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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 September 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 _____________
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. (November 6, 2002)
Common Stock, $0.10 par value: 39,282,578 shares
1
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 Nine Months Ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
------ ------ ------ ------
Sales..................................................... $ 170.1 $ 138.8 $ 495.9 $ 451.2
Cost of sales............................................. 105.8 86.5 303.1 277.2
-------- -------- -------- --------
Gross profit......................................... 64.3 52.3 192.8 174.0
Selling, general and administrative expenses.............. 48.8 41.6 144.7 129.7
Amortization of goodwill and other intangibles............ 0.1 1.5 0.2 4.5
Integration/restructuring and other costs................. -- 2.0 -- 8.6
-------- -------- -------- --------
Operating income..................................... 15.4 7.2 47.9 31.2
Interest expense, net..................................... 3.1 2.5 8.5 7.2
-------- -------- -------- --------
Income before taxes.................................. 12.3 4.7 39.4 24.0
Taxes on income........................................... 2.1 0.8 8.6 6.1
-------- -------- -------- --------
Net income........................................... $ 10.2 $ 3.9 $ 30.8 $ 17.9
======== ======== ======== ========
Basic earnings per common share........................... $ 0.26 $ 0.09 $ 0.78 $ 0.42
======== ======== ======== ========
Diluted earnings per common share......................... $ 0.25 $ 0.09 $ 0.76 $ 0.42
======== ======== ======== ========
Average common shares outstanding:
Basic................................................... 39.5 41.9 39.5 42.2
Diluted................................................. 40.3 42.6 40.4 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)
September 30, December 31,
2002 2001
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 49.3 $ 35.1
Accounts receivable, less allowances of $9.8 and $9.3 at
September 30, 2002 and December 31, 2001, respectively...................... 108.1 100.9
Inventories, net............................................................... 86.9 77.7
Deferred income taxes.......................................................... 6.6 9.2
Other current assets........................................................... 14.9 11.4
--------- ---------
Total current assets................................................. 265.8 234.3
--------- ---------
Property, plant and equipment, net............................................. 152.4 145.2
Goodwill and other intangibles, net............................................ 197.0 181.7
Other assets................................................................... 23.0 22.6
--------- ---------
Total assets................................................................... $ 638.2 $ 583.8
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to banks................................................................... $ 0.6 $ 0.4
Current maturities of long-term debt........................................... 0.4 0.1
Accounts payable and accrued liabilities....................................... 89.9 90.0
Accrued taxes on income........................................................ 16.9 11.6
--------- ---------
Total current liabilities............................................ 107.8 102.1
--------- ---------
Long-term debt................................................................. 179.8 165.9
Deferred income taxes.......................................................... 9.5 12.7
Other liabilities.............................................................. 18.5 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,
39,264,279 and 38,929,163 shares issued and outstanding at
September 30, 2002 and December 31, 2001, respectively...................... 3.9 3.9
Paid-in capital................................................................ 11.6 11.7
Retained earnings.............................................................. 321.4 290.6
Accumulated other comprehensive loss........................................... (14.3) (20.1)
--------- ---------
Total shareholders' equity........................................... 322.6 286.1
--------- ---------
Total liabilities and shareholders' equity..................................... $ 638.2 $ 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)
Nine Months Ended
September 30,
-----------------------
2002 2001
------ ------
OPERATING ACTIVITIES:
Net income.................................................................... $ 30.8 $ 17.9
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.............................................. 22.1 24.5
Deferred income taxes...................................................... -- 0.1
Gain on sale of property and equipment, net................................ (0.2) --
Write-off of property and equipment........................................ 0.7 --
Accretion of discount on post-employment benefit obligations............... 1.2 --
Changes in assets and liabilities, net of businesses acquired:
Accounts receivable........................................................ (6.3) 10.8
Inventories................................................................ (8.6) 2.1
Other current assets....................................................... (3.4) (4.5)
Accounts payable and accrued liabilities................................... 0.5 (6.1)
Accrued taxes on income.................................................... 5.3 (2.2)
Other, net................................................................. (5.0) 0.5
---------- ----------
Net cash provided by operating activities.................................. 37.1 43.1
---------- ----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment.................................... (16.2) (16.9)
Purchases of businesses, net of cash acquired................................. (21.5) (2.7)
Proceeds from sales of property and equipment................................. 0.3 --
Other, net.................................................................... (0.4) 6.4
---------- ----------
Net cash used in investing activities...................................... (37.8) (13.2)
---------- ----------
FINANCING ACTIVITIES:
Net increase in short-term debt............................................... 0.2 0.6
Additions to long-term debt................................................... 83.6 12.4
Reductions in long-term debt.................................................. (70.0) (12.7)
Purchase of common stock...................................................... (9.1) (8.3)
Proceeds from common stock issued under employee
stock option and stock purchase plans....................................... 9.0 3.7
---------- ----------
Net cash provided by (used in) financing activities........................ 13.7 (4.3)
---------- ----------
Effect of exchange rate changes on cash........................................ 1.2 (0.5)
---------- ----------
Increase in cash and cash equivalents...................................... 14.2 25.1
Cash and cash equivalents at beginning of year................................. 35.1 44.3
---------- ----------
Cash and cash equivalents at end of period..................................... $ 49.3 $ 69.4
========== ==========
The accompanying notes are an integral part of the financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data)
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.
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") issued
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 changed 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 $4.5 for the three and nine months ended September 30,
2001, respectively, and would have been $1.6 and $4.8 for the three and nine
months ended September 30, 2002.
Pursuant to SFAS No. 142, the Company completed its initial goodwill
impairment assessment during the second quarter of 2002, and based on a
comparison of the fair values of its reporting units with their carrying
amounts, including goodwill, the Company has determined that the 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 Nine Months Ended
September 30, 2001 September 30, 2001
------------------ ------------------
Reported net income................................................ $ 3.9 $ 17.9
Add back: Amortization of goodwill, net of income taxes............ 1.2 3.4
--------- --------
Adjusted net income................................................ $ 5.1 $ 21.3
========= ========
Reported earnings per share (basic)................................ $ 0.09 $ 0.42
Add back: Amortization of goodwill, net of income taxes............ 0.03 0.08
--------- --------
Adjusted earnings per share (basic)................................ $ 0.12 $ 0.50
========= ========
Reported earnings per share (diluted).............................. $ 0.09 $ 0.42
Add back: Amortization of goodwill, net of income taxes............ 0.03 0.08
--------- --------
Adjusted earnings per share (diluted).............................. $ 0.12 $ 0.50
========= ========
6
The changes in the carrying amounts of goodwill for the nine months ended
September 30, 2002 are as follows:
Beginning Balance Goodwill Foreign Currency Ending Balance
January 1, 2002(a) Acquired Translation Adjustments September 30, 2002
------------------ ----------- ----------------------- ------------------
Americas............................ $ 104.7 $ 6.2 $ -- $ 110.9
EMEA................................ 59.8 4.3 3.2 67.3
Asia Pacific........................ 17.2 0.1 -- 17.3
-------- ------- ------- --------
Total.......................... $ 181.7 $ 10.6 $ 3.2 $ 195.5
======== ======= ======= ========
_________
(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 did 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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF Issue No. 94-3, a liability for an
exit cost was recognized at the date of a commitment to an exit plan. The
provisions of SFAS No. 146 are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company believes that the adoption of
SFAS No. 146 will not have a material impact on its results of operations or
financial position.
NOTE 3: FINANCIAL INSTRUMENTS
On January 1, 2001, 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." 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 the resulting type of hedge transaction.
Gains and losses on derivative instruments reported in comprehensive earnings
will be reclassified to earnings in the period in which earnings are affected by
the hedged item. The cumulative effect on net income and other comprehensive
income of adopting these standards was not material to net income and other
comprehensive income for the three and nine months ended September 30, 2002 and
shareholders' equity at January 1, 2002.
7
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
September 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 nine months ended September 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 $14.9 and $13.9
as of September 30, 2002 and December 31, 2001, respectively. The value of all
other net inventories determined using the first-in, first-out method was $72.0
and $63.8 as of September 30, 2002 and December 31, 2001, respectively.
The components of net inventories are set forth below:
September 30, December 31,
2002 2001
------------ -----------
Raw materials.................................................................. $ 34.3 $ 36.6
Work-in-process................................................................ 9.1 8.2
Finished goods................................................................. 53.6 46.6
--------- ---------
97.0 91.4
Less allowance for obsolescence................................................ (10.1) (13.7)
--------- ---------
$ 86.9 $ 77.7
========= =========
NOTE 5: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
A summary of accounts payable and accrued liabilities is set forth below:
September 30, December 31,
2002 2001
--------- ---------
Accounts payable................................................................ $ 39.9 $ 36.3
Accrued payroll costs........................................................... 21.0 17.7
Other accrued liabilities....................................................... 29.0 36.0
--------- ---------
$ 89.9 $ 90.0
========= =========
8
NOTE 6: LONG -TERM DEBT
A summary of long-term debt is set forth below:
September 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....................................................................... 15.0 0.6
Other.......................................................................... 2.2 2.4
--------- ---------
180.2 166.0
Less current maturities........................................................ 0.4 0.1
--------- ---------
$ 179.8 $ 165.9
========= =========
In September 2002, the Company entered into a three-year, $150 revolving
credit agreement with a group of domestic and international banks. The agreement
amended and restated the Company's previous revolving credit facility, which
would have expired on August 11, 2003.
NOTE 7: SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes is set forth below:
Nine Months Ended
September 30,
-----------------------
2002 2001
-------- --------
Interest....................................................................... $ 11.0 $ 11.2
======== ========
Income taxes................................................................... $ 3.6 $ 7.9
======== ========
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.
Nine Months Ended
September 30,
------------------------
2002 2001
-------- ---------
Net income...................................................................... $ 30.8 $ 17.9
Foreign currency translation adjustments........................................ 5.8 (3.3)
-------- ---------
Comprehensive income............................................................ $ 36.6 $ 14.6
======== =========
NOTE 9: EARNINGS PER COMMON SHARE
The reconciliation of basic and diluted share computation is as follows:
Nine Months Ended
September 30,
------------------------
2002 2001
-------- ---------
(in millions)
Average common shares (basic)................................................... 39.5 42.2
Options and warrants............................................................ 0.9 0.6
-------- ---------
Adjusted average common shares (diluted)........................................ 40.4 42.8
======== =========
9
NOTE 10: SEGMENT INFORMATION
The Company develops, manufactures and markets bar code solutions, apparel
systems, printed labels, woven labels, graphic tags, and identification and
pricing solutions products to customers primarily in the retail and apparel
manufacturing industries. In addition, 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, Central
and South America and the Asia Pacific region.
The Company's operations have been classified into three geographic
segments consisting of North, Central and South America ("Americas"), Europe,
Middle East and Africa ("EMEA"), and the Asia Pacific region ("Asia Pacific").
Each of the three geographic segments develops, manufactures and markets the
Company's products and services. The results from the three geographic segments
are regularly reviewed by the Company's Chief Executive Officer and Chief
Financial Officer to make decisions about resources to be allocated to each
geographic segment and assess performance of each segment. Information regarding
the operations of the Company in the three geographic segments is set forth
below.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Sales to unaffiliated customers:
Americas.................................................. $ 85.0 $ 75.0 $ 251.1 $ 240.7
EMEA...................................................... 44.0 34.0 128.6 119.3
Asia Pacific.............................................. 41.1 29.8 116.2 91.2
--------- --------- --------- ---------
Total........................................... $ 170.1 $ 138.8 $ 495.9 $ 451.2
========= ========= ========= =========
Intersegment sales:
Americas.................................................. $ 16.8 $ 11.0 $ 49.1 $ 38.1
EMEA...................................................... 9.8 7.2 31.1 24.7
Asia Pacific.............................................. 2.8 2.2 7.6 4.8
Eliminations.............................................. (29.4) (20.4) (87.8) (67.6)
--------- --------- --------- ---------
Total........................................... $ -- $ -- $ -- $ --
========= ========= ========= =========
Operating income:
Americas.................................................. $ 7.2 $ 6.6 $ 22.9 $ 23.7
EMEA...................................................... 2.7 0.7 11.5 8.8
Asia Pacific.............................................. 9.5 6.7 26.7 20.6
--------- --------- --------- ---------
19.4 14.0 61.1 53.1
Corporate expenses........................................ (3.9) (3.3) (13.0) (8.8)
Amortization of goodwill and other intangibles............ (0.1) (1.5) (0.2) (4.5)
Integration/restructuring and other costs................. -- (2.0) -- (8.6)
--------- --------- --------- ---------
Total........................................... $ 15.4 $ 7.2 $ 47.9 $ 31.2
========= ========= ========= =========
Depreciation and amortization:
Americas.................................................. $ 4.1 $ 3.9 $ 11.8 $ 13.9
EMEA...................................................... 2.2 2.3 6.3 6.7
Asia Pacific.............................................. 0.9 1.1 2.9 3.3
--------- --------- --------- ---------
7.2 7.3 21.0 23.9
Corporate................................................. 0.5 0.3 1.1 0.6
--------- --------- --------- ---------
Total........................................... $ 7.7 $ 7.6 $ 22.1 $ 24.5
========= ========= ========= =========
Capital expenditures:
Americas.................................................. $ 0.8 $ 1.8 $ 4.4 $ 5.6
EMEA...................................................... 4.0 2.8 7.3 7.0
Asia Pacific.............................................. 1.2 0.7 3.4 3.0
--------- --------- --------- ---------
6.0 5.3 15.1 15.6
Corporate................................................. 0.6 0.3 1.1 1.3
--------- --------- --------- ---------
Total........................................... $ 6.6 $ 5.6 $ 16.2 $ 16.9
========= ========= ========= =========
10
As of
----------------------------------
September 30, December 31,
2002 2001
--------------- ------------
Long-lived assets:
Americas.................................................. $ 196.0 $ 187.4
EMEA...................................................... 110.6 97.6
Asia Pacific.............................................. 36.8 35.5
-------- --------
343.4 320.5
Corporate................................................. 6.0 6.4
-------- --------
Total........................................... $ 349.4 $ 326.9
======== ========
Total assets:
Americas.................................................. $ 294.5 $ 284.9
EMEA...................................................... 205.6 183.5
Asia Pacific.............................................. 94.3 79.6
-------- --------
594.4 548.0
Corporate................................................. 43.8 35.8
-------- --------
Total........................................... $ 638.2 $ 583.8
======== ========
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 September 30, 2002.
Beginning Balance Ending Balance
January 1, 2002 Payments September 30, 2002
------------------ -------- ------------------
Severance............................... $ 3.3 $ 2.6 $ 0.7
NOTE 12: RELATED PARTY TRANSACTIONS
During 2001, the Company entered into a stock repurchase agreement with an
officer, who is also a director and principal shareholder of the Company (the
"shareholder"), under which the Company may be required to purchase from the
shareholder up to a certain number of its shares each year. The maximum number
of shares that the Company may be required to purchase in any year is determined
on the basis of a formula specified in the agreement. The purchase price of the
shares is determined by reference to the closing market price of the Company's
common stock for the seven trading days immediately preceding the date of sale.
The agreement terminates in July 2013. During the three months ended September
30, 2002, the Company repurchased 399,000 of its shares in accordance with the
agreement at a price of $6.4. Since the date of the agreement the Company has
repurchased 799,000 of its shares at a total price of $11.7.
11
Item 2: Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations for the Three and Nine Months Ended September 30, 2002
--------------------------------------------------------------------
All amounts in the following discussion are stated in millions, except
share and per share data.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management has identified the following policies and estimates as critical
to the Company's business operations and the understanding of the Company's
results of operations. Note that the preparation of this Quarterly Report on
Form 10-Q requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the Company's financial statements, and the reported
amounts of revenue and expenses during the reporting period. There can be no
assurance that actual results will conform to 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 September
30, 2002 was $108.1, net of allowances of $9.8.
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 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 $349.4 as of September 30, 2002.
13
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 $4.5 for the three and nine months ended September 30, 2001,
respectively, and would have been $1.6 and $4.8 for the three and nine months
ended September 30, 2002.
Pursuant to SFAS No. 142, the Company completed its initial goodwill
impairment assessment during the second quarter of 2002, and based on a
comparison of the fair values of its reporting units with their carrying
amounts, including goodwill, the Company has determined that the 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 did 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 North, Central and South America ("Americas"), Europe, Middle East
and Africa ("EMEA"), and the Asia Pacific region ("Asia Pacific"). 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 affecting the Company's customer
base including: (1) globalization, as manufacturers continue to migrate
production outside the US and Western 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 these
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 worldwide consistency of its operations responds directly to the needs of
its customers, provides them with 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.
14
The Company's results of operations in dollars and as a percent of sales
are presented below:
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------- --------------------------------------------
2002 2001 2002 2001
-------------------- -------------------- --------------------- --------------------
Sales........................ $ 170.1 100.0% $ 138.8 100.0% $ 495.9 100.0% $ 451.2 100.0%
Cost of sales................ 105.8 62.2 86.5 62.3 303.1 61.1 277.2 61.4
--------- --------- --------- --------- --------- ---------- --------- ---------
Gross profit............. 64.3 37.8 52.3 37.7 192.8 38.9 174.0 38.6
Selling, general and
administrative expenses.... 48.8 28.7 41.6 30.0 144.7 29.2 129.7 28.8
Amortization of goodwill and
other intangibles.......... 0.1 0.1 1.5 1.1 0.2 -- 4.5 1.0
Integration/restructuring and
other costs................ -- -- 2.0 1.4 -- -- 8.6 1.9
--------- --------- --------- --------- --------- ---------- --------- ---------
Operating income......... 15.4 9.0 7.2 5.2 47.9 9.7 31.2 6.9
Interest expense, net........ 3.1 1.8 2.5 1.8 8.5 1.8 7.2 1.6
--------- --------- --------- --------- --------- ---------- --------- ---------
Income before taxes...... 12.3 7.2 4.7 3.4 39.4 7.9 24.0 5.3
Taxes on income.............. 2.1 1.2 0.8 0.6 8.6 1.7 6.1 1.3
--------- --------- --------- --------- --------- ---------- --------- ---------
Net income............... $ 10.2 6.0% $ 3.9 2.8% $ 30.8 6.2% $ 17.9 4.0%
========= ========= ========= ========= ========= ========== ========= =========
The Company's sales increased $31.3 or 23% to $170.1 for the three months
ended September 30, 2002 compared with $138.8 for the three months ended
September 30, 2001. Management notes that increased customer demand for the
existing range of the Company's products ("organic sales growth") of $18.4 or
13%, favorable exchange rates of $3.6 or 3%, and acquisitions made during the
second half of 2001 and first and third quarter of 2002 ("acquisitions") of $9.3
or 7% contributed to the increase in sales. 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. Management
also believes that the sales growth resulted from sales and marketing
initiatives that the Company implemented in the early part of 2002. For the nine
months ended September 30, 2002, sales increased $44.7 or 10% to $495.9 compared
with $451.2 for the nine months ended September 30, 2001. The increase is
attributable to organic sales growth of $13.7 or 3%, favorable exchange rates of
$2.5 or 1%, and acquisitions of $28.5 or 6%.
Gross profit margins were 38% for the three months ended September 30, 2002
and 2001, and 39% for the nine month periods then ended. Management believes
that major restructuring initiatives implemented in 2001 will continue to fuel
productivity and operating efficiencies throughout the Company's manufacturing
operations and lead to gross profit margin improvements.
Operating income increased to $15.4 and $47.9 for the three and nine months
ended September 30, 2002, respectively, from $7.2 and $31.2 for the three and
nine months ended September 30, 2001. As a percent of sales, operating income
was 9% and 10% for the three and nine months ended September 30, 2002,
respectively, compared with 5% and 7% for the three and nine months ended
September 30, 2001. Excluding amortization of goodwill and
integration/restructuring and other costs, operating income would have been
$10.7 or 8% of sales for the three months ended September 30, 2001 and $44.3 or
10% of sales for the nine months ended September 30, 2001.
Sales
The following table presents sales by geographic operating segment:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------------- --------------------------------------------
2002 2001 2002 2001
------------------- ------------------ ------------------ -------------------
Sales to unaffiliated customers:
Americas......................... $ 85.0 50% $ 75.0 54% $ 251.1 51% $ 240.7 53%
EMEA............................. 44.0 26 34.0 25 128.6 26 119.3 27%
Asia Pacific..................... 41.1 24 29.8 21 116.2 23 91.2 20%
------------------- ------------------ ------------------ -------------------
Total........................ $ 170.1 100% $ 138.8 100% $ 495.9 100% $ 451.2 100%
=================== =================== ================== ===================
15
Americas sales include sales delivered through Company operations in North,
Central and South America. Sales increased $10.0 or 13% to $85.0 for the three
months ended September 30, 2002 compared with $75.0 for the three months ended
September 30, 2001. The increase is attributable to organic sales growth of $5.0
and acquisitions of $5.0. For the nine months ended September 30, 2002, sales
increased to $251.1 from $240.7 for the nine months ended September 30, 2001.
The increase is due entirely to acquisitions. A decline in organic sales
attributable to challenging economic and retail conditions in the first quarter
of 2002 was somewhat offset by similar growth in the third quarter of 2002.
Additionally, the sales migration trend has 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 Asia Pacific.
EMEA's sales include sales delivered through Company operations in eleven
countries. Sales increased $10.0 or 30% to $44.0 for the three months ended
September 30, 2002 compared with $34.0 for the three months ended September 30,
2001. The increase is attributable to organic sales growth of $3.3, favorable
exchange rates of $3.5, and acquisitions of $3.2. For the nine months ended
September 30, 2002, sales increased $9.3 or 8% to $128.6 compared with $119.3
for the nine months ended September 30, 2001. The increase is attributable to
acquisitions of $7.7 and favorable exchange rates of $2.7, offset by a decline
in organic sales of $1.1. The organic sales decline resulted from
lower-than-expected customer demand in the first quarter of 2002 and continued
migration of the Company's customers to Asia Pacific.
Asia Pacific consists of the Company's operations in Hong Kong, China,
India, Singapore, Sri Lanka, Australia and Korea. Sales in the region increased
$11.3 or 38% to $41.1 for the three months ended September 30, 2002 compared
with $29.8 for the three months ended September 30, 2001. The increase is
attributable to organic sales growth of $10.1, a favorable exchange rate of
$0.1, and acquisitions of $1.1. For the nine months ended September 30, 2002,
sales increased $25.0 or 27% to $116.2 compared with $91.2 for the nine months
ended September 30, 2001. The increase is attributable to organic sales growth
of $21.5, a favorable exchange rate of $0.1, and acquisitions of $3.4. 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 Western Europe to maximize labor cost
efficiencies. In addition, sales increased significantly over prior year as the
Company continued to increase its market share.
Gross Profit
Gross profit margins were 38% and 39% for the three and nine months ended
September 30, 2002, respectively, compared with 38% and 39% for the three and
nine months ended September 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
add to its top-line growth and lead to gross profit margin improvements.
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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A"), as a percent of
sales, were 29% for the three and nine months ended September 30, 2002,
respectively, compared with 30% and 29% for the three and nine months ended
September 30, 2001. During the three months ended September 30, 2002, the
Company received an updated actuarial valuation of its obligation to provide
post-employment benefits to certain key executives of the Company. This
actuarial valuation, which revised several assumptions used during the initial
valuation, required incremental compensation expense of $0.6. 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 $15.4 and $47.9 for the three and nine months
ended September 30, 2002, respectively, from $7.2 and $31.2 for the three and
nine months ended September 30, 2001. As a percent of sales, operating income
was 9% and 10% for the three and nine months ended September 30, 2002,
respectively, compared with 5% and 7% for the three and nine months ended
September 30, 2001. Excluding integration/restructuring and other costs and
amortization of goodwill, operating income would have been $10.7 or 8% of sales
for the three months ended September 30, 2001 and $44.3 or 10% of sales for the
nine months ended September 30, 2001. On a reportable operating segment basis,
exclusive of corporate expenses, integration/restructuring and other costs, and
amortization of goodwill, operating income, as a percent of sales, was as
follows: Americas was 9% for the three and nine months ended September 30, 2002,
respectively, compared with 9% and 10% for the three and nine months ended
September 30, 2001; EMEA was 6% and 9% for the three and nine months ended
September 30, 2002, respectively, compared with 2% and 7% for the three and nine
months ended September 30, 2001; and Asia Pacific was 23% for the three and nine
months ended September 30, 2002, respectively, compared with 22% and 23% for the
three and nine months ended September 30, 2001.
Interest Expense, Net
Net interest expense, related primarily to long-term debt, increased to
$3.1 and $8.5 for the three and nine months ended September 30, 2002,
respectively, compared with $2.5 and $7.2 for the three and nine months ended
September 30, 2001. The increase is attributable to higher average borrowings,
lower average cash equivalents and lower rates of return available on invested
cash.
Taxes on Income
The effective tax rate decreased to 22% for the nine months ended September
30, 2002 from 25% for the nine months ended September 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:
Nine Months Ended
September 30,
-------------------------
2002 2001
--------- ---------
Net cash provided by operating activities...................... $ 37.1 $ 43.1
Net cash used in investing activities.......................... (37.8) (13.2)
Net cash provided by (used in) financing activities............ 13.7 (4.3)
--------- ---------
Total change in cash and cash equivalents (a)........ $ 13.0 $ 25.6
========= =========
__________
(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. The Company's strong
cash flow continues to strengthen its balance sheet and supports its growth
strategy focused on expanding its geographic reach and product offerings. Net
cash provided by operating activities was $37.1 for the nine months ended
September 30, 2002 compared with $43.1 for the nine months ended September 30,
2001. The decrease is primarily due to increases in accounts receivable and
inventories, partially offset by increases in net income, accounts payable and
accrued taxes on income. Management attributes the increases in accounts
receivable, inventories and accounts payable to the growth and expansion of the
Company's operations in Central and South America, EMEA and Asia Pacific.
16
Investing Activities
Management believes that acquisitions will continue to be a fundamental
element of the Company's growth. During the nine months ended September 30,
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, and NTP Gandrudbakken AS, a manufacturer of
heat transfer labels. Management does not expect these two acquisitions to have
a material impact on the Company's results of operations or financial position.
In addition, the Company continued to integrate and assimilate the operations of
its prior acquisitions, upgrade production machinery, proceed with its
Enterprise Resource Planning ("ERP") system conversions, and grow and expand the
Company's operations in Central and South America, EMEA and Asia Pacific.
Net cash used in investing activities for the nine months ended September
30, 2001 consisted of the acquisition of certain assets of U.S. Label
Corporation sold in a foreclosure proceeding, continued production machinery
upgrades and the ERP system conversions, and the costs associated with growth
and expansion of the Company's operations in Central and South America, EMEA and
Asia Pacific.
Financing Activities
The components of total capital as of September 30, 2002 and December 31,
2001, respectively, are presented below:
September 30, December 31,
2002 2001
--------------- ---------------
Due to banks................................................................... $ 0.6 $ 0.4
Current maturities of long-term debt........................................... 0.4 0.1
Long-term debt................................................................. 179.8 165.9
--------- ---------
Total debt..................................................................... 180.8 166.4
Shareholders' equity........................................................... 322.6 286.1
--------- ---------
Total capital.................................................................. $ 503.4 $ 452.5
========= =========
Total debt as a percent of total capital....................................... 36% 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 nine months ended September
30, 2002, the Company had net borrowings of $13.8 and received proceeds of $9.0
from common stock issued under its employee stock option and stock purchase
plans. In addition, the Company repurchased 200,000 shares under its stock
repurchase program and an additional 399,000 shares in a related party
transaction (see Note 12 of Notes to Consolidated Financial Statements) for a
total cost of $9.1 at an average price of $15.22 per share. Since the inception
of the stock repurchase program the Company repurchased 11,739,000 of its shares
at an average price of $9.87 per share for a total of $115.8. The Company
immediately retires stock that is repurchased. As of September 30, 2002, the
Company had $34.2 available under its $150 stock repurchase program
authorization. The Company may continue to repurchase shares under the existing
authorization, depending on market conditions.
For the nine months ended September 30, 2001, the Company had net
borrowings of $0.3 and received proceeds of $3.7 from common stock issued under
its employee stock option and stock purchase plans. In addition, the Company
repurchased 220,000 shares under its stock repurchase program and an additional
400,000 shares in a related party transaction during the period for a total cost
of $8.2 at an average price of $13.29 per share.
17
Financing Arrangement - New Credit Agreement
In September 2002, the Company entered into a three-year, $150 revolving
credit agreement with a group of domestic and international banks. The agreement
amended and restated the Company's previous revolving credit facility, which
would have expired on August 11, 2003.
The credit facility, among other things, limits the Company's ability to
change the nature of its businesses, incur indebtedness, create liens, sell
assets, engage in mergers and make investments in certain subsidiaries.
The credit facility contains certain customary events of default, which
generally give the banks the right to accelerate payments of outstanding debt.
Under the credit facility, these events include: failure to maintain required
financial covenant ratios, as described below; failure to make a payment of
principal, interest or fees within two days of its due date; default, beyond any
applicable grace period, on any aggregate indebtedness of the Company exceeding
$0.5; judgment or order involving a liability in excess of $0.5; and occurrence
of certain events constituting a change of control of the Company. The Company
does not anticipate the occurrence of any of these default events. Upon the
occurrence of such an event, the Company has the ability to cure or renegotiate
with its lenders.
Under the most restrictive debt covenants as defined in the Company's
revolving credit agreement, the Company must maintain at all times an excess of
consolidated total assets over total liabilities of not less than sum of $274
plus 35% of consolidated net income for the period after July 1, 2002 and plus
100% of the net cash proceeds received by the Company from the sale or issuance
of its capital stock on and after July 1, 2002. The Company's maximum allowable
debt to EBITDA ratio, as defined, is 3.0 to 1 and minimum allowable fixed charge
coverage ratio, as defined, is 1.5 to 1.
The Company is in compliance with the financial covenants of its financing
arrangements. The Company discloses the details of the compliance calculation to
its banks and certain other lending institutions in a timely manner.
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 September
30, 2002 was derived from customers located outside the US, principally in the
Asia Pacific and Europe regions, 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 of Financial Condition and
Results of Operations contained in Item 2 above, which information is hereby
incorporated by reference.
Item 4: Controls and Procedures
-----------------------
a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing
date of this report, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934 (the "Exchange Act")) are
effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods
specified in the Securities Exchange Commission rules and forms.
19
b) Changes in Internal Controls
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the
disclosure controls subsequent to the Chief Executive Officer's and
Chief Financial Officer's most recent evaluation, and there have been
no corrective actions with regard to significant deficiencies and
material weaknesses in such controls.
PART II. OTHER INFORMATION
--------------------------
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits.
(1) 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.
(2) 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
(1) Current Report on Form 8-K, dated August 7, 2002, reporting under Item
5 that Arthur Hershaft, the Registrant's Chairman, sold 399,420 shares
of the Registrant's common stock to the Registrant on August 7, 2002,
at a price of $15.96 per share in accordance with the terms of a Stock
Repurchase Agreement, dated July 11, 2001, between the Registrant and
Arthur Hershaft. Under the Agreement, the price was equal to the
average of the closing sale prices for the Registrant's common stock
during the period of seven (7) trading days ended August 6, 2002.
(2) Current Report on Form 8-K, dated August 15, 2002, reporting under
Item 9 that Arthur Hershaft offered to sell 399,420 shares of the
Registrant's common stock to the Registrant on August 15, 2002 in
accordance with the right of first refusal provisions of the Stock
Repurchase Agreement, dated July 11, 2001, between the Registrant and
Arthur Hershaft. The terms of such offer to sell were the same as
those offered by an unaffiliated third-party buyer under a proposed
prepaid forward contract. The Registrant waived its right to purchase
the shares on those terms. Under the Agreement, Mr. Hershaft had the
right to sell the shares on terms no more favorable to the buyer for a
period of 10 business days. On August 16, 2002, Mr. Hershaft entered
into a prepaid forward contract with such third-party buyer to deliver
such shares in accordance with the same terms as those of the prepaid
forward contract offered to the Registrant.
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)
November 14, 2002
--------------------------
Date
21
PAXAR CORPORATION AND SUBSIDIARIES
CERTIFICATION
I, Paul J. Griswold, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Paxar Corporation
(the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of and for the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal control; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Paul J. Griswold
- ----------------------------------------------
President and Chief Executive Officer
November 14, 2002
- ----------------------------------------------
Date
22
PAXAR CORPORATION AND SUBSIDIARIES
CERTIFICATION
I, Jack R. Plaxe, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Paxar Corporation
(the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of and for the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal control; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Jack R. Plaxe
- -----------------------------------
Senior Vice President and
Chief Financial Officer
November 14, 2002
- -----------------------------------
Date
23