-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SOqyj3tHFnFaAopPEIMLyUu0fTB8WJVLQMW5OmfKcGZxFO1xokcMR0mC+b1QMMzf zkTtjHI4Ykh/jSwO0EeRhg== 0001157523-06-004893.txt : 20060509 0001157523-06-004893.hdr.sgml : 20060509 20060509150654 ACCESSION NUMBER: 0001157523-06-004893 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060509 DATE AS OF CHANGE: 20060509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAXAR CORP CENTRAL INDEX KEY: 0000075681 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL PRINTING [2750] IRS NUMBER: 135670050 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09493 FILM NUMBER: 06820391 BUSINESS ADDRESS: STREET 1: 105 CORPORATE PARK DRIVE CITY: WHITE PLAINS STATE: NY ZIP: 10604 BUSINESS PHONE: 9146976800 FORMER COMPANY: FORMER CONFORMED NAME: PACKAGING SYSTEMS CORP DATE OF NAME CHANGE: 19870401 10-Q 1 a5140993.txt PAXAR CORPORATION 10-Q 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, 2006 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 of Incorporation) (I.R.S. Employer Identification No.) 105 Corporate Park Drive White Plains, New York 10604 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (914) 697-6800 ---------------------- Indicate by check mark whether the registrant (1) has filed all reports require to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes |_| No |X| 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: 41,053,419 shares outstanding as of May 8, 2006 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 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/A for the year ended December 31, 2005. 1 PAXAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in millions, except per share amounts) (unaudited) Three Months Ended March 31, ---------------------- 2006 2005 ---------- -------- Sales $ 199.6 $ 187.2 Cost of sales 125.4 116.5 --------- -------- Gross profit 74.2 70.7 Selling, general and administrative expenses 63.4 60.7 Integration/restructuring and other costs 3.0 0.8 --------- -------- Operating income 7.8 9.2 Other income, net 0.4 0.4 Interest expense, net 1.2 2.6 --------- -------- Income before taxes 7.0 7.0 Taxes on income 1.8 1.6 --------- -------- Net income $ 5.2 $ 5.4 ========= ======== Basic earnings per share $ 0.13 $ 0.14 ========= ======== Diluted earnings per share $ 0.13 $ 0.13 ========= ======== Weighted average shares outstanding: Basic 40.7 39.7 Diluted 41.5 41.2 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, 2006 2005 ----------- ----------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 52.2 $ 48.2 Accounts receivable, net of allowances of $11.3 and $10.7 at March 31, 2006 and December 31, 2005, respectively 134.4 128.9 Inventories 109.5 99.2 Deferred income taxes 19.7 19.3 Other current assets 22.6 20.2 ----------- ----------- Total current assets 338.4 315.8 ----------- ----------- Property, plant and equipment, net 164.2 164.1 Goodwill and other intangible, net 229.7 224.3 Other assets 22.7 23.4 ----------- ----------- Total assets $ 755.0 $ 727.6 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Due to banks $ 3.2 3.0 Accounts payable and accrued liabilities 126.0 118.8 Accrued taxes on income 16.2 17.8 ----------- ----------- Total current liabilities 145.4 139.6 ----------- ----------- Long-term debt 107.7 97.7 Deferred income taxes 15.8 15.9 Other liabilities 19.3 19.5 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, 40,891,384 and 40,630,951 shares issued and outstanding at March 31, 2006 and December 31, 2005, respectively 4.1 4.1 Paid-in capital 30.9 26.2 Retained earnings 421.1 415.9 Accumulated other comprehensive income 10.7 8.7 ----------- ----------- Total shareholders' equity 466.8 454.9 ----------- ----------- Total liabilities and shareholders' equity $ 755.0 $ 727.6 =========== ===========
The accompanying notes are an integral part of the financial statements. 3 PAXAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) (unaudited)
Three Months Ended March 31, ------------------------------ 2006 2005 ------------ ------------ OPERATING ACTIVITIES Net income $ 5.2 $ 5.4 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8.4 7.8 Stock-based compensation 1.2 0.2 Deferred income taxes (0.5) (1.9) Gain on sale of property & equipment, net (0.1) - Write-off of property and equipment - 0.4 Changes in assets and liabilities, net of businesses acquired: Accounts receivable (4.3) 8.4 Inventories (10.2) (1.7) Other current assets (1.9) 1.7 Accounts payable and accrued liabilities 4.8 (8.5) Accrued taxes on income (1.6) 0.9 Other, net (0.7) (1.2) ------------ ------------ Net cash provided by operating activities 0.3 11.5 ------------ ------------ INVESTING ACTIVITIES Purchases of property and equipment (6.9) (7.9) Acquisitions, net of cash acquired (3.3) (2.7) Proceeds from sale of property and equipment 0.1 0.1 Other - 0.3 ------------ ------------ Net cash used in investing activities (10.1) (10.2) ------------ ------------ FINANCING ACTIVITIES Net increase in short-term debt 0.1 0.6 Additions to long-term debt 9.9 - Reductions in long-term debt - (0.1) Proceeds from common stock issued under employee stock option and stock purchase plans 3.5 7.0 ------------ ------------ Net cash provided by financing activities 13.5 7.5 ------------ ------------ Effect of exchange rate changes on cash flows 0.3 (0.9) ------------ ------------ Increase in cash and cash equivalents 4.0 7.9 Cash and cash equivalents at beginning of year 48.2 92.0 ------------ ------------ Cash and cash equivalents at end of period $ 52.2 $ 99.9 ============ ============
The accompanying notes are an integral part of the financial statements. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions, except 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. 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 In December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R), "Share-Based Payment". This standard amends SFAS No. 123, "Accounting for Stock-Based Compensation", and concludes that services received from employees in exchange for stock-based compensation result in a cost to the employer that must be recognized in the financial statements. The cost of such awards is measured at fair value at the date of grant. The Company adopted SFAS No. 123(R) effective January 1, 2006, and is applying the modified prospective method, whereby compensation cost will be recognized for the unvested portion of awards granted prior to January 1, 2006, as well as for awards granted after adoption. Such costs will be recognized in the Company's financial statements over the remaining vesting periods. Under this method, prior periods are not revised for comparative purposes. The adoption of this standard resulted in an incremental pre-tax charge of $0.8 million in the first quarter of 2006, or approximately $.02 per share, and is expected to result in estimated incremental pre-tax charges of approximately $0.8 million being recognized per quarter throughout the remainder of 2006. The related income tax benefit recognized in the statement of operations was approximately $0.2 for the quarter ended March 31, 2006. As of March 31, 2006, there was approximately $7.2 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements. Approximately $2.8 million is expected to be recognized over the remainder of 2006, $2.1 million is expected to be recognized in 2007, $1.5 million in 2008 and $0.8 million in 2009. As of March 31, 2006, the Company had two stock option plans, a long-term incentive plan and an employee stock purchase plan, all of which are described in the Company's 2005 Annual Report on Form 10-K. Stock Option Activity - --------------------- The following is a summary of the stock option activity for the three months ended March 31, 2006:
Weighted Weighted Average Average Remaining Number Exercise Contractual Term Aggregate of Shares Price (Years) Intrinsic Value --------- ---------- ---------------- --------------- Outstanding at January 1, 2006 3.7 $14.43 Granted 0.2 $20.35 Exercised (0.2) $13.69 ----- ---------- Outstanding at March 31, 2006 3.7 $14.44 6.3 $18.5 ===== ========== ===== ===== Exercisable at March 31, 2006 2.5 $13.71 5.3 $14.4 ===== ========== ===== =====
5 The fair value of each stock option grant in 2006 was estimated on the date of grant using the Black-Scholes option-pricing model. The primary assumptions which the Company considered when determining the fair value of each option award included 1) the expected term of awards granted, 2) the expected volatility of the Company's stock price, 3) the risk-free interest rate applied and 4) an estimate for expected forfeitures. The expected term of awards granted is based upon the historical exercise patterns of the participants in the Company's plans, and expected volatility is based on the historical volatility of the Company's stock, commensurate with the expected term of the respective awards. The risk-free rate for the expected term of the awards is based on the U.S. Treasury yield curve in effect at the time of grant. The table below illustrates the aforementioned weighted average assumptions for 2006. There were no awards granted during the first quarter of 2005. 2006 ---- Risk-free interest rate 4.5% Expected years until exercise 6.0 Expected stock volatility 40.9% Dividend yield 0% Weighted average fair value per share $9.52 The Company estimated forfeitures in the range of 7-9% based on historical experience, and will adjust estimated forfeitures over the requisite service period to the extent actual forfeitures differ, or are expected to differ, from such estimates. The aggregate intrinsic value of options exercised during the three months ended March 31, 2006 was $1.4. Cash received from share-based payment arrangements for the three months ended March 31, 2006 and 2005, was $3.5 and $7.0, respectively. Pro Forma Information Under SFAS 123 for Periods Prior to 2006 - -------------------------------------------------------------- Prior to January 1, 2006 employee stock options were accounted for under the intrinsic value method in accordance with APB 25. Compensation expense was generally not recorded in the financial statements. For the quarter ended March 31, 2005, had the Company accounted for all employee stock-based compensation based on the estimated grant date fair values, as defined by SFAS 123, the Company's net income and earnings per share would have been adjusted to the following pro forma amounts: Three Months Ended March 31, 2005 ------------------- Net income, as reported $5.4 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) ------------------- Pro forma net income $5.0 =================== Earnings per share: Basic - as reported $0.14 Basic - pro forma $0.13 Diluted - as reported $0.13 Diluted - pro forma $0.12 During 2005, the Company awarded its President and Chief Executive Officer 75,000 restricted shares of the Company's common stock. The restrictions on 25,000 shares lapse after three years, and the restrictions on the remaining 50,000 shares lapse after four years. The market value of the restricted shares was approximately $1.3 million at the date of the grant and is being charged to expense over the vesting period. In connection with this award, the Company recognized compensation expense of $0.1 during the first three months of 2006. The total unamortized future compensation expense was approximately $1.0 as of March 31, 2006. NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS Effective January 1, 2006, the Company adopted 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's adoption of SFAS No. 151 did not have a material impact on the Company's results of operations or financial condition. 6 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. 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 $31.1 and $26.8 for the three months ended March 31, 2006 and 2005, 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, 2006 and December 31, 2005 for delivery of various currencies at various future dates and the changes in fair value recorded in income during the three month periods ended March 31, 2006 and 2005 were not material. The notional value of outstanding forward foreign exchange contracts at March 31, 2006 and December 31, 2005, was $5.8 and $7.5, 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 $9.8 and $9.1 as of March 31, 2006 and December 31, 2005, respectively. The value of all other inventories determined using the first-in, first-out method was $99.7 and $90.1 as of March 31, 2006 and December 31, 2005, respectively. The components of net inventories are as follows: March 31, December 31, 2006 2005 ----------- ----------- Raw materials $ 51.8 $ 49.2 Work-in-process 9.1 9.3 Finished goods 65.7 57.8 ----------- ----------- 126.6 116.3 Allowance for obsolescence (17.1) (17.1) ----------- ----------- $ 109.5 $ 99.2 =========== =========== 7 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 2005, 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, 2005, 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 months ended March 31, 2006 are as follows:
Americas EMEA Asia Pacific Total -------- -------- ------------ -------- Balance, January 1, 2006 $ 123.0 $ 73.8 $ 27.1 $ 223.9 Acquisitions -- 4.5 -- 4.5 Translation adjustments -- 1.0 -- 1.0 -------- -------- -------- -------- Balance, March 31, 2006 $ 123.0 $ 79.3 $ 27.1 $ 229.4 ======== ======== ======== ========
On March 16, 2006, the Company acquired the business and assets of Adhipress S.A. ("Adhipress"), a supplier of price tickets and merchandising tags, for $3.3. Additional cash purchase consideration of up to $0.9 will be due if Adhipress achieves certain financial performance targets over a two year period commencing April 1, 2006. In connection with this acquisition, the Company recognized goodwill of $4.5, based on its preliminary allocation of the purchase price to the acquired assets and liabilities. The consolidated statements of earnings reflect the results of operations for Adhipress since the effective date of purchase. The pro forma impact of this acquisition was not significant. The Company's other intangible is as follows: March 31, December 31, 2006 2005 ----------- ----------- Noncompete agreement $ 1.7 $ 1.7 Accumulated amortization (1.4) (1.3) ----------- ----------- $ 0.3 $ 0.4 =========== =========== NOTE 7: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES A summary of accounts payable and accrued liabilities is as follows: March 31, December 31, 2006 2005 ------------- ------------- Accounts payable $ 57.5 $ 50.3 Accrued payroll costs 16.6 19.6 Accrued restructuring costs 7.5 7.4 Trade programs 5.7 4.7 Advance service contracts 6.1 4.4 Accrued commissions 2.4 2.5 Accrued professional fees 1.8 3.1 Accrued interest 0.4 0.2 Other accrued liabilities 28.0 26.6 ------------- ------------- $126.0 $118.8 ============= ============= 8 NOTE 8: LONG -TERM DEBT A summary of long-term debt is as follows: March 31, December 31, 2006 2005 ------------- ------------- Revolving Credit facility $ 94.6 $ 84.1 Economic Development Revenue Bonds due 2011 and 2019 13.0 13.0 Other 0.1 0.6 ------------- ------------- $ 107.7 $ 97.7 ============= ============= NOTE 9: SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and income taxes is as follows: Three Months Ended March 31, ---------------------------- 2006 2005 ------------- ------------- Interest $ 1.0 $ 5.1 ============= ============= Income taxes $ 3.4 $ 1.3 ============= ============= NOTE 10: COMPREHENSIVE INCOME/(LOSS) Comprehensive income/(loss) 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 since the Company considers undistributed earnings of foreign subsidiaries to be permanently invested. Three Months Ended March 31, ---------------------------- 2006 2005 ------------- ------------- Net income $ 5.2 $ 5.4 Foreign currency translation adjustments 1.9 (5.8) Unrealized loss on derivatives - (0.1) ------------- ------------- Comprehensive income/(loss) $ 7.1 $(0.5) ============= ============= NOTE 11: EARNINGS PER SHARE The reconciliation of basic and diluted weighted average common shares outstanding is as follows: Three Months Ended March 31, ---------------------------- 2006 2005 ------------- ------------- Weighted average common shares (basic) 40.7 39.7 Options and restricted stock awards 0.8 1.5 ------------- ------------- Adjusted weighted average common shares (diluted) 41.5 41.2 ============= ============= 9 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) Operations in 12 countries in Europe, the Middle East and Africa ("EMEA"); and (3) The Asia Pacific region ("Asia Pacific"), which includes operations in Hong Kong, China, Singapore, Sri Lanka, South Korea, Bangladesh, Indonesia, Malaysia, Vietnam and India 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, --------------------------- 2006 2005 ----------- ----------- Sales to unaffiliated customers: Americas $ 79.6 $ 81.7 EMEA 51.8 53.0 Asia Pacific 68.2 52.5 ----------- ----------- Total $ 199.6 $ 187.2 =========== =========== Intersegment sales: Americas $ 18.0 $ 16.9 EMEA 14.1 10.0 Asia Pacific 8.2 5.5 Eliminations (40.3) (32.4) ----------- ----------- Total $ -- $ -- =========== =========== Operating Income (a): Americas (b) $ 6.1 $ 6.9 EMEA(b) 1.8 1.7 Asia Pacific 8.5 6.4 ----------- ----------- 16.4 15.0 Corporate expense(b) (8.5) (5.7) Amortization of other intangible (0.1) (0.1) ----------- ----------- Operating income 7.8 9.2 Other income, net 0.4 0.4 Interest expense, net (1.2) (2.6) ----------- ----------- Total $ 7.0 $ 7.0 =========== =========== (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, 2006, and March 31, 2005, Americas included integration/restructuring and other costs of $0.2 and $0.8, respectively. Corporate Expenses and EMEA included integration/restructuring and other costs of $2.3 and $0.5, respectively for the three months ended March 31, 2006. 10 Three Months Ended March 31, --------------------------- 2006 2005 ----------- ----------- Depreciation and amortization: Americas $3.0 $3.1 EMEA 2.2 2.3 Asia Pacific 2.9 2.1 ----------- ----------- 8.1 7.5 Corporate 0.3 0.3 ----------- ----------- Total $8.4 $7.8 =========== =========== Capital expenditures: Americas $1.1 $2.0 EMEA 2.2 1.3 Asia Pacific 3.6 4.5 ----------- ----------- 6.9 7.8 Corporate - 0.1 ----------- ----------- Total $6.9 $7.9 =========== =========== March 31, December 31, 2006 2005 ----------- ----------- Long-lived assets: Americas $177.2 $180.9 EMEA 130.9 123.9 Asia Pacific 79.6 78.3 ----------- ----------- 387.7 383.1 Corporate 6.2 5.3 ----------- ----------- Total $393.9 $388.4 =========== =========== Total assets: Americas $276.7 $272.5 EMEA 241.1 223.5 Asia Pacific 182.0 172.0 ----------- ----------- 699.8 668.0 Corporate 55.2 59.6 ----------- ----------- Total $755.0 $727.6 =========== =========== The following table presents sales by product: Three Months Ended March 31, --------------------------- 2006 2005 ----------- ----------- Apparel Identification Products. $139.5 $129.1 Bar Code and Pricing Solutions 60.1 58.1 ----------- ----------- Total $199.6 $187.2 =========== =========== The Company generated sales in the United States of $59.2, or 29.7% of the total sales, for the three months ended March 31, 2006, and $61.1, or 32.6% of the total sales, for the three months ended March 31, 2005. In addition, the Company's long-lived assets in the United States as of March 31, 2006 and December 31, 2005, amounted to $152.7 and $157.3, respectively. No customer accounted for more than 10% of the Company's revenues or accounts receivable for the three months ended March 31, 2006 or 2005. 11 NOTE 13: INTEGRATION/RESTRUCTURING AND OTHER COSTS In October 2005, the Company announced that it would undertake realignment initiatives to restructure production capacity utilization, particularly in response to the continued migration of apparel production outside of the United States (the "2005 Restructuring Program"). The plan is substantially focused on transferring existing apparel identification manufacturing capacity from the Company's U.S. operations primarily to facilities in Mexico, Central America and Asia Pacific. To a lesser extent, the Company is repositioning a portion of its EMEA manufacturing activities to lower-cost facilities in Eastern Europe. In addition, the plan includes the consequential realignment of the Company's sales organization in response to the aforementioned production migration activities. The majority of the 2005 Restructuring Program is expected to be completed during 2007. The plan contemplates significant manufacturing headcount reductions in the Company's U.S. locations and, to a lesser extent, headcount reductions in Western Europe. The Company expects to incur total pre-tax, non-recurring charges, once all phases are implemented, in the range of $25 to $33 to complete the plan, including approximately $5 to $8 of non-cash charges. During the three months ended March 31, 2006, the Company recognized charges of $3.0 in connection with the 2005 Restructuring Program. These charges were related to program management, severance and retention programs and other facility closure costs. In the aggregate, since October 2005 and including the aforementioned $3.0 recorded during the three months ending March 31, 2006, the Company has recorded charges of approximately $12.0 in connection with the 2005 Restructuring Program. All integration/restructuring and other costs are identified on a separate line on the Company's income statement as a component of operating income. The following table presents the changes in accruals pertaining to the Company's restructuring and related initiatives for the three months ended March 31, 2006:
Balance, Balance, January 1, 2006 Expenses Payments March 31, 2006 --------------- -------- -------- --------------- Severance $5.0 $ 0.2 $ (0.1) $ 5.1 Other costs 2.4 2.8 (2.8) 2.4 --------------- -------- -------- --------------- $7.4 $ 3.0 $ (2.9) $ 7.5 =============== ======== ======== ===============
NOTE 14: CONTINGENCIES Paxar Americas, Inc, the Company's operating subsidiary in the United States, brought suit against Zebra Technologies Corporation in April 2003 for patent infringement. After several months of pre-trial discovery, the case is scheduled for trial in January 2007 in the U.S. District Court in Dayton, Ohio. While we can not speculate on the outcome of the litigation, if we prevail, the outcome could be material to the Company's financial condition and results of operations. The Company has been named a potentially responsible party relating to contamination that occurred at certain super-fund sites. Management, including internal counsel, currently believes that the ultimate resolution of such matters taken as a whole, and after considering such factors as 1) available levels of insurance coverage, 2) the Company's proportionate share, in certain cases, as a named potential responsible party, and 3) the dormant nature of certain matters, will not have a materially adverse effect upon our results of operations or financial condition. It is possible that new information or future developments could require us to reassess our potential exposure related to these environmental matters. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-Looking Statements This report contains forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended, and Section 2E of the Securities Exchange Act of 1934, as amended. These statements may be identified by their use of words, such as "anticipate," "estimates," "should," "expect," "guidance," "project," "intend," "plan," "believe" and other words and terms of similar meaning, in connection with any discussion of our future business, results of operations, liquidity and operating or financial performance or results. Such forward-looking statements involve significant material known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. These and other important risk factors are included under the caption "Risk Factors" beginning on page 6 of the Company's Annual Report on Form 10-K. In light of the 12 uncertainty inherent in such forward-looking statements, you should not consider the inclusion of such forward-looking statements to be a representation that such forward-looking events or outcomes will occur. Because the information herein is based solely on data currently available, it is subject to change and should not be viewed as providing any assurance regarding our future performance. Actual results and performance may differ from our current projections, estimates and expectations, and the differences may be material, individually or in the aggregate, to our business, financial condition, results of operations, liquidity or prospects. Additionally, we are not obligated to make public indication of changes in our forward-looking statements unless required under applicable disclosure rules and regulations. All amounts in the following discussion are stated in millions, except per share amounts. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2006, AS COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2005 Overview Paxar Corporation seeks to deliver growth through a concentrated emphasis on executing its strategy as a global operating company, maintaining a continued focus on providing customers with innovative products and solutions, outstanding service, consistent quality, on-time delivery and competitively priced products. Acquisitions will continue to be a fundamental element of executing these growth initiatives. Together with continuing investments in new product development, state-of-the-art manufacturing equipment, and innovative sales and marketing initiatives, management believes the Company is well positioned to compete successfully as a provider of identification solutions to the retail and apparel industry, worldwide. The investments needed to fund this growth are generated, in part, through corporate-wide initiatives to lower costs and increase effective asset utilization. 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) Operations in 12 countries in Europe, the Middle East and Africa ("EMEA"), (3) The Asia Pacific region ("Asia Pacific"), which includes operations in Hong Kong, China, Singapore, Sri Lanka, South Korea, Bangladesh, Indonesia, Malaysia, Vietnam and India The Company's results of operations for the three months ended March 31, 2006 and 2005, in dollars and as a percent of sales, are presented below:
Three Months Ended ----------------------------------------- March 31, 2006 March 31, 2005 ------------------ ----------------- Sales $ 199.6 100.0% $ 187.2 100.0% Cost of sales 125.4 62.8 116.5 62.2 -------- ------- -------- ------- Gross profit 74.2 37.2 70.7 37.8 Selling, general and administrative expenses 63.4 31.8 60.7 32.4 Integration/restructuring and other costs 3.0 1.5 0.8 0.4 -------- ------- -------- ------- Operating income 7.8 3.9 9.2 4.9 Other income, net 0.4 0.2 0.4 0.2 Interest expense, net 1.2 0.6 2.6 1.4 -------- ------- -------- ------- Income before taxes 7.0 3.5 7.0 3.7 Taxes on income 1.8 0.9 1.6 0.8 -------- ------- -------- ------- Net income $ 5.2 2.6% $ 5.4 2.9% ======== ======= ======== =======
For the three months ended March 31, 2006, the Company's sales increased $12.4, or 6.6%, to $199.6, compared with $187.2 for the three months ended March 31, 2005. The sales growth was driven by a $10.6 increase in organic sales and $5.2 from acquisitions, partially offset by an unfavorable impact of changes in foreign exchange rates of $3.4. Management notes that in the first quarter of 2006, the Company realized $1.4 million in interest savings resulting from refinancing initiatives completed in the fourth quarter of 2005, which included the repayment of $150 of 6.74% Senior Notes, the establishment of a new $150 multi-currency revolving credit facility and the repatriation of $122 of foreign 13 earnings. In addition, the Company adopted the provisions of SFAS No. 123(R), "Share-Based Payment", which resulted in an incremental charge of $0.8 of stock-based compensation in the first quarter of 2006. In order to adapt to the changing global apparel industry, the Company announced in October 2005 that it would undertake realignment initiatives to restructure production capacity utilization, particularly in response to the continued migration of apparel production outside of the United States (the "2005 Restructuring Program"). The current plan is substantially focused on transferring the majority of existing apparel identification manufacturing capacity from the Company's U.S. locations primarily to its Mexico, Central America and Asia Pacific locations. To a lesser extent, the Company is also repositioning a portion of its legacy Western Europe manufacturing capacity to lower-cost facilities in Eastern Europe. In addition, the plan includes the realignment of the Company's sales and related support functions in response to the aforementioned production migration activities. The 2005 Restructuring Program is expected to be substantially completed during 2007. The plan contemplates significant manufacturing headcount reductions in the Company's U.S. locations and, to a lesser extent, headcount reductions in Western Europe. In addition, in connection with the closure or streamlining of certain facilities, the Company will incur charges related to write-downs of property, plant and equipment, and other costs related to exiting facilities, including lease terminations. For further information, refer to "Integration/Restructuring and Other Costs", below. Given the continued competitive marketplace and the changing global apparel environment, the Company anticipates that the near-term operating environment will remain challenging. However, the savings and benefits from the 2005 Restructuring Program along with the Company's other ongoing cost-savings and growth initiatives are anticipated to generate increased levels of profitability. Specific to the 2005 Restructuring Program, the Company currently expects to realize approximately $15.0 in cost savings during 2007 and achieve an annual savings rate of $20.0 to $25.0 by the end of 2007. These savings relate principally to salaries and related expenses, and will be reflected primarily as a reduction in cost of goods sold and, to a lesser extent, as a reduction in selling, general and administrative expenses; the Company does not currently expect to redirect these savings to spending in other areas or other income statement line items. Sales The following table presents sales by geographic operating segment: Three Months Ended --------------------------------------------- March 31, 2006 March 31, 2005 ------------------ ------------------ Americas $ 79.6 39.9% $ 81.7 43.7% EMEA 51.8 26.0 53.0 28.3 Asia Pacific 68.2 34.1 52.5 28.0 -------- ------- -------- ------- Total $ 199.6 100.0% $ 187.2 100.0% ======== ======= ======== ======= The Americas segment sales decreased $2.1, or 2.6%, to $79.6 for the three months ended March 31, 2006, compared with $81.7 for the three months ended March 31, 2005. The decrease was primarily attributable to lower organic sales of $3.3, partially offset by acquisition revenue of $1.1, and the favorable impact of changes in foreign exchange rates of $0.1. The decline in organic sales is largely due to the continuing migration of U.S. apparel manufacturing to the Asia Pacific region where U.S. retailers and apparel manufacturers have realized labor savings and operating performance efficiencies. EMEA segment sales decreased $1.2, or 2.3%, to $51.8 for the three months ended March 31, 2006, compared with $53.0 for the three months ended March 31, 2005. Excluding a $3.4 unfavorable impact of changes in foreign exchange rates, sales increased $2.2 million, or 4.2%, due primarily to a modest recovery in apparel demand in Western Europe as well as higher RFID and electronic surveillance sales volume. Asia Pacific sales increased $15.7, or 29.9%, to $68.2 for the three months ended March 31, 2006, compared with $52.5 for the three months ended March 31, 2005. The increase was attributable to organic sales growth of $12.0 and acquisition revenue of $3.8, partially offset by an unfavorable impact of changes in foreign 14 exchange rates of $0.1. The Company's operations in this region have continued to significantly benefit from the steady migration of many of the Company's customers that have moved their production from the U.S., U.K. and Western Europe to minimize labor costs and maximize operating efficiencies. Gross Profit Gross profit was $74.2, or 37.2% of sales, for the three months ended March 31, 2006, compared with $70.7, or 37.8% of sales, for the three months ended March 31, 2005. The lower gross profit was due primarily to unfavorable changes in product mix, primarily related to certain bar code and pricing systems products and, to a lesser extent, the impact of higher freight costs and certain inventory charges incurred in the Company's Asia Pacific segment. Management's ongoing strategy includes implementing process improvements to reduce costs in all of the Company's manufacturing facilities, re-deploying assets to optimize production capacity, and expanding production in new and emerging markets in order to minimize labor costs and maximize operating performance efficiencies. During 2005, the Company announced that it would undertake restructuring activities related to realigning production capacity utilization, primarily related to its domestic locations (refer to discussion below, "Integration/Restructuring and Other Costs"). Selling, General and Administrative ("SG&A") Expenses SG&A expenses were $63.4 for the three months ended March 31, 2006, compared with $60.7 for the three months ended March 31, 2005. As a percent of sales, SG&A expenses were 31.8% for the three months ended March 31, 2006, compared with 32.4% for the three months ended March 31, 2005. The favorable quarter-to-quarter comparison in the ratio of SG&A expenses to sales was due to ongoing cost containment efforts in the U.S. and EMEA regions as well as the continuing migration of sales and production from the U.S. and Western Europe to Asia Pacific, where the Company has a more favorable cost structure. Partially offsetting these cost containment efforts, as discussed in further detail in Note 2 to the Consolidated Financial Statements, for the quarter ended March 31, 2006, the Company adopted the provisions of SFAS No. 123(R), "Share-Based Payment", effective January 1, 2006. The adoption of this standard resulted in a pre-tax charge of $0.8 for additional stock-based compensation in the first quarter of 2006, or approximately $0.02 per share, and is expected to result in incremental charges of $0.8 being recognized per quarter throughout the remainder of 2006, as compared to the comparable periods last year. Integration/Restructuring and Other Costs In October 2005, the Company announced that it would undertake realignment initiatives to restructure production capacity utilization, particularly in response to the continued migration of apparel production outside of the United States (the "2005 Restructuring Program"). The current plan is substantially focused on transferring existing apparel identification manufacturing capacity from the Company's U.S. operations primarily to facilities in Mexico, Central America and Asia Pacific. To a lesser extent, the Company is repositioning a portion of its EMEA manufacturing activities to lower cost facilities in Eastern Europe. In addition, the plan includes the consequential realignment of the Company's sales organization in response to the aforementioned production migration activities. The 2005 Restructuring Program is expected to be substantially completed during 2007. The plan contemplates significant manufacturing headcount reductions in the Company's U.S. locations and, to a lesser extent, headcount reductions in Western Europe. The Company expects to incur total pre-tax, non-recurring charges, once all phases are implemented, in the range of $25 to $33, including approximately $5 to $8 of non-cash charges. During the three months ended March 31, 2006, the Company recognized charges of $3.0 in connection with the 2005 Restructuring Program. These charges were related to program management services, severance and retention programs, and other facility closure costs. In the aggregate, since October 2005 and including the aforementioned $3.0 recorded during the three months ending March 31, 2006, the Company has recorded charges of approximately $12.0 in connection with the 2005 Restructuring Program. In January 2005, the Company announced the consolidation of one of its U.S. woven label manufacturing facilities as part of its continuing effort to improve operating efficiency and costs. For the three month period ending March 31, 2005, the Company recognized $0.8 related to this activity, which was complete at the end of 2005. Operating Income Operating income was $7.8, or 3.9% of sales, for the three months ended March 31, 2006, compared with $9.2, or 4.9% of sales, for the three months ended 15 March 31, 2005. The operating results for the three month periods ended March 31, 2006 and 2005 included integration/restructuring and other costs of $3.0 and $0.8, respectively. 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, --------------------------- 2006 2005 ----------- ----------- Americas 7.7% 8.4% EMEA 3.5 3.2 Asia Pacific 12.5 12.2 America's operating income, as a percent of sales, decreased to 7.7% for the three months ended March 31, 2006, compared to 8.4% for the three months ended March 31, 2005. The decrease was primarily attributable to costs related to integration/restructuring and other costs incurred in connection with the previously announced 2005 Restructuring Program. EMEA's operating income, as a percent of sales, increased to 3.5% compared to 3.2% for the three months ended March 31, 2005. This increase primarily resulted from an improved fixed costs base as a result of the restructuring activities initiated in April of 2005. The EMEA segment included integration/restructuring and other costs, as a percent of sales, of 1.0% for the three months ended March 31, 2006. Asia Pacific's operating income, as a percent of sales, increased to 12.5% for the three months ended March 31, 2006, compared to 12.2% for the three months ended March 31, 2005. The increase was primarily attributable to the higher level of sales for the period, resulting in a greater amount of absorption of fixed costs when compared to the comparable prior year period. Interest Expense, Net Interest expense, net of interest income on invested cash, was $1.2 for the three months ended March 31, 2006, compared with $2.6 for the three months ended March 31, 2005. The decrease was primarily attributable to the refinancing initiatives completed during the fourth quarter of 2005. The net impact of those initiatives reduced the Company's debt position from $167.5 at March 31, 2005 to $110.9 as of March 31, 2006. In addition the Company's weighted average interest rate was effectively reduced from 6.20% in the first three months of 2005 to 4.75% for the three months ended March 31, 2006. Taxes on Income The effective tax rate for the three months ended March 31, 2006 and 2005 was 25.0% and 23.0%, respectively. The rate is based on management's estimates of the geographic mix of projected annual pre-tax income and, to a lesser extent, state and local taxes. In addition to changes in geographic mix, when compared to the first quarter of 2005, the effective tax rate was adversely impacted by approximately 0.9% as a result of the adoption of SFAS No. 123(R), which does not allow tax benefits to be recognized for certain stock options, including qualified incentive stock options. 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, --------------------------- 2006 2005 ----------- ----------- Net cash provided by operating activities $ 0.3 $ 11.5 Net cash used in investing activities (10.1) (10.2) Net cash provided by financing activities 13.5 7.5 ----------- ----------- Increase in cash and cash equivalents (a) $ 3.7 $ 8.8 =========== =========== - ---------- (a) Before the effect of exchange rate changes on cash flows. 16 Overview Cash provided by operating activities has been the Company's primary source of funds to finance operating needs and growth opportunities. In November 2005, the Company entered into a new five-year, $150 multi-currency Revolving Credit Agreement (the "Credit Agreement") with a group of five domestic and three international banks. The Company may increase the credit facility up to $250, subject to providing the participating banks adequate advance notice and securing their approval. Net cash provided by operating activities was $0.3 for the three months ended March 31, 2006, compared with $11.5 for the three months ended March 31, 2005. 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. Operating Activities Working capital and the corresponding current ratio were $193.0 and 2.3:1 at March 31, 2006, compared with $176.2 and 2.3:1 at December 31, 2005. The increase in working capital resulted primarily from substantial increases in inventories and, to a lesser extent, accounts receivable, partially offset by higher accounts payable and accrued liabilities. The increase in inventory was due to strong sales and order activity anticipated for the second quarter of 2006. The increase in accounts receivable was due to higher levels of sales experienced during a particularly strong month of March. In connection with the 2005 Restructuring Program, the Company expects to incur total pre-tax, non-recurring charges, once all phases are implemented, in the range of $25 to $33, which includes approximately $5 to $8 of non-cash charges. During the three months ended March 31, 2006, the Company recognized charges of $3.0 in connection with the 2005 Restructuring Program. In the aggregate, since October 2005, the Company has recorded charges of approximately $12.0 in connection with the 2005 Restructuring Program. The Company currently expects to realize approximately $15.0 in cost savings during 2007 and achieve an annual savings rate of $20.0 to $25.0 by the end of 2007. These savings relate principally to salaries and related expenses, and will be reflected primarily as a reduction in cost of goods sold and, to a lesser extent, as a reduction in selling, general and administrative expenses; the Company currently does not expect to redirect those savings to spending in other areas or other income statement line items. Investing Activities For the three months ended March 31, 2006 and 2005, the Company incurred $6.9 and $7.9, 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. Capital expenditures are typically funded by cash provided by operating activities and, where necessary, availability under the Credit Agreement. In March 2006, the Company acquired the business and assets of Adhipress S.A., a supplier of price tickets and merchandising tags to French hypermarkets for $3.3. During the first quarter of 2005, the Company acquired the business and manufacturing assets of EMCO labels for $2.8. Financing Activities The components of total capital as of March 31, 2006 and December 31, 2005, respectively, are presented below: March 31, December 31, 2006 2005 ------------- ------------- Due to banks $ 3.2 $ 3.0 Long-term debt 107.7 97.7 ------------- ------------- Total debt 110.9 100.7 Shareholders' equity 466.8 454.9 ------------- ------------- Total capital $577.7 $555.6 ============= ============= Total debt as a percent of total capital 19.2% 18.1% ============= ============= 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, 2006 and 2005, net borrowings of the Company's outstanding debt were $10.0 and $0.5, respectively. The Company has various stock-based compensation plans, including two stock option plans, a long-term incentive plan, and an employee stock purchase plan. For the three months ended March 31, 2006 and 2005, the Company received proceeds of $3.5 and $7.0, respectively, from common stock issued under its employee stock option and stock purchase plans. The Company has a stock repurchase plan with an authorization 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, 2006 and 2005. As of March 31, 2006, the Company had $22.0 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 November 2005, the Company replaced its existing three-year $50 revolving credit facility with the new Credit Agreement with a group of five domestic and three international banks. Under the Credit Agreement, the Company pays a facility fee determined by the ratio of debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"). Borrowings under the Credit Agreement bear interest at prime rate, negotiated rates, rates referenced to the London Interbank Offered Rate ("LIBOR") or Euro LIBOR, at the Company's option, with applicable margins varying in accordance with the Company's attainment of specified debt to EBITDA thresholds and are guaranteed by certain domestic subsidiaries of the Company. The Company may increase the credit facility up to $250, subject to providing the participating banks adequate advance notice and securing their approval. At March 31, 2006, the interest rate on outstanding borrowings under this Agreement was based on LIBOR at a weighted average interest rate of 4.75%. The Company must maintain an excess of consolidated total assets over total liabilities of not less than the sum of $350 plus 35% of cumulative consolidated net income from October 1, 2005. The Company's maximum allowable debt to EBITDA ratio, as defined, is 3.0 to 1 and minimum allowable fixed charge coverage ratio, as defined, is 1.5 to 1. The Company 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. Under the Credit Agreement, the Company cannot pay in excess of $50.0 in cash dividends during any 12-month period, and cannot pay in excess of $100.0 in cash dividends over its five-year term. Off Balance Sheet Arrangements The Company has no material transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons, that have or are reasonably likely to have a material current or future impact on its financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses. Market Risk In the normal course of business, the Company is exposed to foreign currency exchange rate and interest rate risks that could impact its results of operations. At times, the Company 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. 18 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 $31.1 and $26.8 for the three months ended March 31, 2006 and 2005, respectively. The following table summarizes as of March 31, 2006, the Company's forward foreign exchange contracts by currency. All of the Company's forward foreign exchange contracts mature within a year. Contract amounts are representative of the expected payments to be made under these instruments:
Contract Amounts (in thousands) Fair Value ------------------------------------ Receive Pay (US$ 000's) ---------------- ---------------- ------------- Contracts to receive US$/pay euro ("EUR") US$ 56 (EUR) 46 $ - Contract to receive US$/pay British pounds ("GBP") US$ 5,174 (GBP) 2,977 $ 4 Contracts to receive GBP/pay EUR (GBP) 103 (EUR) 150 $ (3) Contracts to receive EUR/pay US$ (EUR) 250 US$ 302 $ 1
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, 2006 and 2005. 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. 104 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. 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. 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 19 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, 2006 and 2005, the provision for sales returns and allowances accounted for as a reduction to gross sales was not material. Allowance for Doubtful Accounts Management makes judgments, based on an 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 $134.4, net of allowances of $11.3, at March 31, 2006, and $128.9, net of allowances of $10.7, at December 31, 2005. 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 $9.8 and $9.1 as of March 31, 2006 and December 31, 2005, respectively. The value of all other inventories determined using the first-in, first-out method was $99.7 and $90.1 as of March 31, 2006 and December 31, 2005, 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 2005, 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, 2005, 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. Asset impairment analysis related to certain fixed assets in connection with the Company's restructuring initiatives requires management's best estimate of net realizable value, which includes an assessment of asset life and pricing trends impacting those assets and, where appropriate, quoted market prices. Our analysis is, in part, sensitive to our estimates of salvage value for certain assets as well as the continuing relevance of quoted market prices of assets and other factors of fair value. Changes in our estimates could impact the amount of our impairment charges, as well as depreciation expense recorded on certain assets. There were no significant impairment charges related to long-lived assets for the three months ended March 31, 2006 and 2005. 20 Accounting for Income Taxes As part of the process of preparing the consolidated financial statements, management is required to estimate the income taxes in each jurisdiction in which the Company operates. This process involves estimating the actual current tax liabilities, together with assessing temporary differences resulting from the differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. Management must then assess the likelihood that the deferred tax assets will be recovered, and to the extent that management believes that recovery is not more than likely, the Company must establish a valuation allowance. If a valuation allowance is established or increased during any period, the Company must include this amount as an expense within the tax provision in the consolidated statement of income. Significant management judgment is required in determining the Company's provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recognized against net deferred assets. The valuation allowance is based on management's estimates of the taxable income in the jurisdictions in which the Company operates and the period over which the deferred tax assets will be recoverable. Deferred taxes are not provided on the portion of undistributed earnings of non-U.S. subsidiaries which is considered to be permanently reinvested. In the event that management changes its consideration on permanently reinvesting the undistributed earnings of its non-U.S. subsidiaries, circumstances change in future periods, or there is a change in accounting principles generally accepted in the United States, the Company may need to establish an additional income tax provision for the U.S. and other taxes arising from repatriation, which could materially impact its results of operations. Foreign Currency Translation As of March 31, 2006 and December 31, 2005, accumulated other comprehensive income primarily consisted of cumulative foreign currency translation adjustments. The net assets of the Company's foreign operations are translated into U.S dollars using the exchange rates at each balance sheet date. Results of operations are translated using the average exchange rate prevailing throughout the period. The U.S. dollar results that arise from such translations are included in cumulative currency translation adjustments in accumulated other comprehensive income. At March 31, 2006 and December 31, 2005, the cumulative foreign translation adjustment was $11.9 and $10.0, respectively. Income taxes are generally not provided for these translation adjustments since the Company considers undistributed earnings of foreign subsidiaries to be permanently invested. Gains and losses resulting from foreign currency transactions are included in net income and were not material for the three month periods ending March 31, 2006 and 2005. Stock-Based Compensation The Company adopted Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" (SFAS 123R), which replaces SFAS 123, "Accounting for Stock-Based Compensation", by eliminating the choice to account for employee stock options under Accounting Principle Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). SFAS 123R requires that new, modified and unvested share-based awards to employees, such as stock options and restricted stock, be recognized in the financial statements based on the estimated fair value of such awards at date of grant and recognized as compensation expense over the vesting period. The fair value of each option award is estimated using the Black-Scholes option pricing model taking into account certain key assumptions. The primary assumptions which the Company considered when determining the fair value of each option award included 1) the expected term of awards granted, 2) the expected volatility of the Company's stock price, 3) the risk-free interest rate applied and 4) an estimate for expected forfeitures. The expected term of awards granted is based upon the historical exercise patterns of the participants in the Company's plans, and expected volatility is based on the historical volatility of the Company's stock, commensurate with the expected term of the respective awards. The risk-free rate for the expected term of the awards is based on the U.S. Treasury yield curve in effect at the time of grant. In addition, the Company estimates forfeitures when recognizing compensation expense and will adjust estimated forfeitures over the requisite service period to the extent actual forfeitures differ, or are expected to differ, from such estimates. The company adopted SFAS 123R effective January 1, 2006 using the modified prospective method. Under the modified prospective method, compensation expense is recognized in financial statements subsequent to the date of adoption for all share-based payments granted, modified, or settled after the date of adoption as 21 well as for the unvested portion of awards granted prior to the adoption date. The adoption of this standard resulted in a pre-tax charge of $0.8 of additional stock-based compensation in the first quarter of 2006 and is expected to result in an additional $0.8 being recognized per quarter throughout the remainder of 2006. As of March 31, 2006, there was approximately $7.2 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements. Approximately $2.8 million is expected to be recognized over the remainder of 2006, $2.1 million is expected to be recognized in 2007, $1.5 million in 2008 and $0.8 million in 2009. 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. 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 2006, 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. 22 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. - ---------- 23 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/ Anthony S. Colatrella -------------------------------- Vice President and Chief Financial Officer May 8, 2006 -------------------------------- Date 24 EX-31.1 2 a5140993ex31_1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION I, Robert P. van der Merwe, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Paxar Corporation (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Robert P. van der Merwe - ------------------------------------- President and Chief Executive Officer May 8, 2006 - ------------------------------------- Date EX-31.2 3 a5140993ex31_2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION I, Anthony S. Colatrella, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Paxar Corporation (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Anthony S. Colatrella - ------------------------------------------ Vice President and Chief Financial Officer May 8, 2006 - ------------------------------------------ Date EX-32.1 4 a5140993ex32_1.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION In connection with the Quarterly Report on Form 10-Q of Paxar Corporation (the "Company") for the period ended March 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert P. van der Merwe, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert P. van der Merwe - ------------------------------------- President and Chief Executive Officer May 8, 2006 - ------------------------------------- Date EX-32.2 5 a5140993ex32_2.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION In connection with the Quarterly Report on Form 10-Q of Paxar Corporation (the "Company") for the period ended March 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Anthony S. Colatrella, Interim Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Anthony S. Colatrella - ------------------------------------------- Vice President and Chief Financial Officer May 8, 2006 - ------------------------------------------- Date -----END PRIVACY-ENHANCED MESSAGE-----