Edgar Filing: PAXAR CORP

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 September 30, 2005
------------------
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the transition period from ____________ to _____________

Commission File Number: 1-9493
------

Paxar Corporation
-----------------
(Exact name of registrant as specified in its charter)

New York 13-5670050
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

105 Corporate Park Drive
White Plains, New York 10604
------------------------ -----
(Address of principal executive offices) (Zip Code)

914-697-6800
------------
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). |X| Yes |_| No

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). |_| Yes |X| No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

Common Stock, $0.10 par value: 40,477,604 shares outstanding as of
November 7, 2005

PART I FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements.

The consolidated financial statements included herein have been prepared by
Paxar Corporation (the "Company"), without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. While certain information
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations, the Company
believes that the disclosures made herein are adequate to make the information
presented not misleading. It is recommended that these financial statements be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2004.

PAXAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
(unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------
2005 2004 2005 2004
---- ---- ---- ----
Sales.................................. $200.6 $194.2 $602.3 $597.0
Cost of sales.......................... 127.1 119.1 374.3 365.6
------ ------ ------ ------
Gross profit........................ 73.5 75.1 228.0 231.4
Selling, general and administrative
expenses.............................. 58.0 59.2 178.8 178.2
Integration/restructuring and other
costs................................. 1.9 -- 4.4 --
------ ------ ------ ------
Operating income.................... 13.6 15.9 44.8 53.2
Interest expense, net.................. 2.2 2.6 7.3 8.1
------ ------ ------ ------
Income before taxes................. 11.4 13.3 37.5 45.1
Taxes on income........................ 7.3 3.1 13.7 10.4
------ ------ ------ ------
Net income.......................... $ 4.1 $ 10.2 $ 23.8 $ 34.7
====== ====== ====== ======

Basic earnings per share............... $ 0.10 $ 0.26 $ 0.59 $ 0.88
====== ====== ====== ======

Diluted earnings per share............. $ 0.10 $ 0.25 $ 0.58 $ 0.86
====== ====== ====== ======

Weighted average shares outstanding:
Basic................................ 40.7 39.6 40.3 39.5
Diluted.............................. 41.5 40.9 41.3 40.4

The accompanying notes are an integral part of the financial statements.

PAXAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)

September December
30, 31,
2005 2004
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................... $ 118.9 $ 92.0
Accounts receivable, net of allowances of $11.1 and
$12.3 at September 30, 2005 and December 31, 2004,
respectively....................................... 127.6 132.5
Inventories......................................... 105.1 101.3
Deferred income taxes............................... 15.6 15.0
Other current assets................................ 17.0 18.1
------------ ------------
Total current assets.......................... 384.2 358.9
------------ ------------

Property, plant and equipment, net.................. 169.6 169.9
Goodwill and other intangible, net.................. 221.9 220.5
Other assets........................................ 24.5 24.4
------------ ------------

Total assets........................................ $ 800.2 $ 773.7
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to banks........................................ $ 4.1 $ 3.9
Accounts payable and accrued liabilities............ 115.7 116.6
Accrued taxes on income............................. 18.2 11.2
------------ ------------
Total current liabilities..................... 138.0 131.7
------------ ------------

Long-term debt...................................... 163.1 163.1
Deferred income taxes............................... 19.8 21.8
Other liabilities................................... 16.6 16.5

Commitments and contingent liabilities

Shareholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized and none issued......................... -- --
Common stock, $0.10 par value, 200,000,000 shares
authorized, 40,795,435 and 39,644,756 shares issued
and outstanding at September 30, 2005 and December
31, 2004, respectively............................. 4.1 4.0
Paid-in capital..................................... 29.7 14.7
Retained earnings................................... 416.7 392.9
Accumulated other comprehensive income.............. 12.2 29.0
------------ ------------
Total shareholders' equity.................... 462.7 440.6
------------ ------------

Total liabilities and shareholders' equity.......... $ 800.2 $ 773.7
============ ============

The accompanying notes are an integral part of the financial statements.

PAXAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)

Nine Months Ended
September 30,
---------------------------
2005 2004
---- ----
OPERATING ACTIVITIES
Net income......................................... $ 23.8 $ 34.7
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 24.2 23.3
Deferred income taxes........................... (2.6) 0.4
Gain on sale of property and equipment, net..... -- (0.3)
Write-off of property and equipment............. 1.8 1.2
Changes in assets and liabilities, net of
businesses acquired:
Accounts receivable............................. 7.2 0.4
Inventories..................................... (1.9) (8.4)
Other current assets............................ 1.0 (3.3)
Accounts payable and accrued liabilities........ (2.7) 14.6
Accrued taxes on income......................... 7.0 4.8
Other, net...................................... (2.0) (1.7)
----------- -----------

Net cash provided by operating activities....... 55.8 65.7
----------- -----------

INVESTING ACTIVITIES
Purchases of property and equipment................ (24.0) (25.1)
Acquisitions....................................... (13.4) (0.1)
Proceeds from sale of property and equipment....... 0.1 0.6
Other.............................................. 0.3 1.3
----------- -----------

Net cash used in investing activities........... (37.0) (23.3)
----------- -----------

FINANCING ACTIVITIES
Net increase/(decrease) in short-term debt......... (0.1) 0.7
Additions to long-term debt........................ -- 44.3
Reductions in long-term debt....................... -- (71.5)
Proceeds from common stock issued under employee
stock option and stock purchase plans............. 14.0 4.2
----------- -----------

Net cash provided by/(used in) financing
activities..................................... 13.9 (22.3)
----------- -----------

Effect of exchange rate changes on cash flow........ (5.8) 0.3
----------- -----------
Increase in cash and cash equivalents............... 26.9 20.4

Cash and cash equivalents at beginning of year...... 92.0 64.4
----------- -----------

Cash and cash equivalents at end of period.......... $ 118.9 $ 84.8
=========== ===========

The accompanying notes are an integral part of the financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except headcount and per share data)

NOTE 1: GENERAL

The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial statements and the instructions for Form
10-Q. The interim financial statements are unaudited. In the opinion of
management, all adjustments (which consist only of normal recurring adjustments)
necessary to present fairly the results of operations and financial condition
for the interim periods presented have been made.

Certain reclassifications have been made to the prior periods' consolidated
financial statements and related note disclosures to conform to the presentation
used in the current period.

NOTE 2: STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," provides for a fair-value based method of
accounting for employee options and measures compensation expense using an
option valuation model that takes into account, as of the grant date, the
exercise price and expected life of the option, the current price of the
underlying stock and its expected volatility, expected dividends on the stock,
and the risk-free interest rate for the expected term of the option. The Company
has elected to continue accounting for employee stock-based compensation under
Accounting Principles Board ("APB") Opinion No. 25. Under APB Opinion No. 25,
because the exercise price of the Company's employee stock options equaled the
market price of the underlying stock on the date of grant, no compensation
expense is recognized. The following table presents pro forma net income and
earnings per share as they would be calculated had the Company elected to adopt
SFAS No. 123:

Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------
2005 2004 2005 2004
---- ---- ---- ----

Net income, as reported............................ $ 4.1 $ 10.2 $ 23.8 $ 34.7

Add: Stock-based employee compensation
expense included in the determination of net
income as reported, net of related tax
effects............................................ 0.2 -- 0.4 --
Deduct: Stock-based employee compensation
expense determined under fair value based
method for all awards granted, net of related
tax effects........................................ (0.7) (0.8) (2.3) (3.0)
------- ------- ------- -------
Pro forma net income............................... $ 3.6 $ 9.4 $ 21.9 $ 31.7
======= ======= ======= =======

Earnings per share:
Basic - as reported............................. $ 0.10 $ 0.26 $ 0.59 $ 0.88
Basic - pro forma............................... $ 0.09 $ 0.24 $ 0.54 $ 0.80

Diluted - as reported........................... $ 0.10 $ 0.25 $ 0.58 $ 0.86
Diluted - pro forma............................. $ 0.09 $ 0.23 $ 0.53 $ 0.78

For the nine months ended September 30, 2005 and 2004, the Company received
proceeds of $13.6 and $3.8, respectively, from 1,129,000 and 514,000 common
shares issued upon the exercise of options granted to key employees and
directors.

NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4." SFAS
No. 151 amends the guidance in Accounting Research Bulletin ("ARB") No. 43,
Chapter 4, "Inventory Pricing" and requires that items such as idle facility
expense, freight, handling costs and wasted material (spoilage) be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal" under Paragraph 5 of ARB No. 43, Chapter 4. In addition, SFAS No. 151

requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
provisions of SFAS No. 151 are effective for inventory costs incurred during
fiscal years beginning January 1, 2006. The Company believes that the adoption
of SFAS No. 151 will not have a material impact on the Company's results of
operations or financial condition.

In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary
Assets - an amendment of APB Opinion No. 29." The amendments made by SFAS No.
153 are based on the principle that exchanges of nonmonetary assets should be
based on the fair value of the assets exchanged. Further, the amendments
eliminate the narrow exception for nonmonetary exchanges of similar productive
assets and replace it with a broader exception for exchanges of nonmonetary
assets that do not have commercial substance. The provisions of SFAS No. 153 are
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
July 1, 2005. The Company believes that the adoption of SFAS No. 153 will not
have a material impact on the Company's results of operations or financial
condition.

In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment."
SFAS No. 123(R) is a revision of SFAS No. 123 and supersedes APB Opinion No. 25.
Among other items, SFAS No. 123(R) eliminates the use of APB Opinion No. 25 and
the intrinsic value method of accounting, and requires that the compensation
cost relating to share-based payment transactions be recognized in financial
statements based on the fair value of the equity or liability instruments
issued. SFAS No. 123(R) permits companies to adopt its requirements using either
a "modified prospective" method, or a "modified retrospective" method. Under the
"modified prospective" method, compensation cost is recognized in the financial
statements beginning with the effective date, based on the requirements of SFAS
No. 123(R) for all share-based payments granted after that date, and based on
the requirements of SFAS No. 123 for all unvested awards granted prior to the
effective date of SFAS No. 123(R). Under the "modified retrospective" method,
the requirements are the same as under the "modified prospective" method, but
also permits companies to restate financial statements of previous periods based
on pro forma disclosures made in accordance with SFAS No. 123.

In April 2005, the Securities and Exchange Commission ("SEC") adopted a new
rule that amends the date for compliance with SFAS No. 123(R). Under SFAS No.
123(R), the date for compliance would have been the first reporting period
beginning after June 15, 2005, which is the third quarter of 2005 for calendar
year companies. The SEC's new rule allows companies to implement SFAS No. 123(R)
at the beginning of their next fiscal year, instead of the next reporting
period, that begins on or after June 15, 2005.

The Company currently discloses pro forma compensation expense quarterly
and annually by measuring the fair value of stock option grants using the
Black-Scholes model. While SFAS No. 123(R) permits companies to continue to use
such model, it also permits the use of a more complex lattice model (e.g., a
binomial model).

The Company is in the process of evaluating the requirements of SFAS No.
123(R) and will adopt SFAS No. 123(R) beginning January 1, 2006; however, the
Company has not yet determined which of the aforementioned adoption methods it
will use. In addition, while the Company believes that the pro forma disclosures
under "Stock-Based Compensation" above provide an appropriate short-term
indicator of the level of expense that will be recognized in accordance with
SFAS No. 123(R), the total expense recognized in future periods will depend on
several variables, including the number of share-based awards that vest and the
fair value of those vested awards.

NOTE 4: FINANCIAL INSTRUMENTS AND DERIVATIVES

The Company applies the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of SFAS No. 133," SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," and SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
These statements outline the accounting treatment for all derivative activities
and require that an entity recognize all derivative instruments as either assets
or liabilities on its balance sheet at their fair value. Gains and losses
resulting from changes in the fair value of derivatives are recognized each
period in current or comprehensive earnings, depending on whether a derivative
is designated as part of an effective hedge transaction and the resulting type
of hedge transaction. Gains and losses on derivative instruments reported in
comprehensive earnings will be reclassified to earnings in the period in which
earnings are affected by the hedged item.

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 $25.1
and $29.0 for the three months ended September 30, 2005 and 2004, respectively,
and $67.0 and $94.0 for the nine months ended September 30, 2005 and 2004,
respectively.

The Company formally designates and documents the hedging relationship and
risk management objective for undertaking each hedge. The documentation
describes the hedging instrument, the item being hedged, the nature of the risk
being hedged and the Company's assessment of the hedging instrument's
effectiveness in offsetting the exposure to changes in the hedged item's fair
value.

The fair value of outstanding forward foreign exchange contracts at
September 30, 2005 and December 31, 2004 for delivery of various currencies at
various future dates and the changes in fair value recorded in income during the
three and nine months ended September 30, 2005 were not material. The notional
value of outstanding forward foreign exchange contracts at September 30, 2005
and December 31, 2004, was $8.3 and $9.0, 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 $10.5 and $11.7
as of September 30, 2005 and December 31, 2004, respectively. The value of all
other inventories determined using the first-in, first-out method was $94.6 and
$89.6 as of September 30, 2005 and December 31, 2004, respectively.

The components of net inventories are as follows:

September 30, December 31,
2005 2004
-------------- --------------

Raw materials............................... $ 53.4 $ 50.4
Work-in-process............................. 9.8 8.3
Finished goods.............................. 59.2 58.8
------- -------
122.4 117.5
Allowance for excess and obsolete
inventories................................ (17.3) (16.2)
------- -------

$ 105.1 $ 101.3
======= =======

NOTE 6: GOODWILL AND OTHER INTANGIBLE, NET

The Company applies the provisions of SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that all business combinations be accounted for using the
purchase method of accounting and that certain intangible assets acquired in a
business combination be recognized as assets apart from goodwill. Under SFAS No.
142, goodwill is not amortized. Instead, the Company is required to test
goodwill for impairment at least annually using a fair value approach, at the
reporting unit level. In addition, the Company evaluates goodwill for impairment
if an event occurs or circumstances change, which could result in the carrying
value of a reporting unit exceeding its fair value. Factors the Company
considers important which could indicate impairment include the following: (1)
significant under-performance relative to historical or projected future
operating results; (2) significant changes in the manner of the Company's use of
the acquired assets or the strategy for the Company's overall business; (3)
significant negative industry or economic trends; (4) significant decline in the
Company's stock price for a sustained period; and (5) the Company's market
capitalization relative to net book value.

In accordance with SFAS No. 142, the Company completed its annual goodwill
impairment assessment during the fourth quarter of 2004. 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 that time, 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 nine months ended
September 30, 2005 are as follows:

Americas EMEA Asia Pacific Total
-------- ---- ------------ -----

Balance, January 1, 2005.............. $120.3 $ 78.8 $ 20.7 $219.8
Acquisitions.......................... 2.1 -- 4.6 6.7
Translation adjustments............... -- (5.1) -- (5.1)
------- ------- ------- -------
Balance, September 30, 2005........... $122.4 $ 73.7 $ 25.3 $221.4
======= ======= ======= =======

On June 16, 2005, the Company acquired the remaining 50% interest of a
joint venture located in India for $10.5 ("Paxar India"). Paxar India is a full
service provider of apparel identification products, including woven, printed
and bar code labels, and merchandising tags for retailers and apparel customers
manufacturing in India. In connection with this acquisition, the Company
recognized goodwill of $4.6, based on its preliminary allocation of purchase
price to the fair value of net assets acquired.

In March 2005, the Company acquired the business and manufacturing assets
of EMCO Labels ("EMCO"), a manufacturer and distributor of a wide range of
handheld and thermal labeling products, for a total purchase price of $2.8. In
connection with this acquisition, the Company recognized goodwill of $1.9, based
on its preliminary allocation of the purchase price to the acquired assets and
liabilities.

The consolidated statements of earnings reflect the results of operation
for each of Paxar India and EMCO since their respective effective date of
purchase. The pro forma impact of these acquisitions was not significant.

The Company's other intangible asset is as follows:

September 30, December 31,
2005 2004
------------ ------------
Noncompete agreement..................... $ 1.7 $ 1.7
Accumulated amortization................. (1.2) (1.0)
------------ ------------
$ 0.5 $ 0.7
============ ============

NOTE 7: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

A summary of accounts payable and accrued liabilities is as follows:

September 30, December 31,
2005 2004
------------ ------------
Accounts payable......................... $ 52.1 $ 48.0
Accrued payroll costs.................... 21.5 19.5
Advance service contracts................ 4.8 4.4
Accrued professional fees................ 4.4 3.6
Accrued commissions...................... 3.6 3.8
Trade programs........................... 2.2 2.3
Accrued interest......................... 1.6 4.1
Other accrued liabilities................ 25.5 30.9
------------ ------------
$ 115.7 $ 116.6
============ ============

NOTE 8: LONG-TERM DEBT

A summary of long-term debt is as follows:

September 30, December 31,
2005 2004
------------ ------------
6.74% Senior Notes due 2008.............. $ 150.0 $ 150.0
Economic Development Revenue Bonds due
2011 and 2019........................... 13.0 13.0
Other.................................... 0.1 0.1
------------ ------------
$ 163.1 $ 163.1
============ ============

NOTE 9: SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest and income taxes is as follows:

Nine Months Ended
September 30,
--------------------------
2005 2004
---- ----
Interest................................ $ 10.6 $ 10.8
======== ========
Income taxes............................ $ 6.0 $ 5.1
======== ========

NOTE 10: COMPREHENSIVE INCOME

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 Nine Months Ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
---- ---- ---- ----

Net income.................................... $ 4.1 $ 10.2 $ 23.8 $ 34.7
Foreign currency translation adjustments...... (0.5) 3.3 (16.7) (2.0)
Unrealized loss on derivatives................ (0.1) -- (0.1) --
------ ------ ------ ------
Comprehensive income.......................... $ 3.5 $ 13.5 $ 7.0 $ 32.7
====== ====== ====== ======

NOTE 11: EARNINGS PER SHARE

The reconciliation of basic and diluted weighted average common shares
outstanding is as follows:

Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
---- ---- ---- ----

Weighted average common shares (basic)........ 40.7 39.6 40.3 39.5
Options....................................... 0.8 1.3 1.0 0.9
------ ------ ------ ------
Adjusted weighted average common shares
(diluted).................................... 41.5 40.9 41.3 40.4
====== ====== ====== ======

Options to purchase 42,000 shares of common stock outstanding at September
30, 2004 were not included in the computation of diluted earnings per share
because the effect of their inclusion would be antidilutive. There were no such
options outstanding at September 30, 2005.

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) Principally 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 Nine Months Ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
---- ---- ---- ----

Sales to unaffiliated customers:
Americas.......................................... $ 84.0 $ 89.5 $ 251.1 $ 266.1
EMEA.............................................. 47.8 48.3 156.7 162.7
Asia Pacific...................................... 68.8 56.4 194.5 168.2
-------- -------- -------- --------
Total................................... $ 200.6 $ 194.2 $ 602.3 $ 597.0
======== ======== ======== ========

Intersegment sales:

Americas.......................................... $ 16.2 $ 15.9 $ 51.5 $ 45.7
EMEA.............................................. 11.9 11.8 33.6 36.7
Asia Pacific...................................... 7.0 5.5 20.8 14.1
Eliminations...................................... (35.1) (33.2) (105.9) (96.5)
-------- -------- -------- --------
Total................................... $ -- $ -- $ -- $ --
======== ======== ======== ========

Income before taxes (a):
Americas (b)...................................... $ 8.7 $ 12.3 $ 24.4 $ 30.0
EMEA (b).......................................... (2.6) 3.6 3.1 13.4
Asia Pacific...................................... 11.3 7.7 31.7 29.7
-------- -------- -------- --------
17.4 23.6 59.2 73.1
Corporate expenses ............................... (3.7) (7.6) (14.1) (19.6)
Amortization of other intangible.................. (0.1) (0.1) (0.3) (0.3)
-------- -------- -------- --------
Operating income.................................. 13.6 15.9 44.8 53.2
Interest expense, net............................. (2.2) (2.6) (7.3) (8.1)
-------- -------- -------- --------
Total................................... $ 11.4 $ 13.3 $ 37.5 $ 45.1
======== ======== ======== ========

(a) Certain reclassifications have been made to prior periods to conform
to the presentation used in the current period.
(b) For the three and nine month periods ended September 30, 2005, the
Americas included integration/restructuring and other costs of $0.2
and $1.5, respectively, and EMEA included integration / restructuring
and other costs of $1.7 and $2.9, respectively.

Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
---- ---- ---- ----

Depreciation and amortization:
Americas.......................................... $ 3.1 $ 3.5 $ 9.3 $ 10.4
EMEA.............................................. 2.3 2.4 6.8 6.7
Asia Pacific...................................... 2.5 1.9 7.0 5.0
-------- -------- -------- --------
7.9 7.8 23.1 22.1
Corporate......................................... 0.4 0.4 1.1 1.2
-------- -------- -------- --------
Total................................... $ 8.3 $ 8.2 $ 24.2 $ 23.3
======== ======== ======== ========

Capital expenditures:
Americas.......................................... $ 1.4 $ 1.3 $ 5.0 $ 4.8
EMEA.............................................. 2.7 2.5 6.2 6.1
Asia Pacific...................................... 4.7 6.1 12.3 14.1
-------- -------- -------- --------
8.8 9.9 23.5 25.0
Corporate......................................... 0.4 -- 0.5 0.1
-------- -------- -------- --------
Total................................... $ 9.2 $ 9.9 $ 24.0 $ 25.1
======== ======== ======== ========

September 30, December 31,
2005 2004
------------ ------------
Long-lived assets:
Americas.................................. $ 189.1 $ 193.9
EMEA...................................... 120.6 130.8
Asia Pacific.............................. 76.8 61.5
---------- ----------
386.5 386.2
Corporate................................. 5.0 4.2
---------- ----------
Total........................... $ 391.5 $ 390.4
========== ==========

Total assets:
Americas.................................. $ 293.4 $ 301.1
EMEA...................................... 228.8 243.1
Asia Pacific.............................. 188.1 150.9
---------- ----------
710.3 695.1
Corporate................................. 89.9 78.6
---------- ----------
Total........................... $ 800.2 $ 773.7
========== ==========

The following table presents sales by product:

Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
---- ---- ---- ----

Apparel Identification Products........... $ 137.7 $ 134.8 $ 420.1 $ 423.3
Bar Code and Pricing Solutions............ 62.9 59.4 182.2 173.7
------- ------- ------- -------
Total........................... $ 200.6 $ 194.2 $ 602.3 $ 597.0
======= ======= ======= =======

The Company derived sales in the United States of $61.6, or 30.7% of total
sales, and $185.0, or 30.7% of total sales, for the three and nine months ended
September 30, 2005, respectively, and $66.9, or 34.4 % of total sales, and
$203.1, or 34.0% of total sales, for the three and nine months ended September
30, 2004, respectively. In addition, the Company's long-lived assets in the
United States as of September 30, 2005 and December 31, 2004, amounted to $162.7
and $165.3, respectively.

No one customer accounted for more than 10% of the Company's revenues or
accounts receivable for the three and nine months ended September 30, 2005 or
2004.

NOTE 13: INTEGRATION/RESTRUCTURING AND OTHER COSTS

In April 2005, the Company announced initiatives to improve margins and
lower costs in its EMEA region. The initiative was undertaken in light of recent
volume declines in Europe, primarily due to the migration of apparel
manufacturing and softening of the European economies, notably in the retail and
apparel sectors. In July 2005, the Company incurred additional restructuring and
realignment activities in connection with this initiative. Total costs
associated with all of the aforementioned activities are estimated to be $5.1
and are expected to be substantially completed by December 31, 2005.

In January 2005, the Company announced the consolidation of its U.S. Woven
Label manufacturing facilities as part of its continuing effort to improve
operating efficiency and costs. Manufacturing operations at its Hillsville,
Virginia plant have been substantially moved into the Company's Weston, West
Virginia facility. The Company estimates that the closure of the Hillsville
plant will result in charges of approximately $2.3, primarily relating to
workforce reductions and the relocation of machinery and equipment to the Weston
facility. The Company anticipates that the closure of the Hillsville facility
will be completed by December 31, 2005.

During the three and nine months ended September 30, 2005, the Company
recognized charges of $1.7 and $2.9 respectively, in connection with the EMEA
initiatives, which related primarily to workforce reductions and facility exit
costs, and charges of $0.2 and $1.5, respectively, in connection with the
closure of the Hillsville plant, which related substantially to workforce
reductions and, to a lesser extent, relocation of machinery and equipment.

All exit costs associated with the aforementioned activities 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 nine months ended
September 30, 2005:

Balance, Balance,
January 1, 2005 Expenses Payments September 30, 2005
--------------- -------- -------- ------------------

Severance..................... $ -- $ 2.6 $ (2.2) $ 0.4
Other costs................... -- 0.8 (0.6) 0.2
------ ------ ------ ------
$ -- $ 3.4 $ (2.8) $ 0.6
====== ====== ====== ======

NOTE 14: SUBSEQUENT EVENTS

On October 27, 2005, the Company announced that it would undertake
restructuring initiatives related to realigning production capacity utilization,
particularly in response to the continued migration of apparel production
outside of the United States. The current plan is substantially focused on
transferring existing apparel identification manufacturing capacity from the
Company's domestic locations primarily to its Asia Pacific and Central America
locations. 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 a realignment of the Company's sales organization in
response to the aforementioned production migration activities. The charges
related to these restructuring initiatives will be recognized beginning in the
latter part of the fourth quarter 2005, with the majority of the capacity
realignment and sales realignment activities expected to be completed during
2006. The Company expects to incur total pre-tax, non-recurring charges in the
range of $35 to $45 to complete the plan, with roughly $10 to $14 representing
non-cash charges. The plan contemplates significant manufacturing headcount
reductions in the Company's domestic locations and, to a lesser extent,
manufacturing 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 and related charges.

The Company has not finalized the plan supporting the aforementioned
activities in sufficient detail to support an assertion that no significant
changes to any estimated restructuring charges would be likely. No charges were
recorded in connection with this initiative during the three and nine months
ended September 30, 2005.

On October 27, 2005, the Company also announced a repatriation program
pursuant to the American Jobs Creation Act of 2004 whereby approximately $110 of
foreign earnings is expected to be repatriated on or before December 31, 2005.
In connection with this decision, for the three and nine months ended September
30, 2005, the Company recorded an income tax charge of $4.4. With the exception
of the aforementioned $110 of earnings to be repatriated, the Company intends to
continue to reinvest the earnings of its international subsidiaries and,
therefore, has not recorded a U.S. tax provision on the remaining unremitted
earnings that are considered to be permanently reinvested. The repatriation
program is expected to be funded by cash-on-hand and a new five-year, $150
multi-currency revolving credit facility, which is expected to be in place by
early December 2005.

The Company also disclosed its intention to repay $150 million of 6.74%
Senior Notes due August 11, 2008. As of November 7, 2005 the prepayment of these
notes would result in pre-tax charges of approximately $7.0 million.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

All amounts in the following discussion are stated in millions, except
headcount.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management has identified the following policies and estimates as critical
to the Company's business operations and the understanding of the Company's
results of operations. Note that the preparation of this Quarterly Report on
Form 10-Q requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the Company's financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates, and the differences could be material.

Revenue Recognition

The Company recognizes revenue from product sales at the time of shipment
and includes freight billed to customers. In addition, in accordance with Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition, revised and updated,"
the Company recognizes revenues from fixed price service contracts on a pro-rata
basis over the life of the contract as they are generally performed evenly over
the contract period. Revenues derived from other service contracts are
recognized when the services are performed.

SAB No. 101, "Revenue Recognition in Financial Statements," requires that
four basic criteria be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred or services have
been rendered; (3) the fee is fixed or determinable; and (4) collectibility is
reasonably assured. Determination of criteria (3) and (4) are based on
management's judgments regarding the fixed nature of the fee charged for
products delivered and services rendered and the collectibility of those fees.
Should changes in conditions cause management to determine that these criteria
are not met for certain future transactions, revenue recognized for a reporting
period could be adversely affected.

The Company periodically enters into multiple element arrangements whereby
it may provide a combination of products and services. Revenue from each element
is recorded when the following conditions exist: (1) the product or service
provided represents a separate earnings process; (2) the fair value of each
element can be determined separately; and (3) the undelivered elements are not
essential to the functionality of a delivered element. If the conditions for
each element described above do not exist, revenue is recognized as earned using
revenue recognition principles applicable to each element as if it were one
arrangement, generally on a straight-line basis. In November 2002, the Emerging
Issues Task Force ("EITF") reached a consensus on EITF No. 00-21, "Accounting
for Revenue Arrangements with Multiple Element Deliverables." EITF No. 00-21
addresses how to account for arrangements that may involve the delivery or
performance of multiple products, services and/or rights to use assets. Revenue
arrangements with multiple deliverables should be divided into separate units of
accounting if the deliverables in the arrangement meet certain criteria.
Arrangement consideration should be allocated among the separate units of
accounting based on their relative fair values. The Company determined that the
adoption of EITF No. 00-21 did not have a material impact on its results of
operations or financial condition.

Sales Returns and Allowances

Management must make estimates of potential future product returns, billing
adjustments and allowances related to current period product revenues. In
establishing a provision for sales returns and allowances, management relies
principally on the Company's history of product return rates as well as customer
service billing adjustments and allowances, each of which is regularly analyzed.
Management also considers (1) current economic trends, (2) changes in customer
demand for the Company's products and (3) acceptance of the Company's products
in the marketplace when evaluating the adequacy of the Company's provision for
sales returns and allowances. Historically, the Company has not experienced a
significant change in its product return rates resulting from these factors. For
the three and nine months ended September 30, 2005 and 2004, the provision for
sales returns and allowances accounted for as a reduction to gross sales was not
material.

Allowance for Doubtful Accounts

Management establishes an allowance for doubtful accounts based on an
established aging policy, historical experience and future expectations as to
the collectibility of the Company's accounts receivable. 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 $127.6, net of allowances of $11.1, at
September 30, 2005, and $132.5, net of allowances of $12.3, at December 31,
2004.

Inventories

Inventories are stated at the lower of cost or market value and are
categorized as raw materials, work-in-process or finished goods. The value of
inventories determined using the last-in, first-out method was $10.5 and $11.7
as of September 30, 2005 and December 31, 2004, respectively. The value of all
other inventories determined using the first-in, first-out method was $94.6 and
$89.6 as of September 30, 2005 and December 31, 2004, respectively.

On an ongoing basis, the Company evaluates the composition of its
inventories and the adequacy of its allowance for slow-turning and obsolete
products. Market value of aged inventory is determined based on historical sales
trends, current market conditions, changes in customer demand, acceptance of the
Company's products, and current sales activities for this type of inventory.

Goodwill

The Company evaluates goodwill for impairment annually, using a fair value
approach, at the reporting unit level. In addition, the Company evaluates
goodwill for impairment if a significant event occurs or circumstances change,
which could result in the carrying value of a reporting unit exceeding its fair
value. Factors the Company considers important, which could indicate impairment,
include the following: (1) significant under-performance relative to historical
or projected future operating results; (2) significant changes in the manner of
the Company's use of the acquired assets or the strategy for the Company's
overall business; (3) significant negative industry or economic trends; (4)
significant decline in the Company's stock price for a sustained period; and (5)
the Company's market capitalization relative to net book value. The Company
assesses the existence of impairment by comparing the implied fair values of its
reporting units with their respective carrying amounts, including goodwill.
During the fourth quarter of 2004, the Company completed its annual goodwill
impairment assessment, and based on the results, the Company determined that no
impairment of goodwill existed at October 31, 2004, and there have been no
indicators of impairment since that date. A subsequent determination that this
goodwill is impaired, however, could have a significant adverse impact on the
Company's results of operations or financial condition.

Impairment of Long-Lived Assets

The Company periodically reviews its long-lived assets for impairment by
comparing the carrying values of the assets with their estimated future
undiscounted cash flows. If it is determined that an impairment loss has
occurred, the loss is recognized during that period. The impairment loss is
calculated as the difference between asset carrying values and fair value as
determined by prices of similar items and other valuation techniques (discounted
cash flow analysis), giving consideration to recent operating performance and
pricing trends. There were no significant impairment losses related to
long-lived assets for the three and nine months ended September 30, 2005 and
2004, respectively.

Accounting for Income Taxes

As part of the process of preparing the consolidated financial statements,
management is required to estimate the income taxes in each jurisdiction in
which the Company operates. This process involves estimating the actual current
tax liabilities, together with assessing temporary differences resulting from
the differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included in
the consolidated balance sheet. Management must then assess the likelihood that
the deferred tax assets will be recovered, and to the extent that management
believes that recovery is not more than likely, the Company must establish a
valuation allowance. If a valuation allowance is established or increased during
any period, the Company must include this amount as an expense within the tax
provision in the consolidated statement of income. 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.

On October 22, 2004, the President of the United States signed into law,
the American Jobs Creation Act of 2004 (the "Act"). The Act provides, among
other things, for a temporary dividends received deduction for qualified
earnings from outside the United States that are repatriated (as defined in the
Act) on or before December 31, 2005. For the three and nine months ended
September 30, 2005, the Company recorded an income tax charge of $4.4 in
conjunction with its decision to repatriate approximately $110 of foreign
earnings pursuant to the Act on or before December 31, 2005.

With the exception of the aforementioned $110 of earnings to be
repatriated, the Company intends to continue to reinvest the earnings of its
international subsidiaries and, therefore, has not recorded a U.S. tax provision
on the remaining unremitted earnings that are considered to be permanently
reinvested.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005,
COMPARED WITH THE COMPARABLE PERIODS OF 2004

Overview

In order to better serve a customer base consisting predominantly of
retailers, branded apparel companies and contract manufacturers, the Company has
organized its operations into three geographic segments consisting of the
following:

(1) Principally 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 and nine months ended
September 30, 2005 and 2004, in dollars and as a percent of sales, are presented
below:

Three Months Ended Nine Months Ended
------------------------------------------ ------------------------------------------
September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004
------------------ ------------------ ------------------ ------------------

Sales.............................. $ 200.6 100.0% $ 194.2 100.0% $ 602.3 100.0% $ 597.0 100.0%
Cost of sales...................... 127.1 63.4 119.1 61.3 374.3 62.1 365.6 61.2
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit................... 73.5 36.6 75.1 38.7 228.0 37.9 231.4 38.8
Selling, general and
Administrative expenses........... 58.0 28.9 59.2 30.5 178.8 29.8 178.2 29.8
Integration/restructuring and
Other costs....................... 1.9 .9 -- -- 4.4 .7 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Operating income............... 13.6 6.8 15.9 8.2 44.8 7.4 53.2 9.0
Interest expense, net.............. 2.2 1.1 2.6 1.4 7.3 1.2 8.1 1.4
-------- -------- -------- -------- -------- -------- -------- --------
Income before taxes............ 11.4 5.7 13.3 6.8 37.5 6.2 45.1 7.6
Taxes on income.................... 7.3 3.7 3.1 1.5 13.7 2.2 10.4 1.8
-------- -------- -------- -------- -------- -------- -------- --------
Net income..................... $ 4.1 2.0% $ 10.2 5.3% $ 23.8 4.0% $ 34.7 5.8%
======== ======== ======== ======== ======== ======== ======== ========

The Company's sales increased $6.4, or 3.3%, for the three months ended
September 30, 2005 and $5.3, or 0.9%, for the nine months ended September 30,
2005, compared with the comparable periods of 2004. The sales increase for the
three months ended September 30, 2005 was due to sales growth related to
acquisitions of $4.1, higher organic sales of $2.0 and a favorable impact in
foreign exchange of $0.3. The sales increase for the nine months ended September
30, 2005 was due to an increase in sales related to acquisitions of $6.2 and the
favorable impact of changes in foreign exchange rates of $5.1, partially offset
by a decline in organic sales of $6.0.

Sales

The following table presents sales by geographic operating segment:

Americas...................... $ 84.0 41.9% $ 89.5 46.1% $ 251.1 41.7% $ 266.1 44.6%
EMEA.......................... 47.8 23.8 48.3 24.9 156.7 26.0 162.7 27.2
Asia Pacific.................. 68.8 34.3 56.4 29.0 194.5 32.3 168.2 28.2
-------- -------- -------- -------- -------- -------- -------- --------
Total...................... $ 200.6 100.0% $ 194.2 100.0% $ 602.3 100.0% $ 597.0 100.0%
======== ======== ======== ======== ======== ======== ======== ========

Americas' sales include sales invoiced by the Company's operations
principally in North America and Latin America. Sales for this segment decreased
$5.5, or 6.1%, and $15.0, or 5.6%, for the three and nine months ended September
30, 2005, compared with the comparable periods of 2004. These declines were
primarily attributed to lower organic sales of $7.1 and $18.8, respectively,
which were partially offset by the favorable impact of changes in foreign
exchange rates of $0.3 and $1.0, respectively. In addition, for the three and
nine months ended September 30, 2005, acquisition activity contributed sales of
approximately $1.3 and $2.8, respectively. These declines were largely due to
the ongoing 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's sales, which include sales invoiced by the Company's operations in
12 European countries, the Middle East and Africa, decreased $0.5, or 1.0%, and
$6.0, or 3.7%, for the three and nine months ended September 30, 2005,
respectively, compared with the comparable periods of 2004. These decreases were
attributable to declines in organic sales of $0.5 and $10.1, respectively. Sales
for the nine month period were partially offset by the favorable impact of
changes in foreign exchange rates of $4.1. While there was an improvement in
order activity in the latter part of the 2005 third quarter, continued weakness
in economic and retail conditions in EMEA dampened overall customer demand,
which in turn put pressure on EMEA's sales in the three and nine months ended
September 30, 2005. In addition, the Company experienced sales migration to the
Asia Pacific region as apparel manufacturers sought to reduce labor costs and
align manufacturing capacity closer to customers.

Asia Pacific consists of the Company's operations in Hong Kong, China,
Singapore, Sri Lanka, South Korea, Bangladesh, Indonesia, Malaysia, Vietnam and
India. Sales increased $12.4, or 22.0%, and $26.3, or 15.6%, for the three and
nine months ended September 30, 2005, respectively, compared with the comparable
periods of 2004. The increases were substantially attributable to organic sales
growth of $9.6 and $22.9, respectively, and to a lesser extent, the impact of
acquisition activity of $2.8 and $3.4, respectively. The Company's operations in
this region have continued to benefit from the steady migration of many of the
Company's customers that have moved their production outside the U.S. and
Western Europe to minimize labor costs and maximize operating efficiencies.

Gross Profit

Gross profit was $73.5, or 36.6% of sales, and $228.0, or 37.9% of sales,
respectively, for the three and nine months ended September 30, 2005, compared
with $75.1, or 38.7% of sales, and $231.4, or 38.8% of sales, respectively, for
the three and nine months ended September 30, 2004. The lower gross margin was
primarily the result of the under-absorption of fixed factory overhead costs,
inventory write-offs and certain scrap, rework and machine maintenance expense
principally related to the Company's domestic and EMEA apparel business.
Management's ongoing strategy includes implementing process improvements to
reduce costs in all of the Company's manufacturing facilities, re-deploying
assets to manage production capacity, and expanding production in new and
emerging markets in order to minimize labor costs and maximize operating
efficiencies. In October 2005, the Company announced that it would undertake
restructuring activities related to realigning production capacity utilization,
primarily related to its domestic locations (see Liquidity and Capital
Resources).

Selling, General and Administrative ("SG&A") Expenses

SG&A expenses were $58.0 and $178.8 for the three and nine months ended
September 30, 2005, respectively, compared with $59.2 and $178.2 for the three
and nine months ended September 30, 2004, respectively. As a percent of sales,
SG&A expenses were 28.9% and 29.8% for the three and nine months ended September
30, 2005, respectively, compared with 30.5% and 29.8% for the three and nine
months ended September 30, 2004. The improvement in the three months ended
September 30, 2005 when compared with the same period in the prior year was
largely due to a combination of expense controls in the U.S. and EMEA regions,
coupled with lower bonus and sales incentive requirements. Management is
continuing to execute and evaluate further cost reduction opportunities in
response to the continuing migration of sales and production from the U.S. and
EMEA to the Asia Pacific region.

Integration/Restructuring and Other Costs

In April 2005, the Company announced initiatives to improve margins and
lower costs in its EMEA region, primarily relating to workforce reductions and
transportation costs. The initiative was undertaken in light of recent volume
declines in Europe, primarily due to the migration of apparel manufacturing and
softening of the European economies, notably in the retail and apparel sectors.
In July 2005, the Company initiated additional restructuring and realignment
activities in connection with these initiatives. Total costs associated with all
of the aforementioned activities are estimated to be $5.1. All such activities
are expected to be completed by December 31, 2005.

In January 2005, the Company announced the consolidation of its U.S. Woven
Label manufacturing facilities as part of its continuing effort to improve
operating efficiency and costs. Manufacturing operations at its Hillsville,
Virginia plant have been substantially moved to the Company's Weston, West
Virginia facility. The Company estimates that the closure of the Hillsville
plant will result in charges of approximately $2.3, primarily relating to
workforce reductions and the relocation of machinery and equipment to the Weston
facility. The Company anticipates that the closure of the Hillsville facility
will be completed by December 31, 2005.

During the three and nine months ended September 30, 2005, the Company
recognized charges of $1.7 and $2.9, respectively, in connection with the EMEA
initiatives, which related to workforce reductions and certain asset
write-downs, and charges of $0.2 and $1.5, respectively, in connection with the
closure of the Hillsville plant, which related substantially to workforce
reductions and, to a lesser extent, relocation of machinery and equipment.

Operating Income

Operating income was $13.6, or 6.8% of sales, and $44.8, or 7.4% of sales,
for the three and nine months ended September 30, 2005, respectively, compared
with $15.9, or 8.2% of sales, and $53.2, or 9.0% of sales, for the three and
nine months ended September 30, 2004, 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 Nine Months Ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
---- ---- ---- ----

Americas.................................... 10.4% 13.7% 9.7% 11.3%
EMEA........................................ (5.4%) 7.5% 2.0% 8.2%
Asia Pacific................................ 16.4% 13.7% 16.3% 17.7%

Americas' operating income, as a percent of sales, decreased to 10.4% and
9.7%, respectively, for the three and nine months ended September 30, 2005,
compared with 13.7% and 11.3% for the three and nine months ended September 30,
2004. These declines primarily resulted from a combination of the continued
migration of sales to the Asia Pacific region and related under-absorption of
its fixed cost base, as well as inventory write-offs and certain scrap, rework
and machine maintenance expense, principally related to the Americas' apparel
business. In addition, Americas included integration/restructuring and other
costs, as a percent of sales, of 0.2% and 0.6%, respectively, for the three and
nine months ended September 30, 2005.

EMEA's operating income, as a percent of sales, decreased to (5.4)% and
2.0%, respectively, for the three and nine months ended September 30, 2005
compared with 7.5% and 8.2% for the three and nine months ended September 30,
2004. These declines primarily resulted from a combination of the downturn in
EMEA's sales volume and under-absorption of its fixed cost base as well as
integration/restructuring and other costs which, as a percentage of sales, was
3.6% and 1.9%, respectively for the three and nine months ended September 30,
2005.

Asia Pacific's operating income, as a percent of sales, increased to 16.4%
for the three months ended September 30, 2005 and declined to 16.3% for the nine
months ended September 30, 2005, compared with 13.7% and 17.7% for the three and
nine months ended September 30, 2004, respectively. The increase for the three
months ended September 30, 2005 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. The decrease for the
nine months ended September 30, 2005 was due primarily to higher fixed costs
associated with capacity expansion which began in the second half of 2004 for
which the Company experienced under-absorption during the nine months ended
September 30, 2005.

Interest Expense, Net

Interest expense, net of interest income on invested cash, was $2.2 and
$7.3 for the three and nine months ended September 30, 2005, respectively,
compared with $2.6 and $8.1 for the three and nine months ended September 30,
2004. The reduction in net interest expense was primarily attributable to the
additional interest income earned on higher average cash balances over the
comparable prior year periods, and to a lesser extent, lower average borrowings
under the Company's revolving credit facility during the nine months ended
September 30, 2005.

Taxes on Income

The Company's effective tax rate is based on management's estimates of the
geographic mix of projected pre-tax income and, to a lesser extent, state and
local taxes. The effective tax rate for the three and nine months ended
September 30, 2005 was 64.0% and 36.5%, respectively, compared with the
effective tax rate for each of the three and nine months ended September 30,
2004 of 23.3% and 23.1%, respectively. These increases are substantially due to
a $4.4 charge recorded during the three months ended September 30, 2005 in
conjunction with the Company's decision to repatriate approximately $110 of
foreign earnings pursuant to the American Jobs Creation Act of 2004 and, to a
lesser extent, certain restructuring charges in the Company's EMEA region for
which, in the Company's estimate, no tax benefit is anticipated. 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:

Nine Months Ended
September 30,
----------------------
2005 2004
-------- --------
Net cash provided by operating activities......... $ 55.8 $ 65.7
Net cash used in investing activities............. (37.0) (23.3)
Net cash provided by/(used in) financing
activities....................................... 13.9 (22.3)
------- -------
Increase in cash and cash equivalents (a)....... $ 32.7 $ 20.1
======= =======
----------
(a) Before the effect of exchange rate changes on cash flows.

Operating Activities

Cash provided by operating activities is the Company's primary source of
funds to finance operating needs and growth opportunities. Net cash provided by
operating activities was $55.8 for the nine months ended September 30, 2005,
compared with $65.7 for the nine months ended September 30, 2004. Management
believes that the Company will continue to generate sufficient cash from its
operating activities for the foreseeable future, supplemented by borrowings from
financial institutions, to fund its working capital needs, strengthen its
balance sheet and support its growth strategy. Management believes that the
borrowings available under the Company's existing revolving credit agreement
(the "Credit Agreement") provide sufficient liquidity to supplement the
Company's operating cash flow. The Credit Agreement, which originally expired in
September 2005, was amended during the third quarter 2005 to extend the
expiration to December 31, 2005. A new five-year, $150 multi-currency revolving
credit facility is expected to be in place by early December 2005.

Working capital and the corresponding current ratio were $246.2 and 2.8:1
at September 30, 2005, compared with $227.2 and 2.7:1 at December 31, 2004. The
increase in working capital resulted from increases in cash and cash
equivalents, inventories and deferred tax assets, and decreases in accounts
payable and other liabilities, partially offset by decreases in accounts
receivable and other current assets, and increases in amounts due banks and
accrued taxes on income.

On October 27, 2005, the Company also announced a repatriation program
pursuant to the American Jobs Creation Act of 2004 whereby approximately $110 of
foreign earnings is expected to be repatriated on or before December 31, 2005.
In connection with this decision, for the three and nine months ended September
30, 2005, the Company recorded an income tax charge of $4.4. With the exception
of the aforementioned $110 of earnings to be repatriated, the Company intends to
continue to reinvest the earnings of its international subsidiaries and,
therefore, has not recorded a U.S. tax provision on the remaining amount of
unremitted earnings that are considered to be permanently reinvested. The
repatriation program is expected to be funded by cash-on-hand and a new
five-year, $150 multi-currency revolving credit facility, which is expected to
be in place by early December 2005.

Investing Activities

For the nine months ended September 30, 2005 and 2004, the Company incurred
$24.0 and $25.1, respectively, of capital expenditures to acquire production
machinery, expand capacity, install system upgrades and continue with its growth
and expansion of Company operations in the emerging markets of Latin America,
EMEA and Asia Pacific. The capital expenditures were funded by cash provided by
operating activities. In addition, on March 31, 2005, the Company acquired the
business and manufacturing assets of EMCO Labels, a manufacturer and distributor
of a wide range of handheld and thermal labeling products, for $2.8. Also, on
June 15, 2005, the Company acquired the remaining 50% interest of a joint
venture located in India ("Paxar India"), for $10.5. Paxar India is a full
service provider of apparel identification products, including woven, printed
and bar code labels, and merchandising tags for retailers and apparel customers
manufacturing in India.

Financing Activities

The components of total capital as of September 30, 2005 and December 31,
2004, respectively, are presented below:

September 30, December 31,
2005 2004
------------ ------------
Due to banks............................... $ 4.1 $ 3.9
Long-term debt............................. 163.1 163.1
------------ ------------
Total debt............................. 167.2 167.0
Shareholders' equity....................... 462.7 440.6
------------ ------------
Total capital.......................... $ 629.9 $ 607.6
============ ============

Total debt as a percent of total capital... 26.5% 27.5%
============ ============

For the nine months ended September 30, 2005 and 2004, net repayments of
the Company's outstanding debt were $0.1 and $26.5, respectively.

On October 27, 2005, the Company disclosed its intention to repay $150
million of 6.74% Senior Notes due August 11, 2008, resulting in anticipated
annual interest savings of $4 to $5 million commencing in 2006. As of November
7, 2005 the prepayment of these notes would result in pre-tax charges of
approximately $7.0 million.

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 nine months ended September 30, 2005 and 2004, the Company received
proceeds of $14.0 and $4.2, respectively, from sales of 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 of $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 nine months
ended September 30, 2005 and 2004. As of September 30, 2005, the Company had
$28.0 available under its $150 stock repurchase program authorization.
Subsequent to September 30, 2005 and through November 7, 2005 the Company
repurchased 343,000 shares for approximately $6.0. The Company may continue to
repurchase its shares from time to time subject to authorized limits, depending
on market conditions and cash availability.

Financing Arrangement - Credit Agreement

In September 2002, the Company entered into a three-year, $150 Credit
Agreement with a group of five domestic and international banks. Effective
August 4, 2004, at the Company's request, the Credit Agreement was amended to
reduce the total commitment under the facility from $150 to $50. There were no
borrowings outstanding under the Credit Agreement as of September 30, 2005. The
Credit Agreement, which originally expired in September 2005, was amended during
the third quarter 2005 to extend the expiration to December 31, 2005.

Under the existing 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 September 30, 2005 was 0.275%. Borrowings under the Credit
Agreement bear interest at rates referenced to the London Interbank Offered Rate
with applicable margins varying in accordance with the Company's attainment of
specified debt to EBITDA thresholds or, at the Company's option, rates
competitively bid among the participating banks or the Prime Rate, as defined
(6.75% at September 30, 2005 and 5.25% at December 31, 2004), and are guaranteed
by certain domestic subsidiaries of the Company.

The Credit Agreement, among other things, limits the Company's ability to
change the nature of its businesses, incur indebtedness, create liens, sell
assets, engage in mergers and make investments in certain subsidiaries. In
addition, it contains certain customary events of default, which generally give
the banks the right to accelerate payments of outstanding debt. These events
include:

o Failure to maintain required financial covenant ratios, as described
below;
o Failure to make a payment of principal, interest or fees within two
days of its due date;
o Default, beyond any applicable grace period, on any aggregate
indebtedness of the Company exceeding $0.5;
o Judgment or order involving a liability in excess of $0.5; and
o Occurrence of certain events constituting a change of control of the
Company.

Additionally, the Company must maintain at all times an excess of
consolidated total assets over total liabilities of not less than the sum of
$274 plus 35% of consolidated net income for the period after July 1, 2002 plus
100% of the net cash proceeds received by the Company from the sale or issuance
of its common stock on and after July 1, 2002. The Company's maximum allowable
debt to EBITDA ratio, as defined, is 3.0 to 1 and minimum allowable fixed charge
ratio, as defined, is 1.5 to 1.

The Company is in compliance with all debt covenants. The Company discloses
the details of the compliance calculation to its banks and certain other lending
institutions in a timely manner.

On October 27, 2005, the Company disclosed its intention to enter into a
new five-year, $150 multi-currency revolving credit facility, which is expected
to be in place by early December 2005.

Off Balance Sheet Arrangements

The Company has no material transactions, arrangements, obligations
(including contingent obligations), or other relationships with unconsolidated
entities or other persons, that have or are reasonably likely to have a material
current or future impact on its financial condition, changes in financial
condition, results of operations, liquidity, capital expenditures, capital
resources, or significant components of revenues or expenses.

Market Risk

In the normal course of business, the Company is exposed to foreign
currency exchange rate and interest rate risks that could impact its results of
operations.

The Company at times reduces its market risk exposures by creating
offsetting positions through the use of derivative financial instruments. All of
the Company's derivatives have high correlation with the underlying exposures.
Accordingly, changes in fair value of derivatives are expected to be offset by
changes in value of the underlying exposures. The Company does not use
derivative financial instruments for trading purposes.

The Company manages a foreign currency hedging program to hedge against
fluctuations in foreign currency denominated trade liabilities by periodically
entering into forward foreign exchange contracts. The aggregate notional value
of forward foreign exchange contracts the Company entered into amounted to $25.1
and $29.0 for the three months ended September 30, 2005 and 2004, respectively,
and $67.0 and $94.0 for the nine months ended September 30, 2005 and 2004,
respectively.

The following table summarizes as of September 30, 2005, the Company's
forward foreign exchange contracts by currency. All of the Company's forward
foreign exchange contracts mature within a year. Contract amounts are
representative of the expected payments to be made under these instruments:

Contract Amounts (in thousands)
------------------------------------ Fair Value
Receive Pay (US$ 000's)
---------------- ---------------- ---------------

Contract to receive US$/pay British Pounds ("GBP")............. (US$) 5,243 (GBP) 2,976 $ (2)
Contract to receive US$/pay Euro ("EUR")....................... (US$) 154 (EUR) 128 $ -
Contract to receive US$/pay Moroccan Dirham ("MAD")............ (US$) 137 (MAD) 1,245 $ (1)
Contracts to receive EUR/pay US$............................... (EUR) 444 (US$) 543 $ (6)
Contracts to receive GBP/pay EUR............................... (GBP) 54 (EUR) 77 $ (1)
Contract to receive Hong Kong Dollar ("HKD")/pay US$........... (HKD) 30 (US$) 4 $ -
Contracts to receive GBP/pay US$............................... (GBP) 374 (US$) 672 $ (3)
Contract to receive EUR/pay MAD................................ (EURO) 330 (MAD) 3,615 $ (2)
Contract to receive GBP/pay MAD................................ (GBP) 611 (MAD) 9,810 $ (5)

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 and nine months ended September 30, 2005 and 2004.

Cautionary Statement pursuant to "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995

Except for historical information, the Company's reports to the Securities
and Exchange Commission ("SEC") on Form 10-K, Form 10-Q and Form 8-K and
periodic press releases, as well as other public documents and statements,
contain "forward-looking statements" concerning the Company's objectives and
expectations with respect to gross profit, expenses, operating performance,
capital expenditures and cash flows. The Company's success in achieving its
objectives and expectations is subject to risks and uncertainties that could
cause actual results to differ materially from those expressed or implied by the
statements. Among others, the risks and uncertainties include:

o Worldwide economic and other business conditions that could affect
demand for the Company's products in the U.S. or international
markets;
o Rate of migration of the garment manufacturing industry from the U.S.
and Western Europe;
o The mix of products sold and the profit margins thereon;
o Order cancellation or a reduction in orders from customers;
o Competitive product offerings and pricing actions;
o The availability and pricing of key raw materials;
o The level of manufacturing productivity; and
o Dependence on key members of management.

Additionally, the Company's forward-looking statements are predicated upon
the following assumptions, among others, that are specific to the Company and/or
the markets in which it operates:

o There are no substantial adverse changes in the exchange relationship
between the British pound or the euro and the U.S. dollar;
o Lower economic growth, particularly in the U.S., the U.K. or the
countries in Western Europe, will not occur and affect consumer
spending in those countries;
o There will continue to be adequate supply of the Company's raw
materials to meet the needs of its businesses;
o There are no substantial adverse changes in the availability and
pricing of the Company's petroleum-derived raw materials;
o The Company's Enterprise Resource Planning systems can be successfully
integrated into the Company's operations;
o The Company can continue to successfully integrate the operations and
related infrastructure resulting from acquisitions;
o The Company can continue to successfully realign its operations in
connection with restructuring initiatives;
o There are no adverse changes in U.S. and foreign tax laws and
accounting principles generally accepted in the U.S. that would
require the Company to establish an additional income tax provision
for the U.S. and other taxes arising from repatriation of the
undistributed earnings of non-U.S. subsidiaries;
o The Company can continue to successfully expand its sales,
manufacturing and distribution capacity in certain Eastern European
and Asian Pacific markets in response to the continued migration of
the retail apparel business from the U.S. and Western Europe; and
o There are no substantial adverse changes in the political climates of
developing and other countries in which the Company has operations and
countries in which the Company will endeavor to establish operations
in concert with its major customers' migrations to
lower-production-cost countries.

Readers are cautioned not to place undue reliance on forward-looking
statements. The Company undertakes no obligation to republish or revise
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrences of unanticipated events.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

The information required by this Item is set forth under the heading
"Market Risk" in Management's Discussion and Analysis of Financial Condition and
Results of Operations, above, which information is hereby incorporated by
reference.

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 second quarter of 2005
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.

PART II OTHER INFORMATION
Item 6. Exhibits.

Exhibit 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.

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

November 7, 2005
---------------------------------
Date