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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2005
--------------
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 executive offices) (Zip Code)
914-697-6800
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). |X| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.10 par value: 40,475,427 shares outstanding as of May 3, 2005
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
The consolidated financial statements included herein have been prepared by
Paxar Corporation (the "Company"), without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. While certain information
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations, the Company
believes that the disclosures made herein are adequate to make the information
presented not misleading. It is recommended that these financial statements be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2004.
1
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
2005 2004
------- -------
Sales.................................................. $ 187.2 $ 188.8
Cost of sales.......................................... 116.5 116.5
-------- --------
Gross profit...................................... 70.7 72.3
Selling, general and administrative expenses........... 60.3 58.3
Integration/restructuring and other costs.............. 0.8 --
-------- --------
Operating income.................................. 9.6 14.0
Interest expense, net.................................. 2.6 2.7
-------- --------
Income before taxes............................... 7.0 11.3
Taxes on income........................................ 1.6 2.6
-------- --------
Net income........................................ $ 5.4 $ 8.7
======== ========
Basic earnings per share............................... $ 0.14 $ 0.22
======== ========
Diluted earnings per share............................. $ 0.13 $ 0.22
======== ========
Weighted average shares outstanding:
Basic................................................ 39.7 39.3
Diluted.............................................. 41.2 39.8
The accompanying notes are an integral part of the financial statements.
2
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2005 2004
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 99.9 $ 92.0
Accounts receivable, net of allowances of $11.8 and $12.3 at
March 31, 2005 and December 31, 2004, respectively.............. 124.7 132.5
Inventories........................................................ 103.2 101.3
Deferred income taxes.............................................. 15.4 15.0
Other current assets............................................... 16.5 18.1
-------- --------
Total current assets..................................... 359.7 358.9
-------- --------
Property, plant and equipment, net................................. 168.0 169.9
Goodwill and other intangible, net................................. 220.3 220.5
Other assets....................................................... 24.8 24.4
-------- --------
Total assets....................................................... $ 772.8 $ 773.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to banks....................................................... $ 4.5 $ 3.9
Accounts payable and accrued liabilities........................... 108.8 116.6
Accrued taxes on income............................................ 12.1 11.2
-------- --------
Total current liabilities................................ 125.4 131.7
-------- --------
Long-term debt..................................................... 163.0 163.1
Deferred income taxes.............................................. 20.3 21.8
Other liabilities.................................................. 16.8 16.5
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,
40,267,063 and 39,644,756 shares issued and outstanding at
March 31, 2005 and December 31, 2004, respectively.............. 4.0 4.0
Paid-in capital.................................................... 21.9 14.7
Retained earnings.................................................. 398.3 392.9
Accumulated other comprehensive income............................. 23.1 29.0
-------- --------
Total shareholders' equity............................... 447.3 440.6
-------- --------
Total liabilities and shareholders' equity......................... $ 772.8 $ 773.7
======== ========
The accompanying notes are an integral part of the financial statements.
3
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
2005 2004
-------- ------
OPERATING ACTIVITIES
Net income.................................................... $ 5.4 $ 8.7
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.............................. 7.8 7.6
Deferred income taxes...................................... (1.9) 0.1
Write-off of property and equipment........................ 0.4 0.2
Changes in assets and liabilities, net of businesses acquired:
Accounts receivable........................................ 8.4 (2.4)
Inventories................................................ (1.7) (3.6)
Other current assets....................................... 1.7 (2.9)
Accounts payable and accrued liabilities................... (8.5) 10.3
Accrued taxes on income.................................... 0.9 --
Other, net................................................. (1.0) (1.6)
-------- --------
Net cash provided by operating activities.................. 11.5 16.4
-------- --------
INVESTING ACTIVITIES
Purchases of property and equipment........................... (7.9) (8.4)
Acquisitions.................................................. (2.7) (0.1)
Proceeds from sale of property and equipment.................. 0.1 0.1
Other......................................................... 0.3 1.0
-------- --------
Net cash used in investing activities...................... (10.2) (7.4)
-------- --------
FINANCING ACTIVITIES
Net increase/(decrease) in short-term debt.................... 0.6 (0.3)
Additions to long-term debt................................... -- 44.3
Reductions in long-term debt.................................. (0.1) (71.5)
Proceeds from common stock issued under employee
stock option and stock purchase plans....................... 7.0 4.1
-------- --------
Net cash provided by/(used in) financing activities........ 7.5 (23.4)
-------- --------
Effect of exchange rate changes on cash flows.................. (0.9) (0.1)
-------- --------
Increase/(decrease) in cash and cash equivalents........... 7.9 (14.5)
Cash and cash equivalents at beginning of year................. 92.0 64.4
-------- --------
Cash and cash equivalents at end of period................. $ 99.9 $ 49.9
======== ========
The accompanying notes are an integral part of the financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT HEADCOUNT AND PER SHARE DATA)
NOTE 1: GENERAL
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial statements and the instructions for Form
10-Q. The interim financial statements are unaudited. In the opinion of
management, all adjustments (which consist only of normal recurring adjustments)
necessary to present fairly the results of operations and financial condition
for the interim periods presented have been made.
Certain reclassifications have been made to the prior periods' consolidated
financial statements and related note disclosures to conform to the presentation
used in the current period.
NOTE 2: STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," provides for a fair-value based method of
accounting for employee options and measures compensation expense using an
option valuation model that takes into account, as of the grant date, the
exercise price and expected life of the option, the current price of the
underlying stock and its expected volatility, expected dividends on the stock,
and the risk-free interest rate for the expected term of the option. The Company
has elected to continue accounting for employee stock-based compensation under
Accounting Principles Board ("APB") Opinion 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 as they would be calculated had the Company elected to adopt
SFAS No. 123:
THREE MONTHS ENDED
MARCH 31,
-------------------
2005 2004
------- -------
Net income, as reported................................................. $ 5.4 $ 8.7
Add: Stock-based employee compensation expense included in the
determination of net income as reported, net of related tax effects..... 0.2 --
Deduct: Stock-based employee compensation expense determined
under fair value based method for all awards granted, net of related
tax effects............................................................. (0.6) (0.8)
------- -----
Pro forma net income.................................................... $ 5.0 $ 7.9
======= =======
Earnings per share:
Basic - as reported................................................. $ 0.14 $ 0.22
Basic - pro forma................................................... $ 0.13 $ 0.20
Diluted - as reported............................................... $ 0.13 $ 0.22
Diluted - pro forma................................................. $ 0.12 $ 0.20
For the three months ended March 31, 2005 and 2004, the Company received
proceeds of $7.0 and $3.8, respectively, from 622,000 and 514,000 common shares
issued upon the exercise of options granted to key employees and directors.
NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("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.
5
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 nonmonetary
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.
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.
In April 2005, the Securities and Exchange Commission ("SEC") adopted a new
rule that amends the date for compliance with SFAS No. 123(R). Under SFAS No.
123(R), the date for compliance would have been the first reporting period
beginning after June 15, 2005, which is the third quarter of 2005 for calendar
year companies. The SEC's new rule allows companies to implement SFAS No. 123(R)
at the beginning of their next fiscal year, instead of the next reporting
period, that begins on or after June 15, 2005.
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).
The Company is in the process of evaluating the requirements of SFAS No.
123(R) and currently expects to adopt SFAS No. 123(R) beginning January 1, 2006;
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.
NOTE 4: FINANCIAL INSTRUMENTS AND DERIVATIVES
The Company applies the provisions of 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.
6
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 $26.8
and $33.2 for the three months ended March 31, 2005 and 2004, 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 March
31, 2005 and December 31, 2004 for delivery of various currencies at various
future dates and the changes in fair value recorded in income during the three
months ended March 31, 2005 were not material. The notional value of outstanding
forward foreign exchange contracts at March 31, 2005 and December 31, 2004, was
$10.2 and $10.3, respectively.
All financial instruments of the Company, with the exception of hedge
instruments, are carried at cost, which approximates fair value.
NOTE 5: INVENTORIES, NET
Inventories are stated at the lower of cost or market value. The value of
inventories determined using the last-in, first-out method was $12.3 and $11.7
as of March 31, 2005 and December 31, 2004, respectively. The value of all other
inventories determined using the first-in, first-out method was $90.9 and $89.6
as of March 31, 2005 and December 31, 2004, respectively.
The components of net inventories are as follows:
MARCH 31, DECEMBER 31,
2005 2004
------------- ------------
Raw materials...................................................... $ 51.7 $ 50.4
Work-in-process.................................................... 9.5 8.3
Finished goods..................................................... 58.3 58.8
----------- -----------
119.5 117.5
Allowance for obsolescence......................................... (16.3) (16.2)
----------- -----------
$ 103.2 $ 101.3
=========== ===========
NOTE 6: GOODWILL AND OTHER INTANGIBLE, NET
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.
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.
7
The changes in the carrying amounts of goodwill for the three months ended
March 31, 2005 are as follows:
AMERICAS EMEA ASIA PACIFIC TOTAL
--------- -------- ------------ ----------
Balance, January 1, 2005..................... $ 120.3 $ 78.8 $ 20.7 $ 219.8
Acquisitions................................. 2.1 -- -- 2.1
Translation adjustments...................... -- (2.2) -- (2.2)
---------- ------- ---------- ---------
Balance, March 31, 2005...................... $ 122.4 $ 76.6 $ 20.7 $ 219.7
========= ======== ======== =========
In March 2005, the Company acquired the business and manufacturing assets of
EMCO Labels, a manufacturer and distributor of a wide range of handheld and
thermal labeling products, for $2.6. In connection with this acquisition, the
Company recognized goodwill of $1.9, based on its preliminary allocation of the
purchase price to the acquired assets and liabilities. This acquisition did not
impact the Company's results of operations for the three months ended March 31,
2005.
The Company's other intangible is as follows:
MARCH 31, DECEMBER 31,
2005 2004
----------- -----------
Noncompete agreement............................................... $ 1.7 $ 1.7
Accumulated amortization........................................... (1.1) (1.0)
----------- -----------
$ 0.6 $ 0.7
=========== ===========
NOTE 7: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
A summary of accounts payable and accrued liabilities is as follows:
MARCH 31, DECEMBER 31,
2005 2004
----------- -----------
Accounts payable..................................................... $ 46.0 $ 48.0
Accrued payroll costs................................................ 15.9 19.5
Accrued interest..................................................... 1.6 4.1
Advance service contracts............................................ 5.9 4.4
Customer incentives.................................................. 2.1 2.3
Other accrued liabilities............................................ 37.3 38.3
----------- -----------
$ 108.8 $ 116.6
=========== ===========
NOTE 8: LONG-TERM DEBT
A summary of long-term debt is as follows:
MARCH 31, DECEMBER 31,
2005 2004
----------- -----------
6.74% Senior Notes due 2008........................................ $ 150.0 $ 150.0
Economic Development Revenue Bonds due 2011 and 2019............... 13.0 13.0
Other.............................................................. -- 0.1
----------- -----------
$ 163.0 $ 163.1
=========== ===========
NOTE 9: SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes is as follows:
THREE MONTHS ENDED
MARCH 31,
----------------------
2005 2004
-------- --------
Interest........................................................... $ 5.1 $ 5.5
======== ========
Income taxes....................................................... $ 1.3 $ 2.5
======== ========
8
NOTE 10: COMPREHENSIVE (LOSS)/INCOME
Comprehensive (loss)/income for the periods presented below includes foreign
currency translation items. There was no tax expense or tax benefit associated
with the foreign currency translation items.
THREE MONTHS ENDED
MARCH 31,
----------------------
2005 2004
-------- --------
Net income........................................................... $ 5.4 $ 8.7
Foreign currency translation adjustments............................. (5.8) (2.0)
Unrealized loss on derivatives....................................... (0.1) --
-------- --------
Comprehensive (loss)/income.......................................... $ (0.5) $ 6.7
======== ========
NOTE 11: EARNINGS PER SHARE
The reconciliation of basic and diluted weighted average common shares
outstanding is as follows:
THREE MONTHS ENDED
MARCH 31,
----------------------
2005 2004
-------- --------
Weighted average common shares (basic)............................... 39.7 39.3
Options.............................................................. 1.5 0.5
-------- --------
Adjusted weighted average common shares (diluted).................... 41.2 39.8
======== ========
NOTE 12: 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")
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 as follows:
THREE MONTHS ENDED
MARCH 31,
----------------------
2005 2004
-------- --------
Sales to unaffiliated customers:
Americas............................................................. $ 81.7 $ 85.5
EMEA................................................................. 53.0 57.2
Asia Pacific......................................................... 52.5 46.1
-------- --------
Total........................................................... $ 187.2 $ 188.8
======== ========
Intersegment sales:
Americas............................................................. $ 16.9 $ 14.4
EMEA................................................................. 10.0 11.8
Asia Pacific......................................................... 5.5 4.3
Eliminations......................................................... (32.4) (30.5)
-------- --------
Total........................................................... $ -- $ --
======== ========
9
THREE MONTHS ENDED
MARCH 31,
----------------------
2005 2004
-------- --------
Income before taxes (a):
Americas (b)......................................................... $ 7.0 $ 6.4
EMEA................................................................. 1.7 4.2
Asia Pacific......................................................... 6.4 7.6
-------- --------
15.1 18.2
Corporate expenses................................................... (5.4) (4.1)
Amortization of other intangible..................................... (0.1) (0.1)
-------- --------
Operating income................................................ 9.6 14.0
Interest expense, net................................................ (2.6) (2.7)
-------- --------
Total........................................................... $ 7.0 $ 11.3
======== ========
(a)Certain reclassifications have been made to prior period's income
before taxes to conform to the presentation used in the current
period.
(b)For the three months ended March 31, 2005, Americas included
integration/restructuring and other costs of $0.8.
Depreciation and amortization:
Americas............................................................. $ 3.1 $ 3.4
EMEA................................................................. 2.3 2.3
Asia Pacific......................................................... 2.1 1.5
-------- --------
7.5 7.2
Corporate............................................................ 0.3 0.4
-------- --------
Total........................................................... $ 7.8 $ 7.6
======== ========
Capital expenditures:
Americas............................................................. $ 2.0 $ 2.6
EMEA................................................................. 1.3 1.3
Asia Pacific......................................................... 4.5 4.4
-------- --------
7.8 8.3
Corporate............................................................ 0.1 0.1
-------- --------
Total........................................................... $ 7.9 $ 8.4
======== ========
MARCH 31, DECEMBER 31,
2005 2004
---------- ------------
Long-lived assets:
Americas............................................................. $ 193.8 $ 193.9
EMEA................................................................. 125.8 130.8
Asia Pacific......................................................... 63.5 61.5
---------- ----------
383.1 386.2
Corporate............................................................ 5.2 4.2
---------- ----------
Total........................................................... $ 388.3 $ 390.4
========== ==========
Total assets:
Americas............................................................. $ 298.9 $ 301.1
EMEA................................................................. 237.0 243.1
Asia Pacific......................................................... 147.7 150.9
---------- ----------
683.6 695.1
Corporate............................................................ 89.2 78.6
---------- ----------
Total........................................................... $ 772.8 $ 773.7
========== ==========
The following table presents sales by product:
THREE MONTHS ENDED
MARCH 31,
----------------------
2005 2004
-------- --------
Apparel Identification Products...................................... $ 129.1 $ 132.4
Bar Code and Pricing Solutions....................................... 58.1 56.4
-------- --------
Total........................................................... $ 187.2 $ 188.8
======== ========
10
The Company derived sales in the United States of $61.1, or 32.7% of the
total sales, for the three months ended March 31, 2005, and $66.1, or 35.0% of
the total sales, for the three months ended March 31, 2004. In addition, the
Company's long-lived assets in the United States as of March 31, 2005 and
December 31, 2004, amounted to $161.6 and $161.1, respectively.
No customer accounted for more than 10% of the Company's revenues or
accounts receivable for the three months ended March 31, 2005 or 2004.
NOTE 13: INTEGRATION/RESTRUCTURING AND OTHER COSTS
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.
During the first quarter of 2005, the Company recognized a pre-tax charge of
$0.8 in connection with the closure of the Hillsville plant. The amount
pertained to (1) a charge of $0.5 for severance benefits for 80 manufacturing
employees and 5 customer service and administrative personnel, (2) a charge of
$0.2 for the relocation of machinery and equipment and (3) a charge of $0.1 for
other related costs.
The following table presents the changes in accruals pertaining to the
Company's restructuring and related initiatives for the three months ended March
31, 2005:
BALANCE, BALANCE,
JANUARY 1, 2005 EXPENSES PAYMENTS MARCH 31, 2005
--------------- -------- -------- --------------
Severance..................... $ -- $ 0.5 $ (0.3) $ 0.2
Other costs................... -- 0.3 (0.3) --
----------- -------- -------- -----------
$ -- $ 0.8 $ (0.6) $ 0.2
=========== ======== ======== ===========
In April 2005, the Company announced that it is in the process of evaluating
a series of initiatives that will improve margins and lower costs in its EMEA
region in light of recent volume declines in Europe primarily due to softening
of the economy, notably in the retail and apparel manufacturing industries.
Presently, the Company anticipates those initiatives will result in the
consolidation of certain European operations and headcount reductions with
estimated charges of approximately $2.5 over the balance of the year.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
All amounts in the following discussion are stated in millions, except
headcount.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management has identified the following policies and estimates as critical
to the Company's business operations and the understanding of the Company's
results of operations. Note that the preparation of this Quarterly Report on
Form 10-Q requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the Company's financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
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 each element 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 three months ended March 31, 2005 and 2004, the provision for sales returns
and allowances accounted for as a reduction to gross sales was not material.
12
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 $124.7, net of
allowances of $11.8, at March 31, 2005, and $132.5, net of allowances of $12.3,
at December 31, 2004.
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 $12.3 and $11.7
as of March 31, 2005 and December 31, 2004, respectively. The value of all other
inventories determined using the first-in, first-out method was $90.9 and $89.6
as of March 31, 2005 and December 31, 2004, 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. There were no significant impairment losses related to
long-lived assets for the three months ended March 31, 2005 and 2004.
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.
13
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.
On October 22, 2004, the President of the 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 FOR THE THREE MONTHS ENDED MARCH 31, 2005, AS COMPARED
WITH THE THREE MONTHS ENDED MARCH 31, 2004
OVERVIEW
In order to better serve a customer base consisting predominantly of
retailers, branded apparel companies and contract manufacturers, 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 the three months ended March 31,
2005 and 2004, in dollars and as a percent of sales, are presented below:
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, 2005 MARCH 31, 2004
-------------------- --------------------
Sales............................................. $ 187.2 100.0% $ 188.8 100.0%
Cost of sales..................................... 116.5 62.2 116.5 61.7
-------- ------- -------- -------
Gross profit.................................. 70.7 37.8 72.3 38.3
Selling, general and administrative expenses...... 60.3 32.3 58.3 30.9
Integration/restructuring and other costs......... 0.8 0.4 -- --
-------- ------- -------- -------
Operating income.............................. 9.6 5.1 14.0 7.4
Interest expense, net............................. 2.6 1.4 2.7 1.4
-------- ------- -------- -------
Income before taxes........................... 7.0 3.7 11.3 6.0
Taxes on income................................... 1.6 0.8 2.6 1.4
-------- ------- -------- -------
Net income.................................... $ 5.4 2.9% $ 8.7 4.6%
======== ======= ======== =======
For the three months ended March 31, 2005, the Company's sales declined
$1.6, or 0.8%, to $187.2, compared with $188.8 for the three months ended March
31, 2004. The sales decline was driven by a $4.0 decline in organic sales, which
excludes acquisitions, offset by the favorable impact of changes in foreign
exchange rates of $2.4. Management notes that in the first quarter of 2005, the
anticipated sales upswing in March was not fully realized primarily due to
softness in European markets. In addition, the Company experienced some weakness
in the U.S. apparel markets.
14
SALES
The following table presents sales by geographic operating segment:
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, 2005 MARCH 31, 2004
--------------------- --------------------
Americas.......................................... $ 81.7 43.7% $ 85.5 45.3%
EMEA.............................................. 53.0 28.3 57.2 30.3
Asia Pacific...................................... 52.5 28.0 46.1 24.4
-------- ------- -------- -------
Total......................................... $ 187.2 100.0% $ 188.8 100.0%
======== ======= ======== =======
Americas' sales include sales delivered through the Company's operations
principally in North America and Latin America. Sales decreased $3.8, or 4.4%,
to $81.7 for the three months ended March 31, 2005, compared with $85.5 for the
three months ended March 31, 2004. The decrease was attributable to a decline in
organic sales of $4.1, offset by the favorable impact of changes in foreign
exchange rates of $0.3. Management attributes the decline in organic sales to
the softening in the U.S. retail and apparel manufacturing industries.
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.
EMEA's sales, which include sales delivered through the Company's operations
in 12 European countries, the Middle East and Africa, decreased $4.2, or 7.3%,
to $53.0 for the three months ended March 31, 2005, compared with $57.2 for the
three months ended March 31, 2004. The decrease was attributable to a decline in
organic sales of $6.3, offset by the favorable impact of changes in foreign
exchange rates of $2.1. Management believes that the weakness in economic and
retail conditions in EMEA dampened overall customer demand, which in turn put
pressure on EMEA's sales in the first quarter of 2005. In addition, the Company
experienced sales migration to Asia Pacific as manufacturers sought to reduce
labor costs.
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 $6.4, or 13.9%, to $52.5 for the three months ended March
31, 2005, compared with $46.1 for the three months ended March 31, 2004. The
entire increase was attributable to organic sales growth. The Company's
operations in this region have continued to benefit from the steady migration of
many of the Company's customers that have moved their production outside the
U.S. and Western Europe to minimize labor costs and maximize operating
performance efficiencies.
GROSS PROFIT
Gross profit was $70.7, or 37.8% of sales, for the three months ended March
31, 2005, compared with $72.3, or 38.3% of sales, for the three months ended
March 31, 2004. The lower gross margin was primarily the result of the
under-absorption of fixed factory overhead costs. Management's ongoing strategy
includes implementing process improvements to reduce costs in all of the
Company's manufacturing facilities, re-deploying assets to manage production
capacity, and expanding production in new and emerging markets in order to
minimize labor costs and maximize operating performance efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A) EXPENSES
SG&A expenses were $60.3 for the three months ended March 31, 2005, compared
with $58.3 for the three months ended March 31, 2004. As a percent of sales,
SG&A expenses were 32.3% for the three months ended March 31, 2005, compared
with 30.9% for the three months ended March 31, 2004. The increase in spending
was primarily attributable to the negative impact of changes in foreign exchange
rates and incremental costs incurred as a result of regulatory requirements
under the Sarbanes-Oxley Act of 2002.
INTEGRATION/RESTRUCTURING AND OTHER COSTS
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.
15
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.
During the first quarter of 2005, the Company recognized a pre-tax charge of
$0.8 in connection with the closure of the Hillsville plant. The amount
pertained to (1) a charge of $0.5 for severance benefits for 80 manufacturing
employees and 5 customer service and administrative personnel, (2) a charge of
$0.2 for the relocation of machinery and equipment and (3) a charge of $0.1 for
other related costs.
OPERATING INCOME
Operating income was $9.6, or 5.1% of sales, for the three months ended
March 31, 2005, compared with $14.0, or 7.4% of sales, for the three months
ended March 31, 2004. On a reportable segment basis, exclusive of corporate
expenses and amortization of other intangible, operating income, as a percent of
sales, was as follows:
THREE MONTHS ENDED
MARCH 31,
----------------------
2005 2004
-------- --------
Americas.............................................. 8.6% 7.5%
EMEA.................................................. 3.2 7.3
Asia Pacific.......................................... 12.2 16.5
Americas included integration/restructuring and other costs, as a percent of
sales, of 1.0% for the three months ended March 31, 2005.
EMEA's operating income, as a percent of sales, decreased to 3.2% for the
three months ended March 31, 2005, compared with 7.3% for the three months ended
March 31, 2004. The decrease primarily resulted from a combination of the
downturn in EMEA's sales volume and its fixed cost base.
Asia Pacific's operating income, as a percent of sales, decreased to 12.2%
for the three months ended March 31, 2005, compared with 16.5% for the three
months ended March 31, 2004. The decrease was primarily attributable to the
under-absorption of fixed factory overhead costs.
INTEREST EXPENSE, NET
Interest expense, net of interest income on invested cash, was $2.6 for the
three months ended March 31, 2005, compared with $2.7 for the three months ended
March 31, 2004. The decrease was primarily attributable to lower average
borrowings under the Company's revolving credit facility.
TAXES ON INCOME
The effective tax rate for each of the three months ended March 31, 2005 and
2004 was 23.0%. The rate is based on management's estimates of the geographic
mix of projected pre-tax income, the timing and amounts of foreign dividends,
and state and local taxes. In the event that actual results differ from these
estimates or these estimates change in future periods, the Company may need to
adjust the rate, which could materially impact its results of operations.
16
LIQUIDITY AND CAPITAL RESOURCES
The following table presents summary cash flow information for the periods
indicated:
THREE MONTHS ENDED
MARCH 31,
----------------------
2005 2004
-------- --------
Net cash provided by operating activities............. $ 11.5 $ 16.4
Net cash used in investing activities................. (10.2) (7.4)
Net cash provided by/(used in) financing activities... 7.5 (23.4)
-------- --------
Increase/(decrease) in cash and cash equivalents (a) $ 8.8 $ (14.4)
======== ========
- ----------
(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 $11.5 for the three months ended March 31, 2005, compared with
$16.4 for the three months ended March 31, 2004. 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 $234.3 and 2.9:1 at
March 31, 2005, compared with $227.2 and 2.7:1 at December 31, 2004. The
increase in working capital resulted from increases in cash and cash
equivalents, inventories and deferred income taxes, and decreases in accounts
payable and accrued liabilities, offset by decreases in accounts receivable and
other current assets, and increases in amounts due to banks and accrued taxes on
income.
INVESTING ACTIVITIES
For the three months ended March 31, 2005 and 2004, the Company incurred
$7.9 and $8.4, 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 the first quarter of 2005, the Company
acquired the business and manufacturing assets of EMCO Labels, a manufacturer
and distributor of a wide range of handheld and thermal labeling products, for
$2.6.
During the first quarter of 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.
FINANCING ACTIVITIES
The components of total capital as of March 31, 2005 and December 31, 2004,
respectively, are presented below:
MARCH 31, DECEMBER 31,
2005 2004
------------- -------------
Due to banks....................................................... $ 4.5 $ 3.9
Long-term debt..................................................... 163.0 163.1
----------- -----------
Total debt..................................................... 167.5 167.0
Shareholders' equity............................................... 447.3 440.6
----------- -----------
Total capital.................................................. $ 614.8 $ 607.6
=========== ===========
Total debt as a percent of total capital........................... 27.2% 27.5%
=========== ===========
17
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 three months ended March 31, 2005 and 2004, net borrowings/
(repayments) of the Company's outstanding debt were $0.5 and $(27.5),
respectively.
The Company has various stock-based compensation plans, including two stock
option plans, a long-term incentive plan, and an employee stock purchase plan.
For the three months ended March 31, 2005 and 2004, the Company received
proceeds of $7.0 and $4.1, 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 during the three
months ended March 31, 2005 and 2004. As of March 31, 2005, 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.
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
March 31, 2005 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 (5.75% at March 31, 2005 and
5.25% at December 31, 2004), 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:
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 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.
18
RECENT DEVELOPMENT
In April 2005, the Company announced that it is in the process of evaluating
a series of initiatives that will improve margins and lower costs in its EMEA
region in light of recent volume declines in Europe primarily due to softening
of the economy, notably in the retail and apparel manufacturing industries.
Presently, the Company anticipates those initiatives will result in the
consolidation of certain European operations and headcount reductions with
estimated charges of approximately $2.5 over the balance of the year.
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 $26.8
and $33.2 for the three months ended March 31, 2005 and 2004, respectively.
The following table summarizes as of March 31, 2005, the Company's forward
foreign exchange contracts by currency. All of the Company's forward foreign
exchange contracts mature within a year. Contract amounts are representative of
the expected payments to be made under these instruments:
Contract Amounts (in thousands)
------------------------------------ Fair Value
Receive Pay (US$ 000's)
---------------- ---------------- ------------
Contracts to receive US$/pay euro ("EUR")....................... US$ 245 (EUR) 184 $ 7
Contract to receive US$/pay British pounds ("GBP").............. US$ 5,603 (GBP) 2,977 $ 10
Contract to receive US$/pay Moroccan dirham ("MAD")............. US$ 136 (MAD) 1,161 $ 1
Contracts to receive GBP/pay US$................................ (GBP) 100 US$ 191 $ (3)
Contracts to receive GBP/pay EUR................................ (GBP) 158 (EUR) 228 $ 11
Contract to receive GBP/pay MAD................................. (GBP) 611 (MAD) 9,849 $ 1
Contracts to receive EUR/pay US$................................ (EUR) 1,656 US$ 2,187 $ (55)
Contract to receive EUR/pay MAD................................. (EUR) 330 (MAD) 3,707 $ (6)
Contract to receive Hong Kong $ ("HK$")/pay EUR................. (HK$) 114 (EUR) 11 $ -
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 a minimal impact 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
for the three months ended March 31, 2005 and 2004.
19
CAUTIONARY STATEMENT PURSUANT TO "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical information, the Company's reports to the Securities
and Exchange Commission ("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 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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The information required by this Item is set forth under the heading "Market
Risk" in Management's Discussion and Analysis of Financial Condition and Results
of Operations, above, which information is hereby incorporated by reference.
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ITEM 4. 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 Chief 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 Chief Financial
Officer concluded as of the Evaluation Date that its disclosure controls and
procedures were effective such that the information relating to the Company
required to be disclosed in its SEC reports (i) is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms, and (ii) is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
INTERNAL CONTROL OVER FINANCIAL REPORTING. 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 first quarter of 2005,
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS.
Exhibit 10.1 Employment Agreement, dated April 21, 2005, between Paxar
Corporation and Robert P. van der Merwe.(A)
Exhibit 10.2 Change of Control Employment Agreement, dated April 26, 2005,
by and between Paxar Corporation and Robert P. van der Merwe.(B)
Exhibit 31.1 Certification of the Chief Executive Officer required by Rule
13a-14(a) or Rule 15d-14(a).
Exhibit 31.2 Certification of the Chief Financial Officer required by Rule
13a-14(a) or Rule 15d-14(a).
Exhibit 32.1 Certification of the Chief Executive Officer required by
Rule 13a-14(b) or 18 U.S.C. 1350.
Exhibit 32.2 Certification of the Chief Financial Officer required by
Rule 13a-14(b) or 18 U.S.C. 1350.
- ----------
(A) Incorporated herein by reference from Item 1.01 of the Registrant's Current
Report on Form 8-K dated April 21, 2005.
(B) Incorporated herein by reference from Exhibit 10.1 to the Registrant's
Current Report on Form 8-K dated April 26, 2005.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAXAR CORPORATION
--------------------------------
(Registrant)
BY: /S/ JAMES R. PAINTER
--------------------------------
Interim Executive Vice President
and Chief Financial Officer
MAY 9, 2005
--------------------------------
Date
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