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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 September 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: 39,119,680 shares outstanding as of
November 13, 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
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 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. The consolidated balance sheet as of December 31, 2002 included herein
reflects certain reclassifications from amounts included in previous filings as
discussed in Note 12 of the Notes to Consolidated Financial Statements as of and
for the periods ended September 30, 2003 included herein. Prior filings under
the Securities Exchange Act of 1934 will be amended to the extent required to
give effect to the reclassifications.
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 Nine Months Ended
September 30, September 30,
--------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Sales............................................. $ 170.7 $ 170.1 $ 517.3 $ 495.9
Cost of sales..................................... 106.0 105.8 321.5 303.1
-------- -------- -------- --------
Gross profit................................. 64.7 64.3 195.8 192.8
Selling, general and administrative expenses...... 52.6 48.9 160.6 144.9
Restructuring and other charges................... 4.1 -- 10.8 --
-------- -------- -------- --------
Operating income............................. 8.0 15.4 24.4 47.9
Interest expense, net............................. 2.9 3.1 8.4 8.5
-------- -------- -------- --------
Income before taxes.......................... 5.1 12.3 16.0 39.4
Taxes on income................................... 1.2 2.1 3.7 8.6
-------- -------- -------- --------
Net income................................... $ 3.9 $ 10.2 $ 12.3 $ 30.8
======== ======== ======== ========
Basic earnings per share.......................... $ 0.10 $ 0.26 $ 0.32 $ 0.78
======== ======== ======== ========
Diluted earnings per share........................ $ 0.10 $ 0.25 $ 0.31 $ 0.76
======== ======== ======== ========
Weighted average shares outstanding:
Basic........................................... 39.0 39.5 39.0 39.5
Diluted......................................... 39.5 40.3 39.5 40.4
The accompanying notes are an integral part of the financial statements.
2
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
September 30, December 31,
2003 2002
--------------- --------------
(unaudited) (See Note 12)
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 62.1 $ 49.6
Accounts receivable, net of allowances of $10.3 and $10.2 at
September 30, 2003 and December 31, 2002, respectively.......... 120.8 106.8
Inventories, net................................................... 99.8 83.8
Deferred income taxes.............................................. 10.9 10.5
Other current assets............................................... 20.6 14.3
-------- --------
Total current assets..................................... 314.2 265.0
-------- --------
Property, plant and equipment, net................................. 165.2 154.9
Goodwill and other intangibles, net................................ 209.3 197.7
Other assets....................................................... 22.1 22.0
-------- --------
Total assets....................................................... $ 710.8 $ 639.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to banks....................................................... $ 4.4 $ 2.1
Current maturities of long-term debt............................... 0.1 0.1
Accounts payable and accrued liabilities........................... 100.8 94.5
Accrued taxes on income............................................ 15.0 13.9
-------- --------
Total current liabilities................................ 120.3 110.6
-------- --------
Long-term debt..................................................... 198.2 164.5
Deferred income taxes.............................................. 12.8 12.1
Other liabilities.................................................. 15.5 14.8
Commitments and contingent liabilities
Common stock subject to redemption, 2,562,380 and 2,544,042
shares issued and outstanding at September 30, 2003 and
December 31, 2002, respectively................................... 33.2 37.6
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,
36,523,637 and 36,686,342 shares issued and outstanding at
September 30, 2003 and December 31, 2002, respectively.......... 3.7 3.7
Paid-in capital.................................................... -- --
Retained earnings.................................................. 319.7 304.7
Accumulated other comprehensive income (loss)...................... 7.4 (8.4)
-------- --------
Total shareholders' equity............................... 330.8 300.0
-------- --------
Total liabilities and shareholders' equity......................... $ 710.8 $ 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)
Nine Months Ended
September 30,
----------------------
2003 2002
-------- --------
OPERATING ACTIVITIES
Net income.................................................... $ 12.3 $ 30.8
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.............................. 22.3 22.1
Gain on sale of property and equipment, net................ (0.1) (0.2)
Write-off of property and equipment........................ 4.9 0.7
Post-employment benefit costs.............................. 1.3 1.2
Changes in assets and liabilities, net of businesses acquired:
Accounts receivable........................................ (7.2) (6.3)
Inventories................................................ (8.1) (8.6)
Other current assets....................................... (5.8) (3.4)
Accounts payable and accrued liabilities................... 3.3 0.5
Accrued taxes on income.................................... 0.7 5.3
Other, net................................................. 5.7 (5.0)
-------- --------
Net cash provided by operating activities.................. 29.3 37.1
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment.................... (23.9) (16.2)
Acquisitions, net of cash acquired............................ (28.4) (21.5)
Proceeds from sale of property and equipment.................. 0.2 0.3
Other, net.................................................... - (0.4)
-------- --------
Net cash used in investing activities...................... (52.1) (37.8)
-------- --------
FINANCING ACTIVITIES
Net increase in short-term debt............................... 2.3 0.2
Additions to long-term debt................................... 201.2 83.6
Reductions in long-term debt.................................. (167.5) (70.0)
Purchase of common stock subject to redemption................ -- (6.4)
Purchase of common stock...................................... (5.1) (2.7)
Proceeds from common stock issued under employee
stock option and stock purchase plans....................... 3.5 9.0
-------- --------
Net cash provided by financing activities.................. 34.4 13.7
-------- --------
Effect of exchange rate changes on cash flows.................. 0.9 1.2
-------- --------
Increase in cash and cash equivalents...................... 12.5 14.2
Cash and cash equivalents at beginning of year................. 49.6 35.1
-------- --------
Cash and cash equivalents at end of period................. $ 62.1 $ 49.3
======== ========
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 following table presents pro forma net income and earnings per
share had the Company elected to adopt SFAS No. 123:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income, as reported............................... $ 3.9 $ 10.2 $ 12.3 $ 30.8
Deduct: Stock-based employee compensation expense
determined under fair value based method for all
awards granted, net of related tax effects............ -- -- (4.4) (3.7)
-------- -------- -------- --------
Pro forma net income.................................. $ 3.9 $ 10.2 $ 7.9 $ 27.1
======== ======== ======== ========
Earnings Per Share:
Basic - as reported............................... $ 0.10 $ 0.26 $ 0.32 $ 0.78
Basic - pro forma................................. $ 0.10 $ 0.26 $ 0.20 $ 0.69
Diluted - as reported............................. $ 0.10 $ 0.25 $ 0.31 $ 0.76
Diluted - pro forma............................... $ 0.10 $ 0.25 $ 0.20 $ 0.67
NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("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 determined
that the adoption of SFAS No. 146 did not have a material impact on its results
of operations or financial position.
In November 2002, the EITF reached a consensus on EITF No. 00-21,
"Accounting for Revenue Arrangements with Multiple Element Deliverables." EITF
No. 00-21 addresses how to account for arrangements that may involve the
delivery or performance of multiple products, services and/or rights to use
assets. Revenue arrangements with multiple deliverables should be divided into
separate units of accounting if the deliverables in the arrangement meet certain
criteria. Arrangement consideration should be allocated among the separate units
of accounting based on their relative fair values. The final consensus is
applicable to agreements entered into in quarters beginning after June 15, 2003,
with early adoption permitted. Additionally, companies are permitted to apply
the consensus guidance to all existing arrangements as a cumulative effect of a
change in accounting principle. The Company determined that the adoption of EITF
No. 00-21 did not have a material impact on its results of operations or
financial position.
5
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 determined that the recognition requirements of FIN No. 45 did
not have a material impact on its results of operations or financial condition.
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 effect of SFAS No.
148 did 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
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 determined that the adoption of SFAS No. 149 did 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 that 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 determined that the adoption
of SFAS No. 150 did not have a material impact on its results of operations or
financial condition.
6
NOTE 4: FINANCIAL INSTRUMENTS
The Company applies 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," SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," and SFAS No. 149. 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.
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 September 30, 2003 for delivery of various currencies at various
future dates and the changes in fair value recorded in income during the three
and nine months ended September 30, 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 $15.9 and $12.9
as of September 30, 2003 and December 31, 2002, respectively. The value of all
other net inventories determined using the first-in, first-out method was $83.9
and $70.9 as of September 30, 2003 and December 31, 2002, respectively.
The components of net inventories are as follows:
September 30, December 31,
2003 2002
-------------- -----------
Raw materials...................................................... $ 45.1 $ 34.7
Work-in-process.................................................... 9.3 8.1
Finished goods..................................................... 61.4 52.4
-------------- -----------
115.8 95.2
Less allowance for obsolescence.................................... (16.0) (11.4)
-------------- -----------
1
$ 99.8 $ 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 impairment of goodwill in its individual reporting
units existed at October 31, 2002 and there have been no indicators of
impairment since that date.
7
The changes in the carrying amounts of goodwill for the nine months ended
September 30, 2003, are as follows:
Beginning Balance Goodwill Foreign Currency Ending Balance
January 1, 2003 Acquired Translation Adjustments September 30, 2003
----------------- -------- ----------------------- ------------------
Americas....................... $ 111.0 $5.3 $ -- $ 116.3
EMEA........................... 67.4 -- 4.5 71.9
Asia Pacific................... 17.3 2.1 -- 19.4
------- ------ ------ -------
Total..................... $ 195.7 $7.4 $ 4.5 $ 207.6
======= ====== ====== =======
Net other intangibles as of September 30, 2003 and December 31, 2002,
consisted of a noncompete agreement of $1.1 and $1.4, respectively, and
post-employment benefit obligation adjustments of $0.6 as of each such date.
During the third quarter of 2003, the Company acquired the business and
assets of Alkahn Labels, Inc. for $25.0. In connection with this acquisition,
the Company recorded goodwill of $5.4 based on its preliminary allocation of the
purchase price to the acquired assets and liabilities.
NOTE 7: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
A summary of accounts payable and accrued liabilities is as follows:
September 30, December 31,
2003 2002
-------------- -----------
Accounts payable..................................................... $ 40.4 $ 44.1
Accrued payroll costs................................................ 19.9 17.1
Other accrued liabilities............................................ 40.5 33.3
----------- -----------
$ 100.8 $ 94.5
=========== ===========
NOTE 8: LONG -TERM DEBT
A summary of long-term debt is as follows:
September 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........................................................... 35.0 --
Other.............................................................. 0.3 1.6
----------- -----------
198.3 164.6
Less current maturities............................................ 0.1 0.1
----------- -----------
$ 198.2 $ 164.5
=========== ===========
NOTE 9: SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes is as follows:
Nine Months Ended
September 30,
---------------------
2003 2002
-------- --------
Interest............................................................................ $ 11.4 $ 10.8
======== ========
Income taxes........................................................................ $ 4.1 $ 3.6
======== ========
8
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.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income............................................ $ 3.9 $ 10.2 $ 12.3 $ 30.8
Foreign currency translation adjustments.............. 1.0 (1.6) 15.8 5.8
-------- -------- -------- --------
Comprehensive income.................................. $ 4.9 $ 8.6 $ 28.1 $ 36.6
======== ======== ======== ========
NOTE 11: EARNINGS PER SHARE
The reconciliation of basic and diluted weighted average common shares
outstanding is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Weighted average common shares (basic)(a)............. 39.0 39.5 39.0 39.5
Options and warrants.................................. 0.5 0.8 0.5 0.9
-------- -------- -------- --------
Adjusted weighted average common shares (diluted)..... 39.5 40.3 39.5 40.4
======== ======== ======== ========
(a) Included issued and outstanding common shares subject to
redemption in all periods.
Options to purchase 2.5 and 0.1 shares of common stock outstanding at
September 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: COMMON STOCK SUBJECT TO REDEMPTION
On July 11, 2001, the Company entered into the Stock Repurchase Agreement
with its Chairman and Chief Executive Officer (the "Chairman"). Under the Stock
Repurchase Agreement, which is effective through July 1, 2013, the Chairman has
the right and option to sell to the Company, and the Company has the obligation
to purchase, the shares owned by the Chairman and those to which the Chairman
becomes entitled through the exercise of his stock compensation awards. In
addition, the Company has the right of first refusal for offers to purchase the
shares received by the Chairman from third parties. All transactions under the
agreement must be settled in cash. During any rolling 12-month period, the
Chairman may put up to 0.4 shares to the Company; in addition, if he did not
exercise his right to put the full 0.4 shares in the preceding rolling 12-month
period, he may put up to 0.4 additional shares as to which he did not exercise
his put option in such preceding period. The timing of the put and the periods
during which he may exercise it are regulated by the terms of the agreement. The
put may be exercised at a price equivalent to the average of the closing sales
prices for the common stock during the last seven trading days ending on the day
preceding exercise of the put.
In accordance with Rule 5-02.28 of Regulation S-X as interpreted by EITF
D-98, "Classification and Measurement of Redeemable Securities," securities that
are redeemable for cash or other assets must be classified outside of permanent
equity if they are redeemable at the option of the holder, as are the shares
owned by the Chairman. Therefore, the shares have been classified in temporary
equity at the redemption value. Changes in redemption value have been recognized
through offsetting adjustments to shareholders' equity.
The accompanying consolidated balance sheet as of December 31, 2002 has
been reclassified to reflect the redemption value of the common stock subject to
redemption at that date as temporary equity, as opposed to the permanent equity
classification previously reported.
9
On November 17, 2003, the Stock Repurchase Agreement was terminated, and,
therefore, at December 31, 2003, the common stock owned by the Chairman will no
longer be subject to redemption and will be classified as permanent equity at
that date.
The Company did not repurchase its shares from the Chairman during 2003.
During 2002, the Company repurchased 0.4 shares from the Chairman for $6.4, or
$15.96 per share. The Company immediately retired the shares it repurchased from
the Chairman.
NOTE 13: 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 often 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 Nine Months Ended
September 30, September 30,
--------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- -------
Sales to unaffiliated customers:
Americas.......................................... $ 80.8 $ 85.0 $ 239.3 $ 251.1
EMEA.............................................. 45.7 44.0 144.8 128.6
Asia Pacific...................................... 44.2 41.1 133.2 116.2
-------- -------- -------- --------
Total................................... $ 170.7 $ 170.1 $ 517.3 $ 495.9
======== ======== ======== ========
Intersegment sales:
Americas.......................................... $ 12.0 $ 16.8 $ 42.5 $ 49.1
EMEA.............................................. 10.9 9.8 30.4 31.1
Asia Pacific...................................... 3.2 2.8 9.7 7.6
Eliminations...................................... (26.1) (29.4) (82.6) (87.8)
-------- -------- -------- --------
Total................................... $ -- $ -- $ -- $ --
======== ======= ======== ========
Operating income:
Americas (a), (b)................................. $ 2.5 $ 7.2 $ 8.1 $ 22.9
EMEA (a).......................................... 0.9 2.7 4.0 11.5
Asia Pacific (a), (b)............................. 8.9 9.5 29.0 26.7
-------- -------- -------- --------
12.3 19.4 41.1 61.1
Corporate expenses (a)............................ (4.2) (3.9) (16.4) (13.0)
Amortization of intangibles....................... (0.1) (0.1) (0.3) (0.2)
-------- -------- -------- --------
Total................................... $ 8.0 $ 15.4 $ 24.4 $ 47.9
======== ======== ======== ========
(a) Americas, EMEA and Asia Pacific included restructuring and other
charges of $3.9, $0.1 and $0.1, respectively, for the three months
ended September 30, 2003, and $7.6, $1.5 and $0.1 for the nine months
ended September 30, 2003. In addition, Corporate expenses included
restructuring and other charges of $1.6 for the nine months ended
September 30, 2003.
(b) For the three and nine months ended September 30, 2003, Americas and
Asia Pacific included a charge of $0.3 and $0.3, respectively, due to
the impact of recording certain purchased finished goods inventory at
fair value.
10
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- -------
Depreciation and amortization:
Americas.......................................... $ 3.4 $ 4.1 $ 9.9 $ 11.8
EMEA.............................................. 2.3 2.2 6.8 6.3
Asia Pacific...................................... 1.3 0.9 3.4 2.9
-------- -------- -------- --------
7.0 7.2 20.1 21.0
Corporate......................................... 1.5 0.5 2.2 1.1
-------- -------- -------- --------
Total................................... $ 8.5 $ 7.7 $ 22.3 $ 22.1
======== ======== ======== ========
Capital expenditures:
Americas.......................................... $ 1.5 $ 0.8 $ 6.9 $ 4.4
EMEA.............................................. 2.1 4.0 8.2 7.3
Asia Pacific...................................... 4.7 1.2 8.1 3.4
-------- -------- -------- --------
8.3 6.0 23.2 15.1
Corporate......................................... -- 0.6 0.7 1.1
-------- -------- -------- --------
Total................................... $ 8.3 $ 6.6 $ 23.9 $ 16.2
======== ======== ======== ========
September 30, December 31,
2003 2002
-------- ------------
Long-lived assets:
Americas.......................................... $ 199.3 $ 193.9
EMEA.............................................. 121.3 115.2
Asia Pacific...................................... 47.8 37.2
-------- --------
368.4 346.3
Corporate......................................... 6.1 6.3
-------- --------
Total................................... $ 374.5 $ 352.6
======== ========
Total assets:
Americas.......................................... $ 314.1 $ 292.1
EMEA.............................................. 228.2 207.6
Asia Pacific...................................... 116.6 91.1
-------- --------
658.9 590.8
Corporate......................................... 51.9 48.8
-------- --------
Total................................... $ 710.8 $ 639.6
======== ========
NOTE 14: 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.
During 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 $5.6 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 174 factory positions and 75 managerial and
administrative positions primarily in North America and the UK.
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.
During the third quarter of 2003, the Company took a non-cash charge of
$3.9 to write off the remaining net book value of an Enterprise Resource
Planning system no longer in use.
11
The following table presents the changes in severance accrual for the nine
months ended September 30, 2003:
Beginning Balance Ending Balance
January 1, 2003 Expenses Payments September 30, 2003
--------------- -------- -------- ------------------
Severance...................... $ 0.2 $ 6.6 $ (5.8) $ 1.0
Item 2: Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations for the Three and Nine Months Ended September 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.
The Company may enter into multiple element arrangements whereby it may
provide a combination of products and services. Revenue from each element is
recorded when the following conditions exist: (1) the product or service
provided represents a separate earnings process; (2) the fair value of each
element can be determined separately; and (3) the undelivered elements are not
essential to the functionality of a delivered element. If the conditions for
each element described above do not exist, revenue is recognized as earned using
revenue recognition principles applicable to those elements as if it were one
arrangement, generally on a straight-line basis. In November 2002, the Emerging
Issues Task Force ("EITF") reached a consensus on EITF No. 00-21, "Accounting
for Revenue Arrangements with Multiple Element Deliverables." EITF No. 00-21
addresses how to account for arrangements that may involve the delivery or
performance of multiple products, services and/or rights to use assets. Revenue
arrangements with multiple deliverables should be divided into separate units of
accounting if the deliverables in the arrangement meet certain criteria.
Arrangement consideration should be allocated among the separate units of
accounting based on their relative fair values. EITF No. 00-21 also supercedes
certain guidance set forth in SAB No. 101. The final consensus is applicable to
agreements entered into in quarters beginning after June 15, 2003, with early
adoption permitted. Additionally, companies are permitted to apply the consensus
guidance to all existing arrangements as a cumulative effect of a change in
accounting principle. The Company determined that the adoption of EITF No. 00-21
did not have a material impact on its results of operations or financial
position.
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 experience,
customer concentrations, customer creditworthiness and current trends when
evaluating the adequacy of the allowance for doubtful accounts. The Company's
accounts receivable balances were $120.8, net of allowances of $10.3 at
September 30, 2003, and $106.8, net of allowances of $10.2, at December 31,
2002.
12
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 impairment of goodwill in
its individual reporting units existed at October 31, 2002 and there have been
no indicators of impairment since that date.
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 fair value as
determined by prices of similar items and other valuation techniques (discounted
cash flow analysis), giving consideration to recent operating performance and
pricing trends. There were no significant impairment losses related to
long-lived assets for the three and nine months ended September 30, 2003 and
2002.
RESULTS OF OPERATIONS
Overview
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"). Structurally, the Company is aligned in a geographic orientation
across all product lines to better serve a customer base consisting of retailers
and apparel manufacturers. 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 nine months ended
September 30, 2003 and 2002, respectively, in dollars and as a percent of sales
are presented below:
Three Months Ended Nine Months Ended
------------------------------------------ -------------------------------------------
September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002
-------------------- --------------------- --------------------- ---------------------
Sales............................ $ 170.7 100.0% $ 170.1 100.0% $ 517.3 100.0% $ 495.9 100.0%
Cost of sales.................... 106.0 62.1 105.8 62.2 321.5 62.1 303.1 61.1
-------- ------- -------- ------- -------- ------- -------- -------
Gross profit................. 64.7 37.9 64.3 37.8 195.8 37.9 192.8 38.9
Selling, general and
administrative expenses........ 52.6 30.8 48.9 28.8 160.6 31.0 144.9 29.2
Restructuring and other charges.. 4.1 2.4 -- -- 10.8 2.1 -- --
-------- ------- -------- ------- -------- ------- -------- -------
Operating income............. 8.0 4.7 15.4 9.0 24.4 4.8 47.9 9.7
Interest expense, net............ 2.9 1.7 3.1 1.8 8.4 1.7 8.5 1.8
-------- ------- -------- ------- -------- ------- -------- -------
Income before taxes.......... 5.1 3.0 12.3 7.2 16.0 3.1 39.4 7.9
Taxes on income.................. 1.2 0.7 2.1 1.2 3.7 0.7 8.6 1.7
-------- ------- -------- ------- -------- ------- -------- -------
Net income................... $ 3.9 2.3% $ 10.2 6.0% $ 12.3 2.4% $ 30.8 6.2%
======== ======= ======== ======= ======== ======= ======== =======
13
The continuance of a sluggish global economic environment and weakness in
the retail and apparel manufacturing industries have impacted the Company's
sales in 2003. For the three months ended September 30, 2003, the Company's
sales increased $0.6, or 0.4%, to $170.7 compared with $170.1 for the three
months ended September 30, 2002. The sales increase is attributable to the
favorable impact of changes in foreign exchange rates of $4.5 and the impact of
the acquisition of the business and assets of Alkahn Labels, Inc. ("Alkahn") of
$3.3, offset by price deflation and lower volumes of $7.2. For the nine months
ended September 30, 2003, sales increased $21.4, or 4.3%, to $517.3 compared
with $495.9 for the nine months ended September 30, 2002. The sales increase is
attributable to the favorable impact of changes in foreign exchange rates of
$19.5 and the impact of prior acquisitions of $6.9, offset by price deflation
and lower volumes of $5.0. 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. Nonetheless, 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.
Operating income was $8.0 and $24.4 for the three and nine months ended
September 30, 2003, respectively, compared with $15.4 and $47.9 for the three
and nine months ended September 30, 2002. As a percent of sales, operating
income was 4.7% and 4.8% for the three and nine months ended September 30, 2003,
respectively, compared with 9.0% and 9.7% for the three and nine months ended
September 30, 2002. The operating results for the three and nine months ended
September 30, 2003 included a charge of $0.6 due to the impact of recording
Alkahn's finished goods inventory at fair value and restructuring and other
charges of $4.1 and $10.8, respectively, recorded in connection with the
consolidation of certain operations, headcount reductions, a severance payment
to the Company's former Chief Executive Officer, and a write-off of an
Enterprise Resource Planning ("ERP") system no longer in use (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 2003, the Company acquired the business and
assets of Alkahn for $25.0. Alkahn, which produces woven labels at facilities in
West Virginia, South Carolina and Hong Kong, had sales of approximately $45 in
2002 and working capital of approximately $10 at the time of acquisition. 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 apparel manufacturers, and 100% of the equity of NTP Gandrudbakken
AS, a manufacturer of heat transfer labels located in Norway.
Sales
The following table presents sales by geographic operating segment:
Three Months Ended Nine Months Ended
----------------------------------------- ----------------------------------------
September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002
------------------- ------------------ ------------------ ------------------
Sales to unaffiliated customers:
Americas........................ $ 80.8 47.3% $ 85.0 49.9% $ 239.3 46.3% $ 251.1 50.7%
EMEA............................ 45.7 26.8 44.0 25.9 144.8 28.0 128.6 25.9
Asia Pacific.................... 44.2 25.9 41.1 24.2 133.2 25.7 116.2 23.4
-------- ------- -------- ------- -------- ------- -------- -------
Total....................... $ 170.7 100.0% $ 170.1 100.0% $ 517.3 100.0% $ 495.9 100.0%
======== ======= ======== ======= ======== ======= ======== =======
Americas sales include sales delivered through the Company's operations in
North (primarily in the US), Central and South America. Sales declined $4.2, or
4.9%, to $80.8 for the three months ended September 30, 2003 compared with $85.0
for the three months ended September 30, 2002. For the nine months ended
September 30, 2003, sales declined $11.8, or 4.7%, to $239.3 compared with
$251.1 for the nine months ended September 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. 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 cost efficiencies. This
has resulted in a shift in the Company's geographic sales mix primarily to the
Asia Pacific region.
14
EMEA's sales, which include sales delivered through the Company's
operations in twelve European countries, the Middle East and Africa, increased
$1.7, or 3.9%, to $45.7 for the three months ended September 30, 2003 compared
with $44.0 for the three months ended September 30, 2002. The increase is
attributable to the favorable impact of changes in foreign exchange rates of
$3.8, offset by $2.1 attributed to price deflation and reduced volumes. For the
nine months ended September 30, 2003, sales increased $16.2, or 12.6%, to $144.8
compared with $128.6 for the nine months ended September 30, 2002. The increase
is attributable to the favorable impact of changes in foreign exchange rates of
$18.0 and the impact of a prior year acquisition of $3.3, offset by $5.1
attributed to price deflation and reduced volumes. 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 in 2003. In addition, the Company
experienced sales migration to Asia Pacific as manufacturers sought to maximize
production efficiencies.
Asia Pacific consists of the Company's operations in Hong Kong, China,
Singapore, Sri Lanka, Korea, Bangladesh, Indonesia, Vietnam, Australia and
India. Sales increased $3.1, or 7.5%, to $44.2 for the three months ended
September 30, 2003 compared with $41.1 for the three months ended September 30,
2002. The increase is attributable to the increased customer demand for the
Company's products of $1.9, the favorable impact of a foreign exchange rate of
$0.3, and the impact of the acquisition of Alkahn of $0.9. For the nine months
ended September 30, 2003, sales increased $17.0, or 14.6%, to $133.2 compared
with $116.2 for the nine months ended September 30, 2002. The increase is
attributable the increased customer demand for the Company's products of $15.4,
the favorable impact of a foreign exchange rate of $0.7, and the impact of the
acquisition of Alkahn of $0.9. The Company's operations in this region have
benefited significantly from the steady and continued migration of apparel
manufacturing to production facilities outside the US and Western Europe to
realize 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, was 37.9% for the three months ended
September 30, 2003, compared with 37.8% for the three months ended September 30,
2002. The slight increase is primarily attributable to cost reductions in labor
and materials, offset by a charge of $0.6 due to the impact of recording
Alkahn's finished goods inventory at fair value. For the nine months ended
September 30, 2003, gross profit, as a percent of sales, was 37.9% compared with
38.9% for the nine months ended September 30, 2002. The decrease is primarily
attributable to the negative impact of continued price deflation,
under-utilization of certain production capacity, more frequent and costly
production runs on smaller orders, and a charge of $0.6 due to the impact of
recording Alkahn's finished goods inventory at fair value, offset by cost
reductions in labor and materials. 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
realize labor cost and operating performance efficiencies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A"), as a percent of
sales, increased to 30.8% and 31.0% for the three and nine months ended
September 30, 2003, respectively, from 28.8% and 29.2% for the three and nine
months ended September 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 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 $5.6 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 174 factory positions and 75 managerial and
administrative positions primarily in North America and the UK.
15
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.
During the third quarter of 2003, the Company took a non-cash charge of
$3.9 to write off the remaining net book value of an ERP system no longer in
use.
Presently, the Company is evaluating additional opportunities to
consolidate its businesses in North America and Western Europe to increase
productivity and reduce fixed costs. It is anticipated that the Company will
report additional restructuring and other charges associated with these
activities in the near future. Once completed, these initiatives are expected to
generate $10 to $12 in annual cost reductions by 2005. Most of these savings
will occur in 2004 and will be in addition to the $9 to $10 in SG&A savings
previously targeted for 2004.
Operating Income
Operating income was $8.0 and $24.4 for the three and nine months ended
September 30, 2003, respectively, compared with $15.4 and $47.9 for the three
and nine months ended September 30, 2002. As a percent of sales, operating
income was 4.7% and 4.8% for the three and nine months ended September 30, 2003,
respectively, compared with 9.0% and 9.7% for the three and nine months ended
September 30, 2002. The operating results for the three and nine months ended
September 30, 2003 included a charge of $0.6 due to the impact of recording
Alkahn's finished goods inventory at fair value and restructuring and other
charges of $4.1 and $10.8, respectively, recorded in connection with the
consolidation of certain operations, headcount reductions, a severance payment
to the Company's former Chief Executive Officer, and a write-off of an ERP
system no longer in use. 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 3.1% and 3.4% for the three and
nine months ended September 30, 2003, respectively, compared with 8.5% and 9.1%
for the three and nine months ended September 30, 2002; EMEA was 2.0% and 2.8%
for the three and nine months ended September 30, 2003, respectively, compared
with 6.1% and 8.9% for the three and nine months ended September 30, 2002; and
Asia Pacific was 20.1% and 21.8% for the three and nine months ended September
30, 2003, respectively, compared with 23.1% and 23.0% for the three and nine
months ended September 30, 2002. Americas, EMEA and Asia Pacific included
restructuring and other charges, as a percent of sales, of 4.8%, 0.2% and 0.2%,
respectively, for the three months ended September 30, 2003, and 3.2%, 1.0% and
0.1% for the nine months ended September 30, 2003. In addition, Americas and
Asia Pacific included a charge due to the impact of recording Alkahn's finished
goods inventory at fair value, as a percent of sales, of 0.4% and 0.7%,
respectively, for the three months ended September 30, 2003, and 0.1% and 0.2%
for the nine months ended September 30, 2003.
Interest Expense, Net
Interest expense, net of interest income on invested cash, was $2.9 and
$8.4 for the three and nine months ended September 30, 2003, respectively,
compared with $3.1 and $8.5 for the three and nine months ended September 30,
2002. The decrease is primarily attributable to higher interest income on
invested cash.
Taxes on Income
The effective tax rates for the nine months ended September 30, 2003 and
2002 were 23.0% and 21.8%, respectively.
16
Liquidity and Capital Resources
The following table presents summary cash flow information for the periods
indicated:
Nine Months Ended
September 30,
----------------------
2003 2002
-------- --------
Net cash provided by operating activities............. $ 29.3 $ 37.1
Net cash used in investing activities................. (52.1) (37.8)
Net cash provided by financing activities............. 34.4 13.7
-------- --------
Total change in cash and cash equivalents (a) $ 11.6 $ 13.0
======== ========
- ----------
(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 $29.3 for the nine
months ended September 30, 2003 compared with $37.1 for the nine months ended
September 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 $193.9 and 2.6:1
and $154.4 and 2.4:1 at September 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
decrease in accounts payable, offset by increases in accrued liabilities,
accrued taxes on income and amounts due to banks.
Investing Activities
For the nine months ended September 30, 2003, the Company continued to
upgrade production machinery, proceed with its ERP system conversions, and grow
and expand the Company's operations in the emerging markets of Central and South
America, EMEA and Asia Pacific. In addition, during the third quarter of 2003,
the Company acquired the business and assets of Alkahn, a manufacturer of woven
labels, for $25.0. Management does not expect this acquisition to have a
material impact on the Company's results of operations or financial condition.
Investing activities for the nine months ended September 30, 2002 consisted
of acquisitions of the business and manufacturing assets of Disenos de
Coleccion, a leading manufacturer of merchandising labels and tags for Mexican
retailers and apparel manufacturers, and NTP Gandrudbakken AS, a manufacturer of
heat transfer labels, 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.
17
Financing Activities
The components of total capital as of September 30, 2003 and December 31,
2002, respectively, are presented below:
September 30, December 31,
2003 2002
----------- -----------
Due to banks....................................................... $ 4.4 $ 2.1
Current maturities of long-term debt............................... 0.1 0.1
Long-term debt..................................................... 198.2 164.5
----------- -----------
Total debt......................................................... 202.7 166.7
Common stock subject to redemption................................. 33.2 37.6
Shareholders' equity............................................... 330.8 300.0
----------- -----------
Total capital...................................................... $ 566.7 $ 504.3
=========== ===========
Total debt as a percent of total capital........................... 35.8% 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 nine months
ended September 30, 2003 and 2002, net borrowings of the Company's outstanding
debt were $36.0 and $13.8, 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 nine months ended September 30, 2003 and 2002, the Company received
proceeds of $3.5 and $9.0, 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 or by block purchases. For
the nine months ended September 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 September 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.
In addition to the stock repurchase plan, the Company entered into the
Stock Repurchase Agreement, dated July 11, 2001, with its Chairman and Chief
Executive Officer (the "Chairman"). On November 17, 2003, the stock repurchase
agreement was terminated. Under the Stock Repurchase Agreement, which was
effective through July 1, 2013, the Chairman had the right and option to sell to
the Company, and the Company had the obligation to purchase, the shares owned by
the Chairman and those to which the Chairman became entitled through the
exercise of his stock compensation awards. Additionally, the Company had the
right of first refusal for offers to purchase the shares received by the
Chairman from third parties. All transactions under the agreement must be
settled in cash. During any rolling 12-month period, the Chairman may put up to
400,000 shares to the Company; in addition, if he did not exercise his right to
put the full 400,000 shares in the preceding rolling 12-month period, he may put
up to 400,000 additional shares as to which he did not exercise his put option
in such preceding period. The timing of the put and the periods during which he
may exercise it were regulated by the terms of the agreement. The put may be
exercised at a price equivalent to the average of the closing sales prices for
the common stock during the last seven trading days ending on the day preceding
exercise of the put.
18
The Company did not repurchase its shares from the Chairman during 2003.
During 2002, the Company repurchased 399,000 shares from the Chairman for $6.4,
or $15.96 per share. The Company immediately retired the shares it repurchased
from the Chairman.
In accordance with Rule 5-02.28 of Regulation S-X as interpreted by EITF
D-98, "Classification and Measurement of Redeemable Securities," securities that
are redeemable for cash or other assets must be classified outside of permanent
equity if they are redeemable at the option of the holder, as are the shares
owned by the Chairman. Therefore, the shares have been classified in temporary
equity at the redemption value. Changes in redemption value have been recognized
through offsetting adjustments to shareholders' equity.
The accompanying consolidated balance sheet as of December 31, 2002 has
been reclassified to reflect the redemption value of the common stock subject to
redemption at that date as temporary equity, as opposed to the permanent equity
classification previously reported.
As the Stock Repurchase Agreement was terminated in November 2003, the
common stock owned by the Chairman is no longer subject to redemption and will
be classified as permanent equity at December 31, 2003.
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.
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 September 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 September 30, 2003 and December 31, 2002, 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:
o failure to maintain required financial covenant ratios, as described
below;
o failure to make a payment of principal, interest or fees within two
days of its due date;
o default, beyond any applicable grace period, on any aggregate
indebtedness of the Company exceeding $0.5;
o judgment or order involving a liability in excess of $0.5; and
o occurrence of certain events constituting a change of control of the
Company.
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's revolving credit agreement defines debt as including all
obligations to purchase, redeem, retire, or otherwise make any payment in
respect of any capital stock. Accordingly, the Company should have reflected in
its quarterly debt covenant compliance calculations provided to its banks and
certain other lending institutions its obligations to purchase common stock from
its Chairman and Chief Executive Officer as the obligations had been existent
from the inception of the agreement. Such obligations, however, had been
inadvertently omitted from the Company's compliance calculations. Because this
omission placed the Company in technical default under the terms of the
agreement, the Company obtained temporary waivers from its banks to prevent
immediate call of the Company's debt by the banks. The Company expects to
receive permanent waivers immediately after the filing of this quarterly report
and related reports and to be in technical compliance and in compliance with all
debt covenants during the fourth quarter of 2003. Additionally, the Company no
longer has the obligations to purchase or redeem any of its common stock as the
Stock Repurchase Agreement between the Company and its Chairman and Chief
Executive Officer was terminated on November 17, 2003. (See Note 12 of the Notes
to Consolidated Financial Statements.)
19
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 September
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.
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:
20
o Worldwide economic and other business conditions that could affect
demand for the Company's products in the US or international markets
o Rate of migration of garment manufacturing industry moving from the US
and Western Europe
o The mix of products sold and the profit margins thereon
o Order cancellation or a reduction in orders from customers
o Competitive product offerings and pricing actions
o The availability and pricing of key raw materials
o The level of manufacturing productivity
o Dependence on key members of management
Readers are cautioned not to place undue reliance on forward-looking
statements. The Company undertakes no obligation to republish or revise
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrences of unanticipated events.
Item 3: Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
The information called for by this item is set forth under the heading
"Market Risk" in Management's Discussion and Analysis 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.
PART II. OTHER INFORMATION
--------------------------
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) or 18 U.S.C. 1350.
Exhibit 32.2 Certification of the Chief Financial Officer required by Rule
13a-14(b) or 18 U.S.C. 1350.
b) Reports on Form 8-K
Current Report on Form 8-K, dated July 29, 2003, reporting under Items 9
and 12 that the Registrant issued a press release announcing its second
quarter 2003 earnings.
Current Report on Form 8-K, dated August 6, 2003, as amended by Current
Report on Form 8-K/A, reporting under Item 4 that the Audit Committee of
the Board of the Directors of the Registrant dismissed
PricewaterhouseCoopers LLP as its independent accountant effective upon
completion of services related to the review of the June 30, 2003 financial
statements and certain related matters.
Current Report on Form 8-K, dated September 4, 2003, reporting under Item 9
that the Registrant acquired the business and assets of Alkahn Labels, Inc.
21
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)
November 19, 2003
-----------------------------
Date
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