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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 2005
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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
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(Exact name of registrant as specified in its charter)
New York 13-5670050
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
105 Corporate Park Drive
White Plains, New York 10604
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(Address of principal (Zip Code)
executive offices)
914-697-6800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value New York Stock Exchange, Inc.
$0.10 per share
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes |X| No |_|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act.
Yes |_| No |X|
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is 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 ExchangeAct.
(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|
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of June 30, 2005 was approximately
$615,918,790. On such date, the closing price of the registrant's Common Stock,
as quoted on the New York Stock Exchange, was $17.75.
The registrant had 40,870,966 shares of Common Stock outstanding as of
March 9, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K is herein incorporated by
reference from the registrant's Definitive Proxy Statement to be filed with the
Securities and Exchange Commission with respect to the registrant's Annual
Meeting of Shareholders scheduled to be held on May 4, 2006.
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PART I
Item 1: Business
Paxar Corporation ("Paxar" or the "Company"), incorporated in New York in
1946, is a global leader in providing innovative identification solutions to the
retail and apparel manufacturing industries, worldwide. These solutions include:
1) brand development, 2) information services and 3) supply chain logistics.
Paxar's brand development solutions include offering creative design
services to apparel customers and retailers to translate their branding concepts
into fashionable systems of apparel identification, including tickets, tags and
labels that make a garment stand-out to consumers, as well as assist consumers
with their purchasing decisions. The Company's comprehensive information
services provide customers with exceptional control, visibility and access to
information concerning apparel identification activities, regardless of
point-of-manufacture, worldwide. Paxar's supply chain logistics offerings, which
include bar code and RFID (radio frequency identification) labels, bar code and
RFID printers and labelers, as well as the design of integrated systems for
large in-store and warehouse applications, offer customers high-quality
inventory control and distribution management capabilities.
The Company operates globally, with approximately 70% of its sales outside
the United States. The Company's operations have been organized into three
geographic segments consisting of (1) the operations principally in North
America and Latin America ("Americas"); (2) Europe, the Middle East and Africa
("EMEA"); and (3) the Asia Pacific region ("Asia Pacific"). The Company's entire
array of products and services is offered for sale across each of those
geographic segments. As of December 31, 2005, the Company had 86 manufacturing
facilities and sales offices located in 39 countries and employed approximately
10,800 people worldwide. In addition, the Company sells its products through
independent distributors in 24 countries where it does not sell directly to the
final customer. Net sales and operating profit by business segment during the
last three years appears under the caption "Results of Operations" in Part II,
Item 7 of this report and in Note 11 to the consolidated financial statements.
For recent business developments and other information, refer to the
information set forth under the captions, "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Results of Operations",
"-Integration/Restructuring and Other Costs" and "-Liquidity and Capital
Resources" in Part II, Item 7 of this report.
Products and Services
1. Apparel Identification Products
The Company manufactures woven, printed and heat transfer labels in
its facilities around the world. Labels are attached to garments by the
garment manufacturer early in the manufacturing process. They provide
brand, size, country of origin, care and content information for consumers
and tracking information for retailers. Multi-color woven labels are
produced on jacquard broad looms and needle looms. Printed labels are
produced on coated fabrics and narrow woven-edge fabrics made by the
Company. The Company uses proprietary processes it has developed to coat,
weave, dye, finish and print the printed labels that it manufactures. Heat
transfer labels are produced using the technology that combines specially
formulated inks and adhesives in a process involving heat, pressure and
dwell time. Paxar has developed many innovative specialty labels. Some
incorporate security features to protect in-store merchandise from theft
and to protect branded apparel from counterfeiters, while others meet
industrial needs, such as those that remain legible on uniforms through
repeated industrial washings.
The Company also prints tags for retailers and apparel manufacturers.
The tags can be either plain black and white tags with human-readable
information (letters and numbers) and a bar code or multi-color graphic
tags with promotional information as well as price and other variable
information. In these latter situations, Paxar generally preprints the
multi-color tag and then puts the tag through a second print process to
apply variable information, which generally includes a bar code. This
two-step process allows for just-in-time delivery of large volumes of tags
once the customer conveys the variable information (e.g., price,
department, etc.). In addition, the Company manufactures or produces
these tags on specialty substrates such as plastic, translucent film and
metals.
The Company also operates service bureaus around the world to provide
customers with rapid delivery of labels and tags.
Generally, manufacturers use the Company's apparel systems to print,
cut and batch large volumes of labels and tags in their own facilities.
1
Such systems are also capable of printing variable information on various
fabric and paper substrates. They may also contain bar codes or
RFID-enabled tickets and tags. The Company has developed systems to print
permanent bar code labels on fabric using specialty stocks and inks.
Permanent bar codes provide the manufacturers with information regarding
the date and place of production.
Paxar produces the components of its apparel systems, including
printers, fabrics, inks and printing accessories such as label cutters and
stackers. The sale of a system usually results in ongoing sales of inks,
fabrics, services and replacement parts to the customer.
Paxar's Web-based information services give marketers and retailers of
branded and private label apparel and the contractors who actually
manufacture the items, the capability to exchange order and shipping
information quickly and easily over the Internet. This system gives
contractors the ability to download customer specifications for each label
to be printed from a password-protected site and to print that information
in their facilities on Paxar label stock.
Manufacturers attach the labels and tags to completed garments to
provide brand and other promotional information to support point-of-sale
merchandising.
The Company has the following capabilities and resources that it
constantly strives to strengthen, which it believes sets it apart from its
competitors:
o Extensive creative design services that are an important
value-added component of its relationship with its customers;
o Global presence enabling "source tagging" of garments by the
manufacturer wherever the garments are produced;
o The unique ability to provide electronic global information
services that ensure data integrity; and
o State-of-the-art presses and other equipment enabling
"just-in-time-delivery" of tags that meets stringent customer
specifications.
2. Bar Code ("BC") and Pricing Solutions ("PS") (collectively, "BCPS")
The Company manufactures and markets thermal transfer and thermal
direct printers, which produce high quality images on a wide variety of
papers and other materials. The printers are linked electronically (often
by radio frequency) with the customer's remote data input and data
collection equipment. In this way, the printers can scan and "read" bar
codes and/or RFID tags on a given item, download the variable data for the
specific label to be printed, and then encode the RFID tags and/or print
the bar code and human readable data and, in some cases, apply the label
directly to the item.
The Company's printers are available in handheld, portable and
tabletop models and are supported with a wide range of accessories,
supplies and services.
BC's customers primarily include mass merchandisers, large retail
stores, distribution centers and consumer goods manufacturers. Bar coding
is essential to the optimization of integrated supply chain management
solutions. In addition, bar code labels are used for price and inventory
marking in stores and to pre-mark items in distribution centers.
In the rapidly emerging field of RFID, the Company introduced a
tabletop printer/encoder specifically designed to write to RFID chips
embedded in thermal direct or thermal transfer bar code labels. This
product tests the chip for accuracy and reliability, writes to the chip,
verifies that the information is correct, and prints human-readable
information and bar code data.
In addition, the Company has invested in manufacturing equipment in
its Miamisburg, Ohio plant allowing it to purchase rolls of RFID
transponders from any of several vendors, cut those transponders into
individual tags and insert the tags into finished "smart labels" at high
speeds. Produced in a strict electrostatic discharge controlled environment
with stringent processes and high quality components, every RFID tag is
"twice tested," once before insertion into the label, and again when the
label is completed to verify data encoding performance; thus, the Company
believes that its RFID tags are highly reliable.
The Company believes that RFID technology, with its capability to
transmit product serial numbers or other encoded information wirelessly to
a scanner without the need for human intervention, is creating new
opportunities for retailers, suppliers and manufacturers to improve
warehouse/distribution control, supply chain management, in-store stock and
logistics tracking. The Company plans to continue to develop innovative
RFID-enabled products as RFID becomes integral to the way retailers,
suppliers and manufacturers do business.
2
The Company's handheld mechanical labelers print human-readable
information for retail store and distribution center price and inventory
marking, as well as promotional item marking. Additionally, the Company's
PS products are used for food freshness dating and for material
identification in the automotive, healthcare and other industries. In
addition to manufacturing the labelers, the Company produces the adhesive
labels used in the labelers and supports the complete system with what it
believes is an industry-leading service organization.
Sales by Product
The following table presents sales (in millions) by product:
2005 2004 2003
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Apparel Identification Products............. $ 562.4 69.5% $ 566.2 70.4% $ 482.5 67.8%
Bar Code and Pricing Solutions.............. 246.7 30.5 238.2 29.6 229.5 32.2
------- ------- ------- ------- ------- -------
Total.................................. $ 809.1 100.0% $ 804.4 100.0% $ 712.0 100.0%
======= ======= ======= ======= ======= =======
Customers
Most of the Company's customers are retailers, branded apparel companies or
contract and consumer packaged goods manufacturers. Many retailers use Paxar
products and services in their store locations and/or in their distribution
centers. The most frequently used applications include: item and shelf labeling
for product identification, branding, pricing and merchandising, and carton and
pallet labeling to facilitate the efficient movement of goods from suppliers to
consumers. These retailers also typically qualify and specify Paxar as an
approved supplier of labels and tags to contractors that manufacture private
label and branded apparel or other products. Manufacturers of branded products
will do the same if they outsource their production. Usually, Paxar competes
with other suppliers for the contractors' business; therefore, reliability and
service are critically important.
No one customer accounted for more than 10% of the Company's revenues or
accounts receivable in 2005, 2004 or 2003.
Competition
The Company continues to be a market leader in developing and providing
innovative products and solutions that add significant value for its customers
in brand building, information services and supply chain management. In
addition, while the Company strives to maintain a highly competitive cost
profile, it is also fully committed to providing its customers with excellent
quality products that are supported with exceptional service.
Increasingly, global capabilities are of critical importance. On a global
product basis, the Company believes that it is a market leader in fabric labels,
apparel systems and PS products and services for apparel manufacturers and
retailers and that it is among the largest suppliers of graphic tags for apparel
and tickets, tags, labels and thermal printers for bar code applications in the
retail supply chain. The Company competes, domestically and internationally,
with a number of small and medium-sized companies in addition to four larger
companies. The larger competitors are: Avery Dennison Corporation in apparel
labels and tags (through their Retail Information Services business); Zebra
Technologies Corporation in BC printers; R.R. Donnelley & Sons Co. in BC labels;
and Checkpoint Systems, Inc. in PS and security products.
Sales and Marketing
Most of the Company's sales are derived from salespeople employed by the
Company who call directly upon its customers. Non-exclusive manufacturers'
representatives, international and export distributors, and commission agents
account for a less significant portion of total sales. Paxar has 184 sales
people in Americas; 182 sales people in EMEA; and 117 sales people in Asia
Pacific.
Generally, the Company's salespeople are compensated on the basis of salary
plus a bonus. Non-exclusive manufacturers' representatives sell the Company's
products on a commission basis in select markets.
The Company also promotes its products and services through its Web site,
direct mail campaigns, publication of catalogs and brochures, participation in
trade shows, telemarketing and advertising, principally in trade journals. In
addition, the Company markets its PS products through office-supply retailers
and by a catalog, which provides a cost-effective way for the Company to reach
smaller retailers.
3
Seasonality
The Company's business does not exhibit significant seasonality; however,
sales are typically higher in the second and fourth calendar quarters.
Sources and Availability of Raw Materials
The Company purchases fabrics, inks, chemicals, polyester film, plastic
resins, electronic components, adhesive-backed papers, yarns and other raw
materials from major suppliers around the world. The Company believes that its
raw materials are in good supply to meet its reasonably foreseeable production
requirements and are available from multiple sources. Nonetheless, shortages of
raw materials could arise in the future, which may adversely impact the
Company's ability to timely deliver its products.
Additionally, the Company's raw materials principally derived from
petroleum are subject to price fluctuations based on changes in petroleum
prices, availability and other factors. The Company purchases these materials
from a number of suppliers. Significant and sustained increases in prices for
these materials could adversely affect the Company's earnings if selling prices
for its finished products are not adjusted or if adjustments significantly trail
the increases in prices for these materials.
Patents, Trademarks and Licenses
The Company relies upon trade secrets and confidentiality to protect the
proprietary nature of its technology. The Company also owns and controls
numerous patents and trademarks. The Company believes that its patents are
significant to its operations and its competitive position.
Backlog
Backlog is not a reliable indicator of future sales activity because more
than 80 percent of annual sales consists of orders that the Company typically
fills within one month of receipt. The balance of the orders is for products
that are ordered to individual customer specifications for delivery within two
to three months.
Research and Development
The Company believes that continuous product innovation helps it to compete
effectively in its markets. Through its research and product development
investments, the Company continues to introduce new products to serve the needs
of its customers. The Company's research and development expenses were
approximately $7.4, $7.1 and $6.8 for 2005, 2004 and 2003, respectively. The
Company had 76 research and development personnel as of December 31, 2005.
Environmental Compliance
The Company is subject to various federal, state and local environmental
laws and regulations limiting or related to the use, emission, discharge,
storage, treatment, handling and disposal of hazardous substances. The Company
has programs that are designed to ensure that operations and facilities meet or
exceed applicable rules and regulations. Federal laws that are particularly
applicable are:
o Water Pollution Control Act
o Clear Air Act of 1970 (as amended in 1990)
o Resource Conservation and Recovery Act (including amendments relating
to underground tanks)
The Company has been named a potentially responsible party relating to
contamination that occurred at certain super-fund sites. Management does not
expect the ultimate outcome of this matter to be material in relation to the
Company's results of operations or financial condition.
4
Executive Officers of the Registrant
The following presents information regarding the executive officers of the
Company:
Robert van der Merwe, 53, President and Chief Executive Officer and
Director since April 2005. Prior to that time, he was Group
President-North Atlantic Family Care of Kimberly-Clark Corporation
since 2004. From 1998 to 2004 he was President, Kimberly-Clark Europe
and Group President, Kimberly-Clark Europe, Middle East & Africa since
1998.
Paul Chu, 54, President, Asia Pacific since February 2002 and Managing
Director of Asia Pacific since November 1996.
Anthony S. Colatrella, 50, Vice President and Chief Financial Officer
since July 2005. Prior to that time, he was Senior Vice President and
Controller of The Scotts Company, Inc. since 2003. From 2001 to 2003
he held the positions of Senior Vice President and General Manager of
Scotts Lawn Service, and from 1999 to 2001, he was Senior Vice
President, Finance - Scotts North America.
Susan P. Guerin, 44, President of North American Apparel Group since
October 2005. Prior to that time, she was Senior Vice President of
Finance of the Cendant Corporation, working closely with the Travel
Content and Vehicle Services Divisions. From 2000 to 2003 she was
Chief Financial Officer of Lerner New York.
George K. Hoffman, 54, President, Apparel Business Development and
Strategy and Latin American Apparel Group since October 2005; Prior to
that time, he was President of the Americas Apparel Group, since March
2003; Vice President and General Manager of the Printed Label Business
for North America since October 2002. Prior to that time, he was Chief
Executive Officer of eRevenue, Inc. since July 1999.
John P. Jordan, 60, Vice President and Treasurer since August 1998.
James L. Martin, 59, President, Bar Code Pricing Solutions Group since
January 2004. Prior to that time, he was President, Bar Code and
Pricing Solutions since March 2003; Vice President and General Manager
of the Bar Code business since February 2003; Global Business Manager
of the Pricing Solutions business since January 2002; and Vice
President and General Manager of the Pricing Solutions business since
April 1996.
Richard Maue, 35, Vice President and Controller since July 2005. From
June 2003 to July 2005, he was Director of Internal Audit Practice of
Protiviti, Inc. a national provider of independent auditing and risk
consulting services. Mr. Maue was Executive Vice President and Chief
Financial Officer of Andrea Electronics Corporation from 1999 to 2003.
Robert S. Stone, 68, Vice President, General Counsel and Secretary
since September 1999.
James Wrigley, 52, President, EMEA since November 2002 and President,
Europe since June 1999.
Each of the foregoing executive officers serves at the pleasure of the Board of
Directors.
Employees
The Company had approximately 10,800 employees worldwide as of December 31,
2005. Approximately 110 production employees of the Company in three locations
in the U.S. are covered by four different union contracts, which expire at
various times from June 2007 to January 2008. The Company has no recent history
of material labor disputes. The Company believes that it has good employee
relations.
Code of Business Ethics
The Company has a Code of Business Ethics that applies to its employees,
including its Chief Executive Officer, Chief Financial Officer and other persons
performing similar management and finance functions, globally. The Company makes
available free of charge through its Web site (www.paxar.com) its Code of
Business Ethics. If the Company makes changes to its Code of Business Ethics for
any of its senior officers, the Company expects to provide the public with
notice of any such change or waiver by publishing a description of such event on
its Web site or by other appropriate means as required by applicable rules of
the Securities and Exchange Commission ("SEC").
5
Financial Information About Geographic Areas
Worldwide net sales and operating income by business segment during the
last three years appears under the caption "Results of Operations" in part II,
Item 7 of this report and in Note 11 of the consolidated financial statements.
Available Information
Paxar files annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any document Paxar files
at the SEC's public reference room at Room 1024, 450 Fifth Street, NW,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on
the public reference room. The SEC maintains a Web site (www.sec.gov) that
contains annual, quarterly and current reports, proxy statements and other
information that issuers (including Paxar) file electronically with the SEC.
Paxar makes available free of charge through its Web site (www.paxar.com)
its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, Forms 3, 4 and 5 filed on behalf of directors and executive
officers, and any amendments to those reports filed or furnished pursuant to the
Securities Exchange Act of 1934 as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the SEC.
Paxar's most recent annual report on Form 10-K, its quarterly reports on
Form 10-Q for the current fiscal year and its most recent proxy statement can be
viewed through its Web site, although in some cases these documents are not
available on its site as soon as they are available on the SEC's site. The
information on Paxar's Web site is not incorporated by reference into this
report.
In addition, Paxar will provide, upon written request and without charge,
paper or electronic copies of its reports and other filings made with the SEC.
Requests for such filings should be directed to Investor Relations, Paxar
Corporation, 105 Corporate Park Drive, White Plains, NY 10604.
Financial Information About Operations in the United States and Other Countries
The information required by this Item is incorporated by reference to Note
11 of the consolidated financial statements in Part IV, Item 15 of this report.
Item 1A: Risk Factors
Many of the factors that affect the Company's business and operations
involve risk and uncertainty. The following is a summary of the principal risks
to an investment in the Company's securities. Additional risks and
uncertainties, not presently known to the Company or currently deemed material,
could negatively impact its results of operations or financial condition in the
future.
The Company faces risks associated with significant international operations.
The Company has operations in 39 countries, with approximately 70% of net
sales coming from operations outside the U.S. While geographic diversity helps
to reduce the Company's exposure to risks in any one country or part of the
world, it also means that it is subject to the full range of risks associated
with significant international operations, including, but not limited to:
o changes in exchange rates for foreign currencies, which may reduce the
U.S. dollar value of revenue received from non-U.S. markets or
increase the U.S. dollar value of labor or supply costs in those
markets;
o political or economic instability or changing macroeconomic conditions
in the Company's major markets; and
o changes in foreign or domestic legal, tax and regulatory requirements
resulting in the imposition of new or more onerous trade restrictions,
tariffs, embargoes, exchange or other government controls.
The Company monitors foreign currency exposure to minimize the impact on
earnings of foreign currency rate movements through a combination of
cost-containment measures, selling price increases and foreign currency hedging
of certain costs. The Company cannot provide assurance, however, that these
monitoring activities will succeed in offsetting any negative impact of foreign
currency rate movements.
6
The Company's business is subject to the risks inherent in global manufacturing
activities.
As a company engaged in manufacturing on a global scale, Paxar is subject
to the risks inherent in such activities, including, but not limited to:
o availability of petroleum-based raw materials, which are subject to
price fluctuations, and the Company's ability to control or pass on
cost increases to customers;
o the rate of migration of garment manufacturing from the U.S., U.K. and
Western Europe, and the Company's ability to continue to rapidly
expand manufacturing capacity in developing markets;
o product quality or safety issues;
o loss or impairment of key manufacturing sites;
o environmental events; and
o natural disasters, acts of war or terrorism, epidemics and other
external factors over which the Company has no control.
If the Company is unable to improve productivity, reduce costs and align
manufacturing operations with customers' needs and best manufacturing processes,
the Company may not succeed in executing its business plan.
The Company is committed to continuous productivity improvement and
continues to evaluate opportunities to reduce fixed costs, simplify or improve
global processes, and increase the reliability of order fulfillment and
satisfaction of customer needs. In October 2005, the Company announced a major
realignment plan to accomplish those goals (the 2005 Restructuring Program),
which is described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - "Integration/Restructuring and Other
Costs" in Part II, Item 7 of this report, and in Note 18 to the consolidated
financial statements. This program presents significant organizational
challenges, particularly with respect to planned rapid expansion of
manufacturing capacity and facilities in Mexico, Central America and Asia
Pacific. The Company can not provide assurance that:
o the 2005 Restructuring Program will be implemented in accordance with
the planned timetable;
o the actual charges incurred will not exceed the estimated charges; or
o the full extent of the expected savings will be realized.
The Company's failure to achieve projected levels of efficiencies from cost
reduction measures as well as any unanticipated inefficiencies resulting from
the 2005 Restructuring Program, would adversely affect the presently anticipated
benefit from implementing the program, which, in turn, would adversely affect
the Company's profitability.
Significant competition in the Company's industry could adversely affect its
business.
Paxar faces vigorous competition around the world, including competition
from other large, multinational companies, as well as smaller, agile regional
companies. The Company faces this competition in several aspects of its
business, including, but not limited to:
o the pricing of products;
o promotional activities; and
o new product introductions.
The Company may be unable to anticipate the timing and scale of such
activities or initiatives by competitors or to successfully counteract them,
which could harm its business. In addition, the cost of responding to such
activities and initiatives may affect the Company's financial performance in the
relevant period. Paxar's ability to compete also depends on whether it can
attract and retain key talent, and its ability to protect patent and trademark
rights and to defend against related challenges brought by competitors. A
failure to compete effectively could adversely affect the Company's growth and
profitability.
If the Company is unable to successfully develop and introduce new products, its
financial condition and results of operations could be adversely affected.
The Company's growth depends on continued sales of existing products, as
well as the successful development and introduction of new products, which face
the uncertainty of retail and consumer acceptance and reaction from competitors.
In addition, the Company's ability to create new products and to sustain
existing products is affected by whether it can:
7
o develop and fund technological innovations, such as those related to
Paxar's RFID initiatives;
o receive and maintain necessary patent and trademark protection; or
o successfully anticipate customer needs and preferences.
The failure to develop and launch successful new products could hinder the
growth of Paxar's business. Also, any delay in the development or launch of a
new product could result in the Company not being the first to market, which
could compromise its competitive position.
Acquisitions may not be successful, or the Company many not be able to identify
new acquisition opportunities.
The Company's ability to grow is based, in part, on identifying acquisition
opportunities. Failure to find businesses that meet Paxar's acquisition criteria
could have a material adverse effect on its business, financial condition and
future growth. Acquisitions have inherent risks, including, but not limited to,
whether it can:
o successfully integrate the acquired business;
o achieve projected synergies and performance targets; and
o retain key personnel.
Depending on the significance of the acquisition, the failure to achieve
expected synergies or projections could have an adverse effect on the Company's
results.
The Company's operating results and financial condition may fluctuate.
Paxar's operating results and financial condition may fluctuate from
quarter-to-quarter and year-to-year and are likely to continue to vary due to a
number of factors, many of which are not within the Company's control, such as
the elimination of import quotas on apparel textiles. If the Company's operating
results do not meet the expectations of securities analysts or investors, who
may derive their expectations by extrapolating data from recent historical
operating results, the market price of Paxar's common stock may decline.
Fluctuations in Paxar's operating results and financial condition may be due to
a number of factors, including, but not limited to, those listed below and those
identified throughout this "Risk Factors" section:
o changes in the amount the Company spends to promote its products;
o development of new competitive products by others;
o the geographic distribution of the Company's sales;
o the Company's responses to price competition;
o market acceptance of the Company's products
o changes in quotas on apparel textile imports from China;
o general industry conditions, in particular, changes in consumer demand
for retail and apparel products;
o general economic conditions, including changes in interest rates
affecting returns on cash balances and investments, as well as changes
in foreign exchange rates; and
o the Company's level of research and development activities.
Due to all of the foregoing factors, and the other risks discussed in this
report, reliance should not be placed on quarter-to-quarter comparisons of the
Company's operating results as an indicator of future performance.
If the Company's internal controls over financial reporting do not comply with
the requirements of the Sarbanes-Oxley Act, Paxar's business and stock price
could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires the Company to
evaluate the effectiveness of its internal controls over financial reporting as
of the end of each year, and to include a management report assessing the
effectiveness of its internal controls over financial reporting in all annual
reports. Section 404 also requires the Company's independent registered public
accounting firm to attest to, and to report on, management's assessment of its
internal controls over financial reporting.
The Company's management, including Paxar's Chief Executive Officer and
Chief Financial Officer, does not expect that its internal controls over
financial reporting will prevent all error and fraud. A control system, no
8
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system's objectives will be met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, involving Paxar have been, or will be detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake. The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and the Company can not provide assurance that
any design will succeed in achieving its stated goals under all potential future
conditions. Over time, Paxar's controls may become inadequate because of changes
in conditions or deterioration in the degree of compliance with policies or
procedures. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Although management has determined, and the Company's independent
registered public accounting firm has attested, that the Company's internal
controls over financial reporting were effective as of December 31, 2005, the
Company can not provide assurance that management or its independent registered
accounting firm will not identify a material weakness in the Company's internal
controls in the future. A material weakness in the Company's internal controls
over financial reporting would require management and its independent registered
public accounting firm to evaluate the Company's internal controls as
ineffective. If the Company's internal controls over financial reporting are not
considered adequate, the Company may experience a loss of public confidence,
which could have an adverse effect on its business and stock price.
The risks described above are not the only risks the Company faces. There
can be no assurance that the Company has correctly identified and appropriately
assessed all factors affecting its business or that the publicly available and
other information with respect to these matters is complete and correct.
Additional risks and uncertainties not presently known to the Company or that
the Company currently believes to be immaterial also may adversely impact its
business. Should any risks or uncertainties develop into actual events, these
developments could have material adverse effects on Paxar's business, financial
condition, and results of operations.
The Company assumes no obligation (and specifically disclaims any such
obligation) to update these Risk Factors or any other forward-looking statements
contained in this Annual Report to reflect actual results, changes in
assumptions or other factors affecting such forward-looking statements.
Item 1B: Unresolved Staff Comments
Not applicable.
Item 2: Properties
The Company has 86 facilities globally in 39 countries. These facilities,
which are used principally for manufacturing, warehousing and sales operations,
totaled 3.9 million square feet at December 31, 2005. Of these facilities, 21
are owned and 65 are leased. The Company's headquarters is located in a 30,000
square foot leased facility in White Plains, New York. On a world-wide
geographic segment basis, the Company has major manufacturing facilities located
as follows:
Americas - California, Minnesota, New Jersey, New York, North
Carolina, Ohio, Pennsylvania, South Carolina, West
Virginia, Australia, Colombia, Dominican Republic,
Honduras, and Mexico.
EMEA - Bulgaria, England, France, Germany, Italy, Morocco,
Norway, Romania, Spain, Dubai UAE and Turkey.
Asia Pacific - Bangladesh, China, Hong Kong, Indonesia, India, Korea,
Singapore, Sri Lanka, Thailand and Vietnam.
In addition to the above facilities, the Company has other facilities and
sales offices located throughout the world. The Company believes that its
facilities are adequate to maintain its existing business.
9
Item 3: Legal Proceeding
Paxar Americas, Inc, the Company's operating subsidiary in the United
States, brought an action against Zebra Technologies Corporation in April 2003
for patent infringement. After many 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 this litigation, if it prevails,
the damages payable to the Company could be material to the Company's financial
condition and results of operations. As of December 31, 2005, no asset has been
recorded in connection with this proceeding.
In the ordinary course of business, the Company and its subsidiaries are
involved in certain disputes and litigation, none of which will, in the opinion
of management, have a material adverse effect on the Company's financial
condition or results of operations.
Item 4: Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
and Issuer Purchases of Equity Securities.
Market Value of Common Stock and Related Stockholder Matters
The Company's common stock is traded on the New York Stock Exchange using
the symbol "PXR." The following table sets forth the 2005 and 2004 high and low
sales prices of the Company's common stock as reported on the New York Stock
Exchange for the periods indicated.
Sales Prices
-------------------
High Low
-------- --------
Calendar Year 2005
First Quarter....................... $ 25.13 $ 20.29
Second Quarter...................... 21.62 16.25
Third Quarter....................... 19.99 16.50
Fourth Quarter...................... 20.08 16.74
Calendar Year 2004
First Quarter....................... $ 15.34 $ 12.90
Second Quarter...................... 19.53 14.55
Third Quarter....................... 23.09 17.81
Fourth Quarter...................... 24.19 20.80
As of March 9, 2006, there were approximately 1,400 record holders of the
Company's common stock.
The Company has never paid any cash dividends on its common stock and does
not plan to pay cash dividends on its common stock in the near term. The Company
may pay up to $50.0 in cash dividends per year under its current credit facility
and up to $100.0 in cash dividends over the facility's five-year term.
Information regarding the Company's equity compensation plans, including
both stockholder approved plans and non-stockholder approved plans, is
incorporated herein by reference to the Company's Definitive Proxy statement
with respect to the Company's Annual Meeting of Shareholders scheduled to be
held on May 4, 2006.
Issuer Purchases of Equity Securities
The Company repurchases its common stock under a share repurchase plan
authorized by its Board of Directors. The shares may be purchased from time to
time at prevailing prices in the open-market or by block purchases. On July 30,
1998, the Company announced the stock repurchase plan with an authorization to
repurchase $25.0 of its shares. The Company subsequently increased the program
to $40.0 in February 1999, to $70.0 in February 2000, to $100.0 in August 2000
and then to $150.0 in November 2001.
10
The following table shows the stock repurchase activity for the quarter
ended December 31, 2005:
Total Number of Shares
Total Number of Average Price Paid Purchased as Part of Publicly
Period Shares Purchased per Share Announced Plans or Programs
------ ---------------- ------------------ -----------------------------
October 1 through October 31, 2005 342,780 $17.47 342,780
As of December 31, 2005, the Company had $22.0 available under its $150.0 stock
repurchase plan authorization.
Item 6: Selected Financial Data
The following selected consolidated financial data as of and for the
five-year period ended December 31, 2005, has been derived from the Company's
Consolidated Financial Statements. This data should be read in conjunction with
the Consolidated Financial Statements and related Notes for the year ended
December 31, 2005, and Management's Discussion and Analysis of Financial
Condition and Results of Operations.
All amounts are stated in millions, except per share data.
2005 2004 2003 2002(c) 2001(c)
--------- --------- --------- --------- ---------
OPERATING RESULTS
Sales $809.1 $804.4 $712.0 $667.8 $610.6
Operating income (a) 50.1 70.9 30.9 59.5 31.1
Net income (b) 23.0 47.4 14.6 40.3 18.8
Basic earnings per share (b) 0.57 1.20 0.37 1.02 0.45
Diluted earnings per share (b) 0.56 1.17 0.37 1.00 0.44
FINANCIAL CONDITION
Total assets $727.6 $773.7 $714.9 $639.6 $583.8
Total debt 100.7 167.0 194.6 166.7 166.4
Shareholders' equity (c) 454.9 440.6 377.3 337.6 286.1
Total debt as a percent of total capital 18.1% 27.5% 34.0% 33.1% 36.8%
----------
(a) Includes integration/restructuring and other costs of $15.1, $20.4 and
$13.3 in 2005, 2003 and 2001, respectively; $7.3 of post-employment benefit
costs pertaining to the one-time, prior period service costs in 2001; and
amortization of goodwill of $6.0 in 2001.
(b) Includes the effect of items cited in note (a) and $7.4 of debt prepayment
costs, and $4.8 of taxes on repatriation of foreign earnings in 2005.
(c) For 2002 and 2001, reflects certain restatement (see Note 2 of the Notes to
the Consolidated Financial Statements), and includes common stock subject
to redemption of $37.6 and $46.6, respectively.
11
Item 7: 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 this report. In light of the 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 references to years relate to fiscal years ended on December 31, and
all amounts in the following discussion are stated in millions, except employee,
share and per share data.
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) Europe, the Middle East and Africa ("EMEA"); and
(3) The Asia Pacific region ("Asia Pacific")
The Company's results of operations for 2005, 2004 and 2003, in dollars and
as a percent of sales, are presented below:
2005 2004 2003
---------------- ---------------- ----------------
Sales $809.1 100.0% $804.4 100.0% $712.0 100.0%
Cost of sales 504.6 62.4 492.7 61.3 444.9 62.5
------ ------ ------ ------ ------ ------
Gross profit 304.5 37.6 311.7 38.7 267.1 37.5
Selling, general and administrative expenses 239.3 29.5 240.8 29.9 215.8 30.3
Integration/restructuring and other costs 15.1 1.9 -- -- 20.4 2.9
------ ------ ------ ------ ------ ------
Operating income 50.1 6.2 70.9 8.8 30.9 4.3
Other income, net 2.1 0.2 1.6 0.2 0.6 0.1
Interest expense, net 9.3 1.1 10.7 1.3 11.3 1.6
Prepayment charges - debt retirement 7.4 0.9 -- -- -- --
------ ------ ------ ------ ------ ------
Total interest expense 16.7 2.0 10.7 1.3 11.3 1.6
------ ------ ------ ------ ------ ------
Income before taxes 35.5 4.4 61.8 7.7 20.2 2.8
Taxes on income 12.5 1.5 14.4 1.8 5.6 0.7
------ ------ ------ ------ ------ ------
Net income $ 23.0 2.9% $ 47.4 5.9% $ 14.6 2.1%
====== ====== ====== ====== ====== ======
12
For the year ended December 31, 2005, the Company's sales increased $4.7,
or 0.6%, to $809.1 in 2005, compared to $804.4 in 2004. The increase was
comprised of $11.1 related to acquisitions and $2.1 related to the impact of
changes in foreign exchange rates, offset by an $8.5 organic sales decline. The
organic sales decline was primarily a result of ongoing pricing pressure and a
generally weaker economic and retail environment which dampened overall customer
demand, when compared to the prior year. In addition, the Company also
experienced a significant shift in customer sourcing requirements during 2005,
primarily as a result of the elimination of quotas during the first quarter on
apparel textile imports from China. Consequently, substantial apparel product
fulfillment migrated from the U.S. to the Asia Pacific region throughout the
year, requiring the Company to manage through considerable uncertainty in its
supply chain as apparel manufacturers sought to reduce labor costs and align
their manufacturing capacity closer to customers.
In order to adapt to the changing global apparel industry, 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 the majority of 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 also
repositioning a portion of its EMEA manufacturing capacity to lower cost
facilities in Eastern Europe. In addition, the plan includes the consequential
realignment of the Company's sales and related support functions in response to
the aforementioned production migration activities.
The majority of the 2005 Restructuring Program is expected to be completed
by the middle of 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", under "Results of Operations",
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 provide additional funds for investment in
support of new product development while also supporting an increased level 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.
For the year ended December 31, 2004, the Company's sales increased $92.4,
or 13.0%, to $804.4, compared to $712.0 in 2003. Of the total increase,
$50.5 was attributable to organic sales growth due to increased consumer
consumption, $22.3 of the increase was attributable to the September 2003
acquisition of Alkahn Labels, Inc. ("Alkahn") and $19.6 of the increase related
to the impact of changes in foreign exchange rates.
Operating income was $50.1 in 2005, compared to $70.9 in 2004, and $30.9 in
2003. As a percent of sales, operating income was $6.2% in 2005 compared to 8.8%
in 2004 and 4.3% in 2003. The operating results for 2005 included
integration/restructuring costs of $15.1. The operating results for 2003
included integration/restructuring and other costs of $20.4.
RESULTS OF OPERATIONS
Sales
The following table presents sales by geographic operating segment:
2005 2004 2003
-----------------------------------------------------------------
Americas $ 331.0 40.9% $ 355.2 44.2% $ 332.1 46.7%
EMEA 209.5 25.9 219.9 27.3 199.5 28.0
Asia Pacific 268.6 33.2 229.3 28.5 180.4 25.3
-------- ------- -------- ------- -------- --------
Total $ 809.1 100.0% $ 804.4 100.0% $ 712.0 100.0%
======== ======= ======== ======= ======== ========
The Americas segment sales include sales from the Company's operations
principally in North America and Latin America. Sales decreased $24.2, or 6.8%,
to $331.0 in 2005, compared to $355.2 in 2004. The decrease was attributable to
lower organic sales of $29.4, which was partially offset by a favorable impact
of changes in foreign exchange rates of $1.2. In addition, acquisition activity
13
for the year contributed sales of $4.0. The substantial decline in organic sales
was due primarily to accelerated migration of U.S. apparel manufacturing to the
Asia Pacific region where U.S. retailers and apparel manufacturers continue to
realize labor savings and operating performance efficiencies. There was a
notable increase in migration experienced in 2005 when compared to prior years,
primarily due to the reduction of apparel and textile import quotas, effective
January 1, 2005. In 2004, sales increased $23.1, or 7.0%, to $355.2 in 2004,
compared to $332.1 in 2003. The increase was attributable to organic sales
growth of $7.9, the impact of the Alkahn acquisition of $13.5 and the favorable
impact of changes in foreign exchange rates of $1.7. The organic sales increase
was primarily attributable to increases in sales of apparel identification
products, largely driven by the Company's operations in Latin America and, to a
lesser extent, by an improved economic environment in the U.S. The economic
improvement also benefited sales of bar code and pricing solutions products.
Offsetting these increases in 2004, the Company's customers continued to move
their production outside the U.S to realize labor savings and operating
performance efficiencies.
EMEA segment sales, which include sales from the Company's operations in 12
European countries, the Middle East and Africa, decreased $10.4, or 4.7%,to
$209.5 in 2005, compared to $219.9 in 2004. The decrease was attributable to
lower organic sales of $11.3, partially offset by a favorable impact of foreign
exchange rates of $0.9. Continued weakness in economic and retail conditions in
EMEA dampened overall customer demand, which, in turn, put pressure on EMEA's
sales during the year ended December 31, 2005. In addition, the Company
experienced continued sales migration to the Asia Pacific region as apparel
manufacturers sought to reduce labor costs and align manufacturing capacity
closer to customers. In 2004, sales increased $20.4, or 10.2%, to $219.9 in
2004, compared to $199.5 in 2003. The increase was attributable to organic sales
growth of $2.5 and the favorable impact of changes in foreign exchange rates of
$17.9. Despite the continued sales migration to Asia Pacific experienced by EMEA
in 2004, the Company's operations in Western Europe and Turkey posted solid
volume gains.
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 $39.3, or 17.1% to $268.6 in 2005, compared to $229.3 in
2004. The increase was attributable to organic sales growth of $32.2 and the
impact of the acquisition of the balance of the Company's India joint venture
which contributed $7.1. 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. Sales
increased $48.9, or 27.1%, to $229.3 in 2004, compared to $180.4 in 2003. The
increase was attributable to organic sales growth of $40.1 and the impact of the
Alkahn acquisition of $8.8. The Company's operations in this region benefited
from the migration of the Company's customers who have moved their production
outside the U.S., U.K. and Western Europe.
Gross Profit
Gross profit, as a percent of sales, was 37.6% in 2005, compared to 38.7%
in 2004, and 37.5% in 2003. The lower gross margin in 2005 as compared to 2004
was primarily the result of the under-absorption of fixed factory overhead costs
as production migrated to Asia Pacific, as well as, to a lesser extent,
inventory write-offs and certain scrap, rework and machine maintenance expense,
principally related to the Company's domestic and EMEA apparel business. The
Company's consolidation in 2003 of certain of its productions sites in the U.S.
and the U.K. benefited gross margin in 2004 by improving capacity utilization
and operating efficiency.
Management's ongoing strategy includes implementing process improvements to
reduce costs in all of its manufacturing facilities, re-deploying assets to
balance production capacity with customer demand and expanding production in new
and emerging markets 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 $239.3 in 2005, compared to $240.8 in 2004 and $215.8 in
2003. As a percent of sales, SG&A expenses were 29.5% in 2005, compared to 29.9%
in 2004 and 30.3% in 2003. The improvement in the ratio of SG&A to sales in
2005, when compared to 2004, was largely due to continued 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 Mexico, Central America and the Asia
Pacific region. The increases in spending in 2004, as compared to 2003, were
primarily attributable to (i) sales growth and corresponding expansion-related
expenses, including expenditures made in connection with the development of
innovative RFID (or radio frequency identification) solutions for supply-chain
applications; (ii) incremental costs incurred to comply with the Sarbanes-Oxley
Act of 2002; (iii) the negative impact of changes in foreign exchange rates; and
(iv) the acquisition of Alkahn.
14
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 the majority of 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 also repositioning a portion of its EMEA manufacturing capacity to
lower cost facilities in Eastern Europe. In addition, the plan includes the
consequential realignment of the Company's sales and related support functions
in response to the aforementioned production migration activities. In 2005, $8.7
in charges related to the 2005 Restructuring Program were recorded ($4.9 in
severance related costs, $2.8 in asset impairment charges and $1.0 in other exit
costs). The majority of the 2005 Restructuring Program activities are expected
to be completed by the middle of 2007. 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. 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 and related charges.
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 initiatives were 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. In the aggregate, during 2005,
the Company recorded pre-tax charges of $4.8 in connection with these
initiatives, which were substantially complete at the end of 2005.
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. In 2005, the Company recorded pre-tax charges of
$1.6 related to this activity which was complete at the end of 2005.
The Company did not incur any integration/restructuring charges in 2004.
In 2003, the Company recognized a pre-tax charge of $20.4 in connection
with the consolidation of certain operations, headcount reductions, a severance
payment to the Company's former Chief Executive Officer, and a write-off of an
Enterprise Resource Planning system and certain other fixed assets that were no
longer in use.
Operating Income
Operating income was $50.1 in 2005, compared to $70.9 in 2004, and $30.9 in
2003. As a percent of sales, operating income was 6.2% in 2005, compared to 8.8%
in 2004 and 4.3% in 2003. The operating results for 2005 include
integration/restructuring and other costs of $15.1, and the operating results
for 2003 included integration/restructuring and other costs of $20.4.
On a reportable segment basis, exclusive of corporate expenses and
amortization of other intangibles, operating income, as a percent of sales, was
as follows:
2005 2004 2003
---- ---- ----
Americas 6.5% 11.6% 4.8%
EMEA 2.1 7.6 0.4
Asia Pacific 16.8 16.8 18.8
Americas' operating income in 2005, as a percent of sales, decreased to
6.5% compared to 11.6% in 2004. This decline primarily resulted from a
combination of the continued migration of sales to the Asia Pacific region and
the corresponding 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 apparel business. In addition, the Americas segment
included integration/restructuring and other costs approximating 2.6% of sales
for the year ended December 31, 2005.
15
EMEA's operating income in 2005, as a percent of sales, decreased to 2.1%
compared to 7.6% in 2004. This decline primarily resulted from a combination of
the downturn in EMEA's sales volume and related under-absorption of its fixed
cost base in legacy manufacturing sites, and infrastructure investments to
support growth in emerging markets, primarily Eastern Europe. In addition,
integration/restructuring and other costs represented 2.7% of sales for 2005.
Asia Pacific's operating income in 2005, as a percent of sales, remained
flat at 16.8%. The decrease in Asia Pacific's 2004 operating income, as a
percent of sales compared to 2003, primarily resulted from increased
charge-backs of certain global program development costs and other fees incurred
on behalf of the Asia Pacific region.
In 2003, integration/ restructuring and other costs, as a percent of sales,
was 2.8%, 4.7% and 0.1%, in the Americas, EMEA and Asia Pacific segments,
respectively.
Other Income, Net
Other income, net was $2.1, $1.6 and $0.6 in 2005, 2004 and 2003,
respectively. The increase in 2005 when compared to 2004 was due primarily to a
$0.7 gain from the settlement of a trademark lawsuit during the year. The
increase in 2004 when compared to 2003 was due primarily to net gains on the
sales of property, plant and equipment.
Total Interest Expense
Total interest expense, net of interest income on invested cash, was $16.7
in 2005, compared to $10.7 in 2004 and $11.3 in 2003. The increase in 2005 was
attributable to $7.4 of charges related to the prepayment of $150.0 of 6.74%
Senior Notes in December 2005. This was partially offset by additional interest
income resulting from higher average cash balances and higher interest rates
earned on invested funds.
Taxes on Income
The effective income tax rate was 35.3% in 2005, compared to 23.3% in 2004
and 27.8% in 2003. The rate may change year to year based on factors such as the
geographic mix of pre-tax income, the timing and amounts of foreign dividends,
and state and local taxes. The increase in the 2005 rate is primarily due to a
$4.8 charge recorded in conjunction with the Company's decision to repatriate
$122.4 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 no tax benefit was provided.
In 2004 and 2003, a shift in income from Asia Pacific to the U.S. and
certain of EMEA operations as a result of the increased charge-backs to Asia
Pacific of certain global program development costs and other fees increased the
effective tax rates, as higher tax rates were applied on the income from the
U.S. and certain EMEA operations. In addition, the effective tax rate for 2003
was further increased as a result of losses generated in the Company's EMEA
region, which included integration/restructuring and other costs for which no
tax benefits were provided.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents summary cash flow information for the years
indicated:
2005 2004 2003
----------- ----------- -----------
Net cash provided by operating activities $ 69.3 $ 85.5 $ 35.6
Net cash used in investing activities (43.8) (36.5) (60.0)
Net cash (used in)/provided by financing activities (63.4) (23.3) 26.8
----------- ----------- -----------
Total change in cash and cash equivalents (a) $ (37.9) $ 25.7 $ 2.4
=========== =========== ===========
(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 $69.3,
$85.5, and $35.6 in 2005, 2004 and 2003, respectively. Management believes that
the Company will continue to generate sufficient cash from its operating
activities for the foreseeable future, supplemented by availability under the
Credit Agreement, to fund its working capital needs, strengthen its balance
sheet and support its growth strategy of expanding its geographic reach and
product offerings.
Operating Activities
Working capital and the corresponding current ratio were $176.2 and 2.3:1
and $227.2 and 2.7:1 at December 31, 2005 and 2004, respectively. The decrease
in working capital in 2005 when compared to 2004 primarily resulted from the
decrease in cash and cash equivalents, substantially due to the prepayment of
$150.0 of 6.74% Senior Notes in December 2005. In addition, to a lesser extent,
the decrease was due to decreases in accounts receivable and inventories, and
increases in accounts payable and accrued liabilities as well as accrued taxes
payable, partially offset by an increase in deferred income taxes.
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 the majority of 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 also repositioning a portion of its EMEA manufacturing capacity to
lower cost facilities in Eastern Europe. In addition, the plan includes the
consequential realignment of the Company's sales and related support functions
in response to the aforementioned production migration activities. In 2005, $8.7
in charges related to the 2005 Restructuring Program were recorded ($4.9 in
severance related costs, $2.8 in asset impairment charges and $1.0 in other exit
costs). The majority of the 2005 Restructuring Program activities are expected
to be completed by the middle of 2007. 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. 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 and related charges.
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 initiatives were 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. In the aggregate, during 2005,
the Company recorded pre-tax charges of $4.8 in connection with these
initiatives, which were substantially complete at the end of 2005.
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. In 2005, the Company recorded pre-tax charges of
$1.6 related to this activity which was complete at the end of 2005.
The American Jobs Creation Act of 2004 (the "AJCA") created a temporary
incentive for U.S. corporations to repatriate accumulated income earned abroad
by generally providing an 85% exemption for qualifying dividends received prior
to December 31, 2005. During 2005, the Company's Chief Executive Office and
Chief Financial Officer, together with the Board of Directors, approved a
domestic reinvestment plan as required by AJCA to repatriate $122.4 in foreign
earnings. The Company recorded tax expense in 2005 of $4.8 related to the
repatriation program, which was completed during the fourth quarter of 2005.
Investing Activities
For the years ended December 31, 2005, 2004 and 2003, the Company incurred
$30.9, $38.7, and $32.8, respectively, of capital expenditures to acquire the
production machinery, expand capacity, install system upgrades and continue the
growth and expansion of company operations in the emerging markets of Mexico,
Central America, EMEA and Asia Pacific. Capital expenditures are primarily
funded by cash provided by operating activities. In 2005, certain capital
projects that were originally scheduled for completion during the second half of
17
the year were deferred pending the approval of the 2005 Restructuring Program.
As a result of the delayed spending, coupled with the subsequent approval of the
2005 Restructuring Program, which requires expansion of manufacturing capacity
primarily in Mexico, Central America and Asia Pacific, 2006 capital expenditures
are currently anticipated to be in the range of $45.0 to $50.0, which is
approximately $10.0 higher than typical spending levels. In addition, during
2005, the Company purchased the remaining 50% interest in its joint venture in
India for $10.5 and the business and manufacturing assets of EMCO labels for
$2.8. In connection with these acquisitions, the Company recognized goodwill of
$4.3 and $1.9, respectively, based on its allocations of purchase prices to the
fair value of net assets acquired.
During 2004, the Company received proceeds of $1.0 from the sale of its 10%
equity interest in Disc Graphics, Inc., a diversified manufacturer and printer
of specialty paperboard packaging.
Financing Activities
The components of total capital as of December 31, 2005, 2004 and 2003,
respectively, are presented below:
2005 2004 2003
----------- ----------- -----------
Due to banks $ 3.0 $ 3.9 $ 4.3
Long-term debt 97.7 163.1 190.3
----------- ----------- -----------
Total debt 100.7 167.0 194.6
Shareholders' equity 454.9 440.6 377.3
----------- ----------- -----------
Total capital $555.6 $607.6 $571.9
=========== =========== ===========
Total debt as a percent 18.1% 27.5% 34.0%
of total capital =========== =========== ===========
The Company had an unsecured ten-year, $150 Senior Note agreement (the
"Senior Notes") due 2008 with institutional lenders, primarily insurance
companies. The Senior Notes had an interest rate of 6.74%, payable
semi-annually. These notes were repaid in December 2005 with accrued interest of
$3.2 and prepayment charges of $7.4.
Management believes that the borrowings available under the Company's new
Credit Agreement provide sufficient liquidity to supplement the Company's
operating cash flow. For the years ended December 31, 2005, 2004 and 2003, net
(repayments)/ borrowings of the Company's outstanding debt were $(73.5), $(27.5)
and $27.9, respectively.
The Company has various stock-based compensation plans, including two stock
option plans, a long-term incentive plan, and an employee stock purchase plan.
For the years ended December 31, 2005, 2004 and 2003, the Company received
proceeds of $16.1, $4.2 and $4.0, 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 $150.0 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 repurchased approximately 343,000
shares in 2005 for an aggregate price of $6.0, or $17.47 per share. The Company
did not repurchase any shares in 2004. In 2003, the Company repurchased
approximately 469,000 shares for an aggregate price of $5.1, an average of
$10.80 per share. Since the inception of the stock repurchase program, the
Company has repurchased approximately 12,636,000 of its shares for an aggregate
price of $128.0, an average of $10.13 per share. The Company immediately retired
the repurchased shares. As of December 31, 2005, the Company had $22.0 available
under its $150.0 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 Arrangements
The Company's Senior Notes had an interest rate of 6.74%, payable
semi-annually. These notes were repaid in December 2005.
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
18
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 December 31, 2005, the interest rate on outstanding
borrowings under this Agreement was based on LIBOR at a weighted average
interest rate of 4.8%.
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 can not pay in excess of $50.0 in
cash dividends during any 12-month period, and can not pay in excess of $100.0
in cash dividends over its five-year term.
Average borrowings under the Credit Agreement during 2005 were $10.0 at an
average interest rate of 5.03%. Average borrowings under the revolving credit
facility in 2004 and 2003 were $3.8, and $22.0 at average interest rates of
2.10%, and 1.86%, respectively. The borrowings outstanding under the Credit
Agreement at December 31, 2005 were $84.1.
Facilities financed by economic development revenue bonds have been
accounted for as plant and equipment, and the related bonds are recorded as
long-term debt. The variable rate bonds for the years ended December 31, 2005
and 2004 had weighted average interest rates of 2.5% and 1.31%, respectively.
The rate on these bonds was 3.6% at December 31, 2005.
Excluding the impact of the $7.4 of prepayment charges relating to debt
retired in 2005, net interest expense was $9.3 in 2005, $10.7 in 2004 and $11.3
in 2003.
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.
The Company manages a foreign currency hedging program to hedge against
fluctuations in foreign currency denominated trade assets and liabilities by
periodically entering into forward foreign exchange contracts. The aggregate
notional value of forward foreign exchange contracts that the Company entered
into amounted to $114.8, $153.9 and $55.1 in 2005, 2004 and 2003, respectively.
The following table summarizes, as of December 31, 2005, the Company's
forward foreign exchange contracts by currency. All of the Company's forward
foreign exchange contracts mature within a year. Contract amounts are
representative of the expected payments to be made under these instruments:
19
Contract Amounts (in thousands) Fair Value
---------------------------------
Receive Pay (US$ 000's)
------------- ----------------- --------------
Contract to receive US$/pay Euro ("EUR") US$ 170 EUR 144 $ -
Contracts to receive US$/pay British pounds ("GBP") US$ 5,117 GBP 2,977 $(13)
Contract to receive US$/pay Moroccan dirham ("MAD") US$ 137 MAD 1,257 $ (1)
Contract to receive GBP/pay US$ GBP 85 US$ 146 $ -
Contracts to receive GBP/pay EUR GBP 39 EUR 56 $ (1)
Contracts to receive EUR/pay US$ EUR 388 US$ 460 $ (4)
Contract to receive GBP/pay MAD GBP 614 MAD 9,700 $ (2)
Contract to receive EUR/pay MAD EUR 332 MAD 3,619 $ (2)
A 10% change in interest rates affecting the Company's floating rate debt
instruments would have an immaterial impact on the Company's pre-tax earnings
and cash flows over the next fiscal year. Such a move in interest rates would
have virtually no effect on the fair value of the Company's floating rate debt
instruments.
The Company sells its products worldwide, and a substantial portion of its
net sales, cost of sales and operating expenses are denominated in foreign
currencies. This exposes the Company to risks associated with changes in foreign
currency exchange rates that can adversely impact revenues, net income and cash
flow. In addition, the Company is potentially subject to concentrations of
credit risk, principally in accounts receivable. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.
The Company's major customers are retailers, branded apparel companies and
contract manufacturers that have historically paid their balances with the
Company.
There were no significant changes in the Company's exposure to market risk
in the past three years.
Aggregate Contractual Obligations
The Company's aggregate contractual obligations are as follows:
Payments due by period
-------------------------------------------------------------
Contractual Obligations Less than More than
Total 1 year 1-3 years 3-5 years 5 years
------------------------------------ ---------- ---------- --------- --------- -----------
Long-term debt obligations $100.7 $ 3.0 $ -- $84.5 $13.2
Operating lease obligations 38.5 10.9 13.1 8.0 6.5
Capital lease obligations 1.6 0.4 0.5 0.6 0.1
Severance obligations 8.6 5.4 -- -- 3.2
Purchase obligations 13.1 12.8 0.3 -- --
Post-employment benefit obligations 11.3 1.9 1.2 1.2 7.0
---------- ---------- --------- --------- -----------
Total $173.8 $34.4 $15.1 $94.3 $30.0
========== ========== ========= ========= ===========
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management has identified the following policies and estimates as critical
to the Company's business operations and the understanding of the Company's
results of operations. Note that the preparation of this Annual Report on Form
10-K requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the Company's financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates, and the differences could be material.
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment
and includes freight billed to customers. In addition, in accordance with Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition, revised and updated,"
the Company recognizes revenues from fixed price service contracts on a pro-rata
basis over the life of the contract, as they are generally performed evenly over
the contract period. Revenues derived from other service contracts are
recognized when the services are performed. SAB No. 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;
20
(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
principally on the Company's history of product return rates as well as customer
service billing adjustments and allowances, each of which is regularly analyzed.
Management also considers (1) current economic trends, (2) changes in customer
demand for the Company's products and (3) acceptance of the Company's products
in the marketplace when evaluating the adequacy of the Company's provision for
sales returns and allowances. Historically, the Company has not experienced a
significant change in its product return rates resulting from these factors. For
the years ended December 31, 2005, 2004 and 2003, 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 its 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 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 $128.9, net of
allowances of $10.7, and $132.5, net of allowances of $12.3, at December 31,
2005 and 2004, respectively.
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 $9.1 and $11.7 as
of December 31, 2005 and 2004, respectively. The value of all other inventories,
which are determined using the first-in, first-out method, was $90.1 and $89.6
as of December 31, 2005 and 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 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
21
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.
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 different 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 establishes a
valuation allowance. If a valuation allowance is established or increased during
any period, the Company records 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 tax assets. Valuation allowances are 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 that 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.
The American Jobs Creation Act of 2004 (the "AJCA") created a temporary
incentive for U.S. corporations to repatriate accumulated income earned abroad
by generally providing an 85% exemption for qualifying dividends received prior
to December 31, 2005. During 2005, the Company's Chief Executive Officer and
Chief Financial Officer, together with the Board of Directors, approved a
domestic reinvestment plan as required by AJCA to repatriate $122.4 in foreign
earnings. The Company recorded tax expense in 2005 of $4.8 related to the
repatriation program which was completed during the fourth quarter of 2005.
Recently Issued Accounting Pronouncement
In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 154, "Accounting Changes and Error Corrections" (SFAS 154) which replaces
Accounting Principles Board Opinions No. 20 "Accounting Changes" and SFAS No 3,
"Reporting Accounting Changes in Interim Financial Statements -- An Amendment of
APB Opinion No. 28." SFAS 154 provides guidance on the accounting for and
reporting of accounting changes and error corrections. It establishes
retrospective application, or the earliest practicable date, as the required
method for reporting a change in accounting principle and restatement with
respect to the reporting of a correction of an error. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005 and is required to be adopted by the Company in the
first quarter of fiscal 2006. We currently do not expect to make any accounting
changes which would be impacted by SFAS 154.
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.
22
In December 2004, the FASB issued SFAS No. 123(R). SFAS No. 123(R) replaces
SFAS No. 123 by eliminating the choice to account for employee stock options
under APB Opinion No. 25 and requires companies to recognize the compensation
expense resulting from awards of equity instruments to employees, such as stock
options and restricted stock, based on the fair value of such awards at date of
grant. Under APB 25 the value of restricted stock awards is expensed over the
restriction time period and no compensation expense is recognized for stock
option grants as all such grants have an exercise price not less than market
value at date of grant.
For periods through December 31, 2005, the Company has disclosed pro forma
compensation expense quarterly and annually by measuring the fair value of stock
option grants using the Black-Scholes model.
The Company adopted the provisions of SFAS No. 123(R) as of January 1, 2006
using the prospective method which, will result in an incremental expense upon
adoption. The impact on earnings per share in fiscal year 2006 of these
requirements is currently estimated in the range of $0.06 to $0.07. Future
expense amounts for any particular quarterly or annual period could be affected
by changes in the Company's valuation assumptions or changes in market
conditions. Due to the timing of the Company's equity grants, the charge will
not be spread evenly throughout the year. SFAS 123R also requires the benefits
of tax deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as currently
required, thereby potentially reducing net operating cash flows and increasing
net financing cash flows in periods after adoption. Such amounts cannot be
estimated for future periods with certainty because they depend largely on when
employees will exercise stock options and the market price of the Company's
stock at the time of exercise.
Compliance with Section 404 of the Sarbanes-Oxley Act of 2002
In June 2003, the Securities and Exchange Commission ("SEC") issued rules
on internal control over financial reporting that were mandated by Section 404
of the Sarbanes-Oxley Act of 2002 ("Section 404"). These rules require
management reporting on internal control over financial reporting. The Company
employed the Internal Control - Integrated Framework established by the
Committee of Sponsoring Organizations of the Treadway Commission to evaluate the
effectiveness of the Company's internal control over financial reporting. The
Company's management has assessed the Company's internal control over financial
reporting to be effective as of December 31, 2005. Additionally, Ernst & Young
LLP, the independent registered public accounting firm has issued an attestation
report on management's assessment of the Company's internal control over
financial reporting as of December 31, 2005.
Restatement
In the fourth quarter of 2003, the Company reconsidered its accounting and
reporting matters related to its obligations to purchase redeemable common
shares under the July 11, 2001 Agreement with its Chairman. In accordance with
Rule 5-02.28 of Regulation S-X, or Accounting Series Release No. 268,
"Redeemable Preferred Stocks," (issued by the SEC on July 27, 1979), as
interpreted by EITF Topic D-98, "Classification and Measurement of Redeemable
Securities," (issued by the FASB on July 19, 2001), securities that are
redeemable for cash or other assets must be classified outside of shareholders'
equity if they are redeemable at the option of the holder, as were the
redeemable common shares owned by the Chairman. The Company concluded that Rule
5-02.28, as interpreted by EITF Topic D-98, applied to the redeemable common
shares because the redemption features were not solely within its control. While
Rule 5-02.28 specifically addressed redeemable preferred stocks, EITF Topic D-98
makes it clear that redeemable preferred stock is analogous to other equity
instruments, including common shares. Accordingly, the Company determined that
the redeemable common shares should have been classified as temporary equity in
its financial statements for periods ended after July 11, 2001 until the
Agreement was terminated on November 17, 2003. As a result, during 2003, the
Company restated its balance sheet as of December 31, 2002 and December 31, 2001
to report the redemption value of redeemable common stock outside of
shareholders' equity, as "Common Stock Subject to Redemption." The redeemable
common stock was previously reported within shareholders' equity. Corresponding
revisions also were made to the consolidated statements of shareholders' equity
and comprehensive income.
As the Agreement was terminated on November 17, 2003, the redeemable common
shares owned by the Chairman were no longer subject to redemption and,
therefore, were classified as permanent equity in the financial statements at
December 31, 2003.
Item 7A: Quantitative and Qualitative Disclosure About Market Risk
The information required by this Item is set forth under the heading
"Market Risk" in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", above, which information is hereby
incorporated by reference.
23
Item 8: Financial Statements and Supplementary Data
The financial information required by this Item is incorporated by
reference to the consolidated financial statements and notes thereto as an
exhibit in Part IV, Item 15.
Item 9: Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9A: Controls and Procedures
Disclosure Controls and Procedures. The Company, under the supervision and
with the participation of the Company's management, including its Chief
Executive Officer and 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. The Company, under the
supervision and with the participation of the Company's management, including
its Chief Executive Officer and Chief Financial Officer, is responsible for
establishing and maintaining an adequate system of internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934). The Company's management conducted an
assessment of the Company's internal control over financial reporting based on
the framework established by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control - Integrated Framework. Management
concluded that, as of December 31, 2005, the Company's internal control over
financial reporting is effective. Additionally, Ernst & Young LLP, the
independent registered public accounting firm that audited the Company's 2005,
2004 and 2003 consolidated financial statements, has issued an attestation
report on management's assessment of the Company's internal control over
financial reporting as of December 31, 2005.
There have not been any changes in the Company's internal control over
financial reporting identified in connection with the assessment that occurred
during the fourth quarter of 2005, that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART III
Item 10: Directors and Executive Officers of the Registrant
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders scheduled
to be held on May 4, 2006.
Item 11: Executive Compensation
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders scheduled
to be held on May 4, 2006.
Item 12: Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders scheduled
to be held on May 4, 2006.
Item 13: Certain Relationships and Related Transactions
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders scheduled
to be held on May 4, 2006.
24
Item 14: Principal Accountant Fees and Services
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders scheduled
to be held on May 4, 2006.
25
PART IV
Item 15: Exhibits and Financial Statement Schedules
(a) Documents
(1) FINANCIAL STATEMENTS --
Management's Responsibility for Financial
Reporting.......................................................28
Management's Report on Internal Control
over Financial Reporting........................................28
Reports of Independent Registered
Public Accounting Firm...................................29 and 30
Consolidated Statements of Income for the years
ended December 31, 2005, 2004 and 2003..........................31
Consolidated Balance Sheets as of December 31,
2005 and 2004...................................................32
Consolidated Statements of Shareholders' Equity
and Comprehensive Income for the years ended
December 31, 2005, 2004 and 2003 ...............................33
Consolidated Statements of Cash Flows for the
years ended December 31, 2005, 2004 and 2003....................34
Notes to Consolidated Financial Statements.................35 to 52
(2) FINANCIAL STATEMENT SCHEDULE --
Schedule II -- Valuation and Qualifying Accounts.................53
Separate financial statements of the registrant have been omitted because the
registrant is primarily an operating company. All subsidiaries included in the
consolidated financial statements are majority owned, and none of the
subsidiaries have indebtedness which is not guaranteed by the registrant. All
other financial statement schedules are not required under the related
instructions or are not applicable and therefore have been omitted.
(b) Exhibits
3.1 By-Laws. (A)
3.2 Amended and Restated Certificate of Incorporation. (C)
3.3 Amendment to Amended and Restated Certificate of
Incorporation. (D)
10.1 Registrant's 1990 Employee Stock Option Plan. (B)
10.2 Registrant's 1997 Incentive Stock Option Plan. (E)
10.3 Deferred Compensation Plan for Directors. (F)
10.4 Note Purchase Agreement dated as of August 4, 1998. (G)
10.5 Form of Change of Control Employment Agreement between
the Registrant and named executive officers and other
executives. (H)
10.6 Agreement, dated as of February 8, 2000, among the
Registrant, Paxar Capital Corporation, International
Imaging
Material, Inc., Center Capital Investors III, L.P. and
Related Partnerships. (I)
10.7 Amendment No. 1, dated March 9, 2000 to the Stock
Purchase and Recapitalization Agreement, dated as of
February 8, 2000, among the Registrant, Paxar Capital
Corporation, International Imaging Materials, Inc., Centre
Capital Investors III, L.P., and related partnerships. (I)
10.8 Registrant's 2000 Long-Term Performance and Incentive
Plan. (J)
10.9 Agreement, dated as of July 11, 2001, by and between Paxar
Corporation and Arthur Hershaft. (K)
10.10 Agreement, dated as of September 1, 2001, by and between
Paxar Corporation and Victor Hershaft. (L)
10.11 Credit Agreement, dated as of November 28, 2005. (M)
10.12 Termination of Agreement, dated as of November 17, 2003,
by and between Paxar Corporation and Arthur Hershaft. (N)
10.13 Employment Agreement, dated as of October 1, 2004,
between Paxar Corporation and Arthur Hershaft. (O)
10.14 Registrant's 2005 Incentive Compensation Plan. (P)
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Registered Public Accounting Firm.
31.1 Certification Pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities and Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities and Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
26
----------
(A) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1980.
(B) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1990.
(C) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1992.
(D) Incorporated herein by reference from Annex D to the Joint Proxy
Statement/Prospectus included in the Registrant's Registration Statement on
Form S-4 (File No. 333-36283), filed on September 24, 1997.
(E) Incorporated herein by reference from Exhibits to the Registrant's
Registration Statement on Form S-8 (File No. 333-38923), filed on October
28, 1997.
(F) Incorporated herein by reference from Annex A to Registrant's preliminary
proxy statement dated March 31, 1998.
(G) Incorporated herein by reference from Exhibits to the Registrant's Form 8-K
filed on August 26, 1998.
(H) Incorporated herein by reference from Exhibit to the Registrant's Form 8-K
filed on April 26, 2005.
(I) Incorporated herein by reference from Exhibits to Registrant's Form 8-K
dated March 9, 2000.
(J) Incorporated herein by reference from Appendix B and C to Registrant's
definitive proxy statement dated March 31, 2000.
(K) Incorporated herein by reference from Exhibits to Registrant's Form 8-K
dated July 11, 2001.
(L) Incorporated herein by reference from Exhibits to Registrant's Form 10-Q
filed on November 14, 2001.
(M) Filed herein as Exhibit 10.11.
(N) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003.
(O) Incorporated herein by reference from Exhibits to Registrant's Form 10-Q
filed on November 5, 2004.
(P) Incorporated herein by reference from Exhibits to Registrant's Form 8-K
dated January 1, 2005.
27
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the integrity and objectivity of the
consolidated financial statements and accompanying information. These financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States and, as such, include amounts that are based on
management's best estimates and judgments.
Management has established and maintains a system of internal accounting
and other controls for the Company and its subsidiaries. This system and its
established accounting procedures and related controls are designed to provide
reasonable assurance that assets are safeguarded, that the books and records
properly reflect all transactions, that policies and procedures are implemented
by qualified personnel, and that published financial statements are properly
prepared and fairly presented. The Company's system of internal accounting and
other controls is continually reviewed by internal auditors and supported by
widely communicated written policies, including business conduct policies, which
are designed to require all employees to maintain high ethical standards in the
conduct of the Company's affairs.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an adequate
system of internal control over financial reporting. Management conducted an
assessment of the Company's internal control over financial reporting based on
the framework established by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control - Integrated Framework. Management
concluded that, as of December 31, 2005, the Company's internal control over
financial reporting is effective.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2005, has been audited by
Ernst & Young LLP, an independent registered public accounting firm, as stated
in their report which is included herein.
/s/ Robert P. van der Merwe
Robert P. van der Merwe
President and Chief Executive Officer
/s/ Anthony S. Colatrella
Anthony S. Colatrella
Vice President and Chief
Financial Officer
March 9, 2006
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Paxar Corporation:
We have audited the accompanying consolidated balance sheets of Paxar
Corporation and Subsidiaries (the "Company") as of December 31, 2005 and 2004,
and the related consolidated statements of income, shareholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 2005. Our audits also included the financial statement
schedule listed in the Index at Item 15(a)(2). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 2005 and 2004, and the consolidated results of their operations and
their cash flows for the each of the three years in the period ended December
31, 2005, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule for each of the
three years in the period ended December 31, 2005, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 9, 2006 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Stamford, Connecticut
March 9, 2006
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Paxar Corporation:
We have audited management's assessment, included in the accompanying
"Management's Report on Internal Control over Financial Reporting," that Paxar
Corporation and Subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those polices and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the polices or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of the Company as of December 31, 2005 and 2004, and the related
consolidated statements of income, shareholders' equity and comprehensive
income, and cash flows for each of the three years in the period ended December
31, 2005 of the Company, and our report dated March 9, 2006 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Stamford, Connecticut
March 9, 2006
30
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2005, 2004 and 2003
(in millions, except per share amounts)
2005 2004 2003
------ ------ ------
Sales $809.1 $804.4 $712.0
Cost of sales 504.6 492.7 444.9
------ ------ ------
Gross profit 304.5 311.7 267.1
Selling, general and administrative
expenses 239.3 240.8 215.8
Integration/restructuring and
other costs 15.1 -- 20.4
------ ------ ------
Operating income 50.1 70.9 30.9
Other income, net 2.1 1.6 0.6
Interest expense, net 9.3 10.7 11.3
Prepayment charges - debt retirement 7.4 -- --
------ ------ ------
Total interest expense 16.7 10.7 11.3
------ ------ ------
Income before taxes 35.5 61.8 20.2
Taxes on income 12.5 14.4 5.6
------ ------ ------
Net income $ 23.0 $ 47.4 $ 14.6
====== ====== ======
Basic earnings per share $ 0.57 $ 1.20 $ 0.37
====== ====== ======
Diluted earnings per share $ 0.56 $ 1.17 $ 0.37
====== ====== ======
Weighted average shares outstanding:
Basic 40.3 39.6 39.1
Diluted 41.3 40.6 39.5
The accompanying notes are an integral part of the financial statements.
31
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)
December 31, December 31,
2005 2004
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $48.2 $92.0
Accounts receivable, net of allowances
of $10.7 and $12.3 in 2005 and 2004, respectively 128.9 132.5
Inventories 99.2 101.3
Deferred income taxes 19.3 15.0
Other current assets 20.2 18.1
------------- -------------
Total current assets 315.8 358.9
------------- -------------
Property, plant and equipment, net 164.1 169.9
Goodwill and other intangible, net 221.6 220.5
Other assets 26.1 24.4
------------- -------------
Total assets $727.6 $773.7
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to banks $3.0 $3.9
Accounts payable and accrued liabilities 118.8 116.6
Accrued taxes on income 17.8 11.2
------------- -------------
Total current liabilities 139.6 131.7
------------- -------------
Long-term debt 97.7 163.1
Deferred income taxes 15.9 21.8
Other liabilities 19.5 16.5
Commitments and contingent liabilities (Note 17)
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, 40,630,951 and 39,644,756 shares issued
and outstanding in 2005 and 2004, respectively 4.1 4.0
Paid-in capital 26.2 14.7
Retained earnings 415.9 392.9
Accumulated other comprehensive income 8.7 29.0
------------- -------------
Total shareholders' equity 454.9 440.6
------------- -------------
Total liabilities and shareholders' equity $727.6 $773.7
============= =============
The accompanying notes are an integral part of the financial statements.
32
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For the years ended December 31, 2005, 2004 and 2003
(in millions)
Accumulated
Common Stock Other
------------- Paid-In Treasury Retained Comprehensive Comprehensive
Shares Amount Capital Stock Earnings Income(Loss) Income
------ ------ -------- -------- -------- ------------- -------------
Balance, December 31, 2002 (restated) 36.7 $3.7 $ -- $ -- $304.7 $ (8.4)
Comprehensive income:
Net income -- -- -- -- 14.6 -- $ 14.6
Other comprehensive income:
Translation adjustments -- -- -- -- -- 25.6 25.6
Post-employment benefit obligation
adjustments, net of taxes -- -- -- -- -- 0.4 0.4
-------
Comprehensive income -- -- -- -- -- -- $ 40.6
=======
Shares issued -- various plans 0.4 -- 4.0 -- -- --
Stock compensation -- -- 0.2 -- -- --
Purchase of common stock -- -- -- (5.1) -- --
Retirement of treasury stock (0.5) -- (5.1) 5.1 -- --
Termination of a Stock Repurchase
Agreement (See Note 2) 2.5 0.2 11.2 -- 19.1 --
Change in carrying value of common stock
subject to redemption (See Note 2) -- -- -- -- 7.1 --
------ ---- ----- ----- ------ -------
Balance, December 31, 2003 39.1 3.9 10.3 -- 345.5 17.6
Comprehensive income:
Net income -- -- -- -- 47.4 -- $ 47.4
Other comprehensive income/(loss):
Translation adjustments -- -- -- -- -- 11.8 11.8
Unrealized gain on derivatives,
net of taxes -- -- -- -- -- 0.1 0.1
Post-employment benefit obligation
adjustments, net of taxes -- -- -- -- -- (0.5) (0.5)
-------
Comprehensive income -- -- -- -- -- -- $ 58.8
=======
Shares issued -- various plans 0.5 0.1 4.1 -- -- --
Stock compensation -- -- 0.3 -- -- --
------ ---- ----- ----- ------ -------
Balance, December 31, 2004 39.6 4.0 14.7 -- 392.9 29.0
Comprehensive income:
Net income -- -- -- -- 23.0 -- $ 23.0
Other comprehensive income/(loss):
Translation adjustments -- -- -- -- -- (19.7) (19.7)
Unrealized gain on derivatives,
net of taxes
-- -- -- -- -- (0.1) (0.1)
Post-employment benefit obligation
adjustments, net of taxes -- -- -- -- -- (0.5) (0.5)
-------
Comprehensive income -- -- -- -- -- -- $ 2.7
=======
Shares issued -- various plans 1.3 0.1 16.0 -- -- --
Purchase of common stock -- -- -- (6.0) -- --
Retirement of treasury stock (0.3) -- (6.0) 6.0 -- --
Stock compensation -- -- 1.5 -- -- --
------ ---- ----- ----- ------ -------
Balance, December 31, 2005 40.6 $4.1 $26.2 $ -- $415.9 $ 8.7
====== ==== ===== ===== ====== =======
The accompanying notes are an integral part of the financial statements.
33
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2005, 2004 and 2003
(in millions)
2005 2004 2003
------- ------ -------
OPERATING ACTIVITIES
Net income $ 23.0 $ 47.4 $ 14.6
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 32.7 32.4 30.2
Prepayment charges - debt retirement 7.4 -- --
Deferred income taxes (10.2) 6.7 (2.6)
(Gain)/loss on sale of property and equipment, net (0.2) (0.6) 0.3
Write-off of property and equipment 4.7 2.3 8.0
Changes in assets and liabilities, net
of businesses acquired:
Accounts receivable 6.0 (6.7) (13.8)
Inventories 4.2 (9.3) (2.6)
Other current assets (2.2) (2.2) 0.3
Accounts payable and accrued liabilities 0.3 13.2 1.9
Accrued taxes on income 6.5 (0.6) (2.5)
Other, net (2.9) 2.9 1.8
------- ------ -------
Net cash provided by operating activities 69.3 85.5 35.6
------- ------ -------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (30.9) (38.7) (32.8)
Acquisitions, net of cash acquired (13.8) (0.7) (28.4)
Proceeds from sale of property and equipment 0.6 1.6 1.2
Other, net 0.3 1.3 --
------- ------ -------
Net cash used in investing activities (43.8) (36.5) (60.0)
------- ------ -------
FINANCING ACTIVITIES
Net (decrease)/increase in short-term debt (1.1) (0.3) 2.2
Additions to long-term debt 84.5 57.8 275.0
Reductions in long-term debt (156.9) (85.0) (249.3)
Purchase of common stock (6.0) -- (5.1)
Proceeds from common stock issued under
employee stock option and stock purchase plans 16.1 4.2 4.0
------- ------ -------
Net cash (used in)/provided by financing activities (63.4) (23.3) 26.8
------- ------ -------
Effect of exchange rate changes on cash flows (5.9) 1.9 12.4
------- ------ -------
(Decrease)/increase in cash and cash equivalents (43.8) 27.6 14.8
Cash and cash equivalents at beginning of year 92.0 64.4 49.6
------- ------ -------
Cash and cash equivalents at end of year $ 48.2 $ 92.0 $ 64.4
======= ====== =======
The accompanying notes are an integral part of the financial statements.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except headcount, share and per share data)
Note 1: Description of Business
Paxar Corporation ("Paxar" or the "Company"), incorporated in New York in
1946, is a global leader in providing innovative identification solutions to the
retail and apparel manufacturing industries, worldwide. These solutions include:
1) brand development, 2) information services and 3) supply chain logistics.
Paxar's brand development solutions include offering creative design
services to apparel customers and retailers to translate their branding concepts
into fashionable systems of apparel identification, including tickets, tags and
labels that make a garment stand-out to consumers, as well as assist consumers
with their purchasing decisions. The Company's comprehensive information
services provide customers with exceptional control, visibility and access to
information concerning apparel identification activities, regardless of
point-of-manufacture, worldwide. Paxar's supply chain logistics offerings, which
include bar code and RFID (radio frequency identification) labels, bar code and
RFID printers and labelers, as well as the design of integrated systems for
large in-store and warehouse applications, offer customers high-quality
inventory control and distribution management capabilities.
The Company operates globally, with approximately 70% of its sales outside
the United States. The Company's operations have been organized into three
geographic segments consisting of (1) the operations principally in North
America and Latin America ("Americas"); (2) Europe, the Middle East and Africa
("EMEA"); and (3) the Asia Pacific region ("Asia Pacific"). The Company's entire
array of products and services is offered for sale across each of those
geographic segments. As of December 31, 2005, the Company had 86 manufacturing
facilities and sales offices located in 39 countries and employed approximately
10,800 people worldwide. In addition, the Company sells its products through
independent distributors in 24 countries in which it does not sell directly to
the final customer.
Note 2: Restatement
In the fourth quarter of 2003, the Company reconsidered its accounting and
reporting matters related to its obligations to purchase redeemable common
shares under a Stock Repurchase Agreement (the "Agreement"), dated July 11,
2001, with its Chairman and Chief Executive Officer (the "Chairman"). In
accordance with Rule 5-02.28 of Regulation S-X, or Accounting Series Release No.
268, "Redeemable Preferred Stocks," (issued by the Securities and Exchange
Commission ("SEC") on July 27, 1979), as interpreted by the Emerging Issues Task
Force ("EITF") Topic D-98, "Classification and Measurement of Redeemable
Securities," (issued by the Financial Accounting Standards Board ("FASB") on
July 19, 2001), securities that are redeemable for cash or other assets must be
classified outside of shareholders' equity if they are redeemable at the option
of the holder, as were the redeemable common shares owned by the Chairman. The
Company concluded that Rule 5-02.28, as interpreted by EITF Topic D-98, applied
to the redeemable common shares because the redemption features were not solely
within its control. While Rule 5-02.28 specifically addressed redeemable
preferred stocks, EITF Topic D-98 makes it clear that redeemable preferred stock
is analogous to other equity instruments, including common shares. Accordingly,
the Company determined that the redeemable common shares should have been
classified as temporary equity in its financial statements for periods ended
after July 11, 2001 until the Agreement was terminated on November 17, 2003. As
a result, during 2003, the Company restated its balance sheet as of December 31,
2002 to report the redemption value of redeemable common stock outside of
shareholders' equity, as "Common Stock Subject to Redemption." The redeemable
common stock was previously reported within shareholders' equity. Corresponding
revisions were also made to the consolidated statements of shareholders' equity
and comprehensive income.
Since the Agreement was terminated on November 17, 2003, the redeemable
common shares owned by the Chairman are no longer subject to redemption and,
therefore, are classified as permanent equity in the financial statements at
December 31, 2003.
35
Note 3: Summary of Significant Accounting Policies
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements and related note disclosures to conform to the presentation
used in the current period.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of 90 days or less to be cash equivalents.
Allowance for Doubtful Accounts
Management makes judgments, based on 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 $128.9, net of allowances of $10.7, and $132.5, net of allowances of $12.3,
at December 31, 2005 and 2004, respectively.
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 $9.1 and $11.7 as
of December 31, 2005 and 2004, respectively. The value of all other inventories
determined using the first-in, first-out method was $90.1 and $89.6 as of
December 31, 2005 and 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 and acceptance of
the Company's products, and current sales negotiations for this type of
inventory.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Upon
retirement or disposition, the cost and accumulated depreciation are removed
from the asset and accumulated depreciation accounts, and the net gain or loss
is reflected in income. Expenditures for maintenance and repairs are charged
against income as incurred. Expenditures for improvements and renewals which
extend estimated useful lives are capitalized.
Financial Instruments and Derivatives
The Company applies the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of SFAS No. 133," SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," and SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." These statements outline the accounting
treatment for all derivative activities and require that an entity recognize all
derivative instruments as either assets or liabilities on its balance sheet at
their fair value. Gains and losses resulting from changes in the fair value of
derivatives are recognized each period in current or comprehensive earnings,
depending on whether a derivative is designated as part of an effective hedge
transaction and the resulting type of hedge transaction. Gains and losses on
derivative instruments reported in comprehensive earnings will be reclassified
to earnings in the period in which earnings are affected by the hedged item.
36
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
$114.8, $153.9 and $55.1 in 2005, 2004 and 2003, respectively.
The Company formally designates and documents the hedging relationship and
risk management objective for undertaking each hedge. The documentation
describes the hedging instrument, the item being hedged, the nature of the risk
being hedged and the Company's assessment of the hedging instrument's
effectiveness in offsetting the exposure to changes in the hedged item's fair
value.
The fair value of outstanding forward foreign exchange contracts at
December 31, 2005 and 2004, for delivery of various currencies at various future
dates and the changes in fair value recognized in income in 2005, 2004 and 2003,
were not material. The notional value of outstanding forward foreign exchange
contracts at December 31, 2005 and 2004, was $7.5 and $10.3, respectively.
All financial instruments of the Company, with the exception of hedge
instruments, are carried at cost, which approximates fair value.
Goodwill and Other Intangible Assets
The Company applies the provisions of SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that all business combinations be accounted for using the
purchase method of accounting and that certain intangible assets acquired in a
business combination be recognized as assets apart from goodwill. Under SFAS No.
142, goodwill is not amortized. Instead, the Company is required to test
goodwill for impairment at least annually, using a fair value approach, at the
reporting unit level. In addition, the Company evaluates goodwill for impairment
if an event occurs or circumstances change, which could result in the carrying
value of a reporting unit exceeding its fair value. Factors the Company
considers important, which could indicate impairment, include the following: (1)
significant under-performance relative to historical or projected future
operating results; (2) significant changes in the manner of the Company's use of
the acquired assets or the strategy for the Company's overall business; (3)
significant negative industry or economic trends; (4) significant decline in the
Company's stock price for a sustained period; and (5) the Company's market
capitalization relative to net book value.
Impairment of Long-Lived Assets
The Company periodically reviews its long-lived assets for impairment by
comparing the carrying values of the assets with their estimated future
undiscounted cash flows. If it is determined that an impairment loss has
occurred, the loss is recognized during that period. The impairment loss is
calculated as the difference between asset carrying values and fair value as
determined by prices of similar items and other valuation techniques (discounted
cash flow analysis), giving consideration to recent operating performance and
pricing trends. Except for certain write offs of fixed assets that the Company
recognized in connection with its restructuring and related initiatives in 2005
and 2003, there were no significant impairment losses related to long-lived
assets in the past three years.
Other Investments
Investments where the Company has the ability to exercise significant
influence over financial and accounting policies are accounted for under the
equity method of accounting. Investments where the Company does not have
significant influence and where the market value is not readily determinable are
accounted for under the cost method. Other investments are included in other
noncurrent assets in the accompanying consolidated balance sheets.
Deferred Financing Costs
Deferred financing costs are amortized over the terms of the related
indebtedness. In the fourth quarter of 2005, approximately $0.4 of financing
costs were written-off in connection with the early repayment of the Company's
6.74% Senior Notes (see Note 9).
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.
37
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. 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.
Sales Returns and Allowances
Management must make estimates of potential future product returns, billing
adjustments and allowances related to current period product revenues. In
establishing a provision for sales returns and allowances, management relies
principally on the Company's history of product return rates as well as customer
service billing adjustments and allowances, each of which is regularly analyzed.
Management also considers (1) current economic trends, (2) changes in customer
demand for the Company's products and (3) acceptance of the Company's products
in the marketplace when evaluating the adequacy of the Company's provision for
sales returns and allowances. Historically, the Company has not experienced a
significant change in its product return rates resulting from these factors. For
the years ended December 31, 2005, 2004 and 2003, the provision for sales
returns and allowances accounted for as a reduction to gross sales was not
material.
Research and Development
Research and development costs are expensed as incurred. The Company's
research and development expenses were approximately $7.4, $7.1 and $6.8 for
2005, 2004 and 2003, respectively.
Accounting for Income Taxes
The provision for income taxes is determined using the asset and liability
method. 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 position 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.
The American Jobs Creation Act of 2004 (the "AJCA") created a temporary
incentive for U.S. corporations to repatriate accumulated income earned abroad
by providing an 85% dividends received deduction for qualifying dividends
received prior to December 31, 2005. During 2005, the Company's Chief Executive
Officer and Chief Financial Officer, together with the Board of Directors,
approved a domestic reinvestment plan as required by AJCA to repatriate $122.4
in foreign earnings. The Company recorded tax expense in 2005 of $4.8 related to
these dividends received. The related earnings were repatriated during the
fourth quarter of 2005.
Earnings per Share
Basic earnings per share is computed by dividing net income available to
common stockholders by the weighted average number of common shares, including
redeemable common shares, outstanding during the year. Diluted earnings per
share reflects the potential dilutive effect of additional common shares that
are issuable upon exercise of outstanding stock options.
38
Foreign Currency Translation
Assets and liabilities of the Company's foreign subsidiaries are translated
into U.S. dollars using the exchange rates in effect at the balance sheet date.
Results of operations are translated using the average exchange rate prevailing
throughout the period. The effects of exchange rate fluctuations from
translating foreign currency assets and liabilities into U.S. dollars are
included as a component of other comprehensive income within shareholders'
equity. Gains and losses resulting from foreign currency transactions are
included in net income and were not material in the past three years.
Use of Estimates
The preparation of these consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to use certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," provides for a
fair-value based method of accounting for employee options and measures
compensation expense using an option valuation model that takes into account, as
of the grant date, the exercise price and expected life of the option, the
current price of the underlying stock and its expected volatility, expected
dividends on the stock and the risk-free interest rate for the expected term of
the option. The Company elected to continue accounting for employee stock-based
compensation under Accounting Principles Board ("APB") Opinion No. 25 through
December 31, 2005. Under APB Opinion No. 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized. The following table
presents pro forma net income and earnings per share had the Company elected to
adopt SFAS No. 123:
2005 2004 2003
------ ------ ------
Net income, as reported $ 23.0 $ 47.4 $ 14.6
Add: Stock-based compensation expense
included in the determination of net
income as reported, net of related
tax effects 0.6 0.1 0.2
Deduct: Stock-based employee compensation
expense determined under fair-value-
based method for all awards granted,
net of related tax effects (3.0) (3.8) (4.4)
------ ------ ------
Pro forma net income $ 20.6 $ 43.7 $ 10.4
====== ====== ======
Earnings per Share:
Basic - as reported $0.57 $1.20 $0.37
Basic - pro forma $0.51 $1.10 $0.27
Diluted - as reported $0.56 $1.17 $0.37
Diluted - pro forma $0.50 $1.08 $0.26
Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 154, "Accounting Changes and Error Corrections" (SFAS 154) which replaces
Accounting Principles Board Opinions No. 20 "Accounting Changes" and SFAS No 3,
"Reporting Accounting Changes in Interim Financial Statements -- An Amendment of
APB Opinion No. 28." SFAS 154 provides guidance on the accounting for and
reporting of accounting changes and error corrections. It establishes
retrospective application, or the earliest practicable date, as the required
method for reporting a change in accounting principle and restatement with
respect to the reporting of a correction of an error. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005 and is required to be adopted by the Company in the
first quarter of fiscal 2006. We currently do not expect to make any accounting
changes which would be impacted by SFAS 154.
39
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4." SFAS No. 151 amends the guidance in
Accounting Research Bulletin ("ARB") No. 43, Chapter 4, "Inventory Pricing" and
requires that 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). SFAS No. 123(R) replaces
SFAS No. 123 by eliminating the choice to account for employee stock options
under APB Opinion No. 25 and requires companies to recognize the cost of
employee services received in exchange for awards of equity instruments, such as
stock options, based on the fair value of those awards at date of grant.
Currently, under APB 25 the value of restricted stock awards is expensed by the
Company over the restriction time period and no compensation expense is
recognized for stock option grants as all such grants have an exercise price not
less than market value at date of grant.
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.
The Company will adopt the provisions of SFAS No. 123(R) beginning January
1, 2006 using the prospective method which will result in an incremental expense
upon adoption. The impact on earnings per share in fiscal year 2006 of these
requirements is currently estimated in the range of $0.06 to $0.07. Future
expense amounts for any particular quarterly or annual period could be affected
by changes in the Company's assumptions or changes in market conditions. Due to
the timing of the Company's equity grants the charge will not be recognized
evenly throughout the year. SFAS 123R also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as currently
required, thereby potentially reducing net operating cash flows and increasing
net financing cash flows in periods after adoption. Such amounts in prior years
were not material and can not be estimated for future periods with certainty
because they depend largely on when employees will exercise stock options and
the market price of the Company's stock at the time of exercise.
Note 4: Inventories
The components of inventories are as follows:
At December 31, 2005 2004
----------------------------------------------- ----------- -----------
Raw materials $ 49.2 $ 50.4
Work-in-process 9.3 8.3
Finished goods 57.8 58.8
----------- -----------
116.3 117.5
Allowance for obsolescence (17.1) (16.2)
----------- -----------
$ 99.2 $ 101.3
=========== ===========
If all inventories were reported on a first-in, first-out basis,
inventories would be approximately $2.1 and $2.0 higher at December 31, 2005 and
2004, respectively.
Note 5: Other Current Assets
A summary of other current assets is as follows:
40
At December 31, 2005 2004
----------------------------------------------- ----------- -----------
Prepaid expenses $ 10.3 $ 7.1
Prepaid insurance 1.6 1.0
Other receivables 7.9 9.9
Other 0.4 0.1
----------- -----------
$ 20.2 $ 18.1
=========== ===========
Note 6: Property, Plant and Equipment
A summary of property, plant and equipment is as follows:
At December 31, 2005 2004
----------------------------------------------- ----------- -----------
Machinery and equipment $ 273.9 $ 268.8
Building and leasehold improvements 65.9 67.4
Land 5.3 4.4
----------- -----------
345.1 340.6
Accumulated depreciation (181.0) (170.7)
----------- -----------
$ 164.1 $ 169.9
=========== ===========
Years
-----------
Estimated useful lives:
Buildings 10 to 50
Building and leasehold improvements 2 to 20
Machinery and equipment 2 to 25
Depreciation expense was $32.4 in 2005, $32.1 in 2004 and $29.9 in 2003.
Note 7: Goodwill and Other Intangibles
In accordance with SFAS No. 142, the Company completed its annual goodwill
impairment assessment during the fourth quarter of 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 years ended
December 31, 2005, 2004 and 2003 are as follows:
Asia
Americas EMEA Pacific Total
--------- --------- --------- ---------
Balance, January 1, 2003 $111.0 $67.4 $17.3 $195.7
Acquisitions 6.0 -- 3.2 9.2
Translation adjustments -- 7.6 -- 7.6
--------- --------- --------- ---------
Balance, December 31, 2003 117.0 75.0 20.5 212.5
Acquisitions 3.3 0.2 0.2 3.7
Translation adjustments -- 3.6 -- 3.6
--------- --------- --------- ---------
Balance, December 31, 2004 120.3 78.8 20.7 219.8
Acquisitions 2.1 0.9 4.3 7.3
Translation adjustments -- (5.9) -- (5.9)
--------- --------- --------- ---------
Balance, December 31, 2005 $122.4 $73.8 $25.0 $221.2
========= ========= ========= =========
During 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. In connection with this acquisition, the
Company recognized goodwill of $1.9 based on the allocation of purchase price to
the acquired assets and liabilities. In addition, also during 2005, the Company
acquired the remaining 50% interest of a joint venture 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 $4.3
based on its preliminary allocation of purchase price to the fair value of net
assets acquired.
41
The consolidated statements of earnings reflect the results of operation
for each of EMCO and Paxar India since their respective effective date of
purchase. The pro forma impact of these acquisitions was not significant.
In September 2003, the Company acquired the business and assets of Alkahn
Labels, Inc., a manufacturer of woven labels, for $25.0. In connection with this
acquisition, the Company recognized goodwill of $7.1 in 2003 and $3.2 in 2004,
based on its allocation of the purchase price to the acquired assets and
liabilities. This acquisition did not have a material impact on the Company's
results of operations.
The Company's other intangible is as follows:
At December 31, 2005 2004
----------------------------------------------- ----------- -----------
Noncompete agreement $ 1.7 $ 1.70
Accumulated amortization (1.3) (1.0)
----------- -----------
$ 0.4 $ 0.7
=========== ===========
Note 8: Accounts Payable and Accrued Liabilities
A summary of accounts payable and accrued liabilities is as follows:
At December 31, 2005 2004
--------------------------------------- ----------- -----------
Accounts payable $ 50.3 $ 48.0
Accrued payroll costs 19.6 18.9
Accrued restructuring costs 7.4 --
Trade programs 4.7 2.3
Advance service contracts 4.4 5.8
Accrued commissions 2.5 3.8
Accrued professional fees 3.1 3.6
Accrued interest 0.2 4.1
Other accrued liabilities 26.6 30.1
----------- -----------
$118.8 $116.6
=========== ===========
Note 9: Long-Term Debt
A summary of long-term debt is as follows:
At December 31, 2005 2004
--------------------------------------- ----------- -----------
6.74% Senior Notes due 2008 $ -- $150.0
Revolving credit facility 84.1 --
Economic Development Revenue Bonds
due 2011 and 2019 13.0 13.0
Other 0.6 0.1
----------- -----------
$ 97.7 $ 163.1
=========== ===========
Maturities of long-term debt are as follows:
Years ending December 31,
---------------------------------------
2010 $84.6
Thereafter 13.1
-----------
$97.7
The Company had an unsecured ten-year, $150 Senior Note Agreement (the
"Senior Notes") due 2008 with institutional lenders, primarily insurance
companies. The Senior Notes had an interest rate of 6.74%, payable
semi-annually. These notes were repaid in December 2005 with accrued interest of
$3.2 and prepayment charges of $7.4.
42
In November 2005, the Company replaced its existing three-year $50
revolving credit facility with a new five-year, $150 multi-currency Revolving
Credit Agreement (the "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 December 31, 2005, the interest rate on outstanding
borrowings under this Agreement was based on LIBOR at a weighted average
interest rate of 4.8%.
Additionally, 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 can not pay in excess of $50.0 in
cash dividends during any 12-month period, and can not pay in excess of $100.0
in cash dividends over its five-year term.
Average borrowings under the Credit Agreement during 2005 were $10.0 at an
average interest rate of 5.03%. Average borrowings under the revolving credit
facility in 2004 and 2003 were $3.8, and $22.0 at average interest rates of
2.10%, and 1.86%, respectively. The borrowings outstanding under the Credit
Agreement at December 31, 2005 were $84.1.
Facilities financed by economic development revenue bond have been
accounted for as plant and equipment, and the related bonds are recorded as
long-term debt. The variable rate bonds for the years ended December 31, 2005
and 2004 had weighted average interest rates of 2.5% and 1.31%, respectively.
The rate on these bonds was 3.6% at December 31, 2005.
Excluding the impact of the $7.4 of prepayment charges relating to debt
retired in 2005, net interest expense was $9.3, $10.7 and $11.3 in 2005, 2004
and 2003, respectively.
Note 10: Income Taxes
The components of the provision for income taxes are as follows:
At December 31, 2005 2004 2003
----------------------------------------------- ------- ------- -------
Federal
Current $ (7.9) $ (2.8) $ (1.3)
Deferred 8.3 0.5 (2.2)
Foreign
Current 10.1 10.5 8.3
Deferred 1.9 6.1 0.7
State 0.1 0.1 0.1
------- ------- -------
$ 12.5 $ 14.4 $5.6
======= ======= =======
The deferred tax assets and liabilities are as follows:
At December 31, 2005 2004 2003
----------------------------------------------- ------- ------- -------
Deferred tax assets:
Tax credit and tax loss carryforwards $ 30.7 $ 17.9 $ 17.2
Other accrued liabilities and allowances 3.4 7.6 12.5
Deferred compensation 3.6 3.4 3.9
------- ------- -------
Total gross deferred tax assets 37.7 28.9 33.6
Valuation allowance (18.4) (13.9) (13.8)
------- ------- -------
Net deferred tax assets 19.3 15.0 19.8
Deferred tax liabilities:
Depreciation and other property
basis differences (4.1) (7.9) (8.5)
Other (11.8) (13.9) (11.4)
------- ------- -------
Net deferred tax assets/(liabilities) $ 3.4 $ (6.8) $ (0.1)
======= ======= =======
43
At December 31, 2005, the Company had domestic and foreign tax loss
carryforwards of $89.6, which will be available to reduce future tax
liabilities. The Company also had $1.6 of foreign tax credit carryforwards. The
tax credit carryforwards of $1.6 and tax loss carryforwards in the U.S. of $30.0
are scheduled to expire beginning in 2011 and 2022, respectively. The remaining
$59.6 of foreign tax losses are subject to varying carryforward limitations. A
valuation allowance is established for those deferred tax assets for which the
Company believes that recovery is not more than likely. As of December 31, 2005,
a valuation allowance of $18.4 existed for certain tax credit and foreign tax
loss carryforwards.
The following tabulation sets forth the reconciliation of federal statutory
income tax to the Company's effective income tax rate:
At December 31, 2005 2004 2003
----------------------------------------------- ------- ------- -------
Federal statutory tax rate 35.0% 35.0% 35.0%
State income tax, net of federal
income tax benefit 0.2 0.1 0.5
Foreign taxes at different rates (18.9) (9.1) (25.1)
Tax credit and tax loss carryforwards
not benefited 1.2 1.0 27.2
Repatriation, net of foreign tax credits 13.5 -- --
Accruals no longer required -- (3.1) (11.7)
All other, net 4.3 (0.6) 1.9
------- ------- -------
35.3% 23.3% 27.8%
======= ======= ======
The Company reviewed the status of ongoing and completed tax examinations
during 2005, 2004, and 2003, and reduced the income tax provisions in 2004 and
2003 by amounts determined to be in excess of requirements.
The American Jobs Creation Act of 2004 (the "AJCA") created a temporary
incentive for U.S. corporations to repatriate accumulated income earned abroad
by providing an 85% dividends received deduction for qualifying dividends
received prior to December 31, 2005. During 2005, the Company's Chief Executive
Officer and Chief Financial Officer, together with the Board of Directors,
approved a domestic reinvestment plan as required by the AJCA to repatriate
$122.4 in foreign earnings. The Company recorded tax expense in 2005 of $4.8
related to these dividends received. The related earnings were repatriated
during the fourth quarter of 2005. A provision has not been established for
undistributed foreign earnings of $156.2 not repatriated at December 31, 2005,
as those earnings are considered permanently reinvested in the foreign
operations. At December 31, 2005 the estimated U.S. tax liability on the
undistributed earnings was $28.3. Total foreign-based pre-tax income was
approximately $55.0, $65.4 and $28.3 for 2005, 2004 and 2003, respectively.
Note 11: Segment Information
The Company has organized its operations into three geographic segments
consisting of the following:
(1) The Company's operations principally in North America and Latin
America ("Americas");
(2) Europe, the Middle East and Africa ("EMEA"); and
(3) The Asia Pacific region ("Asia Pacific")
Each of the three geographic segments develops, manufactures and markets
apparel identification products and bar code and pricing solutions products to
customers primarily in the retail and apparel manufacturing industries. 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 the segments and assess their performance. Information regarding
the operations of the Company in different geographic segments is set forth
below. The accounting policies of the geographic segments are the same as those
described in Note 3: Summary of Significant Accounting Policies.
44
Years ended December 31, 2005 2004 2003
----------------------------------- ----------- ----------- ------------
Sales to unaffiliated customers:
Americas $ 331.0 $ 355.2 $ 332.1
EMEA 209.5 219.9 199.5
Asia Pacific 268.6 229.3 180.4
---------- ------------ ------------
Total $ 809.1 $ 804.4 $ 712.0
========== ============ ============
Intersegment sales:
Americas $ 67.2 $ 61.7 $ 53.3
EMEA 46.9 49.7 41.8
Asia Pacific 27.9 20.7 13.8
Eliminations (142.0) (132.1) (108.9)
---------- ------------ ------------
Total $ -- $ -- $ --
========== ============ ============
Operating Income (a):
Americas (b) $ 21.6 $ 41.3 $ 15.8
EMEA (b) 4.4 16.6 0.7
Asia Pacific (b) 45.2 38.6 33.8
---------- ------------ ------------
71.2 96.5 50.3
Corporate expenses (b) (20.8) (25.3) (19.1)
Amortization of other intangible (0.3) (0.3) (0.3)
---------- ------------ ------------
Operating income 50.1 70.9 30.9
Other income, net 2.1 1.6 0.6
Total interest expense (c) (16.7) (10.7) (11.3)
---------- ------------ ------------
Total $ 35.5 $ 61.8 $ 20.2
========== ============ ============
(a) Certain reclassifications have been made to prior years' operating income
to conform to the presentation used in the current period.
(b) Americas, EMEA and Corporate expenses include integration/restructuring
costs of $8.6, $5.6 and $0.9, respectively, in 2005. Americas, EMEA, Asia
Pacific and Corporate expenses included the integration/restructuring and
other costs of $9.3, $9.4, $0.1 and $1.6, respectively, in 2003.
(c) Includes prepayment charges-debt retirement of $7.4 in 2005.
2005 2004 2003
----------- ----------- ------------
Depreciation and amortization:
Americas $12.7 $14.0 $14.4
EMEA 8.9 9.7 9.6
Asia Pacific 9.7 7.1 4.6
----------- ----------- ------------
31.3 30.8 28.6
Corporate 1.4 1.6 1.6
----------- ----------- ------------
Total $32.7 $32.4 $30.2
========== ============ ============
Capital expenditures:
Americas $ 6.8 $ 7.1 $ 9.5
EMEA 7.9 8.9 10.8
Asia Pacific 15.7 22.3 11.8
----------- ----------- ------------
30.4 38.3 32.1
Corporate 0.5 0.4 0.7
----------- ----------- ------------
Total $30.9 $38.7 $32.8
========== ============ ============
45
At December 31, 2005 2004
--------------------------------------- ----------- -----------
Long-lived assets:
Americas $180.9 $190.6
EMEA 123.9 135.2
Asia Pacific 76.2 60.4
----------- -----------
381.0 386.2
Corporate 4.7 4.2
----------- -----------
Total $385.7 $ 390.4
=========== ===========
At December 31, 2005 2004
--------------------------------------- ----------- -----------
Total assets:
Americas $238.7 $301.1
EMEA 223.5 243.1
Asia Pacific 172.0 150.9
----------- -----------
634.2 695.1
Corporate 93.4 78.6
----------- -----------
Total $727.6 $773.7
=========== ===========
The following table presents sales by product:
Years ended December 31, 2005 2004 2003
----------------------------------------------- ------- ------- -------
Apparel Identification Products $562.4 $566.2 $482.5
Bar Code and Pricing Solutions 246.7 238.2 229.5
------- ------- -------
Total $809.1 $804.4 $712.0
======= ======= =======
The Company derived sales in the United States of $248.1, or 30.7 % of
total sales in 2005, $271.2, or 33.7% of total sales in 2004, and $258.5, or
36.3% of total sales in 2003. In addition, long-lived assets in the United
States as of December 31, 2005 and 2004, amounted to $157.3 and $161.1,
respectively.
No one customer accounted for more than 10% of the Company's revenues or
accounts receivable in 2005, 2004, or 2003.
Note 12: Supplemental Cash Flow Information
Cash paid for interest and income taxes is as follows:
Years ended December 31, 2005 2004 2003
----------------------------------------------- ------- ------- -------
Interest $ 15.6 $ 10.7 $ 11.5
Income taxes 12.5 9.3 12.4
For the year ended December 31, 2005, approximately $7.4 of charges were
recorded and paid as interest in connection with the early retirement of the
6.74% Senior Notes (see Note 9).
Note 13: Shareholders' Equity
The Company has various stock-based compensation plans, including two stock
option plans, a long-term incentive plan, and an employee stock purchase plan.
The 1990 Employee Stock Option Plan (the "1990 Plan"), the 1997 Incentive
Stock Option Plan (the "1997 Plan") and the 2000 Long-Term Performance and
Incentive Plan (the "2000 Plan") provide for grants of incentive stock options,
non-qualified stock options and stock appreciation rights, which may be granted
in tandem with non-qualified stock options. The 2000 Plan also permits awards of
restricted stock and bonus stock and other similar stock-based compensation
arrangements. In addition, the shares previously authorized and available for
46
issuance under the 1990 Plan and the 1997 Plan were made available for issuance
under the 2000 Plan and are no longer available for grant under the 1990 Plan
and the 1997 Plan. The option price per share of incentive stock options cannot
be less than 100% of the market value at the date of grant. The option price per
share of non-qualified stock options and stock appreciation rights is determined
by the Compensation Committee of Board of Directors at its sole discretion.
In 2005, 2004, and 2003, the Company received proceeds of $15.2, $3.8 and
$2.5, respectively, from 1,281,000, 514,000 and 257,000 common shares issued
upon the exercise of options granted to employees and directors.
As of December 31, 2005, 3,615,000 shares of common stock were reserved for
issuance upon the exercise of options granted to key employees and directors
under the 1997 Plan and the 2000 Plan, and 2,242,000 shares of common stock were
reserved for future grants under the 2000 Plan. In addition, under the 1990
Plan, 121,000 shares of common stock were reserved for issuance upon the
exercise of options granted to key employees and directors.
Generally, options vest over four years and are exercisable for ten years.
Under the 2000 Plan, the Company has granted certain key executives a
performance based award, which enables them to receive a future payment from the
Company, based on the appreciation in the fair market value, as defined in the
plan, of the Company's common stock in relation to a certain market index. The
Company recognizes the changes in the fair value of the award amounts in income
at the end of each reporting period. In connection with such awards, the Company
recognized compensation expenses (benefits) of $0.2, $1.6 and $(0.4) in 2005,
2004 and 2003, respectively. Also, during 2005, the Company has granted certain
key executives performance-based awards, which enables them to receive payment
in shares of the Company's common stock, based on certain operating performance
criteria, as defined in the plan. The Company is required to evaluate the
probability of the achievement of the performance criteria over the service
period. In connection with these awards, the Company recognized compensation
expense of $0.3 in 2005.
In addition, 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 $0.2 in 2005.
A summary of outstanding stock options is as follows:
Number Weighted Average
of Shares Exercise Price
------------- -----------------
(in millions)
2003
----
Outstanding at beginning of year 4.5 $12.19
Granted 0.7 $14.20
Exercised (0.2) $ 8.93
Canceled/forfeited (0.3) $14.25
-----------
Outstanding at end of year 4.7 $12.54
2004
----
Granted 0.6 $14.56
Exercised (0.5) $ 8.52
Canceled/forfeited (0.5) $14.03
-----------
Outstanding at end of year 4.3 $13.16
2005
----
Granted 0.7 $17.88
Exercised (1.2) $11.89
Canceled/forfeited (0.1) $14.53
-----------
Outstanding at end of year 3.7 $14.43
===========
47
The weighted average fair value per option granted in 2005, 2004 and 2003
was $7.71, $6.90 and $6.38, respectively.
The following table summarizes information about stock options outstanding
as of December 31, 2005:
Weighted Average
Range of Options Weighted Average Remaining
Exercise Prices Outstanding Exercise Price Contractual Life
--------------- ----------- -------------- ----------------
(in millions) (years)
Options outstanding
$ 7.37 - $12.89 0.8 $ 9.88 4.4
$12.90 - $18.43 2.9 $ 15.75 6.8
-----------
3.7 $ 14.14 6.3
===========
Options exercisable
$ 7.37 - $12.89 0.8 $ 9.88
$12.90 - $18.43 1.6 $ 15.43
-----------
2.4 $ 13.50
===========
The estimated fair value of each option granted is calculated using the
Black-Scholes option-pricing model. The following summarizes the assumptions
used in the model:
2005 2004 2003
----------- ---------- ----------
Risk-free interest rate 3.7% 3.5% 3.0%
Expected years until exercise 5.0 6.0 6.0
Expected stock volatility 43.3% 44.8% 43.1%
Dividend yield 0.0 0.0 0.0
Employee Stock Purchase Plan
The Company maintains an employee stock purchase plan, which allows
employees to purchase a certain amount of the Company's common stock at a
discount to the market price. The discount to the market price was 15% for 2005
and 20% for 2004 and 2003. The Company may sell up to 1,819,000 shares under
this plan and, as of December 31, 2005, 508,800 shares were available for future
purchases. The total number of shares and the average fair value of shares
issued under this plan were 47,663 and $18.28, 27,500 and $14.01, and 128,000
and $12.40 in 2005, 2004 and 2003, respectively. The Company recognized
stock-based compensation expenses of $0.1, $0.1 and $0.3 in 2005, 2004 and 2003,
respectively.
Stock Repurchase Plan
The Company has a stock repurchase plan with an authorization from its
Board of Directors to use up to $150 for the repurchase of its shares. The
shares may be purchased from time to time at prevailing prices in the
open-market or by block purchases. The Company repurchased approximately 343,000
shares in 2005 for an aggregate price of $6.0, an average of $17.47 per share.
The Company did not repurchase any shares in 2004. The Company repurchased
approximately 469,000 shares for an aggregate price of $5.1, an average of
$10.80 per share in 2003. Since the inception of the stock repurchase program,
the Company has repurchased approximately 12,636,000 of its shares for an
aggregate price of $128.0, an average of $10.13 per share. The Company
immediately retired the repurchased shares. As of December 31, 2005, 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.
Note 14: Earnings per Common Share
The reconciliation of basic and diluted weighted average common shares
outstanding, in millions, is as follows:
Years ended December 31, 2005 2004 2003
--------------------------------------- ----------- ---------- ----------
Weighted average common shares (basic) 40.3 39.6 39.1
Options and warrants 1.0 1.0 0.4
----------- ---------- ----------
Adjusted weighted average common
shares (diluted) 41.3 40.6 39.5
=========== ========== ==========
48
In determining the dilutive effect of options, the number of shares
resulting from the assumed exercise of the options is reduced by the number of
shares that could have been purchased by the Company with the proceeds from the
exercise of such options.
Options to purchase 25,000 and 2,434,000 shares of common stock at December
31, 2005 and December 31, 2003, respectively, were not included in the
computation of diluted earnings per common share because the effect of their
inclusion would be antidilutive. There were no antidilutive options outstanding
at December 31, 2004.
Note 15: Employee Savings Plan
The Company maintains a voluntary employee savings plan covering all
eligible U.S. employees adopted pursuant to Section 401(k) of the Internal
Revenue Code. The Company's contributions under the plan were $2.4, $2.9 and
$3.1 in 2005, 2004 and 2003, respectively.
Note 16: Post-Employment Benefit Costs
The Company is obligated to provide post-employment benefits to certain
current and former executives. Accordingly, the Company recognized $0.9, $0.6,
and $1.4 of post-employment benefit costs in 2005, 2004 and 2003, respectively.
The discount rates used to determine the post-employment benefit costs were
5.75% in 2005 and 2004, and 6.25% in 2003. The post-employment benefit costs
were included within selling, general and administrative expenses in the
accompanying consolidated statements of income for the years ended December 31,
2005, 2004 and 2003.
The unfunded projected benefit obligation and the unfunded accumulated
benefit obligation were as follows:
At December 31, 2005 2004
------------------------------------------------------ ------ ------
Projected benefit obligation........................... $ 11.3 $ 9.9
Accumulated benefit obligation......................... $ 10.7 $ 8.9
Note 17: Commitments and Contingencies
Total rental expense for all operating leases amounted to $11.6 in 2005,
$11.7 in 2004 and $10.9 in 2003.
Minimum rental commitments for all non-cancelable operating leases are as
follows:
Years ending December 31,
----------------------------------------------------------
2006...................................................... $ 10.9
2007...................................................... 7.7
2008...................................................... 5.4
2009...................................................... 4.3
2010...................................................... 3.7
Thereafter................................................ 6.5
--------
$ 38.5
The Company accrues severance expense for employees of its Italian
subsidiaries, as required by Italian law. As of December 31, 2005 and 2004, the
amounts were $2.8 and $3.1, respectively, and were included in other noncurrent
liabilities in the accompanying consolidated balance sheets.
The Company has entered into various short-term and long-term contracts for
the purchase of raw materials, equipment and property maintenance services.
Commitments under these contracts are $12.8 in 2006 and $0.3 in 2007. Although
the Company is primarily liable for payments on its purchase commitments,
management believes that the Company's exposure to losses, if any, under these
arrangements is not material.
The Company has outstanding stand-by letters of credit of $16.3 at December
31, 2005.
The Company has been named a potentially responsible party relating to
contamination that occurred at certain super-fund sites. Management does not
expect the ultimate outcome of this matter to be material in relation to the
Company's results of operations or financial condition.
49
Paxar Americas, Inc, the Company's operating subsidiary in the United
States, brought an action against Zebra Technologies Corporation in April 2003
for patent infringement. After many 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 this litigation, if it prevails,
the damages payable to the Company could be material to the Company's financial
condition and results of operations. As of December 31, 2005, no asset has been
recorded in connection with this proceeding.
In the ordinary course of business, the Company and its subsidiaries are
involved in certain disputes and litigation, none of which will, in the opinion
of management, have a material adverse effect on the Company's financial
condition or results of operations.
Note 18: Integration/Restructuring and Other Costs
In 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. In 2005, $8.7 in charges related to the 2005 Restructuring
Program were recorded ($4.9 in severance related costs, $2.8 in asset impairment
charges and $1.0 in other exit costs). The majority of the 2005 Restructuring
Program is expected to be completed by the middle of 2007. 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. 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 and related charges.
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 initiatives were 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. In the aggregate, during 2005,
the Company recorded pre-tax charges of $4.8 in connection with these
initiatives, which were substantially complete at the end of 2005.
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. In 2005, the Company recorded pre-tax charges of
$1.6 related to this activity which was complete at the end of 2005.
The Company did not incur any integration/restructuring charges in 2004.
In 2003, the Company incurred $20.4 of integration/restructuring and other
costs. Of this amount, $11.4 primarily pertained to: (1) the closing of several
manufacturing plants in the U.S. and the U.K., countries which have experienced
a migration of apparel manufacturing to lower-production-cost countries; and (2)
headcount reductions, which resulted in a reduction of 320 manufacturing
positions and 160 managerial and administrative personnel primarily in the U.S.
and the U.K. In addition, the Company recognized $1.3 of
integration/restructuring and other costs in connection with the severance
payment made to its former Chief Executive Officer. Lastly, the Company
recognized non-cash charges of $7.7 to write off the remaining net book value of
an Enterprise Resource Planning system and certain other fixed assets no longer
in use.
The following table presents the changes in accruals pertaining to the
Company's restructuring and related initiatives for the year ended December 31,
2005:
Beginning Balance Restructuring Ending Balance
January 1, 2005 Expenses Payments December 31, 2005
Severance............... $-- $ 8.5 $ (3.5) $ 5.0
Other costs ............ -- 3.2 (0.8) 2.4
--- ------ ------ -------
$-- $ 11.7 $ (4.3) $ 7.4
=== ====== ====== ======
50
In addition, during 2005, the Company recorded asset impairment charges of
$3.4 million related to the 2005 Restructuring Program.
Note 19: Common Stock Subject to Redemption
Under the July 11, 2001 Agreement (later terminated on November 17, 2003),
the Chairman had the option to sell to the Company, and the Company had the
obligation to purchase, the redeemable common shares owned by the Chairman and
those to which the Chairman became entitled through the exercise of his stock
compensation awards. All transactions under the Agreement were required to be
settled in cash. During any rolling 12-month period, the Chairman had the right
to sell up to 400,000 shares to the Company. In addition, if he did not exercise
his right to sell the full 400,000 shares in the preceding rolling 12-month
period, he had the right to sell up to 400,000 additional shares as to which he
did not exercise his option in such preceding periods. The timing of the sale
and the periods during which the Chairman had the right to redeem his common
shares were regulated by the terms of the Agreement. The purchase price for the
redeemable common shares was equal to the average of the closing prices for the
Company's common stock during the last seven trading days ending on the day
preceding the sale.
The Company did not purchase any shares from the Chairman during the period
in 2003 the Agreement had been in effect.
Note 20: Related Party Transaction
The Company leases a manufacturing facility in Sayre, Pennsylvania, owned
beneficially by the Company's Chairman, other family members and a trust. During
2004, the lease was extended through December 31, 2011, and amended to revise
certain terms, including termination provisions. The annual rental expenses
amounted $0.1 in 2005, 2004, and 2003.
51
Note 21: Condensed Quarterly Financial Data (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2005
Sales............................... $ 187.2 $ 214.5 $ 200.6 $ 206.8
Gross profit........................ 70.7 83.8 73.5 76.5
Operating income.................... 9.2 21.3 13.3 6.3
Net income (loss)................... 5.4 14.4 4.1 (0.8)
Basic earnings (loss) per share..... 0.14 0.36 0.10 (0.02)
Diluted earnings (loss) per share... 0.13 0.35 0.10 (0.02)
2004
Sales............................... $ 188.8 $ 214.0 $ 194.2 $ 207.4
Gross profit........................ 72.3 84.0 75.1 80.3
Operating income.................... 13.8 22.4 15.9 18.8
Net income.......................... 8.7 15.8 10.2 12.7
Basic earnings per share............ 0.22 0.40 0.26 0.32
Diluted earnings per share.......... 0.22 0.39 0.25 0.31
52
PAXAR CORPORATION AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2005, 2004 and 2003
(in millions)
Additions
Allowance for doubtful accounts Charged
------------------------------- Balance at to Costs
Beginning and Balance at
Description of Year Expenses Other (1) Deductions (2) End of Year
----------------------------------------------- ------- -------- --------- -------------- -----------
Year ended December 31, 2005................... $ 12.3 $ 2.1 $ 0.2 $ 3.9 $ 10.7
Year ended December 31, 2004................... 10.0 3.8 -- 1.5 12.3
Year ended December 31, 2003................... 10.2 2.1 0.9 3.2 10.0
Additions
Allowance for inventory obsolescence Charged
------------------------------------ Balance at to Costs
Beginning and Balance at
Description of Year Expenses Other (1) Deductions (2) End of Year
----------------------------------------------- ------- -------- --------- -------------- -----------
Year ended December 31, 2005................... $ 16.2 $ 4.9 $ 0.3 $ 4.3 $ 17.1
Year ended December 31, 2004................... 16.3 6.0 -- 6.1 16.2
Year ended December 31, 2003................... 11.3 6.5 0.8 2.3 16.3
Valuation allowance for deferred Additions
deferred tax assets Charge
-------------------------------- Balance at to Costs
Beginning and Balance at
Description of Year Expenses Other Deductions End of Year
----------------------------------------------- ------- -------- --------- -------------- -----------
Year ended December 31, 2005................... $ 13.9 $ 4.5 $ -- $ -- $ 18.4
Year ended December 31, 2004................... 13.8 0.1 -- -- 13.9
Year ended December 31, 2003................... 6.4 7.4 -- -- 13.8
(1) Allowance related to acquisitions.
(2) Write-offs, recoveries, currency exchange and other.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Paxar Corporation
By: /s/ ANTHONY S. COLATRELLA
-----------------------------
Anthony S. Colatrella
Vice President and Chief Financial Officer
Dated: March 9, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
By: /s/ Arthur Hershaft By: /s/ David L. Kolb
----------------------- ---------------------
Arthur Hershaft David L. Kolb
Chairman of the Board of Directors Director
Dated: March 9, 2006 Dated: March 9, 2006
By: /s/ Jack Becker By: /s/ Thomas R. Loemker
------------------- -------------------------
Jack Becker Thomas R. Loemker
Director Director
Dated: March 9, 2006 Dated: March 9, 2006
By: /s/ Leo Benatar By: /s/ James C. McGroddy
------------------- -------------------------
Leo Benatar James C. McGroddy
Director Director
Dated: March 9, 2006 Dated: March 9, 2006
By: /s/ Joyce F. Brown By: /s/ David E. McKinney
---------------------- -------------------------
Joyce F. Brown David E. McKinney
Director Director
Dated: March 9, 2006 Dated: March 9, 2006
By: /s/ Harvey L. Ganis By: /s/ James R. Painter
----------------------- ------------------------
Harvey L. Ganis James R. Painter
Director Director
Dated: March 9, 2006 Dated: March 9, 2006
By: /s/ Victor Hershaft By: /s/ Roger M. Widmann
----------------------- ------------------------
Victor Hershaft Roger M. Widmann
Director Director
Dated: March 9, 2006 Dated: March 9, 2006
By: /s/ Robert P. van der Merwe By: /s/ Anthony S. Colatrella
------------------------------- -----------------------------
Robert P. van der Merwe Anthony S. Colatrella
Director Vice President and Chief Financial
President and Chief Executive Officer Officer
(Principal Executive Officer) (Principal Financial Officer)
Dated: March 9, 2006 Dated: March 9, 2006
54