============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-5610
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 Number)
105 Corporate Park Drive, White Plains, New York 10604
(Address of principal executive offices)
914-697-6800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
Common Stock, par value $.10 per share New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of June 28, 2002 was approximately
$589,079,000. On such date, the closing price of the registrant's Common Stock,
as quoted on the New York Stock Exchange, was $16.75.
The registrant had 38,841,115 shares of Common Stock outstanding as of
March 14, 2003.
Documents Incorporated by Reference
Part III of this Annual Report on Form 10-K is herein incorporated by
reference from the registrant's Definitive Proxy Statement to be filed with the
Securities and Exchange Commission with respect to the registrant's Annual
Meeting of Shareholders scheduled to be held on April 30, 2003.
============================================================================
PART I
Item 1: Business
Paxar Corporation ("Paxar" or the "Company"), incorporated in the State of
New York in 1946, is a global leader in providing innovative merchandising
systems to retailers and apparel manufacturers. Paxar brings to its customers a
fusion of innovative fashion ideas and technological expertise to help them
achieve retailing success. The Company's business includes the design,
manufacture and distribution of a wide variety of tags and labels, including
bar-coded labels, as well as printers and the associated supplies for customers
who prefer the flexibility of creating labels and tags on an "as-needed" basis
in their facilities. Product design, process reengineering and data management
services are becoming more important as the Company continues to differentiate
itself as a global leader.
The Company has core competencies that range from graphic design to coating,
weaving, design of mechanical and electronic printers, systems integration and
creation of software. The Company believes that its vertical integration
enhances product quality, provides manufacturing economies and helps drive
product innovation. In addition, Paxar's "concept to checkout" capabilities,
global manufacturing operations, worldwide distribution network and brand
recognition are enabling the Company to expand its competitive advantage and
market share.
The Company manufactures finished labels and tags primarily for retailers
and apparel manufacturers. It also manufactures the printers, the paper and
fabric substrates, and the inks for in-plant tag and label printing systems; and
develops most of the operating software and all of the related application
software. The Company manufactures electronic bar code systems and hand-held
mechanical labelers for use in retail stores and distribution centers as well as
for remote tracking applications. The Company also designs integrated systems
that combine its electronic printer/scanners and specialized software for large
in-store and warehouse applications, such as inventory control and distribution
management. In addition, the Company provides service for its printers at
customer locations worldwide and services mechanical labelers in its facilities
at multiple locations.
The Company operates globally with more than 55% of its business outside
the United States. Organizationally, it manages its operations across three
major geographies: North, Central and South America ("Americas"), Europe, the
Middle East, and Africa ("EMEA"), and the Asia Pacific region ("Asia Pacific").
The Company's entire array of products and services is offered for sale across
each of the aforementioned geographies. During the last three years, Paxar has
significantly expanded productive capacity in Turkey, Sri Lanka and China. As of
December 31, 2002, the Company manufactured and sold its products from 57
manufacturing facilities and sales offices located in 32 countries, and employed
a total of approximately 7,700 persons worldwide. In addition, the Company sells
its products through independent distributors in over 50 countries in which
Paxar does not sell directly to the final customer.
Acquisitions
In July 2002, the Company acquired 100% of the equity of NTP Gandrudbakken
AS ("NTP"), a manufacturer of heat transfer labels located in Norway. NTP had
annual sales of approximately $5 million.
In February 2002, the Company acquired the business and manufacturing assets
of Disenos de Coleccion ("DDC"), a leading manufacturer of merchandising labels
and tags for Mexican retailers and apparel manufacturers. DDC, located in Lerma,
Mexico, had annual sales of approximately $10 million.
Recent Events
Financing Arrangement
In September 2002, the Company entered into a three-year, $150 million
revolving credit agreement with a group of five domestic and international
banks. The agreement amended and restated the Company's previous revolving
credit facility, which would have expired on August 11, 2003.
1
Stock Repurchase
The Company has a stock repurchase plan with an authorization to use up to
$150 million in total for the repurchase of its shares. The shares may be
purchased from time to time at prevailing prices in the open-market, by block
purchases, or in privately-negotiated transactions. During 2002, the Company
repurchased 285,000 shares for an aggregate price of $3.8 million, or $13.38 per
share. Since the inception of the stock repurchase program, the Company
repurchased 11,824,000 of its shares for an aggregate price of $116.9 million,
or $9.89 per share. The Company immediately retired the repurchased shares. As
of December 31, 2002, the Company had $33.1 million available under its $150
million stock repurchase program authorization. The Company may continue to
repurchase its shares under the existing authorization, depending on market
conditions.
Products and Services
1 Bar Code Systems (BCS)
The Company manufactures and markets thermal transfer printers, which
produce high quality images on a wide variety of papers and fabrics, and
direct thermal printers, appropriate for smaller, less expensive
applications. The printers are linked electronically (often by radio
frequency) with the customer's remote data input and data collection
equipment. In this way, the printers can scan and "read" bar codes on a
given item, download the variable data for the specific label to be
printed, and then print (and, in some cases, apply) the label directly to
the item.
BCS customers are primarily in the retail industry, particularly mass
merchandisers, large retail stores and distribution centers. Bar coding is
essential to optimization of integrated, global supply chain management
solutions. In addition, bar code labels are used for price and inventory
marking in stores and to pre-mark items in distribution centers.
The Company's printers are available in handheld, portable and
tabletop models.
a. Handheld Printers
The Company has brought triple functionality to handheld models: they
can scan, print and apply bar code labels. This makes them ideal for
inventory control, re-pricing and similar warehouse applications. Their
ability to communicate with remote servers via radio frequency adds
important functionality for mobile networking applications.
Some newer models, built to work in conjunction with handheld
computers, are used by sales clerks in the retail store environment to
create a scan-and-print system with "line busting" applications. The units
can scan an item to be purchased, scan the consumer's credit card, record
the sale and print a receipt; hence, eliminating the need for consumers to
stand in the usual checkout line to have purchases processed at the cash
register.
b. Portable Printers
Portable printers weighing approximately one pound generally produce
tags and labels for in-store price mark-ups and mark-downs. Used with
handheld computers, the machines complete a total scanning and printing
system: the computer scans the merchandise and sends printing instructions
to the printer via radio frequency. These printers also function in
point-of-sale situations, generating labels and tags at the cash register.
c. Tabletop Printers
Tabletop bar code printers are heavy-duty machines used by
manufacturers for carton and pallet labeling as goods move through
the supply chain and by retailers for initial price marking in their
distribution centers. These machines can print a wide range of labels
and tags and are available on carts (frequently in multiple arrays)
so that they can be wheeled, as needed, to appropriate locations in
the warehouse or on the loading dock.
2. Apparel Systems
Generally, manufacturers use the Company's apparel systems to print,
cut and batch large volumes of labels and tags in their facilities. Such
systems are also capable of printing variable information on various fabric
and paper substrates. Typically, the labels are human-readable and provide
information such as brand identification, brand logo, care instructions,
fiber content and country of origin for retail customers. They may also
contain bar codes in addition to the aforementioned human-readable
information. The Company has developed systems to put permanent bar code
labels on apparel fabric using specialty stocks and inks. Permanent bar
codes provide the manufacturers with information regarding the date and
place of production. This information is critical in the event of customer
returns.
2
Paxar produces all the components of apparel systems, including
printers, fabrics, inks and printing accessories such as label cutters and
stackers. The sales of a system usually results in the ongoing sale of
inks, fabrics, services and replacement parts to the customer.
The newer systems give designers and retailers of branded and retail
apparel and the contractors who actually fabricate the items the capability
to exchange order and shipping information quickly and easily over the
Internet. The Company's D2Comm software gives contractors the ability to
download customer specifications for each label to be printed from a
password-protected Web site and to print that information in their
facilities on pre-purchased Paxar label stock.
3. Fabric Labels
Fabric labels and tags are the most traditional part of the Company's
business. Labels are attached inexpensively to garments early in the
manufacturing process. They provide brand, size, country of origin, care
and content information for consumers and tracking information for
retailers. The Company's creative design services capability is a very
important enabler of its fabric label business.
The Company manufactures woven labels and printed labels in its
facilities around the world in proximity to customer plants. Multi-color
woven labels are produced on jacquard broad looms and needle looms. Printed
labels are produced on coated fabrics and narrow woven-edge fabrics made by
the Company. The coating, weaving, dyeing, finishing and printing of
printed labels are accomplished using proprietary processes developed by
Paxar. The Company also operates printed label service bureaus around the
world to provide delivery of these products on an accelerated basis, often
in less than 48 hours.
Paxar has developed many innovative specialty labels. Some incorporate
security features to protect in-store merchandise from theft and to protect
branded apparel from counterfeiters. Others meet industrial needs, such as
the Company's LOKPRINT(TM) labels that remain legible on uniforms through
repeated industrial washings. Also, a companion of a LOKPRINT(TM) was
recently introduced to enable customers to create extremely durable labels
with up to six colors.
4. Graphic Tags
The Company manufactures multi-color graphic tags around the world
primarily for sale to retailers and apparel manufacturers. Generally,
graphic tags are printed on paper of various specifications. The Company
also provides these tags on other substrates such as plastic, translucent
film and metals.
The business is highly dependent upon the following capabilities and
resources:
a. Creative design services;
b. A global presence;
c. Electronic global data management; and
d. State-of-the-art presses, die-cutters and other equipment
Creative design services are an important value-added component of
Paxar's relationship with its customers; a global presence is required to
enable "source tagging" of garments by the manufacturer wherever the
garments are produced; electronic global data management ensures data
integrity; and having state-of-the-art presses and other equipment enables
"just-in-time-delivery" of tags meeting customer specifications. The
Company has these capabilities and resources and it works constantly to
strengthen them.
Manufacturers attach the tags to completed garments and provide brand
and other promotional information to support point-of-sale merchandising.
The Company also provides tags to retailers for application in their
distribution centers. In these cases, the tags can be either plain black
and white with a human-readable price and a bar code or a multi-color
graphic tag with promotional information as well as price and other
variable information. In these situations, Paxar generally preprints the
multi-color tag and then puts the tag through a second print process to
apply variable information, which generally includes a bar code. This
two-step process allows for just-in-time delivery of large volumes of tags
once the customer has knowledge of the variable information (i.e., price,
department, etc.).
As with fabric labels, the Company operates service bureaus around the
world to provide customers with rapid delivery of graphic tags. Also, as
with fabric labels, Paxar manufactures graphic tags that incorporate
security features to protect in-store merchandise from theft and to protect
branded apparel from counterfeiters.
3
5. Identification and Pricing Solutions (IPS)
IPS handheld mechanical labelers print human-readable information
(letters and numbers) for retail store and distribution center price
marking and promotional marking. To a lesser extent, IPS products are used
for food freshness dating and for component identification in the
automotive, medical and other industries. The printers are made of durable
plastic materials and deliver outstanding performance over many years of
use. Models range from labelers that print one line of information to those
that can print three lines and up to 30 characters. In addition to
manufacturing the printers, the Company produces the self-adhesive labels
used in the labelers and provides service. Merchandising products, such as
hangers, plastic bags and similar retail offerings, have been added to the
IPS product mix.
Customers
A significant majority of the Company's customers are either retailers or
manufacturers of branded apparel. Retailers purchase Paxar's BCS and IPS
products and services for in-store item marking and to facilitate the efficient
movement of goods from suppliers to consumers. In addition, retailers qualify
and specify Paxar as an approved supplier of labels and tags to contractors that
manufacture private label apparel for the retailers. (Private label merchandise
has taken significant market share from traditional non-retailer brands in
recent years.) Usually, Paxar competes with other qualified suppliers for the
contractors' business; therefore, reliability and service are critically
important. Generally, with the exception of IPS, branded apparel manufacturers
purchase the entire range of the Company's products and services.
No one customer accounted for more than 10% of the Company's revenues or
accounts receivable in either 2002 or 2001.
Competition
The Company competes on the basis of service, quality and price.
Increasingly, global capabilities are of critical importance. On a global basis,
the Company believes that it is the market leader in apparel systems, fabric
labels and BCS products and services for retailers; that it is the number one or
a close number two supplier of IPS products; and that it is among the largest
suppliers of graphic tags for apparel.
Sales and Marketing
A majority of the Company's sales are derived from salespersons employed by
the Company who call directly upon its customers. Non-exclusive manufacturers'
representatives, international and export distributors, and commission agents
account for a less significant portion of total sales. Paxar has approximately
200 sales people in North, Central and South America; approximately 180 sales
people in Europe, the Middle East and Africa; and approximately 100 sales people
in the Asia Pacific region.
Generally, the Company's salespersons are compensated on the basis of
salary plus a bonus. Non-exclusive manufacturers' representatives sell the
Company's products on a commission basis.
IPS products are also marketed through the office-supply channel and by a
catalog, which provides a cost-effective way for the Company to reach smaller
retailers.
The Company promotes its products and services through its Web site, direct
mail campaigns, publication of catalogs and brochures, participation in trade
shows, telemarketing and advertising, principally in trade journals.
4
Seasonality
The Company's business does not exhibit significant seasonality.
Sources and Availability of Raw Materials
The Company purchases fabrics, inks, chemicals, polyester film, plastic
resins, electronic components, adhesive-backed papers, yarns and other raw
materials from major suppliers around the world. The Company believes that such
materials are in good supply and are available from multiple sources.
Patents, Trademarks and Licenses
The Company relies upon trade secrets and confidentiality to protect the
proprietary nature of its technology. The Company also owns and controls
numerous patents and trademarks. Although no one patent or group of related
patents is material to the Company's business, the Company believes that, in the
aggregate, its patents are significant to its operations and its competitive
position.
Backlog
The Company's total backlog of orders was approximately $49 million and $41
million at December 31, 2002 and 2001, respectively. Backlog is not a reliable
indicator of future sales activity because more than 80 percent of annual sales
consist of orders that the Company typically fills within one month of receipt.
The balance of the orders are for products that are ordered to individual
customer specifications for delivery within two to three months.
Research and Engineering
The Company believes that continuous product innovation helps it to compete
effectively in its markets. Therefore, the Company makes substantial annual
research and product engineering investments to develop new products to serve
the needs of its customers. The Company had 92 research and engineering
personnel at December 31, 2002.
Environmental Compliance
The Company is subject to various federal, state and local environmental
laws and regulations limiting or related to the use, emission, discharge,
storage, treatment, handling and disposal of hazardous substances. Federal laws
that are particularly applicable are:
-- Water Pollution Control Act
-- Clear Air Act of 1970 (as amended in 1990)
-- Resource Conservation and Recovery Act (including amendments relating
to underground tanks)
The Company has been named a potentially responsible party relating to
contamination that occurred at certain super-fund sites. Management does not
expect the ultimate outcome of settling these contingencies to be material.
Employees
The Company had approximately 7,700 employees worldwide at December 31,
2002. Approximately 180 production employees of the Company in several locations
in the US are covered by three different union contracts, which expire at
various times from June 2003 to November 2004. The Company has no recent history
of material labor disputes. The Company believes that it has good employee
relations.
Financial Information About Geographic Areas
The information required by this Item is incorporated by reference to the
Company's Financial Statements included elsewhere in this report. (See Part IV,
Item 15, Note 10.)
5
Available Information
Paxar files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission ("SEC"). You may
read and copy any document Paxar files at the SEC's public reference room at
Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for information on the public reference room. The SEC maintains a
Web site (www.sec.gov) that contains annual, quarterly and current reports,
proxy statements and other information that issuers (including Paxar) file
electronically with the SEC.
Paxar makes available free of charge through its Web site (www.paxar.com)
its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, Forms 3, 4 and 5 filed on behalf of directors and executive
officers, and any amendments to those reports filed or furnished pursuant to the
Securities Exchange Act of 1934 as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the SEC.
Paxar's most recent annual report on Form 10-K, its quarterly reports on
Form 10-Q for the current fiscal year and its most recent proxy statement can be
viewed through its Web site, although in some cases these documents are not
available on its site as soon as they are available on the SEC's site. The
information on Paxar's Web site is not incorporated by reference into this
report.
Cautionary Statement Pursuant to "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
Except for historical information, the Company's reports to the 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.
Financial Information About Operations in the United States and Other Countries
The information required by this Item is incorporated by reference to the
Company's Financial Statements included elsewhere in this report. (See Part IV,
Item 15, Note 10.)
6
Item 2: Properties
The Company uses the following principal facilities in its operations:
Square Owned/ Lease
Location Footage Leased Expiration Used For
---------------------------- ------------------- ------------ -----------------------
Lenoir, North Carolina...... 117,000 Owned Administrative and Manufacturing
Lenoir, North Carolina...... 10,000 Leased Monthly Manufacturing
Lenoir, North Carolina...... 38,400 Leased 2004 Warehousing
Snow Hill, North Carolina... 55,000 Owned Administrative and Manufacturing
Sayre, Pennsylvania......... 182,000 Owned Administrative and Manufacturing
Sayre, Pennsylvania......... 36,000 Leased Monthly Administrative and Manufacturing
Sayre, Pennsylvania......... 35,500 Leased 2003 Administrative and Manufacturing
Fairlawn, Virginia.......... 20,221 Leased 2012 Administrative and Warehousing
Hillsville, Virginia........ 46,630 Leased 2006 Manufacturing
Hillsville, Virginia........ 33,108 Owned Manufacturing
Huber Heights, Ohio......... 104,000 Owned Administrative and Manufacturing
Miamisburg, Ohio............ 350,170 Owned Administrative and Manufacturing
Thief River Falls, Minnesota 23,200 Leased 2011 Administrative and Manufacturing
Holdrege, Nebraska.......... 33,075 Owned Administrative and Manufacturing
Holdrege, Nebraska.......... 14,800 Leased 2004 Warehousing
White Plains, New York...... 81,721 Leased 2011 Administrative
Ontario, Canada............. 37,169 Leased 2008 Administrative and Warehousing
Mexico City, Mexico......... 42,635 Owned Administrative and Manufacturing
Lerma, Mexico............... 69,911 Leased 2005 Administrative and Manufacturing
Antioquia, Columbia......... 21,667 Leased 2003 Administrative and Warehousing
Cortes, Honduras............ 11,549 Leased 2003 Administrative and Manufacturing
Runcorn, England............ 58,762 Leased 2005 Administrative and Manufacturing
Runcorn, England............ 38,349 Leased 2011 Manufacturing
Harlow, England............. 62,500 Leased 2013 Administrative and Manufacturing
Milton Keynes, England...... 32,365 Leased 2015 Administrative
Nottingham, England......... 28,606 Owned Administrative and Manufacturing
Congleton, England.......... 26,300 Owned Administrative and Manufacturing
London, England............. 14,184 Leased 2003 Administrative
Ancarano, Italy............. 96,005 Owned Administrative and Manufacturing
Carpi, Italy................ 16,684 Leased 2009 Administrative and Manufacturing
Lohne, Germany.............. 17,004 Leased 2012 Administrative and Warehousing
Sprockhovel, Germany........ 38,493 Owned Administrative and Manufacturing
Sprockhovel, Germany........ 142,605 Leased 2006 Administrative and Manufacturing
Sprockhovel, Germany........ 38,751 Leased 2007 Warehousing
Barcelona, Spain............ 16,146 Leased 2006 Administrative and Warehousing
Fontenay Sous Bois, France.. 28,181 Leased 2003 Administrative and Manufacturing
Torcy, France............... 18,288 Leased 2005 Warehousing
Saray, Turkey............... 81,593 Owned Administrative and Manufacturing
Gaupne, Norway.............. 37,460 Owned Administrative and Manufacturing
Sydney, Australia........... 17,248 Owned Administrative and Manufacturing
Hong Kong................... 78,632 Leased 2003 Administrative and Manufacturing
Hong Kong................... 75,557 Leased 2004 Administrative and Manufacturing
Sri Lanka................... 130,680 Leased 2047 Administrative and Manufacturing
Singapore................... 15,000 Leased 2003 Administrative and Manufacturing
Malaysia.................... 12,000 Leased 2003 Administrative and Manufacturing
Panyu City, China........... 58,979 Owned Administrative and Manufacturing
Panyu City, China........... 80,790 Leased 2012 Manufacturing
Panyu,City, China........... 55,500 Leased 2003 Manufacturing
Panyu City, China........... 24,640 Leased 2004 Manufacturing
In addition to the above facilities, the Company has other administrative
and manufacturing facilities and sales offices located throughout the world.
The Company believes that its facilities are adequate to maintain its
existing business activities.
7
Executive Officers of the Registrant:
Arthur Hershaft, 65, Chairman of the Board of Directors since 1986.
Paul J. Griswold, 51, President and Chief Executive Officer since August
2001 and President and Chief Operating Officer since February 2000. Prior
to that time, he was Senior Vice President-Protective Packaging and
International Operations at Pactiv Corporation, formerly Tenneco Packaging.
He joined Tenneco in 1994.
Jack R. Plaxe, 61, Senior Vice President and Chief Financial Officer since
December 1997. He had been Vice President and Chief Financial Officer of
the Company from August 1993 through March 1997.
John P. Jordan, 57, Vice President and Treasurer since August 1998. Prior
to that time, he was Vice President and Treasurer of Amscan Inc., which he
joined in 1987.
Larry M. Segall, 47, Vice President and Controller since November 2001.
Prior to that time, he was Senior Vice President-Finance and Administration
of Vitamin Shoppe Industries, Inc. from October 1997 until joining the
Company and, prior to that, was Senior Vice President of Tiffany & Co.,
which he joined in 1985.
Robert S. Stone, 65, Vice President, General Counsel and Secretary since
September 1999. Prior to that time, he was Of Counsel to the law firm of
Jackson Lewis Schnitzler & Krupman from May 1997 until joining the Company
and, prior to that, was a member of the IBM Law Department since 1962.
Each of the foregoing executive officers, except for Mr. Hershaft and Mr.
Griswold, serves at the pleasure of the Board of Directors. Mr. Hershaft is
employed under an employment agreement that expires on December 31, 2005, and
Mr. Griswold is employed under an employment agreement that expires on February
28, 2005. Mr. Griswold's agreement may be extended for an additional five years.
Item 3: Legal Proceedings
The Company is involved in a number of pending or threatened legal
proceedings in the ordinary course of business. In the opinion of management,
there are no legal proceedings which will have a material adverse effect on the
financial position or operating results of the Company.
Item 4: Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5: Market for Registrant's Common Equity and Related Shareholder Matters
The Company's common stock is traded on the New York Stock Exchange using
the symbol "PXR." The following table sets forth the 2002 and 2001 high and low
sales prices of the Company's common stock as reported on the New York Stock
Exchange for the periods indicated.
Sales Prices
------------------
High Low
Calendar Year 2002 -------- -------
First Quarter........ $ 17.55 $ 14.03
Second Quarter....... 18.05 15.70
Third Quarter........ 17.15 12.20
Fourth Quarter....... 15.43 12.35
Calendar Year 2001
First Quarter........ $ 12.50 $ 9.44
Second Quarter....... 14.40 10.35
Third Quarter........ 14.30 10.80
Fourth Quarter....... 14.24 10.20
As of March 14, 2003, there were approximately 1,600 record holders of the
Company's common stock.
The Company has never paid any cash dividends on its Common Stock and has
no present intention of doing so.
Item 6: Selected Consolidated Financial Data
The selected consolidated financial data as of and for the five-year period
ended December 31, 2002 has been derived from the Company's Consolidated
Financial Statements. This data should be read in conjunction with the
Consolidated Financial Statements and related Notes for the year ended December
31, 2002 and Management's Discussion and Analysis of Financial Condition and
Results of Operations.
8
All amounts are stated in millions, except employee and per share data.
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- -------
Operating Results
As reported:
Sales........................................ $ 667.8 $ 610.6 $ 645.4 $ 661.8 $ 611.6
EBITDA (a)(c)................................ 90.1 86.0 96.7 107.3 95.3
Net income................................... 40.3 18.8 77.5 33.4 33.6
Basic earnings per share..................... 1.02 0.45 1.74 0.72 0.69
Diluted earnings per share (d)............... 1.00 0.44 1.73 0.71 0.68
As adjusted: (b)
Sales........................................ $ 667.8 $ 610.6 $ 631.6 $ 581.0 $ 528.8
EBITDA (a)(c)................................ 90.1 86.0 93.3 85.8 78.8
Financial Condition
Total assets.................................... $ 639.6 $ 583.8 $ 603.4 $ 621.9 $ 581.4
Total debt...................................... 166.7 166.4 166.8 208.7 207.1
Shareholders' equity............................ 337.6 286.1 303.3 281.9 266.2
Total debt as a percent of total capital........ 33.1% 36.8% 35.5% 42.5% 43.8%
Financial STATISTICS
EBITDA as a percent of sales (a)(b)(c).......... 13.5% 14.1% 14.8% 14.8% 14.9%
Net income as a percent of sales................ 6.0% 3.1% 12.0% 5.0% 5.5%
Effective income tax rate....................... 18.8% 17.2% 23.2% 32.9% 30.0%
Return on average shareholders' equity (e)...... 12.9% 6.4% 26.4% 12.2% 13.4%
OTHER DATA
Operating cash flow............................. $ 62.7 $ 53.5 $ 69.8 $ 72.7 $ 68.5
Capital expenditures............................ 25.5 24.2 32.2 31.9 35.7
Depreciation and amortization................... 29.6 32.8 31.9 38.3 32.7
Dividends....................................... None None None None None
Number of employees at year end................. 7,700 6,400 6,000 5,900 4,950
Weighted average shares outstanding, diluted.... 40.3 42.4 44.8 47.2 49.4
Shares outstanding.............................. 39.2 38.9 42.1 46.7 47.9
Book value per share............................ $ 8.61 $ 7.35 $ 7.20 $ 6.04 $ 5.56
- ----------
(a) Earnings before interest, taxes, depreciation and amortization.
(b) Excludes International Imaging Materials, Inc. ("IIMAK") in 2000, 1999 and
1998.
(c) Excludes non-recurring charges in 2001, 2000 and 1999, $7.3 ($4.7 after
taxes) of post-employment benefit costs in 2001 and $2.5 due to recording of
Bornemann & Bick's inventories at fair value in 2000.
(d) Excluding items cited in (c), $50.3 ($40.3 after taxes) of gain on sale of
IIMAK in 2000 and amortization of goodwill in 2001, 2000, 1999 and 1998,
diluted earnings per share would have been $0.88 in 2001, $1.01 in 2000,
$0.89 in 1999 and $0.78 in 1998.
(e) Excluding items cited in (c), $50.3 ($40.3 after taxes) of gain on sale of
IIMAK in 2000 and amortization of goodwill in 2001, 2000, 1999 and 1998,
return on average shareholders' equity would have been 12.7% in 2001, 15.5%
in 2000, 15.4% in 1999 and 15.3% in 1998.
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
All references to years relate to fiscal years ended on December 31 and 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 Annual Report on Form
10-K requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the Company's financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results may
differ from those estimates.
9
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 or determinable;
and (4) collectibility is reasonably assured. Determination of criteria (3) and
(4) are based on management's judgments regarding the fixed nature of the fee
charged for products delivered and services rendered and the collectibility of
those fees. Should changes in conditions cause management to determine that
these criteria are not met for certain future transactions, revenue recognized
for 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 and current trends when evaluating the
adequacy of the allowance for doubtful accounts. The Company's accounts
receivable balance at December 31, 2002 was $106.8, net of allowances of $10.2.
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, net intangible assets and goodwill amounted to $352.6 as of
December 31, 2002.
On January 1, 2002, Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," became effective and as a
result, the Company no longer amortizes goodwill. The amortization of goodwill
the Company recorded in 2001 was $6.0 and would have been $6.2 in 2002.
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. Accordingly, the Company completed its annual goodwill impairment
assessment in 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 has not been impaired.
In 2002, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," also became effective. SFAS No. 144 provides guidance for
the development of one accounting model based on the framework established in
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and addresses significant implementation
issues. The Company has 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.
10
Accounting for Income Taxes
As part of the process of preparing the consolidated financial statements,
management is required to estimate the income taxes in each jurisdiction in
which the Company operates. This process involves estimating the actual current
tax exposure together with assessing temporary differences resulting from the
differing treatment of items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included on the
consolidated balance sheet. Management must then assess the likelihood that the
deferred tax assets will be recovered, and to the extent that management
believes that recovery is not likely, the Company must establish a valuation
allowance. If a valuation allowance is established or increased during any
period, the Company must generally include this amount as an expense within the
tax provision on the consolidated statement of income. Significant management
judgment is required in determining the Company's provision for income taxes,
deferred tax assets and liabilities and any valuation allowance recorded against
net deferred assets. The valuation allowance is based on management's estimates
of the taxable income in the jurisdictions in which the Company operates and the
period over which the deferred tax assets will be recoverable. In the event that
actual results differ from these estimates or management adjusts these estimates
in future periods, the Company may need to establish an additional valuation
allowance, which could materially impact its results of operations. The gross
deferred tax assets as of December 31, 2002 were $21.9, net of a valuation
allowance of $6.4.
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, the 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 impacting 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 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
its global operational capability 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. Moreover, the Company believes that the
Company's concept to checkout capabilities, global manufacturing operations,
worldwide distribution network, brand recognition and absolute commitment to
providing its customers with a broad array of quality products and outstanding
service are enabling the Company to expand its competitive advantage and market
share.
The Company's results of operations for the years ended December 31, 2002,
2001 and 2000, respectively, in dollars and as a percent of sales are presented
below:
2002 2001 2000
------------------- ------------------- -------------------
Sales............................................ $ 667.8 100.0% $ 610.6 100.0% $ 645.4 100.0%
Cost of sales.................................... 410.7 61.5 376.1 61.6 394.6 61.1
-------- ------- -------- ------- -------- -------
Gross profit................................ 257.1 38.5 234.5 38.4 250.8 38.9
Selling, general and administrative expenses..... 196.3 29.4 182.6 29.9 182.8 28.3
Amortization of goodwill and other intangibles... 0.3 -- 6.0 1.0 5.7 0.9
Integration/restructuring and other costs........ -- -- 13.3 2.2 1.9 0.3
-------- ------ -------- ------- -------- -------
Operating income............................ 60.5 9.1 32.6 5.3 60.4 9.4
Gain on sale of IIMAK............................ -- -- -- -- 50.3 7.7
Interest expense, net............................ 10.9 1.7 9.9 1.6 9.8 1.5
-------- ------- -------- ------- -------- -------
Income before taxes......................... 49.6 7.4 22.7 3.7 100.9 15.6
Taxes on income.................................. 9.3 1.4 3.9 0.6 23.4 3.6
-------- ------- -------- ------- -------- -------
Net income.................................. $ 40.3 6.0% $ 18.8 3.1% $ 77.5 12.0%
======== ======= ======== ======= ======== =======
Despite the continuance of a sluggish global economic environment and a
marked downturn in retail sales, which began in mid-2000 and continued
throughout 2002, the Company's sales increased $57.2 or 9.4% to $667.8 in 2002
from $610.6 in 2001. The sales increase is attributable to increased customer
demand for the existing range of the Company's products ("organic sales growth")
of $17.0, favorable exchange rates of $6.3 and acquisitions made during the
second half of 2001 and 2002 of $33.9. Management believes that the Company's
ability to provide its customers with outstanding service, consistent quality
and on-time deliveries helped fuel the organic sales growth. In addition,
management believes that the Company's investments in new product development,
upgraded manufacturing equipment, new technology and sales and marketing
initiatives have positioned the Company to compete successfully and achieve
continued success in executing its core strategy of building volume and
earnings. Nonetheless, there can be no assurance as to the extent or duration of
this cyclical downturn or as to its future impact on the Company. Operating
income was $60.5 in 2002 compared with $32.6 in 2001. As a percent of sales,
operating income was 9.1% in 2002 and 5.3% in 2001. In 2001, the Company took
non-recurring charges totaling $13.3 in connection with implementing major
restructuring initiatives. Excluding non-recurring charges, $7.3 of
post-employment benefit costs (see Note 15 of Notes to Consolidated Financial
Statements) and amortization of goodwill (see Note 2 of Notes to Consolidated
Financial Statements), operating income was $59.2 or 9.7%, as a percent of
sales, in 2001.
11
In 2001, sales decreased 5.4% to $610.6 from $645.4 in 2000. Excluding the
impact of the operations of International Imaging Materials, Inc. ("IIMAK"), a
business which was determined to be non-strategic and sold in early 2000 (see
Note 4 of Notes to Consolidated Financial Statements), sales declined 3.3% from
the prior year. Operating income was $32.6 in 2001 compared with $60.4 in 2000.
As a percent of sales, operating income was 5.3% in 2001 and 9.4% in 2000.
Excluding the impact of the operations of IIMAK in 2000, non-recurring charges
in 2001 and 2000, $7.3 of post-employment benefit costs in 2001, $2.5 due to
recording of Bornemann & Bick's inventories at fair value in 2000, and
amortization of goodwill in 2001 and 2000, operating income was $59.2 in 2001
compared with $68.4 in 2000, or as a percent of sales, 9.7% in 2001 and 10.8% in
2000.
Management believes that acquisitions will continue to be a fundamental
element of the Company's growth. During 2002, the Company continued to integrate
and assimilate the operations of prior acquisitions. In addition, the Company
acquired the business and manufacturing assets of Disenos de Coleccion, a
leading manufacturer of merchandising labels and tags for Mexican retailers and
NTP Gandrudbakken AS, a manufacturer of heat transfer labels located in Norway.
Sales
The following table presents sales by geographic operating segment:
2002 2001 2000
-------------------- -------------------- -------------------
Sales to unaffiliated customers:
Americas........................ $ 332.4 49.8% $ 322.2 52.8% $ 365.0 56.6%
EMEA............................ 176.6 26.4 162.8 26.7 162.3 25.1
Asia Pacific.................... 158.8 23.8 125.6 20.5 118.1 18.3
-------- ------- -------- ------- -------- ------
Total................. $ 667.8 100.0% $ 610.6 100.0% $ 645.4 100.0%
======== ======= ======== ======= ======== ======
Americas sales include sales delivered through Company operations in North
(primarily in the US), Central and South America. Sales increased $10.2 or 3.2%
in 2002 and, excluding sales of IIMAK of $13.8 in 2000, declined $29.0 or 8.3%
in 2001. Management attributes the increase in 2002 to acquisitions and organic
sales growth in the Company's Central and South America operations. Management
notes, however, that organic sales in the Company's North America operations
declined in 2002 and 2001 due to challenging economic and retail conditions that
resulted in fewer orders and smaller average transaction size and generally
reduced customer demand for the entire range of the Company's products.
Additionally, management points to a sales migration trend that strengthened
significantly in 2000 and continued into 2001 and 2002. Many of the Company's
customers have steadily moved their production facilities outside the US where
they have realized labor and cost efficiencies. This has resulted in a shift in
sales mix primarily to Central and South America as well as outside the region
to Asia Pacific.
EMEA's sales in 2002, which include sales delivered through Company
operations in eleven European countries, the Middle East and Africa, increased
$13.8 or 8.5% in 2002. The increase is attributable to acquisitions of $12.4 and
favorable exchange rates of $6.3, offset by $4.9 decline in organic sales.
Management believes that the weakness in economic and retail conditions in EMEA
and uncertainties surrounding global economic environment continued to dampen
overall customer demand level, which in turn put pressure on EMEA's sales in
2002. The overall decline in organic sales was somewhat offset by significant
sales growth in Turkey. In addition, the Company experienced sales migration to
Asia Pacific as manufacturers sought to maximize production efficiencies. In
2001, sales were flat when compared with 2000. The increase attributable to
organic sales growth of $6.8, occurring primarily in Turkey and France, and
acquisition related sales of $7.5 was offset by a decline of $13.8 in the UK.
Asia Pacific consists of the Company's operations in Hong Kong, China,
India, Singapore, Sri Lanka, Australia and Korea. Sales increased $33.2 or 26.4%
in 2002. The increase is attributable to organic sales growth of $29.5, a
favorable exchange rate of $0.3 and an acquisition 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
facilities outside the US and Western Europe to maximize labor cost and
operating performance efficiencies. In addition, the Company continued to gain
market share in Asia Pacific. In 2001, sales increased $7.5 or 6.4%. The
increase was attributable to organic sales growth resulting from sales migration
from the US and Western Europe of $11.0 and an acquisition of $2.0, offset by a
sales decline of $5.5, primarily in Singapore and Australia.
12
Gross Profit
Gross profit, as a percent of sales, improved slightly to 38.5% in 2002 from
38.4% in 2001 and decreased in 2001 from 39.2% (excluding the impact of a fair
value adjustment to inventories in connection with an acquisition) in 2000. In
2002, the negative impact of continued price compression and smaller less
efficient production runs was offset by cost reductions in labor and materials.
The decrease in 2001 was primarily due to price compression and more frequent
and costly production runs on smaller orders. Since 2001, management's ongoing
strategy has included implementing process improvements to reduce costs in all
of its manufacturing facilities, efficiently re-deploying assets to manage
production capacity and expanding production in new and emerging markets in
order to maximize labor and cost efficiencies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A"), as a percent of
sales, were 29.4% in 2002 and 29.9% in 2001. During 2001, certain key executives
of the Company signed employment agreements under which the Company is obligated
to provide post-employment benefits. In connection with these agreements, the
Company recorded $1.5 and $7.3 of post-employment benefit costs in 2002 and
2001, respectively, as SG&A. SG&A, as a percent of sales, was 28.3% in 2000.
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.
Integration/Restructuring and Other Costs
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. During 2000, the Company recorded a pre-tax charge of $1.9
relating to integration/restructuring and other costs. Of this amount, $0.9
pertained to the integration of certain facilities and severance for personnel
in Europe. The remaining $1.0 pertained to the severance for personnel as well
as other costs associated with the Company's decision to discontinue a supplies
manufacturing operation in Canada.
Operating Income
Operating income was $60.5 in 2002 compared with $32.6 in 2001. As a percent
of sales, operating income was 9.1% in 2002 and 5.3% in 2001. In 2001, the
Company took non-recurring charges totaling $13.3 in connection with
implementing major restructuring initiatives. Excluding non-recurring charges,
$7.3 of post-employment benefit costs and amortization of goodwill, operating
income was $59.2, or 9.7% of sales, in 2001.
Operating income was $32.6 in 2001 compared with $60.4 in 2000. As a
percent of sales, operating income was 5.3% in 2001 and 9.4% in 2000. Excluding
the impact of the operations of IIMAK in 2000, non-recurring charges in 2001 and
2000, $7.3 of post-employment benefit costs in 2001, $2.5 due to recording of
Bornemann & Bick's inventories at fair value in 2000, and amortization of
goodwill in 2001 and 2000, operating income was $59.2 in 2001 compared with
$68.4 in 2000, or as a percent of sales, 9.7% in 2001 and 10.8% in 2000.
On a reportable operating segment basis, operating income, as a percent of
sales, was as follows: Americas (excluding the operations of IIMAK in 2000 and
non-recurring charges and amortization of goodwill in 2001 and 2000) was 8.3%,
10.4% and 11.1% in 2002, 2001 and 2000, respectively; EMEA (excluding
non-recurring charges and amortization of goodwill in 2001 and 2000) was 8.0%,
6.3% and 7.5% in 2002, 2001 and 2000, respectively; and Asia Pacific (excluding
non-recurring charges in 2001 and amortization of goodwill in 2001 and 2000) was
22.9%, 23.5% and 24.0% in 2002, 2001 and 2000, respectively.
Gain on Sale of IIMAK
During 2000, the Company sold 92.5% of IIMAK for $127.5, which included
$120.0 in cash and $7.5 of IIMAK preferred stock. The sale resulted in a gain of
$50.3 ($40.3, net of taxes).
13
Interest Expense, Net
Net interest expense related primarily to long-term debt increased to $10.9
in 2002 and $9.9 in 2001 from $9.8 in 2000. The increase is attributable to
higher average borrowings, reduced amounts of cash and cash equivalents and
lower rates of return available on invested cash. Management expects this trend
to continue in 2003.
Taxes on Income
The effective income tax rate was 18.8% in 2002 compared with 17.2% in 2001
and 23.2% in 2000. The rate will change year to year based on non-recurring
items including the geographic mix of pre-tax income, the timing and amounts of
foreign dividends, and state and local taxes. In addition, the 2001 effective
tax rate was reduced by incremental integration/restructuring and other costs
and post-employment benefit costs to which higher tax rates applied. The tax
rate in 2001 was further reduced as a result of a settlement with IIMAK (see
Note 9 of the Notes to Consolidated Financial Statements). The 2000 effective
tax rate reflects the benefit of various tax versus book basis items related to
the sale of IIMAK.
Liquidity and Capital Resources
The table below presents summary cash flow information for the years
indicated:
2002 2001 2000
--------- --------- -------
Net cash provided by operating activities............. $ 62.7 $ 53.5 $ 69.8
Net cash provided by (used in) investing activities... (47.9) (28.1) 38.1
Net cash used in financing activities................. (1.6) (34.3) (94.1)
-------- -------- --------
Total change in cash and cash equivalents (a) $ 13.2 $ (8.9) $ 13.8
======== ======== ========
- ----------
(a) Before the effect of exchange rate changes on cash flows.
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
revolving credit agreement provides additional liquidity for seasonal and
specific-purpose expenditures. Net cash provided by operating activities was
$62.7, $53.5 and $69.8 in 2002, 2001 and 2000, respectively. Management believes
that the Company will continue to generate sufficient cash from its operating
activities for the foreseeable future supplemented by availability under its
revolving credit agreement to fund its working capital needs, strengthen its
balance sheet and support its growth strategy of expanding its geographic reach
and product offerings.
Working capital and the corresponding current ratio were $154.4 and 2.4:1
and $132.2 and 2.3:1 at December 31, 2002 and 2001, respectively. The increase
in working capital from 2001 to 2002 resulted from increases in cash and cash
equivalents, accounts receivable, inventories and other current assets, offset
by increases in due to banks, accounts payable and accrued liabilities and
accrued taxes on income.
Investing Activities
Management believes that acquisitions will continue to be a fundamental
element of the Company's growth. In 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 NTP Gandrudbakken AS, a
manufacturer of heat transfer labels located in Norway. 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 the emerging
markets of Central and South America, EMEA and Asia Pacific. Capital
expenditures in 2002 were $25.5 compared with $24.2 in 2001 and were funded by
cash provided by operating activities. In 2003, management anticipates that the
Company's capital expenditures for production machinery upgrades, ERP system
conversions and growth and expansion of the Company's operations in the Central
and South America, EMEA and Asia Pacific markets will be approximately $31.
Investing activities during 2001 primarily consisted of the acquisitions of
Europrint S.A., Independent Machine Service, Inc., and certain assets of U.S.
Label Corporation, continued production machinery upgrades and the ERP system
conversions, and the costs associated with growth and expansion of the Company's
operations in the Central and South America, EMEA and Asia Pacific markets.
Net cash provided by investing activities in 2000 resulted from net proceeds
from the sale of 92.5% of IIMAK, offset by the cost of the Company's acquisition
of Bornemann & Bick group of companies, continued upgrade of the production
equipment, the costs associated with growth and expansion of the Company's
operations in the Central and South America and Asia Pacific markets and
continued investment in the ERP system conversions.
14
Material Commitments
Total rental expense for all operating leases amounted to $8.1 in 2002, $6.9
in 2001 and $6.2 in 2000.
Minimum rental commitments for all non-cancelable operating leases are as
follows:
Years ending December 31,
------------------------------------------------------------
2003........................................................ $ 7.2
2004........................................................ 5.5
2005........................................................ 4.1
2006........................................................ 3.0
2007........................................................ 2.6
Thereafter.................................................. 11.6
--------
$ 34.0
========
Financing Activities
The components of total capital as of December 31, 2002, 2001 and 2000,
respectively, are presented below:
2002 2001 2000
---------- ---------- -------
Due to banks........................... $ 2.1 $ 0.4 $ 0.9
Current maturities of long-term debt... 0.1 0.1 0.1
Long-term debt......................... 164.5 165.9 165.8
-------- -------- --------
Total debt............................. 166.7 166.4 166.8
Shareholders' equity................... 337.6 286.1 303.3
-------- -------- --------
Total capital.......................... $ 504.3 $ 452.5 $ 470.1
======== ======== ========
Total debt as a percent of total capital 33.1% 36.8% 35.5%
======== ======== ========
Management believes that the borrowings available under the Company's
revolving credit agreement provide sufficient liquidity to supplement the
Company's operating cash flow to support the Company's planned business
activities and seasonal and specific-purpose expenditures. For the years ended
December 31, 2002, 2001 and 2000, net repayments of the Company's outstanding
debt were $1.1, $0.5 and $45.6, respectively. In 2000, the Company repaid the
outstanding balance of $49.4 under its revolving credit agreement out of the net
proceeds from the sale of 92.5% of IIMAK.
The Company has various stock-based compensation plans, including two stock
option plans, a long-term incentive plan, and an employee stock purchase plan.
For the years ended December 31, 2002, 2001 and 2000, the Company received
proceeds of $9.7, $4.7 and $2.5, respectively, from common stock issued under
its employee stock option and stock purchase plans.
The Company has a stock repurchase plan with an authorization to use up to
$150 in total for the repurchase of its shares. The shares may be purchased from
time to time at prevailing prices in the open-market, by block purchases, or in
privately-negotiated transactions. The Company repurchased 285,000 shares for an
aggregate price of $3.8, or $13.38 per share, in 2002, 3,238,000 shares for an
aggregate price of $33.1, or $10.22 per share, in 2001 and 5,035,000 shares for
an aggregate price of $51.0, or $10.14 per share, in 2000. Since the inception
of the stock repurchase program, the Company repurchased 11,824,000 of its
shares for an aggregate price of $116.9, or $9.89 per share. The Company
immediately retired the repurchased shares. As of December 31, 2002, the Company
had $33.1 available under its $150 stock repurchase program authorization. The
Company may continue to repurchase its shares under the existing authorization,
depending on market conditions. The Company believes that funds from future
operating cash flows and funds available under its revolving credit agreement
are adequate to allow it to continue to repurchase its shares under the stock
repurchase plan.
15
During 2001, the Company entered into a stock repurchase agreement with an
officer (the "shareholder"), who is also a director and principal shareholder of
the Company, under which the Company may be required to purchase from the
shareholder up to a certain number of its shares each year (see Note 18 of Notes
to Consolidated Financial Statements). The Company repurchased from the
shareholder 399,000 of its shares for $6.4, or $15.96 per share in 2002 and
400,000 of its shares for $5.4, or $13.40 per share in 2001. The Company
immediately retired the shares it purchased from the shareholder. The Company's
obligations under the stock repurchase agreement are in addition to its
authorization under the stock repurchase plan.
Financing Arrangement - Amended and Restated Credit Agreement
In September 2002, the Company entered into a three-year, $150 revolving
credit agreement with a group of five domestic and international banks. The
agreement amended and restated the Company's previous revolving credit facility,
which would have expired on August 11, 2003. Under the credit agreement, the
Company pays a facility fee determined by reference to the debt to EBITDA ratio.
The applicable percentage for the facility fee at December 31, 2002 was 0.275%.
Borrowings under the credit agreement bear interest at rates referenced to the
London Interbank Offered Rate with applicable margins varying in accordance with
the Company's attainment of specified financial threshholds or, at the Company's
option, rates competitively bid among the participating banks or the Prime Rate,
as defined (4.25% and 4.75% at December 31, 2002 and 2001, respectively), and
are guaranteed by certain domestic subsidiaries of the Company.
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.
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 the sum of
$274 plus 35% of consolidated net income for the period after July 1, 2002 plus
100% of the net cash proceeds received by the Company from the sale or issuance
of its 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.
Off Balance Sheet Arrangements
The Company has no material transactions, arrangements, obligations
(including contingent obligations), or other relationships with unconsolidated
entities or other persons, that have or are reasonably likely to have a material
current or future impact on its financial position, changes in financial
position, results of operations, liquidity, capital expenditures, capital
resources, or significant components of revenues or expenses.
Market Risk
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.
16
The following assumptions, among others, are "risk factors" which could
affect the likelihood that the Company will achieve the objectives and
expectations communicated by management: (1) that there are no substantial
adverse changes in the exchange relationship between the British Pound Sterling
or the Euro and the US Dollar; (2) that low or negative economic growth,
particularly in the US, the UK or in Europe, will not occur and affect consumer
spending in those countries; (3) that there will continue to be adequate supply
of the Company's raw materials and components at economic terms; (4) that its
new ERP systems can be successfully integrated into the Company's operations;
(5) that the Company can continue to expand its manufacturing and distribution
capacity in developing markets; and (6) that there are no substantial adverse
changes in the political climates of developing and other countries in which the
Company has operations and countries in which the Company will endeavor to
establish operations in consort with its major customers' migrations to
lower-production-cost countries.
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 pre-tax earnings
and cash flows over the next fiscal year. Such a move in interest rates would
have no effect on the fair value of the Company's floating rate debt
instruments. 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 in 2002 was derived from customers
located outside the US, principally in EMEA and Asia Pacific, where the Company
also manufactures its products. This exposes the Company to risks associated
with changes in foreign currency that can adversely impact revenues, net income
and cash flow. In addition, the Company is potentially subject to concentrations
of credit risk, principally in accounts receivable. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.
The Company's major customers are retailers and global apparel manufacturers
that have historically paid their accounts payable balances with the Company.
Item 7A: Quantitative and Qualitative Disclosure about Market Risk
The information required by this Item is set forth under the heading "Market
Risk" in Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, above, which information is hereby incorporated by
reference.
Item 8: Financial Statements and Supplementary Data
The financial information required by Item 8 is incorporated by reference
to the consolidated financial statements and notes thereto as an exhibit in Part
IV, Item 15, pages 24 through 41.
Item 9: Changes In and Disagreements with Accountants on Accounting and on
Financial Disclosure
The Company dismissed Arthur Andersen LLP as its independent accountants,
effective upon the completion of their audit of the Company's December 31, 2001
financial statements. Since January 1, 2000, there were no disagreements between
the Company and Arthur Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures. The
Company engaged PricewaterhouseCoopers LLP to serve as its new independent
accountants for fiscal year 2002, after evaluating several firms. The Company
previously reported this change in accountants in a Current Report on Form 8-K,
dated February 20, 2002.
PART III
Item 10: Directors and Executive Officers of the Registrant
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders scheduled
to be held on April 30, 2003. Also refer to Item 2 entitled "Executive Officers
of the Registrant" in Part I of this Form.
17
Item 11: Executive Compensation
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders scheduled
to be held on April 30, 2003.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders scheduled
to be held on April 30, 2003.
Item 13: Certain Relationships and Related Transactions
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders scheduled
to be held on April 30, 2003.
Item 14: 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.
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 IV
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents
(1) FINANCIAL STATEMENTS --
Statement of Management's Responsibility for Financial Statements.............. 20
Report of Independent Accountants.............................................. 21
Report of Independent Accountants on Financial Statement Schedule.............. 22
Copy of Previously Issued Report of Independent Public Accountants............. 23
Consolidated Statements of Income for the years ended December 31, 2002, 2001
and 2000....................................................................... 24
Consolidated Balance Sheets as of December 31, 2002 and 2001................... 25
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the
years ended December 31, 2002, 2001 and 2000................................... 26
Consolidated Statements of Cash Flows for the years ended December 31, 2002,
2001 and 2000.................................................................. 27
Notes to Consolidated Financial Statements..................................... 28 to 41
(2) FINANCIAL STATEMENT SCHEDULE --
Schedule II-- Valuation and Qualifying Account................................. 42
All other schedules called for under Regulation S-X are not submitted because
they are not applicable or not required, or because the required information is
included in the financial statements or notes thereto.
Separate financial statements of the registrant have been omitted because the
registrant is primarily an operating company. All subsidiaries included in the
consolidated financial statements are majority owned, and none of the
subsidiaries have indebtedness which is not guaranteed by the registrant.
18
(b) Report on Form 8-K
None.
(c) Exhibits
3.1 By-Laws. (A)
3.2 Amended and Restated Certificate of Incorporation. (C)
3.3 Amendment to Amended and Restated Certificate of
Incorporation. (E)
10.1 Registrant's 1990 Employee Stock Option Plan. (B)
10.2 Agreement and Plan of Merger dated as of July 15, 1997,
among the Registrant, Ribbon Manufacturing, Inc., and
International Imaging Materials, Inc. (D)
10.3 Registrant's 1997 Incentive Stock Option Plan. (F)
10.4 Deferred Compensation Plan for Directors. (G)
10.5 Change of Control Employment Agreement dated as of April 20,
1999, between the Registrant and Jack Plaxe. (H)
10.6 Agreement, dated as of February 8, 2000, among the
Registrant, Paxar Capital Corporation, International Imaging
Material, Inc., Center Capital Investors III, L.P. and
Related Partnerships. (I)
10.7 Amendment No. 1, dated March 9, 2000 to the Stock Purchase
and Recapitalization Agreement, dated as of February 8,
2000, among the Registrant, Paxar Capital Corporation,
International Imaging Materials, Inc., Centre Capital
Investors III, L.P., and related partnerships. (I)
10.8 Registrant's 2000 Long-Term Performance and Incentive
Plan. (J)
10.9 Commercial Limited Partnership Interest Purchase and
Assignment Agreement, dated May 18, 2000, among the
Registrant, Bornemann & Bick GmbH & Co, KG, Gerhard
Bornemann, and Ulrich Bornemann. (K)
10.10 Sale and Purchase Agreement, dated May 18, 2000, between
Paxar Far East Limited and Ulrich Wilhelm Helmut
Bornemann. (K)
10.11 Agreement, dated as of July 11, 2001, by and between Paxar
Corporation and Arthur Hershaft. (L)
10.12 Agreement, dated as of August 10, 2001, by and between Paxar
Corporation and Paul Griswold. (M)
10.13 Agreement, dated as of September 1, 2001, by and between Paxar
Corporation and Victor Hershaft. (M)
10.14 Credit Agreement, dated as of September 24, 2002. (N)
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
23.2 Notice Regarding Consent of Arthur Andersen LLP.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------
(A) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1980.
(B) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1990.
(C) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1992.
(D) Incorporated herein by reference from Exhibits to Registrant's Current
Report on Form 8-K dated July 15, 1997.
(E) Incorporated herein by reference from Annex D to the Joint Proxy
Statement/Prospectus included in the Registrant's Registration Statement
on Form S-4 (File No. 333-36283), filed on September 24, 1997.
(F) Incorporated herein by reference from Exhibits to the Registrant's
Registration Statement on Form S-8 (File No. 333-38923), filed on October
28, 1997.
(G) Incorporated herein by reference from Annex A to Registrant's preliminary
proxy statement dated March 31, 1998.
(H) Incorporated herein by reference from Exhibits to the Registrant's Form
10-Q filed on August 11, 1999.
(I) Incorporated herein by reference from Exhibits to Registrant's Form 8-K
dated March 9, 2000.
(J) Incorporated herein by reference from Appendix B and C to Registrant's
definitive proxy statement dated March 31, 2000.
(K) Incorporated herein by reference from Exhibits to Registrant's Form 8-K
dated May 18, 2000.
(L) Incorporated herein by reference from Exhibits to Registrant's Form 8-K
dated July 11, 2001.
(M) Incorporated herein by reference from Exhibits to Registrant's Form 10-Q
filed on November 14, 2001.
(N) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 2002.
19
STATEMENT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
To the Shareholders of Paxar Corporation:
The consolidated financial statements and accompanying information were
prepared by management, who accepts full responsibility for their integrity and
objectivity. The statements were prepared in conformity with generally accepted
accounting principles in the United States and, as such, include amounts that
are based on management's best estimates and judgments.
Management is further responsible for maintaining a system of internal
accounting control designed to provide reliable financial information for the
preparation of financial statements, to safeguard assets against loss or
unauthorized use and to ensure that transactions are executed consistent with
Company policies and procedures. Management believes that existing internal
accounting control systems are achieving these objectives and provide reasonable
assurance concerning the accuracy of the financial statements.
Oversight of management's financial reporting and internal accounting
control responsibilities is exercised by the Board of Directors, through its
Audit Committee, which consists solely of outside directors. The Committee meets
periodically with financial management, internal auditors and the independent
accountants to obtain reasonable assurance that each is meeting its
responsibilities and to discuss matters concerning auditing, internal accounting
control and financial reporting. The independent accountants and the Company's
internal audit department have free access to meet with the Audit Committee
without management's presence.
/s/ Paul J. Griswold
- --------------------
Paul J. Griswold
President and Chief Executive Officer
/s/ Jack R. Plaxe
- -----------------
Jack R. Plaxe
Senior Vice President and Chief Financial Officer
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Paxar Corporation:
In our opinion, the accompanying consolidated balance sheet as of December
31, 2002 and the related consolidated statements of income, shareholders' equity
and comprehensive income and cash flows for the year then ended present fairly,
in all material respects, the financial position of Paxar Corporation and its
subsidiaries (the "Company") as of December 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. The financial statements of the Company as of
December 31, 2001 and for each of the two years in the period ended December 31,
2001, prior to the revisions discussed in Note 2 to the consolidated financial
statements, were audited by other independent accountants who have ceased
operations. Those independent accountants expressed an unqualified opinion on
those financial statements in their report dated January 29, 2002.
As disclosed in Note 2, the Company changed the manner in which it accounts
for goodwill and other intangible assets as a result of the adoption of
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets" on January 1, 2002.
As discussed above, the financial statements of Paxar Corporation as of
December 31, 2001, and for each of the two years in the period ended December
31, 2001, were audited by other independent accounts who have ceased operations.
As described in Note 2, these financial statements have been revised to
separately reflect amounts that represent goodwill, and to include the
transitional disclosures required by SFAS No. 142. We audited the adjustments
described in Note 2 that were applied to revise the 2001 and 2000 financial
statements. We also audited the transitional disclosures described in Note 2. In
our opinion, the revisions and transitional disclosures for 2001 and 2000
described in Note 2 are appropriate and the adjustments described in Note 2 are
appropriate and have been properly applied. However, we were not engaged to
audit, review, or apply any procedures to the 2001 or 2000 financial statements
of the Company other than with respect to such adjustments and transitional
disclosures and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 or 2000 financial statements taken as a whole.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
New York, New York
March 5, 2003
21
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors of Paxar Corporation:
Our audit of the consolidated financial statements referred to in our report
dated March 5, 2003 appearing in the 2002 Annual Report to Shareholders of Paxar
Corporation (which report and consolidated financial statements are incorporated
by reference in this Annual Report on Form 10-K) also included an audit of the
financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule for the year ended December 31, 2002
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements. The
financial statement schedule of Paxar Corporation for the years ended December
31, 2001 and 2000, were audited by other independent accountants who have ceased
operations. Those independent accountants expressed an unqualified opinion on
those financial statements schedules in their report dated January 29, 2002.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
New York, New York
March 5, 2003
22
The following report is a copy of a report previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP. These independent
accountants have ceased operations, and have not reissued their report in
conjunction with this Annual Report on Form 10-K. Their report is included in
the Annual Report on Form 10-K as permitted by Rule 2-02(e) of Regulation S-X of
the Securities and Exchange Commission. As described in Note 2, the 2001 and
2000 consolidated financial statements have been revised to separately reflect
amounts that represent goodwill and to include transitional disclosures required
by Statement of Financial Accounting Standards No. (SFAS) 142, "Goodwill and
Other Intangible Assets," which was adopted by the Company as of January 1,
2002. The Arthur Andersen LLP report does not extend to these changes to the
2001 and 2000 consolidated financial statements. The adjustments to the 2001 and
2000 consolidated financial statements were reported on by
PricewaterhouseCoopers LLP as stated in their report appearing hearin.
COPY OF PREVIOUSLY ISSUED REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Paxar Corporation:
We have audited the accompanying consolidated balance sheets of Paxar
Corporation (a New York corporation) and subsidiaries as of December 31, 2001
and 2000*, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2001*. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paxar Corporation and
subsidiaries as of December 31, 2001 and 2000*, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001*, in conformity with accounting principles generally accepted
in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 15(a)(2) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
- ------------------------------
Stamford, Connecticut
January 29, 2002
* The consolidated balance sheet at December 31, 2000 and the consolidated
statements of income, shareholders' equity and cash flows for the year ended
December 31, 1999 are not required to be presented in the 2002 Annual Report
on Form 10-K.
23
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2002, 2001 and 2000
(in millions, except per share amounts)
2002 2001 2000
-------- -------- ------
Sales........................................... $ 667.8 $ 610.6 $ 645.4
Cost of sales................................... 410.7 376.1 394.6
-------- -------- --------
Gross profit................................. 257.1 234.5 250.8
Selling, general and administrative expenses.... 196.3 182.6 182.8
Amortization of goodwill and other intangibles.. 0.3 6.0 5.7
Integration/restructuring and other costs....... -- 13.3 1.9
-------- -------- --------
Operating income............................. 60.5 32.6 60.4
Gain on sale of IIMAK........................... -- -- 50.3
Interest expense, net........................... 10.9 9.9 9.8
-------- -------- --------
Income before taxes.......................... 49.6 22.7 100.9
Taxes on income................................. 9.3 3.9 23.4
-------- -------- --------
Net income................................... $ 40.3 $ 18.8 $ 77.5
======== ======== ========
Basic earnings per share........................ $ 1.02 $ 0.45 $ 1.74
======== ======== ========
Diluted earnings per share...................... $ 1.00 $ 0.44 $ 1.73
======== ======== ========
Weighted average shares outstanding:
Basic........................................ 39.4 41.8 44.5
Diluted...................................... 40.3 42.4 44.8
The accompanying notes are an integral part of the financial statements.
24
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
December 31, December 31,
2002 2001
--------------- ----------
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 49.6 $ 35.1
Accounts receivable, net of allowances of $10.2 and $9.3 in
2002 and 2001, respectively................................ 106.8 100.9
Inventories, net........................................... 83.8 77.7
Deferred income taxes...................................... 10.5 9.2
Other current assets....................................... 14.3 11.4
--------- ---------
Total current assets............................. 265.0 234.3
--------- ---------
Property, plant and equipment, net......................... 154.9 145.2
Goodwill and other intangibles, net........................ 197.7 181.7
Other assets............................................... 22.0 22.6
--------- ---------
Total assets............................................... $ 639.6 $ 583.8
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to banks............................................... $ 2.1 $ 0.4
Current maturities of long-term debt....................... 0.1 0.1
Accounts payable and accrued liabilities................... 94.5 90.0
Accrued taxes on income.................................... 13.9 11.6
--------- ---------
Total current liabilities........................ 110.6 102.1
------- -------
Long-term debt............................................. 164.5 165.9
Deferred income taxes...................................... 12.1 12.7
Other liabilities.......................................... 14.8 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, 39,230,384 and 38,929,163 shares issued and
outstanding in 2002 and 2001, respectively............... 3.9 3.9
Paid-in capital............................................ 11.2 11.7
Retained earnings.......................................... 330.9 290.6
Accumulated other comprehensive loss....................... (8.4) (20.1)
--------- ---------
Total shareholders' equity....................... 337.6 286.1
--------- ---------
Total liabilities and shareholders' equity................. $ 639.6 $ 583.8
========= =========
The accompanying notes are an integral part of the financial statements.
25
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For the years ended December 31, 2002, 2001 and 2000
(in millions)
Accumulated
Common Stock Other
Paid-In Treasury Retained Comprehensive Comprehensive
Shares Amount Capital Stock Earnings Loss Income
---------- ------------ ------------ ------------ ------------ --------------- ------
Balance, December 31, 1999...... 46.7 $ 4.7 $ 93.2 $ -- $ 194.3 $ (10.3)
Comprehensive income:
Net income.................. -- -- -- -- 77.5 -- $ 77.5
Other comprehensive loss:
Translation adjustments.. -- -- -- -- -- (7.6) (7.6)
-------
Comprehensive income........ -- -- -- -- -- -- $ 69.9
=======
Shares issued-- various plans... 0.4 -- 2.5 -- -- --
Purchase of common shares....... -- -- -- (51.0) -- --
Retirement of treasury shares... (5.0) (0.5) (50.5) 51.0 -- --
----- ------- ------- ------- ------- -------
Balance, December 31, 2000...... 42.1 4.2 45.2 -- 271.8 (17.9)
=
Comprehensive income:
Net income.................. -- -- -- -- 18.8 -- $ 18.8
Other comprehensive loss:
Translation adjustments.. -- -- -- -- -- (2.2) (2.2)
-------
Comprehensive income........ -- -- -- -- -- -- $ 16.6
=======
Shares issued-- various plans... 0.5 -- 4.7 -- -- --
Purchase of common shares....... -- -- -- (38.5) -- --
Retirement of treasury shares... (3.7) (0.3) (38.2) 38.5 -- --
----- ------- ------- ------- ------- -------
Balance, December 31, 2001...... 38.9 3.9 11.7 -- 290.6 (20.1)
Comprehensive income:
Net income.................. -- -- -- -- 40.3 -- $ 40.3
Other comprehensive loss:
Translation adjustments.. -- -- -- -- -- 12.3 12.3
Post-employment benefit
obligation adjustments.. -- -- -- -- -- (0.6) (0.6)
-------
Comprehensive income........ -- -- -- -- -- -- $ 52.0
=======
Shares issued:
Various plans............... 0.8 0.1 9.6 -- -- --
Warrants.................... 0.2 -- -- -- -- --
Purchase of common shares....... -- -- -- (10.2) -- --
Retirement of treasury shares... (0.7) (0.1) (10.1) 10.2 -- --
----- ------- ------- ------- ------- -------
Balance, December 31, 2002...... 39.2 $ 3.9 $ 11.2 $ -- $ 330.9 $ (8.4)
===== ======= ======= ======= ======= ========
The accompanying notes are an integral part of the financial statements.
26
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2002, 2001 and 2000
(in millions)
2002 2001 2000
---------- ---------- -------
OPERATING ACTIVITIES
Net income.................................................. $ 40.3 $ 18.8 $ 77.5
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 29.6 32.8 31.9
Deferred income taxes.................................... (1.5) (2.0) 1.4
Gain on sale of IIMAK, net of taxes...................... -- -- (40.3)
Gain on sale of property and equipment, net.............. (0.2) (0.7) --
Write-off of property and equipment...................... 1.1 3.3 --
Post-employment benefit costs............................ 1.5 7.3 --
Changes in assets and liabilities, net of businesses acquired:
Accounts receivable...................................... (5.0) 11.3 8.0
Inventories.............................................. (5.5) 4.9 (2.9)
Other current assets..................................... (2.7) (1.5) 5.2
Accounts payable and accrued liabilities................. 4.1 (8.9) (8.1)
Accrued taxes on income.................................. 2.2 (11.1) 3.5
Other, net............................................... (1.2) (0.7) (6.4)
---------- --------- ---------
Net cash provided by operating activities................ 62.7 53.5 69.8
--------- --------- ---------
INVESTING ACTIVITIES
Purchases of property, plant and equipment.................. (25.5) (24.2) (32.2)
Acquisitions, net of cash acquired.......................... (21.7) (10.3) (52.5)
Proceeds from sale of IIMAK, net............................ -- -- 119.8
Proceeds from sale of property and equipment................ 0.3 4.3 --
Other, net.................................................. (1.0) 2.1 3.0
---------- --------- ---------
Net cash provided by (used in) investing activities...... (47.9) (28.1) 38.1
---------- ---------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in short-term debt.................. 1.7 (0.5) (44.2)
Additions to long-term debt................................. 91.0 23.6 323.5
Reductions in long-term debt................................ (93.8) (23.6) (324.9)
Purchase of common stock.................................... (10.2) (38.5) (51.0)
Proceeds from common stock issued under employee stock option
and stock purchase plans................................... 9.7 4.7 2.5
--------- --------- ---------
Net cash used in financing activities.................... (1.6) (34.3) (94.1)
--------- --------- ---------
Effect of exchange rate changes on cash flows............ 1.3 (0.3) (1.7)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents............. 14.5 (9.2) 12.1
Cash and cash equivalents at beginning of year............... 35.1 44.3 32.2
--------- --------- ---------
Cash and cash equivalents at end of year..................... $ 49.6 $ 35.1 $ 44.3
========= ========= =========
The accompanying notes are an integral part of the financial statements.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 1: Description of Business
Paxar Corporation ("Paxar" or the "Company") is a global leader in providing
innovative merchandising systems to retailers and apparel manufacturers. Paxar's
concept to checkout capabilities, global manufacturing operations, worldwide
distribution network and brand recognition are enabling the Company to expand
its competitive advantage and market share.
Paxar brings to its customers a fusion of innovative fashion ideas and
technological expertise to help them achieve retailing success. The Company's
business includes the design, manufacture and distribution of a wide variety of
tags and labels, including bar-coded labels, as well as printers and the
associated supplies for customers who prefer the flexibility of creating labels
and tags on an "as-needed" basis in their facilities. Product design, process
reengineering and data management services are becoming more important as the
Company continues to differentiate itself as a global leader.
Paxar has core competencies that range from graphic design to coating,
weaving, design of mechanical and electronic printers, systems integration and
creation of software.
Note 2: Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Paxar and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of 90 days or less to be cash equivalents.
Accounts Receivable and Sales Returns
The Company's domestic and international presence and large, diversified
customer base serve to limit overall credit risk and the potential for future
product returns. The Company maintains reserves for potential credit losses and
sales returns and, historically, such losses, in the aggregate, have not
exceeded management's estimates.
Inventories
Inventories are stated at the lower of cost or market. The value of
inventories determined using the last-in, first-out ("LIFO") method was $12.9
and $13.9 as of December 31, 2002 and 2001, respectively. The value of all other
inventories determined using the first-in, first-out ("FIFO") method was $70.9
and $63.8 as of December 31, 2002 and 2001, respectively. During 2000, the
Company changed its method of accounting for a portion of inventories in the US
from LIFO to FIFO. The Company believes the FIFO method results in a closer
matching of costs and revenue during periods of declining prices, and it is the
primary method used in the industry in which this unit operates. This change has
been applied by retroactively restating the accompanying consolidated financial
statements.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated by the
straight-line method over the estimated useful lives of the assets. Upon
retirement or other disposition, the cost and accumulated depreciation are
removed from the asset and accumulated depreciation accounts, and the net gain
or loss is reflected in income. Expenditures for maintenance and repairs are
charged against income as incurred. Significant expenditures for improvements
and renewals are capitalized.
28
Income Taxes
Deferred tax assets and liabilities are established based on differences
between the financial statement and tax bases of assets and liabilities using
presently enacted tax rates. The classification of deferred tax assets and
liabilities corresponds with the classification of the underlying assets and
liabilities giving rise to the difference. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred taxes are not provided on that portion of undistributed earnings of
non-US subsidiaries which is considered to be permanently reinvested.
Revenue Recognition
Revenue is recognized when title to the product passes to the customer,
generally upon shipment.
The Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," in
December 1999. 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 or
determinable; and (4) collectibility is reasonably assured. The Company adopted
SAB No. 101, as amended, in the fourth quarter of 2000 and determined there was
no material impact on annual revenue and earnings or the timing of revenue and
profit recognition between quarters during the year.
Earnings per Share
Basic earnings per share is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
during the year. Diluted earnings per share reflects the potential dilutive
effect of additional common shares that are issuable upon exercise of
outstanding stock options and warrants.
Foreign Currency Translation
Assets and liabilities of the Company's foreign subsidiaries are translated
into US dollars using the exchange rates in effect at the balance sheet date.
Results of operations are translated using the average exchange rate prevailing
throughout the period. The effects of exchange rate fluctuations from
translating foreign currency assets and liabilities into US dollars are included
as a component of other comprehensive earnings within shareholders' equity.
Gains and losses resulting from foreign currency transactions are included in
net income and were not significant in the past three years.
Financial Instruments
The Company adopted the provisions of Statement of Financial Accounting
Standards ("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
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 year ended December 31, 2002
and shareholders' equity at January 1, 2002.
The Company manages a foreign currency hedging program intended to reduce
the Company's risk in foreign currency-denominated transactions by entering into
forward foreign exchange contracts.
The Company formally designates and documents the hedging relationship and
risk management objective for undertaking the hedge. The documentation describes
the hedging instrument, the item being hedged, the nature of the risk being
hedged and the Company's assessment of the hedging instrument's effectiveness in
offsetting the exposure to changes in the hedged item's fair value.
The fair value of outstanding forward foreign exchange contracts at January
1, 2002 and December 31, 2002 for delivery of various currencies at various
future dates and the changes in fair value recorded in income during 2002 were
not material.
All financial instruments of the Company with the exception of hedge
instruments are carried at cost, which approximates fair value.
29
Goodwill
Goodwill represents the excess of the cost of acquired companies over the
sum of identifiable net assets. Through December 31, 2001, goodwill had been
amortized on a straight-line basis over a period not to exceed 40 years.
The Company evaluates 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. Factors the Company
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. The Company assesses the existence of
an impairment by comparing the fair values of its reporting units with their
carrying amounts, including goodwill. If it is determined that the impairment
exists, the Company measures the impairment by comparing each reporting unit's
implied fair value of goodwill with its corresponding carrying amount and then
classifies it as an operating expense.
Impairment of Long-Lived Assets
The Company periodically reviews its long-lived assets for impairment by
comparing the carrying values of the assets with their estimated future
undiscounted cash flows. If it is determined that an impairment loss has
occurred, the loss is recognized during that period. The impairment loss is
calculated as the difference between asset carrying values and the present value
of estimated net cash flows or comparable market values, giving consideration to
recent operating performance and pricing trends. In 2002, 2001 and 2000, there
were no significant impairment losses related to long-lived assets.
Use of Estimates
The preparation of these consolidated financial statements in conformity
with accounting principles generally accepted in the US requires management to
use certain estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements and related note disclosures to conform to the presentation
used in the current period.
Recent Accounting Pronouncements
On June 29, 2001, the Financial Accounting Standards Board ("FASB") issued
two new statements, 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. 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 $6.0 in 2001 and would have been $6.2 in
2002.
30
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. Accordingly, the Company completed its annual goodwill impairment
assessment in 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 has not been 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, 2000:
2001 2000
-------- ------
Reported net income............................................................. $ 18.8 $ 77.5
Add back: Amortization of goodwill, net of income taxes......................... 5.4 5.1
--------- ---------
Adjusted net income............................................................. $ 24.2 $ 82.6
========= =========
Reported earnings per share (basic)............................................. $ 0.45 $ 1.74
Add back: Amortization of goodwill, net of income taxes......................... 0.13 0.12
--------- ---------
Adjusted earnings per share (basic)............................................. $ 0.58 $ 1.86
========= =========
Reported earnings per share (diluted)........................................... $ 0.44 $ 1.73
Add back: Amortization of goodwill, net of income taxes......................... 0.13 0.11
--------- ---------
Adjusted earnings per share (diluted)........................................... $ 0.57 $ 1.84
========= =========
The changes in the carrying amounts of goodwill for the year ended December
31, 2002 are as follows:
Beginning Balance Goodwill Foreign Currency Ending Balance
January 1, 2002 (a) Acquired Translation Adjustments December 31, 2002
------------------ -------- ----------------------- ------------------
Americas............................ $ 104.7 $ 6.3 $ -- $ 111.0
EMEA................................ 59.8 3.3 4.3 67.4
Asia Pacific........................ 17.2 0.1 -- 17.3
-------- ------ ------ --------
Total.......................... $ 181.7 $ 9.7 $ 4.3 $ 195.7
======== ====== ====== ========
- ---------
(a) Reflects allocation of goodwill pursuant to the Company's adoption of SFAS
No. 142.
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." SFAS No. 144 provides guidance for the development of
one accounting model based on the framework established in SFAS No. 121, and
addresses 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.
31
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.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 expands the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize a
liability for the fair value of an obligation assumed under a guarantee. It
clarifies the requirements of SFAS No. 5, "Accounting for Contingencies,"
relating to guarantees. In general, FIN No. 45 applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying that is
related to an asset, liability, or equity security of the guaranteed party. It
requires disclosure of the nature of the guarantee, the maximum potential amount
of future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of FIN No. 45 are
to be applied prospectively to guarantees issued or modified after December 31,
2002. The Company believes that the recognition requirements of FIN No. 45 will
not have a material impact on its results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 provides guidance on how
to transition from the intrinsic value method of accounting for stock-based
employee compensation under Accounting Principles Board ("APB") No. 25 to the
fair value method of accounting under SFAS No. 123, "Accounting for Stock Based
Compensation," if a company so elects. The Company believes that the adoption of
SFAS No. 148 will not have a material impact on its results of operations or
financial position.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 provides guidance on how to identify a variable
interest entity ("VIE") and determine when the assets, liabilities and
non-controlling interests, and results of operations of a VIE need to be
included in a company's consolidated financial statements. A company that holds
variable interests in an entity will need to consolidate the entity if the
company's interest in the VIE is such that the company will absorb a majority of
the VIE's expected losses and/or receive a majority of the entity's expected
residual returns, if they occur. FIN No. 46 also requires additional disclosures
by primary beneficiaries and other significant variable interest holders. The
provisions of FIN No. 46 became effective upon issuance. The Company believes
that FIN No. 46 will not have a material impact on its results of operations or
financial position.
Note 3: Business Acquisition
Bornemann & Bick
On May 18, 2000, the Company acquired the Bornemann & Bick ("B&B") group of
companies for approximately $51.2. The B&B companies manufacture apparel
identification products. The acquisition has been accounted for as a purchase
with assets acquired and liabilities assumed recorded at their estimated fair
values at the date of acquisition. The $31.7 excess of the purchase price and
transaction costs over the fair value of net assets acquired was recorded as
goodwill and had been amortized on a straight-line basis over a period of 25
years through December 31, 2001. The fair value of assets acquired and
liabilities assumed is as follows:
Current assets................. $ 22.4
Property, plant and equipment.. 11.1
Other assets................... 3.4
Goodwill....................... 31.7
Liabilities.................... (17.4)
--------
Net assets..................... $ 51.2
========
32
The operating results of B&B are included in the accompanying consolidated
statements of income beginning May 1, 2000. The following unaudited pro forma
results of operations of the Company assumes the acquisition occurred as of
January 1, 2000. These pro forma results do not purport to be indicative of the
results of operations, which may result in the future.
Year ended December 31, 2000
-------------------------------------- ------
Sales............................... $ 661.6
========
Net income.......................... $ 78.5
========
Basic earnings per share............ $ 1.76
========
Diluted earnings per share.......... $ 1.75
========
Note 4: Divestiture
On March 9, 2000, the Company sold 92.5% of its International Imaging
Materials, Inc. ("IIMAK") subsidiary for $127.5, which included $120.0 in cash
and $7.5 of IIMAK preferred stock.
Note 5: Inventories
The components of inventories are as follows:
At December 31, 2002 2001
----------------------------------- ------- ------
Raw materials.................... $ 34.7 $ 36.6
Work-in-process.................. 8.1 8.2
Finished goods................... 52.4 46.6
------- -------
95.2 91.4
Less allowance for obsolescence.. (11.4) (13.7)
-------- --------
$ 83.8 $ 77.7
======= =======
If all inventories were reported on a FIFO basis, inventories would be
approximately $2.1 and $2.0 higher at December 31, 2002 and 2001, respectively.
Note 6: Property, Plant and Equipment
A summary of property, plant and equipment is as follows:
At December 31, 2002 2001
---------------------------------------- ---------- -------
Machinery and equipment............... $ 221.8 $ 190.6
Buildings and building improvements... 56.3 52.5
Land.................................. 5.3 4.3
--------- ---------
283.4 247.4
Accumulated depreciation.............. (128.5) (102.2)
--------- ---------
$ 154.9 $ 145.2
========= =========
Estimated useful lives: Years
--------------------------------------- --------
Buildings.............................. 10 to 50
Building and leasehold improvements.... 2 to 20
Machinery and equipment................ 2 to 15
Depreciation expense was $29.3 in 2002, $26.8 in 2001 and $26.2 in 2000.
Note 7: Accounts Payable and Accrued Liabilities
A summary of accounts payable and accrued liabilities is as follows:
At December 31, 2002 2001
------------------------- ------- ------
Accounts payable......... $ 44.1 $ 36.3
Accrued payroll costs.... 17.1 17.7
Other accrued liabilities 33.3 36.0
------- -------
$ 94.5 $ 90.0
======= =======
33
Note 8: Long-Term Debt
A summary of long-term debt is as follows:
At 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.................................................... -- 0.6
Other....................................................... 1.6 2.4
-------- --------
164.6 166.0
Less current maturities..................................... 0.1 0.1
-------- --------
$ 164.5 $ 165.9
======== ========
Maturities of long-term debt are as follows:
Years ending December 31,
-------------------------------------------
2003....................................... $ 0.1
2004....................................... 0.4
2005....................................... 0.1
2006....................................... 0.1
2007....................................... 0.1
Thereafter................................. 163.8
--------
$ 164.6
On August 11, 1998, the Company entered into unsecured ten-year, $150
Senior Note agreements (the "Senior Notes") with institutional lenders,
primarily insurance companies. The Senior Notes bear interest at 6.74%, payable
semi-annually. The proceeds were used to repay the term loan and a portion of
the indebtedness outstanding under the Company's revolving credit facility
before it was amended and restated. The Senior Notes contain covenants requiring
the Company, among other things, to maintain a minimum net worth. The Company
was in compliance with all covenants as of December 31, 2002 and 2001.
Economic Development Revenue Bond financed facilities have been accounted
for as plant and equipment, and the related bonds are recorded as long-term
debt. The variable rate bonds for the years ended December 31, 2002 and 2001 had
weighted average interest rates of 1.52% and 2.78%, respectively.
In September 2002, the Company entered into a three-year, $150 revolving
credit agreement with a group of five domestic and international banks. The
agreement amended and restated the Company's previous revolving credit facility,
which would have expired on August 11, 2003. Under the credit agreement, the
Company pays a facility fee determined by reference to the debt to EBITDA ratio.
The applicable percentage for the facility fee at December 31, 2002 was 0.275%.
Borrowings under the credit agreement bear interest at rates referenced to the
London Interbank Offered Rate with applicable margins varying in accordance with
the Company's attainment of specified financial threshholds or, at the Company's
option, rates competitively bid among the participating banks or the Prime Rate,
as defined (4.25% and 4.75% at December 31, 2002 and 2001, respectively), and
are guaranteed by certain domestic subsidiaries of the Company.
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.
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 the sum of
$274 plus 35% of consolidated net income for the period after July 1, 2002 plus
100% of the net cash proceeds received by the Company from the sale or issuance
of its 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.
As of December 31, 2002, the Company was 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.
Average borrowings under the credit facility during 2002 and 2001 were $9.8
and $0.1, at an average interest rate of 2.23% and 2.20%, respectively. The
borrowings outstanding under the credit facility at December 31, 2002 and 2001
were $0.0 and $0.6, respectively.
Interest expense was $11.6 in 2002, $11.5 in 2001 and $12.0 in 2000.
34
Note 9: Income Taxes
The components of the provision for income taxes are as follows:
At December 31, 2002 2001 2000
-------------------- ------- ------- ------
Federal
Current.......... $ (0.1) $ (3.9) $ 11.6
Deferred......... (3.3) (1.2) 1.1
Foreign
Current.......... 10.9 9.6 9.9
Deferred......... 1.4 (0.8) 0.3
State.............. 0.4 0.2 0.5
------- ------- -------
$ 9.3 $ 3.9 $ 23.4
======= ======= =======
The deferred tax assets and liabilities are as follows:
At December 31, 2002 2001 2000
-------------------------------------------------- --------- --------- -------
Deferred tax assets:
Tax credits and tax loss carryforwards............ $ 9.0 $ 5.8 $ 2.1
Other accrued liabilities and allowances.......... 8.4 3.7 8.1
Deferred compensation............................. 4.5 3.6 0.3
Other............................................. -- -- 1.9
------- ------- --------
Total gross deferred tax assets.............. 21.9 13.1 12.4
Valuation allowance............................... (6.4) (5.8) (0.4)
-------- -------- --------
Net deferred tax assets...................... 15.5 7.3 12.0
Deferred tax liabilities:
Depreciation and other property basis differences. (10.9) (9.4) (11.9)
Other............................................. (6.2) (1.4) (5.3)
-------- -------- --------
Net deferred tax liabilities................. $ (1.6) $ (3.5) $ (5.2)
======== ======== ========
A valuation allowance is established for those deferred tax assets to the
extent that the Company believes that recovery is not more than likely. As of
December 31, 2002, a valuation allowance of $6.4 exists for certain tax credit
and tax loss carryforwards.
The federal statutory income tax rate reconciles to the effective income
tax rate as follows:
Years ended December 31, 2002 2001 2000
---------------------------------------------------- ------- ------- ------
Federal statutory tax rate.......................... 35.0% 35.0% 35.0%
State income tax, net of federal income tax benefit. 0.5 0.7 0.3
Foreign taxes less than federal rate................ (14.2) (19.0) (7.3)
Book vs. tax basis difference on sale of subsidiary. -- -- (7.7)
Tax credits utilized................................ -- (5.0) --
Nondeductible goodwill amortization................. -- 6.2 1.4
Reserves no longer required......................... (2.4) -- --
All other, net...................................... (0.1) (0.7) 1.5
------ ------ -----
18.8% 17.2% 23.2%
===== ===== =====
During 2000, the Company sold 92.5% of its interest in IIMAK and recorded a
tax provision on the sale that reflected a higher tax basis than book basis.
During 2001, the Company settled a dispute with IIMAK regarding alternative
minimum tax credits carried forward and used by the Company in 1999 and 2000 in
the amount of $3.5. The Company paid IIMAK $2.4 and retained $1.1 in final
settlement of the dispute. During 2002, the Company reviewed the status of tax
reserves and reduced the 2002 provision for income taxes by the amount
determined to be in excess of requirements.
35
A provision has not been provided on undistributed foreign earnings of
$174.5 at December 31, 2002, as those earnings will be permanently reinvested
for expansion of the foreign operations. At December 31, 2002, the estimated US
tax liability on the undistributed earnings was $36.2. Total foreign-based
pre-tax income was approximately $60, $43 and $46 for 2002, 2001, and 2000,
respectively.
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, Africa, 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,
the 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 different geographic
segments is set forth below. The accounting policies of the geographic segments
are the same as those described in Note 2: Summary of Significant Accounting
Policies.
Years ended December 31, 2002 2001 2000
-------------------------------- -------- -------- ------
Sales to unaffiliated customers:
Americas........................ $ 332.4 $ 322.2 $ 365.0
EMEA............................ 176.6 162.8 162.3
Asia Pacific.................... 158.8 125.6 118.1
-------- -------- --------
Total................. $ 667.8 $ 610.6 $ 645.4
======== ======== ========
Intersegment sales:
Americas........................ $ 64.1 $ 49.7 $ 53.2
EMEA............................ 41.5 30.6 36.5
Asia Pacific.................... 10.2 6.9 2.3
Eliminations.................... (115.8) (87.2) (92.0)
--------- --------- ---------
Total................. $ -- $ -- $ --
======== ======== ========
Operating income:
Americas........................ $ 27.8 $ 33.5 $ 41.1
EMEA............................ 14.2 10.2 12.2
Asia Pacific.................... 36.4 29.5 28.4
-------- -------- --------
78.4 73.2 81.7
Corporate expenses.............. (17.6) (14.0) (13.7)
Amortization of intangibles..... (0.3) (6.0) (5.7)
Post-employment benefit costs... -- (7.3) --
Integration/restructuring and...
other costs................... -- (13.3) (1.9)
-------- --------- ---------
Total................. $ 60.5 $ 32.6 $ 60.4
======== ======== ========
Depreciation and amortization:
Americas........................ $ 16.2 $ 18.1 $ 20.0
EMEA............................ 8.0 9.1 8.0
Asia Pacific.................... 3.9 4.5 3.2
-------- -------- --------
28.1 31.7 31.2
Corporate....................... 1.5 1.1 0.7
-------- -------- --------
Total................. $ 29.6 $ 32.8 $ 31.9
======== ======== ========
Capital expenditures:
Americas........................ $ 8.6 $ 7.1 $ 12.7
EMEA............................ 10.3 9.5 8.6
Asia Pacific.................... 5.3 3.7 8.7
-------- -------- --------
24.2 20.3 30.0
Corporate....................... 1.3 3.9 2.2
-------- -------- --------
Total................. $ 25.5 $ 24.2 $ 32.2
======== ======== ========
36
At December 31, 2002 2001
-------------------------------- -------- ------
Long-lived assets:
Americas........................ $ 193.9 $ 172.2
EMEA............................ 115.2 105.4
Asia Pacific.................... 37.2 43.4
-------- --------
346.3 321.0
Corporate....................... 6.3 5.9
-------- --------
Total................. $ 352.6 $ 326.9
======== ========
Total assets:
Americas........................ $ 292.1 $ 226.4
EMEA............................ 207.6 191.4
Asia Pacific.................... 91.1 87.4
-------- --------
590.8 505.2
Corporate....................... 48.8 78.6
-------- --------
Total................. $ 639.6 $ 583.8
======== ========
No one customer accounted for more than 10% of the Company's revenues or
accounts receivable in 2002, 2001 or 2000.
Note 11: Supplemental Cash Flow Information
Cash paid for interest and income taxes is as follows:
Years ended December 31, 2002 2001 2000
------------------------------- ------ ------ ------
Interest.................... $ 11.0 $ 9.8 $ 9.3
Income taxes................ $ 11.7 $ 15.7 $ 7.7
Note 12: Shareholders' Equity
The Company has various stock-based compensation plans, including two stock
option plans, a long-term incentive plan, and an employee stock purchase plan.
The 1990 Employee Stock Option Plan (the "1990 Plan"), the 1997 Incentive
Stock Option Plan (the "1997 Plan") and the 2000 Long-Term Performance and
Incentive Plan (the "2000 Plan") provide for grants of incentive stock options,
non-qualified stock options and stock appreciation rights, which may be granted
in tandem with non-qualified stock options. The 2000 Plan also permits awards of
restricted stock and bonus stock and other similar stock-based compensation
arrangements. In addition, the shares previously authorized and available for
issuance under the 1997 Plan became available for issuance under the 2000 Plan
upon approval of the 2000 Plan by the Company's shareholders in May 2000. The
option price per share of incentive stock options cannot be less than 100% of
the market value at the date of grant. The option price per share of
non-qualified stock options and stock appreciation rights is determined by the
Board of Directors at its sole discretion.
As of December 31, 2002, 3,838,000 shares of common stock were reserved for
issuance upon the exercise of options granted to key employees and directors
under the 1997 Plan and the 2000 Plan, and 508,000 shares of common stock were
reserved for future grants under the 2000 Plan. In addition, under the 1990
Plan, 686,000 shares of common stock were reserved for issuance upon the
exercise of options granted to key employees and directors.
Generally, options vest over four years and are exercisable for ten years.
37
A summary of outstanding stock options is as follows:
Number Weighted Average
of Shares Exercise Price
(in millions)
2000
Outstanding at beginning of year.. 3.6 $ 11.22
Granted........................... 0.9 $ 8.92
Exercised......................... (0.2) $ 5.21
Canceled/forfeited................ (0.4) $ 12.94
----
Outstanding at end of year........ 3.9 $ 10.81
2001
Granted........................... 0.9 $ 10.74
Exercised......................... (0.4) $ 8.10
Canceled/forfeited................ (0.1) $ 10.34
----
Outstanding at end of year........ 4.3 $ 11.04
2002
Granted........................... 1.1 $ 16.04
Exercised......................... (0.7) $ 10.85
Canceled/forfeited................ (0.2) $ 12.19
----
Outstanding at end of year........ 4.5 $ 12.19
====
The weighted average fair value per option granted in 2002, 2001 and 2000
was $7.38, $5.03 and $4.53, respectively.
The following table summarizes information about stock options outstanding
as of December 31, 2002:
Weighted Average
Weighted Average Remaining
Range of Exercise Prices Options Outstanding Exercise Price Contractual Life
------------------------ ------------------- --------------- -----------------
(in millions)
Options outstanding
$ 1.00 - $ 6.00 0.1 $ 4.74 2.4
$ 6.01 - $ 10.75 2.0 $ 9.37 6.6
$ 10.76 - $ 17.92 2.4 $ 15.03 6.4
---
4.5 $ 12.19 6.3
===
Options exercisable
$ 1.00 - $ 6.00 0.1 $ 5.33
$ 6.01 - $ 10.75 1.1 $ 8.99
$ 10.76 - $ 17.92 1.3 $ 14.61
---
2.5 $ 11.69
===
SFAS No. 123 provides for a fair-value based method of accounting for
employee options and measures compensation expense using an option valuation
model that takes into account, as of the grant date, the exercise price and
expected life of the option, the current price of the underlying stock and its
expected volatility, expected dividends on the stock, and the risk-free interest
rate for the expected term of the option. The Company has elected to continue
accounting for employee stock-based compensation under APB No. 25. Under APB No.
25, because the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized. The compensation expense under SFAS No. 123 for the
stock-based compensation plans would have been $4.0, $2.3 and $2.0 in 2002, 2001
and 2000, respectively. The following table presents pro forma net income and
earnings per share had the Company elected to adopt SFAS No. 123:
Years ended December 31, 2002 2001 2000
------------------------------- ------- ------- ------
Net income:
As reported................. $ 40.3 $ 18.8 $ 77.5
Pro forma................... $ 36.3 $ 16.5 $ 75.5
Basic earnings per share:
As reported................. $ 1.02 $ 0.45 $ 1.74
Pro forma................... $ 0.92 $ 0.40 $ 1.70
Diluted earnings per share:
As reported................. $ 1.00 $ 0.44 $ 1.73
Pro forma................... $ 0.90 $ 0.39 $ 1.69
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years.
38
The estimated fair value of each option granted is calculated using the
Black-Scholes option-pricing model. The following summarizes the assumptions
used in the model:
2002 2001 2000
------- ------- ------
Risk-free interest rate....... 3.0% 4.4% 5.5%
Expected years until exercise. 6.0 6.0 7.0
Expected stock volatility..... 41.5% 41.6% 37.7%
Dividend yield................ 0.0% 0.0% 0.0%
Employee Stock Purchase Plan
The Company maintains an employee stock purchase plan, which allows
employees to purchase a certain amount of stock at a discount of 20% to the
market price. The Company may sell up to 1,819,000 shares under this plan and,
as of December 31, 2002, 712,000 shares were available for future purchases. The
total number of shares and the average fair value of shares issued under this
plan in 2002, 2001 and 2000 were 101,000 and $15.66 in 2002, 123,000 and $12.06
in 2001, and 151,000 and $9.94 in 2000, respectively. The Company recognized
total compensation expense for stock-based compensation of $0.3 for 2002, 2001
and 2000, respectively.
Warrants
The warrants outstanding are as follows:
At December 31, 2002 2001
----------------------------------------------------- ----------- ----------
Warrants outstanding and exercisable at $14.00....... -- 1,250,000
Warrants outstanding and exercisable at $17.50....... -- 250,000
----------- ----------
Total........................................... -- 1,500,000
=========== =========
In February 2002, 1,250,000 warrants were exercised. In a cashless
transaction, the Company issued 162,000 of its common shares in exchange for the
excess value of the warrants. During 2002, 250,000 warrants exercisable at
$17.50 expired.
Stock Repurchase Plan
The Company has a stock repurchase plan with an authorization to use up to
$150 in total for the repurchase of its shares. The shares may be purchased from
time to time at prevailing prices in the open-market, by block purchases, or in
privately-negotiated transactions. The Company repurchased 285,000 shares for an
aggregate price of $3.8, or $13.38 per share, in 2002, 3,238,000 shares for an
aggregate price of $33.1, or $10.22 per share, in 2001 and 5,035,000 shares for
an aggregate price of $51.0, or $10.14 per share, in 2000. Since the inception
of the stock repurchase program, the Company repurchased 11,824,000 of its
shares for an aggregate price of $116.9, or $9.89 per share. The Company
immediately retired the repurchased shares. As of December 31, 2002, the Company
had $33.1 available under its $150 stock repurchase program authorization. The
Company may continue to repurchase its shares under the existing authorization,
depending on market conditions.
Note 13: Earnings per Common Share
The reconciliation of basic and diluted weighted average common shares
outstanding is as follows:
Years ended December 31, 2002 2001 2000
----------------------------------------------------- --------------------
(in millions)
Weighted average common shares (basic)............... 39.4 41.8 44.5
Options and warrants................................. 0.9 0.6 0.3
---- ---- ----
Adjusted weighted average common shares (diluted).... 40.3 42.4 44.8
==== ==== ====
Options and warrants to purchase 847,000, 2,949,000, and 3,286,000 shares
of common stock outstanding at December 31, 2002, 2001 and 2000, respectively,
were not included in the computation of diluted earnings per common share
because the effect of their inclusion would be antidilutive.
39
Note 14: Employee Savings Plans
The Company maintains a voluntary employee savings plan adopted pursuant to
Section 401(k) of the Internal Revenue Code. The Company's contribution under
the plan was $2.9, $2.4, and $2.6 in 2002, 2001 and 2000, respectively.
Note 15: Post-Employment Benefit Costs
During 2001, certain key executives of the Company signed employment
agreements with the Company under which the Company is obligated to provide
post-employment benefits as specified in the agreements. In connection with
these agreements, the Company recorded $1.5 and $7.3 of post-employment benefit
costs in 2002 and 2001, respectively. In 2001, the post-employment benefits
costs pertained to the one-time, prior period service costs, which were incurred
as a result of the employment agreements. The post-employment benefit costs were
included in selling, general and administrative expenses in the accompanying
consolidated statements of income for the years ended December 31, 2002 and
2001.
Note 16: Commitments and Contingent Liabilities
Total rental expense for all operating leases amounted to $8.1 in 2002, $6.9
in 2001 and $6.2 in 2000.
Minimum rental commitments for all non-cancelable operating leases are as
follows:
Years ending December 31,
------------------------------------------------------------
2003........................................................ $ 7.2
2004........................................................ 5.5
2005........................................................ 4.1
2006........................................................ 3.0
2007........................................................ 2.6
Thereafter.................................................. 11.6
--------
$ 34.0
========
The Company accrues severance expense for employees of its Italian
subsidiaries, as required by Italian statute, and these amounts are included in
other liabilities in the accompanying consolidated balance sheets.
The Company has been named a potentially responsible party relating to
contamination that occurred at certain super-fund sites. Management does not
expect the ultimate outcome of settling these contingencies to be material.
In the ordinary course of business, the Company and its subsidiaries are
involved in certain disputes and litigation, none of which will, in the opinion
of management, have a material adverse effect on the Company's financial
position or results of operations.
Note 17: Integration/Restructuring and Other Costs
During 2000, the Company recorded $1.9 (pre-tax) of
integration/restructuring and other costs. Of this amount, $0.9 pertained to the
integration of certain facilities and severance for six selling and
administrative personnel and 42 manufacturing positions in EMEA. The remaining
$1.0 pertained to severance for nine selling and administrative personnel and 30
manufacturing positions and other costs associated with the discontinuance of a
supplies manufacturing operation in Canada. Of this amount, $0.7 of severance
was unpaid at December 31, 2000.
Beginning Balance Ending Balance
January 1, 2000 Expenses Payments December 31, 2000
-------------------- ---------- ---------- --------------------
Severance.... $ -- $ 1.7 $ 1.0 $ 0.7
Other costs.. -- 0.2 0.2 --
----- ------ ----- -----
$ -- $ 1.9 $ 1.2 $ 0.7
===== ====== ===== =====
40
During 2001, the Company implemented specific initiatives to enhance revenue
growth, increase capital efficiency and lower operating costs. As a result, the
Company recorded $13.3 (pre-tax) of 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.
Beginning Balance Ending Balance
January 1, 2001 Expenses Payments December 31, 2001
-------------------- ---------- ---------- --------------------
Severance.... $ 0.7 $ 6.9 $ 4.3 $ 3.3
Other costs.. -- 5.0 5.0 --
----- ------ ----- -----
$ 0.7 $ 11.9 $ 9.3 $ 3.3
===== ====== ===== =====
Of the total unpaid severance of $3.3 at December 31, 2001, the Company paid
$3.1 during 2002. The remaining $0.2 balance at December 31, 2002 is expected to
be paid during 2003.
Note 18: Related Party Transactions
During 2001, the Company entered into a stock repurchase agreement with an
officer (the "shareholder"), who is also a director and principal shareholder of
the Company, 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. The Company repurchased from the
shareholder 399,000 of its shares for $6.4, or $15.96 per share in 2002 and
400,000 of its shares for $5.4, or $13.40 per share in 2001. The Company
immediately retired the shares it purchased from the shareholder. The Company's
obligations under the stock repurchase agreement are in addition to its
authorization under the stock repurchase plan.
The Company leased a manufacturing facility in Sayre, Pennsylvania, owned
beneficially by its principal shareholders, at an annual rental of $0.1 through
2002.
Note 19: Condensed Quarterly Financial Data (Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter
2002 ------------- -------------- ------------- --------------
Sales................................ $ 152.7 $ 173.1 $ 170.1 $ 171.9
Operating income..................... 12.6 19.9 15.4 12.6
Net income........................... 7.5 13.1 10.2 9.5
Basic earnings per share............. 0.19 0.33 0.26 0.24
Diluted earnings per share........... 0.19 0.32 0.25 0.24
2001
Sales................................ $ 155.3 $ 157.1 $ 138.8 $ 159.4
Operating income (a)(b).............. 12.4 11.7 7.2 1.3
Net income (a)(b).................... 7.2 6.8 3.9 0.9
Basic earnings per share (a)(b)...... 0.17 0.16 0.09 0.02
Diluted earnings per share (a)(b).... 0.17 0.16 0.09 0.02
- ----------
(a) Fourth quarter 2001 includes $7.3 ($4.7 after taxes) of post-employment
benefit costs.
(b) Second, third and fourth quarter 2001 include $6.6 ($4.3 after taxes), $2.0
($1.3 after taxes) and $4.7 ($3.1 after taxes), respectively, of
integration/restructuring and other costs.
41
PAXAR CORPORATION AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2002, 2001 and 2000
(in millions)
Additions
Charged
Balance at to Costs
Beginning of and Balance at
Description Year Expenses Other (1) Deductions (2) End of Year
--------------------------------- -------------- ---------- -----------------------------------------
Year ended December 31, 2002
Allowance for doubtful
accounts.................... $ 9.3 $ 3.7 $ -- $ 2.8 $ 10.2
Year ended December 31, 2001
Allowance for doubtful
accounts.................... $ 9.6 $ 2.8 $ 0.5 $ 3.6 $ 9.3
Year ended December 31, 2000
Allowance for doubtful
accounts.................... $ 8.3 $ 4.1 $ (0.2) $ 2.6 $ 9.6
- ----------
(1) Allowance related to acquisitions and divestiture.
(2) Write-off of uncollectible accounts, net of recoveries, and other.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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
By: /s/ JACK R. PLAXE
---------------------
Jack R. Plaxe
Senior Vice President and
Chief Financial Officer
Dated: March 21, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
By: /s/ ARTHUR HERSHAFT By: /s/ DAVID L. KOLB
----------------------- ---------------------
Arthur Hershaft David L. Kolb
Chairman of the Board of Directors Director
Dated: March 21, 2003 Dated: March 21, 2003
By: /s/ PAUL J. GRISWOLD By: /s/ THOMAS R. LOEMKER
------------------------ -------------------------
Paul J. Griswold Thomas R. Loemker
President and Chief Executive Officer Director
(Principal Executive Officer) Dated: March 21, 2003
Director
Dated: March 21, 2003 By: /s/ JAMES C. MCGRODDY
-------------------------
James C. McGroddy
By: /s/ JACK BECKER Director
------------------- Dated: March 21, 2003
Jack Becker
Director
Dated: March 21, 2003 By: /s/ DAVID E. MCKINNEY
-------------------------
David E. McKinney
By: /s/ LEO BENATAR Director
------------------- Dated: March 21, 2003
Leo Benatar
Director
Dated: March 21, 2003 By: /s/ JAMES R. PAINTER
------------------------
James R. Painter
By: /s/ JOYCE F. BROWN Director
---------------------- Dated: March 21, 2003
Joyce F. Brown
Director
Dated: March 21, 2003 By: /s/ JACK R. PLAXE
---------------------
Jack R. Plaxe
Senior Vice President and
----------------------- Chief Financial Officer
Victor Hershaft Dated: March 21, 2003
Director
Dated: March 21, 2003
By: /s/ LARRY M. SEGALL
-----------------------
Larry M. Segall
Vice President and Controller
(Chief Accounting Officer)
Dated: March 21, 2003
43
PAXAR CORPORATION AND SUBSIDIARIES
CERTIFICATION
I, Paul J. Griswold, certify that:
1. I have reviewed this annual report on Form 10-K of Paxar Corporation (the
"registrant");
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) Presented in this annual 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
annual 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
March 21, 2003
- ----------------------------------------------
Date
44
PAXAR CORPORATION AND SUBSIDIARIES
CERTIFICATION
I, Jack R. Plaxe, certify that:
1. I have reviewed this annual report on Form 10-K of Paxar Corporation (the
"registrant");
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) Presented in this annual 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
annual 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
March 21, 2003
- -----------------------------------
Date
45