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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 JUNE 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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COMMISSION FILE NUMBER 0-5610
------
PAXAR CORPORATION
-----------------
(Exact name of registrant as specified in its charter)
NEW YORK 13-5670050
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 CORPORATE PARK DRIVE, WHITE PLAINS, N.Y. 10604
--------------------------------------------------
(Address of principal executive offices)
914-697-6800
------------
(Registrant's telephone number, including area code)
(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. (August 9, 2002)
Common Stock, $0.10 par value: 39,648,344 shares
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. These condensed financial statements
should 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
------- ------- ------- -------
Sales ............................................. $ 173.1 $ 157.1 $ 325.8 $ 312.4
Cost of sales ..................................... 103.8 94.2 197.3 190.7
------- ------- ------- -------
Gross profit ................................. 69.3 62.9 128.5 121.7
Selling, general and administrative expenses ...... 49.3 43.1 95.9 88.0
Amortization of goodwill and other intangibles .... 0.1 1.5 0.1 3.0
Integration/restructuring and other costs ......... -- 6.6 -- 6.6
------- ------- ------- -------
Operating income ............................. 19.9 11.7 32.5 24.1
Interest expense, net ............................. 2.9 2.3 5.4 4.7
------- ------- ------- -------
Income before taxes .......................... 17.0 9.4 27.1 19.4
Taxes on income ................................... 3.9 2.6 6.5 5.4
------- ------- ------- -------
Net income ................................... $ 13.1 $ 6.8 $ 20.6 $ 14.0
======= ======= ======= =======
Basic earnings per common share ................... $ 0.33 $ 0.16 $ 0.52 $ 0.33
======= ======= ======= =======
Diluted earnings per common share ................. $ 0.32 $ 0.16 $ 0.51 $ 0.33
======= ======= ======= =======
Average common shares outstanding:
Basic ........................................... 39.7 42.2 39.5 42.2
Diluted ......................................... 40.8 42.8 40.5 42.8
The accompanying notes are an integral part of the financial statements.
3
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2002 2001
------- -------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 44.9 $ 35.1
Accounts receivable, less allowances of $9.1 and $9.3 at
June 30, 2002 and December 31, 2001, respectively ............ 117.3 100.9
Inventories, net ................................................ 85.2 77.7
Deferred income taxes ........................................... 6.4 9.2
Other current assets ............................................ 13.9 11.4
------- -------
Total current assets .................................. 267.7 234.3
------- -------
Property, plant and equipment, net .............................. 152.4 145.2
Goodwill and other intangibles, net ............................. 191.7 181.7
Other assets .................................................... 22.8 22.6
------- -------
Total assets .................................................... $ 634.6 $ 583.8
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to banks .................................................... $ 0.5 $ 0.4
Current maturities of long-term debt ............................ 0.5 0.1
Accounts payable and accrued liabilities ........................ 94.2 90.0
Accrued taxes on income.......................................... 16.0 11.6
------- -------
Total current liabilities ............................. 111.2 102.1
------- -------
Long-term debt .................................................. 175.4 165.9
Deferred income taxes ........................................... 9.4 12.7
Other liabilities ............................................... 16.0 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,
39,819,901 and 38,929,163 shares issued and outstanding at
June 30, 2002 and December 31, 2001, respectively ............ 4.0 3.9
Paid-in capital ................................................. 20.1 11.7
Retained earnings ............................................... 311.2 290.6
Accumulated other comprehensive loss ............................ (12.7) (20.1)
------- -------
Total shareholders' equity ............................ 322.6 286.1
------- -------
Total liabilities and shareholders' equity ...................... $ 634.6 $ 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)
SIX MONTHS ENDED
JUNE 30,
-----------------------
2002 2001
------- -------
OPERATING ACTIVITIES
Net income ........................................................ $ 20.6 $ 14.0
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .................................. 14.4 16.9
Deferred income taxes .......................................... -- 0.1
Gain on sales of property and equipment, net ................... (0.2) --
Write-off of property and equipment ............................ 0.3 --
Accretion of discount on post-employment benefit obligations ... 0.4 --
Changes in assets and liabilities, net of businesses acquired:
Accounts receivable ............................................ (16.4) 4.1
Inventories .................................................... (7.5) 7.2
Other current assets ........................................... (2.4) (7.2)
Accounts payable and accrued liabilities ....................... 5.9 (6.7)
Accrued taxes on income ........................................ 4.4 (0.3)
Other, net ..................................................... (1.2) (2.8)
------- -------
Net cash provided by operating activities ...................... 18.3 25.3
------- -------
INVESTING ACTIVITIES
Purchases of property, plant and equipment ........................ (9.6) (11.3)
Purchases of businesses, net of cash acquired ..................... (18.0) 1.3
Proceeds from sales of property and equipment ..................... 0.3 --
Other, net ........................................................ (0.3) 6.5
------- -------
Net cash used in investing activities .......................... (27.6) (3.5)
------- -------
FINANCING ACTIVITIES
Net increase in short-term debt ................................... 0.1 0.7
Additions to long-term debt ....................................... 58.4 12.1
Reductions in long-term debt ...................................... (48.5) (5.4)
Proceeds from common stock issued under employee
stock option and stock purchase plans ........................... 8.5 2.3
------- -------
Net cash provided by financing activities ...................... 18.5 9.7
------- -------
Effect of exchange rate changes on cash ............................ 0.6 (0.5)
------- -------
Increase in cash and cash equivalents .......................... 9.8 31.0
Cash and cash equivalents at beginning of year ..................... 35.1 44.3
------- -------
Cash and cash equivalents at end of period ......................... $ 44.9 $ 75.3
======= =======
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 the purchase method be used for
business combinations initiated after June 30, 2001 and eliminates the use of
the pooling-of-interests method. 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 changes the method by which companies may recognize intangible
assets in purchase business combinations and generally requires that
identifiable intangible assets be recognized separately from goodwill. In
addition, it stipulates that goodwill and certain intangible assets will no
longer be amortized, but must be tested for impairment at least annually.
Accordingly, the amortization of goodwill for previous acquisitions ceased upon
the Company's adoption of SFAS No. 142 on January 1, 2002. The amortization of
goodwill was $1.5 and $3.0 for the three and six months ended June 30, 2001,
respectively, and would have been $1.6 and $3.2 for the three and six months
ended June 30, 2002.
Pursuant to SFAS No. 142, the Company completed its initial goodwill
impairment assessment during the second quarter of 2002, and based on comparison
of the fair values of its reporting units with their carrying amounts, including
goodwill, the Company has determined that goodwill of the reporting units is not
impaired.
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 at January 1, 2001:
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
------------------ ----------------
Reported net income ........................................ $ 6.8 $ 14.0
Add back: Amortization of goodwill, net of income taxes .... 1.1 2.2
-------- --------
Adjusted net income ........................................ $ 7.9 $ 16.2
======== ========
Reported earnings per share (basic) ........................ $ 0.16 $ 0.33
Add back: Amortization of goodwill, net of income taxes .... 0.03 0.05
-------- --------
Adjusted earnings per share (basic) ........................ $ 0.19 $ 0.38
======== ========
Reported earnings per share (diluted) ...................... $ 0.16 $ 0.33
Add back: Amortization of goodwill, net of income taxes .... 0.03 0.05
-------- --------
Adjusted earnings per share (diluted) ...................... $ 0.19 $ 0.38
======== ========
6
The changes in the carrying amounts of goodwill for the six months ended
June 30, 2002 are as follows:
Beginning Balance Goodwill Foreign Currency Ending Balance
January 1, 2002 (a) Acquired Translation Adjustments June 30, 2002
------------------- -------- ----------------------- -------------
North America .. $ 104.7 $ 5.2 $ -- $ 109.9
Europe ......... 59.8 -- 3.1 62.9
Asia Pacific ... 17.2 0.1 -- 17.3
---------- ---------- ---------- ----------
Total ..... $ 181.7 $ 5.3 $ 3.1 $ 190.1
========== ========== ========== ==========
- ---------------
(a) Reflects allocation of goodwill pursuant to the Company's initial
goodwill impairment assessment.
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
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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44,
and 64, Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 145
rescinds SFAS No. 4, which required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. SFAS No. 64 amended SFAS No. 4, and is no longer
necessary because SFAS No. 4 has been rescinded. SFAS No. 44 was issued to
establish accounting requirements for the effects of transition to the
provisions of the Motor Carrier Act of 1980. Because the transition has been
completed, SFAS No. 44 is no longer necessary. SFAS No. 145 amends SFAS No. 13
to require that certain lease modifications that have economic effects similar
to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. SFAS No. 145 also makes technical corrections to
existing pronouncements. The Company determined that the adoption of SFAS No.
145 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 and six months ended June 30, 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.
7
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 June 30,
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 and six
months ended June 30, 2002 were not material.
All financial instruments of the Company with the exception of hedge
instruments are carried at cost, which approximates fair value.
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 $16.4 and $13.9
as of June 30, 2002 and December 31, 2001, respectively. The value of all other
net inventories determined using the first-in, first-out method was $68.8 and
$63.8 as of June 30, 2002 and December 31, 2001, respectively.
The components of net inventories are set forth below:
June 30, December 31,
2002 2001
------- -------
Raw materials ........................................ $ 35.7 $ 36.6
Work-in-process ...................................... 9.9 8.2
Finished goods ....................................... 53.5 46.6
------- -------
99.1 91.4
Less allowance for obsolescence (13.9) (13.7)
------- -------
$ 85.2 $ 77.7
======= =======
NOTE 5: LONG-TERM DEBT
A summary of long-term debt is set forth below:
June 30, December 31,
2002 2001
------ ------
6.74% Senior Notes .................................... $150.0 $150.0
Economic Development Revenue Bonds due 2011 and 2019... 13.0 13.0
Revolver .............................................. 10.4 0.6
Other ................................................. 2.5 2.4
------ ------
175.9 166.0
Less current maturities ............................... 0.5 0.1
------ ------
$175.4 $165.9
====== ======
NOTE 6: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
A summary of accounts payable and accrued liabilities is set forth below:
June 30, December 31,
2002 2001
-------- ------------
Accounts payable ...................................... $ 41.0 $ 36.3
Accrued payroll costs ................................. 20.9 17.7
Other accrued liabilities ............................. 32.3 36.0
------- -------
$ 94.2 $ 90.0
======= =======
8
NOTE 7: SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes is set forth below:
Six Months Ended
June 30,
------------------------
2002 2001
-------- --------
Interest, net .............................. $ 5.3 $ 4.7
======== ========
Income taxes, net .......................... $ 1.3 $ 4.9
======== ========
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.
Six Months Ended
June 30,
------------------------
2002 2001
-------- --------
Net income .................................. $ 20.6 $ 14.0
Foreign currency translation adjustments..... 7.4 (6.6)
-------- --------
Comprehensive income ........................ $ 28.0 $ 7.4
======== ========
NOTE 9: EARNINGS PER COMMON SHARE
The reconciliation of basic and diluted share computation is as follows:
Six Months Ended
June 30,
------------------------
2002 2001
-------- --------
Average common shares (basic) ............... 39.5 42.2
Options and warrants ........................ 1.0 0.6
-------- --------
Adjusted average common shares (diluted)..... 40.5 42.8
======== ========
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, Latin America and the
Asia Pacific region.
The Company's operations have been classified into three geographic segments
consisting of North America (including the US, Canada and Latin America), Europe
and Asia Pacific. Each of the three geographic segments develops, manufactures
and markets the Company's products and services. The results from the three
geographic segments are regularly reviewed by the Company's chief executive
officer 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.
9
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Sales to unaffiliated customers:
North America .................................. $ 85.6 $ 80.4 $ 166.1 $ 165.7
Europe ......................................... 44.4 42.6 84.6 85.3
Asia Pacific ................................... 43.1 34.1 75.1 61.4
-------- -------- -------- --------
Total ................................ $ 173.1 $ 157.1 $ 325.8 $ 312.4
======== ======== ======== ========
Intersegment sales:
North America .................................. $ 17.0 $ 14.1 $ 32.3 $ 27.1
Europe ......................................... 10.9 8.8 21.3 17.5
Asia Pacific ................................... 2.7 1.6 4.8 2.6
Eliminations ................................... (30.6) (24.5) (58.4) (47.2)
-------- -------- -------- --------
Total ................................ $ -- $ -- $ -- $ --
======== ======== ======== ========
Operating income:
North America .................................. $ 9.6 $ 8.6 $ 15.7 $ 17.2
Europe ......................................... 5.2 5.0 8.8 8.1
Asia Pacific ................................... 10.6 8.6 17.2 13.9
-------- -------- -------- --------
25.4 22.2 41.7 39.2
Corporate expenses ............................. (5.4) (2.4) (9.1) (5.5)
Amortization of goodwill and other intangibles.. (0.1) (1.5) (0.1) (3.0)
Integration/restructuring and other costs ...... -- (6.6) -- (6.6)
-------- -------- -------- --------
Total ................................ $ 19.9 $ 11.7 $ 32.5 $ 24.1
======== ======== ======== ========
Depreciation and amortization:
North America .................................. $ 4.1 $ 3.8 $ 7.7 $ 10.0
Europe ......................................... 2.3 2.3 4.1 4.4
Asia Pacific ................................... 1.2 1.0 2.0 2.2
-------- -------- -------- --------
7.6 7.1 13.8 16.6
Corporate ...................................... 0.4 0.1 0.6 0.3
-------- -------- -------- --------
Total ................................ $ 8.0 $ 7.2 $ 14.4 $ 16.9
======== ======== ======== ========
Capital expenditures:
North America .................................. $ 2.3 $ 1.6 $ 3.6 $ 3.8
Europe ......................................... 1.8 2.3 3.3 4.2
Asia Pacific ................................... 1.6 1.8 2.2 2.3
-------- -------- -------- --------
5.7 5.7 9.1 10.3
Corporate ...................................... 0.4 0.8 0.5 1.0
-------- -------- -------- --------
Total ................................ $ 6.1 $ 6.5 $ 9.6 $ 11.3
======== ======== ======== ========
As of
--------------------------
June 30, December 31,
2002 2001
-------- --------
Long-lived assets:
North America .................................. $ 197.7 $ 187.4
Europe ......................................... 102.9 97.6
Asia Pacific ................................... 36.5 35.5
-------- --------
337.1 320.5
Corporate ...................................... 7.0 6.4
-------- --------
Total ................................ $ 344.1 $ 326.9
========= =========
Total assets:
North America .................................. $ 296.9 $ 284.9
Europe ......................................... 197.5 183.5
Asia Pacific ................................... 91.0 79.6
-------- --------
585.4 548.0
Corporate ...................................... 49.2 35.8
-------- --------
Total ................................ $ 634.6 $ 583.8
======== ========
10
Certain reclassifications have been made to prior year amounts pursuant to
the Company's initial goodwill impairment assessment.
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; and (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. 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.
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 June 30, 2002.
Beginning Balance Ending Balance
January 1, 2002 Payments June 30, 2002
------------------- --------- ----------------
Severance...... $ 3.3 $ 1.9 $ 1.4
11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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 June 30,
2002 was $117.3, net of allowances of $9.1.
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 projected
discounted cash flow method using a discount rate determined by management to be
commensurate with
12
the risk inherent in the Company's current business model. Long-lived assets,
goodwill and other intangibles, net of accumulated depreciation and
amortization, amounted to $344.1 as of June 30, 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 amortizing goodwill. The amortization of goodwill was $1.5
and $3.0 for the three and six months ended June 30, 2001, respectively, and
would have been $1.6 and $3.2 for the three and six months ended June 30, 2002.
Pursuant to SFAS No. 142, the Company completed its initial goodwill
impairment assessment during the second quarter of 2002, and based on comparison
of the fair values of its reporting units with their carrying amounts, including
goodwill, the Company has determined that goodwill of the reporting units is not
impaired. Additionally, under SFAS No. 142, the Company is required to test
goodwill for impairment on an annual basis or if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount.
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.
13
The Company's results of operations in dollars and as a percent of sales are
presented below:
Three Months Ended Six Months Ended
------------------------------------------------- --------------------------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
-------------------- -------------------- -------------------- --------------------
Sales ....................... $173.1 100.0% $157.1 100.0% $325.8 100.0% $312.4 100.0%
Cost of sales ............... 103.8 60.0 94.2 60.0 197.3 60.6 190.7 61.0
------ ------ ------ ------ ------ ------ ------ ------
Gross profit ............ 69.3 40.0 62.9 40.0 128.5 39.4 121.7 39.0
Selling, general and
administrative expenses ... 49.3 28.5 43.1 27.4 95.9 29.4 88.0 28.2
Amortization of goodwill and
other intangibles ......... 0.1 0.1 1.5 1.0 0.1 -- 3.0 1.0
Integration/restructuring and
other costs ............... -- -- 6.6 4.2 -- -- 6.6 2.1
------ ------ ------ ------ ------ ------ ------ ------
Operating income ........ 19.9 11.4 11.7 7.4 32.5 10.0 24.1 7.7
Interest expense, net ....... 2.9 1.6 2.3 1.4 5.4 1.7 4.7 1.5
------ ------ ------ ------ ------ ------ ------ ------
Income before taxes ......... 17.0 9.8 9.4 6.0 27.1 8.3 19.4 6.2
Taxes on income ............. 3.9 2.2 2.6 1.7 6.5 2.0 5.4 1.7
------ ------ ------ ------ ------ ------ ------ ------
Net income .............. $ 13.1 7.6% $ 6.8 4.3% $ 20.6 6.3% $ 14.0 4.5%
====== ====== ====== ====== ====== ====== ====== ======
The Company's sales increased 10% to $173.1 compared with $157.1 for the
three months ended June 30, 2001. The increase is primarily attributable to
increased customer demand for the existing range of the Company's products
("organic sales growth") and acquisitions made during the second half of 2001
and first quarter of 2002 ("acquisitions"). Management believes that the
Company's ability to provide its customers with outstanding service, quality
products and on-time deliveries helped fuel the organic sales growth. For the
six months ended June 30, 2002, sales increased 4% to $325.8 compared with
$312.4 for the six months ended June 30, 2001. The increase is primarily
attributable to organic sales growth in the second quarter of 2002 and to
acquisitions, offset by sales declines attributable to challenging economic and
retail conditions in the first quarter of 2002.
Gross profit margins were 40% and 39% for the three and six months ended
June 30, 2002, respectively, compared with 40% and 39% for the three and six
months ended June 30, 2001. Management believes that major restructuring
initiatives implemented in 2001 continue to drive productivity and operating
efficiencies throughout the Company's manufacturing operations and improve the
Company's gross profit margin.
Operating income increased to $19.9 and $32.5 for the three and six months
ended June 30, 2002, respectively, from $11.7 and $24.1 for the three and six
months ended June 30, 2001. As a percent of sales, operating income was 11% and
10% for the three and six months ended June 30, 2002, respectively, compared
with 7% and 8% for the three and six months ended June 30, 2001. Excluding
amortization of goodwill and integration/restructuring and other costs,
operating income would have been $19.8 or 13% of sales for the three months
ended June 30, 2001 and $33.7 or 11% of sales for the six months ended June 30,
2001.
SALES
The following table presents sales by geographic operating segment:
Three Months Ended Six Months Ended
------------------------------------------- -----------------------------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------------ -------------------- ------------------- -------------------
Sales to unaffiliated customers:
North America .................. $ 85.6 49% $ 80.4 51% $ 166.1 51% $ 165.7 53%
Europe ......................... 44.4 26 42.6 27 84.6 26 85.3 27
Asia Pacific ................... 43.1 25 34.1 22 75.1 23 61.4 20
------- ------- ------- ------- ------- ------- ------- -------
Total ...................... $ 173.1 100% $ 157.1 100% $ 325.8 100% $ 312.4 100%
======= ======= ======= ======= ======= ======= ======= =======
North America sales include sales delivered through Company operations in
the US, Canada and Latin America. Sales increased 6% to $85.6 for the three
months ended June 30, 2002 compared with $80.4 for the three months ended June
30, 2001. The increase is primarily attributable to acquisitions and to organic
sales growth. For the six months ended June 30, 2002, sales increased slightly
to $166.1 from $165.7 for the six months ended June 30, 2001.
14
The increase is due almost entirely to organic sales growth in the second
quarter of 2002 and to acquisitions, largely offset by the sales decline
attributable to challenging economic and retail conditions in the first quarter
of 2002 that resulted in fewer orders and smaller average transaction size.
Additionally, management points to a sales migration trend that continued into
2002. Many of the Company's customers have steadily moved their production
outside the US where they have realized labor cost efficiencies. This has
resulted in a shift in sales mix primarily to the Company's Asia Pacific region.
Europe's sales include sales delivered through Company operations in eight
countries. Sales increased 4% to $44.4 for the three months ended June 30, 2002
compared with $42.6 for the three months ended June 30, 2001. The increase is
primarily attributable to an acquisition made in late 2001, to organic sales
growth and to favorable currency exchange rates, offset by sales declines
attributable to the continued sales migration to the Asia Pacific region. For
the six months ended June 30, 2002, sales decreased slightly to $84.6 compared
with $85.3 for the six months ended June 30, 2001. The decrease is attributable
to lower than expected customer demand in the first quarter of 2002 and
continued migration of the Company's customers to the Asia Pacific region,
offset by sales generated by an acquisition made in late 2001 and organic sales
growth in the second quarter of 2002.
The Asia Pacific region consists of the Company's operations in Hong Kong,
China, Singapore, Sri Lanka, Australia and Korea. Sales in the region increased
26% to $43.1 and 22% to $75.1 for the three and six months ended June 30, 2002,
respectively, compared with $34.1 and $61.4 for the three and six months ended
June 30, 2001. The Company's operations in this region have benefited
significantly from the steady and continued migration of the Company's customers
who have moved their production outside the US and Europe to maximize labor cost
efficiencies. In addition, sales increased significantly over prior year as the
Company continued to establish a strong foothold in the region in response to
growing customer demand.
GROSS PROFIT
Gross profit margins were 40% and 39% for the three and six months ended
June 30, 2002, respectively, compared with 40% and 39% for the three and six
months ended June 30, 2001. During 2001, the Company implemented major
restructuring initiatives to improve productivity and operating efficiencies
throughout the Company's manufacturing operations. Management believes that
these initiatives will serve as the catalysts that will enable the Company to
continue to add to its top-line growth and improve its gross profit margin.
Additionally, 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
Selling, general and administrative expenses ("SG&A"), as a percent of
sales, was 28% and 29% for the three and six months ended June 30, 2002,
respectively, compared with 27% and 28% for the three and six months ended June
30, 2001. The increase in SG&A is attributable to incremental staffing and other
fixed costs necessary to support the Company's global expansion 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.
15
OPERATING INCOME
Operating income increased to $19.9 and $32.5 for the three and six months
ended June 30, 2002, respectively, from $11.7 and $24.1 for the three and six
months ended June 30, 2001. As a percent of sales, operating income was 11% and
10% for the three and six months ended June 30, 2002, respectively, compared
with 7% and 8% for the three and six months ended June 30, 2001. Excluding
amortization of goodwill and integration/restructuring and other costs,
operating income would have been $19.8 or 13% of sales for the three months
ended June 30, 2001 and $33.7 or 11% of sales for the six months ended June 30,
2001. On a reportable operating segment basis, exclusive of corporate expenses,
amortization of goodwill and integration/ restructuring and other costs,
operating income, as a percent of sales, was as follows: North America was 11%
and 9% for the three and six months ended June 30, 2002, respectively, compared
with 11% and 10% for the three and six months ended June 30, 2001; Europe was
12% and 10% for the three and six months ended June 30, 2002, respectively,
compared with 12% and 9% for the three and six months ended June 30, 2001; and
Asia Pacific was 25% and 23% for the three and six months ended June 30, 2002,
respectively, compared with 25% and 23% for the three and six months ended June
30, 2001.
INTEREST EXPENSE, NET
Net interest expense, related primarily to long-term debt, increased to $2.9
and $5.4 for the three and six months ended June 30, 2002, respectively,
compared with $2.3 and $4.7 for the three and six months ended June 30, 2001. As
a percent of sales, net interest expense was 1.6% and 1.7% for the three and six
months ended June 30, 2002, respectively, compared with 1.4% and 1.5% for the
three and six months ended June 30, 2001. The increase is attributable to higher
average borrowings, lower average cash and cash equivalents, and lower rates of
return available on invested cash.
TAXES ON INCOME
The effective tax rates decreased to 23% and 24% for the three and six
months ended June 30, 2002, respectively, from 28% for both three and six months
ended June 30, 2001. The decrease is attributable to a shift in the geographic
business mix toward lower tax rate jurisdictions. In addition, the Company's
adoption of SFAS No. 142 on January 1, 2002 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.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents summary cash flow information for the periods
indicated below:
Six Months Ended
June 30,
-----------------------
2002 2001
------- -------
Net cash provided by operating activities .......... $ 18.3 $ 25.3
Net cash used in investing activities .............. (27.6) (3.5)
Net cash provided by financing activities .......... 18.5 9.7
------- -------
Total change in cash and cash equivalents (a).... $ 9.2 $ 31.5
======= =======
- ---------------
(a) Before the effect of exchange rate changes on cash.
16
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 was $18.3 for the six months ended June 30, 2002 compared
with $25.3 for the six months ended June 30, 2001. The decrease is primarily due
to increases in accounts receivable and inventories, partially offset by
increases in accounts payable and accrued taxes on income. Management attributes
the increases in accounts receivable, inventories and accounts payable to the
significant increase in sales in the second quarter of 2002 over the previous
quarter.
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, proceed with
its Enterprise Resource Planning ("ERP") system conversions, and invest in the
Company's growth and expansion in Europe, Latin America and the Asia Pacific
region.
Net cash used in investing activities for the six months ended June 30, 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 June 30, 2002 and December 31, 2001,
respectively, are presented below:
June 30, December 31,
2002 2001
------- -------
Due to banks ............................. $ 0.5 $ 0.4
Current maturities of long-term debt ..... 0.5 0.1
Long-term debt ........................... 175.4 165.9
------- -------
Total debt ............................... 176.4 166.4
Shareholders' equity ..................... 322.6 286.1
------- -------
Total capital ............................ $ 499.0 $ 452.5
======= =======
Total debt as a percent of total capital.. 35% 37%
======= =======
Management believes that the Company's revolving credit agreement provides
sufficient liquidity to support the Company's planned business activities and
seasonal and specific-purpose expenditures. For the six months ended June 30,
2002, the Company had net borrowings of $10.0 and received proceeds of $8.5 from
common stock issued under its employee stock option and stock purchase plans.
For the six months ended June 30, 2001, the Company had net borrowings of
$7.4 and received proceeds of $2.3 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.
17
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 June 30,
2002 was derived from customers located outside the US, principally in Europe
and the Asia Pacific region, 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 payable balances with the Company.
18
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:
- Worldwide economic and other business conditions that could affect
demand for the Company's products in the US or international markets
- Rate of migration of garment manufacturing industry moving from the
United States and Western Europe
- The mix of products sold and the profit margins thereon
- Order cancellation or a reduction in orders from customers
- Competitive product offerings and pricing actions
- The availability and pricing of key raw materials
- The level of manufacturing productivity
- 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.
19
PART II. OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 30, 2002, the Company held its Annual Meeting of Shareholders
to elect five Directors to serve for two-year terms. No other
shareholder action was taken at the Annual Meeting.
The nominees for election to the Board of Directors received the number
of votes set forth opposite their names below:
For Election Withheld Authority
------------ ------------------
Arthur Hershaft 35,118,792 1,213,045
Joyce F. Brown 35,777,591 554,246
David L. Kolb 35,356,170 975,667
Thomas R. Loemker 35,084,329 1,247,508
James C. McGroddy 35,357,240 974,597
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits.
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
b) Reports on Form 8-K
Current Report on Form 8-K, dated February 20, 2002, and filed on April
17, 2002, reporting under Item 4 that on April 15, 2002, the Registrant
engaged PricewaterhouseCoopers LLP ("PwC") to serve as the Registrant's
independent public accountants for fiscal year 2002 and that during the
years ended December 31, 2001 and 2000, and through the date of
engagement, it did not consult PwC with respect to the application of
accounting principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on its
consolidated financial statements, or any other matters or reportable
events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.
20
PAXAR CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Paxar Corporation
---------------------------
Registrant
By: /s/ Larry M. Segall
---------------------------
Vice President and Controller
(Chief Accounting Officer)
August 14, 2002
---------------------------
Date
21