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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 MARCH 31, 2002
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 0-5610
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PAXAR CORPORATION
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(Exact name of registrant as specified in its charter)
NEW YORK 13-5670050
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 CORPORATE PARK DRIVE, WHITE PLAINS, N.Y. 10604
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(Address of principal executive offices)
914-697-6800
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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.
Yes x 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. (May 9, 2002)
Common Stock, $0.10 par value: 39,719,674 shares
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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
and footnote 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 condensed
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, 2001.
In the opinion of the Company, all adjustments, consisting only of normal
recurring accruals and adjustments necessary to present fairly the financial
information contained herein, have been included.
2
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------
2002 2001
------ ------
Sales.................................................. $152.7 $155.3
Cost of sales.......................................... 93.5 96.5
------ ------
Gross profit...................................... 59.2 58.8
Selling, general and administrative expenses........... 46.6 44.9
Amortization of goodwill............................... -- 1.5
------ ------
Operating income.................................. 12.6 12.4
Interest expense, net.................................. 2.5 2.4
------ ------
Income before taxes............................... 10.1 10.0
Taxes on income........................................ 2.6 2.8
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Net income........................................ $ 7.5 $ 7.2
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Basic earnings per common share........................ $ 0.19 $ 0.17
====== ======
Diluted earnings per common share...................... $ 0.19 $ 0.17
====== ======
Average common shares outstanding:
Basic................................................ 39.2 42.1
Diluted.............................................. 40.2 42.6
The accompanying notes are an integral part of the financial statements.
3
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2002 2001
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 35.6 $ 35.1
Accounts receivable, less allowances of $8.2 and $9.3 at
March 31, 2002 and December 31, 2001, respectively.............. 102.3 100.9
Inventories, net................................................... 79.2 77.7
Deferred income taxes.............................................. 6.3 9.2
Other current assets............................................... 14.2 11.4
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Total current assets..................................... 237.6 234.3
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Property, plant and equipment, net................................. 149.3 145.2
Goodwill, net...................................................... 187.4 181.7
Other assets....................................................... 22.4 22.6
------ ------
Total assets....................................................... $596.7 $583.8
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to banks....................................................... $ 1.4 $ 0.4
Current maturities of long-term debt............................... 0.4 0.1
Accounts payable and accrued liabilities........................... 82.3 90.0
Accrued taxes on income............................................ 14.5 11.6
------ ------
Total current liabilities................................ 98.6 102.1
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Long-term debt..................................................... 174.9 165.9
Deferred income taxes.............................................. 9.6 12.7
Other liabilities.................................................. 16.7 17.0
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized,
none issued and outstanding..................................... -- --
Common stock, $0.10 par value, 200,000,000 shares authorized,
39,575,957 and 38,929,163 shares issued and outstanding at
March 31, 2002 and December 31, 2001, respectively.............. 4.0 3.9
Paid-in capital.................................................... 17.0 11.7
Retained earnings.................................................. 298.1 290.6
Accumulated other comprehensive loss............................... (22.2) (20.1)
------ ------
Total shareholders' equity............................... 296.9 286.1
------ ------
Total liabilities and shareholders' equity......................... $596.7 $583.8
====== ======
The accompanying notes are an integral part of the financial statements.
4
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
2002 2001
OPERATING ACTIVITIES
Net income.................................................... $ 7.5 $ 7.2
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.............................. 6.4 9.7
Deferred income taxes...................................... -- (0.1)
Write-off of property, plant and equipment................. 0.2 --
Changes in assets and liabilities, net of businesses acquired:
Accounts receivable........................................ (1.4) 3.4
Inventories................................................ (1.5) 3.5
Other current assets....................................... (2.8) (10.0)
Accounts payable and accrued liabilities................... (5.9) (11.4)
Accrued taxes on income.................................... 2.9 1.5
Other, net................................................. (2.1) (0.8)
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Net cash provided by operating activities.................. 3.3 3.0
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INVESTING ACTIVITIES
Purchases of property, plant and equipment.................... (3.5) (4.8)
Purchase of business, net of cash acquired.................... (18.0) --
Divestiture................................................... -- 1.3
Other, net.................................................... 2.6 2.6
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Net cash used in investing activities...................... (18.9) (0.9)
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FINANCING ACTIVITIES
Net increase in short-term debt............................... 0.9 0.3
Additions to long-term debt................................... 27.5 --
Reductions in long-term debt.................................. (18.1) (0.5)
Exercise of stock options/stock purchase plan................. 5.4 1.1
------ ------
Net cash provided by financing activities.................. 15.7 0.9
------ ------
Effect of exchange rate changes on cash........................ 0.4 (0.6)
------ ------
Increase in cash and cash equivalents...................... 0.5 2.4
Cash and cash equivalents at beginning of year................. 35.1 44.3
------ ------
Cash and cash equivalents at end of period..................... $ 35.6 $ 46.7
====== ======
The accompanying notes are an integral part of the financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: GENERAL
The accounting policies followed during interim periods are in conformity
with accounting principles generally accepted in the United States and are
consistent with those applied for annual periods as described in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
Reclassifications:
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, the Financial Accounting Standards Board ("FASB")
promulgated two new statements, Statement of Financial Accounting Standards
("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 under the purchase method of accounting, eliminates the use of the
pooling-of-interests method and requires that the purchase method be used for
business combinations initiated after June 30, 2001. SFAS No. 141 also expands
the definition of intangible assets acquired in a purchase transaction. As a
result, the purchase price allocation of future business combinations may be
different from the allocation that would have resulted under the old rules.
SFAS No. 142 stipulates that goodwill and certain intangible assets will no
longer be amortized, but must be reviewed for impairment at least annually.
Under SFAS No. 142, goodwill acquired in a business combination completed after
June 30, 2001 will not be amortized. The amortization of goodwill for the three
months ended March 31, 2001 was $1.5 and would have been approximately the same
amount for the three months ended March 31, 2002. The initial impairment
assessment is required to be completed by no more than six months after the date
of adoption. The Company expects to complete its initial impairment assessment
of goodwill before the end of the second quarter of 2002. The amortization of
goodwill for previous acquisitions ceased upon the Company's adoption of SFAS
No. 142 on January 1, 2002.
The following table presents a reconciliation of reported net income and
earnings per share to adjusted net income and earnings per share had SFAS No.
142 been in effect for 2001:
Three Months Ended
March 31, 2001
------------------
Reported net income......................................... $ 7.2
Add back: Amortization of goodwill, net of income taxes..... 1.3
-----
Adjusted net income......................................... $ 8.5
=====
Reported earnings per share (basic)......................... $0.17
Add back: Amortization of goodwill, net of income taxes..... 0.03
-----
Adjusted earnings per share (basic)......................... $0.20
=====
Reported earnings per share (diluted)....................... $0.17
Add back: Amortization of goodwill, net of income taxes..... 0.03
-----
Adjusted earnings per share (diluted)....................... $0.20
=====
6
The changes in the carrying amounts of goodwill for the three months ended
March 31, 2002 are as follows:
Beginning Balance Goodwill Foreign Currency Ending Balance
January 1, 2002 Acquired Translation Adjustments March 31, 2002
----------------- -------- ----------------------- ---------------
North America........ $ 89.1 $6.3 $ -- $ 95.4
Europe............... 67.6 -- (0.6) 67.0
Asia Pacific......... 25.0 -- -- 25.0
------ ---- ----- ------
Total........... $181.7 $6.3 $(0.6) $187.4
====== ==== ===== ======
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. The provisions of SFAS No. 143 are effective for fiscal years
beginning after June 15, 2002. The Company will adopt SFAS No. 143 beginning in
the first quarter of 2003. The Company believes that the adoption of SFAS No.
143 will not have a material impact on its results of operations or financial
position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The primary objectives of SFAS No. 144 were to
develop one accounting model based on the framework established in SFAS No. 121,
and to address significant implementation issues. The provisions of SFAS No. 144
are effective for fiscal years beginning after December 15, 2001. The Company
has adopted SFAS No. 144 in the first quarter of 2002 and determined that it
will not have a material impact on its results of operations or financial
position.
NOTE 3: FINANCIAL INSTRUMENTS
The Company adopted the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, and
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," on January 1, 2001. These statements outline the accounting
treatment for all derivative instruments and hedging 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, if it is, the 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 cumulative effects of adopting these standards on net
income and other comprehensive loss were not material to net income and other
comprehensive loss for the three months ended March 31, 2002 and shareholders'
equity at January 1, 2002.
The Company manages a foreign currency hedging program intended to reduce
the Company's risk in foreign currency-denominated transactions by entering into
forward foreign exchange contracts.
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 March
31, 2002 and January 1, 2002 for delivery of various currencies at various
future dates and the changes in fair value recorded in income during the three
months ended March 31, 2002 were not material.
All financial instruments of the Company with the exception of hedge
instruments are carried at cost, which approximates fair value.
7
NOTE 4: INVENTORIES, NET
Inventories are stated at lower of cost or market. The value of net
inventories determined using the last-in, first-out method was $14.6 and $13.9
as of March 31, 2002 and December 31, 2001, respectively. The value of all other
net inventories determined using the first-in, first-out method was $64.6 and
$63.8 as of March 31, 2002 and December 31, 2001, respectively.
The components of net inventories are set forth below:
March 31, December 31,
2002 2001
---------- ------------
Raw materials.......................................... $ 34.7 $ 36.6
Work-in-process........................................ 7.8 8.2
Finished goods......................................... 36.7 32.9
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$ 79.2 $ 77.7
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NOTE 5: LONG-TERM DEBT
A summary of long-term debt is set forth below:
March 31, December 31,
2002 2001
---------- ------------
6.74% Senior Notes..................................... $150.0 $150.0
Economic Development Revenue Bonds due 2011 and 2019... 13.0 13.0
Other.................................................. 12.3 3.0
------ ------
175.3 166.0
Less current maturities................................ 0.4 0.1
------ ------
$174.9 $165.9
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NOTE 6: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
A summary of accounts payable and accrued liabilities is set forth below:
March 31, December 31,
2002 2001
---------- ------------
Accounts payable....................................... $ 36.4 $ 36.3
Accrued payroll costs.................................. 16.6 17.7
Other accrued liabilities.............................. 29.3 36.0
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$ 82.3 $ 90.0
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NOTE 7: SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid (received) for interest and income taxes is set forth below:
Three Months Ended
March 31,
-------------------
2002 2001
------ ------
Interest, net.......................................... $ 5.2 $ 4.9
====== ======
Income taxes, net...................................... $ (0.9) $ 0.6
====== ======
8
NOTE 8: COMPREHENSIVE INCOME
Comprehensive income reflects changes in equity that result from
transactions and economic events from non-owner sources. 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
March 31,
------------------
2002 2001
------ ------
Net income............................................. $ 7.5 $ 7.2
Foreign currency translation adjustments............... (2.1) (4.7)
------ ------
Comprehensive income................................... $ 5.4 $ 2.5
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NOTE 9: EARNINGS PER COMMON SHARE
The reconciliation of basic and diluted share computation is as follows:
Three Months Ended
March 31,
-------------------
2002 2001
------ ------
Average common shares (basic).......................... 39.2 42.1
Options and warrants................................... 1.0 0.5
------ ------
Adjusted average common shares (diluted)............... 40.2 42.6
====== ======
NOTE 10: SEGMENT INFORMATION
The Company develops, manufactures and markets bar code systems, apparel
systems, fabric labels, graphic tags, and identification and pricing solutions
products to customers primarily in the retail and apparel manufacturing
industries. In addition, the sales of the Company's products usually result in
the ongoing sale of supplies, replacement parts and services. The Company's
printers and labelers are sold worldwide through a direct sales force, through
non-exclusive manufacturers' representatives in the US and through international
and export distributors and commission agents in Europe, the Asia Pacific and
Latin America.
The Company's operations have been classified into three geographic
segments consisting of North America (including the US, Canada and Latin
America), Asia Pacific and Europe. 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 and chief financial officer to make decisions
about resources to be allocated to each geographic segment and assess its
performance. Information regarding the operations of the Company in different
geographic segments is set forth below.
Three Months Ended
March 31,
-------------------
2002 2001
------ ------
Sales to unaffiliated customers:
North America.......................................... $ 80.5 $ 85.3
Europe................................................. 40.2 42.7
Asia Pacific........................................... 32.0 27.3
------ ------
Total........................................ $152.7 $155.3
====== ======
Intersegment sales:
North America.......................................... $ 15.3 $ 13.0
Europe................................................. 10.4 8.7
Asia Pacific........................................... 2.1 1.0
Eliminations........................................... (27.8) (22.7)
------ ------
Total........................................ $ -- $ --
====== ======
9
Three Months Ended
March 31,
-------------------
2002 2001
------ ------
Operating income:
North America.......................................... $ 6.1 $ 8.6
Europe................................................. 3.6 3.1
Asia Pacific........................................... 6.6 5.3
------ ------
16.3 17.0
Corporate expenses..................................... (3.7) (3.1)
Amortization of goodwill............................... -- (1.5)
------ ------
Total........................................ $ 12.6 $ 12.4
====== ======
Depreciation and amortization:
North America.......................................... $ 3.6 $ 6.2
Europe................................................. 1.8 2.1
Asia Pacific........................................... 0.8 1.2
------ ------
6.2 9.5
Corporate.............................................. 0.2 0.2
------ ------
Total........................................ $ 6.4 $ 9.7
====== ======
Long-lived assets:
North America.......................................... $182.1 $178.5
Europe................................................. 103.9 100.0
Asia Pacific........................................... 43.1 45.7
------ ------
329.1 324.2
Corporate.............................................. 7.6 3.7
------ ------
Total........................................ $336.7 $327.9
====== ======
Total assets:
North America.......................................... $234.8 $213.1
Europe................................................. 189.1 187.9
Asia Pacific........................................... 85.8 90.8
------ ------
509.7 491.8
Corporate.............................................. 87.0 108.2
------ ------
Total........................................ $596.7 $600.0
====== ======
Capital expenditures:
North America.......................................... $ 1.3 $ 2.2
Europe................................................. 1.5 1.9
Asia Pacific........................................... 0.6 0.5
------ ------
3.4 4.6
Corporate.............................................. 0.1 0.2
------ ------
Total........................................ $ 3.5 $ 4.8
====== ======
NOTE 11: RESTRUCTURING AND OTHER SPECIAL CHARGES
During 2001, the Company implemented specific initiatives to enhance
revenue growth, increase capital efficiency and lower operating costs. As a
result, the Company recorded a pre-tax charge of $13.3 relating to
integration/restructuring and other costs. Of this amount, $11.9 pertained to:
(1) integration of certain manufacturing facilities and the consolidation of
production sites as the Company closed and sold two manufacturing locations in
North America and rationalized operations in the UK, Italy and Spain; (2)
strategic unification of the sales and marketing organization and a global
organizational reshaping, which resulted in severance for 125 managerial and
administrative personnel and 350 manufacturing positions in the US, Canada, Hong
Kong, the UK, Italy and Turkey; (3) establishment of the Asia Pacific as the
Company's third major geographic business region; and (4) creation of a global
business management group to support the three geographic business regions. In
addition, the Company disposed of certain property, plant and equipment in
connection with its strategic initiatives and recorded a net write-off of $1.4.
10
As of January 1, 2002, the Company had total unpaid severance of $3.3
recorded in connection with aforementioned strategic initiatives. The following
table presents severance payments and the remaining balance of the severance
accrual as of March 31, 2002.
Beginning Balance Ending Balance
January 1, 2002 Payments March 31, 2002
----------------- -------- ---------------
Severance............... $3.3 $1.1 $2.2
11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002
All amounts in the following discussion are stated in millions.
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. There can be no
assurance that actual results will not differ from those estimates.
REVENUE RECOGNITION
The Securities and Exchange Commission issued Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements," in December
1999. The Company adopted SAB No. 101, as amended, in the fourth quarter of
2000. SAB No. 101 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 and 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 any reporting period could be adversely affected.
SALES RETURNS AND ALLOWANCES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Management must make estimates of potential future product returns related
to current period product revenues. Management analyzes historical returns,
current economic trends, and changes in customer demand and acceptance of the
Company's products when evaluating the adequacy of the sales returns and
allowances. Significant management judgments and estimates must be made and used
in connection with establishing the sales returns and allowances in any
accounting period. Material differences could result in the amount and timing of
the Company's revenue for any period if management had made different judgments
or utilized different estimates. Similarly, management must make estimates of
the uncollectibility of the Company's accounts receivable. Management
specifically analyzes accounts receivable, historical bad debt, customer
concentrations, customer creditworthiness, current trends and changes in the
Company's customer payment terms when evaluating the adequacy of the allowance
for doubtful accounts. The Company's accounts receivable balance at March 31,
2002 was $102.3, net of sales returns and allowances of $1.2 and allowance for
doubtful accounts of $7.0.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL
Management assesses the impairment of long-lived assets, identifiable
intangibles and related goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors management
considers important which could trigger an impairment include the following: (1)
significant under-performance relative to expected 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.
If management determines that the carrying value of long-lived assets and
intangibles and related goodwill may not be recoverable based on the existence
of one or more of the above indicators of impairment, management assesses the
existence of an impairment by comparing the carrying value of the underlying
assets with the estimated undiscounted future operating cash flows. If such
impairment is found to exist, management measures it based on a
12
projected discounted cash flow method using a discount rate determined by
management to be commensurate with the risk inherent in the Company's current
business model. Long-lived assets, net intangible assets and goodwill amounted
to $336.7 as of March 31, 2002.
On January 1, 2002, Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," became effective, and as a
result, the Company ceased to amortize goodwill. The amortization of goodwill
the Company recorded for the three months ended March 31, 2001 was $1.5 and
would have been approximately the same amount for the three months ended March
31, 2002. The Company is required to complete an initial impairment assessment
of its goodwill by no more than six months after the adoption of SFAS No. 142
and perform an annual impairment review thereafter. Management will complete the
initial impairment assessment of goodwill before the end of the second quarter
of 2002. At present, the Company is unable to determine whether a material
charge will be recorded when the impairment assessment is completed. In 2002,
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
also became effective and it provides further implementation guidance relative
to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The Company adopted SFAS No. 144 in the
first quarter of 2002 and determined that SFAS No. 144 will not have a material
adverse impact on its results of operations or financial position.
RESULTS OF OPERATIONS
OVERVIEW
In order to better serve a customer base consisting of retailers and
apparel manufacturers, the Company during the second half of 2001 completed a
strategic realignment of its core businesses into three geographic segments
consisting of the North America, Europe, and Asia Pacific regions. The
cornerstone of this initiative involved combining and unifying the previously
separate Apparel Identification (labels and tags) and Labeling Solutions (bar
code and price marking systems) business segments under a single sales and
marketing organization. Structurally, the Company is now aligned in a geographic
orientation across all product lines representing a significant change from the
former single product, single region view. Management initiated this effort in
direct response to a number of major forces impacting the Company's customer
base including: (1) globalization, as manufacturers continue to migrate
production outside the US and Europe and require greater product consistency and
systems coordination; (2) global retail consolidation and the strengthening of
private label retail brands; and (3) complexity fueled by a lengthening supply
chain and the need to increase the speed to market. The Company believes that
managing the business in a consistent manner across three geographic regions and
presenting a single face globally make it easier for customers to conduct
business with the Company. The Company also believes that by doing so, it
responds directly to the needs of its customers, provides them with the products
and services that are consistent in quality, look and feel, and enhances the
Company's value proposition to both its current and prospective customers.
The Company's results of operations in dollars and as a percent of sales
are presented below:
Three Months Ended
--------------------------------------
March 31, 2002 March 31, 2001
--------------- ----------------
Sales............................................. $152.7 100.0% $155.3 100.0%
Cost of sales..................................... 93.5 61.2 96.5 62.1
------ ----- ------ -----
Gross profit.................................. 59.2 38.8 58.8 37.9
Selling, general and administrative expenses...... 46.6 30.5 44.9 28.9
Amortization of goodwill.......................... -- -- 1.5 1.0
------ ----- ------ -----
Operating income.............................. 12.6 8.3 12.4 8.0
Interest expense, net............................. 2.5 1.7 2.4 1.6
------ ----- ------ -----
Income before taxes............................... 10.1 6.6 10.0 6.4
Taxes on income................................... 2.6 1.7 2.8 1.8
------ ----- ------ -----
Net income.................................... $ 7.5 4.9% $ 7.2 4.6%
====== ===== ====== =====
13
The Company's sales decreased 1.7% to $152.7 for the three months ended
March 31, 2002 from $155.3 for the three months ended March 31, 2001. Management
attributes the sales decline to the changes in foreign exchange rates as both
the Euro and the British pound had lower values relative to the US dollar in
2002 as compared to 2001. In addition, management believes that the customers
placed fewer orders as they attempted to manage their inventories in response to
weakness in their markets. Despite the decline in sales, the Company's gross
profit margin increased to 38.8% for the three months ended March 31, 2002 from
37.9% for the three months ended March 31, 2001 as major restructuring
initiatives implemented in 2001 began to drive productivity and operating
efficiencies throughout the Company's manufacturing operations. Management
believes that the Company will continue to realize improvements in productivity
and operating efficiencies.
Operating income was $12.6 for the three months ended March 31, 2002
compared to $12.4 for the three months ended March 31, 2001. As a percent of
sales, operating income was 8.3% for the three months ended March 31, 2002 and
8.0% for the three months ended March 31, 2001. Had SFAS No. 142, which
stipulates that goodwill and certain intangible assets will no longer be
amortized to earnings, become effective on January 1, 2001, operating income for
the three months ended March 31, 2001 would have been $13.9 or 9.0% of sales.
Management believes that acquisitions will continue to be a fundamental
element of the Company's growth. During the first quarter of 2002, the Company
acquired the business and manufacturing assets of Disenos De Coleccion, a
leading manufacturer of merchandising labels and tags for Mexican retailers and
apparel manufacturers.
SALES
The following table shows sales by geographic operating segment:
Three Months Ended
--------------------------------------
March 31, 2002 March 31, 2001
--------------- ----------------
Sales to unaffiliated customers:
North America..................................... $ 80.5 52.7% $ 85.3 54.9%
Europe............................................ 40.2 26.3 42.7 27.5
Asia Pacific...................................... 32.0 21.0 27.3 17.6
------ ----- ------ -----
Total......................................... $152.7 100.0% $155.3 100.0%
====== ===== ====== =====
North America sales include sales delivered through Company operations in
the US, Canada and Latin America. Sales declined $4.8 or 5.6% to $80.5 for the
three months ended March 31, 2002 compared to $85.3 for the three months ended
March 31, 2001. Management attributes the sales decline to challenging economic
and retail conditions that resulted in fewer orders and smaller average
transaction size and generally reduced customer demand for the entire range of
the Company's products. Management also points to a sales migration trend that
continued into 2002 despite the global reach of the recession. The Company's
customers have steadily moved their production outside the US where they have
realized labor cost efficiencies. In order to remain competitive in a rapidly
changing global business environment, the Company has aggressively expanded its
operations to wherever its major customers are located. This has resulted in a
shift in sales mix primarily to the Company's Asia Pacific region. The sales
decline in 2002 was offset somewhat by $3.5 of sales generated by two companies
acquired during the second half of 2001.
Europe's sales include sales delivered through Company operations in eight
countries. Sales declined $2.5 or 5.9% to $40.2 for the three months ended March
31, 2002 compared to $42.7 for the three months ended March 31, 2001. Management
attributes the sales decline to the changes in foreign exchange rates as both
the Euro and the British pound had lower values relative to the US dollar in
2002 as compared to 2001. In addition, management notes that Europe was
similarly impacted by the global recession that continued into 2002. Moreover,
the Company experienced intra-continent sales migration to emerging markets such
as Turkey, as well as to the Asia Pacific region, as manufacturers sought to
maximize labor cost efficiencies. The sales decline in 2002 was partially offset
by $1.8 of sales related to an acquisition made in late-2001.
14
The Asia Pacific region consists of the Company's operations in Hong Kong,
China, Singapore, Sri Lanka, and Australia. Sales in the region increased 17.2%
to $32.0 for the three months ended March 31, 2002 compared to $27.3 for the
three months ended March 31, 2001. This region has benefited significantly from
the steady and continued migration of the Company's customers who have moved
their production outside the US and Europe to take advantage of low labor costs.
The sales increase of $4.7 consisted of sales increase of $3.2 in Hong Kong,
China and Sri Lanka and $1.5 of sales related to an acquisition made in
September 2001.
GROSS PROFIT
Gross profit, as a percent of sales, increased to 38.8% for the three
months ended March 31, 2002 from 37.9% for the three months ended March 31, 2001
as major restructuring initiatives implemented in 2001 began to drive
productivity and operating efficiencies throughout the Company's manufacturing
operations. Management's ongoing strategy includes implementing process
improvements to reduce costs in all of its manufacturing facilities, efficiently
re-deploying assets to manage production capacity and transferring production to
new and emerging markets in which the Company's major customers are located in
order to maximize labor cost efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
SG&A, as a percent of sales, was 30.5% for the three months ended March 31,
2002 from 28.9% for the three months ended March 31, 2001. The increase in SG&A
is attributed to incremental staffing and other fixed costs necessary to support
the Company's global expansion, a loss of leverage due to sales decline, and
certain incremental expenses associated with the Company's re-branding
initiatives and prior acquisitions. Management's ongoing objective is to control
absolute SG&A dollars and further reduce the ratio of SG&A to sales by
leveraging sales growth against the Company's fixed expense base.
OPERATING INCOME
Operating income was $12.6 for the three months ended March 31, 2002
compared to $12.4 for the three months ended March 31, 2001. As a percent of
sales, operating income was 8.3% for the three months ended March 31, 2002 and
8.0% for the three months ended March 31, 2001. On a reportable operating
segment basis, exclusive of certain corporate allocations, operating income, as
a percent of sales, was as follows: North America was 7.6% and 10.1% for the
three months ended March 31, 2002 and 2001, respectively; Europe was 9.0% and
7.3% for the three months ended March 31, 2002 and 2001, respectively; and Asia
Pacific was 20.6% and 19.4% for the three months ended March 31, 2002 and 2001,
respectively.
INTEREST EXPENSE, NET
Net interest expense, related primarily to long-term debt, increased
slightly to $2.5 for the three months ended March 31, 2002 compared to $2.4 for
the three months ended March 31, 2001. As a percent of sales, net interest
expense was 1.7% and 1.6% for the three months ended March 31, 2002 and 2001,
respectively. Based on current operating plans, management expects the net
interest expense to increase in the remainder of 2002 compared to the
corresponding period in 2001 as a result of higher average borrowings and
lower rates of return available on invested cash.
TAXES ON INCOME
The effective tax rates for the three months ended March 31, 2002 and 2001
were 25.7% and 28.0%, respectively. The decrease in the effective tax rate is
attributed to a shift in the geographic business mix toward lower tax rate
jurisdictions and the Company's adoption of SFAS No. 142 on January 1, 2002,
which lowered the effective tax rate as a nondeductible portion of goodwill
amortization previously added back to income before taxes for tax reporting
purposes is no longer applicable.
15
LIQUIDITY AND CAPITAL RESOURCES
The table below presents summary cash flow information for the years
indicated:
Three Months Ended
March 31,
------------------
2002 2001
------ ------
Net cash provided by operating activities............. $ 3.3 $ 3.0
Net cash used in investing activities................. (18.9) (0.9)
Net cash provided by financing activities............. 15.7 0.9
------ -----
Total change in cash and cash equivalents (a)... $ 0.1 $ 3.0
====== =====
----------
(a) Before the effect of exchange rate changes on cash.
OPERATING ACTIVITIES
Cash provided by operating activities is the Company's primary source of
funds to finance operating needs and growth opportunities. Net cash provided by
operating activities increased to $3.3 for the three months ended March 31, 2002
from $3.0 for the three months ended March 31, 2001.
Working capital and the corresponding current ratio were $139.0 and 2.4:1
and $134.5 and 2.2:1 at March 31, 2002 and 2001, respectively. The increase in
working capital resulted primarily from increase in inventories and decreases in
accounts payables and accrued liabilities and accrued taxes on income, offset by
decreases in cash and cash equivalents and accounts receivable.
INVESTING ACTIVITIES
During the first quarter of 2002, the Company acquired the business and
manufacturing assets of Disenos De Coleccion, a leading manufacturer of
merchandising labels and tags for Mexican retailers and apparel manufacturers.
In addition, the Company continued to upgrade production machinery, invest in
the Enterprise Resource Planning ("ERP") system conversions, and accommodate the
Company's growth and expansion in the Asia Pacific, Latin America, Europe and
North Africa markets.
Net cash used in investing activities for the three months ended March 31,
2001 consisted of the Company's continued upgrade of production equipment, the
costs associated with growth and expansion of the Company's operations in the
Asia Pacific and Latin America markets, and continued investment in the ERP
system conversions.
FINANCING ACTIVITIES
The components of total capital as of March 31, 2002 and December 31, 2001,
respectively, are presented below:
March 31, December 31,
2002 2001
--------- ------------
Due to banks................................... $ 1.4 $ 0.4
Current maturities of long-term debt........... 0.4 0.1
Long-term debt................................. 174.9 165.9
------ ------
Total debt..................................... 176.7 166.4
Shareholders' equity........................... 296.9 286.1
------ ------
Total capital.................................. $473.6 $452.5
====== ======
Total debt as a percent of total capital....... 37.3% 36.8%
====== ======
16
The Company believes that its revolving credit agreement provides
sufficient liquidity to support the Company's planned business activities and
seasonal and specific-purpose expenditures. During the first quarter of 2002,
the Company borrowed $9.4, net of repayments, under the Company's revolving
credit agreement. In addition, the Company received proceeds of $5.4 from common
stock issued under its employee stock option and stock purchase plans.
During the first quarter of 2001, the Company received proceeds of $1.1
from common stock issued under its employee stock option and stock purchase
plans.
MARKET RISK
In the normal course of business, the Company is exposed to interest rate
and foreign currency exchange rate risks that could impact its results of
operations. The Company may reduce its market risk exposures by creating
offsetting positions through the use of derivative financial instruments. The
Company does not use derivative financial instruments for trading purposes.
A 10% change in interest rates affecting the Company's floating rate debt
instruments would have an insignificant impact on the Company's pretax 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. In addition, all of the Company's derivatives have high correlation
with the underlying exposure and are highly effective in offsetting underlying
currency movements. Accordingly, changes in derivative fair values are expected
to be offset by changes in value of the underlying exposures.
The Company sells its products in many countries and a substantial portion
of its net sales and costs and expenses are denominated in foreign currencies. A
significant portion of the Company's sales for the three months ended March 31,
2002 was derived from customers located outside the US, principally in Europe
and the Asia Pacific, where the Company also manufactures its products. This
exposes the Company to risks associated with changes in foreign currency 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 accounts receivable balances with the Company.
17
CAUTIONARY STATEMENT PURSUANT TO "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
This document contains certain "forward-looking statements" concerning the
Company's objectives and expectations with respect to gross profit, expenses,
inventory performance, capital expenditures and cash flow. In addition,
management makes other forward-looking statements from time to time concerning
objectives and expectations. The Company's success in achieving the objectives
and expectations is somewhat dependent upon economic conditions, competitive
developments and consumer attitudes. However, certain assumptions are specific
to the Company and/or the markets in which it operates.
Except for historical information, the Company's reports to the Securities
and Exchange Commission on Form 10-K and Form 10-Q and periodic press releases,
as well as other public documents and statements, contain "forward-looking
statements" within the meaning of the federal securities laws. Forward-looking
statements are 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
United States 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
o Dependence on key members of management
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 contained in Item 2 above
which information is hereby incorporated by reference.
18
PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits.
None.
b) Reports on Form 8-K
Current Report on Form 8-K, dated February 20, 2002, as amended by
Current Report on Form 8-K/A, dated March 27, 2002, reporting under
Item 4 that the Registrant had adopted a plan to change the
Registrant's auditors approximately every seven years, that it had
informed Arthur Andersen LLP that its engagement as the Registrant's
independent public accountants to audit and certify the Registrant's
financial statements would be discontinued effective upon the
completion of the audit of the Registrant's December 31, 2001 financial
statements and that since January 1, 2000, there were no disagreements
between the Registrant and Arthur Andersen on any matter of accounting
principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to Arthur
Andersen's satisfaction would have caused them to make reference to the
subject matter of the disagreement in connection with their reports.
19
PAXAR CORPORATION AND SUBSIDIARIES
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/ Larry M. Segall
-----------------------------------------
Vice President and Controller
(Chief Accounting Officer)
May 15, 2002
-----------------------------------------
Date
20