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, 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 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: 39,644,756 shares outstanding as of May 3, 2004
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, 2003.
1
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
(unaudited)
Three Months Ended
March 31,
-----------------------
2004 2003
---------- ----------
Sales................................................ $ 188.8 $ 163.0
Cost of sales........................................ 116.5 102.0
---------- ----------
Gross profit.................................... 72.3 61.0
Selling, general and administrative expenses......... 58.3 53.2
Integration/restructuring and other costs............ -- 3.1
---------- ----------
Operating income................................ 14.0 4.7
Interest expense, net................................ 2.7 2.9
---------- ----------
Income before taxes............................. 11.3 1.8
Taxes on income...................................... 2.6 0.4
---------- ----------
Net income...................................... $ 8.7 $ 1.4
========== ==========
Basic earnings per share............................. $ 0.22 $ 0.04
========== ==========
Diluted earnings per share........................... $ 0.22 $ 0.03
========== ==========
Weighted average shares outstanding:
Basic.............................................. 39.3 39.1
Diluted............................................ 39.8 39.7
The accompanying notes are an integral part of the financial statements.
2
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
March 31, December 31,
2004 2003
---------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 49.9 $ 64.4
Accounts receivable, net of allowances
of $10.5 and $10.0 at March 31, 2004
and December 31, 2003, respectively................. 129.4 127.0
Inventories.......................................... 96.0 94.1
Deferred income taxes................................ 11.8 11.8
Other current assets................................. 18.9 16.0
---------- -----------
Total current assets....................... 306.0 313.3
---------- -----------
Property, plant and equipment, net................... 163.9 163.8
Goodwill and other intangible, net................... 215.0 213.6
Other assets......................................... 23.8 24.2
---------- -----------
Total assets......................................... $ 708.7 $ 714.9
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to banks......................................... $ 4.0 $ 4.3
Accounts payable and accrued
liabilities......................................... 114.2 103.1
Accrued taxes on income.............................. 11.8 11.8
---------- -----------
Total current liabilities.................. 130.0 119.2
---------- -----------
Long-term debt....................................... 163.1 190.3
Deferred income taxes................................ 12.0 11.9
Other liabilities.................................... 15.4 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 at March 31,
2004 and December 31, 2003,
respectively........................................ 4.0 3.9
Paid-in capital...................................... 14.4 10.3
Retained earnings.................................... 354.2 345.5
Accumulated other comprehensive income............... 15.6 17.6
---------- -----------
Total shareholders' equity................. 388.2 337.3
---------- -----------
Total liabilities and shareholders'
equity.............................................. $ 708.7 $ 714.9
========== ===========
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,
----------------------
2004 2003
-------- --------
OPERATING ACTIVITIES
Net income.......................................... $ 8.7 $ 1.4
Adjustments to reconcile net income
to net cash provided
by operating activities:
Depreciation and amortization..................... 7.6 6.7
Deferred income taxes............................. 0.1 0.4
Write-off of property and equipment............... 0.2 0.3
Changes in assets and liabilities,
net of businesses acquired:
Accounts receivable............................... (2.4) 0.7
Inventories....................................... (3.6) (4.7)
Other current assets.............................. (2.9) (2.3)
Accounts payable and accrued
liabilities...................................... 10.3 (3.8)
Accrued taxes on income........................... -- (1.1)
Other, net........................................ (1.6) 4.9
-------- --------
Net cash provided by operating
activities....................................... 16.4 2.5
-------- --------
INVESTING ACTIVITIES
Purchases of property and equipment................. (8.4) (7.3)
Acquisition related................................. (0.1) --
Proceeds from sale of property and
equipment.......................................... 0.1 --
Other............................................... 1.0 --
-------- --------
Net cash used in investing
activities....................................... (7.4) (7.3)
-------- --------
FINANCING ACTIVITIES
Net (decrease)/increase in short-term
debt............................................... (0.3) 3.3
Additions to long-term debt......................... 44.3 46.2
Reductions in long-term debt........................ (71.5) (30.9)
Purchase of common stock............................ -- (5.1)
Proceeds from common stock issued
under employee stock option and
stock purchase plans............................... 4.1 1.0
-------- --------
Net cash (used in)/provided by
financing activities............................. (23.4) 14.5
-------- --------
Effect of exchange rate changes on
cash flows........................................ (0.1) 0.5
-------- --------
(Decrease)/increase in cash and cash
equivalents...................................... (14.5) 10.2
Cash and cash equivalents at beginning
of year........................................... 64.4 49.6
-------- --------
Cash and cash equivalents at end of
period........................................... $ 49.9 $ 59.8
======== ========
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 EFFECT ON NET INCOME
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," provides for a fair-value based method of
accounting for employee options and measures compensation expense using an
option valuation model that takes into account, as of the grant date, the
exercise price and expected life of the option, the current price of the
underlying stock and its expected volatility, expected dividends on the stock,
and the risk-free interest rate for the expected term of the option. The Company
has elected to continue accounting for employee stock-based compensation under
Accounting Principles Board ("APB") Opinion 25. Under APB Opinion 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. The following table presents pro forma net income (loss) and
earnings (loss) per share had the Company elected to adopt SFAS No. 123:
Three Months Ended
March 31,
----------------------
2004 2003
---------- ---------
Net income, as reported............................... $ 8.7 $ 1.4
Deduct: Stock-based employee
compensation expense determined under
fair value based method for all awards
granted, net of related tax effects................... (3.3) (3.7)
---------- ---------
Pro forma net income (loss)........................... $ 5.4 $ (2.3)
========== =========
Earnings (Loss) per Share:
Basic - as reported............................... $ 0.22 $ 0.04
Basic - pro forma................................. $ 0.14 $ (0.06)
Diluted - as reported............................. $ 0.22 $ 0.03
Diluted - pro forma............................... $ 0.14 $ (0.06)
For the three months ended March 31, 2004 and 2003, the Company received
proceeds of $3.8 and $0.6, respectively, from 514,000 and 64,000 common shares
issued upon the exercise of options granted to key employees and directors.
NOTE 3: RECENT ACCOUNTING PRONOUNCEMENT
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest
Entities," as revised in December 2003. FIN No. 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. The adoption of
FIN No. 46 did not have an impact on the Company's results of operations or
financial condition.
5
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 recorded each period
in current or comprehensive earnings, depending on whether a derivative is
designated as part of an effective hedge transaction and the resulting type of
hedge transaction. Gains and losses on derivative instruments reported in
comprehensive earnings will be reclassified to earnings in the period in which
earnings are affected by the hedged item.
The Company manages a foreign currency hedging program intended to reduce
the Company's risk in foreign currency-denominated transactions by periodically
entering into forward foreign exchange contracts. For each of the three months
ended March 31, 2004 and 2003, the aggregate notional value of forward foreign
exchange contracts the Company entered into amounted to $9.
The Company formally designates and documents the hedging relationship and
risk management objective for undertaking the hedge. The documentation describes
the hedging instrument, the item being hedged, the nature of the risk being
hedged and the Company's assessment of the hedging instrument's effectiveness in
offsetting the exposure to changes in the hedged item's fair value.
The fair value of outstanding forward foreign exchange contracts at March
31, 2004 and December 31, 2003 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, 2004 were not material. The notional value of outstanding
forward foreign exchange contracts at March 31, 2004 and December 31, 2003 was
$6 and $19, 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. The value of net
inventories determined using the last-in, first-out method was $13.1 and $14.3
as of March 31, 2004 and December 31, 2003, respectively. The value of all other
net inventories determined using the first-in, first-out method was $82.9 and
$79.8 as of March 31, 2004 and December 31, 2003, respectively.
The components of net inventories are as follows:
March 31, December 31,
2004 2003
--------- ------------
Raw materials................................. $ 44.1 $ 44.5
Work-in-process............................... 8.5 7.8
Finished goods................................ 60.2 58.1
-------- --------
112.8 110.4
Allowance for obsolescence.................... (16.8) (16.3)
-------- --------
$ 96.0 $ 94.1
======== ========
6
NOTE 6: OTHER CURRENT ASSETS
A summary of other current assets is as follows:
March 31, December 31,
2004 2003
--------- ------------
Prepaid insurance............................. $ 0.9 $ 1.1
Prepaid expenses.............................. 8.1 6.8
Other receivables............................. 9.5 7.7
Other......................................... 0.4 0.4
-------- --------
$ 18.9 $ 16.0
======== ========
NOTE 7: 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 2003, and based on a
comparison of the implied fair values of its reporting units with their
respective carrying amounts, including goodwill, the Company determined that no
impairment of goodwill existed at October 31, 2003, and there have been no
indicators of impairment since that date. A subsequent determination that this
goodwill is impaired, however, could have a significant adverse impact on the
Company's results of operations or financial condition.
The changes in the carrying amounts of goodwill for the three month ended
March 31, 2004 are as follows:
Americas EMEA Asia Pacific Total
--------- -------- ------------ ----------
Balance, January 1, 2004...... $ 119.2 $ 75.0 $ 18.3 $ 212.5
Acquisitions.................. 2.3 -- 0.1 2.4
Translation adjustments....... -- (0.9) -- (0.9)
--------- --------- -------- ---------
Balance, March 31, 2004....... $ 121.5 $ 74.1 $ 18.4 $ 214.0
========= ======== ======== =========
During the first quarter of 2004, the Company recorded goodwill of $2.3
pertained to its acquisition of the business and assets of Alkahn Labels, Inc.
in September 2003, based on its revised preliminary allocation of the purchase
price to the acquired assets and liabilities.
The Company's other intangible, which pertained to a noncompete agreement,
was $1.0, net of accumulated amortization of $0.7, at March 31, 2004, and $1.1,
net of accumulated amortization of $0.6, at December 31, 2003.
7
NOTE 8: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
A summary of accounts payable and accrued liabilities is as follows:
March 31, December 31,
2004 2003
--------- ------------
Accounts payable................................. $ 51.0 $ 45.3
Accrued payroll costs............................ 16.8 13.0
Accrued interest................................. 1.6 4.1
Advance service contracts........................ 6.3 4.6
Customer incentives.............................. 2.3 2.1
Other accrued liabilities........................ 36.2 34.0
-------- --------
$ 114.2 $ 103.1
======== ========
NOTE 9: LONG -TERM DEBT
A summary of long-term debt is as follows:
March 31, December 31,
2004 2003
--------- ------------
6.74% Senior Notes............................... $ 150.0 $ 150.0
Economic Development Revenue Bonds due 2011
and 2019........................................ 13.0 13.0
Revolving credit................................. -- 27.2
Other............................................ 0.1 0.1
-------- --------
$ 163.1 $ 190.3
======== ========
During the first quarter of 2004, the Company paid off $27.2 outstanding
balance under its revolving credit agreement at December 31, 2003.
NOTE 10: SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes is as follows:
Three Months Ended
March 31,
----------------------
2004 2003
-------- --------
Interest......................................... $ 5.5 $ 5.4
======== ========
Income taxes..................................... $ 2.5 $ 0.8
======== ========
NOTE 11: COMPREHENSIVE INCOME
Comprehensive income reflects changes in equity that result from
transactions and economic events from non-owner sources. Comprehensive income
for the periods presented below includes foreign currency translation items.
There was no tax expense or tax benefit associated with the foreign currency
translation items.
Three Months Ended
March 31,
----------------------
2004 2003
-------- --------
Net income....................................... $ 8.7 $ 1.4
Foreign currency translation adjustments......... (2.0) 6.2
-------- --------
Comprehensive income............................. $ 6.7 $ 7.6
======== ========
8
NOTE 12: EARNINGS PER SHARE
The reconciliation of basic and diluted weighted average common shares
outstanding is as follows:
Three Months Ended
March 31,
-------------------
2004 2003
----- -----
Weighted average common shares (basic)................... 39.3 39.1
Options.................................................. 0.5 0.6
----- -----
Adjusted weighted average common shares (diluted)........ 39.8 39.7
===== =====
NOTE 13: SEGMENT INFORMATION
The Company develops, manufactures and markets apparel identification
products and bar code and pricing solutions products to customers primarily in
the retail and apparel manufacturing industries. In addition, the sale of the
Company's products often result in the ongoing sale of supplies, replacement
parts and services. The Company's products are sold worldwide through a direct
sales force, through non-exclusive manufacturers' representatives, and through
international and export distributors and commission agents.
The Company's operations have been organized into three geographic segments
consisting of 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,
----------------------
2004 2003
-------- --------
Sales to unaffiliated customers:
Americas.............................................. $ 85.5 $ 79.2
EMEA.................................................. 57.2 46.6
Asia Pacific.......................................... 46.1 37.2
-------- --------
Total............................................ $ 188.8 $ 163.0
======== ========
Intersegment sales:
Americas.............................................. $ 14.4 $ 15.1
EMEA.................................................. 11.8 8.9
Asia Pacific.......................................... 4.3 2.7
Eliminations.......................................... (30.5) (26.7)
-------- --------
Total............................................ $ -- $ --
======== ========
Operating income (a):
Americas (b).......................................... $ 6.4 $ 2.0
EMEA.................................................. 3.7 1.0
Asia Pacific.......................................... 8.1 6.6
-------- --------
18.2 9.6
Corporate expenses (b)................................ (4.1) (4.8)
Amortization of other intangible...................... (0.1) (0.1)
-------- --------
Total............................................ $ 14.0 $ 4.7
======== ========
(a) Certain reclassifications have been made to prior periods' operating income
to conform to the presentation used in the current period.
(b) For the three months ended March 31, 2003, Americas and Corporate expenses
included the integration/restructuring and other costs of $2.9 and $0.2,
respectively.
9
Three Months Ended
March 31,
----------------------
2004 2003
-------- --------
Depreciation and amortization:
Americas.............................................. $ 3.4 $ 3.3
EMEA.................................................. 2.3 2.1
Asia Pacific.......................................... 1.5 1.0
-------- --------
7.2 6.4
Corporate............................................. 0.4 0.3
-------- --------
Total............................................ $ 7.6 $ 6.7
======== ========
Capital expenditures:
Americas.............................................. $ 2.6 $ 3.1
EMEA.................................................. 1.3 2.5
Asia Pacific.......................................... 4.4 1.6
-------- --------
8.3 7.2
Corporate............................................. 0.1 0.1
-------- --------
Total............................................ $ 8.4 $ 7.3
======== ========
March 31, December 31,
2004 2003
--------- ------------
Long-lived assets:
Americas........................................... $ 201.4 $ 199.9
EMEA............................................... 122.3 125.0
Asia Pacific....................................... 50.3 47.3
-------- --------
374.0 372.2
Corporate.......................................... 4.9 5.2
-------- --------
Total......................................... $ 378.9 $ 377.4
======== ========
Total assets:
Americas........................................... $ 313.6 $ 313.2
EMEA............................................... 225.0 228.5
Asia Pacific....................................... 119.4 116.6
-------- --------
658.0 658.3
Corporate.......................................... 50.7 56.6
-------- --------
Total......................................... $ 708.7 $ 714.9
======== ========
The following table presents sales by product:
Three Months Ended
March 31,
----------------------
2004 2003
-------- --------
Apparel Identification Products....................... $ 132.4 $ 109.1
Bar Code and Pricing Solutions........................ 56.4 53.9
-------- --------
Total............................................ $ 188.8 $ 163.0
======== ========
The Company derived sales in the US of $66.1, or 35.0% of the total sales,
for the three months ended March 31, 2004, and $61.4, or 37.7% of the total
sales, for the three months ended March 31, 2003. In addition, the Company's
long-lived assets in the US as of March 31, 2004 and 2003, amounted to $168.3
and $167.1, respectively.
No one customer accounted for more than 10% of the Company's revenues or
accounts receivable for the three months ended March 31, 2004 or 2003.
10
NOTE 14: INTEGRATION/RESTRUCTURING AND OTHER COSTS
During the fourth quarter of 2003, the Company incurred $9.6 of
integration/restructuring and other costs. Of this amount, $6.0 primarily
pertained to: (1) closing of several manufacturing plants in the US and the UK,
areas which have experienced a migration of apparel manufacturing to the
lower-production-cost countries and (2) headcount reductions, which resulted in
severance of 146 manufacturing positions and 85 managerial and administrative
personnel primarily in the US and the UK. In addition, the Company recognized
non-cash charges of $3.6 to write off certain 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 three month ended March
31, 2004:
Beginning Balance Ending Balance
January 1, 2004 Payments March 31, 2004
----------------- -------- --------------
Severance................... $ 1.4 $ (1.4) $ --
Termination of leases....... 1.1 (0.1) 1.0
------ ------ ------
$ 2.5 $ (1.5) $ 1.0
====== ====== ======
During the first quarter of 2003, the Company implemented specific
initiatives to reduce the cost of the Company's infrastructure and improve
operating efficiency. As a result, the Company recognized a pre-tax charge of
$3.1 primarily pertaining to: (1) consolidation of certain manufacturing
facilities as the Company closed one manufacturing location in the US and (2)
headcount reductions, which resulted in severance of 90 factory positions and 30
managerial and administrative positions primarily in the US.
11
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations for the Three Months Ended March 31, 2004
All amounts in the following discussion are stated in millions, except
headcount, share and per share data.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management has identified the following policies and estimates as critical
to the Company's business operations and the understanding of the Company's
results of operations. Note that the preparation of this Quarterly Report on
Form 10-Q requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the Company's financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
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.
Sales Returns and Allowances and Allowance for Doubtful Accounts
Management must make estimates of potential future product returns related
to current period product revenues. Management analyzes historical returns,
current economic trends, and changes in customer demand and acceptance of the
Company's products when evaluating the adequacy of the sales returns and
allowances. Significant management judgments and estimates must be made and used
in connection with establishing the sales returns and allowances in any
accounting period. Material differences could result in the amount and timing of
the Company's revenue for any period if management had made different judgments
or utilized different estimates. Similarly, management must make estimates of
the uncollectibility of the Company's accounts receivable. Management
specifically analyzes accounts receivable, historical bad debt experience,
customer concentrations, customer creditworthiness and current trends when
evaluating the adequacy of the allowance for doubtful accounts. The Company's
accounts receivable balances were $129.4, net of allowances of $10.5, at March
31, 2004, and $127.0, net of allowances of $10.0, at December 31, 2003.
12
Inventories
Inventories are stated at the lower of cost or market. The value of
inventories determined using the last-in, first-out method was $13.1 and $14.3
as of March 31, 2004 and December 31, 2003, respectively. The value of all other
inventories determined using the first-in, first-out method was $82.9 and $79.8
as of March 31, 2004 and December 31, 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.
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 2003, the Company completed its annual goodwill
impairment assessment, and based on the results, the Company determined that no
impairment of goodwill existed at October 31, 2003, and there have been no
indicators of impairment since that date. A subsequent determination that this
goodwill is impaired, however, could have a significant adverse impact on the
Company's results of operations or financial condition.
Impairment of Long-Lived Assets
The Company periodically reviews its long-lived assets for impairment by
comparing the carrying values of the assets with their estimated future
undiscounted cash flows. If it is determined that an impairment loss has
occurred, the loss is recognized during that period. The impairment loss is
calculated as the difference between asset carrying values and fair value as
determined by prices of similar items and other valuation techniques (discounted
cash flow analysis), giving consideration to recent operating performance and
pricing trends. There were no significant impairment losses related to
long-lived assets for the three months ended March 31, 2004 and 2003.
Accounting for Income Taxes
As part of the process of preparing the consolidated financial statements,
management is required to estimate the income taxes in each jurisdiction in
which the Company operates. This process involves estimating the actual current
tax liabilities together with assessing temporary differences resulting from the
differing treatment of items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included in the
consolidated balance sheet. Management must then assess the likelihood that the
deferred tax assets will be recovered, and to the extent that management
believes that recovery is not more than likely, the Company must establish a
valuation allowance. If a valuation allowance is established or increased during
any period, the Company must include this amount as an expense within the tax
provision in the consolidated statement of income. Significant management
judgment is required in determining the Company's provision for income taxes,
deferred tax assets and liabilities and any valuation allowance recognized
against net deferred assets. The valuation allowance is based on management's
estimates of the taxable income in the jurisdictions in which the Company
operates and the period over which the deferred tax assets will be recoverable.
In the event that actual results differ from these estimates or management
adjusts these estimates in future periods, the Company may need to establish an
additional valuation allowance, which could materially impact its results of
operations. Deferred taxes are not provided on the portion of undistributed
earnings of non-US subsidiaries which is considered to be permanently
reinvested.
13
RESULTS OF OPERATIONS
Overview
In order to better serve a customer base consisting of retailers and
apparel manufacturers, the Company's operations have been organized into three
geographic segments consisting of 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,
2004 and 2003, in dollars and as a percent of sales are presented below:
Three Months Ended
---------------------------------------------
March 31, 2004 March 31, 2003
-------------------- --------------------
Sales............................................. $188.8 100.0% $163.0 100.0%
Cost of sales..................................... 116.5 61.7 102.0 62.6
------ ----- ------ -----
Gross profit.................................. 72.3 38.3 61.0 37.4
Selling, general and administrative expenses...... 58.3 30.9 53.2 32.6
Integration/restructuring and other costs......... -- -- 3.1 1.9
------ ----- ------ -----
Operating income.............................. 14.0 7.4 4.7 2.9
Interest expense, net............................. 2.7 1.4 2.9 1.8
------ ----- ------ -----
Income before taxes........................... 11.3 6.0 1.8 1.1
Taxes on income................................... 2.6 1.4 0.4 0.2
------ ----- ------ -----
Net income.................................... $ 8.7 4.6% $ 1.4 0.9%
====== ===== ====== =====
The Company began 2004 with strong first quarter results. The Company's
sales increased $25.8, or 15.8%, to $188.8 for the three months ended March 31,
2004, from $163.0 for the three months ended March 31, 2003. Of the total
increase, $9.3 was attributable to organic sales growth, which excludes
acquisitions and the impact of changes in foreign exchange rates. This solid
growth reflects the combination of increased customer demand across the entire
range of the Company's existing and new products and the expansion of the
Company's operations in the emerging markets of Latin America, EMEA and Asia
Pacific. In addition, $9.2 increase was attributable to an acquisition made
during 2003, and $7.3 increase was attributable to favorable impact of changes
in foreign exchange rates.
Management believes that the Company was able to increase sales over the
prior year period through the successful implementation of its proven business
strategy and continued focus on providing its customers with value-added
products and solutions, outstanding service, consistent quality and on-time
deliveries. In addition, the Company continued to successfully execute its
longstanding strategy of growing through acquisitions with its September 2003
acquisition of Alkahn Labels, Inc. ("Alkahn"). Management believes that the
Company's investments in new product development, upgraded manufacturing
equipment, new technology, innovative programs, and sales and marketing
initiatives have positioned the Company to compete successfully.
Operating income was $14.0, or 7.4% of sales, for the three months ended
March 31, 2004, compared with $4.7, or 2.9% of sales, for the three months ended
March 31, 2003. The operating results for the three months ended March 31, 2003,
included integration/restructuring and other costs of $3.1 recognized in
connection with the consolidation of operations and headcount reductions (see
Note 14 of the Notes to Consolidated Financial Statements).
14
Sales
The following table presents sales by geographic operating segment:
Three Months Ended
---------------------------------------------
March 31, 2004 March 31, 2003
-------------------- --------------------
Americas......................... $ 85.5 45.3% $ 79.2 48.6%
EMEA............................. 57.2 30.3 46.6 28.6
Asia Pacific..................... 46.1 24.4 37.2 22.8
-------- ------ -------- ------
Total........................ $ 188.8 100.0% $ 163.0 100.0%
======== ====== ======== ======
Americas sales include sales delivered through Company's operations
principally in North America and Latin America. Sales increased $6.3 or 8.0% to
$85.5 for the three months ended March 31, 2004, compared with $79.2 for the
three months ended March 31, 2003. The Americas sales increase was primarily due
to the Alkahn acquisition. Management notes that sales volume gains driven by
strength in apparel identification products from an improving economic
environment in the US were offset by a sales migration trend that continued into
2004. Many of the Company's customers have steadily moved their production
facilities outside the US 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 Company's operations in
12 European countries, the Middle East and Africa, increased $10.6, or 22.7%, to
$57.2 for the three months ended March 31, 2004, compared with $46.6 for the
three months ended March 31, 2003. The increase is attributable to organic sales
growth of $4.2 and favorable impact of changes in foreign exchange rates of
$6.4. Management notes that the Company's operations in Turkey, Italy and Norway
posted solid volume gains. In addition, the Company's recently established
operations in Morocco, Portugal and United Arab Emirates contributed to EMEA's
sales growth. The overall increase in organic sales was somewhat offset by the
continued sales migration to Asia Pacific as manufacturers sought to maximize
production efficiencies.
Asia Pacific consists of the Company's operations in Hong Kong, China,
Singapore, Sri Lanka, Korea, Bangladesh, Indonesia, Vietnam and India. Sales
increased $8.9, or 23.9%, to $46.1 for the three months ended March 31, 2004,
compared with $37.2 for the three months ended March 31, 2003. The increase is
attributable to organic sales growth of $5.9 and the Alkahn acquisition of $3.0.
The Company's operations in this region have benefited significantly from the
steady and continued migration of the Company's customers who have moved their
production facilities outside the US and Western Europe to maximize labor cost
and operating performance efficiencies. In addition, the Company believes that
it continued to gain market share in Asia Pacific.
Gross Profit
Gross profit, as a percent of sales, increased to 38.3% for the three
months ended March 31, 2004, compared with 37.4% for the three months ended
March 31, 2003. The higher gross margin reflects reduced manufacturing costs as
the Company successfully executed the consolidation of its production sites in
the US and completed transferring of apparel manufacturing from its UK
operations to the lower-production-cost countries. Since 2001, management's
ongoing strategy has included implementing process improvements to reduce costs
in all of the Company's manufacturing facilities, efficiently re-deploying
assets to manage production capacity and expanding production in new and
emerging markets in order to maximize labor and production efficiencies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, as a percent of sales,
decreased to 30.9% for the three months ended March 31, 2004, compared with
32.6% for the three months ended March 31, 2003. The decrease is primarily
attributable to the benefits captured through a series of initiatives in 2003 to
reduce fixed costs and sales growth leveraged against the Company's fixed
expense base.
15
Integration/Restructuring and Other Costs
During the first quarter of 2003, the Company implemented specific
initiatives to reduce the cost of the Company's infrastructure and improve
operating efficiency. As a result, the Company recognized a pre-tax charge of
$3.1 primarily pertaining to: (1) consolidation of certain manufacturing
facilities as the Company closed one manufacturing location in the US and (2)
headcount reductions, which resulted in severance of 90 factory positions and 30
managerial and administrative positions primarily in the US.
Operating Income
Operating income was $14.0 for the three months ended March 31, 2004,
compared with $4.7 for the three months ended March 31, 2003. As a percent of
sales, operating income was 7.4% for the three months ended March 31, 2004 and
2.9% for the three months ended March 31, 2003. The operating results for the
three months ended March 31, 2003 included integration/restructuring and other
costs of $3.1.
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,
------------------
2004 2003
----- -----
Americas.............................................. 7.5% 2.5%
EMEA.................................................. 6.5 2.1
Asia Pacific.......................................... 17.6 17.7
Americas included the integration/restructuring and other costs, as a
percent of sales, of 3.7% for the three months ended March 31, 2003.
Interest Expense, Net
Interest expense, net of interest income on invested cash, decreased to
$2.7 for the three months ended March 31, 2004, compared with $2.9 for the three
months ended March 31, 2003. The decrease is primarily attributable to higher
interest income on invested cash.
Taxes on Income
The effective tax rate for each of the three months ended March 31, 2004
and 2003 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.
Liquidity and Capital Resources
The following table presents summary cash flow information for the periods
indicated:
Three Months Ended
March 31,
-----------------------
2004 2003
-------- --------
Net cash provided by operating activities............. $ 16.4 $ 2.5
Net cash used in investing activities................. (7.4) (7.3)
Net cash (used in)/provided by financing activities... (23.4) 14.5
-------- --------
(Decrease)/increase in cash and cash equivalents (a) $ (14.4) $ 9.7
======== ========
__________
(a) Before the effect of exchange rate changes on cash flows.
16
Operating Activities
Cash provided by operating activities is a primary source of funds to
finance operating needs and growth opportunities. The Company's revolving credit
agreement provides additional liquidity for seasonal and specific-purpose
expenditures. Net cash provided by operating activities was $16.4 for the three
months ended March 31, 2004, compared with $2.5 for the three months ended March
31, 2003. Management believes that the Company will continue to generate cash
from its operating activities for the foreseeable future supplemented by
availability under its revolving credit agreement to fund its working capital
needs, strengthen its balance sheet and support its growth strategy of expanding
its geographic reach and product offerings.
Working capital and the corresponding current ratio were $176.0 and 2.4:1
and $194.1 and 2.6:1 at March 31, 2004 and December 31, 2003, respectively. The
decrease in working capital resulted primarily from decreases in cash and cash
equivalents and increases in accounts payable and accrued liabilities, offset by
increases in accounts receivable, inventories and other current assets.
Investing Activities
For the three months ended March 31, 2004 and 2003, the Company incurred
$8.4 and $7.3, respectively, of capital expenditures pertaining to continued
production machinery and system upgrades and the costs associated with growth
and expansion of the Company's operations in the emerging markets of Latin
America, EMEA and Asia Pacific. Additionally, 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, 2004 and December 31, 2003,
respectively, are presented below:
March 31, December 31,
2004 2003
--------- ------------
Due to banks......................................... $ 4.0 $ 4.3
Long-term debt....................................... 163.1 190.3
-------- --------
Total debt....................................... 167.1 194.6
Shareholders' equity................................. 388.2 377.3
-------- --------
Total capital.................................... $ 555.3 $ 571.9
======== ========
Total debt as a percent of total capital............. 30.1% 34.0%
======== ========
Management believes that the borrowings available under the Company's
revolving credit agreement provide sufficient liquidity to supplement the
Company's operating cash flow to support the Company's planned business
activities and seasonal and specific-purpose expenditures. For the three months
ended March 31, 2004 and 2003, net (repayments)/borrowings of the Company's
outstanding debt were $(27.5) and $18.6, respectively.
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 for
the three months ended March 31, 2004. For the three months ended March 31,
2003, the Company repurchased 469,000 shares for an aggregate price of $5.1, or
$10.80 per share. Since the inception of the stock repurchase program, the
Company 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 March 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 revolving credit agreement
are adequate to allow it to continue to repurchase its shares under the stock
repurchase plan.
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, 2004 and 2003, the Company received
proceeds of $4.1 and $1.0, respectively, from common stock issued under its
employee stock option and stock purchase plans.
17
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 ("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 EITF Topic D-98, "Classification
and Measurement of Redeemable Securities," (issued by the Financial Accounting
Standards Board on July 19, 2001), securities that are redeemable for cash or
other assets must be classified outside of shareholders' equity, if they are
redeemable at the option of the holder, as were the redeemable common shares
owned by the Chairman. The Company concluded that Rule 5-02.28, as interpreted
by EITF Topic D-98, applied to the redeemable common shares because the
redemption features were not solely within its control. While Rule 5-02.28
specifically addressed redeemable preferred stocks, EITF Topic D-98 makes it
clear that redeemable preferred stock is analogous to other equity instruments,
including common shares. Accordingly, the Company determined that the redeemable
common shares should have been classified as temporary equity in its financial
statements for periods ended after July 11, 2001 until the Agreement was
terminated on November 17, 2003. However, the Company was unable to have the
reclassification adjustments pertaining to its 2001 financial statements
audited. Consequently, the Company was unable to file three years of audited
financial information in its 2003 Annual Report on Form 10-K as required under
Rules 3-01 and 3-02 of Regulation S-X.
Because the Company does not have three years of audited financial
information on file with the SEC, the Company's reports filed under the
Securities Exchange Act of 1934 (the "Exchange Act") are not in full compliance
with the requirements of the Exchange Act. As a result, the effectiveness of the
Company's Registration Statements on Form S-8 (Nos. 333-38923, 333-43694, and
333-43696) is suspended, and the Company is unable to issue shares under its
employee stock purchase and stock option plans. Additionally, during any period
when the Company is not current in its SEC reports, neither affiliates of the
Company nor any person that purchased shares from the Company in a private
offering during the preceding two years will be able to sell their shares in
public markets pursuant to Rule 144 under the Securities Act of 1933. The
Company expects that it will again have three years of audited financial
information on file with the SEC and its Exchange Act reports will comply with
SEC requirements when the Company files its 2004 audited financial statements
with its 2004 Annual Report on Form 10-K.
Financing Arrangement - Amended and Restated Credit Agreement
In September 2002, the Company entered into a three-year, $150 revolving
credit agreement with a group of five domestic and international banks. The
agreement amended and restated the Company's previous revolving credit facility.
Under the credit agreement, the Company pays a facility fee determined by
reference to the ratio of debt to earnings before interest, taxes, depreciation
and amortization ("EBITDA"). The applicable percentage for the facility fee at
March 31, 2004 was 0.3%. Borrowings under the credit agreement bear interest at
rates referenced to the London Interbank Offered Rate with applicable margins
varying in accordance with the Company's attainment of specified debt to EBITDA
thresholds or, at the Company's option, rates competitively bid among the
participating banks or the Prime Rate, as defined (4.00% at March 31, 2004 and
December 31, 2003), and are guaranteed by certain domestic subsidiaries of the
Company.
The credit facility, among other things, limits the Company's ability to
change the nature of its businesses, incur indebtedness, create liens, sell
assets, engage in mergers and make investments in certain subsidiaries. The
credit facility contains certain customary events of default, which generally
give the banks the right to accelerate payments of outstanding debt. Under the
credit facility, these events include:
o Failure to maintain required financial covenant ratios, as described
below;
o Failure to make a payment of principal, interest or fees within two
days of its due date;
o Default, beyond any applicable grace period, on any aggregate
indebtedness of the Company exceeding $0.5;
o Judgment or order involving a liability in excess of $0.5; and
o Occurrence of certain events constituting a change of control of the
Company.
18
Additionally, the Company must maintain at all times an excess of
consolidated total assets over total liabilities of not less than the sum of
$274 plus 35% of consolidated net income for the period after July 1, 2002 plus
100% of the net cash proceeds received by the Company from the sale or issuance
of its common stock on and after July 1, 2002. The Company's maximum allowable
debt to EBITDA ratio, as defined, is as follows:
Prior to January 1, 2004......................................3.0 to 1
From January 1, 2004 to September 30, 2004....................3.5 to 1
After September 30, 2004......................................3.0 to 1
The Company's minimum allowable fixed charge coverage ratio, as defined, is
as follows:
Prior to October 1, 2003......................................1.5 to 1
From October 1, 2003 to September 30, 2004....................1.25 to 1
After September 30, 2004......................................1.5 to 1
The Company's revolving credit agreement defines debt as including all
obligations to purchase, redeem, retire, or otherwise make any payment in
respect of any capital stock. Accordingly, the Company should have reflected in
its quarterly debt covenant compliance reports provided to its banks and certain
other lending institutions its obligation to purchase common stock from its
Chairman under the July 11, 2001 Agreement. Since the obligation had been
omitted from the Company's compliance reports, the Company was in technical
default under the terms of the credit agreement. The Company obtained permanent
waivers for this technical default from the lenders during the first quarter of
2004. As the Agreement was terminated on November 17, 2003, the Company no
longer has the obligation to purchase or redeem any of its common stock.
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 interest rate
and foreign currency exchange rate risks that could impact its results of
operations. The Company at times reduces its market risk exposures by creating
offsetting positions through the use of derivative financial instruments. The
Company does not use derivative financial instruments for trading purposes.
A 10% change in interest rates affecting the Company's floating rate debt
instruments would have an insignificant impact on the Company's pre-tax earnings
and cash flows over the next fiscal year. Such a move in interest rates would
have no effect on the fair value of the Company's floating rate debt
instruments. In addition, all of the Company's derivatives have high correlation
with the underlying exposure and are highly effective in offsetting underlying
currency movements. Accordingly, changes in derivative fair values are expected
to be offset by changes in value of the underlying exposures.
The Company sells its products in many countries and a substantial portion
of its net sales and costs and expenses are denominated in foreign currencies. A
significant portion of the Company's sales for the three months ended March 31,
2004, was derived from customers located outside the US, principally in EMEA and
Asia Pacific, where the Company also manufactures its products. This exposes the
Company to risks associated with changes in foreign currency that can adversely
impact revenues, net income and cash flow. In addition, the Company is
potentially subject to concentrations of credit risk, principally in accounts
receivable. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company's major customers are
retailers and global apparel manufacturers that have historically paid their
accounts payable balances with the Company.
19
There were no significant changes in the Company's exposure to market risk
for the three months ended March 31, 2004 and 2003.
Cautionary Statement pursuant to "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995.
Except for historical information, the Company's reports to the SEC on Form
10-K, Form 10-Q and Form 8-K and periodic press releases, as well as other
public documents and statements, contain "forward-looking statements" concerning
the Company's objectives and expectations with respect to gross profit,
expenses, operating performance, capital expenditures and cash flows. The
Company's success in achieving the objectives and expectations is subject to
risks and uncertainties that could cause actual results to differ materially
from those expressed or implied by the statements. Among others the risks and
uncertainties include:
o Worldwide economic and other business conditions that could affect
demand for the Company's products in the US or international markets;
o Rate of migration of garment manufacturing industry moving from the US
and Western Europe;
o The mix of products sold and the profit margins thereon;
o Order cancellation or a reduction in orders from customers;
o Competitive product offerings and pricing actions;
o The availability and pricing of key raw materials;
o The level of manufacturing productivity; and
o Dependence on key members of management.
Additionally, the Company's forward-looking statements contain the
following assumptions, among others, that are specific to the Company and/or the
markets in which it operates:
o There are no substantial adverse changes in the exchange relationship
between the British Pound or the Euro and the US Dollar;
o Low or negative economic growth, particularly in the US, the UK or
Europe, will not occur and affect consumer spending in those
countries;
o There will continue to be adequate supply of the Company's raw
materials and components at economic terms;
o The Company's new Enterprise Resource Planning systems can be
successfully integrated into the Company's operations;
o The Company can continue to expand its manufacturing and distribution
capacity in developing markets; and
o There are no substantial adverse changes in the political climates of
developing and other countries in which the Company has operations and
countries in which the Company will endeavor to establish operations
in concert with its major customers' migrations to
lower-production-cost countries.
Readers are cautioned not to place undue reliance on forward-looking
statements. The Company undertakes no obligation to republish or revise
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrences of unanticipated events.
Item 3: Quantitative and Qualitative Disclosure About Market Risk
The information called for by this item is set forth under the heading
"Market Risk" in Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in Item 2 above, which information is hereby
incorporated by reference.
Item 4: Controls and Procedures
Under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Accounting Officer,
the Company conducted an evaluation of the effectiveness of the design and
operation of its disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this report (the "Evaluation Date"). Based on this
20
evaluation, the Company's Chief Executive Officer and Chief Accounting 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 Accounting Officer, as appropriate to allow timely
decisions regarding required disclosure.
PART II OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
a) Exhibits.
Exhibit 31.1 Certification of the Chief Executive Officer required by Rule
13a-14(a) or Rule 15d-14(a).
Exhibit 31.2 Certification of the Chief Accounting 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 Accounting Officer required by Rule
13a-14(b) or 18 U.S.C. 1350.
b) Reports on Form 8-K
Current Report on Form 8-K, dated February 10, 2004, reporting under Item 9
that until the matter with respect to the change in presentation of the
Registrant's 2002 and 2001 financial statements as disclosed in the
Registrant's Form 10-Q for the quarter ended September 30, 2003, is
resolved, the 2003 financial results to be reported in an earnings release
on February 12, 2004, will be unaudited.
Current Report on Form 8-K, dated February 12, 2004, reporting under Items
7 and 12 that the Registrant issued a press release announcing its fourth
quarter 2003 earnings.
Current Report on Form 8-K, dated March 30, 2004, reporting under Items 7
and 9 that the Registrant issued a press release announcing the retirement
of Jack R. Plaxe, Senior Vice President and Chief Financial Officer.
21
PAXAR CORPORATION AND SUBSIDIARIES
SIGNATURE
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/ Larry M. Segall
-----------------------------
Vice President and Controller
(Chief Accounting Officer)
May 10, 2004
-----------------------------
Date
22