UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
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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
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Paxar Corporation
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(Exact name of registrant as specified in its charter)
New York 13-5670050
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
105 Corporate Park Drive
White Plains, New York 10604
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(Address of principal (Zip Code)
executive offices)
914-697-6800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value $.10 per share New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of June 30, 2003 was approximately
$382,972,000. On such date, the closing price of the registrant's Common Stock,
as quoted on the New York Stock Exchange, was $11.00.
The registrant had 39,644,756 shares of Common Stock outstanding as of March
12, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K is herein incorporated by
reference from the registrant's Definitive Proxy Statement to be filed with the
Securities and Exchange Commission with respect to the registrant's Annual
Meeting of Shareholders scheduled to be held on April 29, 2004.
================================================================================
PART I
Item 1: Business
Paxar Corporation ("Paxar" or the "Company"), incorporated in the State of
New York in 1946, is a global leader in providing innovative merchandising
solutions to retailers and apparel manufacturers. The Company's business
includes the design, manufacture and distribution of a wide variety of tags and
labels, including labels with bar codes, as well as printers and the associated
supplies for customers who prefer the flexibility of creating labels and tags on
an "as-needed" basis in their facilities. Product design and reengineering, as
well as data management services, are becoming more important as the Company
continues to differentiate itself as a global leader.
The Company has core competencies that range from graphic design to coating,
weaving, design of mechanical and electronic printers, and systems integration.
The Company believes that its vertical integration enhances product quality,
provides manufacturing economies and helps drive product innovation.
The Company manufactures finished labels and tags primarily for retailers
and apparel manufacturers. It also manufactures the printers, the paper and
fabric substrates, and the inks for in-plant tag and label printing systems. The
Company manufactures electronic bar code systems and hand-held mechanical
labelers for use in retail stores and distribution centers as well as for remote
tracking applications. The Company also designs integrated systems for large
in-store and warehouse applications, such as inventory control and distribution
management. In addition, the Company provides service for its printers and
mechanical labelers at customer locations worldwide and in its own facilities at
multiple locations.
The Company operates globally, with more than 60% of its sales outside the
United States. Organizationally, it manages its operations across three major
geographies: North, Central and South America ("Americas"), Europe, the Middle
East and Africa ("EMEA"), and the Asia Pacific region ("Asia Pacific"). The
Company's entire array of products and services is offered for sale across each
of the aforementioned geographies. During 2003, the Company opened new
operations in Bangladesh, Indonesia, Portugal, Morocco, Mauritius, Peru and
Vietnam. Additionally, the Company's operations in China, Honduras, Turkey and
Sri Lanka have expanded significantly during the last three years. As of
December 31, 2003, the Company had 74 manufacturing facilities and sales offices
located in 35 countries, and employed a total of approximately 8,400 persons
worldwide. In addition, the Company sells its products through independent
distributors in 15 countries in which Paxar does not sell directly to the final
customer.
Acquisition
In September 2003, the Company acquired the business and assets of Alkahn
Labels, Inc. ("Alkahn"), including all of the equity of Alkahn-Hong Kong
Limited, for $25 million plus the assumption of certain trade liabilities.
Alkahn, which produces woven labels, had sales in 2002 of approximately $45
million.
Recent Events
Restatement
In the fourth quarter of 2003, the Company reconsidered its accounting and
reporting matters related to its obligations to purchase redeemable common
shares under a Stock Repurchase Agreement (the "Agreement"), dated July 11,
2001, with its Chairman and Chief Executive Officer (the "Chairman"). In
accordance with Rule 5-02.28 of Regulation S-X, or Accounting Series Release No.
268, "Redeemable Preferred Stocks," (issued by the Securities and Exchange
Commission ("SEC") on July 27, 1979), as interpreted by the Emerging Issues Task
Force Topic ("EITF") D-98, "Classification and Measurement of Redeemable
Securities," (issued by the Financial Accounting Standards Board on July 19,
2001), securities that are redeemable for cash or other assets must be
classified outside of shareholders' equity, if they are redeemable at the option
of the holder, as were the redeemable common shares owned by the Chairman. The
Company concluded that Rule 5-02.28, as interpreted by EITF Topic D-98,
applied to the redeemable common shares because the redemption features were not
solely within its control. While Rule 5-02.28 specifically addressed redeemable
preferred stocks, EITF Topic D-98 makes it clear that redeemable preferred stock
is analogous to other equity instruments, including common shares. Accordingly,
the Company determined that the redeemable common shares should have been
classified as temporary equity in its financial statements for periods ended
after July 11, 2001 until the Agreement was terminated on November 17, 2003. As
a result, the Company has restated its balance sheet as of December 31, 2002 to
report the redemption value of redeemable common stock outside of shareholders'
equity, as "Common Stock Subject to Redemption." The redeemable common stock was
previously reported within shareholders' equity. Corresponding revisions have
also been made to the consolidated statements of shareholders' equity and
comprehensive income.
1
As the Agreement was terminated on November 17, 2003, the redeemable common
shares owned by the Chairman are no longer subject to redemption and therefore
are classified as permanent equity in the financial statements at December 31,
2003.
As the Company was unable to have the reclassification adjustments
pertaining to its 2001 financial statements audited, the 2001 financial
statements and related note disclosures contained herein are unaudited and are
labeled as such.
Since the Company is unable to file three years of audited financial
information in its 2003 Annual Report on Form 10-K as required under Rules 3-01
and 3-02 of Regulation S-X, the Company's reports filed under the Securities
Exchange Act of 1934 (the "Exchange Act") will not be in full compliance with
the requirements of the Exchange Act. As a result, the effectiveness of the
Company's Registration Statements on Form S-8 (Nos. 333-38923, 333-43694, and
333-43696) will be suspended, and the Company will be unable to issue shares
under its employee stock purchase and stock option plans. In addition, the
Company will not be in compliance with Item 13(a)(1) of Schedule 14A under the
Exchange Act in connection with its solicitation of proxies for its 2004 annual
meeting of shareholders. During any period when the Company is not current in
its SEC reports, neither affiliates of the Company nor any person that purchased
shares from the Company in a private offering during the preceding two years
will be able to sell their shares in public markets pursuant to Rule 144 under
the Securities Act of 1933. The Company expects that it will again have three
years of audited financial information on file with the SEC and its Exchange Act
reports will comply with SEC requirements when the Company files its 2004
audited financial statements with its 2004 Annual Report on Form 10-K.
Stock Repurchase
The Company has a stock repurchase plan with an authorization from its Board
of Directors to use up to $150 million 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. During 2003, the Company repurchased 469,000
shares for an aggregate price of $5.1 million, or an average of $10.80 per
share. Since the inception of the stock repurchase program, the Company has
repurchased 12,293,000 of its shares for an aggregate price of $122.0 million,
or an average of $9.92 per share. The Company immediately retired the
repurchased shares. As of December 31, 2003, the Company had $28.0 million
available under its $150 million stock repurchase program authorization. The
Company may continue to repurchase its shares under the existing authorization,
depending on market conditions and cash availability.
Products and Services
1. Apparel Identification Products
The Company manufactures woven, printed and heat transfer labels in its
facilities around the world. Labels are attached to garments early in the
manufacturing process. They provide brand, size, country of origin, care
and content information for consumers and tracking information for
retailers. Multi-color woven labels are produced on jacquard broad looms
and needle looms. Printed labels are produced on coated fabrics and narrow
woven-edge fabrics made by the Company. The coating, weaving, dyeing,
finishing and printing of printed labels are accomplished using proprietary
processes developed by Paxar. Heat transfer labels are produced using the
technology that combines specially formulated inks and adhesives in a
process involving heat, pressure and dwell time. In addition to
manufacturing these products, the Company operates service bureaus around
the world to provide delivery of its products on an accelerated basis,
often in less than 48 hours.
Paxar has developed many innovative specialty labels. Some incorporate
security features to protect in-store merchandise from theft and to protect
branded apparel from counterfeiters, while others meet industrial needs,
such as those that remain legible on uniforms through repeated industrial
washings.
The Company also manufactures multi-color graphic tags around the world
primarily for sale to retailers and apparel manufacturers. Generally,
graphic tags are printed on paper and paperboard of various specifications.
In addition, the Company provides these tags on specialty substrates such
as plastic, translucent film and metals.
2
Creative design services are an important value-added component of
Paxar's relationship with its customers; a global presence is required to
enable "source tagging" of garments by the manufacturer wherever the
garments are produced; electronic global data management ensures data
integrity; and having state-of-the-art presses and other equipment enables
"just-in-time-delivery" of tags meeting customer specifications. The
Company has these capabilities and resources and constantly strives to
strengthen them.
Manufacturers attach the tags to completed garments to provide brand and
other promotional information to support point-of-sale merchandising.
The Company also provides tags to retailers for application in their
distribution centers. In these cases, the tags can be either plain black
and white with human-readable information (letters and numbers) and a bar
code or a multi-color graphic tag with promotional information as well as
price and other variable information. In these latter situations, Paxar
generally preprints the multi-color tag and then puts the tag through a
second print process to apply variable information, which generally
includes a bar code. This two-step process allows for just-in-time delivery
of large volumes of tags once the customer conveys the variable information
(i.e., price, department, etc.).
As with fabric labels, the Company operates service bureaus around the
world to provide customers with rapid delivery of graphic tags and
manufactures graphic tags that incorporate security features to protect
in-store merchandise from theft and to protect branded apparel from
counterfeiters.
Generally, manufacturers use the Company's apparel systems to print, cut
and batch large volumes of labels and tags in their own facilities. Such
systems are also capable of printing variable information on various fabric
and paper substrates. They may also contain bar codes. The Company has
developed systems to put permanent bar code labels on apparel fabric using
specialty stocks and inks. Permanent bar codes provide the manufacturers
with information regarding the date and place of production. This
information is critical in the event of customer returns.
Paxar produces all the components of apparel systems, including
printers, fabrics, inks and printing accessories such as label cutters and
stackers. The sale of a system usually results in the ongoing sale of inks,
fabrics, services and replacement parts to the customer.
The newer systems give designers and retailers of branded and retail
apparel and the contractors who actually manufacture the items the
capability to exchange order and shipping information quickly and easily
over the Internet. This feature gives contractors the ability to download
customer specifications for each label to be printed from a
password-protected Web site and to print that information in their
facilities on Paxar label stock.
2. Bar Code and Pricing Solutions
The Company manufactures and markets thermal transfer printers, which
produce high quality images on a wide variety of papers and fabrics, and
direct thermal printers, appropriate for smaller, less expensive
applications. The printers are linked electronically (often by radio
frequency) with the customer's remote data input and data collection
equipment. In this way, the printers can scan and "read" bar codes on a
given item, download the variable data for the specific label to be
printed, and then print (and, in some cases, apply) the label directly to
the item.
Bar Code (BCS) customers are primarily in the retail industry,
particularly mass merchandisers, large retail stores and distribution
centers. Bar coding is essential to optimization of integrated, global
supply chain management solutions. In addition, bar code labels are used
for price and inventory marking in stores and to pre-mark items in
distribution centers.
The Company's printers are available in handheld, portable and tabletop
models.
Recently, the Company introduced a tabletop printer specifically
designed to write to RFID (or radio frequency identification) chips
embedded in thermal direct or thermal transfer bar code labels. This model
tests the chip, writes to the chip, verifies that the information is
correct, and prints human-readable information and bar code data. RFID is a
fast emerging technology that wirelessly transmits product serial numbers
or other encoded information to a scanner without the need for human
intervention. The Company believes that it creates new opportunities for
retailers, suppliers and manufacturers to improve warehouse/distribution
control, supply chain management and logistics tracking. The Company plans
to continue to develop innovative RFID-enabled products as RFID becomes
integral to the way retailers, suppliers and manufacturers do business.
3
Pricing and Identification (IPS) handheld mechanical labelers print
human-readable information for retail store and distribution center price
and inventory marking, as well as promotional item marking. IPS products
are also used for food freshness dating and for component identification in
the automotive, medical and other industries. In addition to manufacturing
the printers, the Company produces the adhesive labels used in the labelers
and supports the complete system with a service team.
Sales by Product
The following table presents sales (in millions) by product:
2003 2002 2001
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(unaudited)
Apparel Identification Products.... $ 482.5 67.8% $ 438.8 65.7% $ 379.0 62.1%
Bar Code and Pricing Solutions..... 229.5 32.2 229.0 34.3 231.6 37.9
-------- ------- -------- ------- -------- -------
Total........................... $ 712.0 100.0% $ 667.8 100.0% $ 610.6 100.0%
======== ======= ======== ======= ======== =======
Customers
A significant majority of the Company's customers are either retailers or
manufacturers of branded apparel. Retailers qualify and specify Paxar as an
approved supplier of labels and tags to contractors that manufacture private
label apparel for the retailers. In addition, retailers purchase Paxar's BCS and
IPS products and services for in-store item marking and to facilitate the
efficient movement of goods from suppliers to consumers. Usually, Paxar competes
with other qualified suppliers for the contractors' business; therefore,
reliability and service are critically important.
No one customer accounted for more than 10% of the Company's revenues or
accounts receivable in either 2003, 2002 or 2001.
Competition
The Company continues to be a market leader in developing and providing
innovative products and solutions that add significant value for its customers
both in brand building and data management. In addition, while striving to
maintain the lowest-cost-producer profile, the Company is fully committed to
providing its customers with products that are supported with exceptional
service and quality.
Increasingly, global capabilities are of critical importance. On a global
product basis, the Company believes that it is the market leader in fabric
labels, apparel systems and BCS products and services for retailers; that it is
among the largest suppliers of graphic tags for apparel; and that it is the
number one or a close number two supplier of IPS products. The Company competes,
both domestically and internationally, with a number of small and medium-sized
firms in addition to four larger firms. The larger competitors are: Avery
Dennison Corporation in apparel labels and tags; Zebra Technologies Corporation
in BCS printers; Moore Wallace Inc. in BCS labels; and Checkpoint Systems, Inc.
in IPS.
Sales and Marketing
A majority of the Company's sales are derived from salespeople employed by
the Company who call directly upon its customers. Non-exclusive manufacturers'
representatives, international and export distributors, and commission agents
account for a less significant portion of total sales. Paxar has approximately
230 sales people in Americas; approximately 170 sales people in EMEA; and
approximately 150 sales people in Asia Pacific.
Generally, the Company's salespeople are compensated on the basis of salary
plus a bonus. Non-exclusive manufacturers' representatives sell the Company's
products on a commission basis.
IPS products are also marketed through office-supply retailers and by a
catalog, which provides a cost-effective way for the Company to reach smaller
retailers.
The Company promotes its products and services through its Web site, direct
mail campaigns, publication of catalogs and brochures, participation in trade
shows, telemarketing and advertising, principally in trade journals.
4
Seasonality
The Company's business does not exhibit significant seasonality.
Sources and Availability of Raw Materials
The Company purchases fabrics, inks, chemicals, polyester film, plastic
resins, electronic components, adhesive-backed papers, yarns and other raw
materials from major suppliers around the world. The Company believes that such
materials are in good supply and are available from multiple sources.
Patents, Trademarks and Licenses
The Company relies upon trade secrets and confidentiality to protect the
proprietary nature of its technology. The Company also owns and controls
numerous patents and trademarks. Although no one patent or group of related
patents is material to the Company's business, the Company believes that, in the
aggregate, its patents are significant to its operations and its competitive
position.
Backlog
The Company's total backlog of orders was approximately $57 million and $49
million at December 31, 2003 and 2002, respectively. Backlog is not a reliable
indicator of future sales activity because more than 80 percent of annual sales
consist of orders that the Company typically fills within one month of receipt.
The balance of the orders are for products that are ordered to individual
customer specifications for delivery within two to three months.
Research and Development
The Company believes that continuous product innovation helps it to compete
effectively in its markets. Through its research and product development
investments, the Company continues to introduce new products to serve the needs
of its customers. The Company's research and development expenses were
approximately $7 million, $8 million and $7 million in 2003, 2002 and 2001,
respectively. The Company had 72 research and development personnel as of
December 31, 2003.
Environmental Compliance
The Company is subject to various federal, state and local environmental
laws and regulations limiting or related to the use, emission, discharge,
storage, treatment, handling and disposal of hazardous substances. Federal laws
that are particularly applicable are:
o Water Pollution Control Act
o Clear Air Act of 1970 (as amended in 1990)
o Resource Conservation and Recovery Act (including amendments relating
to underground tanks)
The Company has been named a potentially responsible party relating to
contamination that occurred at certain super-fund sites. Management does not
expect the ultimate outcome of this matter to be material in relation to the
Company's results of operations or financial condition.
Employees
The Company had approximately 8,400 employees worldwide at December 31,
2003. Approximately 150 production employees of the Company in three locations
in the US are covered by four different union contracts, which expire at various
times from June 2004 to January 2005. The Company has no recent history of
material labor disputes. The Company believes that it has good employee
relations.
Financial Information About Geographic Areas
The information required by this Item is incorporated by reference to the
Company's Financial Statements included elsewhere in this report. (See Part IV,
Item 15, Note 11.)
5
Available Information
Paxar files annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any document Paxar files
at the SEC's public reference room at Room 1024, 450 Fifth Street, NW,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on
the public reference room. The SEC maintains a Web site (www.sec.gov) that
contains annual, quarterly and current reports, proxy statements and other
information that issuers (including Paxar) file electronically with the SEC.
Paxar makes available free of charge through its Web site (www.paxar.com)
its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, Forms 3, 4 and 5 filed on behalf of directors and executive
officers, and any amendments to those reports filed or furnished pursuant to the
Securities Exchange Act of 1934 as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the SEC.
Paxar's most recent annual report on Form 10-K, its quarterly reports on
Form 10-Q for the current fiscal year and its most recent proxy statement can be
viewed through its Web site, although in some cases these documents are not
available on its site as soon as they are available on the SEC's site. The
information on Paxar's Web site is not incorporated by reference into this
report.
Cautionary Statement Pursuant to "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
Except for historical information, the Company's reports to the SEC on Form
10-K, Form 10-Q and Form 8-K and periodic press releases, as well as other
public documents and statements, contain "forward-looking statements" concerning
the Company's objectives and expectations with respect to gross profit,
expenses, operating performance, capital expenditures and cash flows. The
Company's success in achieving the objectives and expectations is 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:
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; and
o Dependence on key members of management.
Additionally, the Company's forward-looking statements contain the following
assumptions, among others, that are specific to the Company and/or the markets
in which it operates:
o There are no substantial adverse changes in the exchange relationship
between the British Pound or the Euro and the US Dollar;
o Low or negative economic growth, particularly in the US, the UK or Europe,
will not occur and affect consumer spending in those countries;
o There will continue to be adequate supply of the Company's raw materials
and components at economic terms;
o The Company's new Enterprise Resource Planning systems can be successfully
integrated into the Company's operations;
o The Company can continue to expand its manufacturing and distribution
capacity in developing markets; and
o There are no substantial adverse changes in the political climates of
developing and other countries in which the Company has operations and
countries in which the Company will endeavor to establish operations in
concert with its major customers' migrations to lower-production-cost
countries.
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.
6
Financial Information About Operations in the United States and Other Countries
The information required by this Item is incorporated by reference to the
Company's Financial Statements included elsewhere in this report. (See Part IV,
Item 15, Note 11.)
Item 2: Properties
The Company uses the following principal facilities in its operations:
Square Owned/ Lease
Location Footage Leased Expiration Used For
-------------------------------------- ------ ------ ---------- ----------------------------------
North America:
Ontario, Canada.................... 37,169 Leased 2008 Administrative and warehousing
Thief River Falls, Minnesota....... 23,200 Leased 2011 Administrative and manufacturing
Lenoir, North Carolina............. 117,000 Owned Administrative and manufacturing
Lenoir, North Carolina............. 20,000 Leased Monthly Manufacturing and warehousing
Lenoir, North Carolina............. 48,000 Leased 2009 Warehousing
Fair Lawn, New Jersey.............. 20,221 Leased 2012 Administrative and warehousing
Orangeburg, New York............... 60,000 Owned Administrative and manufacturing
Waverly, New York.................. 15,000 Leased 2004 Warehousing
White Plains, New York............. 29,538 Leased 2011 Administrative
Huber Heights, Ohio................ 104,000 Owned Administrative and manufacturing
Miamisburg, Ohio................... 350,170 Owned Administrative and manufacturing
Sayre, Pennsylvania................ 66,000 Owned Administrative and manufacturing
Sayre, Pennsylvania................ 36,000 Leased Monthly Administrative and manufacturing
Rock Hill, South Carolina.......... 56,000 Owned Administrative and manufacturing
Hillsville, Virginia............... 46,630 Leased 2006 Manufacturing
Hillsville, Virginia............... 33,108 Owned Manufacturing
Weston, West Virginia.............. 96,000 Owned Administrative and manufacturing
Central and South America:
Antioquia, Colombia................ 26,000 Leased 2005 Administrative and warehousing
Cortes, Honduras................... 29,276 Leased 2008 Administrative and manufacturing
Lerma, Mexico...................... 37,652 Leased 2005 Administrative and manufacturing
Mexico City, Mexico................ 42,635 Owned Administrative and manufacturing
Europe, the Middle East, and Africa:
Congleton, England................. 26,300 Owned Administrative and manufacturing
Harlow, England.................... 62,500 Leased 2013 Administrative and manufacturing
Milton Keynes, England............. 32,365 Leased 2015 Administrative
Nottingham, England................ 28,606 Owned Administrative and manufacturing
Runcorn, England................... 37,237 Leased 2005 Administrative and manufacturing
Runcorn, England................... 21,525 Leased 2011 Administrative and manufacturing
Runcorn, England................... 38,349 Leased 2011 Manufacturing
Fontenay Sous Bois, France......... 40,838 Leased 2009 Administrative and warehousing
Lohne, Germany..................... 17,004 Leased 2012 Administrative and warehousing
Sprockhovel, Germany............... 12,917 Owned Administrative and manufacturing
Sprockhovel, Germany............... 66,737 Leased 2006 Administrative and manufacturing
Sprockhovel, Germany............... 38,750 Leased 2007 Warehousing
Ancarano, Italy.................... 133,680 Owned Administrative and manufacturing
Carpi, Italy....................... 16,684 Leased 2009 Administrative and manufacturing
Casablanca, Morocco................ 13,993 Leased 2008 Administrative and warehousing
Gaupne, Norway..................... 37,458 Owned Administrative and manufacturing
Bucharest, Romania................. 13,060 Leased 2006 Administrative and warehousing
Barcelona, Spain................... 16,146 Leased 2006 Administrative and warehousing
Istanbul, Turkey................... 42,000 Leased 2006 Administrative and warehousing
Saray, Turkey...................... 76,480 Owned Administrative and manufacturing
Asia Pacific:
Sydney, Australia.................. 17,248 Owned Administrative and manufacturing
Dhaka, Bangladesh.................. 66,691 Leased 2032 Administrative and manufacturing
Panyu City, China.................. 58,979 Owned Administrative
Panyu City, China.................. 24,640 Leased 2004 Manufacturing
Panyu City, China.................. 209,285 Leased 2012 Manufacturing
7
Square Owned/ Lease
Location Footage Leased Expiration Used For
-------------------------------------- ------- ------ ---------- ----------------------------------
Hong Kong.......................... 138,629 Leased 2004 Administrative and manufacturing
Hong Kong.......................... 119,525 Leased 2005 Administrative and manufacturing
Seoul, Korea....................... 10,236 Leased 2004 Administrative and warehousing
Malaysia........................... 12,000 Leased 2004 Administrative and manufacturing
Singapore.......................... 17,012 Leased 2005 Administrative and manufacturing
Malwana, Sri Lanka................. 130,680 Leased 2047 Administrative and manufacturing
Binh Duong, Vietnam................ 10,463 Leased 2006 Administrative and manufacturing
In addition to the above facilities, the Company has other facilities and
sales offices located throughout the world.
The Company believes that its facilities are adequate to maintain its
existing business activities.
Item 3: Legal Proceedings
The Company is involved in a number of pending or threatened legal
proceedings in the ordinary course of business. In the opinion of management,
there are no legal proceedings that will have a material adverse effect on the
Company's results of operations or financial condition.
Item 4: Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5: Market for Registrant's Common Equity and Related Shareholder Matters
The Company's common stock is traded on the New York Stock Exchange using
the symbol "PXR." The following table sets forth the 2003 and 2002 high and low
sales prices of the Company's common stock as reported on the New York Stock
Exchange for the periods indicated.
Sales Prices
---------------
High Low
Calendar Year 2003 ---- ----
First Quarter....................... $ 15.35 $ 9.80
Second Quarter...................... 12.15 9.30
Third Quarter....................... 14.33 10.90
Fourth Quarter...................... 13.90 11.46
Calendar Year 2002
First Quarter....................... $ 17.55 $ 14.03
Second Quarter...................... 18.05 15.70
Third Quarter....................... 17.15 12.20
Fourth Quarter...................... 15.43 12.35
As of March 8, 2004, there were approximately 1,600 record holders of the
Company's common stock.
The Company has never paid any cash dividends on its common stock and
currently has no intention of doing so.
Information regarding the Company's equity compensation plans, including
both stockholder approved plans and non-stockholder approved plans, is
incorporated herein by reference to Item 12 of this Annual Report on Form 10-K.
Item 6: Selected Financial Data
The following selected consolidated financial data as of and for the
five-year period ended December 31, 2003 has been derived from the Company's
Consolidated Financial Statements. This data should be read in conjunction with
the Consolidated Financial Statements and related Notes for the year ended
December 31, 2003 and Management's Discussion and Analysis of Financial
Condition and Results of Operations.
8
All amounts are stated in millions, except per share data.
2003 2002 (d) 2001 (d) 2000 1999
--------- --------- --------- -------------- -------
Operating Results
Sales (a)......................................................... $ 712.0 $ 667.8 $ 610.6 $ 645.4 $ 661.8
Operating income (b).............................................. 31.5 60.5 32.6 60.4 64.0
Net income (c).................................................... 14.6 40.3 18.8 77.5 33.4
Basic earnings per share (c)...................................... 0.37 1.02 0.45 1.74 0.72
Diluted earnings per share (c).................................... 0.37 1.00 0.44 1.73 0.71
Financial Condition
Total assets...................................................... $ 714.9 $ 639.6 $ 583.8 $ 603.4 $ 621.9
Total debt........................................................ 194.6 166.7 166.4 166.8 208.7
Common stock subject to redemption (d)............................ -- 37.6 46.6 -- --
Shareholders' equity (d).......................................... 377.3 300.0 239.5 303.3 281.9
Total debt as a percent of total capital.......................... 34.0% 33.1% 36.8% 35.5% 42.5%
- ----------
(a) Includes $13.8 and $80.8 of International Imaging Materials, Inc.
("IIMAK")'s sales in 2000 and 1999, respectively.
(b) Includes the integration/restructuring and other costs of $20.4, $13.3,
$1.9 and $5.0 in 2003, 2001, 2000 and 1999, respectively; $7.3 of
post-employment benefit costs pertaining to the one-time, prior period
service costs in 2001; $2.5 due to the purchase accounting impact of
recording inventories of Bornemann & Bick at fair value in 2000;
amortization of goodwill of $6.0, $5.7 and $6.1 in 2001, 2000 and 1999,
respectively; and $2.1 and $12.5 of IIMAK's operating income in 2000 and
1999, respectively.
(c) Includes items cited in note (b) and $50.3 ($40.3 after taxes) of gain on
sale of IIMAK in 2000.
(d) Includes amounts restated in 2002 and in 2001. (See Note 2 of the Notes to
the Consolidated Financial Statements.)
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
All references to years relate to fiscal years ended on December 31, and all
amounts in the following discussion are stated in millions, except headcount,
share and per share data. All information related to 2001 is unaudited.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management has identified the following policies and estimates as critical
to the Company's business operations and the understanding of the Company's
results of operations. Note that the preparation of this Annual Report on Form
10-K requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the Company's financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
Revenue Recognition
Revenue is recognized at the time of shipment and includes freight billed to
customers.
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," issued by the Securities and Exchange Commission ("SEC") 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 a reporting
period could be adversely affected.
In addition, in accordance with SAB No. 104, "Revenue Recognition, revised
and updated," the Company recognizes revenues from fixed price service contracts
on a pro-rata basis over the life of the contract as they are generally
performed evenly over the contract period. Revenues derived from other service
contracts are recognized when the services are performed.
The Company periodically enters 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 supersedes
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
condition.
9
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 $127.0, net of allowances of $10.0 at December
31, 2003, and $106.8, net of allowances of $10.2, at December 31, 2002.
Inventories
Inventories are stated at the lower of cost or market. The value of
inventories determined using the last-in, first-out method was $14.3 and $12.9
as of December 31, 2003 and 2002, respectively. The value of all other
inventories determined using the first-in, first-out method was $79.8 and $70.9
as of December 31, 2003 and 2002, respectively.
On an ongoing basis, the Company evaluates the composition of its
inventories and the adequacy of its allowance for slow-turning and obsolete
products. Market value of aged inventory is determined based on historical sales
trends, current market conditions, changes in customer demand and acceptance of
the Company's products, and current sales negotiations for this type of
inventory.
Goodwill
The Company evaluates goodwill for impairment annually using a fair value
approach, at the reporting unit level. In addition, the Company evaluates
goodwill for impairment 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 indicate an
impairment include the following: (1) significant under-performance relative to
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 2003, the Company completed its
annual goodwill impairment assessment, and based on the results, the Company
determined that no impairment of goodwill existed at October 31, 2003, and there
have been no indicators of impairment since that date. A subsequent
determination that this goodwill is impaired, however, could have a significant
adverse impact on the Company's results of operations or financial condition.
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. Except for certain write-offs of fixed assets the Company
recognized in connection with its restructuring and related initiatives, there
were no significant impairment losses related to long-lived assets in the past
three years.
10
Accounting for Income Taxes
As part of the process of preparing the consolidated financial statements,
management is required to estimate the income taxes in each jurisdiction in
which the Company operates. This process involves estimating the actual current
tax liabilities together with assessing temporary differences resulting from the
differing treatment of items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included in the
consolidated balance sheet. Management must then assess the likelihood that the
deferred tax assets will be recovered, and to the extent that management
believes that recovery is not more than likely, the Company must establish a
valuation allowance. If a valuation allowance is established or increased during
any period, the Company must include this amount as an expense within the tax
provision in the consolidated statement of income. Significant management
judgment is required in determining the Company's provision for income taxes,
deferred tax assets and liabilities and any valuation allowance recognized
against net deferred assets. The valuation allowance is based on management's
estimates of the taxable income in the jurisdictions in which the Company
operates and the period over which the deferred tax assets will be recoverable.
In the event that actual results differ from these estimates or management
adjusts these estimates in future periods, the Company may need to establish an
additional valuation allowance, which could materially impact its results of
operations. Deferred taxes are not provided on the portion of undistributed
earnings of non-US subsidiaries which is considered to be permanently
reinvested.
RESULTS OF OPERATIONS
Overview
In order to better serve a customer base consisting of retailers and apparel
manufacturers, the Company's operations have been organized into three
geographic segments consisting of North, Central and South America ("Americas"),
Europe, the Middle East and Africa ("EMEA"), and the Asia Pacific region ("Asia
Pacific"). The Company's results of operations for 2003, 2002 and 2001, in
dollars and as a percent of sales are presented below:
2003 2002 2001
----------------- ------------------ -----------------
(unaudited)
Sales........................................... $ 712.0 100.0% $ 667.8 100.0% $ 610.6 100.0%
Cost of sales................................... 444.9 62.5 410.7 61.5 376.1 61.6
-------- ------- -------- ------- -------- -------
Gross profit................................ 267.1 37.5 257.1 38.5 234.5 38.4
Selling, general and administrative expenses.... 214.9 30.2 196.3 29.4 182.6 29.9
Amortization of goodwill and other intangibles.. 0.3 -- 0.3 -- 6.0 1.0
Integration/restructuring and other costs....... 20.4 2.9 -- -- 13.3 2.2
-------- ------- -------- ------- -------- -------
Operating income............................ 31.5 4.4 60.5 9.1 32.6 5.3
Interest expense, net........................... 11.3 1.6 10.9 1.7 9.9 1.6
-------- ------- -------- ------- -------- -------
Income before taxes......................... 20.2 2.8 49.6 7.4 22.7 3.7
Taxes on income................................. 5.6 0.7 9.3 1.4 3.9 0.6
-------- ------- -------- ------- -------- -------
Net income.................................. $ 14.6 2.1% $ 40.3 6.0% $ 18.8 3.1%
======== ======= ======== ======= ======== =======
The Company's sales increased $44.2 or 6.6% to $712.0 in 2003 from $667.8 in
2002. The sales increase is primarily attributable to the favorable impact of
foreign exchange rates of $26.6 and the impact of acquisitions of $17.5.
Throughout 2003, the Company was impacted by the continuation of a sluggish
global economic environment and weakness in the retail and apparel manufacturing
industries. The continued weakness in the US dollar against the Canadian dollar,
Euro, British pound and Australian dollar, however, benefited the Company's
sales in 2003. In addition, the Company continued to successfully execute its
longstanding strategy of growing through acquisitions. Management believes that
the Company's investments in new product development, upgraded manufacturing
equipment, new technology, innovative programs, 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
global economic environment or as to its future impact on the Company.
Operating income was $31.5 in 2003 compared with $60.5 in 2002. As a percent
of sales, operating income was 4.4% in 2003 and 9.1% in 2002. The operating
results for 2003 included the integration/restructuring and other costs of $20.4
recorded in connection with the closing of several manufacturing plants in the
US and the UK, headcount reductions, a severance payment to the Company's former
Chief Executive Officer, and write-offs of an Enterprise Resource Planning
("ERP") system and certain other fixed assets no longer in use (see Note 18 of
Notes to Consolidated Financial Statements).
11
In 2002, sales increased 9.4% to $667.8 from $610.6 in 2001. Operating
income was $60.5 in 2002 compared with $32.6 in 2001. As a percent of sales,
operating income was 9.1% in 2002 and 5.3% in 2001. The operating results for
2001 included the non-recurring charges of $13.3 recorded in connection with
implementing major restructuring initiatives, $7.3 of post-employment benefit
costs pertaining to the one-time, prior period service costs (see Note 16 of
Notes to Consolidated Financial Statements), and $6.0 of amortization of
goodwill (see Note 7 of Notes to Consolidated Financial Statements).
Management believes that acquisitions will continue to be a fundamental
element of the Company's growth. In September 2003, the Company acquired the
business and assets of Alkahn Labels, Inc. ("Alkahn"), a manufacturer of woven
labels with facilities in the US and Hong Kong, for $25.0. Alkahn 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 Norwegian manufacturer of heat transfer labels.
Sales
The following table presents sales by geographic operating segment:
2003 2002 2001
----------------- ----------------- -------------------
(unaudited)
Americas.................... $ 325.0 45.7% $ 332.4 49.8% $ 322.2 52.8%
EMEA........................ 199.5 28.0 176.6 26.4 162.8 26.7
Asia Pacific................ 187.5 26.3 158.8 23.8 125.6 20.5
-------- ------- -------- ------- -------- -------
Total..................... $ 712.0 100.0% $ 667.8 100.0% $ 610.6 100.0%
======== ======= ======== ======= ======== =======
Americas sales include sales delivered through Company operations in North
(primarily in the US), Central and South America. Sales declined $7.4 or 2.2%,
to $325.0 in 2003 compared with $332.4 in 2002. Management attributes the
decline to the challenging economic and retail conditions that resulted in fewer
orders and smaller average transaction size and generally reduced customer
demand. In addition, many of the Company's customers have steadily moved their
production facilities outside the US where they have realized labor cost
efficiencies. This trend had been continuing for quite some time and
strengthened significantly in 2003. As a result, the Company's geographic sales
mix has continued to shift primarily to the Asia Pacific region. The sales
decline in 2003 was somewhat offset by the favorable impact of a foreign
exchange rate and the impact of acquisitions. In 2002, sales increased $10.2 or
3.2%, to $332.4 compared with $322.2 in 2001. The increase was attributable to
the impact of acquisitions and organic sales growth in the Company's Central and
South America Operations.
EMEA's sales in 2003, which include sales delivered through Company
operations in 12 European countries, the Middle East and Africa, increased $22.9
or 13.0%, to $199.5 in 2003 compared with $176.6 in 2002. The increase is
attributable to the favorable impact of foreign exchange rates of $24.1 and the
impact of a prior year acquisition of $3.3, offset by $4.5 attributed to price
deflation and reduced volumes. Management believes that the weakness in economic
and retail conditions in EMEA and uncertainties surrounding global economic
environment continued to dampen overall customer demand level, which in turn put
pressure on EMEA's sales in 2003. In addition, the Company experienced sales
migration to Asia Pacific as manufacturers sought to reduce labor costs. In
2002, sales increased $13.8 or 8.5%, to $176.6 compared with $162.8 in 2001. The
increase was attributable to the favorable impact of foreign exchange rates of
$6.3 and the impact of acquisitions of $12.4, offset by $4.9 attributed to price
deflation and reduced volumes.
Asia Pacific consists of the Company's operations in Hong Kong, China,
Singapore, Sri Lanka, Australia, Korea, Bangladesh, Indonesia and Vietnam. Sales
increased $28.7 or 18.1%, to $187.5 in 2003 compared with $158.8 in 2002. The
increase is attributable to organic sales growth of $23.0, the favorable impact
of a foreign exchange rate of $1.2, and the impact of an acquisition of $4.5.
The Company's operations in this region continued to benefit 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
operating efficiencies. In addition, management believes that the Company gained
market share in Asia Pacific. In 2002, sales increased $33.2 or 26.4%, to $158.8
compared with $125.6 in 2001. The increase was attributable to organic sales
growth of $29.5, the favorable impact of a foreign exchange rate of $0.3, and
the impact of an acquisition of $3.4.
Gross Profit
Gross profit, as a percent of sales, was 37.5% in 2003 compared with 38.5%
in 2002 and 38.4% in 2001. The decrease is primarily attributable to the
negative impact of under-utilization of certain manufacturing facilities in the
US, inefficiencies associated with the discontinuation of manufacturing at two
facilities in the UK, continued price compression, and, in general, smaller,
less
12
efficient production runs. Since 2001, management's ongoing strategy has
included implementing process improvements to reduce costs in all of its
manufacturing facilities, efficiently re-deploying assets to manage production
capacity and expanding production in new and emerging markets in order to
maximize labor and production efficiencies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A"), as a percent of
sales, were 30.2% in 2003, 29.4% in 2002 and 29.9% in 2001. The increase in 2003
is primarily attributable to incremental staffing, occupancy expenses and other
fixed costs related to the Company's global expansion, as well as certain
incremental expenses associated with the Company's prior acquisitions.
Additionally, during 2001, certain key executives of the Company signed
employment agreements under which the Company is obligated to provide
post-employment benefits. In connection with these agreements, the Company
recorded $1.4, $1.5 and $7.3 of post-employment benefit costs in 2003, 2002 and
2001, respectively, as SG&A. Management's ongoing objective is to control
absolute SG&A dollars and further reduce the ratio of SG&A to sales by
leveraging sales growth against the Company's fixed expense base.
Integration/Restructuring and Other Costs
In 2003, the Company incurred $20.4 of integration/restructuring and other
costs. Of this amount, $11.4 primarily pertained to: (1) the closing of several
manufacturing plants in the US and the UK, areas which have experienced a
migration of apparel manufacturing to the lower-production-cost countries; and
(2) headcount reductions, which resulted in a reduction of 320 manufacturing
positions and 160 managerial and administrative personnel primarily in the US
and the UK. In addition, the Company recorded $1.3 of integration/restructuring
and other costs in connection with the severance payment made to its former
Chief Executive Officer. Lastly, the Company recognized non-cash charges of $7.7
to write off the remaining net book value of an ERP system and certain other
fixed assets no longer in use .
In 2001, the Company recorded $13.3 of integration/restructuring and other
costs. Of this amount, $11.9 pertained to: (1) integration of certain
manufacturing facilities and the consolidation of production sites as the
Company closed and sold two manufacturing locations in North America and
rationalized operations in the UK, Italy and Spain; and (2) strategic
unification of the sales and marketing organization and a global organizational
reshaping, which resulted in termination of 350 manufacturing positions and 125
managerial and administrative personnel in the US, Canada, Hong Kong, the UK,
Italy and Turkey. In addition, the Company disposed of and wrote off $1.4 of
certain fixed assets in connection with its strategic initiatives.
Operating Income
Operating income was $31.5 in 2003 compared with $60.5 in 2002. As a percent
of sales, operating income was 4.4% in 2003 and 9.1% in 2002. The operating
results for 2003 included the integration/restructuring and other costs of $20.4
recorded in connection with the closing of several manufacturing plants in the
US and the UK, headcount reductions, a severance payment to the Company's former
Chief Executive Officer, and write-offs of an ERP system and certain other fixed
assets no longer in use.
Operating income was $60.5 in 2002 compared with $32.6 in 2001. As a percent
of sales, operating income was 9.1% in 2002 and 5.3% in 2001. The operating
results for 2001 included non-recurring charges totaling $13.3 recorded in
connection with implementing major restructuring initiatives, $7.3 of
post-employment benefit costs pertaining to the one-time, prior period service
costs, and $6.0 of amortization of goodwill.
On a reportable segment basis, exclusive of corporate expenses and
amortization of goodwill and other intangibles, operating income (loss), as a
percent of sales, was as follows:
2003 2002 2001
------- ------- ---------
(unaudited)
Americas........... 4.6% 9.8% 8.8%
EMEA............... (0.7) 8.0 5.0
Asia Pacific....... 19.3 20.0 18.6
Americas, EMEA, and Asia Pacific included the integration/ restructuring and
other costs, as a percent of sales, of 2.9%, 4.7% and 0.1%, respectively, in
2003, and 2.3%, 2.5% and 0.6% in 2001.
13
Interest Expense, Net
Net interest expense related primarily to long-term debt increased to $11.3
in 2003 and $10.9 in 2002 from $9.9 in 2001. The increase is attributable to
higher average borrowings and lower rates of return available on invested cash.
Taxes on Income
The effective income tax rate was 27.8% in 2003 compared with 18.8% in 2002
and 17.2% in 2001. The rate will change year to year based on factors such as
the geographic mix of pre-tax income, the timing and amounts of foreign
dividends, and state and local taxes. The higher effective tax rate in 2003
compared with 2002 and 2001 primarily resulted from losses in the Company's UK
operations (which included $7.9 of integration/restructuring and other costs)
for which no tax benefits were provided. In addition, a shift in income from
Asia Pacific to the US operations as a result of certain charge-backs further
increased the effective tax rate in 2003 as higher tax rates were applied on the
income from the US operations. The tax rate increase in 2003 was somewhat offset
by reversal of accruals no longer needed and change in the geographic mix of
pre-tax income. In 2001, the tax rate was reduced as a result of a settlement
with International Imaging Materials, Inc. (see Note 10 of the Notes to
Consolidated Financial Statements).
Liquidity and Capital Resources
The table below presents summary cash flow information for the years
indicated:
2003 2002 2001
-------- -------- -------
(unaudited)
Net cash provided by operating activities............ $ 35.6 $ 62.7 $ 53.5
Net cash used in investing activities................ (60.0) (47.9) (28.1)
Net cash provided by (used in) financing activities.. 26.8 (1.6) (34.3)
-------- -------- --------
Total change in cash and cash equivalents (a)... $ 2.4 $ 13.2 $ (8.9)
======== ======== ========-
(a) Before the effect of exchange rate changes on cash flows.
Operating Activities
Cash provided by operating activities is the Company's primary source of
funds to finance operating needs and growth opportunities. The Company's
revolving credit agreement provides additional liquidity for seasonal and
specific-purpose expenditures. Net cash provided by operating activities was
$35.6, $62.7 and $53.5 in 2003, 2002 and 2001, respectively. Management believes
that the Company will continue to generate sufficient cash from its operating
activities for the foreseeable future supplemented by availability under its
revolving credit agreement to fund its working capital needs, strengthen its
balance sheet and support its growth strategy of expanding its geographic reach
and product offerings.
Working capital and the corresponding current ratio were $194.1 and 2.6:1
and $155.2 and 2.4:1 at December 31, 2003 and 2002, respectively. The increase
in working capital from 2002 to 2003 primarily resulted from increases in cash
and cash equivalents, accounts receivable, inventories, and other current
assets, and a decrease in accrued taxes on income, offset by increases in
amounts due to banks, accounts payable and accrued liabilities.
Investing Activities
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, a manufacturer of woven labels, including all of the equity of
Alkahn-Hong Kong Limited, for $25.0 plus the assumption of certain trade
liabilities. This acquisition did not have a material impact on the Company's
results of operations for 2003. In addition, the Company continued to integrate
and assimilate the operations of its prior acquisitions, upgrade production
machinery, proceed with its ERP system upgrades, and grow and expand the
Company's operations in the emerging markets of Central and South America, EMEA
and Asia Pacific. Capital expenditures in 2003 were $32.8 compared with $25.5 in
2002 and $24.2 in 2001, and were funded by cash provided by operating
activities.
Investing activities during 2002 primarily consisted of the acquisitions of
the business and manufacturing assets of Disenos de Coleccion, a leading
manufacturer of merchandising labels and tags for Mexican retailers, and NTP
Gandrudbakken AS, a Norwegian 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 the Central
and South America, EMEA and Asia Pacific markets.
14
Investing activities during 2001 primarily consisted of the acquisitions of
Europrint S.A., Independent Machine Service, Inc., and certain assets of U.S.
Label Corporation, continued production machinery upgrades and the ERP system
conversions, and the costs associated with growth and expansion of the Company's
operations in the Central and South America, EMEA and Asia Pacific markets.
Financing Activities
The components of total capital as of December 31, 2003, 2002 and 2001,
respectively, are presented below:
2003 2002 2001
-------- -------- -------------
(restated) (restated
and unaudited)
Due to banks.................................. $ 4.3 $ 2.1 $ 0.4
Current maturities of long-term debt.......... -- 0.1 0.1
Long-term debt................................ 190.3 164.5 165.9
-------- -------- --------
Total debt............................... 194.6 166.7 166.4
Common stock subject to redemption............ -- 37.6 46.6
Shareholders' equity.......................... 377.3 300.0 239.5
-------- -------- --------
Total capital............................ $ 571.9 $ 504.3 $ 452.5
======== ======== ========
Total debt as a percent of total capital...... 34.0% 33.1% 36.8%
======== ======== ========
Management believes that the borrowings available under the Company's
revolving credit agreement provide sufficient liquidity to supplement the
Company's operating cash flow to support the Company's planned business
activities and seasonal and specific-purpose expenditures. For the years ended
December 31, 2003, 2002 and 2001, net borrowings (repayments) of the Company's
outstanding debt were $27.9, $(1.1) and $(0.5), 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 years ended December 31, 2003, 2002 and 2001, the Company received
proceeds of $4.0, $9.7 and $4.7, respectively, from common stock issued under
its employee stock option and stock purchase plans.
The Company has a stock repurchase plan with an authorization from its Board
of Directors to use up to $150 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. The Company repurchased 469,000 shares for an aggregate price
of $5.1, or an average of $10.80 per share, in 2003; 285,000 shares for an
aggregate price of $3.8, or an average of $13.38 per share, in 2002; and
3,238,000 shares for an aggregate price of $33.1, or an average of $10.22 per
share, in 2001. Since the inception of the stock repurchase program, the Company
has repurchased 12,293,000 of its shares for an aggregate price of $122.0, or an
average of $9.92 per share. The Company immediately retired the repurchased
shares. As of December 31, 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 and
cash availability. 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 a Stock
Repurchase Agreement (the "Agreement"), dated July 11, 2001 with its Chairman
and Chief Executive Officer (the "Chairman"). On November 17, 2003, the
Agreement was terminated. Under the Agreement, the Chairman had the option to
sell to the Company, and the Company had the obligation to purchase, the
redeemable common shares owned by the Chairman and those to which the Chairman
became entitled through the exercise of his stock compensation awards. All
transactions under the Agreement were required to be settled in cash. During any
rolling 12-month period, the Chairman had the right to sell up to 400,000 shares
to the Company. In addition, if he did not exercise his right to sell the full
400,000 shares in the preceding rolling 12-month period, he had the right to
sell up to 400,000 additional shares as to which he did not exercise his option
in such preceding periods. The timing of the sale and the periods during which
the Chairman had the right to redeem his common shares were regulated by the
terms of the Agreement. The purchase price for the redeemable common shares was
equal to the average of the closing prices for the Company's common stock during
the last seven trading days ending on the day preceding the sale.
15
During 2001, the Company purchased 400,000 shares from the Chairman for
$5.4, or $13.40 per share. During 2002, the Company purchased 399,000 shares
from the Chairman for $6.4, or $15.96 per share. All of the shares purchased
from the Chairman were retired. (See Note 19 of the Notes to the Consolidated
Financial Statements). The Company did not purchase any shares from the Chairman
in 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 ratio of debt to earnings before interest, taxes, depreciation
and amortization ("EBITDA"). The applicable percentage for the facility fee at
December 31, 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 debt to EBITDA
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 December
31, 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.
Additionally, 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 common stock on and after July 1, 2002. The Company's maximum allowable
debt to EBITDA ratio, as defined, is as follows:
Prior to January 1, 2004...................................... 3.0 to 1
From January 1, 2004 to September 30, 2004.................... 3.5 to 1
After September 30, 2004...................................... 3.0 to 1
The Company's minimum allowable fixed charge coverage ratio, as defined, is
as follows:
Prior to October 1, 2003...................................... 1.5 to 1
From October 1, 2003 to September 30, 2004.................... 1.25 to 1
After September 30, 2004...................................... 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 reports provided to its banks and certain
other lending institutions its obligation to purchase common stock from its
Chairman under the July 11, 2001 Agreement. Since the obligation had been
omitted from the Company's compliance reports, the Company was in technical
default under the terms of the credit agreement. The Company obtained temporary
waivers from its banks in November 2003. As the Agreement was terminated on
November 17, 2003, the Company no longer has the obligation to purchase or
redeem any of its common stock. (See Note 19 of the Notes to Consolidated
Financial Statements.) The lenders have indicated that permanent waivers will be
issued immediately after the filing of this annual report.
At December 31, 2003, the Company was in compliance with all debt covenants.
The Company discloses the details of the compliance calculation to its banks and
certain other lending institutions in a timely manner.
16
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 at times reduces its market risk exposures by creating
offsetting positions through the use of derivative financial instruments. The
Company does not use derivative financial instruments for trading purposes.
A 10% change in interest rates affecting the Company's floating rate debt
instruments would have an insignificant impact on the Company's pre-tax earnings
and cash flows over the next fiscal year. Such a move in interest rates would
have no effect on the fair value of the Company's floating rate debt
instruments. In addition, all of the Company's derivatives have high correlation
with the underlying exposure and are highly effective in offsetting underlying
currency movements. Accordingly, changes in derivative fair values are expected
to be offset by changes in value of the underlying exposures.
The Company sells its products in many countries and a substantial portion
of its net sales and costs and expenses are denominated in foreign currencies. A
significant portion of the Company's sales in 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 flow. In addition, the Company is potentially subject to concentrations
of credit risk, principally in accounts receivable. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.
The Company's major customers are retailers and global apparel manufacturers
that have historically paid their accounts payable balances with the Company.
There were no significant changes in the Company's exposure to market risk
in the past three years.
Aggregate Contractual Obligations
The Company's aggregate contractual obligations are as follows:
Payments due by period
-----------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
- -------------------------------------------------------- ---------- ----------- ---------- --------- ----------
Long-term debt obligations.......................... $ 190.3 $ -- $ 27.2 $ 150.0 $ 13.1
Operating lease obligations......................... 39.7 9.7 12.0 8.2 9.8
Severance obligations............................... 2.9 -- -- -- 2.9
Purchase obligations................................ 5.5 4.8 0.7 -- --
Post-employment benefit obligations................. 7.7 0.3 0.5 0.5 6.4
------- ------- ------ ------- ------
Total........................................... $ 246.1 $ 14.8 $ 40.4 $ 158.7 $ 32.2
======= ======= ====== ======= ======
Restatement
In the fourth quarter of 2003, the Company reconsidered its accounting and
reporting matters related to its obligations to purchase redeemable common
shares under the July 11, 2001 Agreement with its Chairman. In accordance with
Rule 5-02.28 of Regulation S-X, or Accounting Series Release No. 268,
"Redeemable Preferred Stocks," (issued by SEC on July 27, 1979), as interpreted
by EITF Topic D-98, "Classification and Measurement of Redeemable Securities,"
(issued by the Financial Accounting Standards Board on July 19, 2001),
securities that are redeemable for cash or other assets must be classified
outside of shareholders' equity, if they are redeemable at the option of the
holder, as were the redeemable common shares owned by the Chairman. The Company
concluded that Rule 5-02.28, as interpreted by EITF Topic D-98, applied to the
redeemable common shares because the redemption features were not solely within
its control. While Rule 5-02.28 specifically addressed redeemable preferred
stocks, EITF Topic D-98 makes it clear that redeemable preferred stock is
analogous to other equity instruments, including common shares. Accordingly, the
Company determined that the redeemable common shares should have been classified
as temporary equity in its financial statements for periods ended after July 11,
2001 until the Agreement was terminated on November 17, 2003. As a result, the
Company has restated its balance sheet as of December 31, 2002 to report the
redemption value of redeemable common stock outside of shareholders' equity, as
"Common Stock Subject to Redemption." The redeemable common stock was previously
reported within shareholders' equity. Corresponding revisions have also been
made to the consolidated statements of shareholders' equity and comprehensive
income.
17
As the Agreement was terminated on November 17, 2003, the redeemable common
shares owned by the Chairman are no longer subject to redemption and therefore
are classified as permanent equity in the financial statements at December 31,
2003.
As the Company was unable to have the reclassification adjustments
pertaining to its 2001 financial statements audited, the 2001 financial
statements and related note disclosures contained herein are unaudited and are
labeled as such. (See Note 2 of the Notes to the Consolidated Financial
Statements.)
Since the Company is unable to file three years of audited financial
information in its 2003 Annual Report on Form 10-K as required under Rules 3-01
and 3-02 of Regulation S-X, the Company's reports filed under the Securities
Exchange Act of 1934 (the "Exchange Act") will not be in full compliance with
the requirements of the Exchange Act. As a result, the effectiveness of the
Company's Registration Statements on Form S-8 (Nos. 333-38923, 333-43694, and
333-43696) will be suspended, and the Company will be unable to issue shares
under its employee stock purchase and stock option plans. In addition, the
Company will not be in compliance with Item 13(a)(1) of Schedule 14A under the
Exchange Act in connection with its solicitation of proxies for its 2004 annual
meeting of shareholders. During any period when the Company is not current in
its SEC reports, neither affiliates of the Company nor any person that purchased
shares from the Company in a private offering during the preceding two years
will be able to sell their shares in public markets pursuant to Rule 144 under
the Securities Act of 1933. The Company expects that it will again have three
years of audited financial information on file with the SEC and its Exchange Act
reports will comply with SEC requirements when the Company files its 2004
audited financial statements with its 2004 Annual Report on Form 10-K.
Item 7A: Quantitative and Qualitative Disclosure About Market Risk
The information required by this Item is set forth under the heading "Market
Risk" in Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, above, which information is hereby incorporated by
reference.
Item 8: Financial Statements and Supplementary Data
The financial information required by this Item is incorporated by reference
to the consolidated financial statements and notes thereto as an exhibit in Part
IV, Item 15, pages 26 through 45.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The information required by this Item is incorporated herein by reference to
the Company's Current Report on Form 8-K, dated August 6, 2003, and filed August
8, 2003, as amended by the Current Report on Form 8-K/A, dated August 6, 2003,
and filed September 4, 2003.
Item 9A: Controls and Procedures
Under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
the Company conducted an evaluation of the effectiveness of the design and
operation of its disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this report (the "Evaluation Date"). Based on this
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded as of the Evaluation Date that its disclosure controls and procedures
were effective such that the information relating to the Company required to be
disclosed in its SEC reports (i) is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and (ii) is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
18
PART III
Item 10: Directors and Executive Officers of the Registrant
Incorporated herein by reference to the Company's Definitive Proxy Statement
with respect to the Company's Annual Meeting of Shareholders scheduled to be
held on April 29, 2004.
The following presents information regarding the executive officers of the
Company:
Arthur Hershaft, 66, Chairman of the Board of Directors, President and
Chief Executive Officer since May 2003. He had been Chairman of the Board
of Directors since 1986 and Chief Executive Officer from 1980 through
August 2001.
Jack R. Plaxe, 62, Senior Vice President and Chief Financial Officer
since December 1997.
John P. Jordan, 58, Vice President and Treasurer since August 1998.
Larry M. Segall, 49, Vice President and Controller since November 2001.
Prior to that time, he was Senior Vice President-Finance and
Administration of Vitamin Shoppe Industries, Inc. from October 1997 until
joining the Company.
Robert S. Stone, 66, Vice President, General Counsel and Secretary since
September 1999. Prior to that time, he was Of Counsel to the law firm of
Jackson Lewis Schnitzler & Krupman from May 1997 until joining the
Company.
Each of the foregoing executive officers, except for Mr. Hershaft, serves
at the pleasure of the Board of Directors. Mr. Hershaft is employed under an
employment agreement that expires on December 31, 2005.
Item 11: Executive Compensation
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders scheduled
to be held on April 29, 2004.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference to the Company's Definitive Proxy Statement
with respect to the Company's Annual Meeting of Shareholders scheduled to be
held on April 29, 2004.
Item 13: Certain Relationships and Related Transactions
Incorporated herein by reference to the Company's Definitive Proxy Statement
with respect to the Company's Annual Meeting of Shareholders scheduled to be
held on April 29, 2004.
Item 14: Principal Accountant Fees and Services
Incorporated herein by reference to the Company's Definitive Proxy Statement
with respect to the Company's Annual Meeting of Shareholders scheduled to be
held on April 29, 2004.
PART IV
Item 15: Exhibits, Financial Statement Schedules and Report on Form 8-K
(a) Documents
(1) FINANCIAL STATEMENTS --
Statement of Management's Responsibility for Financial Statements........ 22
Report of Independent Auditors........................................... 23
Report of Independent Accountants........................................ 24
Report of Independent Accountants on Financial Statement Schedule........ 25
Consolidated Statements of Income for the years ended December 31, 2003,
2002 and 2001 (unaudited)............................................... 26
Consolidated Balance Sheets as of December 31, 2003 and 2002 (restated).. 27
19
Consolidated Statements of Shareholders' Equity and Comprehensive Income for
the years ended December 31, 2003, 2002 (restated) and 2001 (restated and
unaudited)................................................................. 28
Consolidated Statements of Cash Flows for the years ended December 31, 2003,
2002 and 2001 (unaudited).................................................. 29
Notes to Consolidated Financial Statements................................. 30 to 45
(2) FINANCIAL STATEMENT SCHEDULE --
Schedule II-- Valuation and Qualifying Account............................. 46
Separate financial statements of the registrant have been omitted because the
registrant is primarily an operating company. All subsidiaries included in the
consolidated financial statements are majority owned, and none of the
subsidiaries have indebtedness which is not guaranteed by the registrant. All
other financial statement schedules are not required under the related
instructions or are not applicable and therefore have been omitted.
(b) Report on Form 8-K
Current Report on Form 8-K, dated October 29, 2003, reporting under
Items 7 and 12 that the Registrant issued a press release announcing its
third quarter 2003 earnings.
(c) Exhibits
3.1 By-Laws. (A)
3.2 Amended and Restated Certificate of Incorporation. (C)
3.3 Amendment to Amended and Restated Certificate of
Incorporation. (D)
10.1 Registrant's 1990 Employee Stock Option Plan. (B)
10.2 Registrant's 1997 Incentive Stock Option Plan. (E)
10.3 Deferred Compensation Plan for Directors. (F)
10.4 Note Purchase Agreement dated as of August 4, 1998. (G)
10.5 Change of Control Employment Agreement dated as of April 20,
1999, between the Registrant and Jack Plaxe. (H)
10.6 Agreement, dated as of February 8, 2000, among the
Registrant, Paxar Capital Corporation, International Imaging
Material, Inc., Center Capital Investors III, L.P. and
Related Partnerships. (I)
10.7 Amendment No. 1, dated March 9, 2000 to the Stock Purchase
and Recapitalization Agreement, dated as of February 8,
2000, among the Registrant, Paxar Capital Corporation,
International Imaging Materials, Inc., Centre Capital
Investors III, L.P., and related partnerships. (I)
10.8 Registrant's 2000 Long-Term Performance and Incentive
Plan. (J)
10.9 Commercial Limited Partnership Interest Purchase and
Assignment Agreement, dated May 18, 2000, among the
Registrant, Bornemann & Bick GmbH & Co, KG, Gerhard
Bornemann, and Ulrich Bornemann. (K)
10.10 Sale and Purchase Agreement, dated May 18, 2000, between
Paxar Far East Limited and Ulrich Wilhelm Helmut
Bornemann. (K)
10.11 Agreement, dated as of July 11, 2001, by and between
Paxar Corporation and Arthur Hershaft. (L)
10.12 Agreement, dated as of September 1, 2001, by and
between Paxar Corporation and Victor Hershaft. (M)
10.13 Credit Agreement, dated as of September 24, 2002. (N)
10.14 Termination of Agreement, dated as of November 17,
2003, by and between Paxar Corporation and Arthur
Hershaft.
21.1 Subsidiaries of Registrant.
31.1 Certification Pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities and Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities and Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------
(A) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1980.
(B) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1990.
(C) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1992.
20
(D) Incorporated herein by reference from Annex D to the Joint Proxy
Statement/Prospectus included in the Registrant's Registration Statement on
Form S-4 (File No. 333-36283), filed on September 24, 1997.
(E) Incorporated herein by reference from Exhibits to the Registrant's
Registration Statement on Form S-8 (File No. 333-38923), filed on October
28, 1997.
(F) Incorporated herein by reference from Annex A to Registrant's preliminary
proxy statement dated March 31, 1998.
(G) Incorporated herein by reference from Exhibits to the Registrant's Form 8-K
filed on August 26, 1998.
(H) Incorporated herein by reference from Exhibits to the Registrant's Form
10-Q filed on August 11, 1999.
(I) Incorporated herein by reference from Exhibits to Registrant's Form 8-K
dated March 9, 2000.
(J) Incorporated herein by reference from Appendix B and C to Registrant's
definitive proxy statement dated March 31, 2000.
(K) Incorporated herein by reference from Exhibits to Registrant's Form 8-K
dated May 18, 2000.
(L) Incorporated herein by reference from Exhibits to Registrant's Form 8-K
dated July 11, 2001.
(M) Incorporated herein by reference from Exhibits to Registrant's Form 10-Q
filed on November 14, 2001.
(N) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 2002.
21
STATEMENT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
To the Shareholders of Paxar Corporation:
The consolidated financial statements and accompanying information were
prepared by management, who accepts full responsibility for their integrity and
objectivity. The statements were prepared in conformity with accounting
principles generally accepted in the United States and, as such, include amounts
that are based on management's best estimates and judgments.
Management is further responsible for maintaining a system of internal
accounting controls designed to provide reliable financial information for the
preparation of financial statements, to safeguard assets against loss or
unauthorized use and to ensure that transactions are executed consistent with
Company policies and procedures. Management believes that existing internal
accounting control systems are achieving these objectives and provide reasonable
assurance concerning the accuracy of the financial statements.
Oversight of management's financial reporting and internal accounting
control responsibilities is exercised by the Board of Directors, through its
Audit Committee, which consists solely of outside directors. The Committee meets
periodically with financial management, internal auditors and the independent
accountants to obtain reasonable assurance that each is meeting its
responsibilities and to discuss matters concerning auditing, internal accounting
control and financial reporting. The independent accountants and the Company's
internal audit department have free access to meet with the Audit Committee
without management's presence.
/s/ Arthur Hershaft
Arthur Hershaft
Chairman, President and Chief Executive Officer
/s/ Jack R. Plaxe
Jack R. Plaxe
Senior Vice President and Chief Financial Officer
22
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Paxar Corporation:
We have audited the accompanying consolidated balance sheet of Paxar
Corporation and Subsidiaries (the "Company") as of December 31, 2003 and the
related consolidated statements of income, shareholders' equity and
comprehensive income and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in the Index at Item 15(a)(2).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 2003, and the consolidated results of their operations and their
cash flows for the year ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule for the year ended December 31, 2003, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
Stamford, Connecticut
March 10, 2004
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Paxar Corporation:
In our opinion, the accompanying consolidated balance sheet as of December
31, 2002 and the related consolidated statements of income, shareholders' equity
and comprehensive income and cash flows for the year then ended present fairly,
in all material respects, the financial position of Paxar Corporation and its
subsidiaries (the "Company") as of December 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
As disclosed in Note 2, the Company changed the manner in which it accounts
for goodwill and other intangible assets as a result of the adoption of
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets" on January 1, 2002.
As disclosed in Note 2, the Company restated its consolidated balance sheet
as of December 31, 2002 and its consolidated statement of shareholders' equity
for the year then ended to report the redemption value of redeemable common
stock outside of shareholders' equity.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 5, 2003, except for the Restatement section of Note 2, as to which the
date is March 5, 2004
24
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors of Paxar Corporation:
Our audit of the consolidated financial statements referred to in our report
dated March 5, 2003, except for the Restatement section of Note 2, as to which
the date is March 5, 2004, appearing in the 2003 Annual Report to Shareholders
of Paxar Corporation (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in Item 15(a)(2) of this Form
10-K. In our opinion, this financial statement schedule for the year then ended
December 31, 2002 presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 5, 2003, except for the Restatement section of Note 2, as to which the
date is March 5, 2004
25
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2003, 2002 and 2001
(in millions, except per share amounts)
2003 2002 2001
------- ------- --------
(unaudited)
(See Note 2)
Sales..................................................... $ 712.0 $ 667.8 $ 610.6
Cost of sales............................................. 444.9 410.7 376.1
-------- -------- --------
Gross profit........................................... 267.1 257.1 234.5
Selling, general and administrative expenses.............. 214.9 196.3 182.6
Amortization of goodwill and other intangibles............ 0.3 0.3 6.0
Integration/restructuring and other costs................. 20.4 -- 13.3
-------- ------- --------
Operating income....................................... 31.5 60.5 32.6
Interest expense, net..................................... 11.3 10.9 9.9
-------- -------- --------
Income before taxes.................................... 20.2 49.6 22.7
Taxes on income........................................... 5.6 9.3 3.9
-------- -------- --------
Net income............................................. $ 14.6 $ 40.3 $ 18.8
======== ======== ========
Basic earnings per share.................................. $ 0.37 $ 1.02 $ 0.45
======== ======== ========
Diluted earnings per share................................ $ 0.37 $ 1.00 $ 0.44
======== ======== ========
Weighted average shares outstanding:
Basic.................................................. 39.1 39.4 41.8
Diluted................................................ 39.5 40.3 42.4
The accompanying notes are an integral part of the financial statements.
26
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
December 31, December 31,
2003 2002
--------------- ------------
(restated)
(See Note 2)
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 64.4 $ 49.6
Accounts receivable, net of allowances of $10.0 and $10.2 in 2003 and
2002, respectively..................................................... 127.0 106.8
Inventories.............................................................. 94.1 83.8
Deferred income taxes.................................................... 11.8 10.5
Other current assets..................................................... 16.0 12.8
-------- --------
Total current assets........................................... 313.3 263.5
-------- --------
Property, plant and equipment, net....................................... 163.8 154.9
Goodwill and other intangibles, net...................................... 213.6 197.7
Other assets............................................................. 24.2 23.5
-------- --------
Total assets............................................................. $ 714.9 $ 639.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to banks............................................................. $ 4.3 $ 2.1
Current maturities of long-term debt..................................... -- 0.1
Accounts payable and accrued liabilities................................. 103.1 92.2
Accrued taxes on income.................................................. 11.8 13.9
-------- --------
Total current liabilities...................................... 119.2 108.3
-------- --------
Long-term debt........................................................... 190.3 164.5
Deferred income taxes.................................................... 11.9 12.1
Other liabilities........................................................ 16.2 17.1
Commitments and contingent liabilities
Common stock subject to redemption, none and 2,544,042
shares in 2003 and 2002, respectively.................................. -- 37.6
Shareholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized
and none issued........................................................ -- --
Common stock, $0.10 par value, 200,000,000 shares authorized,
39,148,055 and 36,686,342 shares issued and outstanding in 2003
and 2002, respectively................................................. 3.9 3.7
Paid-in capital.......................................................... 10.3 --
Retained earnings........................................................ 345.5 304.7
Accumulated other comprehensive income (loss)............................ 17.6 (8.4)
-------- --------
Total shareholders' equity..................................... 377.3 300.0
-------- --------
Total liabilities and shareholders' equity............................... $ 714.9 $ 639.6
======== ========
The accompanying notes are an integral part of the financial statements.
27
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For the years ended December 31, 2003, 2002 and 2001 (unaudited)
(in millions)
Accumulated
Common Stock Other
--------------- Paid-In Treasury Retained Comprehensive Comprehensive
Shares Amount Capital Stock Earnings Income (Loss) Income
------- -------- ------------ ---------- ----------- -------------- --------------
Balance, January 1, 2001............ 42.1 $ 4.2 $ 45.2 $ -- $ 271.8 $ (17.9)
Comprehensive income:
Net income...................... -- -- -- -- 18.8 -- $ 18.8
Other comprehensive loss:
Translation adjustments...... -- -- -- -- -- (2.2) (2.2)
------
Comprehensive income............ -- -- -- -- -- -- $ 16.6
======
Shares issued-- various plans....... 0.5 -- 4.7 -- -- --
Common stock subject to redemption
(See Note 2)...................... (3.7) (0.3) (17.1) -- (33.8) --
Purchase of common stock............ -- -- -- (33.1) -- --
Retirement of treasury stock........ (3.3) (0.3) (32.8) 33.1 -- --
Change in carrying value of common
stock subject to redemption (See Note 2) -- -- -- -- (0.8) --
----- ----- ------- ------- -------- ------
Balance, December 31, 2001 (restated) 35.6 3.6 -- -- 256.0 (20.1)
Comprehensive income:
Net income...................... -- -- -- -- 40.3 -- $ 40.3
Other comprehensive loss:
Translation adjustments...... -- -- -- -- -- 12.3 12.3
Post-employment benefit
obligation adjustments....... -- -- -- -- -- (0.6) (0.6)
------
Comprehensive income............ -- -- -- -- -- -- $ 52.0
======
Shares issued:
Various plans................... 0.8 0.1 9.6 -- -- --
Warrants........................ 0.2 -- -- -- -- --
Purchase of common stock............ -- -- -- (3.8) -- --
Retirement of treasury stock........ (0.3) (0.1) (3.7) 3.8 -- --
Change in carrying value of common
stock subject to redemption (See Note 2) 0.4 0.1 (5.9) -- 8.4 --
---- ------ -------- ------- ------- ------
Balance, December 31, 2002 (restated) 36.7 3.7 -- -- 304.7 (8.4)
Comprehensive income:
Net income...................... -- -- -- -- 14.6 -- $ 14.6
Other comprehensive loss:
Translation adjustments...... -- -- -- -- -- 25.6 25.6
Post-employment benefit
obligation adjustments......... -- -- -- -- -- 0.4 0.4
------
Comprehensive income............ -- -- -- -- -- -- $ 40.6
======
Shares issued-- various plans....... 0.4 -- 4.0 -- -- --
Stock compensation.................. -- -- 0.2 -- -- --
Purchase of common stock............ -- -- -- (5.1) -- --
Retirement of treasury stock........ (0.5) -- (5.1) 5.1 -- --
Termination of a Stock Repurchase
Agreement (See Note 2)............ 2.5 0.2 11.2 -- 19.1 --
Change in carrying value of common
stock subject to redemption (See Note 2) -- -- -- -- 7.1 --
---- ------ -------- ------- ------- ------
Balance, December 31, 2003.......... 39.1 $ 3.9 $ 10.3 $ -- $ 345.5 $ 17.6
==== ====== ========= ======= ======= ======
The accompanying notes are an integral part of the financial statements.
28
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2003, 2002 and 2001
(in millions)
2003 2002 2001
-------- -------- -----------
(unaudited)
(See Note 2)
OPERATING ACTIVITIES
Net income................................................................ $ 14.6 $ 40.3 $ 18.8
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.......................................... 30.2 29.6 32.8
Deferred income taxes.................................................. (2.6) (1.5) (2.0)
Loss (gain) on sale of property and equipment, net..................... 0.3 (0.2) (0.7)
Write-off of property and equipment.................................... 8.0 1.1 3.3
Post-employment benefit costs.......................................... 1.4 1.5 7.3
Changes in assets and liabilities, net of businesses acquired:
Accounts receivable.................................................... (13.8) (5.0) 11.3
Inventories............................................................ (2.6) (5.5) 4.9
Other current assets................................................... 0.3 (2.7) (1.5)
Accounts payable and accrued liabilities............................... 1.9 4.1 (8.9)
Accrued taxes on income................................................ (2.5) 2.2 (11.1)
Other, net............................................................. 0.4 (1.2) (0.7)
-------- -------- --------
Net cash provided by operating activities.............................. 35.6 62.7 53.5
-------- -------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment................................ (32.8) (25.5) (24.2)
Acquisitions, net of cash acquired........................................ (28.4) (21.7) (10.3)
Proceeds from sale of property and equipment.............................. 1.2 0.3 4.3
Other, net................................................................ -- (1.0) 2.1
-------- -------- --------
Net cash used in investing activities.................................. (60.0) (47.9) (28.1)
-------- -------- --------
FINANCING ACTIVITIES
Net increase (decrease) in short-term debt................................ 2.2 1.7 (0.5)
Additions to long-term debt............................................... 275.0 91.0 23.6
Reductions in long-term debt.............................................. (249.3) (93.8) (23.6)
Purchase of common stock subject to redemption............................ -- (6.4) (5.4)
Purchase of common stock.................................................. (5.1) (3.8) (33.1)
Proceeds from common stock issued under employee stock option
and stock purchase plans................................................ 4.0 9.7 4.7
-------- -------- --------
Net cash provided by (used in) financing activities.................... 26.8 (1.6) (34.3)
-------- -------- --------
Effect of exchange rate changes on cash flows.......................... 12.4 1.3 (0.3)
-------- -------- --------
Increase (decrease) in cash and cash equivalents........................... 14.8 14.5 (9.2)
Cash and cash equivalents at beginning of year............................. 49.6 35.1 44.3
-------- -------- --------
Cash and cash equivalents at end of year................................... $ 64.4 $ 49.6 $ 35.1
======== ======== ========
The accompanying notes are an integral part of the financial statements.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except headcount, share and per share data)
(All information related to 2001 is unaudited.)
Note 1: Description of Business
Paxar Corporation ("Paxar" or the "Company") provides innovative
merchandising solutions to retailers and apparel manufacturers. The Company's
business includes the design, manufacture and distribution of a wide variety of
tags and labels, including labels with bar codes, as well as printers and the
associated supplies for customers who prefer the flexibility of creating labels
and tags on an "as-needed" basis in their facilities.
The Company has core competencies that range from graphic design to coating,
weaving, design of mechanical and electronic printers, and systems integration.
The Company believes that its vertical integration enhances product quality,
provides manufacturing economies and helps drive product innovation.
The Company manufactures finished labels and tags primarily for retailers
and apparel manufacturers. It also manufactures the printers, the paper and
fabric substrates, and the inks for in-plant tag and label printing systems. The
Company manufactures electronic bar code systems and hand-held mechanical
labelers for use in retail stores and distribution centers as well as for remote
tracking applications. The Company also designs integrated systems for large
in-store and warehouse applications, such as inventory control and distribution
management. In addition, the Company provides service for its printers and
mechanical labelers at customer locations worldwide and in its own facilities at
multiple locations.
The Company operates globally, with more than 60% of its sales outside the
United States. Organizationally, it manages its operations across three major
geographies: North, Central and South America ("Americas"), Europe, the Middle
East and Africa ("EMEA"), and the Asia Pacific region ("Asia Pacific"). The
Company's entire array of products and services is offered for sale across each
of the aforementioned geographies. During 2003, the Company opened new
operations in Bangladesh, Indonesia, Portugal, Morocco, Mauritius, Peru and
Vietnam. Additionally, the Company's operations in China, Honduras, Turkey and
Sri Lanka have expanded significantly during the last three years. As of
December 31, 2003, the Company had 74 manufacturing facilities and sales offices
located in 35 countries, and employed a total of approximately 8,400 persons
worldwide. In addition, the Company sells its products through independent
distributors in 15 countries in which Paxar does not sell directly to the final
customer.
Note 2: Restatement
In the fourth quarter of 2003, the Company reconsidered its accounting and
reporting matters related to its obligations to purchase redeemable common
shares under a Stock Repurchase Agreement (the "Agreement"), dated July 11,
2001, with its Chairman and Chief Executive Officer (the "Chairman"). In
accordance with Rule 5-02.28 of Regulation S-X, or Accounting Series Release No.
268, "Redeemable Preferred Stocks," (issued by the Securities and Exchange
Commission ("SEC") on July 27, 1979), as interpreted by the Emerging Issues Task
Force ("EITF") Topic D-98, "Classification and Measurement of Redeemable
Securities," (issued by the Financial Accounting Standards Board ("FASB") on
July 19, 2001), securities that are redeemable for cash or other assets must be
classified outside of shareholders' equity, if they are redeemable at the option
of the holder, as were the redeemable common shares owned by the Chairman. The
Company concluded that Rule 5-02.28, as interpreted by EITF Topic D-98, applied
to the redeemable common shares because the redemption features were not solely
within its control. While Rule 5-02.28 specifically addressed redeemable
preferred stocks, EITF Topic D-98 makes it clear that redeemable preferred stock
is analogous to other equity instruments, including common shares. Accordingly,
the Company determined that the redeemable common shares should have been
classified as temporary equity in its financial statements for periods ended
after July 11, 2001 until the Agreement was terminated on November 17, 2003. As
a result, the Company has restated its balance sheet as of December 31, 2002 to
report the redemption value of redeemable common stock outside of shareholders'
equity, as "Common Stock Subject to Redemption." The redeemable common stock was
previously reported within shareholders' equity. Corresponding revisions have
also been made to the consolidated statements of shareholders' equity and
comprehensive income.
As the Agreement was terminated on November 17, 2003, the redeemable common
shares owned by the Chairman are no longer subject to redemption and therefore
are classified as permanent equity in the financial statements at December 31,
2003.
30
As the Company was unable to have the reclassification adjustments
pertaining to its 2001 financial statements audited, the 2001 financial
statements and related note disclosures contained herein are unaudited and are
labeled as such.
Note 3: Summary of Significant Accounting Policies
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements and related note disclosures to conform to the presentation
used in the current period.
Principles of Consolidation
The consolidated financial statements include the accounts of Paxar and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of 90 days or less to be cash equivalents.
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 domestic and international presence and large, diversified
customer base serve to limit overall credit risk and the potential for future
product returns. Historically, the credit losses and sales returns, in the
aggregate, have not exceeded management's estimates.
Inventories
Inventories are stated at the lower of cost or market. The value of
inventories determined using the last-in, first-out method was $14.3 and $12.9
as of December 31, 2003 and 2002, respectively. The value of all other
inventories determined using the first-in, first-out method was $79.8 and $70.9
as of December 31, 2003 and 2002, respectively.
On an ongoing basis, the Company evaluates the composition of its
inventories and the adequacy of its allowance for slow-turning and obsolete
products. Market value of aged inventory is determined based on historical sales
trends, current market conditions, changes in customer demand and acceptance of
the Company's products, and current sales negotiations for this type of
inventory.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Upon
retirement or disposition, the cost and accumulated depreciation are removed
from the asset and accumulated depreciation accounts, and the net gain or loss
is reflected in income. Expenditures for maintenance and repairs are charged
against income as incurred. Significant expenditures for improvements and
renewals are capitalized.
31
Financial Instruments and Derivatives
The Company applies the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," 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, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." 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 periodically
entering into forward foreign exchange contracts. During 2003 and 2002, the
aggregate notional value of forward foreign exchange contracts the Company
entered into amounted to $55 and $50, respectively.
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 December
31, 2003 and 2002 for delivery of various currencies at various future dates and
the changes in fair value recorded in income in 2003, 2002 and 2001 were not
material. The notional value of outstanding forward foreign exchange contracts
at December 31, 2003 and 2002 was $19 and $20, respectively.
All financial instruments of the Company, with the exception of hedge
instruments, are carried at cost, which approximates fair value.
Goodwill and Other Intangibles
The Company has adopted SFAS No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all
business combinations be accounted for using the purchase method of accounting
and that certain intangible assets acquired in a business combination be
recognized as assets apart from goodwill. Under SFAS No. 142, which was adopted
as of January 1, 2002, goodwill is no longer amortized. Instead, the Company is
required to test goodwill for impairment at least annually using a fair value
approach, at the reporting unit level. In addition, the Company evaluates
goodwill for impairment if an 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 indicate an impairment
include the following: (1) significant under-performance relative to 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.
Prior to January 1, 2002, goodwill was amortized using the straight-line
method over a period not to exceed 40 years.
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. Except for certain write-offs of fixed assets the Company
recognized in connection with its restructuring and related initiatives, there
were no significant impairment losses related to long-lived assets in the past
three years.
32
Other Investments
Investments where the Company has the ability to exercise significant
influence over financial and accounting policies are accounted for under the
equity method of accounting. Investments where the Company does not have
significant influence and where the market value is not readily determinable are
accounted for under the cost method. Other investments are included in other
noncurrent assets in the accompanying consolidated balance sheets.
Deferred Financing Costs
Deferred financing costs are amortized by the straight-line method over the
terms of the related indebtedness.
Revenue Recognition
Revenue is recognized at the time of shipment and includes freight billed to
customers.
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," issued by SEC 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 a reporting period could be adversely affected.
In addition, in accordance with SAB No. 104, "Revenue Recognition, revised
and updated," the Company recognizes revenues from fixed price service contracts
on a pro-rata basis over the life of the contract as they are generally
performed evenly over the contract period. Revenues derived from other service
contracts are recognized when the services are performed.
The Company periodically enters 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, 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 supersedes 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 condition.
Research and Development
Research and development costs are expensed as incurred. The Company's
research and development expenses were approximately $7, $8 and $7 in 2003, 2002
and 2001, respectively.
Income Taxes
Deferred tax assets and liabilities are established based on differences
between the financial statement and tax bases of assets and liabilities using
presently enacted tax rates. The classification of deferred tax assets and
liabilities corresponds with the classification of the underlying assets and
liabilities giving rise to the difference. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred taxes are not provided on the portion of undistributed earnings of
non-US subsidiaries which is considered to be permanently reinvested.
33
Earnings per Share
Basic earnings per share is computed by dividing net income available to
common stockholders by the weighted average number of common shares, including
redeemable common shares, outstanding during the year. Diluted earnings per
share reflects the potential dilutive effect of additional common shares that
are issuable upon exercise of outstanding stock options.
Foreign Currency Translation
Assets and liabilities of the Company's foreign subsidiaries are translated
into US dollars using the exchange rates in effect at the balance sheet date.
Results of operations are translated using the average exchange rate prevailing
throughout the period. The effects of exchange rate fluctuations from
translating foreign currency assets and liabilities into US dollars are included
as a component of other comprehensive earnings within shareholders' equity.
Gains and losses resulting from foreign currency transactions are included in
net income and were not significant in the past three years.
Stock-Based Compensation
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:
2003 2002 2001
-------- -------- -------
(unaudited)
Net income, as reported................................... $ 14.6 $ 40.3 $ 18.8
Deduct: Stock-based employee compensation
expense determined under fair value based method
for all awards granted, net of related tax effects...... (4.4) (4.0) (2.3)
---- ------- -------
Pro forma net income..................................... $ 10.2 $ 36.3 $ 16.5
======= ======== ========
Earnings per Share:
Basic - as reported................................... $ 0.37 $ 1.02 $ 0.45
Basic - pro forma..................................... $ 0.26 $ 0.92 $ 0.40
Diluted - as reported................................. $ 0.37 $ 1.00 $ 0.44
Diluted - pro forma................................... $ 0.26 $ 0.90 $ 0.39
Use of Estimates
The preparation of these consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to use certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities." FIN No. 46 requires variable
interest entities to be consolidated if the equity investment at risk is not
sufficient to permit an entity to finance its activities without support from
other parties or the equity investors lack certain specified characteristics of
a controlling financial interest. The Company believes that the adoption of FIN
No. 46 will not have a material impact on its results of operations or financial
condition.
34
In April 2003, the FASB issued SFAS No. 149. 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. 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, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," 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 adoption of SFAS No.
149 did not have a material impact on the Company's 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.
Note 4: Inventories
The components of inventories are as follows:
At December 31, 2003 2002
-------------------------------------------------------------- ----------- -------
Raw materials.................................................. $ 44.5 $ 34.7
Work-in-process................................................ 7.8 8.1
Finished goods................................................. 58.1 52.4
----------- -----------
110.4 95.2
Allowance for obsolescence..................................... (16.3) (11.4)
----------- -----------
$ 94.1 $ 83.8
=========== ===========
If all inventories were reported on a first-in, first-out basis, inventories
would be approximately $2.0 and $2.1 higher at December 31, 2003 and 2002,
respectively.
Note 5: Other Current Assets
A summary of other current assets is as follows:
At December 31, 2003 2002
-------------------------------------------------------------- ----------- -------
Prepaid insurance.............................................. $ 1.1 $ 1.1
Prepaid expenses............................................... 6.8 5.9
Other receivables.............................................. 7.7 4.9
Others......................................................... 0.4 0.9
----------- -----------
$ 16.0 $ 12.8
=========== ===========
Note 6: Property, Plant and Equipment
A summary of property, plant and equipment is as follows:
At December 31, 2003 2002
-------------------------------------------------------------- ----------- -------
Machinery and equipment........................................ $ 244.4 $ 221.8
Building and building improvements............................. 63.2 56.3
Land........................................................... 4.3 5.3
----------- -----------
311.9 283.4
Accumulated depreciation....................................... (148.1) (128.5)
----------- -----------
$ 163.8 $ 154.9
=========== ===========
35
Years
-----
Estimated useful lives:
Buildings..................................................... 10 to 50
Building and leasehold improvements........................... 3 to 20
Machinery and equipment....................................... 2 to 15
Depreciation expense was $29.9 in 2003, $29.3 in 2002 and $26.8 in 2001.
Note 7: Goodwill and Other Intangibles
In accordance with SFAS No. 142, the Company completed its annual goodwill
impairment assessment during the fourth quarter of 2003, 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 existed at October 31, 2003, and there have been no
indicators of impairment since that date. A subsequent determination that this
goodwill is impaired, however, could have a significant adverse impact on the
Company's results of operations or financial condition.
The following table presents a reconciliation of reported net income and
earnings per share to adjusted net income and earnings per share had SFAS No.
142 been in effect at January 1, 2001:
2003 2002 2001
------- ------- ---------
(unaudited)
Reported net income.................................................. $ 14.6 $ 40.3 $ 18.8
Add back: Amortization of goodwill, net of income taxes.............. -- -- 5.4
-------- -------- --------
Adjusted net income.................................................. $ 14.6 $ 40.3 $ 24.2
======== ======== ========
Reported earnings per share (basic).................................. $ 0.37 $ 1.02 $ 0.45
Add back: Amortization of goodwill, net of income taxes.............. -- -- 0.13
-------- -------- ---------
Adjusted earnings per share (basic).................................. $ 0.37 $ 1.02 $ 0.58
======== ======== ========
Reported earnings per share (diluted)................................ $ 0.37 $ 1.00 $ 0.44
Add back: Amortization of goodwill, net of income taxes.............. -- -- 0.13
-------- -------- ---------
Adjusted earnings per share (diluted)................................ $ 0.37 $ 1.00 $ 0.57
======== ======== ========
The changes in the carrying amounts of goodwill for the years ended December
31, 2003 and 2002 are as follows:
Americas EMEA Asia Pacific Total
-------- ------ ------------ -------
Balance, January 1, 2002..................... $ 104.7 $ 59.8 $ 17.2 $ 181.7
Acquisitions................................. 6.3 3.3 0.1 9.7
Translation adjustments...................... -- 4.3 -- 4.3
--------- ------- --------- ---------
Balance, December 31, 2002................... 111.0 67.4 17.3 195.7
Acquisitions................................. 6.0 -- 3.2 9.2
Translation adjustments...................... -- 7.6 -- 7.6
--------- ------- --------- ---------
Balance, December 31, 2003................... $ 117.0 $ 75.0 $ 20.5 $ 212.5
========= ======== ======== =========
In September 2003, the Company acquired the business and assets of Alkahn
Labels, Inc. ("Alkahn") for $25.0. In connection with this acquisition, the
Company recorded goodwill of $7.1 based on its preliminary allocation of the
purchase price to the acquired assets and liabilities. This acquisition did not
have a material impact on the Company's results of operations.
A summary of other intangibles is as follows:
At December 31, 2003 2002
-------------------------------------------------------------- ----------- -------
Noncompete agreement........................................... $ 1.7 $ 1.7
Post-employment benefit obligation adjustments................. -- 0.6
---------- -----------
1.7 2.3
Accumulated amortization....................................... (0.6) (0.3)
----------- -----------
$ 1.1 $ 2.0
=========== ===========
36
Note 8: Accounts Payable and Accrued Liabilities
A summary of accounts payable and accrued liabilities is as follows:
At December 31, 2003 2002
-------------------------------------------------------------- ----------- --------
Accounts payable............................................... $ 45.3 $ 44.1
Accrued payroll costs.......................................... 13.0 17.1
Accrued interest............................................... 4.1 4.1
Advance service contracts...................................... 4.6 3.9
Customer incentives............................................ 2.1 1.9
Other accrued liabilities...................................... 34.0 21.1
----------- -----------
$ 103.1 $ 92.2
=========== ===========
Note 9: Long-Term Debt
A summary of long-term debt is as follows:
At December 31, 2003 2002
-------------------------------------------------------------- ----------- -------
6.74% Senior Notes............................................. $ 150.0 $ 150.0
Economic Development Revenue Bonds due 2011 and 2019........... 13.0 13.0
Revolving credit............................................... 27.2 --
Other.......................................................... 0.1 1.6
----------- -----------
190.3 164.6
Less current maturities........................................ -- 0.1
---------- -----------
$ 190.3 $ 164.5
=========== ===========
Maturities of long-term debt are as follows:
Years ending December 31,
--------------------------------------------------------------
2005.......................................................... $ 27.2
2008.......................................................... 150.0
Thereafter.................................................... 13.1
--------
$ 190.3
========
The Company has unsecured ten-year, $150 Senior Note agreements (the "Senior
Notes") due 2008 with institutional lenders, primarily insurance companies. The
Senior Notes bear interest at 6.74%, payable semi-annually.
Economic Development Revenue Bond financed facilities have been accounted
for as plant and equipment, and the related bonds are recorded as long-term
debt. The variable rate bonds for the years ended December 31, 2003 and 2002 had
weighted average interest rates of 1.15% and 1.52%, respectively.
In September 2002, the Company entered into a three-year, $150 revolving
credit agreement with a group of five domestic and international banks. The
agreement amended and restated the Company's previous revolving credit facility.
Under the credit agreement, the Company pays a facility fee determined by
reference to the ratio of debt to earnings before interest, taxes, depreciation
and amortization ("EBITDA"). The applicable percentage for the facility fee at
December 31, 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 debt to EBITDA
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 December
31, 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;
37
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.
Additionally, 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 common stock on and after July 1, 2002. The Company's maximum allowable
debt to EBITDA ratio, as defined, is as follows:
Prior to January 1, 2004...................................... 3.0 to 1
From January 1, 2004 to September 30, 2004.................... 3.5 to 1
After September 30, 2004...................................... 3.0 to 1
The Company's minimum allowable fixed charge coverage ratio, as defined, is
as follows:
Prior to October 1, 2003...................................... 1.5 to 1
From October 1, 2003 to September 30, 2004.................... 1.25 to 1
After September 30, 2004...................................... 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 reports provided to its banks and certain
other lending institutions its obligation to purchase common stock from its
Chairman under the July 11, 2001 Agreement. Since the obligation had been
omitted from the Company's compliance reports, the Company was in technical
default under the terms of the credit agreement. The Company obtained temporary
waivers from its banks in November 2003. As the Agreement was terminated on
November 17, 2003, the Company no longer has the obligation to purchase or
redeem any of its common stock. (See Note 19 of the Notes to Consolidated
Financial Statements. The lenders have indicated that permanent waivers will be
issued immediately after the filing of this annual report.
At December 31, 2003, the Company was in compliance with all debt covenants.
The Company discloses the details of the compliance calculation to its banks and
certain other lending institutions in a timely manner.
Average borrowings under the credit facility during 2003, 2002 and 2001 were
$22.1, $9.8 and $0.1, respectively, at average interest rates of 1.50%, 2.23%
and 2.20%. The borrowings outstanding under the credit facility at December 31,
2003 and 2002 were $27.2 and $0.0, respectively.
Interest expense was $11.9 in 2003, $11.6 in 2002 and $11.5 in 2001.
Note 10: Income Taxes
The components of the provision for income taxes are as follows:
At December 31, 2003 2002 2001
-------------------------------------------------------- ---------- -------- -------
(unaudited)
Federal
Current................................................ $ (1.3) $ (0.1) $ (3.9)
Deferred............................................... (2.2) (3.3) (1.2)
Foreign
Current................................................ 8.3 10.9 9.6
Deferred............................................... 0.7 1.4 (0.8)
State.................................................... 0.1 0.4 0.2
----- -------- --------
$ 5.6 $ 9.3 $ 3.9
======== ======== ========
38
The deferred tax assets and liabilities are as follows:
At December 31, 2003 2002 2001
----------------------------------------------------- -------------- -------- -------
(unaudited)
Deferred tax assets:
Tax credit and tax loss carryforwards................. $ 17.2 $ 9.0 $ 5.8
Other accrued liabilities and allowances............... 12.5 8.4 3.7
Deferred compensation.................................. 3.9 4.5 3.6
----- -------- --------
Total gross deferred tax assets................... 33.6 21.9 13.1
Valuation allowance.................................... (13.8) (6.4) (5.8)
----- -------- --------
Net deferred tax assets........................... 19.8 15.5 7.3
Deferred tax liabilities:
Depreciation and other property basis differences...... (8.5) (10.9) (9.4)
Other.................................................. (11.4) (6.2) (1.4)
------ --------- ---------
Net deferred tax liabilities...................... $ (0.1) $ (1.6) $ (3.5)
====== ======== ========
At December 31, 2003, the Company had tax credit and tax loss carryforwards
of $17.2, which will be available to reduce future taxable income. The tax
credit carryforwards of $1.4 and tax loss carryforwards of $15.8 are scheduled
to expire in 2006 and 2022, respectively.
A valuation allowance is established for those deferred tax assets for which
the Company believes that recovery is not more than likely. As of December 31,
2003, a valuation allowance of $13.8 existed for certain tax credit and tax loss
carryforwards.
The federal statutory income tax rate reconciles to the effective income tax
rate as follows:
At December 31, 2003 2002 2001
-------------------------------------------------------- ----------- -------- -------
(unaudited)
Federal statutory tax rate............................... 35.0% 35.0% 35.0%
State income tax, net of federal income tax benefit...... 0.5 0.5 0.7
Foreign taxes at different rates......................... (25.1) (16.6) --
Tax loss/credit carryforwards not benefited.............. 27.2 2.4 --
Tax credits utilized..................................... -- -- (5.0)
Nondeductible goodwill amortization...................... -- -- 6.2
Accruals no longer required.............................. (11.7) (2.4) --
All other, net........................................... 1.9 (0.1) (0.7)
-------- -------- --------
27.8% 18.8% 17.2%
======== ======== ========
The Company reviewed the status of tax accruals during 2003 and 2002, and
reduced the income tax provisions by the amounts determined to be in excess of
requirements. During 2001, the Company settled a dispute with International
Imaging Materials, Inc. ("IIMAK") regarding alternative minimum tax credits
carried forward and used by the Company in 2000 and 1999 in the amount of $3.5.
The Company paid IIMAK $2.4 and retained $1.1 in final settlement of the
dispute.
A provision has not been established for undistributed foreign earnings of
$190 at December 31, 2003, as those earnings have been permanently reinvested
for expansion of the foreign operations. At December 31, 2003, the estimated US
tax liability on the undistributed earnings was $37. Total foreign-based pre-tax
income was approximately $28, $60 and $43 for 2003, 2002, and 2001,
respectively.
Note 11: Segment Information
The Company develops, manufactures and markets apparel identification
products and bar code and pricing solutions products to customers primarily in
the retail and apparel manufacturing industries. In addition, the sale of the
Company's products usually result in the ongoing sale of supplies, replacement
parts and services. The Company's products are sold worldwide through a direct
sales force, through non-exclusive manufacturers' representatives, and through
international and export distributors and commission agents.
The Company's operations have been organized into three geographic segments
consisting of America, EMEA, and Asia Pacific. Each of the three geographic
segments develops, manufactures and markets the Company's products and services.
The results from the three geographic segments are regularly reviewed by the
Company's Chief Executive Officer and Chief Financial Officer to make decisions
about resources to be allocated to each segment and assess its performance.
Information regarding the operations of the Company in different geographic
segments is set forth below. The accounting policies of the geographic segments
are the same as those described in Note 2: Summary of Significant Accounting
Policies.
39
Years ended December 31, 2003 2002 2001
--------------------------------------------------------- ---------- -------- -------
(unaudited)
Sales to unaffiliated customers:
Americas................................................... $ 325.0 $ 332.4 $ 322.2
EMEA....................................................... 199.5 176.6 162.8
Asia Pacific............................................... 187.5 158.8 125.6
----- -------- --------
Total................................................. $ 712.0 $ 667.8 $ 610.6
======== ======== ========
Intersegment sales:
Americas................................................... $ 53.3 $ 64.1 $ 49.7
EMEA....................................................... 41.8 41.5 30.6
Asia Pacific............................................... 13.8 10.2 6.9
Eliminations............................................... (108.9) (115.8) (87.2)
------ -------- --------
Total................................................ $ -- $ -- $ --
======= ======= =======
Operating income (a):
Americas (b).............................................. $ 15.1 $ 32.5 $ 28.5
EMEA (b).................................................. (1.3) 14.2 8.1
Asia Pacific (b).......................................... 36.2 31.7 23.3
----- -------- --------
Total................................................ 50.0 78.4 59.9
Corporate expenses (b), (c)............................... (18.2) (17.6) (21.3)
Amortization of goodwill and other intangibles............ (0.3) (0.3) (6.0)
----- -------- --------
Total................................................ $ 31.5 $ 60.5 $ 32.6
======== ======== ========
(a) Certain reclassifications have been made to prior years' operating
income to conform to the presentation used in the current period.
(b) Americas, EMEA, Asia Pacific and Corporate expenses included the
integration/restructuring and other costs of $9.3, $9.4, $0.1 and
$1.6, respectively, in 2003, and $7.5, $4.1, $0.7 and $1.0 in 2001.
(c) In 2001, Corporate expenses included $7.3 of post-employment benefit
costs pertaining to the one-time, prior period service costs.
Depreciation and amortization:
Americas.................................................... $ 14.2 $ 16.2 $ 18.1
EMEA........................................................ 9.6 8.0 9.1
Asia Pacific................................................ 4.8 3.9 4.5
----- -------- --------
28.6 28.1 31.7
Corporate................................................... 1.6 1.5 1.1
----- -------- --------
Total.................................................. $ 30.2 $ 29.6 $ 32.8
======== ======== ========
Capital expenditures:
Americas.................................................... $ 9.3 $ 8.6 $ 7.1
EMEA........................................................ 10.8 10.3 9.5
Asia Pacific................................................ 12.0 5.3 3.7
----- -------- --------
32.1 24.2 20.3
Corporate................................................... 0.7 1.3 3.9
----- -------- --------
Total.................................................. $ 32.8 $ 25.5 $ 24.2
======== ======== ========
At December 31, 2003 2002
----------------------------------------------------------- ----------- -------
Long-lived assets:
Americas.................................................... $ 196.6 $ 193.9
EMEA........................................................ 125.0 115.2
Asia Pacific................................................ 50.6 37.2
----- --------
372.2 346.3
Corporate................................................... 5.2 6.3
----- --------
Total..................................................$ 377.4 $ 352.6
======== ========
40
At December 31, 2003 2002
---------------------------------------------------------- --------- -------
Total assets:
Americas....................................................$ 305.4 $ 292.1
EMEA........................................................ 228.5 207.6
Asia Pacific................................................ 124.4 91.1
----- --------
658.3 590.8
Corporate................................................... 56.6 48.8
----- --------
Total..................................................$ 714.9 $ 639.6
======== ========
The following table presents sales by product:
Years ended December 31, 2003 2002 2001
----------------------------------------------------------- -------- -------- ---------
(unaudited)
Apparel Identification Products.............................$ 482.5 $ 438.8 $ 379.0
Bar Code and Pricing Solutions.............................. 229.5 229.0 231.6
----- -------- --------
Total................................................. $ 712.0 $ 667.8 $ 610.6
======== ======== ========
The Company derived sales in the United States of $258.5 or 36.3% of the
total sales in 2003, $274.3 or 41.1% of the total sales in 2002, and $277.0 or
45.4% of the total sales in 2001. In addition, the Company's long-lived assets
in the United States as of December 31, 2003 and 2002, amounted to $167.1 and
$163.5, respectively.
No one customer accounted for more than 10% of the Company's revenues or
accounts receivable in 2003, 2002 or 2001.
Note 12: Supplemental Cash Flow Information
Cash paid for interest and income taxes is as follows:
Years ended December 31, 2003 2002 2001
---------------------------------------------------------- --------- -------- ----------
(unaudited)
Interest................................................... $ 11.5 $ 11.0 $ 9.8
Income taxes............................................... $ 12.4 $ 11.7 $ 15.7
Note 13: Shareholders' Equity
The Company has various stock-based compensation plans, including two stock
option plans, a long-term incentive plan, and an employee stock purchase plan.
The 1990 Employee Stock Option Plan (the "1990 Plan"), the 1997 Incentive
Stock Option Plan (the "1997 Plan") and the 2000 Long-Term Performance and
Incentive Plan (the "2000 Plan") provide for grants of incentive stock options,
non-qualified stock options and stock appreciation rights, which may be granted
in tandem with non-qualified stock options. The 2000 Plan also permits awards of
restricted stock and bonus stock and other similar stock-based compensation
arrangements. In addition, the shares previously authorized and available for
issuance under the 1997 Plan are available for issuance under the 2000 Plan. The
option price per share of incentive stock options cannot be less than 100% of
the market value at the date of grant. The option price per share of
non-qualified stock options and stock appreciation rights is determined by the
Board of Directors at its sole discretion.
As of December 31, 2003, 4,116,000 shares of common stock were reserved for
issuance upon the exercise of options granted to key employees and directors
under the 1997 Plan and the 2000 Plan, and 3,097,000 shares of common stock were
reserved for future grants under the 2000 Plan. In addition, under the 1990
Plan, 561,000 shares of common stock were reserved for issuance upon the
exercise of options granted to key employees and directors.
Under the 2000 Plan, the Company has granted certain key executives a
performance based award, which enables them to receive a future payment from the
Company, based on the appreciation in the fair market value, as defined in the
plan, of the Company's common stock in relation to a certain market index. The
Company records the changes in the fair value of the award amounts in income at
the end of each reporting period. In connection with this award, the Company
recognized compensation (benefits) expenses of $(0.4), $1.9 and $2.0 in 2003,
2002 and 2001, respectively.
41
Generally, options vest over four years and are exercisable for ten years.
A summary of outstanding stock options is as follows:
Number Weighted Average
of Shares Exercise Price
------------ ----------------
(in millions)
2001 (unaudited)
Outstanding at beginning of year......... 3.9 $ 10.81
Granted.................................. 0.9 $ 10.74
Exercised................................ (0.4) $ 8.10
Canceled/forfeited....................... (0.1) $ 10.34
----
Outstanding at end of year............... 4.3 $ 11.04
2002
Granted.................................. 1.1 $ 16.04
Exercised................................ (0.7) $ 10.85
Canceled/forfeited....................... (0.2) $ 12.19
----
Outstanding at end of year............... 4.5 $ 12.19
2003
Granted.................................. 0.7 $ 14.20
Exercised................................ (0.2) $ 8.93
Canceled/forfeited....................... (0.3) $ 14.25
----
Outstanding at end of year............... 4.7 $ 12.54
====
The weighted average fair value per option granted in 2003, 2002 and 2001
was $6.38, $7.38 and $5.03, respectively.
The following table summarizes information about stock options outstanding
as of December 31, 2003:
Weighted Average
Range of Options Weighted Average Remaining
Exercise Prices Outstanding Exercise Price Contractual Life
--------------- ----------- -------------- ----------------
(in millions) (years)
Options outstanding
$ 1.00 - $ 6.00 0.1 $ 5.29 0.8
$ 6.01 - $10.75 1.9 $ 9.46 5.8
$ 10.76 - $17.92 2.7 $ 14.93 6.2
----
4.7 $ 12.54 5.9
====
Options exercisable
$ 1.00 - $ 6.00 0.1 $ 5.29
$ 6.01 - $10.75 1.5 $ 9.32
$ 10.76 - $17.92 1.7 $ 14.71
----
3.3 $ 11.88
====
The estimated fair value of each option granted is calculated using the
Black-Scholes option-pricing model. The following summarizes the assumptions
used in the model:
2003 2002 2001
----------- -------- ---------
(unaudited)
Risk-free interest rate.............................. 3.0% 3.0% 4.4%
Expected years until exercise........................ 6.0 6.0 6.0
Expected stock volatility............................ 43.1% 41.5% 41.6%
Dividend yield....................................... 0.0 0.0 0.0
42
Employee Stock Purchase Plan
The Company maintains an employee stock purchase plan, which allows
employees to purchase a certain amount of stock at a discount of 20% to the
market price. The Company may sell up to 1,819,000 shares under this plan and,
as of December 31, 2003, 584,000 shares were available for future purchases. The
total number of shares and the average fair value of shares issued under this
plan were 128,000 and $12.40 in 2003, 101,000 and $15.66 in 2002, and 123,000
and $12.06 in 2001, respectively. The Company recognized stock-based
compensation expenses of $0.3 in 2003, 2002 and 2001.
Stock Repurchase Plan
The Company has a stock repurchase plan with an authorization from its Board
of Directors to use up to $150 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. The Company repurchased 469,000 shares for an aggregate price
of $5.1, or an average of $10.80 per share, in 2003; 285,000 shares for an
aggregate price of $3.8, or an average of $13.38 per share, in 2002; and
3,238,000 shares for an aggregate price of $33.1, or an average of $10.22 per
share, in 2001. Since the inception of the stock repurchase program, the Company
has repurchased 12,293,000 of its shares for an aggregate price of $122.0, or an
average of $9.92 per share. The Company immediately retired the repurchased
shares. As of December 31, 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 and
cash availability.
Note 14: Earnings per Common Share
The reconciliation of basic and diluted weighted average common shares
outstanding, in millions, is as follows:
Years ended December 31, 2003 2002 2001
-------------------------------------------------------- -------- -------- ----------
(unaudited)
Weighted average common shares (basic)................... 39.1 39.4 41.8
Options and warrants..................................... 0.4 0.9 0.6
----- -------- --------
Adjusted weighted average common shares (diluted)........ 39.5 40.3 42.4
===== ======== ========
Options and warrants to purchase 2,434,000, 847,000, and 2,949,000 shares of
common stock at December 31, 2003, 2002 and 2001, respectively, were not
included in the computation of diluted earnings per common share because the
effect of their inclusion would be antidilutive.
Note 15: Employee Savings Plans
The Company maintains a voluntary employee savings plan adopted pursuant to
Section 401(k) of the Internal Revenue Code. The Company's contribution under
the plan was $3.1, $2.9, and $2.4 in 2003, 2002 and 2001, respectively.
Note 16: Post-Employment Benefit Costs
During 2001, certain key executives of the Company signed employment
agreements with the Company under which the Company is obligated to provide
post-employment benefits as specified in the agreements. In connection with
these agreements, the Company recognized $1.4, $1.5 and $7.3 of post-employment
benefit costs in 2003, 2002 and 2001, respectively. In 2001, the post-employment
benefits costs pertained to the one-time, prior period service costs, which were
incurred as a result of the employment agreements. The post-employment benefit
costs were included within selling, general and administrative expenses in the
accompanying consolidated statements of income for the years ended December 31,
2003, 2002 and 2001.
The projected benefit obligation and unfunded benefit obligation were as
follows:
At December 31, 2003 2002
-------------------------------------------------------- ----------- -------
Projected benefit obligation............................. $ 8.1 $ 10.4
Unfunded benefit obligation.............................. $ 7.3 $ 8.9
43
Note 17: Commitments and Contingent Liabilities
Total rental expense for all operating leases amounted to $10.9 in 2003,
$8.1 in 2002 and $6.9 in 2001.
Minimum rental commitments for all non-cancelable operating leases are as
follows:
Years ending December 31,
-----------------------------------------------------
2004................................................. $ 9.7
2005................................................. 6.9
2006................................................. 5.1
2007................................................. 4.3
2008................................................. 3.9
Thereafter........................................... 9.8
--------
$ 39.7
========
The Company accrues severance expense for employees of its Italian
subsidiaries, as required by Italian statute. As of December 31, 2003 and 2002,
the amounts were $2.7 and $2.1, respectively, and were included in other
noncurrent liabilities in the accompanying consolidated balance sheets.
The Company has been named a potentially responsible party relating to
contamination that occurred at certain super-fund sites. Management does not
expect the ultimate outcome of this matter to be material in relation to the
Company's results of operations or financial condition.
In the ordinary course of business, the Company and its subsidiaries are
involved in certain disputes and litigation, none of which will, in the opinion
of management, have a material adverse effect on the Company's financial
condition or results of operations.
Note 18: Integration/Restructuring and Other Costs
In 2003, the Company incurred $20.4 of integration/restructuring and other
costs. Of this amount, $11.4 primarily pertained to: (1) the closing of several
manufacturing plants in the US and the UK, areas which have experienced a
migration of apparel manufacturing to the lower-production-cost countries; and
(2) headcount reductions, which resulted in a reduction of 320 manufacturing
positions and 160 managerial and administrative personnel primarily in the US
and the UK. In addition, the Company recorded $1.3 of integration/restructuring
and other costs in connection with the severance payment made to its former
Chief Executive Officer. Lastly, the Company recognized non-cash charges of $7.7
to write off the remaining net book value of an ERP system and certain other
fixed assets no longer in use .
The following table presents the changes in accruals pertaining to the
Company's restructuring and related initiatives for the year ended December 31,
2003:
Beginning Balance Ending Balance
January 1, 2003 Expenses Payments December 31, 2003
------------------- ----------- --------- -----------------
Severance...................... $ 0.2 $ 8.4 $ (7.2) $ 1.4
Termination of leases.......... -- 1.3 (0.2) 1.1
----- ------ ------ ------
$ 0.2 $ 9.7 $ (7.4) $ 2.5
====== ====== ====== ======
The remaining balance of $2.5 at December 31, 2003 is expected to be paid
during 2004.
In 2001, the Company recorded $13.3 of integration/restructuring and other
costs. Of this amount, $11.9 pertained to: (1) integration of certain
manufacturing facilities and the consolidation of production sites as the
Company closed and sold two manufacturing locations in North America and
rationalized operations in the UK, Italy and Spain; and (2) strategic
unification of the sales and marketing organization and a global organizational
reshaping, which resulted in termination of 350 manufacturing positions and 125
managerial and administrative personnel in the US, Canada, Hong Kong, the UK,
Italy and Turkey. In addition, the Company disposed of and wrote off $1.4 of
certain fixed assets in connection with its strategic initiatives.
44
Note 19: Common Stock Subject to Redemption
Under the July 11, 2001 Agreement (later terminated on November 17, 2003),
the Chairman had the option to sell to the Company, and the Company had the
obligation to purchase, the redeemable common shares owned by the Chairman and
those to which the Chairman became entitled through the exercise of his stock
compensation awards. All transactions under the Agreement were required to be
settled in cash. During any rolling 12-month period, the Chairman had the right
to sell up to 400,000 shares to the Company. In addition, if he did not exercise
his right to sell the full 400,000 shares in the preceding rolling 12-month
period, he had the right to sell up to 400,000 additional shares as to which he
did not exercise his option in such preceding periods. The timing of the sale
and the periods during which the Chairman had the right to redeem his common
shares were regulated by the terms of the Agreement. The purchase price for the
redeemable common shares was equal to the average of the closing prices for the
Company's common stock during the last seven trading days ending on the day
preceding the sale.
During 2001, the Company purchased 400,000 shares from the Chairman for
$5.4, or $13.40 per share. During 2002, the Company purchased 399,000 shares
from the Chairman for $6.4, or $15.96 per share. All of the shares purchased
from the Chairman were retired. The Company did not purchase any shares from the
Chairman in 2003.
Note 20: Related Party Transaction
The Company, on a month-to-month basis, leases a manufacturing facility in
Sayre, Pennsylvania, owned beneficially by its Chairman and his family members.
The rental expenses totaled $0.1 in 2003, 2002, and 2001.
Note 21: Condensed Quarterly Financial Data (unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2003
Sales............................ $ 163.0 $ 183.6 $ 170.7 $ 194.7
Gross profit..................... 61.0 70.1 64.7 71.3
Operating income................. 4.7 11.7 8.0 7.1
Net income....................... 1.4 7.0 3.9 2.3
Basic earnings per share......... 0.04 0.18 0.10 0.06
Diluted earnings per share....... 0.03 0.18 0.10 0.06
2002
Sales............................ $ 152.7 $ 173.1 $ 170.1 $ 171.9
Gross profit..................... 59.2 69.3 64.3 64.3
Operating income................. 12.6 19.9 15.4 12.6
Net income....................... 7.5 13.1 10.2 9.5
Basic earnings per share......... 0.19 0.33 0.26 0.24
Diluted earnings per share....... 0.19 0.32 0.25 0.24
45
PAXAR CORPORATION AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2003, 2002 and 2001
(in millions)
Additions
Charged
Balance at to Costs
Beginning and Balance at
Description of Year Expenses Other (1) Deductions (2) End of Year
----------------------------------------------- ------------ --------- ---------- -------------- ------------
Year ended December 31, 2003
Allowance for doubtful accounts............. $ 10.2 $ 2.1 $ 0.9 $ 3.2 $ 10.0
Year ended December 31, 2002
Allowance for doubtful accounts............. $ 9.3 $ 3.7 $ -- $ 2.8 $ 10.2
Year ended December 31, 2001 (unaudited)
Allowance for doubtful accounts............. $ 9.6 $ 2.8 $ 0.5 $ 3.6 $ 9.3
- ----------
(1) Allowance related to acquisitions.
(2) Write-off of uncollectible accounts, net of recoveries, and other.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Paxar Corporation
By: /s/ JACK R. PLAXE
-------------------------
Jack R. Plaxe
Senior Vice President and
Chief Financial Officer
Dated: March 15, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
By: /s/ ARTHUR HERSHAFT By: /s/ THOMAS R. LOEMKER
----------------------- -------------------------
Arthur Hershaft Thomas R. Loemker
Chairman of the Board of Directors, Director
President and Chief Executive Officer Dated: March 15, 2004
(Principal Executive Officer)
Dated: March 15, 2004 By: /s/ JAMES C. MCGRODDY
-------------------------
James C. McGroddy
By: /s/ JACK BECKER Director
------------------- Dated: March 15, 2004
Jack Becker
Director
Dated: March 15, 2004 By: /s/ DAVID E. MCKINNEY
-------------------------
David E. McKinney
By: /s/ LEO BENATAR Director
------------------- Dated: March 15, 2004
Leo Benatar
Director
Dated: March 15, 2004 By: /s/ JAMES R. PAINTER
------------------------
James R. Painter
By: /s/ JOYCE F. BROWN Director
---------------------- Dated: March 15, 2004
Joyce F. Brown
Director
Dated: March 15, 2004 By: /s/ ROGER M. WIDMANN
------------------------
Roger M. Widmann
By: /s/ HARVEY L. GANIS Director
----------------------- Dated: March 15, 2004
Harvey L. Ganis
Director
Dated: March 15, 2004 By: /s/ JACK R. PLAXE
---------------------
Jack R. Plaxe
By: Senior Vice President and
----------------------- Chief Financial Officer
Victor Hershaft Dated: March 15, 2004
Director
Dated: March 15, 2004
By: /s/ LARRY M. SEGALL
-----------------------
By: /s/ DAVID L. KOLB Larry M. Segall
--------------------- Vice President and Controller
David L. Kolb (Chief Accounting Officer)
Director Dated: March 15, 2004
Dated: March 15, 2004
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