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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2003
-------------
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to _____________
Commission File Number: 1-9493
Paxar Corporation
(Exact name of registrant as specified in its charter)
New York 13-5670050
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Corporate Park Drive
White Plains, NY 10604
---------------- -----
(Address of principal executive offices) (Zip Code)
914-697-6800
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). |X| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.10 par value: 39,035,373 shares outstanding as
of August 7, 2003
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1: Consolidated Financial Statements
---------------------------------
The consolidated financial statements included herein have been prepared by
Paxar Corporation (the "Company") without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. While certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations, the
Company believes that the disclosures made herein are adequate to make the
information presented not misleading. It is recommended that these condensed
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2002.
In the opinion of the Company, all adjustments, consisting only of normal
recurring accruals and adjustments necessary to present fairly the financial
information contained herein, have been included.
1
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Sales............................................. $ 183.6 $ 173.1 $ 346.6 $ 325.8
Cost of sales..................................... 113.5 103.8 215.5 197.3
-------- -------- -------- --------
Gross profit................................. 70.1 69.3 131.1 128.5
Selling, general and administrative expenses...... 54.8 49.4 108.0 96.0
Restructuring and other charges................... 3.6 -- 6.7 --
-------- ------ -------- ------
Operating income............................. 11.7 19.9 16.4 32.5
Interest expense, net............................. 2.6 2.9 5.5 5.4
-------- -------- -------- --------
Income before taxes.......................... 9.1 17.0 10.9 27.1
Taxes on income................................... 2.1 3.9 2.5 6.5
-------- -------- -------- --------
Net income................................... $ 7.0 $ 13.1 $ 8.4 $ 20.6
======== ======== ======== ========
Basic earnings per share.......................... $ 0.18 $ 0.33 $ 0.22 $ 0.52
======== ======== ======== ========
Diluted earnings per share........................ $ 0.18 $ 0.32 $ 0.21 $ 0.51
======== ======== ======== ========
Weighted average shares outstanding:
Basic........................................... 39.0 39.7 39.0 39.5
Diluted......................................... 39.2 40.8 39.5 40.5
The accompanying notes are an integral part of the financial statements.
2
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
June 30, December 31,
2003 2002
-------- --------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 60.8 $ 49.6
Accounts receivable, net of allowances of $10.6 and $10.2 at
June 30, 2003 and December 31, 2002, respectively............... 123.3 106.8
Inventories, net................................................... 90.5 83.8
Deferred income taxes.............................................. 10.4 10.5
Other current assets............................................... 19.2 14.3
-------- --------
Total current assets..................................... 304.2 265.0
-------- --------
Property, plant and equipment, net................................. 157.8 154.9
Goodwill and other intangibles, net................................ 203.9 197.7
Other assets....................................................... 21.7 22.0
-------- --------
Total assets....................................................... $ 687.6 $ 639.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to banks....................................................... $ 4.6 $ 2.1
Current maturities of long-term debt............................... 0.1 0.1
Accounts payable and accrued liabilities........................... 102.7 94.5
Accrued taxes on income............................................ 12.5 13.9
-------- --------
Total current liabilities................................ 119.9 110.6
------- ------
Long-term debt..................................................... 182.9 164.5
Deferred income taxes.............................................. 12.6 12.1
Other liabilities.................................................. 14.0 14.8
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,
39,008,163 and 39,230,384 shares issued and outstanding at
June 30, 2003 and December 31, 2002, respectively............... 3.9 3.9
Paid-in capital.................................................... 8.6 11.2
Retained earnings.................................................. 339.3 330.9
Accumulated other comprehensive income (loss)...................... 6.4 (8.4)
-------- --------
Total shareholders' equity............................... 358.2 337.6
-------- --------
Total liabilities and shareholders' equity......................... $ 687.6 $ 639.6
======== ========
The accompanying notes are an integral part of the financial statements.
3
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
Six Months Ended
June 30,
----------------------
2003 2002
-------- --------
OPERATING ACTIVITIES
Net income.................................................... $ 8.4 $ 20.6
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.............................. 13.8 14.4
Deferred income taxes...................................... 0.6 --
Gain on sale of property and equipment, net................ (0.1) (0.2)
Write-off of property and equipment........................ 0.7 0.3
Post-employment benefit costs.............................. 0.6 0.4
Changes in assets and liabilities, net of businesses acquired:
Accounts receivable........................................ (16.5) (16.4)
Inventories................................................ (6.7) (7.5)
Other current assets....................................... (4.6) (2.4)
Accounts payable and accrued liabilities................... 8.3 5.9
Accrued taxes on income.................................... (1.4) 4.4
Other, net................................................. 5.9 (1.2)
-------- --------
Net cash provided by operating activities.................. 9.0 18.3
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment.................... (15.6) (9.6)
Acquisitions, net of cash acquired............................ (2.5) (18.0)
Proceeds from sale of property and equipment.................. 0.1 0.3
Other, net.................................................... -- (0.3)
-------- --------
Net cash used in investing activities...................... (18.0) (27.6)
-------- --------
FINANCING ACTIVITIES
Net increase in short-term debt............................... 2.5 0.1
Additions to long-term debt................................... 118.6 58.4
Reductions in long-term debt.................................. (100.2) (48.5)
Purchase of common stock...................................... (5.1) --
Proceeds from common stock issued under employee
stock option and stock purchase plans....................... 2.6 8.5
-------- --------
Net cash provided by financing activities.................. 18.4 18.5
-------- --------
Effect of exchange rate changes on cash flows.................. 1.8 0.6
-------- --------
Increase in cash and cash equivalents...................... 11.2 9.8
Cash and cash equivalents at beginning of year................. 49.6 35.1
-------- --------
Cash and cash equivalents at end of period................. $ 60.8 $ 44.9
======== ========
The accompanying notes are an integral part of the financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except headcount and per share data)
NOTE 1: GENERAL
The accounting policies followed during interim periods are in conformity
with accounting principles generally accepted in the United States and are
consistent with those applied for annual periods as described in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002.
NOTE 2: STOCK-BASED COMPENSATION EFFECT ON NET INCOME
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock Based Compensation," 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
Accounting Principles Board ("APB") Opinion 25. Under APB Opinion 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 $0.7 and $4.4 for the three and six months
ended June 30, 2003, respectively, and $0.5 and $3.7 for the three and six
months ended June 30, 2002. The following table presents pro forma net income
and earnings per share had the Company elected to adopt SFAS No. 123:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- -------
Net income:
As reported................................... $ 7.0 $ 13.1 $ 8.4 $ 20.6
Pro forma..................................... $ 6.3 $ 12.6 $ 4.0 $ 16.9
Basic earnings per share:
As reported................................... $ 0.18 $ 0.33 $ 0.22 $ 0.52
Pro forma..................................... $ 0.16 $ 0.32 $ 0.10 $ 0.43
Diluted earnings per share:
As reported................................... $ 0.18 $ 0.32 $ 0.21 $ 0.51
Pro forma..................................... $ 0.16 $ 0.31 $ 0.10 $ 0.42
NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("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 determined that the recognition
requirements of FIN No. 45 did not have a material impact on its results of
operations or financial condition.
5
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 APB Opinion 25 to the fair value method of
accounting under SFAS No. 123, if a company so elects. The Company believes that
the effect of SFAS No. 148 will not have a material impact on its results of
operations or financial condition.
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 determined
that FIN No. 46 did not have a material impact on its results of operations or
financial condition.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 requires that contracts with comparable
characteristics be accounted for similarly. In particular, SFAS No. 149 (1)
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative discussed in paragraph 6(b) of SFAS No.
133, (2) clarifies when a derivative contains a financing component, (3) amends
the definition of an underlying to conform it to language used in FIN No. 45,
and (4) amends certain other existing pronouncements. The provisions of SFAS No.
149 are effective for contracts entered into or modified after June 30, 2003.
The Company believes that the adoption of SFAS No. 149 will not have a material
impact on its results of operations or financial condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires than an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). The provisions of SFAS No.
150 are effective for financial instruments entered into or modified after May
31, 2003, and otherwise are effective at the beginning of the first interim
period beginning after June 15, 2003. The Company believes that the adoption of
SFAS No. 150 will not have a material impact on its results of operations or
financial condition.
NOTE 4: FINANCIAL INSTRUMENTS
The Company adopted the provisions of SFAS No. 133, as amended by SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of SFAS No. 133," 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 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.
6
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, 2003 and June 30, 2003 for delivery of various currencies at various future
dates and the changes in fair value recorded in income during the three and six
months ended June 30, 2003 were not material.
All financial instruments of the Company with the exception of hedge
instruments are carried at cost, which approximates fair value.
NOTE 5: INVENTORIES, NET
Inventories are stated at lower of cost or market. The value of net
inventories determined using the last-in, first-out method was $17.2 and $12.9
as of June 30, 2003 and December 31, 2002, respectively. The value of all other
net inventories determined using the first-in, first-out method was $73.3 and
$70.9 as of June 30, 2003 and December 31, 2002, respectively.
The components of net inventories are as follows:
June 30, December 31,
2003 2002
----------- -----------
Raw materials...................................................... $ 41.1 $ 34.7
Work-in-process.................................................... 8.7 8.1
Finished goods..................................................... 56.8 52.4
----------- -----------
106.6 95.2
Less allowance for obsolescence.................................... (16.1) (11.4)
----------- -----------
$ 90.5 $ 83.8
=========== ===========
NOTE 6: GOODWILL AND OTHER INTANGIBLES, NET
Under SFAS No. 142, "Goodwill and Other Intangible Assets," the Company is
required to test goodwill for impairment at least annually. Accordingly, the
Company completed its annual goodwill impairment assessment during the fourth
quarter of 2002, and based on a comparison of the implied fair values of its
reporting units with their respective carrying amounts, including goodwill, the
Company determined that no potential impairment of goodwill in its individual
reporting units existed at October 31, 2002.
The changes in the carrying amounts of goodwill for the six months ended
June 30, 2003, are as follows:
Beginning Balance Goodwill Foreign Currency Ending Balance
January 1, 2003 Acquired Translation June 30, 2003
2003 Adjustments
----------------- -------- ------------ --------------
Americas....................... $ 111.0 $1.3 $ -- $ 112.3
EMEA........................... 67.4 -- 3.9 71.3
Asia Pacific................... 17.3 1.2 -- 18.5
----------------- -------- ------------ --------------
Total..................... $ 195.7 $2.5 $ 3.9 $ 202.1
================= ========= ============ ==============
Net other intangibles as of June 30, 2003 and December 31, 2002, consisted
of a noncompete agreement of $1.2 and $1.4, respectively, and post-employment
benefit obligation adjustments of $0.6 as of each such date.
7
NOTE 7: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
A summary of accounts payable and accrued liabilities is as follows:
June 30, December 31,
2003 2002
------------- ---------
Accounts payable..................................................... $ 42.9 $ 44.1
Accrued payroll costs................................................ 17.1 17.1
Other accrued liabilities............................................ 42.7 33.3
----------- -----------
$ 102.7 $ 94.5
=========== ===========
NOTE 8: LONG -TERM DEBT
A summary of long-term debt is as follows:
June 30, December 31,
2003 2002
------------- ---------
6.74% Senior Notes................................................. $ 150.0 $ 150.0
Economic Development Revenue Bonds due 2011 and 2019............... 13.0 13.0
Revolver........................................................... 19.8 --
Other.............................................................. 0.2 1.6
----------- -----------
183.0 164.6
Less current maturities............................................ 0.1 0.1
----------- -----------
$ 182.9 $ 164.5
=========== ===========
NOTE 9: SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes is as follows:
Six Months Ended
June 30,
---------------------
2003 2002
-------- -------
Interest........................................................... $ 5.7 $ 5.6
======== ========
Income taxes....................................................... $ 2.9 $ 3.1
======== ========
NOTE 10: COMPREHENSIVE INCOME
Comprehensive income for the periods presented below includes foreign
currency translation items. There was no tax expense or tax benefit associated
with the foreign currency translation items.
Six Months Ended
June 30,
----------------------
2003 2002
-------- --------
Net income........................................................... $ 8.4 $ 20.6
Foreign currency translation adjustments............................. 14.8 7.4
-------- --------
Comprehensive income................................................. $ 23.2 $ 28.0
======== ========
NOTE 11: EARNINGS PER SHARE
The reconciliation of basic and diluted weighted average common shares
outstanding is as follows:
Six Months Ended
June 30,
----------------------
2003 2002
-------- --------
Weighted average common shares (basic)............................... 39.0 39.5
Options and warrants................................................. 0.5 1.0
-------- --------
Adjusted weighted average common shares (diluted).................... 39.5 40.5
========= ========
8
Options to purchase 2.5 and 0.1 of shares of common stock outstanding at
June 30, 2003 and 2002, respectively, were not included in the computation of
diluted earnings per share because the effect of their inclusion would be
antidilutive.
NOTE 12: 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 as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ --------------------
2003 2002 2003 2002
-------- -------- -------- -------
Sales to unaffiliated customers:
Americas.......................................... $ 80.9 $ 85.6 $ 158.5 $ 166.1
EMEA.............................................. 52.5 44.4 99.1 84.6
Asia Pacific...................................... 50.2 43.1 89.0 75.1
-------- -------- -------- --------
Total................................... $ 183.6 $ 173.1 $ 346.6 $ 325.8
======== ======== ======== ========
Intersegment sales:
Americas.......................................... $ 15.4 $ 17.0 $ 30.5 $ 32.3
EMEA.............................................. 10.6 10.9 19.5 21.3
Asia Pacific...................................... 3.8 2.7 6.5 4.8
Eliminations...................................... (29.8) (30.6) (56.5) (58.4)
-------- -------- -------- --------
Total................................... $ -- $ -- $ -- $ --
======= ======= ======= =======
Operating income:
Americas (a)...................................... $ 5.0 $ 9.6 $ 5.6 $ 15.7
EMEA (a).......................................... 2.1 5.2 3.1 8.8
Asia Pacific...................................... 12.1 10.6 20.1 17.2
-------- -------- -------- --------
19.2 25.4 28.8 41.7
Corporate expenses (a)............................ (7.4) (5.4) (12.2) (9.1)
Amortization of intangibles....................... (0.1) (0.1) (0.2) (0.1)
-------- -------- -------- --------
Total................................... $ 11.7 $ 19.9 $ 16.4 $ 32.5
======== ======== ======== ========
(a) Americas, EMEA and Corporate expenses included restructuring and other
charges of $0.8, $1.4 and $1.4, respectively, for the three months
ended June 30, 2003, and $3.7, $1.4 and $1.6, respectively, for the
six months ended June 30, 2003.
Depreciation and amortization:
Americas.......................................... $ 3.2 $ 4.1 $ 6.5 $ 7.7
EMEA.............................................. 2.4 2.3 4.5 4.1
Asia Pacific...................................... 1.1 1.2 2.1 2.0
-------- -------- -------- --------
6.7 7.6 13.1 13.8
Corporate......................................... 0.4 0.4 0.7 0.6
-------- -------- -------- --------
Total................................... $ 7.1 $ 8.0 $ 13.8 $ 14.4
======== ======== ======== ========
9
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ --------------------
2003 2002 2003 2002
-------- -------- -------- -------
Capital expenditures:
Americas.......................................... $ 2.3 $ 2.3 $ 5.4 $ 3.6
EMEA.............................................. 3.6 1.8 6.1 3.3
Asia Pacific...................................... 1.8 1.6 3.4 2.2
-------- -------- -------- --------
7.7 5.7 14.9 9.1
Corporate......................................... 0.6 0.4 0.7 0.5
-------- -------- -------- --------
Total................................... $ 8.3 $ 6.1 $ 15.6 $ 9.6
======== ======== ======== ========
June 30, December 31,
2003 2002
-------- --------
Long-lived assets:
Americas.......................................... $ 194.6 $ 193.9
EMEA.............................................. 120.6 115.2
Asia Pacific...................................... 40.1 37.2
-------- --------
355.3 346.3
Corporate......................................... 6.4 6.3
-------- --------
Total................................... $ 361.7 $ 352.6
======== ========
Total assets:
Americas.......................................... $ 296.1 $ 292.1
EMEA.............................................. 226.8 207.6
Asia Pacific...................................... 105.9 91.1
-------- --------
628.8 590.8
Corporate......................................... 58.8 48.8
-------- --------
Total................................... $ 687.6 $ 639.6
======== ========
NOTE 13: RESTRUCTURING AND OTHER CHARGES
As of January 1, 2003, the Company had total unpaid severance of $0.2
recorded in connection with the Company's strategic initiatives implemented
during 2001.
During the first half of 2003, the Company implemented specific initiatives
to reduce the cost of the Company's infrastructure and improve operating
efficiency. As a result, the Company recorded pre-tax charges totaling $5.4
primarily pertaining to: (1) consolidation of certain manufacturing facilities
as the Company closed one manufacturing location in the US; and (2) headcount
reductions, which resulted in the severance of 165 factory positions and 70
managerial and administrative positions in North America and the UK.
In addition, during the second quarter of 2003, the Company paid its former
Chief Executive Officer severance of $2.0, and recorded $1.3 as restructuring
and other charges and reduced its post-employment obligation by $0.7.
The following table presents the changes in severance accrual for the six
months ended June 30, 2003:
Beginning Balance Ending Balance
January 1, 2003 Expenses Payments June 30, 2003
------------------- ----------- --------- ---------------
Severance.......................... $ 0.2 $ 6.2 $ (4.3) $ 2.1
10
Item 2: Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations for the Three and Six Months Ended June 30, 2003
--------------------------------------------------------------
All amounts in the following discussion are stated in millions, except
headcount, share and per share data.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management has identified the following policies and estimates as critical
to the Company's business operations and the understanding of the Company's
results of operations. Note that the preparation of this Quarterly Report on
Form 10-Q requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the Company's financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results may
differ from those estimates.
Revenue Recognition
The Securities and Exchange Commission issued Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements," in December
1999. The Company adopted SAB No. 101, as amended, in the fourth quarter of
2000. SAB No. 101 requires that four basic criteria be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the fee is fixed 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 balances were $123.3, net of allowances of $10.6 at June 30, 2003,
and $106.8, net of allowances of $10.2, at December 31, 2002.
Goodwill
The Company evaluates goodwill for impairment on an annual basis or if a
significant event occurs or circumstances change, which could result in the
carrying value of a reporting unit exceeding its fair value. Factors the Company
considers important which could 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 implied fair values of its reporting units with
their respective carrying amounts, including goodwill. During the fourth quarter
of 2002, the Company completed its annual goodwill impairment assessment, and
based on the results, the Company determined that no potential impairment of
goodwill in its individual reporting units existed at October 31, 2002.
11
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. There were no significant
impairment losses related to long-lived assets for the three and six months
ended June 30, 2003 and 2002.
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"). 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 move 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's results of operations for the three and six months ended June
30, 2003 and 2002, respectively, in dollars and as a percent of sales are
presented below:
Three Months Ended Six Months Ended
---------------------------------------------------------------------------------
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
---------------------------------------------------------------------------------
Sales............................ $ 183.6 100.0% $ 173.1 100.0% $ 346.6 100.0% $ 325.8 100.0%
Cost of sales.................... 113.5 61.8 103.8 60.0 215.5 62.2 197.3 60.6
-------- ------- -------- ------- -------- ------- -------- -------
Gross profit................. 70.1 38.2 69.3 40.0 131.1 37.8 128.5 39.4
Selling, general and
administrative expenses........ 54.8 29.8 49.4 28.6 108.0 31.2 96.0 29.4
Restructuring and other charges.. 3.6 2.0 -- -- 6.7 1.9 -- --
-------- ------- -------- --------- -------- ------- -------- -------
Operating income............. 11.7 6.4 19.9 11.4 16.4 4.7 32.5 10.0
Interest expense, net............ 2.6 1.4 2.9 1.6 5.5 1.6 5.4 1.7
-------- ------- -------- ------- -------- ------- -------- -------
Income before taxes.......... 9.1 5.0 17.0 9.8 10.9 3.1 27.1 8.3
Taxes on income.................. 2.1 1.2 3.9 2.2 2.5 0.7 6.5 2.0
-------- ------- -------- ------- -------- ------- -------- -------
Net income................... $ 7.0 3.8% $ 13.1 7.6% $ 8.4 2.4% $ 20.6 6.3%
======== ======= ======== ======= ======== ======= ======== =======
As the Company entered 2003, management was cautious about global economic
uncertainties and did not expect significant improvement in retail and apparel
markets. However, as the Company moved through the first half of 2003, its
business began to improve. For the three months ended June 30, 2003, the
Company's sales increased $10.5, or 6.1%, to $183.6 compared with $173.1 for the
three months ended June 30, 2002. The sales increase is attributable to the
increased customer demand for the existing range of the Company's products
("organic sales growth") of $0.5, the favorable impact of changes in foreign
exchange rates of $8.2, and the impact of a prior acquisition of $1.8. For the
six months ended June 30, 2003, sales increased $20.8, or 6.4%, to $346.6
compared with $325.8 for the six months ended June 30, 2002. The sales increase
is attributable to organic sales growth of $2.2, the favorable impact of changes
in foreign exchange rates of $15.0, and the impact of prior acquisitions of
$3.6. The Company continued to focus on providing its customers with value-added
products and solutions, outstanding service, consistent quality and on-time
deliveries. 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. Nonetheless, there can be no assurance as to the extent or
duration of the current sluggish economic environment or as to its future impact
on the Company.
12
Operating income was $11.7 and $16.4 for the three and six months ended June
30, 2003, respectively, compared with $19.9 and $32.5 for the three and six
months ended June 30, 2002. As a percent of sales, operating income was 6.4% and
4.7% for the three and six months ended June 30, 2003, respectively, compared
with 11.4% and 10.0% for the three and six months ended June 30, 2002. The
operating results for the three and six months ended June 30, 2003 included
restructuring and other charges of $3.6 and $6.7, respectively, recorded in
connection with the consolidation of certain operations, headcount reductions
and a severance payment to the Company's former Chief Executive Officer (see
Note 13 of the Notes to Consolidated Financial Statements).
Management believes that acquisitions will continue to be a fundamental
element of the Company's growth. In July 2002, the Company acquired 100% of the
equity of NTP Gandrudbakken AS, a manufacturer of heat transfer labels located
in Norway. In addition, in February 2002, the Company acquired the business and
manufacturing assets of Disenos de Coleccion, a leading manufacturer of
merchandising labels and tags for Mexican retailers and apparel manufacturers.
During the first half of 2003, the Company continued to integrate and assimilate
the operations of its prior acquisitions.
Sales
The following table presents sales by geographic operating segment:
Three Months Ended Six Months Ended
---------------------------------------------------------------------------------
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
---------------------------------------------------------------------------------
Sales to unaffiliated customers:
Americas......................... $ 80.9 44.1% $ 85.6 49.5% $ 158.5 45.7% $ 166.1 50.9%
EMEA............................. 52.5 28.6 44.4 25.6 99.1 28.6 84.6 26.0
Asia Pacific..................... 50.2 27.3 43.1 24.9 89.0 25.7 75.1 23.1
-------- ------- -------- ------- -------- ------- -------- -------
Total........................ $ 183.6 100.0% $ 173.1 100.0% $ 346.6 100.0% $ 325.8 100.0%
======== ======= ======== ======= ======== ======= ======== =======
Americas sales include sales delivered through the Company's operations in
North (primarily in the US), Central and South America. Sales declined $4.7, or
5.5%, to $80.9 for the three months ended June 30, 2003 compared with $85.6 for
the three months ended June 30, 2002. For the six months ended June 30, 2003,
sales declined $7.6, or 4.6%, to $158.5 compared with $166.1 for the six months
ended June 30, 2002. Management attributes the sales decline to challenging
economic and retail conditions that resulted in fewer orders and smaller average
transaction size and generally reduced customer demand for the entire range of
the Company's products. Management also points to a sales migration trend that
continued into 2003. 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 the Company's geographic sales mix
primarily to the Asia Pacific region.
EMEA's sales, which include sales delivered through the Company's operations
in twelve European countries, the Middle East and Africa, increased $8.1, or
18.2%, to $52.5 for the three months ended June 30, 2003 compared with $44.4 for
the three months ended June 30, 2002. The increase is attributable to the
favorable impact of changes in foreign exchange rates of $7.7 and the impacts of
a prior year acquisition of $1.8, offset by $1.4 decline in organic sales. For
the six months ended June 30, 2003, sales increased $14.5, or 17.1%, to $99.1
compared with $84.6 for the six months ended June 30, 2002. The increase is
attributable to the favorable impact of changes in foreign exchange rates of
$14.2 and the impact of a prior year acquisition of $3.3, offset by $3.0 decline
in organic sales. Management believes that weakness in economic and retail
conditions in EMEA and uncertainties surrounding the global economic environment
continued to dampen overall customer demand, which in turn put pressure on
EMEA's sales during the first half of 2003. 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.
13
Asia Pacific consists of the Company's operations in Hong Kong, China,
Singapore, Sri Lanka, Korea, Bangladesh, Indonesia, Australia and India. Sales
increased $7.1, or 16.5%, to $50.2 for the three months ended June 30, 2003
compared with $43.1 for the three months ended June 30, 2002. The increase is
attributable to organic sales growth of $6.9 and the favorable impact of a
foreign exchange rate of $0.2. For the six months ended June 30, 2003, sales
increased $13.9, or 18.5%, to $89.0 compared with $75.1 for the six months ended
June 30, 2002. The increase is attributable to organic sales growth of $13.5 and
the favorable impact of a foreign exchange rate of $0.4. 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, management believes that the
Company gained market share in Asia Pacific.
Gross Profit
Gross profit, as a percent of sales, decreased to 38.2% and 37.8% for the
three and six months ended June 30, 2003, respectively, from 40.0% and 39.4% for
the three and six months ended June 30, 2002. The decrease is primarily
attributable to under-utilization of certain production capacity, production
inefficiencies at certain manufacturing facilities 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 transferring production to new and emerging markets in order to
maximize labor and cost efficiencies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, as a percent of sales,
increased to 29.8% and 31.2% for the three and six months ended June 30, 2003,
respectively, from 28.6% and 29.4% for the three and six months ended June 30,
2002. The increase is primarily attributable to incremental staffing and other
fixed costs necessary to support the Company's global expansion and certain
incremental expenses associated with the Company's re-branding initiatives and
prior acquisitions.
Restructuring and Other Charges
During the first half of 2003, the Company implemented specific initiatives
to reduce the cost of the Company's infrastructure and improve operating
efficiency. As a result, the Company recorded pre-tax charges totaling $5.4
primarily pertaining to: (1) consolidation of certain manufacturing facilities
as the Company closed one manufacturing location in the US; and (2) headcount
reductions, which resulted in the severance of 165 factory positions and 70
managerial and administrative positions in North America and the UK.
In addition, during the second quarter of 2003, the Company paid its former
Chief Executive Officer severance of $2.0, and recorded $1.3 as restructuring
and other charges and reduced its post-employment obligation by $0.7.
Operating Income
Operating income was $11.7 and $16.4 for the three and six months ended June
30, 2003, respectively, compared with $19.9 and $32.5 for the three and six
months ended June 30, 2002. As a percent of sales, operating income was 6.4% and
4.7% for the three and six months ended June 30, 2003, respectively, compared
with 11.4% and 10.0% for the three and six months ended June 30, 2002. The
operating results for the three and six months ended June 30, 2003 included
restructuring and other charges of $3.6 and $6.7, respectively, recorded in
connection with the consolidation of certain operations, headcount reductions
and a severance payment to the Company's former Chief Executive Officer. On a
reportable operating segment basis, exclusive of corporate expenses and
amortization of intangibles, operating income, as a percent of sales, was as
follows: Americas was 6.2% and 3.5% for the three and six months ended June 30,
2003, respectively, compared with 11.2% and 9.5% for the three and six months
ended June 30, 2002; EMEA was 4.0% and 3.1% for the three and six months ended
June 30, 2003, respectively, compared with 11.7% and 10.4% for the three and six
months ended June 30, 2002; and Asia Pacific was 24.1% and 22.6% for the three
and six months ended June 30, 2003, respectively, compared with 24.6% and 22.9%
for the three and six months ended June 30, 2002. Americas and EMEA included
restructuring and other charges, as a percent of sales, of 1.0% and 2.7%,
respectively, for the three months ended June 30, 2003, and 2.3% and 1.4% for
the six months ended June 30, 2003.
14
Interest Expense, Net
Interest expense, net of interest income on invested cash, decreased to $2.6
for the three months ended June 30, 2003 compared with $2.9 for the three months
ended June 30, 2002. The decrease is primarily attributable to higher interest
income on invested cash.
For the six months ended June 30, 2003, net interest expense increased
slightly to $5.5 compared with $5.4 for the six months ended June 30, 2002. The
increase is attributable to lower rates of return available on invested cash and
higher average borrowings, offset by higher interest income on invested cash.
Taxes on Income
The effective tax rates for the six months ended June 30, 2003 and 2002 were
22.9% and 24.0%, respectively. The decrease in the effective tax rate reflects a
shift in the geographic business mix toward lower tax rate jurisdictions.
Liquidity and Capital Resources
The following table presents summary cash flow information for the periods
indicated:
Six Months Ended
June 30,
---------------------
2003 2002
-------- -------
Net cash provided by operating activities............. $ 9.0 $ 18.3
Net cash used in investing activities................. (18.0) (27.6)
Net cash provided by financing activities............. 18.4 18.5
-------- --------
Total change in cash and cash equivalents (a) $ 9.4 $ 9.2
======== ========
- ----------
(a) Before the effect of exchange rate changes on cash flows.
Operating Activities
Cash provided by operating activities is a 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 $9.0 for the six
months ended June 30, 2003 compared with $18.3 for the six months ended June 30,
2002. Management believes that the Company will continue to generate 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 $184.3 and 2.5:1
and $154.4 and 2.4:1 at June 30, 2003 and December 31, 2002, respectively. The
increase in working capital resulted primarily from increases in cash and cash
equivalents, accounts receivable, inventories and other current assets and
decreases in accounts payable and accrued taxes on income, offset by increase in
accrued liabilities and amounts due to banks.
Investing Activities
For the six months ended June 30, 2003, the Company continued to 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.
15
Investing activities for the six months ended June 30, 2002 consisted of an
acquisition of the business and manufacturing assets of Disenos de Coleccion, a
leading manufacturer of merchandising labels and tags for Mexican retailers and
apparel manufacturers, continued production machinery upgrades and the ERP
system conversions, and the costs associated with growth and expansion of the
Company's operations in Central and South America, EMEA and Asia Pacific
markets.
Financing Activities
The components of total capital as of June 30, 2003 and December 31, 2002,
respectively, are presented below:
June 30, December 31,
2003 2002
----------- -----------
Due to banks................................ $ 4.6 $ 2.1
Current maturities of long-term debt........ 0.1 0.1
Long-term debt.............................. 182.9 164.5
----------- -----------
Total debt.................................. 187.6 166.7
Shareholders' equity........................ 358.2 337.6
----------- -----------
Total capital............................... $ 545.8 $ 504.3
=========== ===========
Total debt as a percent of total capital.... 34.4% 33.1%
=========== ===========
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 six months
ended June 30, 2003 and 2002, net borrowings of the Company's outstanding debt
were $20.9 and $10.0, respectively.
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 six months ended June 30, 2003 and 2002, the Company received proceeds
of $2.6 and $8.5, 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. For the six months ended June 30, 2003, the
Company repurchased 469,000 shares for an aggregate price of $5.1, or $10.80 per
share. Since the inception of the stock repurchase program, the Company
repurchased 12,293,000 of its shares for an aggregate price of $122.0, or $9.92
per share. The Company immediately retired the repurchased shares. As of June
30, 2003, the Company had $28.0 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.
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 June 30, 2003 was 0.35%.
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 thresholds or, at the Company's
option, rates competitively bid among the participating banks or the Prime Rate,
as defined (4.00% and 4.25% at June 30, 2003 and December 31, 2002,
respectively), and are guaranteed by certain domestic subsidiaries of the
Company.
16
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 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 condition, changes in financial
condition, results of operations, liquidity, capital expenditures, capital
resources, or significant components of revenues or expenses.
Market Risk
In the normal course of business, the Company is exposed to 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 material effect on the fair value of the Company's floating rate debt
instruments. In addition, all of the Company's derivatives have high correlation
with the underlying exposure and are highly effective in offsetting underlying
currency movements. Accordingly, changes in derivative fair values are expected
to be offset by changes in value of the underlying exposures.
The Company sells its products in many countries and a substantial portion
of its net sales and costs and expenses are denominated in foreign currencies. A
significant portion of the Company's sales for the three months ended June 30,
2003 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 flows. 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.
17
Cautionary Statement pursuant to "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995.
This document contains certain "forward-looking statements" concerning the
Company's objectives and expectations with respect to gross profit, expenses,
inventory performance, capital expenditures and cash flows. In addition,
management makes other forward-looking statements from time to time concerning
objectives and expectations. The Company's success in achieving the objectives
and expectations is somewhat dependent upon economic conditions, competitive
developments and consumer attitudes. However, certain assumptions are specific
to the Company and/or the markets in which it operates.
Except for historical information, the Company's reports to the Securities
and Exchange Commission on Form 10-K and Form 10-Q and periodic press releases,
as well as other public documents and statements, contain "forward-looking
statements" within the meaning of the federal securities laws. Forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed or implied by the statements.
Among others the risks and uncertainties include:
-- Worldwide economic and other business conditions that could affect
demand for the Company's products in the US or international markets
-- Rate of migration of garment manufacturing industry moving from the US
and Western Europe
-- The mix of products sold and the profit margins thereon
-- Order cancellation or a reduction in orders from customers
-- Competitive product offerings and pricing actions
-- The availability and pricing of key raw materials
-- The level of manufacturing productivity
-- Dependence on key members of management
Readers are cautioned not to place undue reliance on forward-looking
statements. The Company undertakes no obligation to republish or revise
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrences of unanticipated events.
Item 3: Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
The information called for by this item is set forth under the heading
"Market Risk" in Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in Item 2 above, which information is hereby
incorporated by reference.
Item 4: Controls and Procedures
-----------------------
Based on their evaluation required by Rule 13a-15(b) or 15a-15(b) under
the Securities Exchange Act of 1934 (the "Exchange Act"), management, including
the Chief Executive Officer and Chief Financial Officer, concluded that the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) were effective as of the end of the period
covered by this report.
18
PART II. OTHER INFORMATION
--------------------------
Item 4: Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On April 30, 2003, the Company held an Annual Meeting of Shareholders to
elect six Directors, each to serve for a term of two years and until their
successors are duly elected and qualified, and to approve an increase in the
shares authorized for issuance under the Company's 2000 Long-Term Performance
and Incentive Plan by an additional 3,000,000 shares. The nominees for election
to the Board of Directors received the following votes cast:
For Withheld
Nominees Election Authority
- -------- -------- ---------
Jack Becker 27,373,176 8,634,747
Leo Benatar 33,940,553 2,067,370
Paul J. Griswold 34,866,439 1,141,484
Victor Hershaft 34,242,983 1,764,940
David E. McKinney 33,954,358 2,053,565
James R. Painter 34,878,096 1,129,827
Holders of 21,162,586 shares voted for an increase in the shares authorized
for issuance under the Company's 2000 Long-Term Performance and Incentive Plan
by an additional 3,000,000 shares, 7,678,647 shares were voted against, and
there were 836,179 abstentions.
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits.
Exhibit 31.1 Certification of the Chief Executive Officer required
by Rule 13a-14(a) or Rule 15d-14(a).
Exhibit 31.2 Certification of the Chief Financial Officer required
by Rule 13a-14(a) or Rule 15d-14(a).
Exhibit 32.1 Certification of the Chief Executive Officer
required by Rule 13a-14(b) and 18 U.S.C. 1350.
Exhibit 32.2 Certification of the Chief Financial Officer
required by Rule 13a-14(b) and 18 U.S.C. 1350.
b) Reports on Form 8-K
Current Report on Form 8-K, dated April 7, 2003, reporting under Item 9
that the Registrant's earnings for the quarter ended March 31, 2003 would
be less than previously announced estimates.
Current Report on Form 8-K, dated April 29, 2003, reporting under Item 9
that the Registrant issued a press release announcing its first quarter
2003 earnings.
Current Report on Form 8-K, dated May 12, 2003, reporting under Item 9 that
Arthur Hershaft was elected as the Registrant's President and Chief
Executive Officer, and Paul J. Griswold resigned from those offices and as
a director.
Current Report on Form 8-K, dated May 30, 2003, reporting under Item 5
that the Registrant entered into an agreement with Paul J. Griswold,
its former President and Chief Executive Officer and a member of its
Board of Directors, setting forth the terms of Mr. Griswold's
severance as an employee of the Registrant.
19
PAXAR CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements 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
--------------------------------
Registrant
By: /s/ Larry M. Segall
--------------------------------
Vice President and Controller
(Chief Accounting Officer)
August 13, 2003
--------------------------------
Date