circumstances
could cause the accelerated vesting of these different securities.

The Merger has been approved by the Company's Board of Directors. If the
Merger Agreement is terminated under certain circumstances specified in the
Merger Agreement: 1) the Company may be required to pay Avery a termination fee
of $40.0, plus reasonable expenses incurred by Avery relating to the Merger
Agreement, up to an aggregate amount of $5.0 and 2) Avery may be required to pay
the Company a termination fee of $50.0.

On April 20, 2007, the Federal Trade Commission and the Antitrust Division
of the United States Department of Justice granted early termination of the
waiting period applicable to the proposed Merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976. Early termination of the waiting period
concludes the U.S. government's pre-merger antitrust review of the Merger. The
transaction remains subject to Paxar shareholder approval, as well as regulatory
approvals in several other countries. The parties believe that they will receive
regulatory clearance outside the United States by the end of the second quarter.
Paxar expects to hold its shareholder meeting early this summer, and is
preparing the requisite documentation. The parties expect to complete the Merger
immediately after receipt of all regulatory and shareholder approvals.

The Company has incurred a non-refundable investment banking fee of $1.0 in
connection with the execution of the Merger Agreement, which has been recorded
in merger-related expenses as a component of operating income in the Company's
Condensed Consolidated Income Statements for the three months ended March 31,
2007. At the effective time of the Merger, the Company will owe the investment
banking firm additional fees of approximately $14.4. Additionally, the Company
incurred approximately $0.5 in legal fees in the first quarter of 2007 relating
to the Merger, which have also been recorded as merger-related expenses in the
Company's Condensed Consolidated Income Statements for the three months ended
March 31, 2007.

Under the Merger Agreement, the Company has agreed that, prior to the
effective time of the Merger, the Company will carry on business in the ordinary
and usual course and the Company will use commercially reasonable efforts to
preserve the Company's business organizations and maintain relations and
goodwill with customers, suppliers, distributors, agents, strategic partners,
creditors, lessors, employees and business associates. Additionally, the Company
has agreed, subject to certain exceptions, to restrictive covenants which limit
the Company's ability to perfrom specified activities without Avery's prior
written consent.

NOTE 3: STOCK-BASED COMPENSATION

The Company has four types of stock-based compensation programs: stock options,
performance awards, restricted stock and an employee stock purchase plan
("ESPP").

The following summarizes stock-based compensation expense recognized in the
first quarter of 2007 and 2006:

Three months ended
March 31, March 31,
2007 2006
----------- -----------

Stock options........................... $ 0.6 $ 0.8
Performance awards...................... 0.9 0.3
Restricted stock........................ 0.2 0.1
----------- -----------
Total stock-based compensation $ 1.7 $ 1.2
=========== ===========

During the three months ended March 31, 2007, 0.2 shares have been issued upon
exercise of options.

NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with GAAP, and expands disclosures about fair value
measurements. The standard applies whenever other standards require, or permit,
assets or liabilities to be measured at fair value. This statement is effective
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. Early adoption is permitted. We are currently evaluating the
requirements of SFAS 157 and have not yet determined the impact on the
consolidated financial statements.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115 ("FASB 159"). This standard permits an entity to choose to
measure many financial instruments and certain other items at fair value. The
fair value option permits a company to choose to measure eligible items at fair
value at specified election dates. A company will report unrealized gains and
losses on items for which the fair value option has been elected in earnings
after adoption. FASB 159 will be effective beginning in fiscal 2008. We are
currently evaluating the requirements of SFAS 159 and have not yet determined
the impact on the consolidated financial statements.

NOTE 5: 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 recognized 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 $13.8
and $31.1 for the three months ended March 31, 2007 and 2006, respectively.

The fair value of outstanding forward foreign exchange contracts at March
31, 2007 and December 31, 2006 for delivery of various currencies at various
future dates and the changes in fair value recorded in income during the three
month periods ended March 31, 2007 and 2006 were not material. The notional
value of outstanding forward foreign exchange contracts at March 31, 2007 and
December 31, 2006, was $1.7 and $10.9, respectively.

All financial instruments of the Company, with the exception of hedge
instruments, are carried at cost, which approximates fair value.

NOTE 6: INVENTORIES, NET

Inventories are stated at the lower of cost or market value. The value of
inventories determined using the last-in, first-out method was $9.5 and $9.7 as
of March 31, 2007 and December 31, 2006, respectively. The value of all other
inventories determined using the first-in, first-out method was $112.6 and
$109.8 as of March 31, 2007 and December 31, 2006, respectively.

The components of net inventories are as follows:

March 31, December 31,
2007 2006
----------- -----------

Raw materials............................... $ 66.3 $ 64.6
Work-in-process............................. 9.4 9.1

Finished goods.............................. 64.2 64.2
----------- -----------
139.9 137.9
Allowance for obsolescence.................. (17.8) (18.4)
----------- -----------

$ 122.1 $119.5
=========== ===========

NOTE 7: 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 2006, 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, 2006, 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 three months ended
March 31, 2007 are as follows:

Global Global
Apparel Supply Chain
Solutions Solutions Total
--------- --------- --------
Balance, January 1, 2007............. $ 108.2 $ 125.2 $ 233.4
Acquisition adjustments.............. 0.3 - 0.3
Translation adjustments.............. 1.0 - 1.0
------- ------- -------
Balance, March 31, 2007.............. $ 109.5 $ 125.2 $ 234.7
======= ======= =======

Acquisition adjustments during the three months ended March 31, 2007
consisted of purchase price allocation related to acquisitions in 2006.

The Company's other intangibles are as follows:

March 31, December 31,
2007 2006
---------- ----------

Noncompete agreement................... $ 1.7 $ 1.7
Customer relationships................. 0.8 0.8
---------- ----------
2.5 2.5
Accumulated amortization............... (1.8) (1.8)
---------- ----------

$ 0.7 $ 0.7
========== ==========

NOTE 8: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

A summary of accounts payable and accrued liabilities is as follows:

March 31, December 31,
2007 2006
---------- ----------

Accounts payable....................... $59.1 $ 62.4
Accrued payroll costs.................. 19.1 20.9
Accrued restructuring costs............ 4.7 5.8
Trade programs......................... 6.7 7.2
Advance service contracts.............. 6.5 3.7
Accrued commissions.................... 1.3 2.6
Accrued professional fees.............. 1.8 3.3
Accrued interest....................... 0.3 0.2
Other accrued liabilities.............. 31.1 28.7
---------- ----------

$130.6 $ 134.8
========== ==========

NOTE 9: INVESTMENTS

Investments where the Company does not have significant influence and where
the market value is not readily determinable are accounted for under the cost
method; where market value is readily determinable, they are accounted for in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Impairment losses on the Company's investments are charged
to income for other-than-temporary declines in fair value. In the third quarter
of 2006, the Company recognized a $5.0 impairment charge related to an
other-than-temporary decline in fair value of its common stock investment in
International Imaging Materials, Inc. ("IIMAK"). Investments, which are included
in other assets in the accompanying consolidated balance sheets, approximated
$14.8 and $14.5, as of March 31, 2007 and December 31, 2006, respectively, all
of which represent the Company's remaining investment in IIMAK.

NOTE 10: LONG-TERM DEBT

A summary of long-term debt is as follows:

March 31, December 31,
2007 2006
-------- --------

Revolving credit facility ........................... 21.2 30.1
Economic development revenue bonds due 2011 and 2019. 13.0 13.0
Other................................................ 0.1 0.3
-------- --------

Total debt........................................... 34.3 43.4
Less: Current maturities of long-term debt........... (8.0) (8.0)
-------- --------
$ 26.3 $ 35.4
======== ========

Maturities of long-term debt are as follows:

Years ending December 31,
--------------------------------------------

2007........................................ 8.0
2010........................................ 21.2
Thereafter.................................. 5.1
---------
$ 34.3

NOTE 11: SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest and income taxes is as follows:

Three Months Ended
March 31,
---------------------------
2007 2006
--------- ----------

Interest................................. $ 0.4 $ 1.0
========= ==========

Income taxes............................. $ 2.7 $ 3.4
========= ==========

NOTE 12: 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 since the Company considers
undistributed earnings of foreign subsidiaries to be permanently invested.

Three Months Ended
March 31,
-------------------------
2007 2006
-------- -------

Net income................................. $ 4.1 $ 5.2
Foreign currency translation adjustments... 3.1 1.9
-------- --------

Comprehensive income....................... $ 7.2 $ 7.1
======== ========

NOTE 13: EARNINGS PER SHARE

The reconciliation of basic and diluted weighted average common shares
outstanding is as follows:

Three Months Ended
March 31,
-------------------
2007 2006
-------- -------

Weighted average common shares (basic)............ 41.3 40.7
Options and restricted stock awards............... 0.9 0.8
-------- --------

Adjusted weighted average common shares (diluted). 42.2 41.5
========= ========

NOTE 14: SEGMENT INFORMATION

Effective January 1, 2007, the Company changed its operating segments. The
Company believes that the retail and apparel environments increasingly require a
more global, product-oriented organization in order to remain competitive, and
therefore, operations have been organized into two product-focused segments
consisting of the following:

Global Apparel Solutions -- develops, manufactures and sells apparel
identification products which include printed labels, woven labels,
graphics tags, apparel systems (control printers, hot stamp machines,
inks, coated fabrics and roll-to-roll tags) and item level
radio-frequency identification ("RFID") products to customers in the
retail and apparel manufacturing industries.

Global Supply Chain Solutions -- develops, manufactures and sells bar
code, pricing solutions and case and pallet level radio-frequency
identification ("RFID") products to customers in the retail and apparel
manufacturing industries.

During the first three months of 2007, the Global Apparel Solutions segment
contributed approximately 73% of the Company's total sales, while the Global
Supply Chain Solutions segment contributed approximately 27% of the Company's
total sales.

The Company has restated prior period segment information presented in
the table below to conform to the current segment reporting structure:

March 31,
------------------------
2007 2006
-------- --------
Sales to unaffiliated customers:
Global Apparel Solutions...................... $ 156.8 $ 141.8
Global Supply Chain Solutions................. 58.3 57.8
-------- --------

Total.................................... $ 215.1 $ 199.6
======== ========

Intersegment sales:
Global Apparel Solutions...................... $ 37.8 $ 36.6
Global Supply Chain Solutions................. 4.3 3.7
Eliminations.................................. (42.1) (40.3)
-------- --------

Total.................................... $ -- $ --
======== ========

Operating Income (a):
Global Apparel Solutions (a).................. $ 7.4 $ 9.7
Global Supply Chain(a)........................ 5.8 6.7
-------- --------
13.2 16.4
Corporate expenses (a)........................ (7.4) (8.5)
Amortization of other intangible.............. - (0.1)
-------- --------

Operating income......................... 5.8 7.8
Other income, net ............................ 0.4 0.4
Interest expense, net......................... (0.5) (1.2)
-------- --------

Income before taxes.................. $ 5.7 $ 7.0
======== ========

(a) Global Apparel Solutions and Global Supply Chain Solutions include
integration/restructuring expenses of $1.5 and $0.3, respectively,
for the three months ended March 31, 2007. Corporate expenses
include $1.5 of merger-related costs for the three months ended
March 31, 2007. Global Apparel Solutions and Corporate expenses
include integration/restructuring expenses of $0.7 and $2.3,
respectively, for the three months ended March 31, 2006.

Total assets:
Global Apparel Solutions...................... $ 533.5 $ 526.6
Global Supply Chain Solutions................. 200.1 199.0
Corporate and consolidating................... 35.6 45.4
-------- --------

Total.................................... $ 769.2 $ 771.0
======== ========

NOTE 15: INTEGRATION/RESTRUCTURING AND OTHER COSTS

2005 Restructuring Program
--------------------------

In October 2005, the Company announced that it would undertake realignment
initiatives to restructure production capacity utilization, particularly in
response to the continued migration of apparel production outside of the United
States (the "2005 Restructuring Program"). The plan was substantially focused on
transferring existing apparel identification manufacturing capacity from the
Company's U.S. operations primarily to facilities in Mexico, Central America and
Asia Pacific. In April 2007, in response to continued migration of apparel
production outside of Mexico and to improve margins and lower costs, the Company
determined that changes in its manufacturing realignment plans will likely be
required. The Company expects that a significant portion of its manufacturing
capacity in Mexico will be transferred to locations in Central America and Asia
Pacific, or outsourced to third party suppliers.

The Company is also repositioning a portion of its legacy EMEA manufacturing
activities to lower cost facilities in Eastern Europe, as part of the 2005
Restructuring Program. In addition, the plan includes the realignment and
downsizing of the Company's design and customer service organization in legacy
U.S. and Western European markets in response to the aforementioned production
migration activities.

The 2005 Restructuring Program is expected to be substantially completed
during 2007. The 2005 Restructuring Program contemplates significant headcount
reductions in the Company's U.S. locations and, to a lesser extent, headcount
reductions in Western Europe, as well as in Mexico where the Company is now
experiencing similar production migration trends. The Company expects to incur
total pre-tax, non-recurring charges, upon completion, in the range of $25 to
$33, including approximately $5 to $8 of non-cash charges. During the three
months ended March 31, 2007 and 2006, the Company recognized charges of $1.6 and
$3.0, respectively, in connection with the 2005 Restructuring Program. These
charges were related to program management services, severance and retention
programs, asset impairment charges and other facility closure costs. In the
aggregate, the Company has recognized charges of approximately $20.3 in
connection with the 2005 Restructuring Program, of which, approximately $16.9
represents cash costs.

Other Restructuring Initiatives
-------------------------------

During the three months ended March 31, 2007, the Company initiated
additional apparel restructuring and realignment activities to improve margins
and lower costs in two manufacturing locations in Europe, estimating total costs
of approximately $1.2, primarily consisting of workforce reductions and facility
consolidation costs. These activities are expected to be completed by December
31, 2007. The Company recognized charges of $0.2 in connection with these
initiatives during the three months ended March 31, 2007, which related almost
entirely to workforce reductions.

All integration/restructuring and other costs are identified on a separate
line on the Company's income statement as a component of operating income.

The following table presents the changes in accruals pertaining to the
Company's restructuring and related initiatives for the three months ended March
31, 2007:

Balance, Balance,
January 1, 2007 Expenses Payments March 31, 2007
------------------ -------- --------- ----------------

Severance...................... $ 4.3 $ 0.4 $ (0.6) $ 4.1
Other costs.................... 1.5 1.2 (2.1) 0.6
------ ------ ------ ------
$ 5.8 $ 1.6 $ (2.7) $ 4.7
====== ====== ====== ======

In addition, during the three months ended March 31, 2007, the Company
recorded asset impairment charges of $0.2 related to the 2005 Restructuring
Program.

NOTE 16: CONTINGENCIES

The Company has been named a potentially responsible party relating to
contamination that occurred at certain super-fund sites. Management, including
internal counsel, currently believes that the ultimate resolution of such

matters taken as a whole, and after considering such factors as 1) available
levels of insurance coverage, 2) the Company's proportionate share, in certain
cases, as a named potential responsible party, and 3) the dormant nature of
certain matters, will not have a materially adverse effect upon our results of
operations or financial condition. It is possible that new information or future
developments could require us to reassess our potential exposure related to
these environmental matters.

In the ordinary course of business, the Company and its subsidiaries are
involved in certain disputes and litigation, none of which will, in the opinion
of management, have a material adverse effect on the Company's financial
condition or results of operations

NOTE 17: INCOME TAXES

We adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, (FIN 48) on January 1, 2007. As a result of the
implementation of FIN 48, we recognized a $6.3 increase in the liability for
uncertain tax positions, which was accounted for as a reduction of retained
earnings. The reserve for uncertain tax positions at March 31, 2007 was $16.6,
of which $16.5 would affect the effective tax rate if recognized. While we
believe we have adequately provided for all tax positions, amounts asserted by
taxing authorities could be greater than our accrued position. Accordingly,
additional provisions on federal and foreign tax-related matters could be
recorded in the future as revised estimates are made or the underlying matters
are settled or otherwise resolved. We recognize interest accrued related to
uncertain tax positions in tax expense. Penalties, if incurred, would also be
recognized as a component of tax expense. As of March 31, 2007, we had
approximately $0.5 of interest accrued related to uncertain tax positions,
which, net of the federal tax benefit, is approximately $0.3.

The following table summarizes the tax years that are either currently under
audit or remain open and subject to examination by the tax authorities in the
most significant jurisdictions in which the Company operates:

Jurisdiction Years
------------ -----

United States......... 2003-2006
Hong Kong............. 2001-2006
Italy................. 2001-2006
Germany............... 2001-2006
France................ 2003-2006

NOTE 18: SUBSEQUENT EVENT

On May 4, 2007, the Company acquired the remaining 49% interest in Paxar de
Colombia, S.A. for $ 4.7. In connection with this transaction, the Company will
recognize goodwill of approximately $3.2.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

Forward-Looking Statements

This report contains forward-looking statements as defined in Section 27A of
the Securities Act of 1933, as amended, and Section 2E of the Securities
Exchange Act of 1934, as amended. These statements may be identified by their
use of words, such as "anticipate," "estimates," "should," "expect," "guidance,"
"project," "intend," "plan," "believe" and other words and terms of similar
meaning, in connection with any discussion of our future business, results of
operations, liquidity and operating or financial performance or results. Such
forward-looking statements involve significant material known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward looking statements. These
and other important risk factors are included under the caption "Risk Factors"
beginning on page 6 of the Company's Annual Report on Form 10-K/A.

In light of the uncertainty inherent in such forward-looking statements, you
should not consider the inclusion of such forward-looking statements to be a
representation that such forward-looking events or outcomes will occur. Because
the information herein is based solely on data currently available, it is
subject to change and should not be viewed as providing any assurance regarding
our future performance. Actual results and performance may differ from our
current projections, estimates and expectations, and the differences may be
material, individually or in the aggregate, to our business, financial
condition, results of operations, liquidity or prospects. Additionally, we are

not obligated to make public indication of changes in our forward-looking
statements unless required under applicable disclosure rules and regulations.

The following discussion and analysis should be read in conjunction with
Paxar's Condensed Consolidated Financial Statements and the notes thereto that
appear elsewhere in this report. All amounts are stated in millions, except per
share data, or unless otherwise stated.

Merger Agreement with Avery Dennison

On March 22, 2007, Paxar entered into an Agreement and Plan of Merger
("Merger Agreement") among the Company, Avery Dennison Corporation ("Avery") and
Alpha Acquisition Corporate ("Sub"), a wholly-owned subsidiary of Avery,
pursuant to which it is proposed that Paxar will merge with and into the Sub,
with the Company continuing as the surviving corporation and as a wholly owned
subsidiary of Avery (the "Merger"). Pursuant to the terms of the Merger
Agreement, each share of common stock, par value $0.10, of Paxar (other than
shares owned by Avery, Sub or Paxar) will be converted into the right to receive
$30.50 in cash for a total value of approximately $1.34 billion. At the
effective time and as a result of the Merger, each outstanding option to
purchase Paxar common stock, shares of Paxar restricted stock and Paxar
performance share awards will be converted into weight-adjusted options to
purchase Avery common stock, shares of Avery restricted stock or Avery
restricted stock units, respectively. The occurrence of certain circumstances
could cause the accelerated vesting of these different securities.

The Merger has been approved by the Company's Board of Directors. If
the Merger Agreement is terminated under certain circumstances specified in the
Merger Agreement: 1) the Company may be required to pay Avery a termination fee
of $40.0, plus reasonable expenses incurred by Avery relating to the Merger
Agreement, up to an aggregate amount of $5.0, and 2) Avery may be required to
pay the Company a termination fee of $50.0.

On April 20, 2007, the Federal Trade Commission and the Antitrust Division
of the United States Department of Justice granted early termination of the
waiting period applicable to their proposed merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976. Early termination of the waiting period
concludes the U.S. government's pre-merger antitrust review of the Merger. The
transaction remains subject to Paxar shareholder approval, as well as regulatory
approvals in several other countries. The parties believe that they will receive
regulatory clearance outside the United States by the end of the second quarter.
Paxar expects to hold its shareholder meeting early this summer, and is
preparing the requisite documentation. The parties expect to complete the merger
immediately after receipt of all regulatory and shareholder approvals.

Under the Merger Agreement, the Company has agreed that, prior to the
effective time of the Merger, the Company will carry on business in the ordinary
and usual course and the Company will use commercially reasonable efforts to
preserve the Company's business organizations and maintain relations and
goodwill with customers, suppliers, distributors, agents, strategic partners,
creditors, lessors, employees and business associates. Additionally, the Company
has agreed, subject to certain exceptions, to restrictive covenants which limit
the Company's ability to perform specified activities without Avery's prior
written consent.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007, AS COMPARED
WITH THE THREE MONTHS ENDED MARCH 31, 2006

Overview

Paxar Corporation seeks to deliver growth through a concentrated emphasis on
executing its strategy as a global operating company, maintaining a continued
focus on providing customers with innovative products and solutions, outstanding
service, consistent quality, on-time delivery and competitively priced products.
Acquisitions will continue to be a fundamental element of executing these growth
initiatives. Together with continuing investments in new product development,
state-of-the-art manufacturing equipment, and innovative sales and marketing
initiatives, management believes the Company is well positioned to compete
successfully as a provider of identification solutions to the retail and apparel
industry, worldwide. The investments needed to fund this growth are generated,
in part, through corporate-wide initiatives to lower costs and increase
effective asset utilization.

Effective January 1, 2007, the Company changed its operating segments. The
Company believes that the retail and apparel environments increasingly require a
more global, product-oriented organization in order to remain competitive, and
therefore, our operations have been organized into two product-focused segments
consisting of 1) Global Apparel Solutions and 2) Global Supply Chain Solutions.

The Company's results of operations for the three months ended March 31,
2007 and 2006, in dollars and as a percent of sales, are presented below:

Three Months Ended
-------------------------------------------------------------
March 31, 2007 March 31, 2006
---------------------------- ---------------------------

Sales.......................................... $ 215.1 100.0% $ 199.6 100.0%
Cost of sales.................................. 138.5 64.3 125.4 62.8
-------- ------- -------- -------
Gross profit............................... 76.6 35.6 74.2 37.2
Selling, general and administrative expenses... 67.5 31.4 63.4 31.8
Integration/restructuring and other costs...... 1.8 0.8 3.0 1.5
Merger-related costs........................... 1.5 0.7 - -
-------- ------- -------- -------
Operating income........................... 5.8 2.7 7.8 3.9
Other income, net 0.4 0.2 0.4 0.2
Interest expense, net.......................... 0.5 0.2 1.2 0.6
-------- ------- -------- -------
Income before taxes........................ 5.7 2.7 7.0 3.5
Taxes on income................................ 1.6 0.8 1.8 0.9
-------- ------- -------- -------
Net income................................. $ 4.1 1.9% $ 5.2 2.6%
======== ======= ======== =======

For the three months ended March 31, 2007, our sales increased $15.5, or
7.8%, to $215.1, compared with $199.6 for the three months ended March 31, 2006.
The sales growth was driven by a $9.8 increase in organic sales, $3.7 related to
changes in foreign exchange rates and $2.0 as a result of acquisitions.

In order to adapt to the changing global apparel industry, the Company
announced in October 2005 that it would undertake realignment initiatives to
restructure production capacity utilization, particularly in response to the
continued migration of apparel production outside of the United States (the
"2005 Restructuring Program"). The 2005 Restructuring Program is expected to be
substantially completed during 2007. For further information, refer to
"Integration/Restructuring and Other Costs", below.

Given the continued competitive marketplace and the changing global apparel
environment, the Company anticipates that the near-term operating environment
will remain challenging. However, the savings and benefits from the 2005
Restructuring Program along with the Company's other ongoing cost-savings and
growth initiatives are anticipated to provide additional funds for investment in
support of new product development while also supporting an increased level of
profitability. The Company currently expects to realize between $13.0 and $14.0
in cost savings during 2007 and achieve an annual savings rate of at least
$20.0 by the end of 2007. These savings relate principally to salaries and
related expenses, and will be reflected primarily as a reduction in cost of
goods sold and, to a lesser extent, as a reduction in selling, general and
administrative expenses; the Company does not currently expect to redirect those
savings to spending in other areas or other income statement line items.

Sales

The following table presents sales by operating segment:

Three Months Ended
---------------------------------------
March 31, 2007 March 31, 2006
------------------- ------------------

Global Apparel Solutions......... $ 156.8 72.9% $ 141.8 71.0%
Global Supply Chain Solutions.... 58.3 27.1 57.8 29.0
-------- ------- -------- -------
Total........................ $ 215.1 100.0% $ 199.6 100.0%
======== ======= ======== =======

Global Apparel Solutions sales increased $15.0, or 10.6%, to $156.8 for the
three months ended March 31, 2007, compared with $141.8 for the three months
ended March 31, 2006. The increase was primarily attributable to organic sales
growth of $10.4, the favorable impact of changes in foreign exchange rates of
$2.6 and acquisition revenue of $2.0. The increase in organic sales is largely
due to 1) targeted key customer account initiatives where we experienced healthy
gains in heat transfer and graphic tag revenues, and 2) effective capacity
expansion in our Asia Pacific locations, where we continue to benefit from new
business expansion and the steady migration of many of the Company's customers
that have moved their production out of the U.S., U.K. and Western Europe.

Global Supply Chain Solutions sales increased $0.5, or 0.9%, to $58.3 for
the three months ended March 31, 2007, compared with $57.8 for the three months
ended March 31, 2006. The increase was entirely attributable to the favorable
impact of changes in foreign exchange rates of $1.1, partially offset by a $0.6
decrease in organic sales. The decline in organic sales was primarily
attributable to the timing of large bar code printer sales in the U.S.

Gross Profit

Gross profit was $76.6, or 35.6% of sales, for the three months ended March
31, 2007, compared with $74.2, or 37.2% of sales, for the three months ended
March 31, 2006. The lower gross profit as a percentage of sales was due
primarily to under-absorption of fixed factory overhead costs due to lower
volumes and other related production inefficiencies related to our apparel
manufacturing operations in Latin America, primarily Mexico, as well as, to a
lesser extent, certain locations in the U.S. and Western Europe. In addition,
during the quarter we experienced unfavorable changes in product mix related to
the timing of certain bar code printer sales within our Global Supply Chain
Solutions business.

Management's ongoing strategy includes implementing process improvements to
reduce costs in all of the Company's manufacturing facilities, re-deploying
assets to optimize production capacity, and expanding production in new and
emerging markets in order to minimize labor costs and maximize operating
performance efficiencies. During 2005, the Company announced that it would
undertake restructuring activities related to realigning production capacity
utilization, primarily related to its domestic locations (refer to discussion

below, "Integration/Restructuring and Other Costs"). In addition, as part of
continuing efforts to rationalize manufacturing capabilities and respond to
changing market conditions, the Company has begun to execute a separate
initiative involving the transfer of manufacturing capacity from existing
facilities in Hong Kong to a new manufacturing site in China. Production
inefficiencies resulting from start-up activities at the new site in China will
approximate $1.2 million in 2007. We expect the new facility will generate a
nominal benefit in 2008 and approximately $3.5 to $4.0 million in savings in
2009 and beyond.

Selling, General and Administrative ("SG&A") Expenses

SG&A expenses were $67.5 for the three months ended March 31, 2007, compared
with $63.4 for the three months ended March 31, 2006. As a percent of sales,
SG&A expenses were 31.4% for the three months ended March 31, 2007, compared
with 31.8% for the three months ended March 31, 2006. Ongoing migration of sales
and production from the U.S. and Western Europe to Asia Pacific, where the
Company has a more favorable cost structure, is expected to increasingly benefit
the Company's ratio of SG&A expenses to total sales.

Integration/Restructuring and Other Costs

2005 Restructuring Program
--------------------------

In October 2005, the Company announced that it would undertake realignment
initiatives to restructure production capacity utilization, particularly in
response to the continued migration of apparel production outside of the United
States (the "2005 Restructuring Program"). The plan was substantially focused on
transferring existing apparel identification manufacturing capacity from the
Company's U.S. operations primarily to facilities in Mexico, Central America and
Asia Pacific. In April 2007, in response to continued migration of apparel
production outside of Mexico, the Company determined that changes in its
manufacturing realignment plans will likely be required. The Company expects
that a significant portion of its manufacturing capacity in Mexico will be
reduced and either transferred to locations in Central America and Asia Pacific,
or outsourced to third party suppliers.

The Company is also repositioning a portion of its EMEA manufacturing
activities to lower cost facilities in Eastern Europe, as part of the 2005
Restructuring Program. In addition, the plan includes the realignment and
downsizing of the Company's design and customer service organization in legacy
U.S. and Western European markets in response to the aforementioned production
migration activities.

The 2005 Restructuring Program is expected to be substantially completed
during 2007. The 2005 Restructuring Program contemplates significant headcount
reductions in the Company's U.S. locations and, to a lesser extent, headcount
reductions in Western Europe, as well as in Mexico where the Company is now
experiencing similar production migration trends. The Company expects to incur
total pre-tax, non-recurring charges, upon completion, in the range of $25 to
$33, including approximately $5 to $8 of non-cash charges. During the three
months ended March 31, 2007 and 2006, the Company recognized charges of $1.6 and
$3.0, respectively, in connection with the 2005 Restructuring Program. These
charges were related to program management services, severance and retention
programs, asset impairment charges and other facility closure costs. Since
inception, the Company has recognized charges in the aggregate of approximately
$20.3 in connection with the 2005 Restructuring Program, of which, approximately
$16.9 represents cash costs.

Other Restructuring Initiatives
-------------------------------

Merger-related Costs

During the three months ended March 31, 2007, the Company incurred a
non-refundable investment banking fee of $1.0 related to the Merger Agreement,
as well as $0.5 of merger-related professional services fees. The Company will
owe the investment banking firm additional fees of approximately $14.4 upon
completion of the Merger.

Operating Income

Operating income was $5.8, or 2.7% of sales, for the three months ended
March 31, 2007, compared with $7.8, or 3.9% of sales, for the three months ended
March 31, 2006. The operating results for the three month periods ended March
31, 2007 and 2006 included integration/restructuring and other costs of $1.8 and
$3.0, respectively. In addition, $1.5 of merger-related costs was recorded for
the three months ended March 31, 2007. On a reportable segment basis, exclusive
of corporate expenses, operating income, as a percent of sales, was as follows:

Three Months Ended
March 31,
------------------------
2007 2006
------- -------

Global Apparel Solutions............... 4.7% 6.8%
Global Supply Chain Solutions.......... 9.9% 11.6%

Global Apparel Solutions operating income, as a percent of sales, decreased
to 4.7%, compared to 6.8% for the three months ended March 31, 2006. The
decrease primarily resulted from under-absorption of fixed factory overhead
costs and other related production inefficiencies related to our apparel
manufacturing operations in Latin America, primarily Mexico, in light of recent
migration of apparel production to Asia Pacific. In addition, under-absorption
of fixed costs resulting from continuing migration of production, in certain
apparel locations in the U.S. and Western Europe, also adversely impacted
operating income when compared to the same prior year period. The Global Apparel
Solutions segment included integration/restructuring and other costs, as a
percent of sales of 1.0% and 0.5%, respectively, for the three months ended
March 31, 2007 and 2006.

Global Supply Chain Solutions operating income, as a percent of sales,
decreased to 9.9%, compared to 11.6% for the three months ended March 31, 2006.
The decrease primarily resulted from unfavorable changes in product mix related
to the timing of shipments of certain bar code printers. In addition, the Global
Supply Chain Solutions segment included integration/restructuring and other
costs, as a percent of sales of 0.5% for the three months ended March 31, 2007.

Interest Expense, Net

Interest expense, net of interest income on invested cash, was $0.5 for the
three months ended March 31, 2007, compared with $1.2 for the three months ended
March 31, 2006. The decrease was attributable to a reduced debt position
resulting from the use of cash generated from operations and the use of proceeds
received from a patent lawsuit settlement in September of 2006. The net impact
reduced the Company's total borrowings from $110.9 at March 31, 2006 to $35.7 as
of March 31, 2007.

Taxes on Income

The effective tax rate for the three months ended March 31, 2007 and 2006
was 28.1% and 25.0%, respectively. The rate is based on management's estimates
of the geographic mix of projected annual pre-tax income and, to a lesser
extent, state and local taxes. In addition, the effective tax rate is adjusted

for certain discrete events that may arise from time to time. For the three
months ended March 31, 2007, the effective rate was adversely impacted by losses
in jurisdictions for which no tax benefit was recognized and a $0.5 net increase
in income tax reserves for uncertain tax positions. This reserve was increased,
in part, due to the different measurement criteria prescribed by FIN 48 for
certain of the Company's uncertain tax positions. The aforementioned unfavorable
items were partially offset by a $0.5 favorable tax ruling related to the
deductibility of interest expense, based on certain criteria, in a foreign
jurisdiction. Regarding all of the foregoing, 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:

Three Months Ended
March 31,
--------------------
2007 2006
--------- ---------
Net cash provided by operating activities............. $ 10.5 $ 0.3
Net cash used in investing activities................. (10.6) (10.1)
Net cash (used in)/provided by financing activities... (5.7) 13.5
--------- ---------
(Decrease)/increase in cash and cash equivalents(a)... $ (5.8) $ 3.7
========= =========

(a) Before the effect of exchange rate changes on cash flows.

Overview

Cash provided by operating activities has been the Company's primary source
of funds to finance operating needs and growth opportunities. In November 2005,
the Company entered into a five-year, $150 multi-currency Revolving Credit
Agreement (the "Credit Agreement") with a group of five domestic and three
international banks. The Company may increase the credit facility up to $250,
subject to providing the participating banks adequate advance notice and
securing their approval. Net cash provided by operating activities was $10.5 for
the three months ended March 31, 2007, compared with $0.3 for the three months
ended March 31, 2006. The increase in net cash provided by operating activities
for the three months ended March 31, 2007 was primarily attributable to more
effective inventory management and cash generated from collection of accounts
receivable. Management believes that the Company will continue to generate
sufficient cash from its operating activities for the foreseeable future,
supplemented by availability under the 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.

Operating Activities

In connection with the 2005 Restructuring Program, the Company expects to
incur total pre-tax, non-recurring charges, once all phases are implemented, in
the range of $25 to $33, which includes approximately $5 to $8 of non-cash
charges. During the three months ended March 31, 2007 and 2006, the Company
recognized charges of $1.6 and $3.0, respectively in connection with the 2005
Restructuring Program. Since inception, the Company has recorded charges
aggregating approximately $20.3 in connection with the 2005 Restructuring
Program. The Company currently expects to realize between $13 and $14 in cost
savings during 2007 and achieve an annual savings rate of at least $20.0 by the
end of 2007 in connection with its restructuring initiatives. These savings
relate principally to salaries and related expenses, and will be reflected
primarily as a reduction in cost of goods sold and, to a lesser extent, as a
reduction in selling, general and administrative expenses; the Company currently
does not expect to redirect those savings to spending in other areas or other
income statement line items.

Investing Activities

For the three months ended March 31, 2007 and 2006, the Company incurred
$10.6 and $6.9, respectively, of capital expenditures to acquire production
machinery, expand capacity and continue with its growth and expansion of Company
operations in the emerging markets of Latin America, EMEA and Asia Pacific.
Capital expenditures are typically funded by cash provided by operating
activities and, where necessary, availability under the Credit Agreement. In
March 2006, the Company acquired the business and assets of Adhipress S.A., a
supplier of price tickets and merchandising tags to French hypermarkets for
$3.3.

Financing Activities

The components of total capital as of March 31, 2007 and December 31, 2006,
respectively, are presented below:

March 31, December 31,
2007 2006
----------- -----------

Due to banks............................. $ 1.4 $ 1.3
Current maturities of long-term debt..... 8.0 8.0
Long-term debt........................... 26.3 35.4
----------- -----------

Total debt........................... 35.7 44.7
Shareholders' equity..................... 550.2 544.5
----------- -----------

Total capital........................ $ 585.9 $ 589.2
=========== ===========

Total debt as a percent of total capital. 6.1% 7.6%
=========== ===========

Management believes that the borrowings available under the Company's Credit
Agreement provide sufficient liquidity to supplement the Company's operating
cash flow. For the three months ended March 31, 2007, net repayments of the
Company's outstanding debt was $8.8. For the three months ended March 31, 2006,
net borrowings of the Company's outstanding debt was $10.0.

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 three months ended March 31, 2007 and 2006, the Company received
proceeds of $3.1 and $3.5, respectively, from the sale of common stock issued
under its employee stock option and stock purchase plans.

Financing Arrangement - Credit Agreement

In November 2005, the Company replaced its existing three-year $50 revolving
credit facility with a $150 Credit Agreement with a group of five domestic and
three international banks. Under the Credit Agreement, the Company pays a
facility fee determined by the ratio of debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA"). Borrowings under the Credit Agreement
bear interest at the prime rate, negotiated rates, rates referenced to the
London Interbank Offered Rate ("LIBOR") or Euro LIBOR, at the Company's option,
with applicable margins varying in accordance with the attainment of specified
debt to EBITDA thresholds and are guaranteed by certain of its domestic
subsidiaries. The Company may increase the credit facility up to a maximum of
$250, subject to providing the participating banks adequate advance notice and
securing their approval. At March 31, 2007 and 2006, the interest rate on
outstanding borrowings under this Credit Agreement had a weighted average
interest rate of 4.63% and 4.75%, respectively.

The Credit Agreement requires the Company to maintain an excess of
consolidated total assets over total liabilities of not less than the sum of
$350 plus 35% of cumulative consolidated net income from October 1, 2005. Our
maximum allowable debt to EBITDA ratio, as defined, is 3.0 to 1 and minimum
allowable fixed charge coverage ratio, as defined, is 1.5 to 1. 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. Under the Credit Agreement, we cannot pay in excess of $50.0 in
cash dividends during any 12-month period, and cannot pay in excess of $100.0 in
cash dividends over its five-year term.

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.

At times, the Company 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 following table summarizes as of March 31, 2007, 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)
---------------- ----------------- ----------------

Contract to receive US$/pay British pounds ("GBP")......... US$ 751 GBP 401 $ 37
Contracts to receive GBP/pay EUR........................... GBP 253 US$ 498 $ 1
Contracts to receive EUR/pay US$........................... EUR 336 US$ 437 $ 12

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 a minimal impact 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, branded apparel companies and
contract 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 months ended March 31, 2007 and 2006.

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. 104 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. 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.

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, which are both 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. For
the three months ended March 31, 2007 and 2006, the provision for sales returns
and allowances accounted for as a reduction to gross sales was not material.

Allowance for Doubtful Accounts

Management makes judgments, based on established aging policy, historical
experience and future expectations, as to the collectibility of the Company's
accounts receivable, and establishes an allowance for doubtful accounts. The
allowance for doubtful accounts is used to reduce gross trade receivables to
their estimated net realizable value. When evaluating the adequacy of the
allowance for doubtful accounts, management reviews 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 $143.0, net of

allowances of $12.5, at March 31, 2007, and $146.4, net of allowances of $12.3,
at December 31, 2006.

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 $9.5 and $9.7 as
of March 31, 2007 and December 31, 2006, respectively. The value of all other
inventories determined using the first-in, first-out method was $112.6 and
$109.8 as of March 31, 2007 and December 31, 2006, respectively.

On an ongoing basis, the Company evaluates the composition of its
inventories and the adequacy of its allowance for slow-turning and obsolete
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 2006, 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, 2006, 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. Asset impairment analysis related to certain fixed assets in
connection with the Company's restructuring initiatives requires management's
best estimate of net realizable value, which includes an assessment of asset
life and pricing trends impacting those assets and, where appropriate, quoted
market prices. Management's analysis is, in part, sensitive to our estimates of
salvage value for certain assets as well as the continuing relevance of quoted
market prices of assets and other factors of fair value. Changes in management's
estimates could impact the amount of our impairment charges, as well as
depreciation expense recorded on certain assets. There were no significant
impairment charges related to long-lived assets for the three months ended March
31, 2007 and 2006.

Investments

The Company regularly evaluates the carrying value of its investments. When
assessing investment securities for other-than-temporary declines in value, the
Company considers such factors as, among other things, the financial condition
of the investee, competitive factors, the outlook for the overall industry in

which the investee operates and new products that the investee may have
forthcoming that will improve its operating results. When the carrying value of
an investment exceeds the fair value and the decline in fair value is deemed to
be other-than-temporary, the Company reduces the carrying value of the
investment to fair value. During 2006, the Company recorded $5.0 of an
other-than-temporary reduction in fair value of the Company's investment in
International Imaging Materials, Inc. ("IIMAK"). Should the fair value of the
Company's investment continue to decline in future periods, the Company may be
required to record additional charges if the decline is determined to be
other-than-temporary.

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,
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.
In July 2006, the FASB issued Interpretation 48, Accounting for Uncertainty in
Income Taxes ("FIN 48"), which became effective for the Company beginning in
2007. FIN 48 addressed the determination of how tax benefits claimed or expected
to be claimed on a tax return should be recorded in the financial statements.
Under FIN 48, the Company must recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate
resolution. As a result of the implementation of FIN 48, the Company recognized
a $6.3 increase in the liability for uncertain tax positions, which, under the
transition rules, was accounted for as a reduction to retained earnings.

Deferred taxes are not provided on the portion of undistributed earnings of
non-U.S. 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-U.S. subsidiaries, circumstances change in
future periods, or there is a change in accounting principles generally accepted
in the United States, the Company may need to establish an additional income tax
provision for the U.S. and other taxes arising from repatriation, which could
materially impact its results of operations.

Foreign Currency Translation

As of March 31, 2007 and December 31, 2006, accumulated other comprehensive
income primarily consisted of cumulative foreign currency translation
adjustments. The net assets of the Company's foreign operations are translated
into U.S dollars using the exchange rates at each balance sheet date. Results of
operations are translated using the average exchange rate prevailing throughout
the period. The U.S. dollar results that arise from such translations are
included in cumulative currency translation adjustments in accumulated other
comprehensive income. At March 31, 2007 and December 31, 2006, the cumulative
foreign translation adjustment was $27.4 and $24.3, respectively. Income taxes
are generally not provided for these translation adjustments since the Company
considers undistributed earnings of foreign subsidiaries to be permanently
invested. Gains and losses resulting from foreign currency transactions are
included in net income and were not material for the three months ending March
31, 2007.

Stock-Based Compensation

Effective January 1, 2006, we adopted Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" (SFAS 123R), which replaces SFAS 123,
"Accounting for Stock-Based Compensation", by eliminating the choice to account
for employee stock options under Accounting Principle Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). SFAS 123R requires that
new, modified and unvested share-based awards to employees, such as stock
options and restricted stock, be recognized in the financial statements based on
the estimated fair value of such awards at date of grant and recognized as
compensation expense over the vesting period. The fair value of each option
award is estimated using the Black-Scholes option pricing model taking into
account certain key assumptions. The primary assumptions that we considered when
determining the fair value of each option award included:

o the expected term of awards granted,
o the expected volatility of our stock price,
o the risk-free interest rate applied, and
o an estimate for expected forfeitures.

The expected term of awards granted is based upon the historical exercise
patterns of the participants in our plans, and expected volatility is based on
the historical volatility of our stock, commensurate with the expected term of
the respective awards. The risk-free rate for the expected term of the awards is
based on the U.S. Treasury yield curve in effect at the time of grant. In
addition, we estimate forfeitures when recognizing compensation expense and
adjust estimated forfeitures over the requisite service period to the extent
actual forfeitures differ, or are expected to differ, from such estimates.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

The information required by this Item is set forth under the heading "Market
Risk" in Management's Discussion and Analysis of Financial Condition and Results
of Operations, above, which information is hereby incorporated by reference.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures. The Company, under the supervision and
with the participation of the Company's management, including its Chief
Executive Officer and Chief Financial Officer, conducted an assessment 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"). The Company's Chief Executive Officer and Chief 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 Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting. There have not been any changes
in the Company's internal control over financial reporting identified in
connection with the assessment that occurred during the first quarter of 2007,
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.

PART II OTHER INFORMATION

Item 6. Exhibits.

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 Chief 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 Chief Financial Officer required by
Rule 13a-14(b) or 18 U.S.C. 1350.

SIGNATURES

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/ Anthony S. Colatrella
-------------------------------
Vice President and Chief Financial Officer

May 10 , 2007
--------------------------------
Date