================================================================================
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, 2004
-----------------
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to_________
Commission File Number: 1-9493
------
Paxar Corporation
-----------------
(Exact name of registrant as specified in its charter)
New York 13-5670050
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Corporate Park Drive
White Plains, New York 10604
--------------------------- -----
(Address of principal (Zip Code)
executive offices)
914-697-6800
------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $0.10 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. |X|
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, 2004 was approximately
$691,904,000. On such date, the closing price of the registrant's Common Stock,
as quoted on the New York Stock Exchange, was $19.52.
The registrant had 39,644,756 shares of Common Stock outstanding as of March
15, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of 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 26, 2005, are incorporated
by reference into Part II, Item 5, and Part III.
================================================================================
PART I
Item 1: Business
Paxar Corporation ("Paxar" or the "Company"), incorporated in New York in
1946, is a global leader in providing innovative merchandising systems for the
retail and apparel manufacturing industries. The Company's business includes the
design, manufacture and distribution of a wide variety of labels and tags,
including labels with bar codes and/or RFID (or radio frequency identification)
tags, as well as printers, software control systems and related supplies. Brand
development, information services and supply chain management help differentiate
the Company as a global leader in retail product identification.
The Company has core competencies that range from graphic design to coating,
laminating, slitting and weaving of garment and other similar labels and tags,
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,
brand apparel companies and contract manufacturers. It also manufactures the
printers, paper and fabric substrates, and inks for in-plant tag and label
printing systems. The Company manufactures electronic bar code and RFID systems
and handheld 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 at customer locations worldwide and offers a mail-in
repair program for its mechanical labelers.
The Company operates globally, with more than 65% of its sales outside the
United States. The Company's operations have been organized into three
geographic segments consisting of (1) the operations principally in North
America and Latin America ("Americas"); (2) Europe, the Middle East and Africa
("EMEA"); and (3) the Asia Pacific region ("Asia Pacific"). The Company's entire
array of products and services is offered for sale across each of those
geographic segments. As of December 31, 2004, the Company had 73 manufacturing
facilities and sales offices located in 36 countries and employed approximately
9,700 people worldwide. In addition, the Company sells its products through
independent distributors in 16 countries in which it does not sell directly to
the final customer.
Recent Event
Closure of the Manufacturing Operations in Hillsville, Virginia
In January 2005, the Company announced the consolidation of its U.S. Woven
Label manufacturing facilities as part of its continuing effort to improve
operating efficiency and costs. Manufacturing operations at its Hillsville,
Virginia plant will be moved into the Weston, West Virginia facility. The
Company anticipates that the closure of the Hillsville facility will be
completed by December 31, 2005.
The Company estimates that the closure of the Hillsville plant will result
in (1) a charge of approximately $1.4 million for severance benefits for the
Company's 140 manufacturing employees and 30 customer service and administrative
personnel, (2) a charge of approximately $0.4 million for the relocation of
machinery and equipment currently located at the Hillsville plant and (3) a
charge of approximately $0.5 million for other related costs, which include the
costs associated with the manufacturing facility, the termination of the lease
thereof and outplacement services for the Hillsville plant's employees.
Accordingly, the Company expects that the estimated total cost associated with
the closure of the Hillsville plant operation will be approximately $2.3
million. Of the estimated total cost, the Company estimates that the closure of
the Hillsville plant will result in approximately $1.9 million of cash
expenditures.
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 Company uses proprietary processes it has
developed to coat, weave, dye, finish and print the printed labels that it
manufactures. Heat transfer labels are produced using the technology that
combines specially formulated inks and adhesives in a process involving
heat, pressure and dwell time. 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.
1
The Company also prints tags for retailers and apparel manufacturers.
The tags can be either plain black and white tags with human-readable
information (letters and numbers) and a bar code or multi-color graphic tags
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 (e.g., price, department,
etc.). In addition, the Company provides these tags on specialty substrates
such as plastic, translucent film and metals.
The Company operates service bureaus around the world to provide
customers with rapid delivery of labels and tags, often in fewer than 48
hours.
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 print permanent bar code labels on fabric using
specialty stocks and inks. Permanent bar codes provide the manufacturers
with information regarding the date and place of production.
Paxar produces all the components of its apparel systems, including
printers, fabrics, inks and printing accessories such as label cutters and
stackers. The sale of a system usually results in ongoing sales of inks,
fabrics, services and replacement parts to the customer.
Paxar's Web-based information services give marketers and retailers of
branded and private label 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 site and to print that information
in their facilities on Paxar label stock.
Manufacturers attach the labels and tags to completed garments to
provide brand and other promotional information to support point-of-sale
merchandising.
The Company has the following capabilities and resources that it
believes set it apart from its competitors, and it constantly strives to
strengthen them:
o Paxar's extensive creative design services that are an important
value-added component of its relationship with its customers;
o Paxar's global presence enables "source tagging" of garments by
the manufacturer wherever the garments are produced;
o Paxar's ability to provide electronic global information services
ensures data integrity; and
o Paxar's state-of-the-art presses and other equipment enables
"just-in-time-delivery" of tags meeting customer specifications.
2. Bar Code ("BC") and Pricing Solutions ("PS") (collectively, "BCPS")
The Company manufactures and markets thermal transfer and thermal direct
printers, which produce high quality images on a wide variety of papers and
other materials. 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 and/or
RFID tags on a given item, download the variable data for the specific label
to be printed, and then encode the RFID tags and/or print the bar code and
human readable data and, in some cases, apply the label directly to the
item.
The Company's printers are available in handheld, portable and tabletop
models and are supported with a wide range of accessories, supplies and
services.
2
BC's customers are primarily in the retail industry, particularly mass
merchandisers, large retail stores, distribution centers and consumer goods
manufacturers. Bar coding is essential to the optimization of integrated
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.
In the rapidly emerging field of RFID, the Company introduced a tabletop
printer/encoder specifically designed to write to RFID 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.
In addition, the Company has invested in manufacturing equipment in its
Miamisburg, Ohio plant allowing it to purchase rolls of RFID transponders
from any of several vendors, cut those transponders into individual tags and
insert the tags into finished "smart labels" at high speeds. Produced in a
strict electrostatic discharge controlled environment with stringent
processes and high quality components, every RFID tag is "twice tested,"
once before insertion into the label, and again when the label is completed
to verify data encoding performance; thus, the Company believes that its
RFID tags are highly reliable.
The Company believes that RFID technology, with its capability to
transmit product serial numbers or other encoded information wirelessly to a
scanner without the need for human intervention, is creating 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.
The Company's handheld mechanical labelers print human-readable
information for retail store and distribution center price and inventory
marking, as well as promotional item marking. Additionally, the Company's PS
products are used for food freshness dating and for component identification
in the automotive, healthcare and other industries. In addition to
manufacturing the labelers, 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:
2004 2003 2002
------------------ ------------------ ----------------
Apparel Identification Products............. $ 566.2 70.4% $ 482.5 67.8% $ 438.8 65.7%
Bar Code and Pricing Solutions.............. 238.2 29.6 229.5 32.2 229.0 34.3
-------- ------- -------- ------- -------- -------
Total................................... $ 804.4 100.0% $ 712.0 100.0% $ 667.8 100.0%
======== ======= ======== ======= ======== =======
Customers
Most of the Company's customers are retailers, branded apparel companies or
contract manufacturers. Many retailers use Paxar products and services in their
in-store locations or in their distribution centers. The most frequently used
applications include: item and shelf labeling for product identification,
branding, pricing and merchandising, and carton and pallet labeling to
facilitate the efficient movement of goods from suppliers to consumers. These
retailers also typically qualify and specify Paxar as an approved supplier of
labels and tags to contractors that manufacture private label and branded
apparel or other products. Manufacturers of branded products will do the same if
they outsource their production. 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 2004, 2003 or 2002.
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 information services. In addition, while the Company
strives to maintain its lowest-cost-producer profile, it is also 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 a market leader in fabric labels,
apparel systems and PS products and services for apparel manufacturers and
retailers and that it is among the largest suppliers of graphic tags for apparel
and tickets, tags, labels and thermal printers for bar code applications in the
retail supply chain. The Company competes, domestically and internationally,
with a number of small and medium-sized companies in addition to four larger
companies. The larger competitors are: Avery Dennison Corporation in apparel
labels and tags; Zebra Technologies Corporation in BC printers; R.R. Donnelley &
Sons Co. in BC labels; and Checkpoint Systems, Inc. in PS products.
3
Sales and Marketing
Most 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 245 sales
people in Americas; 171 sales people in EMEA; and 72 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.
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. In
addition, the Company markets its PS products through office-supply retailers
and by a catalog, which provides a cost-effective way for the Company to reach
smaller retailers.
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 its
raw materials are in good supply to meet its reasonably foreseeable production
requirements and are available from multiple sources. Nonetheless, shortages of
raw materials could arise in the future, which could adversely impact the
Company's ability to timely deliver its products and its customer relations.
Additionally, the Company's raw materials principally derived from petroleum
are subject to price fluctuations based on changes in petroleum prices,
availability and other factors. The Company purchases these materials from a
number of suppliers. Significant increases in prices for these materials could
adversely affect the Company's earnings if selling prices for its finished
products are not adjusted or if adjustments significantly trail the increases in
prices for these materials.
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 $66 million and $57
million at December 31, 2004 and 2003, 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 is 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, $7 million and $8 million in 2004, 2003 and 2002,
respectively. The Company had 78 research and development personnel as of
December 31, 2004.
4
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.
Executive Officers of the Registrant
The following presents information regarding the executive officers of the
Company:
Arthur Hershaft, 67, 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.
Paul Chu, 51, President, Asia Pacific since February 2002 and Managing
Director of Asia Pacific since November 1996.
John P. Jordan, 59, Vice President and Treasurer since August 1998.
George K. Hoffman, 53, President, Americas Apparel Group since March 2003
and Vice President and General Manager of the Printed Label business for
North America since October 2002. Prior to that time, he was Chief
Executive Officer of eRevenue, Inc. since July 1999.
James L. Martin, 58, President, Bar Code Pricing Solutions Group since
January 2004, President, Bar Code and Pricing Solutions since March 2003,
Vice President and General Manager of the Bar Code business since
February 2003, Global Business Manager of the Pricing Solutions business
since January 2002 and Vice President and General Manager of the Pricing
Solutions business since April 1996.
Larry M. Segall, 50, 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, 67, Vice President, General Counsel and Secretary since
September 1999.
James Wrigley, 51, President, EMEA since November 2002 and President,
Europe since June 1999.
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, 2006.
Employees
The Company had approximately 9,700 employees worldwide as of December 31,
2004. Approximately 150 production employees of the Company in three locations
in the U.S. are covered by four different union contracts, which expire at
various times from January 2006 to November 2007. The Company has not had any
material labor disputes and believes that it has good employee relations.
5
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.)
Available Information
Paxar files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission ("SEC"). You may
read and copy any document Paxar files at the SEC's public reference room at
Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for information on the public reference room. The SEC maintains a
Web site (www.sec.gov) that contains annual, quarterly and current reports,
proxy statements and other information that issuers (including Paxar) file
electronically with the SEC.
Paxar makes available free of charge through its Web site (www.paxar.com)
its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, Forms 3, 4 and 5 filed on behalf of directors and executive
officers, and any amendments to those reports filed or furnished pursuant to the
Securities Exchange Act of 1934 as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the SEC.
Paxar's most recent annual report on Form 10-K, its quarterly reports on
Form 10-Q for the current fiscal year and its most recent proxy statement can be
viewed through its Web site, although in some cases these documents are not
available on its site as soon as they are available on the SEC's site. The
information on Paxar's Web site is not incorporated by reference into this
report.
In addition, Paxar will provide, upon written request and without charge,
paper or electronic copies of its reports and other filings made with the SEC.
Requests for such filings should be directed to Investor Relations, Paxar
Corporation, 105 Corporate Park Drive, White Plains, NY 10604.
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 its 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 U.S. or international
markets;
o Rate of migration of garment manufacturing industry moving from the
U.S. 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.
6
Additionally, the Company's forward-looking statements are predicated upon
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 U.S. dollar;
o Low or negative economic growth, particularly in the U.S., the U.K. or
the countries in Western 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 to meet the needs of its businesses;
o There are no substantial adverse changes in the availability and
pricing of the Company's petroleum-derived raw materials;
o The Company's Enterprise Resource Planning systems can be successfully
integrated into the Company's operations;
o There are no adverse changes in U.S. and foreign tax laws and
accounting principles generally accepted in the U.S. that would
require the Company to establish an additional income tax provision
for the U.S. and other taxes arising from repatriation of the
undistributed earnings of non-U.S. subsidiaries;
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.
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
----------------------------------- ------- ------ ---------- --------------------------------
Thief River Falls, Minnesota....... 23,200 Leased 2011 Administrative and manufacturing
Lenoir, North Carolina............. 117,000 Owned Administrative and manufacturing
Lenoir, North Carolina............. 48,000 Leased 2009 Manufacturing and warehousing
Lenoir, North Carolina............. 10,000 Leased Monthly Manufacturing
Lenoir, North Carolina............. 10,000 Leased 2005 Warehousing
Fair Lawn, New Jersey.............. 20,221 Leased 2011 Administrative
Orangeburg, New York............... 60,000 Owned Administrative and manufacturing
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 2011 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.............. 89,000 Owned Administrative and manufacturing
Ontario, Canada.................... 37,169 Leased 2008 Administrative and warehousing
Antioquia, Colombia................ 26,000 Leased 2005 Administrative and manufacturing
Cortes, Honduras................... 44,595 Leased 2008 Administrative and manufacturing
Lerma, Mexico...................... 37,652 Leased 2005 Administrative and manufacturing
Mexico City, Mexico................ 42,635 Owned Administrative and manufacturing
Sydney, Australia.................. 17,248 Owned Administrative and manufacturing
7
Square Owned/ Lease
Location Footage Leased Expiration Used For
----------------------------------- ------- ------ ---------- --------------------------------
Dhaka, Bangladesh.................. 66,694 Leased 2032 Administrative and manufacturing
Panyu City, China.................. 57,163 Owned Administrative
Panyu City, China.................. 205,429 Leased 2005 Administrative and manufacturing
Panyu City, China.................. 198,526 Leased 2012 Manufacturing
Panyu City, China.................. 177,102 Leased 2013 Manufacturing
San Po Kong, China................. 15,862 Leased 2006 Administrative
San Po Kong, China................. 35,838 Leased 2007 Administrative and warehousing
Shanghai, China.................... 23,844 Leased 2014 Manufacturing
Hong Kong.......................... 110,102 Leased 2005 Administrative and manufacturing
Hong Kong.......................... 160,265 Leased 2006 Administrative and manufacturing
Indonesia.......................... 15,885 Leased 2007 Administrative and manufacturing
South Korea........................ 10,800 Leased 2005 Administrative and warehousing
Malaysia........................... 12,000 Leased 2005 Administrative and manufacturing
Singapore.......................... 19,000 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
Harlow, England.................... 62,500 Leased 2013 Administrative and manufacturing
Nottingham, England................ 28,606 Owned Administrative and manufacturing
Runcorn, England................... 37,237 Leased 2005 Administrative and manufacturing
Runcorn, England................... 59,864 Leased 2011 Administrative and manufacturing
Fontenay Sous Bois, France......... 40,838 Leased 2012 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................ 29,064 Leased 2008 Administrative and manufacturing
Gaupne, Norway..................... 37,458 Owned Administrative and manufacturing
Bucharest, Romania................. 25,834 Leased 2006 Administrative and manufacturing
Barcelona, Spain................... 16,146 Leased 2006 Administrative and warehousing
Istanbul, Turkey................... 45,210 Leased 2006 Administrative and warehousing
Saray, Turkey...................... 48,439 Owned 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 impact on the
Company's results of operations or financial condition.
Item 4: Submission of Matters to a Vote of Security Holders
None.
8
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded on the New York Stock Exchange using
the symbol "PXR." The following table sets forth the 2004 and 2003 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 2004
First Quarter....................... $ 15.34 $ 12.90
Second Quarter...................... 19.53 14.55
Third Quarter....................... 23.09 17.81
Fourth Quarter...................... 24.19 20.80
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
As of March 8, 2005, there were approximately 1,400 record holders of the
Company's common stock.
The Company has never paid any cash dividends on its common stock and does
not plan to pay cash dividends on its common stock in the near term.
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, 2004, 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, 2004, and Management's Discussion and Analysis of Financial
Condition and Results of Operations.
All amounts are stated in millions, except per share data.
2004 2003 2002 (d) 2001 (d) 2000
------- ------- --------- -------- ------
OPERATING RESULTS
Sales (a)...................................................... $804.4 $712.0 $ 667.8 $610.6 $645.4
Operating income (b)........................................... 72.5 31.5 60.5 32.6 60.4
Net income (c)................................................. 47.4 14.6 40.3 18.8 77.5
Basic earnings per share (c)................................... 1.20 0.37 1.02 0.45 1.74
Diluted earnings per share (c)................................. 1.17 0.37 1.00 0.44 1.73
FINANCIAL CONDITION
Total assets................................................... $773.7 $714.9 $639.6 $583.8 $603.4
Total debt..................................................... 167.0 194.6 166.7 166.4 166.8
Common stock subject to redemption (d)......................... -- -- 37.6 46.6 --
Shareholders' equity (d)....................................... 440.6 377.3 300.0 239.5 303.3
Total debt as a percent of total capital....................... 27.5% 34.0% 33.1% 36.8% 35.5%
- ----------
(a) Includes $13.8 sales by International Imaging Materials, Inc. ("IIMAK") in
2000.
(b) Includes the integration/restructuring and other costs of $20.4, $13.3 and
$1.9 in 2003, 2001 and 2000, 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 and $5.7 in
2001 and 2000, respectively; and $2.1 of IIMAK's operating income in 2000.
(c) Includes the effect of items cited in note (b) and $50.3 ($40.3 after taxes)
of gain on sale of IIMAK in 2000.
(d) Reflects certain restatement for 2002 and 2001. (See Note 2 of the Notes to
the Consolidated Financial Statements.)
9
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 employee,
share and per share data.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management has identified the following policies and estimates as critical
to the Company's business operations and the understanding of the Company's
results of operations. Note that the preparation of this Annual Report on Form
10-K requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the Company's financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates and the differences could be material.
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment
and includes freight billed to customers. In addition, in accordance with Staff
Accounting Bulletin ("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.
SAB No. 101, "Revenue Recognition in Financial Statements," 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.
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. 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.
Sales Returns and Allowances
Management must make estimates of potential future product returns, billing
adjustments and allowances related to current period product revenues. In
establishing a provision for sales returns and allowances, management relies
principally on the Company's history of product return rates as well as customer
service billing adjustments and allowances, each of which is regularly analyzed.
Management also considers (1) current economic trends, (2) changes in customer
demand for the Company's products and (3) acceptance of the Company's products
in the marketplace when evaluating the adequacy of the Company's provision for
sales returns and allowances. Historically, the Company has not experienced a
significant change in its product return rates resulting from these factors. For
the years ended December 31, 2004, 2003 and 2002, the provision for sales
returns and allowances accounted for as a reduction to gross sales was not
material.
Allowance for Doubtful Accounts
Management makes judgments, based on established aging policy, historical
experience and future expectations, as to the collectibility of the Company's
accounts receivable, and establishes an allowance for doubtful accounts. The
allowance for doubtful accounts is used to reduce gross trade receivables to
their estimated net realizable value. When evaluating the adequacy of the
allowance for doubtful accounts, management specifically analyzes customer
specific allowances, amounts based upon an aging schedule, historical bad debt
experience, customer concentrations, customer creditworthiness and current
trends. The Company's accounts receivable balances were $132.5, net of
allowances of $12.3, at December 31, 2004, and $127.0, net of allowances of
$10.0, at December 31, 2003.
10
Inventories
Inventories are stated at the lower of cost or market value and are
categorized as raw materials, work-in-process or finished goods. The value of
inventories determined using the last-in, first-out method was $11.7 and $14.3
as of December 31, 2004 and 2003, respectively. The value of all other
inventories determined using the first-in, first-out method was $89.6 and $79.8
as of December 31, 2004 and 2003, 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, acceptance of the
Company's products, and current sales activities 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 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 impairment by comparing the implied fair values of its
reporting units with their respective carrying amounts, including goodwill.
During the fourth quarter of 2004, 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, 2004, 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 that the Company
recognized in connection with its restructuring and related initiatives in 2003,
there were no significant impairment losses related to long-lived assets in the
past three years.
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.
Deferred taxes are not provided on the portion of undistributed earnings of
non-U.S. subsidiaries, which is considered to be permanently reinvested. In the
event that management changes its consideration on permanently reinvesting the
undistributed earnings of its non-U.S. subsidiaries, circumstances change in
future periods, or there is a change in accounting principles generally accepted
in the United States, the Company may need to establish an additional income tax
provision for the U.S. and other taxes arising from repatriation, which could
materially impact its results of operations.
11
On October 22, 2004, the President of United States signed into law the
American Jobs Creation Act of 2004 (the "Act"). The Act provides, among other
things, a special one-time dividends received deduction for certain earnings
from outside the U.S. that are repatriated (as defined in the Act) on or before
December 31, 2005. Currently, the Company is evaluating the effects of the Act
and has not yet determined whether the Company will take advantage of the
earnings repatriation provision of the Act. The Company estimates that the range
of possible amounts of undistributed foreign earnings that may be repatriated to
be $0 to $235. The related potential range of income tax effects of such
repatriation under the earnings repatriation provision of the Act is estimated
to be $0 to $7.
RESULTS OF OPERATIONS
Overview
In order to better serve a customer base consisting predominantly of
retailers, branded apparel companies and contract manufacturer, the Company has
organized its operations into three geographic segments consisting of the
following:
(1) The Company's operations principally in North America and Latin
America ("Americas");
(2) Europe, the Middle East and Africa ("EMEA"); and
(3) The Asia Pacific region ("Asia Pacific")
The Company's results of operations for 2004, 2003 and 2002, in dollars and
as a percent of sales, are presented below:
2004 2003 2002
---------------- ---------------- ----------------
Sales............................................. $ 804.4 100.0% $ 712.0 100.0% $ 667.8 100.0%
Cost of sales..................................... 492.7 61.3 444.9 62.5 410.7 61.5
-------- ------- -------- ------- -------- -------
Gross profit.................................. 311.7 38.7 267.1 37.5 257.1 38.5
Selling, general and administrative expenses...... 239.2 29.7 215.2 30.2 196.6 29.4
Integration/restructuring and other costs......... -- -- 20.4 2.9 -- --
-------- ------- -------- ------- -------- -------
Operating income.............................. 72.5 9.0 31.5 4.4 60.5 9.1
Interest expense, net............................. 10.7 1.3 11.3 1.6 10.9 1.7
-------- ------- -------- ------- -------- -------
Income before taxes........................... 61.8 7.7 20.2 2.8 49.6 7.4
Taxes on income................................... 14.4 1.8 5.6 0.7 9.3 1.4
-------- ------- -------- ------- -------- -------
Net income.................................... $ 47.4 5.9% $ 14.6 2.1% $ 40.3 6.0%
======== ======= ======== ======= ======== =======
The Company exceeded its goals and posted better-than-expected results of
operations in 2004. For the year ended December 31, 2004, the Company's sales
increased $92.4, or 13.0%, to $804.4 in 2004, compared with $712.0 in 2003. Of
the total increase, $50.5 was attributable to organic sales growth, which
excludes acquisitions and the impact of changes in foreign exchange rates. These
comparable year-over-year results reflect the combination of an improved global
economic environment, notably in the retail and apparel manufacturing
industries, which resulted in increased customer demand across the entire range
of the Company's products, strong growth in the Company's core Asia Pacific
operations and increased penetration of the Company's operations in the emerging
markets of Latin America, EMEA and Asia Pacific. In addition, $22.3 of the
increase was attributable to the September 2003 acquisition of Alkahn Labels,
Inc. ("Alkahn") and $19.6 of the increase was attributable to the benefits
derived from the continued weakness in the U.S. dollar against the Canadian
dollar, euro, British pound, Australian dollar and certain other foreign
currencies.
In 2003, the Company's sales increased $44.2, or 6.6%, to $712.0 from $667.8
in 2002. The sales increase was primarily attributable to the favorable impact
of changes in foreign exchange rates of $26.6 and the impact of acquisitions of
$17.5.
Management believes that the Company was able to deliver sales growth over
the prior year periods through a more concentrated emphasis on maintaining and
executing as a unified global operating company, maintaining balance and
diversification throughout its markets, seeking leadership in niche markets and
a continued focus on providing its customers with value-added products and
solutions, outstanding service, consistent quality and on-time deliveries. In
addition, with the September 2003 Alkahn acquisition, the Company continued to
successfully execute on its longstanding strategy of striving for long-term
sustainable growth 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 continue to compete successfully.
12
Operating income was $72.5 in 2004, compared with $31.5 in 2003 and $60.5 in
2002. As a percent of sales, operating income was 9.0% in 2004, compared with
4.4% in 2003 and 9.1% in 2002. The operating results for 2003 included the
integration/restructuring and other costs of $20.4.
Sales
The following table presents sales by geographic operating segment:
2004 2003 2002
------------------ ------------------ -----------------
Americas........................ $ 355.2 44.2% $ 332.1 46.7% $ 338.0 50.7%
EMEA............................ 219.9 27.3 199.5 28.0 176.6 26.4
Asia Pacific.................... 229.3 28.5 180.4 25.3 153.2 22.9
-------- ------- -------- ------- -------- -------
Total......................... $ 804.4 100.0% $ 712.0 100.0% $ 667.8 100.0%
======== ======= ======== ======= ======== =======
Americas' sales include sales delivered through the Company's operations
principally in North America and Latin America. Sales increased $23.1, or 7.0%,
to $355.2 in 2004, compared with $332.1 in 2003. The increase was attributable
to organic sales growth of $7.9, the impact of the Alkahn acquisition of $13.5
and the favorable impact of changes in foreign exchange rates of $1.7.
Management notes that organic sales gains in apparel identification products
were largely driven by the Company's operations in Latin America and to a lesser
degree by an improved economic environment in the U.S. The economic improvement
also benefited sales of bar code and pricing solutions products. Additionally,
many of the Company's customers continued to move their production outside the
U.S. where they have realized labor cost and operating performance efficiencies.
This has resulted in a shift in sales mix primarily to Latin America and the
Asia Pacific region. In 2003, sales decreased $5.9, or 1.7%, to $332.1, compared
with $338.0 in 2002. The decrease was attributable to the challenging economic
and retail conditions and the sales migration trend, which strengthened
significantly in 2003, offset by the favorable impact of changes in foreign
exchange rates and the impact of acquisitions.
EMEA's sales, which include sales delivered through the Company's operations
in 12 European countries, the Middle East and Africa, increased $20.4, or 10.2%,
to $219.9 in 2004, compared with $199.5 in 2003. The increase was attributable
to organic sales growth of $2.5 and the favorable impact of changes in foreign
exchange rates of $17.9. Management notes that despite the continued sales
migration to Asia Pacific experienced by EMEA in 2004, the Company's operations
in Germany, Italy, Belgium and Turkey posted solid volume gains. In addition,
the Company's recently established operations in Romania, Morocco, Mauritius,
Portugal and United Arab Emirates contributed to EMEA's sales growth. In 2003,
sales increased $22.9, or 13.0%, to $199.5, compared with $176.6 in 2002. The
increase was attributable to the favorable impact of changes in foreign exchange
rates of $24.1 and the impact of an acquisition of $3.3, offset by $4.5 decline
in organic sales.
Asia Pacific consists of the Company's operations in Hong Kong, China,
Singapore, Sri Lanka, South Korea, Bangladesh, Indonesia, Malaysia, Vietnam and
India. Sales increased $48.9, or 27.1%, to $229.3 in 2004, compared with $180.4
in 2003. The increase was attributable to organic sales growth of $40.1 and the
impact of the Alkahn acquisition of $8.8. The Company's operations in this
region have significantly benefited from the steady and continued migration of
many of the Company's customers who have moved their production outside the U.S.
and Western Europe to minimize labor costs and maximize operating performance
efficiencies. In addition, the Company believes that sales increases in Asia
Pacific have resulted from strong gains in market share. In 2003, sales
increased $27.2, or 17.8%, to $180.4, compared with $153.2 in 2002. The increase
was attributable to organic sales growth of $22.7 and the impact of the Alkahn
acquisition of $4.5.
Gross Profit
Gross profit, as a percent of sales, was 38.7% in 2004, compared with 37.5%
in 2003 and 38.5% in 2002. The higher gross margin was directly attributable to
the Company's continuing efforts to reduce manufacturing costs and improve
operating efficiencies in existing facilities. In addition, the Company's
consolidation of certain of its productions sites in the U.S. and the U.K. in
2003, benefited gross margin by improving capacity utilization and operating
efficiency throughout 2004. Management's ongoing strategy includes implementing
process improvements to reduce costs in all of its manufacturing facilities,
re-deploying assets to manage production capacity and expanding production in
new and emerging markets to minimize labor costs and maximize operating
performance efficiencies.
13
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses were $239.2 in 2004, compared with $215.2 in 2003 and $196.6
in 2002. As a percent of sales, SG&A expenses were 29.7% in 2004, compared with
30.2% in 2003 and 29.4% in 2002. The increases in spending were primarily
attributable to (i) sales and growth-related expenses, including expenditures
made in connection with the development and innovation of solutions for RFID (or
radio frequency identification) supply-chain applications; (ii) incremental
costs incurred as a result of regulatory requirements under the Sarbanes-Oxley
Act of 2002; (iii) the negative impact of changes in foreign exchange rates; and
(iv) the acquisition of Alkahn. These were partially offset by the benefits
captured through continued fixed cost containment efforts and a series of cost
reduction initiatives in 2003, which produced savings in 2004.
Integration/Restructuring and Other Costs
The Company did not incur any integration/restructuring charges in 2004.
In 2003, the Company recognized a pre-tax charge of $20.4 in connection with
the consolidation of certain operations, headcount reductions, a severance
payment to the Company's former Chief Executive Officer, and a write-off of an
Enterprise Resource Planning system and certain other fixed assets no longer in
use.
Operating Income
Operating income was $72.5 in 2004, compared with $31.5 in 2003 and $60.5 in
2002. As a percent of sales, operating income was 9.0% in 2004, compared with
4.4% in 2003 and 9.1% in 2002. The operating results for 2003 included the
integration/restructuring and other costs of $20.4.
On a reportable segment basis, exclusive of corporate expenses and
amortization of other intangible, operating income, as a percent of sales, was
as follows:
2004 2003 2002
------- ------- ------
Americas................................... 11.6% 4.8% 9.7%
EMEA....................................... 7.9 0.2 8.8
Asia Pacific............................... 16.8 18.8 19.6
The decreases in Asia Pacific's operating income, as a percent of sales, in
2004, compared with 2003 and 2002, primarily resulted from increased
charge-backs of certain global program development costs and other fees incurred
by Americas and EMEA, on behalf of the Asia Pacific region.
In addition, Americas, EMEA, and Asia Pacific included the integration/
restructuring and other costs, as a percent of sales, of 2.8%, 4.7% and 0.1%,
respectively, in 2003.
Interest Expense, Net
Interest expense, net of interest income on invested cash, was $10.7 in
2004, compared with $11.3 in 2003 and $10.9 in 2002. The decrease was primarily
attributable to higher interest income on invested cash and lower average
borrowings under the Company's revolving credit facility.
Taxes on Income
The effective income tax rate was 23.3% in 2004, compared with 27.8% in 2003
and 18.8% in 2002. 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. In 2004 and 2003, a shift in income from
Asia Pacific to the U.S. and certain of EMEA operations as a result of the
increased charge-backs of certain global program development costs and other
fees increased the effective tax rates, as higher tax rates were applied on the
income from the U.S. and certain of EMEA operations. In addition, the effective
tax rate for 2003 was further increased as a result of losses generated by the
Company's U.K. operations (which included $7.9 of integration/restructuring and
other costs) for which no tax benefits were provided. The tax rate increases in
2004 and 2003 were somewhat offset by reversal of accruals no longer needed.
(See Note 10 of the Notes to Consolidated Financial Statements.)
14
LIQUIDITY AND CAPITAL RESOURCES
The table below presents summary cash flow information for the years
indicated:
2004 2003 2002
-------- -------- --------
Net cash provided by operating activities...................... $ 85.5 $ 35.6 $ 62.7
Net cash used in investing activities.......................... (36.5) (60.0) (47.9)
Net cash (used in)/provided by financing activities............ (23.3) 26.8 (1.6)
-------- -------- --------
Total change in cash and cash equivalents (a)............. $ 25.7 $ 2.4 $ 13.2
======== ======== ========
(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. Effective August 4,
2004, at the Company's request, its revolving credit agreement ("Credit
Agreement") was amended to reduce the total commitment under the facility from
$150 to $50. In the event of an additional financing need, the Company believes
that the Credit Agreement can be amended to increase the total commitment up to
$150. The Credit Agreement is available to provide additional liquidity for
capital and other specific-purpose expenditures. Net cash provided by operating
activities was $85.5, $35.6 and $62.7 in 2004, 2003 and 2002, respectively.
Management believes that the Company will continue to generate sufficient cash
from its operating activities for the foreseeable future supplemented by
availability under the 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 $227.2 and 2.7:1
and $194.1 and 2.6:1 at December 31, 2004 and 2003, respectively. The increase
in working capital in 2004 compared with 2003 primarily resulted from increases
in cash and cash equivalents, accounts receivable, inventories, deferred income
taxes and other current assets, and decreases in accrued income taxes and
amounts due to banks, offset by increases in accounts payable and accrued
liabilities.
Investing Activities
For the years ended December 31, 2004, 2003 and 2002, the Company incurred
$38.7, $32.8 and $25.5, respectively, of capital expenditures to acquire
production machinery, expand capacity, install system upgrades and continue with
its growth and expansion of company operations in the emerging markets of Latin
America, EMEA and Asia Pacific. The capital expenditures were funded by cash
provided by operating activities. In addition, during 2004, the Company received
proceeds of $1.0 from the sale of its 10% equity interest in Disc Graphics,
Inc., a diversified manufacturer and printer of specialty paperboard packaging.
During 2003, the Company acquired the business and assets of Alkahn, a
manufacturer of woven labels, for $25.0.
During 2002, the Company acquired the business and manufacturing assets of
Disenos de Coleccion, a leading manufacturer of merchandising labels and tags
for Mexican retailers, and NTP Gandrudbakken AS, a Norwegian manufacturer of
heat transfer labels.
Financing Activities
The components of total capital as of December 31, 2004, 2003 and 2002,
respectively, are presented below:
2004 2003 2002
-------- -------- -------
(restated)
Due to banks................................................... $ 3.9 $ 4.3 $ 2.1
Current maturities of long-term debt........................... -- -- 0.1
Long-term debt................................................. 163.1 190.3 164.5
-------- -------- --------
Total debt................................................ 167.0 194.6 166.7
Common stock subject to redemption............................. -- -- 37.6
Shareholders' equity........................................... 440.6 377.3 300.0
-------- -------- --------
Total capital............................................. $ 607.6 $ 571.9 $ 504.3
======== ======== ========
Total debt as a percent of total capital....................... 27.5% 34.0% 33.1%
======== ======== ========
15
Management believes that the borrowings available under the Company's Credit
Agreement provide sufficient liquidity to supplement the Company's operating
cash flow. For the years ended December 31, 2004, 2003 and 2002, net
(repayments)/ borrowings of the Company's outstanding debt were $(27.5), $27.9
and $(1.1), 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, 2004, 2003 and 2002, the Company received
proceeds of $4.2, $4.0 and $9.7, 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 did not repurchase any shares in 2004. In prior
years, the Company repurchased 469,000 shares for an aggregate price of $5.1, or
an average of $10.80 per share, in 2003, and 285,000 shares for an aggregate
price of $3.8, or an average of $13.38 per share, in 2002. 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, 2004, 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 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.
The Company did not purchase any shares from the Chairman during the period
in 2003 the Agreement had been in effect. 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.)
Financing Arrangement - Credit Agreement
In September 2002, the Company entered into a three-year, $150 Credit
Agreement with a group of five domestic and international banks. Effective
August 4, 2004, at the Company's request, the Credit Agreement was amended to
reduce the total commitment under the facility from $150 to $50. The Company
intends to enter into a new financing arrangement on or prior to the expiration
of the Credit Agreement in September 2005, to finance the Company's operating
needs and growth opportunities.
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, 2004 was 0.275%. Borrowings under the Credit Agreement bear
interest at rates referenced to the London Interbank Offered Rate with
applicable margins varying in accordance with the Company's attainment of
specified debt to EBITDA thresholds or, at the Company's option, rates
competitively bid among the participating banks or the Prime Rate, as defined
(5.25% at December 31, 2004 and 4.00% at December 31, 2003), and are guaranteed
by certain domestic subsidiaries of the Company.
The Credit Agreement, 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. In
addition, it contains certain customary events of default, which generally give
the banks the right to accelerate payments of outstanding debt. These events
include:
16
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 3.0 to 1 and minimum allowable fixed charge
ratio, as defined, is 1.5 to 1.
The 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 Repurchase 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 permanent waivers for this
technical default from the lenders during the first quarter of 2004. As the
Repurchase Agreement was terminated on November 17, 2003, the Company no longer
has the obligation to purchase or redeem any of its common stock.
The Company is 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.
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 foreign currency
exchange rate and interest 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. All of
the Company's derivatives have high correlation with the underlying exposures.
Accordingly, changes in fair value of derivatives are expected to be offset by
changes in value of the underlying exposures. The Company does not use
derivative financial instruments for trading purposes.
The Company manages a foreign currency hedging program to hedge against
fluctuations in foreign-currency-denominated trade liabilities by periodically
entering into forward foreign exchange contracts. The aggregate notional value
of forward foreign exchange contracts the Company entered into amounted to $154,
$55 and $50 in 2004, 2003 and 2002, respectively.
The following table summarizes as of December 31, 2004, the Company's
forward foreign exchange contracts by currency. All of the Company's forward
foreign exchange contracts mature within a year. Contract amounts are
representative of the expected payments to be made under these instruments:
Contract Amounts (in thousands)
------------------------------------- Fair Value
Receive Pay (US$ 000's)
--------------- ---------------- --------------
Contracts to receive US$/pay euro ("EUR").....................US$ 58 (EUR) 43 $ (1)
Contract to receive US$/pay British pounds ("GBP")............US$ 5,775 (GBP) 2,977 $ 80
Contract to receive US$/pay Moroccan dirham ("MAD")...........US$ 136 (MAD) 1,146 $ (3)
Contract to receive US$/pay Norwegian krone ("NOK")...........US$ 134 (NOK) 829 $ 2
Contract to receive GBP/pay US$...............................(GBP) 30 US$ 55 $ 1
Contracts to receive GBP/pay EUR..............................(GBP) 348 (EUR) 504 $ (17)
Contract to receive GBP/pay MAD...............................(GBP) 611 (MAD) 9,995 $ (42)
Contracts to receive EUR/pay US$..............................(EUR) 1,411 US$ 1,832 $ 30
Contract to receive EUR/pay MAD...............................(EUR) 330 (MAD) 3,723 $ (4)
Contract to receive Hong Kong $ ("HK$")/pay EUR...............(HK$) 64 (EUR) 6 $ -
17
A 10% change in interest rates affecting the Company's floating rate debt
instruments would have an immaterial impact on the Company's pre-tax earnings
and cash flows over the next fiscal year. Such a move in interest rates would
have virtually no effect on the fair value of the Company's floating rate debt
instruments.
The Company sells its products worldwide and a substantial portion of its
net sales, cost of sales and operating expenses are denominated in foreign
currencies. This exposes the Company to risks associated with changes in foreign
currency exchange rates 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, branded apparel companies and
contract manufacturers that have historically paid their 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............................ $ 163.1 $ -- $ -- $ 150.0 $ 13.1
Operating lease obligations........................... 37.3 10.0 11.9 7.5 7.9
Capital lease obligations............................. 0.7 0.4 0.3 -- --
Severance obligations................................. 3.9 0.6 -- -- 3.3
Purchase obligations.................................. 12.6 9.0 3.6 -- --
Post-employment benefit obligations................... 8.2 0.3 1.2 1.8 4.9
------- ------- ------ ------- ------
Total............................................. $ 225.8 $ 20.3 $ 17.0 $ 159.3 $ 29.2
======= ======= ====== ======= ======
Closure of the Manufacturing Operations in Hillsville, Virginia
In January 2005, the Company announced the consolidation of its U.S. Woven
Label manufacturing facilities as part of its continuing effort to improve
operating efficiency and costs. Manufacturing operations at its Hillsville,
Virginia plant will be moved into the Weston, West Virginia facility. The
Company anticipates that the closure of the Hillsville facility will be
completed by December 31, 2005.
The Company estimates that the closure of the Hillsville plant will result
in (1) a charge of approximately $1.4 for severance benefits for the Company's
140 manufacturing employees and 30 customer service and administrative
personnel, (2) a charge of approximately $0.4 for the relocation of machinery
and equipment currently located at the Hillsville plant and (3) a charge of
approximately $0.5 for other related costs, which include the costs associated
with the manufacturing facility, the termination of the lease thereof and
outplacement services for the Hillsville plant's employees. Accordingly, the
Company expects that the estimated total cost associated with the closure of the
Hillsville plant operation will be approximately $2.3. Of the estimated total
cost, the Company estimates that the closure of the Hillsville plant will result
in approximately $1.9 of cash expenditures.
Recently Issued Accounting Pronouncement
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based
Payment." SFAS No. 123(R) is a revision of SFAS No. 123 and supersedes
Accounting Principles Board ("APB") Opinion No. 25. Among other items, SFAS No.
123(R) eliminates the use of APB Opinion No. 25 and the intrinsic value method
of accounting, and requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements based on the fair
value of the equity or liability instruments issued. The effective date of SFAS
No. 123(R) is the first reporting period beginning after June 15, 2005, which is
the third quarter of 2005 for calendar year companies, although early adoption
is allowed. SFAS No. 123(R) permits companies to adopt its requirements using
either a "modified prospective" method, or a "modified retrospective" method.
Under the "modified prospective" method, compensation cost is recognized in the
financial statements beginning with the effective date, based on the
requirements of SFAS No. 123(R) for all share-based payments granted after that
date, and based on the requirements of SFAS No. 123 for all unvested awards
granted prior to the effective date of SFAS No. 123(R). Under the "modified
retrospective" method, the requirements are the same as under the "modified
prospective" method, but also permits companies to restate financial statements
of previous periods based on pro forma disclosures made in accordance with SFAS
No. 123.
18
The Company currently discloses pro forma compensation expense quarterly and
annually by measuring the fair value of stock option grants using the
Black-Scholes model. While SFAS No. 123(R) permits companies to continue to use
such model, it also permits the use of a more complex lattice model (e.g., a
binomial model).
SFAS No. 123(R) also requires that the benefits associated with the tax
deductions in excess of recognized compensation cost be reported as a financing
cash flow, rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash flows and increase
net financing cash flows in periods after the effective date. While the Company
cannot estimate what those amounts will be in the future, the amount of
operating cash flows recognized for such deductions were $0.2, $0.4 and $0.2 in
2004, 2003 and 2002, respectively.
The Company is evaluating the requirements of SFAS No. 123(R) and currently
expects to adopt SFAS No. 123(R) beginning July 1, 2005; however, the Company
has not yet determined which of the aforementioned adoption methods it will use.
In addition, while the Company believes that the pro forma disclosures in Note 3
of Notes to the Consolidated Financial Statements under "Stock-Based
Compensation" provide an appropriate short-term indicator of the level of
expense that will be recognized in accordance with SFAS No. 123(R), the total
expense recognized in future periods will depend on several variables, including
the number of share-based awards that vest and the fair value of those vested
awards. (See Note 13 of Notes to the Consolidated Financial Statements for
further information on the Company's stock-based compensation plans.)
Compliance with Section 404 of the Sarbanes-Oxley Act of 2002
In June 2003, the Securities and Exchange Commission ("SEC") issued new
rules on internal control over financial reporting that were mandated by Section
404 of the Sarbanes-Oxley Act of 2002 ("Section 404"). These new rules require
management reporting on internal control over financial reporting. The Company
employed the Internal Control - Integrated Framework founded by the Committee of
Sponsoring Organizations of the Treadway Commission to evaluate the
effectiveness of the Company's internal control over financial reporting. The
Company's management has assessed the Company's internal control over financial
reporting to be effective as of December 31, 2004. Additionally, Ernst & Young
LLP, the independent registered public accounting firm that audited the
Company's 2004 and 2003 consolidated financial statements, has issued an
attestation report on management's assessment of the Company's internal control
over financial reporting as of December 31, 2004. The external costs incurred in
connection with implementation of Section 404 and the evaluation of our internal
control amounted to $3.3 in 2004. The Company expects these costs to be in the
range of $2.0 to $2.5 in 2005 for existing operations.
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 the SEC on July 27, 1979), as
interpreted by EITF Topic D-98, "Classification and Measurement of Redeemable
Securities," (issued by the 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, during 2003, the
Company 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 also were 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.
19
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 28 through 47.
Item 9: Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9A: Controls and Procedures
Disclosure Controls and Procedures. The Company, under the supervision and
with the participation of the Company's management, including its Chief
Executive Officer and Principal Financial Officer, conducted an assessment 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"). The Company's Chief Executive Officer and Principal
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 Principal Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting. The Company, under the
supervision and with the participation of the Company's management, including
its Chief Executive Officer and Principal Financial Officer, is responsible for
establishing and maintaining an adequate system of internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934). The Company's management conducted an
assessment of the Company's internal control over financial reporting based on
the framework established by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control - Integrated Framework. Management
concluded that, as of December 31, 2004, the Company's internal control over
financial reporting is effective. Additionally, Ernst & Young LLP, the
independent registered public accounting firm that audited the Company's 2004
and 2003 consolidated financial statements, has issued an attestation report on
management's assessment of the Company's internal control over financial
reporting as of December 31, 2004.
There have not been any changes in the Company's internal control over
financial reporting identified in connection with the assessment that occurred
during the fourth quarter of 2004, that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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 26, 2005.
The Company has adopted a Code of Business Ethics that applies to its
employees, including Chief Executive Officer, Principal Financial Officer and
persons performing similar functions. The Company makes available free of charge
through its Web site (www.paxar.com) its Code of Business Ethics. If the Company
makes changes to its Code of Business Ethics for any of its senior officers, the
Company expects to provide the public with notice of any such change or waiver
by publishing a description of such event on its Web site or by other
appropriate means as required by applicable rules of the SEC.
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 26, 2005.
Item 12: Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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 26, 2005.
20
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 26, 2005.
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 26, 2005.
PART IV
Item 15: Exhibits and Financial Statement Schedules
(a) Documents
(1) FINANCIAL STATEMENTS --
Management's Responsibility for Financial Reporting................ 23
Management's Report on Internal Control over Financial Reporting... 23
Reports of Independent Registered Public Accounting Firm........... 24 to 25
Report of Independent Registered Public Accounting Firm............ 26
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule....................................... 27
Consolidated Statements of Income for the years ended December 31,
2004, 2003 and 2002................................................ 28
Consolidated Balance Sheets as of December 31, 2004 and 2003....... 29
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the years ended December 31, 2004, 2003 and 2002 30
(restated).........................................................
Consolidated Statements of Cash Flows for the years ended December
31, 2004, 2003 and 2002............................................ 31
Notes to Consolidated Financial Statements......................... 32 to 47
(2) FINANCIAL STATEMENT SCHEDULE --
Schedule II -- Valuation and Qualifying Account..................... 48
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) 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)
21
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. (O)
10.15 Employment Agreement, dated as of October 1, 2004,
between Paxar Corporation and Arthur Hershaft. (P)
10.16 Registrant's 2005 Incentive Compensation Plan. (Q)
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Registered Public Accounting
Firm.
23.2 Consent of Independent Registered Public Accounting
Firm.
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.
(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.
(O) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003.
(P) Incorporated herein by reference from Exhibits to Registrant's Form 10-Q
filed on November 5, 2004.
(Q) Incorporated herein by reference from Exhibits to Registrant's Form 8-K
dated January 1, 2005.
22
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the integrity and objectivity of the
consolidated financial statements and accompanying information. These financial
statements have been prepared in accordance 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 has established and maintains a system of internal accounting and
other controls for the Company and its subsidiaries. This system and its
established accounting procedures and related controls are designed to provide
reasonable assurance that assets are safeguarded, that the books and records
properly reflect all transactions, that policies and procedures are implemented
by qualified personnel, and that published financial statements are properly
prepared and fairly presented. The Company's system of internal accounting and
other controls is continually reviewed by internal auditors and supported by
widely communicated written policies, including business conduct policies, which
are designed to require all employees to maintain high ethical standards in the
conduct of the Company's affairs.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an adequate
system of internal control over financial reporting. Management conducted an
assessment of the Company's internal control over financial reporting based on
the framework established by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control - Integrated Framework. Management
concluded that, as of December 31, 2004, the Company's internal control over
financial reporting is effective.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004, has been audited by
Ernst & Young LLP, an independent registered public accounting firm, as stated
in their report which is included herein.
/s/ Arthur Hershaft
- -------------------
Arthur Hershaft
Chairman, President and Chief Executive Officer
/s/ Larry M. Segall
- -------------------
Larry M. Segall
Vice President and Controller
(Principal Financial Officer)
March 10, 2005
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Paxar Corporation:
We have audited the accompanying consolidated balance sheets of Paxar
Corporation and Subsidiaries (the "Company") as of December 31, 2004 and 2003,
and the related consolidated statements of income, shareholders' equity and
comprehensive income, and cash flows for each of the two years in the period
ended December 31, 2004. Our audits 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
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 2004 and 2003, and the consolidated results of their operations and
their cash flows for the each of the two years in the period ended December 31,
2004, in conformity with U.S. generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule for each of the two years
in the period ended December 31, 2004, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects,
the information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 10, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Stamford, Connecticut
March 10, 2005
24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Paxar Corporation:
We have audited management's assessment, included in the accompanying
"Management's Report on Internal Control over Financial Reporting," that Paxar
Corporation and Subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those polices and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the polices or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company as of December 31, 2004 and 2003, and the related consolidated
statements of income, shareholders' equity and comprehensive income, and cash
flows for each of the two years in the period ended December 31, 2004 of the
Company, and our report dated March 10, 2005 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Stamford, Connecticut
March 10, 2005
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Paxar Corporation:
In our opinion, the accompanying consolidated statements of income,
shareholders' equity and comprehensive income and cash flows for the year ended
December 31, 2002 present fairly, in all material respects, the results of
operations and cash flows of Paxar Corporation and its subsidiaries (the
"Company") for the year ended December 31, 2002 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
standards of the Public Company Accounting Oversight Board (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, 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 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
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders 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 2004 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
27
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2004, 2003 and 2002
(in millions, except per share amounts)
2004 2003 2002
-------- -------- --------
Sales..................................................... $ 804.4 $ 712.0 $ 667.8
Cost of sales............................................. 492.7 444.9 410.7
-------- -------- --------
Gross profit........................................... 311.7 267.1 257.1
Selling, general and administrative expenses.............. 239.2 215.2 196.6
Integration/restructuring and other costs................. -- 20.4 --
-------- -------- --------
Operating income....................................... 72.5 31.5 60.5
Interest expense, net..................................... 10.7 11.3 10.9
-------- -------- --------
Income before taxes.................................... 61.8 20.2 49.6
Taxes on income........................................... 14.4 5.6 9.3
-------- -------- --------
Net income............................................. $ 47.4 $ 14.6 $ 40.3
======== ======== ========
Basic earnings per share.................................. $ 1.20 $ 0.37 $ 1.02
======== ======== ========
Diluted earnings per share................................ $ 1.17 $ 0.37 $ 1.00
======== ======== ========
Weighted average shares outstanding:
Basic.................................................. 39.6 39.1 39.4
Diluted................................................ 40.6 39.5 40.3
The accompanying notes are an integral part of the financial statements.
28
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
December 31, December 31,
2004 2003
--------------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 92.0 $ 64.4
Accounts receivable, net of allowances of $12.3 and $10.0 in 2004 and
2003, respectively..................................................... 132.5 127.0
Inventories.............................................................. 101.3 94.1
Deferred income taxes.................................................... 15.0 11.8
Other current assets..................................................... 18.1 16.0
-------- --------
Total current assets........................................... 358.9 313.3
-------- --------
Property, plant and equipment, net....................................... 169.9 163.8
Goodwill and other intangible, net....................................... 220.5 213.6
Other assets............................................................. 24.4 24.2
-------- --------
Total assets............................................................. $ 773.7 $ 714.9
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to banks............................................................. $ 3.9 $ 4.3
Accounts payable and accrued liabilities................................. 116.6 103.1
Accrued taxes on income.................................................. 11.2 11.8
-------- --------
Total current liabilities...................................... 131.7 119.2
------ ------
Long-term debt........................................................... 163.1 190.3
Deferred income taxes.................................................... 21.8 11.9
Other liabilities........................................................ 16.5 16.2
Commitments and contingent liabilities
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,
39,644,756 and 39,148,055 shares issued and outstanding in 2004
and 2003, respectively................................................. 4.0 3.9
Paid-in capital.......................................................... 14.7 10.3
Retained earnings........................................................ 392.9 345.5
Accumulated other comprehensive income................................... 29.0 17.6
-------- --------
Total shareholders' equity..................................... 440.6 377.3
-------- --------
Total liabilities and shareholders' equity............................... $ 773.7 $ 714.9
======== ========
The accompanying notes are an integral part of the financial statements.
29
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For the years ended December 31, 2004, 2003 and 2002
(in millions)
Accumulated
Common Stock Other
------------------ Paid-In Treasury Retained Comprehensive Comprehensive
Shares Amount Capital Stock Earnings Income (Loss) Income
------ -------- -------- -------- -------- ------------- ------
Balance, January 1, 2002 (restated). 35.6 $ 3.6 $ -- $ -- $ 256.0 $ (20.1)
Comprehensive income:
Net income...................... -- -- -- -- 40.3 -- $ 40.3
Other comprehensive
income/(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 36.7 3.7 -- -- 304.7 (8.4)
(restated)..........................
Comprehensive income:
Net income...................... -- -- -- -- 14.6 -- $ 14.6
Other comprehensive income:
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
Comprehensive income:
Net income...................... -- -- -- -- 47.4 -- $ 47.4
Other comprehensive
income/(loss):
Translation adjustments...... -- -- -- -- -- 11.8 11.8
Unrealized gain on -- -- -- -- -- 0.1 0.1
derivatives.................
Post-employment benefit
obligation adjustments...... -- -- -- -- -- (0.5) (0.5)
-------
Comprehensive income............ -- -- -- -- -- -- $ 58.8
=======
Shares issued -- various plans....... 0.5 0.1 4.1 -- -- --
Stock compensation.................. -- -- 0.3 -- -- --
------ -------- -------- -------- -------- --------
Balance, December 31, 2004.......... 39.6 $ 4.0 $ 14.7 $ -- $ 392.9 $ 29.0
====== ======== ======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
30
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2004, 2003 and 2002
(in millions)
2004 2003 2002
-------- -------- --------
OPERATING ACTIVITIES
Net income................................................................ $ 47.4 $ 14.6 $ 40.3
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.......................................... 32.4 30.2 29.6
Deferred income taxes.................................................. 6.7 (2.6) (1.5)
(Gain)/loss on sale of property and equipment, net..................... (0.6) 0.3 (0.2)
Write-off of property and equipment.................................... 2.3 8.0 1.1
Changes in assets and liabilities, net of businesses acquired:
Accounts receivable.................................................... (6.7) (13.8) (5.0)
Inventories............................................................ (9.3) (2.6) (5.5)
Other current assets................................................... (2.2) 0.3 (2.7)
Accounts payable and accrued liabilities............................... 13.2 1.9 4.1
Accrued taxes on income................................................ (0.6) (2.5) 2.2
Other, net............................................................. 2.9 1.8 0.3
-------- -------- --------
Net cash provided by operating activities.............................. 85.5 35.6 62.7
-------- -------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment................................ (38.7) (32.8) (25.5)
Acquisitions, net of cash acquired........................................ (0.7) (28.4) (21.7)
Proceeds from sale of property and equipment.............................. 1.6 1.2 0.3
Other, net................................................................ 1.3 -- (1.0)
-------- --------- --------
Net cash used in investing activities.................................. (36.5) (60.0) (47.9)
-------- -------- --------
FINANCING ACTIVITIES
Net (decrease)/increase in short-term debt................................ (0.3) 2.2 1.7
Additions to long-term debt............................................... 57.8 275.0 91.0
Reductions in long-term debt.............................................. (85.0) (249.3) (93.8)
Purchase of common stock subject to redemption............................ -- -- (6.4)
Purchase of common stock.................................................. -- (5.1) (3.8)
Proceeds from common stock issued under employee stock option
and stock purchase plans................................................ 4.2 4.0 9.7
-------- -------- --------
Net cash (used in)/provided by financing activities.................... (23.3) 26.8 (1.6)
-------- -------- --------
Effect of exchange rate changes on cash flows.......................... 1.9 12.4 1.3
-------- -------- --------
Increase in cash and cash equivalents...................................... 27.6 14.8 14.5
Cash and cash equivalents at beginning of year............................. 64.4 49.6 35.1
-------- -------- --------
Cash and cash equivalents at end of year................................... $ 92.0 $ 64.4 $ 49.6
======== ======== ========
The accompanying notes are an integral part of the financial statements.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except headcount, share and per share data)
Note 1: Description of Business
Paxar Corporation (the "Company") provides innovative merchandising systems
for the retail and apparel manufacturing industries. The Company's business
includes the design, manufacture and distribution of a wide variety of labels
and tags, including labels with bar codes and/or RFID (or radio frequency
identification) tags, as well as printers, software control systems and related
supplies.
The Company has core competencies that range from graphic design to coating,
laminating, slitting and weaving of garment and other similar labels and tags,
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,
brand apparel companies and contract manufacturers. It also manufactures the
printers, paper and fabric substrates, and inks for in-plant tag and label
printing systems. The Company manufactures electronic bar code and RFID systems
and handheld 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 at customer locations worldwide and offers a mail-in
repair program for its mechanical labelers.
The Company operates globally, with more than 65% of its sales outside the
United States. The Company's operations have been organized into three
geographic segments consisting of (1) the operations principally in North
America and Latin America ("Americas"); (2) Europe, the Middle East and Africa
("EMEA"); and (3) the Asia Pacific region ("Asia Pacific"). The Company's entire
array of products and services is offered for sale across each of those
geographic segments. As of December 31, 2004, the Company had 73 manufacturing
facilities and sales offices located in 36 countries and employed approximately
9,700 people worldwide. In addition, the Company sells its products through
independent distributors in 16 countries in which it 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, during 2003, the Company 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 also were 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.
32
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 the Company
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.
Allowance for Doubtful Accounts
Management makes judgments, based on established aging policy, historical
experience and future expectations, as to the collectibility of the Company's
accounts receivable and establishes an allowance for doubtful accounts. The
allowance for doubtful accounts is used to reduce gross trade receivables to
their estimated net realizable value. When evaluating the adequacy of the
allowance for doubtful accounts, management specifically analyzes customer
specific allowances, amounts based upon an aging schedule, historical bad debt
experience, customer concentrations, customer creditworthiness and current
trends. The Company's accounts receivable balances were $132.5, net of
allowances of $12.3, at December 31, 2004, and $127.0, net of allowances of
$10.0, at December 31, 2003.
Inventories
Inventories are stated at the lower of cost or market value and are
categorized as raw materials, work-in-process or finished goods. The value of
inventories determined using the last-in, first-out method was $11.7 and $14.3
as of December 31, 2004 and 2003, respectively. The value of all other
inventories determined using the first-in, first-out method was $89.6 and $79.8
as of December 31, 2004 and 2003, 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.
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 recognized 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.
33
The Company manages a foreign currency hedging program to hedge against
fluctuations in foreign-currency-denominated trade liabilities by periodically
entering into forward foreign exchange contracts. The aggregate notional value
of forward foreign exchange contracts the Company entered into amounted to $154,
$55 and $50 in 2004, 2003 and 2002, respectively.
The Company formally designates and documents the hedging relationship and
risk management objective for undertaking each 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, 2004 and 2003, for delivery of various currencies at various future dates
and the changes in fair value recognized in income in 2004, 2003 and 2002, were
not material. The notional value of outstanding forward foreign exchange
contracts at December 31, 2004 and 2003, was $10 and $19, respectively.
All financial instruments of the Company, with the exception of hedge
instruments, are carried at cost, which approximates fair value.
Goodwill and Other Intangible Assets
The Company applies the provisions of 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, goodwill is not
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 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.
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 that the Company
recognized in connection with its restructuring and related initiatives in 2003,
there were no significant impairment losses related to long-lived assets in the
past three years.
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
The Company recognizes revenue from product sales at the time of shipment
and includes freight billed to customers. In addition, in accordance with Staff
Accounting Bulletin ("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.
34
SAB No. 101, "Revenue Recognition in Financial Statements," 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.
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. 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.
Sales Returns and Allowances
Management must make estimates of potential future product returns, billing
adjustments and allowances related to current period product revenues. In
establishing a provision for sales returns and allowances, management relies
principally on the Company's history of product return rates as well as customer
service billing adjustments and allowances, each of which is regularly analyzed.
Management also considers (1) current economic trends, (2) changes in customer
demand for the Company's products and (3) acceptance of the Company's products
in the marketplace when evaluating the adequacy of the Company's provision for
sales returns and allowances. Historically, the Company has not experienced a
significant change in its product return rates resulting from these factors. For
the years ended December 31, 2004, 2003 and 2002, the provision for sales
returns and allowances accounted for as a reduction to gross sales was not
material.
Research and Development
Research and development costs are expensed as incurred. The Company's
research and development expenses were approximately $7, $7 and $8 in 2004, 2003
and 2002, respectively.
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.
Deferred taxes are not provided on the portion of undistributed earnings of
non-U.S. subsidiaries, which is considered to be permanently reinvested. In the
event that management changes its consideration on permanently reinvesting the
undistributed earnings of its non-U.S. subsidiaries, circumstances change in
future periods, or there is a change in accounting principles generally accepted
in the United States, the Company may need to establish an additional income tax
provision for the U.S. and other taxes arising from repatriation, which could
materially impact its results of operations.
35
On October 22, 2004, the President of United States signed into law the
American Jobs Creation Act of 2004 (the "Act"). The Act provides, among other
things, a special one-time dividends received deduction for certain earnings
from outside the U.S. that are repatriated (as defined in the Act) on or before
December 31, 2005. Currently, the Company is evaluating the effects of the Act
and has not yet determined whether the Company will take advantage of the
earnings repatriation provision of the Act. (See Note 10 of Notes to the
Consolidated Financial Statements for further information.)
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 U.S. 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 U.S. 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.
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.
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 No.
25. Under APB Opinion No. 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized. The following table
presents pro forma net income and earnings per share had the Company elected to
adopt SFAS No. 123:
2004 2003 2002
-------- -------- --------
Net income, as reported........................................ $ 47.4 $ 14.6 $ 40.3
Deduct: Stock-based employee compensation
expense determined under fair value based method
for all awards granted, net of related tax effects............ (3.8) (4.4) (4.0)
------- ------- -------
Pro forma net income........................................... $ 43.6 $ 10.2 $ 36.3
======== ======== ========
Earnings per share:
Basic - as reported......................................... $ 1.20 $ 0.37 $ 1.02
Basic - pro forma........................................... $ 1.10 $ 0.26 $ 0.92
Diluted - as reported....................................... $ 1.17 $ 0.37 $ 1.00
Diluted - pro forma......................................... $ 1.07 $ 0.26 $ 0.90
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4." SFAS No. 151 amends the guidance in
Accounting Research Bulletin ("ARB") No. 43, Chapter 4, "Inventory Pricing" and
requires that the items such as idle facility expense, freight, handling costs
and wasted material (spoilage) be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal" under Paragraph 5
of ARB No. 43, Chapter 4. In addition, SFAS No. 151 requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of SFAS No. 151 are
effective for inventory costs incurred during fiscal years beginning January 1,
2006. The Company believes that the adoption of SFAS No. 151 will not have a
material impact on the Company's results of operations or financial condition.
36
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment."
SFAS No. 123(R) is a revision of SFAS No. 123 and supersedes APB Opinion No. 25.
Among other items, SFAS No. 123(R) eliminates the use of APB Opinion No. 25 and
the intrinsic value method of accounting, and requires that the compensation
cost relating to share-based payment transactions be recognized in financial
statements based on the fair value of the equity or liability instruments
issued. The effective date of SFAS No. 123(R) is the first reporting period
beginning after June 15, 2005, which is the third quarter of 2005 for calendar
year companies, although early adoption is allowed. SFAS No. 123(R) permits
companies to adopt its requirements using either a "modified prospective"
method, or a "modified retrospective" method. Under the "modified prospective"
method, compensation cost is recognized in the financial statements beginning
with the effective date, based on the requirements of SFAS No. 123(R) for all
share-based payments granted after that date, and based on the requirements of
SFAS No. 123 for all unvested awards granted prior to the effective date of SFAS
No. 123(R). Under the "modified retrospective" method, the requirements are the
same as under the "modified prospective" method, but also permits companies to
restate financial statements of previous periods based on pro forma disclosures
made in accordance with SFAS No. 123.
The Company currently discloses pro forma compensation expense quarterly and
annually by measuring the fair value of stock option grants using the
Black-Scholes model. While SFAS No. 123(R) permits companies to continue to use
such model, it also permits the use of a more complex lattice model (e.g., a
binomial model).
SFAS No. 123(R) also requires that the benefits associated with the tax
deductions in excess of recognized compensation cost be reported as a financing
cash flow, rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash flows and increase
net financing cash flows in periods after the effective date. While the Company
cannot estimate what those amounts will be in the future, the amount of
operating cash flows recognized for such deductions were $0.2, $0.4 and $0.2 in
2004, 2003 and 2002, respectively.
The Company is evaluating the requirements of SFAS No. 123(R) and
currently expects to adopt SFAS No. 123(R) beginning July 1, 2005; however, the
Company has not yet determined which of the aforementioned adoption methods it
will use. In addition, while the Company believes that the pro forma disclosures
under "Stock-Based Compensation" above provide an appropriate short-term
indicator of the level of expense that will be recognized in accordance with
SFAS No. 123(R), the total expense recognized in future periods will depend on
several variables, including the number of share-based awards that vest and the
fair value of those vested awards. (See Note 13 of Notes to the Consolidated
Financial Statements for further information on the Company's stock-based
compensation plans.)
In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary
Assets - an amendment of APB Opinion No. 29." The amendments made by SFAS No.
153 are based on the principle that exchanges of nonmonetary assets should be
based on the fair value of the assets exchanged. Further, the amendments
eliminate the narrow exception for nonmonetary exchanges of similar productive
assets and replace it with a broader exception for exchanges of nonmenetary
assets that do not have commercial substance. The provisions of SFAS No. 153 are
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
July 1, 2005. The Company believes that the adoption of SFAS No. 153 will not
have a material impact on the Company's results of operations or financial
condition.
Note 4: Inventories
The components of inventories are as follows:
At December 31, 2004 2003
------------------------------------------------- ----------- -----------
Raw materials..................................... $ 50.4 $ 46.5
Work-in-process................................... 8.3 7.8
Finished goods.................................... 58.8 56.1
----------- -----------
117.5 110.4
Allowance for obsolescence........................ (16.2) (16.3)
----------- -----------
$ 101.3 $ 94.1
=========== ===========
37
If all inventories were reported on a first-in, first-out basis, inventories
would be approximately $2.0 higher at each of December 31, 2004 and 2003.
Note 5: Other Current Assets
A summary of other current assets is as follows:
At December 31, 2004 2003
------------------------------------------------------------------- ----------- -----------
Prepaid insurance.................................................... $ 1.0 $ 1.1
Prepaid expenses..................................................... 7.1 6.8
Other receivables.................................................... 9.9 7.7
Others............................................................... 0.1 0.4
----------- -----------
$ 18.1 $ 16.0
=========== ===========
Note 6: Property, Plant and Equipment
A summary of property, plant and equipment is as follows:
At December 31, 2004 2003
------------------------------------------------------------------- ----------- -----------
Machinery and equipment.............................................. $ 268.8 $ 244.4
Building and building improvements................................... 67.4 63.2
Land................................................................. 4.4 4.3
----------- -----------
340.6 311.9
Accumulated depreciation............................................. (170.7) (148.1)
----------- -----------
$ 169.9 $ 163.8
=========== ===========
Years
-----------
Estimated useful lives:
Buildings.......................................................... 10 to 50
Building and leasehold improvements................................ 2 to 20
Machinery and equipment............................................ 2 to 25
Depreciation expense was $32.1 in 2004, $29.9 in 2003 and $29.3 in 2002.
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 2004, 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, 2004, 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 changes in the carrying amounts of goodwill for the years ended December
31, 2004, 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
Acquisitions................................. 3.3 0.2 0.2 3.7
Translation adjustments...................... -- 3.6 -- 3.6
---------- --------- ------------ ----------
Balance, December 31, 2004................... $ 120.3 $ 78.8 $ 20.7 $ 219.8
========== ========= ============ ==========
In September 2003, the Company acquired the business and assets of Alkahn
Labels, Inc., a manufacturer of woven labels, for $25.0. In connection with this
acquisition, the Company recognized goodwill of $7.1 in 2003 and $3.2 in 2004,
based on its preliminary and final 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.
38
The Company's other intangible is as follows:
At December 31, 2004 2003
------------------------------------------------- ----------- ---------
Noncompete agreement............................. $ 1.7 $ 1.7
Accumulated amortization......................... (1.0) (0.6)
----------- ---------
$ 0.7 $ 1.1
=========== =========
Note 8: Accounts Payable and Accrued Liabilities
A summary of accounts payable and accrued liabilities is as follows:
At December 31, 2004 2003
-------------------------------------------------- ----------- ---------
Accounts payable.................................. $ 48.0 $ 45.3
Accrued payroll costs............................. 19.5 13.0
Accrued interest.................................. 4.1 4.1
Advance service contracts......................... 4.4 4.6
Customer incentives............................... 2.3 2.1
Other accrued liabilities......................... 38.3 34.0
----------- ---------
$ 116.6 $ 103.1
=========== =========
Note 9: Long-Term Debt
A summary of long-term debt is as follows:
At December 31, 2004 2003
----------------------------------------------------- --------- ---------
6.74% Senior Notes due 2008.......................... $ 150.0 $ 150.0
Economic Development Revenue Bonds due 2011 and 2019. 13.0 13.0
Revolving credit..................................... -- 27.2
Other................................................ 0.1 0.1
--------- ---------
$ 163.1 $ 190.3
========= =========
Maturities of long-term debt are as follows:
Years ending December 31,
---------------------------------------------------
2008................................................ $ 150.0
Thereafter.......................................... 13.1
--------
$ 163.1
========
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, 2004 and 2003 had
weighted average interest rates of 1.31% and 1.15%, respectively.
In September 2002, the Company entered into a three-year, $150 Credit
Agreement with a group of five domestic and international banks. Effective
August 4, 2004, at the Company's request, the Credit Agreement was amended to
reduce the total commitment under the facility from $150 to $50. The Company
intends to enter into a new financing arrangement on or prior to the expiration
of the Credit Agreement in September 2005, to finance the Company's operating
needs and growth opportunities.
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, 2004 was 0.275%. Borrowings under the Credit Agreement bear
interest at rates referenced to the London Interbank Offered Rate with
applicable margins varying in accordance with the Company's attainment of
specified debt to EBITDA thresholds or, at the Company's option, rates
competitively bid among the participating banks or the Prime Rate, as defined
(5.25% at December 31, 2004 and 4.00% at December 31, 2003), and are guaranteed
by certain domestic subsidiaries of the Company.
39
The Credit Agreement, 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. In
addition, it contains certain customary events of default, which generally give
the banks the right to accelerate payments of outstanding debt. 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 3.0 to 1 and minimum allowable fixed charge
ratio, as defined, is 1.5 to 1.
The 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 Repurchase 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 permanent waivers for this
technical default from the lenders during the first quarter of 2004. As the
Repurchase Agreement was terminated on November 17, 2003, the Company no longer
has the obligation to purchase or redeem any of its common stock.
The Company is 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 2004, 2003 and 2002 were
$3.8, $22.1 and $9.8, respectively, at average interest rates of 1.92%, 1.50%
and 2.23%. The borrowings outstanding under the credit facility at December 31,
2004 and 2003 were $0.0 and $27.2, respectively.
Interest expense was $11.8 in 2004, $11.9 in 2003 and $11.6 in 2002.
Note 10: Income Taxes
The components of the provision for income taxes are as follows:
At December 31, 2004 2003 2002
-------------------------------------------------------------- -------- -------- -------
Federal
Current...................................................... $ (2.8) $ (1.3) $ (0.1)
Deferred..................................................... 0.5 (2.2) (3.3)
Foreign
Current...................................................... 10.5 8.3 10.9
Deferred..................................................... 6.1 0.7 1.4
State.......................................................... 0.1 0.1 0.4
------- ------- -------
$ 14.4 $ 5.6 $ 9.3
======= ======= =======
40
The deferred tax assets and liabilities are as follows:
At December 31, 2004 2003 2002
-------------------------------------------------------------- -------- -------- -------
Deferred tax assets:
Tax credit and tax loss carryforwards.......................... $ 17.9 $ 17.2 $ 9.0
Other accrued liabilities and allowances....................... 7.6 12.5 8.4
Deferred compensation.......................................... 3.4 3.9 4.5
-------- -------- -------
Total gross deferred tax assets........................... 28.9 33.6 21.9
Valuation allowance............................................ (13.9) (13.8) (6.4)
-------- -------- -------
Net deferred tax assets................................... 15.0 19.8 15.5
Deferred tax liabilities:
Depreciation and other property basis differences.............. (7.9) (8.5) (10.9)
Other.......................................................... (13.9) (11.4) (6.2)
--------- --------- --------
Net deferred tax liabilities.............................. $ (6.8) $ (0.1) $ (1.6)
======== ======== =======
At December 31, 2004, the Company had tax credit and tax loss carryforwards
of $17.9, which will be available to reduce future taxable income. The tax
credit carryforwards of $1.2 and tax loss carryforwards of $4.0 are scheduled to
expire in 2006 and 2022, respectively. The remaining $12.7 of tax losses may be
carried forward indefinitely. 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, 2004, a valuation allowance of $13.9 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, 2004 2003 2002
-------------------------------------------------------------- ------- -------- -------
Federal statutory tax rate..................................... 35.0% 35.0% 35.0%
State income tax, net of federal income tax benefit............ 0.1 0.5 0.5
Foreign taxes at different rates............................... (9.1) (25.1) (16.6)
Tax credit and tax loss carryforwards not benefited............ 1.0 27.2 2.4
Accruals no longer required.................................... (3.1) (11.7) (2.4)
All other, net................................................. (0.6) 1.9 (0.1)
------- ------- -------
23.3% 27.8% 18.8%
======= ======= =======
The Company reviewed the status of ongoing and completed tax examinations
during 2004, 2003 and 2002, and reduced the income tax provisions by amounts
determined to be in excess of requirements.
A provision has not been established for undistributed foreign earnings of
$235 at December 31, 2004, as those earnings are considered permanently
reinvested in the foreign operations. At December 31, 2004, the estimated U.S.
tax liability on the undistributed earnings was $43. Total foreign-based pre-tax
income was approximately $65, $28 and $60 for 2004, 2003 and 2002, respectively.
Currently, the Company is evaluating the effects of the American Jobs
Creation Act of 2004 on undistributed foreign earnings. The Company estimates
that the range of possible amounts of undistributed foreign earnings that may be
repatriated to be $0 to $235. The related potential range of income tax effects
of such repatriation under the earnings repatriation provision of the Act is
estimated to be $0 to $7.
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 sales of the
Company's products often result in ongoing sales of supplies, replacement parts
and services. The Company's products are sold worldwide through a direct sales
force, non-exclusive manufacturers' representatives, international and export
distributors, and commission agents.
The Company has organized its operations into three geographic segments
consisting of the following:
(1) The Company's operations principally in North America and Latin America
("Americas");
(2) Europe, the Middle East and Africa ("EMEA"); and
(3) The Asia Pacific region ("Asia Pacific")
41
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 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 3: Summary of
Significant Accounting Policies.
Years ended December 31, 2004 2003 2002
-------------------------------------------------------------- -------- -------- -------
Sales to unaffiliated customers:
Americas....................................................... $ 355.2 $ 332.1 $ 338.0
EMEA........................................................... 219.9 199.5 176.6
Asia Pacific................................................... 229.3 180.4 153.2
-------- -------- --------
Total..................................................... $ 804.4 $ 712.0 $ 667.8
======== ======== ========
Intersegment sales:
Americas....................................................... $ 61.7 $ 53.3 $ 64.1
EMEA........................................................... 49.7 41.8 41.5
Asia Pacific................................................... 20.7 13.8 10.2
Eliminations................................................... (132.1) (108.9) (115.8)
-------- -------- --------
Total..................................................... $ -- $ -- $ --
======== ======== ========
Income before taxes (a):
Americas (b)................................................... $ 41.2 $ 15.8 $ 32.9
EMEA (b)....................................................... 17.3 0.3 15.5
Asia Pacific (b)............................................... 38.6 33.9 30.0
-------- -------- --------
97.1 50.0 78.4
Corporate expenses (b)......................................... (24.3) (18.2) (17.6)
Amortization of other intangible............................... (0.3) (0.3) (0.3)
-------- -------- --------
Operating income.......................................... 72.5 31.5 60.5
Interest expense, net.......................................... (10.7) (11.3) (10.9)
-------- -------- --------
Total..................................................... $ 61.8 $ 20.2 $ 49.6
======== ======== ========
(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.
Depreciation and amortization:
Americas....................................................... $ 14.0 $ 14.4 $ 16.3
EMEA........................................................... 9.7 9.6 8.0
Asia Pacific................................................... 7.1 4.6 3.8
-------- -------- --------
30.8 28.6 28.1
Corporate...................................................... 1.6 1.6 1.5
-------- -------- --------
Total..................................................... $ 32.4 $ 30.2 $ 29.6
======== ======== ========
Capital expenditures:
Americas....................................................... $ 7.1 $ 9.5 $ 8.7
EMEA........................................................... 8.9 10.8 10.3
Asia Pacific................................................... 22.3 11.8 5.2
-------- -------- --------
38.3 32.1 24.2
Corporate...................................................... 0.4 0.7 1.3
-------- -------- --------
Total..................................................... $ 38.7 $ 32.8 $ 25.5
======== ======== ========
At December 31, 2004 2003
-------------------------------------------------------------- -------- -------
Long-lived assets:
Americas....................................................... $ 193.9 $ 199.9
EMEA........................................................... 130.8 125.0
Asia Pacific................................................... 61.5 47.3
-------- --------
386.2 372.2
Corporate...................................................... 4.2 5.2
-------- --------
Total..................................................... $ 390.4 $ 377.4
======== ========
42
At December 31, 2004 2003
-------------------------------------------------------------- -------- -------
Total assets:
Americas....................................................... $ 301.1 $ 313.2
EMEA........................................................... 243.1 228.5
Asia Pacific................................................... 150.9 116.6
-------- --------
695.1 658.3
Corporate...................................................... 78.6 56.6
-------- --------
Total..................................................... $ 773.7 $ 714.9
======== ========
The following table presents sales by product:
Years ended December 31, 2004 2003 2002
-------------------------------------------------------------- -------- -------- -------
Apparel Identification Products................................ $ 566.2 $ 482.5 $ 438.8
Bar Code and Pricing Solutions................................. 238.2 229.5 229.0
-------- -------- --------
Total..................................................... $ 804.4 $ 712.0 $ 667.8
======== ======== ========
The Company derived sales in the United States of $271.2 or 33.7% of the
total sales in 2004, $258.5 or 36.3% of the total sales in 2003, and $274.3 or
41.1% of the total sales in 2002. In addition, the Company's long-lived assets
in the United States as of December 31, 2004 and 2003, amounted to $161.1 and
$167.1, respectively.
No one customer accounted for more than 10% of the Company's revenues or
accounts receivable in 2004, 2003 or 2002.
Note 12: Supplemental Cash Flow Information
Cash paid for interest and income taxes is as follows:
Years ended December 31, 2004 2003 2002
-------------------------------------------------------------- -------- -------- -------
Interest....................................................... $ 10.7 $ 11.5 $ 11.0
Income taxes................................................... $ 9.3 $ 12.4 $ 11.7
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 1990 Plan and the 1997 Plan were made available for issuance
under the 2000 Plan and are no longer available for grant under the 1990 Plan
and the 1997 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 Compensation Committee of Board of Directors at its sole discretion.
In 2004, 2003 and 2002, the Company received proceeds of $3.8, $2.5 and
$8.1, respectively, from 514,000, 257,000 and 723,000 common shares issued upon
the exercise of options granted to employees and directors.
As of December 31, 2004, 4,004,000 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 2,914,000 shares of common stock were
reserved for future grants under the 2000 Plan. In addition, under the 1990
Plan, 341,000 shares of common stock were reserved for issuance upon the
exercise of options granted to key employees and directors.
43
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 recognizes 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 $1.6, $(0.4) and $1.9 in 2004,
2003 and 2002, respectively.
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)
2002
Outstanding at beginning of year.............. 4.3 $ 11.04
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
2004
Granted....................................... 0.6 $ 14.56
Exercised..................................... (0.5) $ 8.52
Canceled/forfeited............................ (0.5) $ 14.03
----
Outstanding at end of year.................... 4.3 $ 13.16
====
The weighted average fair value per option granted in 2004, 2003 and 2002
was $6.90, $6.38 and $7.38, respectively.
The following table summarizes information about stock options outstanding
as of December 31, 2004:
Weighted Average
Range of Options Weighted Average Remaining
Exercise Prices Outstanding Exercise Price Contractual Life
- --------------- ----------- -------------- ----------------
(in millions) (years)
Options outstanding
$ 6.01 - $10.75....................... 1.4 $ 9.49 4.8
$ 10.76 - $17.92....................... 2.9 $ 14.88 6.4
---
4.3 $ 13.16 5.9
===
Options exercisable
$ 6.01 - $10.75....................... 1.3 $ 9.42
$ 10.76 - $17.92....................... 1.8 $ 14.95
---
3.1 $ 12.62
===
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:
2004 2003 2002
-------- -------- -------
Risk-free interest rate.................. 3.5% 3.0% 3.0%
Expected years until exercise............ 6.0 6.0 6.0
Expected stock volatility................ 44.8% 43.1% 41.5%
Dividend yield........................... 0.0 0.0 0.0
44
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, 2004, 556,500 shares were available for future purchases. The
total number of shares and the average fair value of shares issued under this
plan were 27,500 and $14.01 in 2004, 128,000 and $12.40 in 2003, and 101,000 and
$15.66 in 2002, respectively. The Company recognized stock-based compensation
expenses of $0.1 in 2004, $0.3 in 2003 and $0.3 in 2002.
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 did not repurchase any shares in 2004. In prior
years, the Company repurchased 469,000 shares for an aggregate price of $5.1, or
an average of $10.80 per share, in 2003, and 285,000 shares for an aggregate
price of $3.8, or an average of $13.38 per share, in 2002. 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, 2004, 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, 2004 2003 2002
------------------------------------------------------------ -------- ------- -------
Weighted average common shares (basic)........................ 39.6 39.1 39.4
Options and warrants.......................................... 1.0 0.4 0.9
------- ------- -------
Adjusted weighted average common shares (diluted)............. 40.6 39.5 40.3
======= ======= =======
Options to purchase 2,434,000, and 847,000 shares of common stock at
December 31, 2003 and 2002, respectively, were not included in the computation
of diluted earnings per common share because the effect of their inclusion would
be antidilutive. There were no antidilutive options outstanding at December 31,
2004.
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 $2.9, $3.1 and $2.9 in 2004, 2003 and 2002, respectively.
Note 16: Post-Employment Benefit Costs
The Company is obligated to provide post-employment benefits to certain key
executives. Accordingly, the Company recognized $0.6, $1.4 and $1.5 of
post-employment benefit costs in 2004, 2003 and 2002, respectively. 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, 2004, 2003 and 2002.
The projected benefit obligation and accumulated benefit obligation were as
follows:
At December 31, 2004 2003
--------------------------------------------- ------- -------
Projected benefit obligation................. $ 9.3 $ 8.1
Accumulated benefit obligation............... $ 8.6 $ 7.3
45
Note 17: Commitments and Contingent Liabilities
Total rental expense for all operating leases amounted to $11.7 in 2004,
$10.9 in 2003 and $8.1 in 2002.
Minimum rental commitments for all non-cancelable operating leases are as
follows:
Years ending December 31,
-----------------------------------------------------------
2005...................................................... $ 10.0
2006...................................................... 7.0
2007...................................................... 4.9
2008...................................................... 4.0
2009...................................................... 3.5
Thereafter................................................ 7.9
--------
$ 37.3
========
The Company accrues severance expense for employees of its Italian
subsidiaries, as required by Italian law. As of December 31, 2004 and 2003, the
amounts were $3.1 and $2.7, respectively, and were included in other noncurrent
liabilities in the accompanying consolidated balance sheets.
The Company has entered into various short-term and long-term contracts for
the purchase of raw materials, equipment, and property maintenance services.
Commitments under these contracts are $9.0 in 2005 and $3.6 in 2006-2007.
Although the Company is primarily liable for payments on its purchase
commitments, management believes that the Company's exposure to losses, if any,
under these arrangements is not material.
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 U.S. and the U.K., countries which have experienced
a migration of apparel manufacturing to 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 U.S.
and the U.K. In addition, the Company recognized $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 Enterprise
Resource Planning 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,
2004:
Beginning Balance Ending Balance
January 1, 2004 Payments December 31, 2004
----------------- -------- -----------------
Severance.......................... $ 1.4 $ (1.4) $ --
Termination of leases.............. 1.1 (1.1) --
------ ------ -------
$ 2.5 $ (2.5) $ --
====== ====== =======
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.
46
The Company did not purchase any shares from the Chairman during the period
in 2003 the Agreement had been in effect. 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.
Note 20: Related Party Transaction
The Company leases a manufacturing facility in Sayre, Pennsylvania, owned
beneficially by the Company's Chairman, other family members and a trust. During
2004, the lease was extended through December 31, 2011, and amended to revise
certain terms, including termination provisions. The annual rental expenses
amounted $0.1 in 2004, 2003 and 2002.
Note 21: Condensed Quarterly Financial Data (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- ------- -------
2004
Sales............................... $ 188.8 $ 214.0 $ 194.2 $ 207.4
Gross profit........................ 72.3 84.0 75.1 80.3
Operating income.................... 14.0 23.3 15.9 19.3
Net income.......................... 8.7 15.8 10.2 12.7
Basic earnings per share............ 0.22 0.40 0.26 0.32
Diluted earnings per share.......... 0.22 0.39 0.25 0.31
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
Note 22: Subsequent Event
In January 2005, the Company announced the consolidation of its U.S. Woven
Label manufacturing facilities as part of its continuing effort to improve
operating efficiency and costs. Manufacturing operations at its Hillsville,
Virginia plant will be moved into the Weston, West Virginia facility. The
Company anticipates that the closure of the Hillsville facility will be
completed by December 31, 2005.
The Company estimates that the closure of the Hillsville plant will result
in (1) a charge of approximately $1.4 for severance benefits for the Company's
140 manufacturing employees and 30 customer service and administrative
personnel, (2) a charge of approximately $0.4 for the relocation of machinery
and equipment currently located at the Hillsville plant and (3) a charge of
approximately $0.5 for other related costs, which include the costs associated
with the manufacturing facility, the termination of the lease thereof and
outplacement services for the Hillsville plant's employees. Accordingly, the
Company expects that the estimated total cost associated with the closure of the
Hillsville plant operation will be approximately $2.3. Of the estimated total
cost, the Company estimates that the closure of the Hillsville plant will result
in approximately $1.9 of cash expenditures.
47
PAXAR CORPORATION AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2004, 2003 and 2002
(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, 2004
Allowance for doubtful accounts............. $ 10.0 $ 3.8 $ -- $ 1.5 $ 12.3
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
- -------
(1) Allowance related to acquisitions.
(2) Write-off of uncollectible accounts, net of recoveries, and other.
48
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/ LARRY M. SEGALL
-----------------------------
Larry M. Segall
Vice President and Controller
(Principal Financial Officer)
Dated: March 15, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
By: /s/ ARTHUR HERSHAFT By: /s/ DAVID L. KOLB
----------------------- ---------------------
Arthur Hershaft David L. Kolb
Chairman of the Board of Directors, Director
President and Chief Executive Officer Dated: March 15, 2005
(Principal Executive Officer)
Dated: March 15, 2005 By: /s/ THOMAS R. LOEMKER
-------------------------
Thomas R. Loemker
By: /s/ JACK BECKER Director
------------------- Dated: March 15, 2005
Jack Becker
Director
Dated: March 15, 2005 By: /s/ JAMES C. MCGRODDY
-------------------------
James C. McGroddy
By: /s/ LEO BENATAR Director
------------------- Dated: March 15, 2005
Leo Benatar
Director
Dated: March 15, 2005 By: /s/ DAVID E. MCKINNEY
-------------------------
David E. McKinney
By: /s/ JOYCE F. BROWN Director
---------------------- Dated: March 15, 2005
Joyce F. Brown
Director
Dated: March 15, 2005 By: /s/ JAMES R. PAINTER
------------------------
James R. Painter
By: /s/ HARVEY L. GANIS Director
----------------------- Dated: March 15, 2005
Harvey L. Ganis
Director
Dated: March 15, 2005 By: /s/ ROGER M. WIDMANN
------------------------
Roger M. Widmann
By: /s/ VICTOR HERSHAFT Director
----------------------- Dated: March 15, 2005
Victor Hershaft
Director
Dated: March 15, 2005 By: /s/ LARRY M. SEGALL
-----------------------
Larry M. Segall
Vice President and Controller
(Principal Financial Officer)
Dated: March 15, 2005
49