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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, 2006
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _________ to_________.
Commission File Number: 1-9493
Paxar Corporation
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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 New York Stock Exchange, Inc.
value $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 Exchange Act.
(Check one):
Large Accelerated Filer |X| Accelerated Filer |_| 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, 2006 was approximately
$782,000,000. On such date, the closing price of the registrant's Common Stock,
as quoted on the New York Stock Exchange, was $20.57.
The registrant had 41,501,999 shares of Common Stock outstanding as of
February 26, 2007.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement to be filed with the
Securities and Exchange Commission with respect to the Registrant's Annual
Meeting of Stockholders scheduled to be held on May 3, 2007, are incorporated by
reference into Part II, item 5 and Part III of this Annual Report.
TABLE OF CONTENTS
Page
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PART I
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Item 1. Business 1
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Item 1A. Risk Factors 6
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Item 1B. Unresolved Staff Comments 9
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Item 2. Properties 9
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Item 3. Legal Proceedings 10
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Item 4. Submission of Matters to a Vote of Security Holders 10
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PART II
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Item 5. Market for Registrant's Common Equity, Related Stockholder
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Matters and Issuer Purchases of Equity Securities 10
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Item 6. Selected Financial Data 12
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Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations 12
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk 25
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Item 8. Financial Statements and Supplementary Data 25
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Item 9. Changes in and Disagreements with Accountants on Accounting and
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Financial Disclosure 25
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Item 9A. Controls and Procedures 25
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Item 9B. Other Information 25
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PART III
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Item 10. Directors, Executive Officers and Corporate Governance 26
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Item 11. Executive Compensation 26
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Item 12. Security Ownership of Certain Beneficial Owners and Management
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and Related Stockholder Matters 26
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Item 13. Certain Relationships and Related Transactions, and Director
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Independence 26
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Item 14. Principal Accounting Fees and Services 26
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PART IV
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Item 15. Exhibits and Financial Statement Schedules 27
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PART I
References herein to "Paxar," "we," "us" and "our" refer to Paxar Corporation
and its subsidiaries unless the context specifically states or implies
otherwise. Amounts in the following discussion are presented in millions, except
employee, share and per share data, or unless otherwise stated.
Item 1: Business
We were incorporated in New York in 1946, and we are 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.
Our brand development solutions include offering creative design services
to apparel customers and retailers to translate our 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. Our comprehensive information services provide
customers with exceptional control, visibility and access to information
concerning apparel identification activities, regardless of
point-of-manufacture, worldwide. Our 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, supply chain and distribution management capabilities.
We operate globally, with approximately 72% of our sales outside the United
States. As of December 31, 2006, we had 103 manufacturing facilities and sales
offices located in 40 countries and employed approximately 12,100 people
worldwide. For the fiscal years covered by this filing, our operations were
organized into three geographic segments consisting of (1) operations
principally in the U.S., Canada, and 8 countries in Latin America ("Americas");
(2) operations in 18 countries in Europe, the Middle East and Africa ("EMEA");
and (3) operations in 11 countries in the Asia Pacific region ("Asia Pacific"),
with our entire array of products and services being offered for sale across
each of those geographic segments. In addition, we sell our products through
independent distributors in 31 countries where we do not sell directly to the
final customer.
On November 15, 2006, we announced a change in our operating segments
reflecting the culmination of the business realignment announced in October
2005. We believe that the retail and apparel environments increasingly require a
more global, product-oriented organization in order to remain competitive, and
therefore, our operations will be organized into two product-focused segments
consisting of 1) Global Apparel Solutions and 2) Global Supply Chain Solutions.
These changes will be effective for fiscal year 2007; the three segments
discussed in this section are presented in the way we internally managed and
monitored performance at the business group level in fiscal years 2006, 2005,
and 2004. See Note 9 - Segment Information of the Notes to Consolidated
Financial Statements for financial information regarding segment reporting.
For recent business developments and other information, you should 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
We manufacture woven, printed and heat transfer labels in our 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 that we make. We use
proprietary processes we have developed to coat, weave, dye, finish and
print the printed labels that we manufacture. Heat transfer labels are
produced using a technology that combines specially formulated inks and
adhesives in a process involving heat, pressure and dwell time. We have
developed many innovative specialty labels. Some incorporate security
features to protect in-store merchandise from theft and to protect branded
apparel from being counterfeited, while others meet industrial needs, such
as those that remain legible on uniforms through repeated industrial
washings.
We also print 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, we generally pre-print the multi-color tag and
then put 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, we manufacture or produce these tags on specialty substrates such
as plastic, translucent film, leather, and metals.
1
We also operate service bureaus around the world to provide customers
with rapid delivery of labels and tags.
Manufacturers also use our apparel systems to print, cut and batch labels
and tags in their own facilities. 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. We have 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.
We produce the components of our 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,
machine servicing and replacement parts to the customer.
Our 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, globally, on our label stock.
Manufacturers attach the labels and tags to completed garments to provide
brand and other promotional information to support point-of-sale
merchandising.
We have the following capabilities and resources that we constantly
strive to strengthen, which we believe sets us apart from our competitors:
o Extensive creative design services that are an important
value-added component of our relationship with our customers;
o Global presence enabling "source tagging" of garments by the
manufacturer wherever the garments are produced;
o The 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 meet stringent customer
specifications.
2. Bar Code ("BC") and Pricing Solutions ("PS") (collectively, "BCPS")
We manufacture and market 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.
Our 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.
Our handheld mechanical labelers print human-readable information for
retail store and distribution center price and inventory marking, as well
as promotional item marking. Additionally, our 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,
we produce the adhesive labels used in the labelers and support the
complete system with what we believe is an industry-leading service
organization.
In the rapidly emerging field of RFID, we have introduced products within
our Apparel Identification Product line that incorporate passive radio
frequency technology into tags manufactured for individual apparel item
marking, as well as labels with similar radio frequency technology for
pallet and case tracking solutions within our BCPS product line. We also
offer 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, we have invested in
manufacturing equipment that allows us 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, we believe
that our RFID tags are highly reliable.
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We believe 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, and in-store stock and logistics tracking. We plan to continue
to develop innovative RFID-enabled products as RFID becomes integral to the way
retailers, suppliers and manufacturers manage their supply chains.
Sales by Product
The following table presents sales (dollars in millions) by product:
2006 2005 2004
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Apparel Identification Products .................. $622.5 70.7% $562.4 69.5% $566.2 70.4%
Bar Code and Pricing Solutions ................... 258.3 29.3 246.7 30.5 238.2 29.6
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Total ....................................... $880.8 100.0% $809.1 100.0% $804.4 100.0%
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Customers
Most of our customers are retailers, branded apparel companies or contract
and consumer packaged goods manufacturers. Many retailers use our 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 us 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. Generally, we compete with other
suppliers for the contractors' business; therefore, reliability and service are
critically important.
No one customer accounted for more than 10% of our revenues or accounts
receivable in 2006, 2005 or 2004.
Competition
We continue to be a market leader in developing and providing innovative
products and solutions that add significant value for our customers in brand
building, information services and supply chain management. In addition, while
we strive to maintain a highly competitive cost profile, we are also fully
committed to providing our customers with excellent quality products that are
supported with exceptional service.
Increasingly, global capabilities are of critical importance. On a global
product basis, we believe that we are a market leader in fabric labels, apparel
systems and PS products and services for apparel manufacturers, retailers and
fast food establishments and that we are among the prominent suppliers of
graphic tags for apparel and tickets, tags, labels and thermal printers for bar
code applications in the retail supply chain. We compete, domestically and
internationally, with numerous small, medium, and large companies.
Sales and Marketing
We generate most of our sales from our sales employees who call directly
upon our customers. Non-exclusive manufacturers' representatives, international
and export distributors, and commission agents account for a less significant
portion of total sales. We have 135 sales people in the Americas; 148 sales
people in EMEA; and 144 sales people in Asia Pacific. Generally, our sales
people are compensated on the basis of salary plus a commission. Non-exclusive
manufacturers' representatives sell our products on a commission basis in select
markets.
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We also promote our products and services through our web site, direct mail
campaigns, publication of catalogs and brochures, participation in trade shows,
telemarketing and advertising, principally in trade journals. In addition, we
market our PS products through office-supply retailers and by a catalog, which
we believe provides a cost-effective way for us to reach smaller retailers.
Seasonality
Our business does not exhibit significant seasonality; however, sales are
typically higher in the second and fourth calendar quarters.
Sources and Availability of Raw Materials
We purchase fabrics, inks, chemicals, polyester film, plastic resins,
electronic components, adhesive-backed papers, yarns and other raw materials
from major suppliers around the world. We believe that our raw materials are in
good supply to meet our reasonably foreseeable production requirements and are
available from multiple sources. Nonetheless, shortages of raw materials could
arise in the future, which may adversely impact our ability to timely deliver
our products.
Additionally, our raw materials principally derived from petroleum are
subject to price fluctuations based on changes in petroleum prices, availability
and other factors. We purchase these materials from a number of suppliers.
Significant and sustained increases in prices for these materials could
adversely affect our earnings if selling prices for our finished products are
not adjusted or if adjustments significantly trail the increases in prices for
these materials.
Patents, Trademarks and Licenses
We rely upon trade secrets and confidentiality to protect the proprietary
nature of our technology. We also own and control numerous patents and
trademarks. We believe that our patents are significant to our operations and
our competitive position.
Backlog
Backlog is not a reliable indicator of future sales activity because more
than 80 percent of our annual sales consist of orders that we typically fill
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
We believe that continuous product innovation helps us to compete
effectively in our markets. Through our research and product development
investments, we continue to introduce new products to serve the needs of our
customers. Our research and development expenses were approximately $7.8, $7.4
and $7.1 for 2006, 2005 and 2004, respectively.
Environmental Compliance
We are 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. We have 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 Clean Air Act of 1970 (as amended in 1990)
o Resource Conservation and Recovery Act (including amendments
relating to underground tanks)
We have been named a potentially responsible party relating to
contamination that occurred at certain super-fund sites. Management, including
internal counsel, currently believes that the ultimate resolution of such
matters taken as a whole, and after considering such factors as 1) available
levels of insurance coverage, 2) our proportionate share, in certain cases, as a
named potential responsible party, and 3) the dormant nature of certain matters,
will not have a materially adverse effect upon our results of operations or
financial condition. It is possible that new information or future developments
could require us to reassess our potential exposure related to these
environmental matters.
4
Executive Officers of the Registrant
The following presents information regarding our executive officers:
Robert van der Merwe, 54, President and Chief Executive Officer and
Director since April 2005; Chairman of the Board of Directors since January
2007. Prior to that time, since 2004, he was Group President-North Atlantic
Family Care of Kimberly-Clark Corporation, a global health and hygiene
company. From 1998 to 2004 he was President, Kimberly-Clark Europe and
Group President, Kimberly-Clark Europe, Middle East & Africa since 1998.
Paul Chu, 55, President, Asia Pacific since February 2002 and Managing
Director of Asia Pacific since November 1996.
Anthony S. Colatrella, 51, Vice President and Chief Financial Officer since
July 2005. Prior to that time, he was Senior Vice President and Controller
of The Scotts Miracle Grow Company, Inc., a lawn care products company,
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, 45, President of the Americas Apparel Group since April
2006. Prior to that time, she joined Paxar as President of the North
American Apparel Group on October 18, 2005. Ms. Guerin was Senior Vice
President of Finance of the Cendant Corporation, working closely with the
Travel Content and Vehicle Services Divisions, since 2003. From 2000 to
2003 she was Chief Financial Officer of Lerner New York, a 500-store
provider of women's apparel.
Timothy M. Winston, 42, Vice President and Treasurer since December 2006.
Previously, Mr. Winston was with Coach, Inc., a manufacturer of consumer
leather products, where he held the position of Director of Treasury
Operations for the last four years. In that position, he was responsible
for cash and investment management, capital budgeting and forecasting, and
the company's trade finance program. Prior to joining Coach, he was
Financial Partner and Treasurer for Comstellar Technologies, LLC, a venture
capital fund.
James L. Martin, 60, President, Global Supply Chain Solutions since January
2007. Previously he was President, Bar Code and Pricing Solutions Group,
since March 2003; Vice President and General Manager of the Bar Code
business since February 2003; and Global Business Manager of the Pricing
Solutions business since January 2002.
Richard A. Maue, 36, Vice President and Controller since July 2005. From
June 2003 to July 2005, he was Director of Internal Audit Practice of
Protiviti, Inc. a global provider of independent auditing and risk
consulting services. Mr. Maue was Executive Vice President and Chief
Financial Officer of Andrea Electronics Corporation, a developer of
hardware and software microphone technologies from 1999 to 2003.
Robert S. Stone, 69, Vice President, General Counsel and Secretary since
September 1999.
James Wrigley, 53, Group President, Global Apparel Solutions since January
2007. He joined Paxar in 1996 as President, Paxar Europe, following which
his role expanded in 1999 to include oversight of operations in the Middle
East and Africa. Before joining Paxar, Mr. Wrigley served as International
Director of the Pepe Group.
Each of the foregoing executive officers serves at the pleasure of the Board of
Directors.
Employees
We had approximately 12,100 employees worldwide as of December 31, 2006.
Approximately 95 of our production employees 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. We have no recent history of material labor disputes.
We believe that we have good employee relations.
Financial Information About Geographic Areas
Worldwide 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 9 of the consolidated financial statements.
5
Available Information
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference room , 100 F Street, NE, 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
us) file electronically with the SEC.
We make available free of charge through our Web site (www.paxar.com) our
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 our 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.
Our most recent annual report on Form 10-K, our quarterly reports on Form
10-Q for the current fiscal year and our most recent proxy statement can be
viewed through our Web site, although in some cases these documents are not
available on our site as soon as they are available on the SEC's site. The
information on our Web site is not incorporated by reference into this report.
In addition, we will provide, upon written request and without charge,
paper or electronic copies of our 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
9 of the Consolidated Financial Statements in Part IV, Item 15 of this report.
Item 1A: Risk Factors
Many of the factors that affect our business and operations involve risk
and uncertainty. The following is a summary of the principal risks to an
investment in our securities. Additional risks and uncertainties, not presently
known to us or currently deemed material, could negatively impact our results of
operations or financial condition in the future.
We face risks associated with significant international operations.
We have operations in 40 countries, with approximately 72% of net sales
coming from operations outside the U.S. While geographic diversity helps to
reduce our exposure to risks in any one country or part of the world, it also
means that we are 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, or exchange or other
government controls.
We monitor 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.
We cannot provide assurance, however, that these monitoring activities will
succeed in offsetting any negative impact of foreign currency rate movements.
Our business is subject to the risks inherent in global manufacturing
activities.
As we engage in manufacturing on a global scale, we are subject to the
risks inherent in such activities, including, but not limited to:
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o availability of petroleum-based raw materials, which are subject
to price fluctuations, and our 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 our ability to continue to rapidly
expand manufacturing capacity in more cost-effective regions;
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 we have no control.
If we are unable to improve productivity, reduce costs and align manufacturing
operations with customers' needs and best manufacturing practices, we may not
succeed in executing our business plan.
We are committed to continuous productivity improvement and continue 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, we 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 17 to the consolidated financial statements. The 2005
Restructuring Program presents significant organizational challenges,
particularly with respect to planned rapid expansion of manufacturing capacity
at facilities in Mexico, Central America and Asia Pacific. We 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.
Our 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 savings
from implementing the program, which, in turn, would adversely affect our
profitability. In addition, our failure to continue to anticipate changes in
apparel manufacturing migration trends, and align our manufacturing capacity
accordingly while executing the 2005 Restructuring Program, could adversely
affect our ability to achieve targeted cost savings.
Significant competition in our industry could adversely affect our business.
We face vigorous competition around the world, including competition from
other large, multinational companies, as well as numerous smaller, more agile
regional companies. We face this competition in several aspects of our business,
including, but not limited to:
o the pricing of products;
o promotional activities; and
o new product introductions.
We may be unable to anticipate the timing and scale of such activities or
initiatives by competitors or to successfully counteract them, which could harm
our business. In addition, the cost of responding to such activities and
initiatives may affect our financial performance in the relevant period. Our
ability to compete also depends on whether we can attract and retain key talent,
and our ability to protect patent and trademark rights and to defend against
related challenges brought by competitors. A failure to compete effectively
could adversely affect our growth and profitability.
If we are unable to successfully develop and introduce new products, our
financial condition and results of operations could be adversely affected.
Our 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, our ability to create new products and to sustain existing products is
affected by whether we can:
o develop and fund technological innovations, such as those related
to our RFID initiatives;
o receive and maintain necessary patent and trademark protection;
or
o successfully anticipate customer needs and preferences.
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The failure to develop and launch successful new products could hinder the
growth of our business. Also, any delay in the development or launch of a new
product could result in our not being the first to market, which could
compromise our competitive position.
Acquisitions may not be successful or we may not be able to identify new
acquisition opportunities.
Our ability to grow is based, in part, on identifying acquisition
opportunities. Failure to find businesses that meet our acquisition criteria
could adversely impact our business, financial condition and future growth.
Acquisitions have inherent risks, including, but not limited to, whether we 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 our results.
Our operating results and financial condition may fluctuate.
Our 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 our control, such as the elimination of
import quotas on apparel textiles. If our 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 our common stock may decline. Fluctuations in our 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 we spend to promote our products;
o development of new competitive products by others;
o the geographic distribution of our sales;
o our responses to price competition;
o market acceptance of our products;
o changes in quotas on apparel textile imports from China;
o changes in apparel manufacturing migration trends;
o general industry conditions, in particular, changes in consumer
demand for retail and apparel products; and
o unanticipated changes in foreign exchange rates;
o unanticipated events which disrupt global trade and/or
transportation.
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 our
operating results as an indicator of future performance.
If our internal controls over financial reporting do not comply with the
requirements of the Sarbanes-Oxley Act, our business and stock price could be
adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the
effectiveness of our internal controls over financial reporting as of the end of
each year, and to include a management report assessing the effectiveness of our
internal controls over financial reporting in all annual reports. Section 404
also requires our independent registered public accounting firm to attest to,
and to report on, management's assessment of our internal controls over
financial reporting.
Our management, including our Chief Executive Officer and Chief Financial
Officer, do not expect that our internal controls over financial reporting will
prevent all errors and fraud. A control system, no 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 our 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 us have been, or will be detected. These inherent limitations include
8
the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of a 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 we can not provide assurance that any design will succeed
in achieving our stated goals under all potential future conditions. Over time,
our 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 we have determined that our internal controls over financial
reporting were effective as of December 31, 2006, we cannot provide assurance
that we or our independent registered accounting firm will not identify a
material weakness in our internal controls in the future. A material weakness in
our internal controls over financial reporting would require us to evaluate our
internal controls as ineffective. If our internal controls over financial
reporting are not considered adequate, we may experience a loss of public
confidence, which could have an adverse effect on our business and stock price.
The risks described above are not the only risks we face. There can be no
assurance that we have correctly identified and appropriately assessed all
factors affecting our 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 us or that we currently believe
to be immaterial also may adversely impact our business. Should any risks or
uncertainties develop into actual events, these developments could have material
adverse effects on our business, financial condition, and results of operations.
We assume no obligation (and specifically disclaim 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
None.
Item 2: Properties
We have 103 facilities globally in 40 countries. These facilities, which
are used principally for manufacturing, warehousing and sales operations,
totaled 3.9 million square feet at December 31, 2006. Of these facilities, 19
are owned and 84 are leased. Our headquarters is located in a 30,000 square foot
leased facility in White Plains, New York. On a world-wide geographic segment
basis, we have major manufacturing facilities located as follows:
Americas- Australia, California, Canada, Colombia, Dominican Republic,
Honduras, Mexico, Minnesota, New York, North Carolina, Ohio,
Pennsylvania and South Carolina.
EMEA- England, France, Germany, Italy, Morocco, Norway, Pakistan,
Romania, Spain, Turkey and United Arab Emirates.
Asia Pacific- Bangladesh, China, Hong Kong, Indonesia, India, Singapore,
Sri Lanka, Thailand and Vietnam.
In addition to the above facilities, we have other facilities and sales
offices located throughout the world. We believe that our facilities are
adequate to maintain our existing business.
9
Item 3: Legal Proceedings
On September 14, 2006, we settled a patent infringement lawsuit against
Zebra Technologies Corporation ("Zebra") in the U.S. District Court for the
Southern District of Ohio. Our suit alleged violation of eight of our patents
involving more than 50 Zebra products. The settlement, net of legal and other
costs, resulted in a gain of approximately $39.4 (with an after-tax impact of
$24.3 on net income, or $.58 per diluted share) for the year ended December 31,
2006. In connection with the settlement, approximately $1.7 of previously
expensed and paid legal fees were reimbursed to us by counsel, and classified as
a reduction in selling, general and administrative expenses for the year ended
December 31, 2006.
In the ordinary course of business, we and our subsidiaries are involved in
certain disputes and litigation, none of which will, in the opinion of
management, have a material adverse effect on our financial condition or results
of operations.
Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2006.
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
Our common stock is traded on the New York Stock Exchange using the symbol
"PXR." The following table sets forth the 2006 and 2005 high and low sales
prices of our common stock as reported on the New York Stock Exchange for the
periods indicated.
Sales Prices
High Low
Calendar Year 2006
First Quarter....................... $ 20.86 $ 18.71
Second Quarter...................... 22.67 19.55
Third Quarter....................... 20.80 17.00
Fourth Quarter...................... 23.45 19.55
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
As of February 26, 2007, there were approximately 1,310 record holders of
our common stock.
We have never paid any cash dividends on our common stock and do not plan
to pay cash dividends on our common stock in the near term. We are permitted
however, to pay up to $50.0 in cash dividends per year under our current credit
facility and up to $100.0 in cash dividends over the facility's five-year term.
Information regarding our equity compensation plans, including both
stockholder approved plans and non-stockholder approved plans, is incorporated
herein by reference to our Definitive Proxy Statement with respect to our Annual
Meeting of Shareholders scheduled to be held on May 3, 2007. In addition, refer
to Note 11 in the Notes to Consolidated Financial Statements.
Performance Graph
The following graph compares on a cumulative basis the yearly percentage
change, assuming dividend reinvestment, over the last five fiscal years, in the
total shareholder return on our common stock compared with (a) the total return
on the Russell 2000 Index and (b) the total return on the Standard & Poor's
SmallCap 600 Index. The Russell 2000 is a small capitalization index. As of
January 31, 2007, the average market capitalization of companies included in the
Russell 2000 is approximately $1.2 billion. The S&P 600 is a
capitalization-weighted index of 600 domestic stocks chosen for market size,
liquidity and industry representation, initiated in 1994. As of December 29,
2006, the average market value of the 10 largest companies in the S&P 600 was
$3.2 billion, and for the 10 smallest, the average market value was
approximately $96.0 million. We are one of the constituent companies of the S&P
600.
10
The following graph assumes that $100 had been invested in each of Paxar
Corporation, the Russell 2000 and the S&P 600 on December 31, 2001.
Paxar Corporation S&P Small Cap 600 Russell 2000
----------------- ----------------- ------------
December 31, 2001 $100 $100 $100
December 31, 2002 104 85 80
December 31, 2003 94 118 117
December 31, 2004 156 145 139
December 31, 2005 138 156 145
December 31, 2006 162 180 171
The immediately preceding section entitled, "Performance Graph," will not
be deemed to be soliciting material or to be filed with the SEC or subject to
SEC Regulation 14A or to the liabilities of Section 18 of the Securities
Exchange Act of 1934, and is not to be incorporated by reference into any other
filing that we make with the SEC.
Issuer Purchases of Equity Securities
None.
11
Item 6: Selected Financial Data
The following selected consolidated financial data as of and for the
five-year period ended December 31, 2006, has been derived from our Consolidated
Financial Statements. This data should be read in conjunction with the
Consolidated Financial Statements and related Notes for the year ended December
31, 2006, and Management's Discussion and Analysis of Financial Condition and
Results of Operations.
All amounts are stated in millions, except per share data.
2006 (c) 2005 2004 2003 2002
-------- ------- ------- ------- -------
OPERATING RESULTS
Sales ......................................................... $ 880.8 $ 809.1 $ 804.4 $ 712.0 $ 667.8
Operating income (a)........................................... 88.9 50.1 70.9 30.9 59.5
Net income (b)................................................. 56.8 23.0 47.4 14.6 40.3
Basic earnings per share (b)................................... 1.39 0.57 1.20 0.37 1.02
Diluted earnings per share (b)................................. 1.36 0.56 1.17 0.37 1.00
FINANCIAL CONDITION
Total assets................................................... $ 771.0 $ 727.6 $ 773.7 $ 714.9 $ 639.6
Total debt..................................................... 44.7 100.7 167.0 194.6 166.7
Shareholders' equity........................................... 544.5 454.9 440.6 377.3 337.6
Total debt as a percent of shareholders' equityl............... 7.6% 18.1% 27.5% 34.0% 33.1%
----------
(a) Includes gain on lawsuit settlement of $39.4 in 2006 and
integration/restructuring and other costs of $10.0, $15.1 and $20.4 in
2006, 2005 and 2003, respectively.
(b) Includes the effect of items cited in note (a) and 1) a $5.0 impairment
charge in 2006 related to a long-term investment and 2) $7.4 of debt
prepayment costs, and $4.8 of taxes on repatriation of foreign earnings in
2005.
(c) For 2006, net income and net income per share includes the impact of SFAS
123(R) stock-based compensation charges, which was not present in prior
years. Refer to Note 11 in our Notes to Consolidated Financial Statements.
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"
as set forth in Part I, Item 1A 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.
The following discussion (presented in millions, except employee, share and
per share data) should be read in conjunction with our Consolidated Financial
Statements and Notes thereto. All references for years relate to fiscal years
ended December 31.
12
Overview
We seek to deliver growth through a concentrated emphasis on executing our
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, we believe we are well positioned to compete successfully as a
provider of identification solutions to the retail and apparel industry,
worldwide. The funds needed to support this growth are generated, in part,
through corporate-wide initiatives to lower costs and increase effective asset
utilization.
For the fiscal years covered by this filing, our operations were organized
into three geographic segments consisting of the following:
(1) Operations principally in the U.S., Canada, and 8 countries in Latin
America ("Americas");
(2) Operations in 18 countries in Europe, the Middle East and Africa
("EMEA"); and
(3) Operations in 11 countries in the Asia Pacific region ("Asia Pacific")
On November 15, 2006, we announced a change in our operating segments in
response to market trends and the culmination of the business realignment
announced in October 2005. We believe that the retail and apparel environments
increasingly require a more global, product-oriented organization in order to
remain competitive, and therefore, our operations will be organized into two
product-focused segments consisting of 1) Global Apparel Solutions and 2) Global
Supply Chain Solutions. These changes will be effective for fiscal year 2007;
the three segments discussed in this section are presented in the way we
internally managed and monitored performance at the business group level in
fiscal years 2006, 2005, and 2004.
Our results of operations for 2006, 2005 and 2004, in dollars and as a
percent of sales, are presented below:
2006 2005 2004
---------------- --------------- ----------------
Sales $880.8 100.0% $809.1 100.0% $804.4 100.0%
Cost of sales 556.9 63.2 504.6 62.4 492.7 61.3
---------------- --------------- ----------------
Gross profit 323.9 36.8 304.5 37.6 311.7 38.7
Selling, general and administrative
expenses 264.4 30.0 239.3 29.5 240.8 29.9
Gain on lawsuit settlement 39.4 4.4 -- -- -- --
Integration/restructuring and other costs 10.0 1.1 15.1 1.9 -- --
---------------- --------------- ----------------
Operating income 88.9 10.1 50.1 6.2 70.9 8.8
Other income (loss), net (3.5) (0.4) 2.1 0.2 1.6 0.2
Interest expense, net 3.8 0.4 9.3 1.1 10.7 1.3
Prepayment charges - debt retirement -- -- 7.4 0.9 -- --
---------------- --------------- ----------------
Total interest expense 3.8 0.4 16.7 2.0 10.7 1.3
---------------- --------------- ----------------
Income before taxes 81.6 9.3 35.5 4.4 61.8 7.7
Taxes on income 24.8 2.8 12.5 1.5 14.4 1.8
---------------- --------------- ----------------
Net income $56.8 6.5% $23.0 2.9% $47.4 5.9%
================ =============== ================
For the year ended December 31, 2006, our sales increased $71.7, or 8.9%,
to $880.8, compared to $809.1 in 2005. The increase was attributable to $58.2 of
organic sales growth and $14.0 related to acquisitions, slightly offset by a
$0.5 decrease due to changes in foreign exchange rates. The organic sales
increase was almost entirely realized in our operations in Asia Pacific, where
2006 results benefited from the continuing migration of apparel manufacturing to
the region, primarily as a result of the elimination of quotas during the first
quarter of 2005 on apparel textile imports from China. For the year ended
December 31, 2005, our sales increased $4.7, or 0.6%, to $809.1 compared to
$804.4 in 2004. The increase consisted 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
pricing pressure and a generally weaker economic and retail environment, when
compared to 2004. In addition, substantial apparel product fulfillment migrated
from the U.S. to the Asia Pacific region throughout the year, requiring us to
manage through considerable uncertainty in our supply chain as apparel
manufacturers sought to reduce labor costs and align their manufacturing
capacity to low-labor-cost countries.
13
In order to adapt to the changing global apparel industry, in October 2005,
we announced that we would undertake realignment initiatives to restructure
production capacity utilization, particularly in response to the migration of
apparel production outside of the United States (the "2005 Restructuring
Program"). 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, we anticipate that the operating environment will remain
challenging. However, the savings and benefits from the 2005 Restructuring
Program along with our 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, we currently expect to realize approximately
$15.0 in cost savings during 2007 and achieve an annual savings rate of $20.0 to
$25.0 by the end of 2007. These savings relate principally to salaries and
related expenses, and will be reflected largely as a reduction in cost of goods
sold and, to a lesser extent, as a reduction in selling, general and
administrative expenses; we do not currently expect to redirect a significant
amount of these savings to spending in other areas or other income statement
line items.
Operating income was $88.9 in 2006, compared to $50.1 in 2005, and $70.9 in
2004. As a percent of sales, operating income was 10.1% in 2006 compared to 6.2%
in 2005 and 8.8% in 2004. The operating results for 2006 included a $39.4 gain
on lawsuit settlement and integration/restructuring and other costs of $10.0.
The operating results for 2005 included integration/restructuring and other
costs of $15.1.
RESULTS OF OPERATIONS
Sales
The following table presents sales by geographic operating segment:
2006 2005 2004
--------------- --------------- ---------------
Americas........................ $ 332.7 37.8% $ 331.0 40.9% $ 355.2 44.2%
EMEA............................ 216.1 24.5 209.5 25.9 219.9 27.3
Asia Pacific.................... 332.0 37.7 268.6 33.2 229.3 28.5
------- ------ ------- ------ ------- ------
Total......................... $ 880.8 100.0% $ 809.1 100.0% $ 804.4 100.0%
======= ====== ======= ====== ======= ======
The Americas segment sales increased $1.7, or 0.5%, to $332.7 in 2006,
compared to $331.0 in 2005. The increase was attributable to the impact of the
EMCO acquisition of $1.1 and a favorable impact of changes in foreign exchange
rates of $0.8, partially offset by lower organic sales of $0.2, largely driven
by a decline in apparel identification product sales. The ongoing migration of
U.S. apparel manufacturing to the Asia Pacific region where U.S. retailers and
apparel manufacturers have realized labor savings and operating performance
efficiencies continues to impact apparel sales volumes across the Americas
segment. Offsetting the impact of the migration of apparel product sales, our
bar code products generated modest organic growth during the year ended December
31, 2006. In 2005, Americas segment 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 the favorable impact of changes in
foreign exchange rates of $1.2, and acquisition related growth 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 sought 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.
EMEA segment sales increased $6.6, or 3.2%, to $216.1 in 2006, compared to
$209.5 in 2005. The increase was attributable to organic sales growth of $3.6
and the impact of the Adhipress acquisition of $3.9, partially offset by an
unfavorable impact of foreign exchange rates of $0.9. The growth in organic
sales was due primarily to higher RFID and heat transfer product sales, as well
as general growth across the developing business units in Eastern Europe. These
increases were partially offset by the continuing migration of apparel product
sales from our legacy Western European operations to the Asia Pacific region. In
2005, EMEA segment sales 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.
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, we experienced continued sales migration to the
Asia Pacific region as apparel manufacturers sought to reduce labor costs and
align manufacturing capacity closer to customers.
Asia Pacific segment sales increased $63.4, or 23.6%, to $332.0 in 2006,
compared to $268.6 in 2005. The increase was attributable to organic sales
growth of $54.8, and a $9.0 impact relating to the acquisitions of 1) the
balance of our India joint venture in June 2005, and 2) the Adhipress
acquisition in 2006. Partially offsetting these items was the unfavorable impact
14
of changes in foreign exchange rates of $0.4. Our operations in this region have
benefited from aggressive capacity expansion, investment in new technologies and
continued migration of apparel manufacturing from the U.S., U.K. and Western
Europe to minimize labor costs and maximize operating performance efficiencies.
Asia Pacific segment 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 our India
joint venture which contributed $7.1. Our operations in this region benefited in
2005 from the migration of apparel manufacturing from the U.S., U.K. and Western
Europe to minimize labor costs and maximize operating performance efficiencies.
Gross Profit
Gross profit, as a percent of sales, was 36.8% in 2006, compared to 37.6%
in 2005, and 38.7% in 2004. The lower gross margin in 2006 when compared to 2005
was primarily the result of:
o higher facilities and capacity expansion infrastructure costs in
emerging markets,
o incremental manufacturing costs and production inefficiencies related
to the initial ramp-up of production at specific emerging market
locations as we complete the build-out of capacity in connection with
the 2005 Restructuring Program,
o higher material and freight costs,
o inventory charges principally related to our apparel business,
o specific pricing actions designed to increase our sales to certain
major customers, and
o unfavorable product mix, including increased sales of RFID products
and electronic article surveillance ("EAS") products, which are
generating lower margins during the initial phases of program
expansion.
The lower gross margin in 2005 as compared to 2004 was primarily the result
of the under-absorption of fixed factory overhead costs in legacy U.S., U.K. and
Western European operations as production migrated to Asia Pacific, as well as,
to a lesser extent, inventory charges and certain scrap, rework and machine
maintenance expense, principally related to our domestic and EMEA apparel
business. Our consolidation in 2003 of certain of our production 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 our 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, we announced that we would undertake restructuring
activities related to realigning production capacity utilization in our domestic
and Western European locations (refer to discussion below,
"Integration/Restructuring and Other Costs").
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses were $264.4 in 2006, compared to $239.3 in 2005 and $240.8 in
2004. As a percent of sales, SG&A expenses were 30.0% in 2006, compared to 29.5%
in 2005 and 29.9% in 2004. The increase in the ratio of SG&A to sales in 2006
when compared to 2005 was due primarily to:
o continued infrastructure expansion in existing markets in Asia Pacific
and Latin America to support our global realignment initiatives,
o infrastructure costs associated with geographic expansion into new
markets such as Thailand and Pakistan,
o higher compensation and employee benefit costs, including the impact
of higher incentives, management bonuses and the adoption of FAS
123(R), and
o foreign exchange losses.
Partially offsetting the above increases was $1.7 in cost reimbursements
for previously expensed and paid legal fees associated with the settlement of
the patent lawsuit with Zebra Technologies.
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.
In response to the continuing migration of sales and production from the
U.S., U.K and EMEA to the Latin America and Asia Pacific regions, management is
continuing to evaluate cost reduction opportunities and take appropriate steps
to reduce duplicative costs in our legacy U.S., U.K and Western European
businesses while properly leveraging our SG&A structure in emerging market
locations.
15
Gain on Lawsuit Settlement
On September 14, 2006, we settled a patent infringement lawsuit against
Zebra Technologies Corporation ("Zebra") in the U.S. District Court for the
Southern District of Ohio. Our suit alleged violation of eight of our patents
involving more than 50 Zebra products. The settlement resulted in a gain of
approximately $39.4 (with a $24.3 impact on net income, or $0.58 per diluted
share) for the year ended December 31, 2006.
Integration/Restructuring and Other Costs
In October 2005, we announced that we would undertake realignment
initiatives to restructure production capacity utilization, particularly in
response to the continued migration of apparel production outside of the United
States (the "2005 Restructuring Program"). The plan is substantially focused on
transferring existing apparel identification manufacturing capacity from our
U.S. operations primarily to facilities in Mexico, Central America and Asia
Pacific. To a lesser extent, we are repositioning a portion of our EMEA
manufacturing and customer service activities to lower cost facilities in
Eastern Europe. In addition, the plan includes the realignment of our design and
customer service organization in response to the aforementioned production
migration activities. The 2005 Restructuring Program is expected to be
substantially completed during 2007. The 2005 Restructuring Program contemplates
significant headcount reductions in our U.S. locations and, to a lesser extent,
headcount reductions in Western Europe. We expect to incur total pre-tax,
non-recurring charges, upon completion, in the range of $25 to $33, including
approximately $5 to $8 of non-cash charges. During the years ended December 31,
2006 and 2005, we recognized charges of $10.0 and $8.7, respectively, in
connection with the 2005 Restructuring Program. These charges were related to
program management services, severance and retention programs, asset impairment
charges and other facility closure costs. In the aggregate, we have recognized
charges of approximately $18.7 in connection with the 2005 Restructuring
Program, of which, approximately $15.5 represents cash costs.
In April 2005, we announced initiatives to improve margins and lower costs
in our EMEA region, primarily relating to workforce reductions and
transportation costs. The initiative was undertaken in light of 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 the
aggregate, during 2005, we recorded pre-tax charges of $4.8 in connection with
these initiatives, which were completed at the end of 2005.
In January 2005, we announced the consolidation of one of our U.S. woven
label manufacturing facilities as part of our continuing effort to improve
operating efficiency and costs. In 2005, we recorded pre-tax charges of $1.6
related to this activity which was completed at the end of 2005.
We did not incur any integration/restructuring charges in 2004.
Operating Income
Operating income was $88.9 in 2006, compared to $50.1 in 2005, and $70.9 in
2004. As a percent of sales, operating income was 10.1% in 2006, compared to
6.2% in 2005 and 8.8% in 2004. The operating results for 2006 included the
aforementioned $39.4 gain on lawsuit settlement and integration/restructuring
and other costs of $10.0. The operating results for 2005 included
integration/restructuring and other costs of $15.1. On a reportable segment
basis, exclusive of corporate expenses, amortization of other intangibles and
the gain on lawsuit settlement, operating income, as a percent of sales, was as
follows:
2006 2005 2004
---- ---- ----
Americas................................. 9.6% 6.5% 11.6%
EMEA..................................... 1.0 2.1 7.6
Asia Pacific............................. 14.7 16.8 16.8
Americas' operating income in 2006, as a percent of sales, increased to
9.6% compared to 6.5% in 2005. This increase primarily resulted from reductions
and productivity gains in the Americas' domestic fixed cost base, largely as a
result of the 2005 Restructuring Program, as well as the consolidation of our
woven label manufacturing facilities announced in January 2005 (see
Integration/Restructuring and Other Costs, above). In addition, the Americas
segment included integration/restructuring and other costs, as a percent of
sales, of 0.6% for the year-ended December 31, 2006.
16
The decrease in Americas' 2005 operating income, as a percent of sales
compared to 2004, primarily resulted from a combination of the continued
migration of sales to the Asia Pacific region and the corresponding
under-absorption of our fixed cost base, as well as inventory charges 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, as a percentage of sales, of 2.6% for
2005.
EMEA's operating income in 2006, as a percent of sales, decreased to 1.0%
compared to 2.1% in 2005. This decline primarily resulted from:
o unfavorable product mix, including increased sales of RFID products
and EAS (electronic article surveillance) products, which are
generating relatively low margins during the initial phases of program
expansion,
o certain production inefficiencies in the region,
o foreign exchange losses,
o certain raw material costs increases, and
o incremental costs associated with expansion in Eastern Europe to
support migration of apparel sales from the U.K. and Western Europe.
In addition, the EMEA segment included integration/restructuring and other
costs, as a percentage of sales, of 2.3% for 2006.
The decline in EMEA's 2005 operating income, as a percent of sales compared
to 2004, primarily resulted from a combination of the downturn in EMEA's sales
volume and related under-absorption of our fixed cost base in legacy
manufacturing sites during 2005, 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 2006, as a percent of sales, decreased
to 14.7% compared to 16.8% in 2005. This decline was primarily attributable to:
o higher fixed costs associated with capacity expansion in certain
locations for which such costs have not been fully absorbed,
o higher material, freight, and temporary labor costs to address
specific customer service issues, and
o specific pricing actions designed to increase customer penetration and
share.
Other Income (Loss), net
Other income (loss), net was ($3.5), $2.1 and $1.6 in 2006, 2005 and 2004,
respectively. The loss in 2006 was primarily attributable to a $5.0 impairment
charge recognized during the third quarter of 2006 in connection with an
other-than-temporary decline in fair value of our investment in International
Imaging Materials, Inc. ("IIMAK") (see Note 2 in Notes to Consolidated Financial
Statements). 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.
Total Interest Expense
Total interest expense, net of interest income on invested cash, was $3.8
in 2006, compared to $16.7 in 2005 and $10.7 in 2004. The decline in 2006 was
primarily attributable to the refinancing initiatives completed during the
fourth quarter of 2005, which included $7.4 of charges related to the prepayment
of $150 of 6.74% Senior Notes in December 2005. The net impact of the
refinancing initiatives and the use of cash generated from operations to reduce
global borrowings, reduced our debt position from $100.7 as of December 31, 2005
to $44.7 as of December 31, 2006. The increase in total interest expense, net of
interest income in 2005 when compared to 2004 was attributable to the
aforementioned $7.4 of charges related to the prepayment of $150.0 of 6.74%
Senior Notes, 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 tax rate is based on management's estimates of the geographic
mix of projected annual pre-tax income and, to a lesser extent, state and local
taxes. In addition, the effective tax rate is adjusted for certain discrete
events that may arise from time to time. The effective tax rate was 30.4% in
2006, compared to 35.3% in 2005 and 23.3% in 2004. In 2006, the effective rate
was adversely impacted by:
17
o the gain from the patent lawsuit settlement with Zebra, for which
taxes were provided at a blended U.S. (state and federal) tax rate of
39.5%,
o losses in jurisdictions for which no tax benefit was recognized,
o the $5.0 impairment charge recorded during the third quarter of 2006
(see Note 2 of Notes to Consolidated Financial Statements) for which
no tax benefit was recognized, and
o the adoption of SFAS No. 123R, which impacted the rate by
approximately 1%. SFAS No. 123R requires the expensing of stock
compensation awards, however for certain awards, including qualified
incentive stock options, no tax benefit is recognized.
The adverse impacts described above were partially offset by 1) favorable
adjustments recorded in the third quarter of 2006 of approximately $0.9
attributable to income tax reserves no longer required, as well as a reduction
in the valuation allowance related to certain tax carryforwards of approximately
$1.0, and 2) favorable adjustments recorded in the fourth quarter of 2006 of
approximately $1.2 attributable to a tax rebate realized in our Sri Lankan
operation, and $1.3 related to the realization of state and local income tax
credit carryforwards.
The increase in the 2005 rate when compared to 2004 was primarily due to
the $4.8 charge recorded in conjunction with our decision to repatriate foreign
earnings pursuant to the American Jobs Creation Act of 2004 Act and, to a lesser
extent, certain restructuring charges in the Company's EMEA region for which no
tax benefit was provided.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents summary cash flow information for the years
indicated:
2006 2005 2004
----------- ---------- ----------
Net cash provided by operating activities $85.7 $71.3 $85.5
Net cash used in investing activities (48.5) (45.8) (36.5)
Net cash used in financing activities (46.5) (63.4) (23.3)
----------- ---------- ----------
Total change in cash and cash
equivalents (a) $(9.3) $(37.9) $25.7
=========== ========== ==========
(a) Before the effect of exchange rate changes on cash flows.
Overview
Cash provided by operating activities has been our primary source of funds
to finance operating needs and growth opportunities. In November 2005, we
entered into a five-year, $150 multi-currency Revolving Credit Agreement (the
"Credit Agreement") with a group of five domestic and three international banks.
We may increase the credit facility up to a maximum $250, subject to providing
the participating banks adequate advance notice and securing their approval.
Management believes that we will continue to generate sufficient cash from our
operating activities for the foreseeable future, supplemented by availability
under the Credit Agreement, to fund our working capital needs, strengthen our
balance sheet and support our growth strategy of expanding our geographic reach
and product offerings.
Operating Activities
Net cash provided by operating activities was $85.7, $71.3, and $85.5 in
2006, 2005 and 2004, respectively. The year-ended 2006 includes $24.3 of net
income attributable to the patent lawsuit settlement (see Note 15 to Notes to
Consolidated Financial Statements). Working capital and the corresponding
current ratio were $182.7 and 2.2:1 and $174.2 and 2.2:1 at December 31, 2006
and 2005, respectively. The increase in working capital resulted primarily from
substantial increases in accounts receivable and inventories, which were
partially offset by increases in accounts payable and accrued liabilities. The
increase in inventory was due to strong sales and order activity anticipated in
2007 and a build-up of inventories to support execution of our realignment plan.
The increase in accounts receivable was due primarily to higher levels of sales
experienced during particularly strong months of November and December when
compared to the prior year.
In connection with the 2005 Restructuring Program, we expect to incur total
pre-tax, non-recurring charges, upon completion, in the range of $25.0 to $33.0,
which includes approximately $5.0 to $8.0 of non-cash charges. During 2006 and
2005, we recognized charges of $10.0 and $8.7, respectively, in connection with
the 2005 Restructuring Program. In the aggregate, since October 2005, we have
18
recorded charges of approximately $18.7 in connection with the 2005
Restructuring Program, of which, approximately $15.5 represents cash costs. We
currently expect to realize approximately $15.0 in cost savings during 2007.
These savings relate principally to salaries and related expenses, and will be
reflected as a reduction in cost of goods sold as well as a reduction in
selling, general and administrative expenses; we currently do not expect to
redirect a significant amount of those savings to spending in other areas or
other income statement line items.
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, our 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. We 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, 2006, 2005 and 2004, we incurred $44.7,
$32.9, and $38.7, respectively, of capital expenditures to acquire production
machinery, expand capacity, install system and equipment upgrades and continue
with the growth and expansion of our operations in the emerging markets of Asia
Pacific, EMEA and Latin America. Capital expenditures are primarily funded by
cash provided by operating activities. In 2006, we acquired the business and
manufacturing assets of Alternate Labels and Printing (Proprietary) Limited, a
manufacturer of printed and woven labels, and graphic tags, for a cash payment
of $1.3. In connection with this acquisition, we recognized goodwill of $0.9
based on our preliminary allocation of purchase price to the fair value of the
net assets acquired. In addition, during 2006, we acquired the business assets
of Adhipress S.A., a supplier of price tickets and merchandising tags to French
hypermarkets, for a cash payment of $3.3. In connection with the Adhipress
acquisition, we recognized goodwill and intangible assets of $3.5 and $0.8,
respectively, based on our preliminary allocations of purchase price to the fair
value of the net assets acquired.
During 2005, we purchased the remaining 50% interest in our joint venture
in India for $10.5 and the business and manufacturing assets of EMCO labels for
$2.8. In connection with these acquisitions, we recognized goodwill of $7.0 and
$1.9, respectively, based on our allocations of purchase prices to the fair
value of net assets acquired.
During 2004, we received proceeds of $1.0 from the sale of our 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, 2006, 2005 and 2004,
respectively, are presented below:
2006 2005 2004
-------- -------- --------
Due to banks $1.3 $3.0 $3.9
Current maturities of long-term debt 8.0 -- --
Long-term debt 35.4 97.7 163.1
-------- -------- --------
Total debt 44.7 100.7 167.0
Shareholders' equity 544.5 454.9 440.6
-------- -------- --------
Total capital $589.2 $555.6 $607.6
======== ======== ========
Total debt as a percent of total capital 7.6% 18.1% 27.5%
======== ======== ========
Management believes that the borrowings available under the our Credit
Agreement provide sufficient liquidity to supplement our operating cash flow.
For the years ended December 31, 2006, 2005 and 2004, the net repayments in our
outstanding debt were $56.4, $73.5 and $27.5, respectively. During 2006, we used
the net proceeds received from the patent lawsuit settlement to reduce
borrowings under the Credit Agreement. In 2005, we 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.
We have 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, 2006, 2005 and 2004, we received proceeds of $9.9,
$16.1 and $4.2, respectively, from common stock issued under our employee stock
option and stock purchase plans.
19
We have a stock repurchase plan with an authorization from our Board of
Directors to use up to $150.0 for the repurchase of our shares. The shares may
be purchased from time to time at prevailing prices in the open-market or by
block purchases. We repurchased approximately 343,000 shares in 2005 for an
aggregate price of $6.0, or $17.47 per share. We did not repurchase any shares
in 2006 or 2004. Since the inception of the stock repurchase program, we have
repurchased 12,636,000 of our shares for an aggregate price of $128.0, an
average of $10.13 per share. We immediately retired the repurchased shares. As
of December 31, 2006, we had $22.0 available under our $150.0 stock repurchase
program authorization. We may continue to repurchase our shares under the
existing authorization, depending on market conditions and cash availability. We
believe that funds from future operating cash flows and funds available under
our Credit Agreement are adequate to allow us to continue to repurchase our
shares under the stock repurchase plan, should we choose to do so.
Financing Arrangements
Our Senior Notes had an interest rate of 6.74%, payable semi-annually. These
notes were repaid in December 2005.
In November 2005, we replaced our existing three-year $50 revolving credit
facility with a $150 Credit Agreement with a group of five domestic and three
international banks. Under the Credit Agreement, we pay 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 the prime rate, negotiated rates, rates referenced to the London Interbank
Offered Rate ("LIBOR") or Euro LIBOR, at our option, with applicable margins
varying in accordance with our attainment of specified debt to EBITDA thresholds
and are guaranteed by certain of our domestic subsidiaries. We may increase the
credit facility up to a maximum of $250, subject to providing the participating
banks adequate advance notice and securing their approval. At December 31, 2006,
the interest rate on outstanding borrowings under this Credit Agreement had a
weighted average interest rate of 5.45%.
We 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. Our 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. We are in compliance with all debt covenants. We disclose
the details of the compliance calculation to our banks and certain other lending
institutions in a timely manner. Under the Credit Agreement, we cannot pay in
excess of $50.0 in cash dividends during any 12-month period, and cannot pay in
excess of $100.0 in cash dividends over our five-year term.
Average borrowings under the Credit Agreement during 2006 were $79.8 at an
average interest rate of 5.09%. Average borrowings under the revolving credit
facility in 2005 and 2004 were $10.0, and $3.8 at average interest rates of
5.03%, and 2.10%, respectively. The borrowings outstanding under the Credit
Agreement at December 31, 2006 and December 31, 2005 were $30.1 and $84.1,
respectively.
Facilities financed by economic development revenue bonds have been
accounted for as plant and equipment, and the related bonds are recorded as
debt. In connection with the 2005 Restructuring Program, one of the facilities
financed by these bonds will be closed in 2007 and, accordingly, the amount
related to that facility is classified as a current maturity of long term debt.
The balance of the bonds is recorded as long-term debt. The variable rate bonds
for the years ended December 31, 2006 and 2005 had weighted average interest
rates of 3.46% and 2.5%, respectively. The rate on these bonds was 3.97% at
December 31, 2006.
Net interest expense was $3.8 in 2006, $9.3 in 2005 (excluding the impact
of the $7.4 of prepayment charges), and $10.7 in 2004.
Off Balance Sheet Arrangements
We have 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 our 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, we are exposed to foreign currency
exchange rate and interest rate risks that could impact our results of
operations.
20
At times, we reduce our market risk exposures by creating offsetting
positions through the use of derivative financial instruments. All of our
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. We do not use derivative financial
instruments for trading purposes.
We manage 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 we entered into amounted to $112.0,
$114.8 and $153.9 in 2006, 2005 and 2004, respectively.
The following table summarizes, as of December 31, 2006, our forward
foreign exchange contracts by currency. All of our forward foreign exchange
contracts mature within a year. Contract amounts are representative of the
expected payments to be made under these instruments:
Contract Amounts (in thousands) Fair Value
------------------------------- --------------
Receive Pay (US$ 000's)
------------- ------------- --------------
Contract to receive US$/pay Euro ("EUR")...................... US$ 752 EUR 982 $ 11
Contracts to receive US$/pay British pounds ("GBP")........... US$ 6,132 GBP 3,130 $ (11)
Contract to receive GBP/pay US$............................... GBP 1,944 US$ 3,714 $ 76
A 10% change in interest rates affecting our floating rate debt instruments
would have an immaterial impact on our 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 our floating rate debt instruments.
We sell our products worldwide, and a substantial portion of our net sales,
cost of sales and operating expenses are denominated in foreign currencies. This
exposes us to risks associated with changes in foreign currency exchange rates
that can adversely impact revenues, net income and cash flow. In addition, we
are potentially subject to concentrations of credit risk, principally in
accounts receivable. We perform ongoing credit evaluations of our customers and
generally do not require collateral. Our major customers are retailers, branded
apparel companies and contract manufacturers that have historically paid their
balances with us.
There were no significant changes in our exposure to market risk in the
past three years.
Aggregate Contractual Obligations
Our aggregate contractual obligations are as follows:
Payments due by period
-----------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
----------------------------------- -------- --------- ---------- ---------- ---------
Long-term debt obligations ........ $ 44.7 $ 9.3 $ -- $ 30.3 $ 5.1
Operating lease obligations ....... 45.0 12.1 15.6 9.8 7.5
Capital lease obligations ......... 0.7 0.4 0.3 -- --
Severance obligations ............. 8.2 4.8 -- -- 3.4
Purchase obligations .............. 8.5 8.4 0.1 -- --
Post-employment benefit obligations 12.3 1.1 2.0 2.0 7.2
-------- --------- ---------- ---------- ---------
Total ........................... $ 119.4 $ 36.1 $ 18.0 $ 42.1 $ 23.2
======== ========= ========== ========== =========
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management has identified the following policies and estimates as critical
to our business operations and the understanding of our 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 our
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.
21
Revenue Recognition
We recognize revenue from product sales at the time of shipment and include
freight billed to customers. In addition, in accordance with Staff Accounting
Bulletin ("SAB") No. 104, "Revenue Recognition, revised and updated," we
recognize revenues from fixed price service contracts on a pro-rata basis over
the life of the contract, as they are generally performed evenly over the
contract period. Revenues derived from other service contracts are recognized
when the services are performed. SAB No. 104 requires that four basic criteria
be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services have been rendered;
(3) the fee is fixed or determinable; and (4) collectibility is reasonably
assured. Should changes in conditions cause management to determine that these
criteria are not met for certain future transactions, revenue recognized for a
reporting period could be adversely affected.
Sales Returns and Allowances
Management must make estimates of potential future product returns, billing
adjustments and allowances related to current period product revenues. In
establishing a provision for sales returns and allowances, management relies
principally on our 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 our products and (3) acceptance of our products in the marketplace
when evaluating the adequacy of our provision for sales returns and allowances.
Historically, we have not experienced a significant change in our product return
rates resulting from these factors. For the years ended December 31, 2006, 2005
and 2004, the provision for sales returns and allowances accounted for as a
reduction to gross sales, was not material.
Allowance for Doubtful Accounts
Management makes judgments, based on our established aging policy,
historical experience and future expectations, as to the collectibility of our
accounts receivable, and establishes an allowance for doubtful accounts. The
allowance for doubtful accounts is used to reduce gross trade receivables to our
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. Our accounts
receivable balances were $146.4, net of allowances of $12.3, and $128.9, net of
allowances of $10.7, at December 31, 2006 and 2005, 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 $9.7 and $9.1 as
of December 31, 2006 and 2005, respectively. The value of all other inventories,
which are determined using the first-in, first-out method, was $109.8 and $90.1
as of December 31, 2006 and 2005, respectively.
On an ongoing basis, we evaluate the composition of our inventories and the
adequacy of our 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 our products, and current
sales activities for this type of inventory.
Goodwill
We evaluate goodwill for impairment annually, using a fair value approach,
at the reporting unit level. In addition, we evaluate goodwill for impairment if
a significant event occurs or circumstances change, which could result in the
carrying value of a reporting unit exceeding our fair value. Factors we consider
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 our use of the
acquired assets or the strategy for our overall business; (3) significant
negative industry or economic trends; (4) significant decline in our stock price
for a sustained period; and (5) our market capitalization relative to net book
value. We assess the existence of impairment by comparing the implied fair
values of our reporting units with their respective carrying amounts, including
goodwill. During the fourth quarter of 2006, we completed our annual goodwill
impairment assessment and, based on the results, we determined that no
impairment of goodwill existed at October 31, 2006, 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 our
results of operations or financial condition.
22
Impairment of Long-Lived Assets
We periodically review our long-lived assets for impairment by comparing
the carrying values of the assets with their estimated future undiscounted cash
flows. If it is determined that an impairment loss has occurred, the loss is
recognized during that period. The impairment loss is calculated as the
difference between asset carrying values and fair value as determined by prices
of similar items and other valuation techniques (discounted cash flow analysis),
giving consideration to recent operating performance and pricing trends. Asset
impairment analysis related to certain fixed assets in connection with our
restructuring initiatives requires management's best estimate of net realizable
value, which includes an assessment of asset life and pricing trends impacting
those assets and, where appropriate, quoted market prices. Management's analysis
is, in part, sensitive to our estimates of salvage value for certain assets as
well as the continuing relevance of quoted market prices of assets and other
factors of fair value. Changes in management's estimates could impact the amount
of our impairment charges, as well as depreciation expense recorded on certain
assets. Impairment charges related to long-lived assets approximated $1.0, $4.7,
and $2.3, respectively, in 2006, 2005 and 2004.
Investments
We regularly evaluate the carrying value of our investments. When assessing
investment securities for other-than-temporary declines in value, we consider
such factors as, among other things, the financial condition of the investee,
competitive factors, the outlook for the overall industry in which the investee
operates and new products that the investee may have forthcoming that will
improve its operating results. When the carrying value of an investment exceeds
the fair value and the decline in fair value is deemed to be
other-than-temporary, we reduce the carrying value of the investment to fair
value. During 2006, we recorded $5.0 of an other-than-temporary reduction in
fair value of our investment in International Imaging Materials, Inc. ("IIMAK").
Should the fair value of our investment continue to decline in future periods,
we may be required to record additional charges if the decline is determined to
be other-than-temporary.
Accounting for Income Taxes
As part of the process of preparing the consolidated financial statements,
we are required to estimate the income taxes in each jurisdiction in which we
operate. 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. We must then assess the likelihood that the deferred tax assets
will be recovered, and to the extent that we believe that recovery is not more
than likely, we establish a valuation allowance. If a valuation allowance is
established or increased during any period, we record this amount as an expense
within the tax provision in the consolidated statement of income. Significant
judgment is required in determining our provision for income taxes, deferred tax
assets and liabilities, and any valuation allowance recognized against net
deferred tax assets. Valuation allowances are based on our estimates of the
taxable income in the jurisdictions in which we operate and the period over
which the deferred tax assets may 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 we change our consideration on permanently reinvesting the
undistributed earnings of our non-U.S. subsidiaries, circumstances change in
future periods, or there is a change in accounting principles generally accepted
in the United States, we may need to establish an additional income tax
provision for the U.S. and other taxes arising from repatriation, which could
materially impact our 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, our 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. We recorded tax expense in 2005 of $4.8 related to these
dividends received. The related earnings were repatriated during the fourth
quarter of 2005. With the subsequent filing of our 2005 U.S. federal corporate
income tax return, it was determined that foreign tax credits associated with
the repatriation exceeded original estimates and a tax benefit of $1.0 was
recorded in the third quarter of 2006.
Foreign Currency Translation
As of December 31, 2006 and 2005, accumulated other comprehensive income
primarily consisted of cumulative foreign currency translation adjustments. The
net assets of our foreign operations are translated into U.S dollars using the
exchange rates at each balance sheet date. Results of operations are translated
23
using the average exchange rate prevailing throughout the period. The U.S.
dollar results that arise from such translations are included in cumulative
currency translation adjustments in accumulated other comprehensive income. At
December 31, 2006 and December 31, 2005, the cumulative foreign translation
adjustment was $24.3 and $10.0, respectively. No incremental U.S income taxes
are provided for these translation adjustments since we consider undistributed
earnings of foreign subsidiaries to be permanently invested. Gains and losses
resulting from foreign currency transactions are included in net income. Foreign
currency transactions resulted in losses of $1.3, $0.1 and 0.2, respectively,
for the years ended December 31, 2006, 2005 and 2004.
Stock-Based Compensation
Effective January 1, 2006, we adopted Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" (SFAS 123R), which replaces SFAS 123,
"Accounting for Stock-Based Compensation", by eliminating the choice to account
for employee stock options under Accounting Principle Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). SFAS 123R requires that
new, modified and unvested share-based awards to employees, such as stock
options and restricted stock, be recognized in the financial statements based on
the estimated fair value of such awards at date of grant and recognized as
compensation expense over the vesting period. The fair value of each option
award is estimated using the Black-Scholes option pricing model taking into
account certain key assumptions. The primary assumptions which we considered
when determining the fair value of each option award included:
o the expected term of awards granted,
o the expected volatility of our stock price,
o the risk-free interest rate applied, and
o an estimate for expected forfeitures.
The expected term of awards granted is based upon the historical exercise
patterns of the participants in our plans, and expected volatility is based on
the historical volatility of our stock, commensurate with the expected term of
the respective awards. The risk-free rate for the expected term of the awards is
based on the U.S. Treasury yield curve in effect at the time of grant. In
addition, we estimate forfeitures when recognizing compensation expense and
adjust estimated forfeitures over the requisite service period to the extent
actual forfeitures differ, or are expected to differ, from such estimates.
Recently Issued Accounting Pronouncements
Effective January 1, 2006, we adopted SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4." SFAS No. 151 amends the guidance in
Accounting Research Bulletin ("ARB") No. 43, Chapter 4, "Inventory Pricing" and
requires that the items such as idle facility expense, freight, handling costs
and wasted material (spoilage) be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal" under Paragraph 5
of ARB No. 43, Chapter 4. In addition, SFAS No. 151 requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of SFAS No. 151 are
effective for inventory costs incurred during fiscal years beginning January 1,
2006. Our adoption of SFAS No. 151 did not have a material impact on our results
of operations or financial condition.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No.109" (FIN
48), which prescribes accounting for and disclosure of uncertainty in tax
positions. This interpretation defines the criteria that must be met for the
benefits of a tax position to be recognized in the financial statements and the
measurement of tax benefits recognized. The provisions of FIN 48 are effective
as of the beginning of our 2007 fiscal year, with the cumulative effect of the
change in accounting principle recognized as an adjustment to opening retained
earnings. We are currently evaluating the impact of adopting FIN 48 on the
consolidated financial statements.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair
value, establishes a framework for measuring fair value in accordance with GAAP,
and expands disclosures about fair value measurements. The standard applies
whenever other standards require, or permit, assets or liabilities to be
measured at fair value. This statement is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. Early
adoption is permitted. We are currently evaluating the requirements of SFAS 157
and have not yet determined the impact on the consolidated financial statements.
In September 2006, the FASB issued SFAS 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statement No. 87, 88, 106, and 132(R)." SFAS No. 158 requires recognition of the
funded status of a benefit plan in the statement of financial position. SFAS No.
158 also requires the recognition in other comprehensive income of certain gains
and losses that arise during the period but are deferred under pension
accounting rules, as well as modifies the timing of reporting, and adds certain
disclosures. SFAS No. 158 provides recognition and disclosure elements to be
effective as of the first fiscal year ending after December 15, 2006 and
measurement elements to be effective for the fiscal years ending after December
15, 2008. The adoption of SFAS No. 158 did not have a material impact on our
results of operations or financial condition.
24
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. We employed
the Internal Control - Integrated Framework established by the Committee of
Sponsoring Organizations of the Treadway Commission to evaluate the
effectiveness of our internal control over financial reporting. Our management
has assessed our internal control over financial reporting to be effective as of
December 31, 2006. Additionally, Ernst & Young LLP, the independent registered
public accounting firm has issued an attestation report on management's
assessment of our internal control over financial reporting as of December 31,
2006.
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.
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. We, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, conducted an assessment of the effectiveness of the design
and operation of our 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"). Our Chief
Executive Officer and Chief Financial Officer concluded as of the Evaluation
Date that our disclosure controls and procedures were effective such that the
information relating to our required to be disclosed in our 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 our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting. We, under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, are 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). Our
management conducted an assessment of our 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, 2006, our internal
control over financial reporting is effective. Additionally, Ernst & Young LLP,
the independent registered public accounting firm that audited our 2006, 2005
and 2004 consolidated financial statements, has issued an attestation report on
management's assessment of our internal control over financial reporting as of
December 31, 2006.
There have not been any changes in our internal control over financial
reporting identified in connection with the assessment that occurred during the
fourth quarter of 2006, that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
Item 9B: Other Information
Not applicable.
25
PART III
Item 10: Directors, Executive Officers and Corporate Governance
Except as set forth below, incorporated herein by reference to our
Definitive Proxy Statement with respect to our Annual Meeting of Shareholders
scheduled to be held on May 3, 2007.
Code of Business Ethics
We have a Code of Business Ethics that applies to our employees, including
our Chief Executive Officer, Chief Financial Officer and other persons
performing similar management and finance functions, globally. We make our Code
of Business Ethics available free of charge through our Web site
(www.paxar.com). If we make changes to our Code of Business Ethics for any of
our senior officers, we expect to provide the public with notice of any such
change or waiver by publishing a description of such event on our Web site or by
other appropriate means as required by applicable rules of the SEC.
Item 11: Executive Compensation
Incorporated herein by reference to our Definitive Proxy Statement with
respect to our Annual Meeting of Shareholders scheduled to be held on May 3,
2007.
Item 12: Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Incorporated herein by reference to our Definitive Proxy Statement with
respect to our Annual Meeting of Shareholders scheduled to be held on May 3,
2007.
Item 13: Certain Relationships and Related Transactions, and Director
Independence
Incorporated herein by reference to our Definitive Proxy Statement with
respect to our Annual Meeting of Shareholders scheduled to be held on May 3,
2007.
Item 14: Principal Accountant Fees and Services
Incorporated herein by reference to our Definitive Proxy Statement with
respect to our Annual Meeting of Shareholders scheduled to be held on May 3,
2007.
26
PART IV
Item 15: Exhibits and Financial Statement Schedules
(a) Documents
(1) FINANCIAL STATEMENTS --
Management's Responsibility for Financial Reporting................ 29
Management's Report on Internal Control over Financial Reporting... 29
Reports of Independent Registered Public Accounting Firm...........30 and 31
Consolidated Statements of Income for the years ended December 31,
2006, 2005 and 2004............................................... 32
Consolidated Balance Sheets as of December 31, 2006 and 2005....... 33
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the years ended December 31, 2006, 2005 and 2004........ 34
Consolidated Statements of Cash Flows for the years ended December
31, 2006, 2005 and 2004........................................... 35
Notes to Consolidated Financial Statements......................... 36 to 53
(2) FINANCIAL STATEMENT SCHEDULE --
Schedule II -- Valuation and Qualifying Accounts................... 54
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 Amended and Restated 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)
10.15 Settlement Agreement, dated September 14, 2006, by and between
Paxar Corporation and Zebra Technologies Corporation. (Q)
10.16 Form of Stock Option Award Agreement under the Paxar 2000
Long-Term Performance and Incentive Plan.*
10.17 Performance Share Agreement for 2006, Under the Paxar 2006
Incentive Compensation Plan. (R)
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.
27
(A) Incorporated herein by reference from Exhibits to Registrant's Form
8-K dated December 28, 2006.
(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.
(S) 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.
(Q) Incorporated herein by reference from Exhibits to Registrant's Form
8-K dated September 14, 2006.
(R) Incorporated herein by reference from Exhibits to Registrant's Form
8-K dated May 4, 2006.
* Filed with this report
28
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 us and our 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. Our 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 our 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 our 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, 2006, our internal control over financial
reporting is effective.
Management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2006, 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
Chairman of the Board of Directors
President and Chief Executive Officer
/s/ Anthony S. Colatrella
-------------------------
Anthony S. Colatrella
Vice President and Chief
Financial Officer
February 27, 2007
29
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, 2006 and 2005,
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, 2006. 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, 2006 and 2005, and the consolidated results of their operations and
their cash flows for the each of the three years in the period ended December
31, 2006, 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, 2006, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 123(R) (revised 2004)
"Share-Based Payment" effective January 1, 2006.
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, 2006,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 27, 2007 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
February 27, 2007
30
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, 2006, 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, 2006, 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, 2006, 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, 2006 and 2005, 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, 2006 of the Company, and our report dated February 27, 2007 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
---------------------
New York, New York
February 27, 2007
31
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2006, 2005 and 2004
(in millions, except per share amounts)
2006 2005 2004
--------------------------------
Sales $ 880.8 $ 809.1 $ 804.4
Cost of sales 556.9 504.6 492.7
--------- ------- -------
Gross profit 323.9 304.5 311.7
Selling, general and administrative expenses 264.4 239.3 240.8
Gain on lawsuit settlement 39.4 -- --
Integration/restructuring and other costs 10.0 15.1 --
--------- ------- -------
Operating income 88.9 50.1 70.9
Other income (loss), net (3.5) 2.1 1.6
Interest expense, net 3.8 9.3 10.7
Prepayment charges - debt retirement -- 7.4 --
--------- ------- -------
Total interest expense 3.8 16.7 10.7
--------- ------- -------
Income before taxes 81.6 35.5 61.8
Taxes on income 24.8 12.5 14.4
--------- ------- -------
Net income $ 56.8 $ 23.0 $ 47.4
========= ======= =======
Basic earnings per share $ 1.39 $ 0.57 $ 1.20
========= ======= =======
Diluted earnings per share $ 1.36 $ 0.56 $ 1.17
========= ======= =======
Weighted average shares outstanding:
Basic 41.0 40.3 39.6
Diluted 41.8 41.3 40.6
The accompanying notes are an integral part of the financial statements.
32
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
December 31, December 31,
2006 2005
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 40.2 $ 48.2
Accounts receivable, net of allowances of $12.3 and $10.7 in
2006 and 2005, respectively 146.4 128.9
Inventories 119.5 99.2
Deferred income taxes 12.7 19.3
Other current assets 21.4 18.2
------- ------
Total current assets 340.2 313.8
------- ------
Property, plant and equipment, net 179.7 166.1
Goodwill and other intangible, net 234.1 224.3
Other assets 17.0 23.4
------- ------
Total assets $771.0 $727.6
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to banks $ 1.3 $ 3.0
Current maturities of long-term debt 8.0 --
Accounts payable and accrued liabilities 134.8 118.8
Accrued taxes on income 13.4 17.8
------- ------
Total current liabilities 157.5 139.6
------- ------
Long-term debt 35.4 97.7
Deferred income taxes 12.1 15.9
Other liabilities 21.5 19.5
Commitments and contingent liabilities (Note 16)
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, 41,352,432 and 40,630,951 shares issued and
outstanding in 2006 and 2005, respectively 4.1 4.1
Paid-in capital 45.0 26.2
Retained earnings 472.7 415.9
Accumulated other comprehensive income 22.7 8.7
------- ------
Total shareholders' equity 544.5 454.9
------- ------
Total liabilities and shareholders' equity $771.0 $727.6
======= ======
The accompanying notes are an integral part of the financial statements.
33
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For the years ended December 31, 2006, 2005 and 2004
(in millions)
Accumulated
Common Stock Other
---------------- Paid-In Treasury Retained Comprehensive Comprehensive
Shares Amount Capital Stock Earnings Income (Loss) Income
-------- ------- -------- --------- --------- ------------- -------------
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 4.4 -- -- --
-------- ------- -------- --------- --------- --------
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,
including the tax benefit of stock
option exercises of $0.6 1.3 0.1 16.6 -- -- --
Purchase of common stock -- -- -- (6.0) -- --
Retirement of treasury stock (0.3) -- (6.0) 6.0 -- --
Stock compensation -- -- 0.9 -- -- --
-------- ------- -------- --------- --------- --------
Balance, December 31, 2005 40.6 4.1 26.2 -- 415.9 8.7
Comprehensive income:
Net income -- -- -- -- 56.8 -- $ 56.8
Other comprehensive income/(loss):
Translation adjustments -- -- -- -- -- 14.3 14.3
Post-employment benefit obligation
adjustments, net of taxes -- -- -- -- -- (0.3) (0.3)
--------
Comprehensive income -- -- -- -- -- -- $ 70.8
========
Shares issued -- various plans,
including the tax benefit of stock option
exercises of $2.8 0.8 -- 12.7 -- -- --
Stock compensation -- -- 6.1 -- -- --
-------- ------- -------- --------- --------- --------
Balance, December 31, 2006 41.4 $ 4.1 $ 45.0 $ -- $ 472.7 $ 22.7
======== ======= ======== ========= ========= ========
The accompanying notes are an integral part of the financial statements.
34
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2006, 2005 and 2004
(in millions)
2006 2005 2004
-------- -------- --------
OPERATING ACTIVITIES
Net income $ 56.8 $ 23.0 $ 47.4
Adjustments to reconcile net income to net
cash provided by
operating activities:
Depreciation and amortization 34.6 32.7 32.4
Stock-based compensation 6.1 0.9 --
Prepayment charges - debt retirement -- 7.4 --
Deferred income taxes 2.6 (10.2) 6.7
Impairment of investment 5.0 -- --
Gain on sale of property and equipment,
net (0.4) (0.2) (0.6)
Write-off of property and equipment 1.0 4.7 2.3
Changes in assets and liabilities, net of
businesses acquired:
Accounts receivable (15.9) 6.0 (6.7)
Inventories (19.9) 4.2 (9.3)
Other current assets (2.8) (0.2) (2.2)
Accounts payable and accrued liabilities 13.0 0.3 13.2
Accrued taxes on income (1.7) 6.5 (0.6)
Other, net 7.3 (3.8) 2.9
-------- -------- --------
Net cash provided by operating activities 85.7 71.3 85.5
-------- -------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (44.7) (32.9) (38.7)
Acquisitions, net of cash acquired (4.6) (13.8) (0.7)
Proceeds from sale of property and equipment 0.8 0.6 1.6
Other, net -- 0.3 1.3
-------- -------- --------
Net cash used in investing activities (48.5) (45.8) (36.5)
-------- -------- --------
FINANCING ACTIVITIES
Net (decrease)/increase in short-term debt 6.2 (1.1) (0.3)
Additions to long-term debt -- 84.5 57.8
Repayments of long-term debt (62.6) (156.9) (85.0)
Purchase of common stock -- (6.0) --
Proceeds from common stock issued under
employee stock option
and stock purchase plans 9.9 16.1 4.2
-------- -------- --------
Net cash used in financing activities (46.5) (63.4) (23.3)
-------- -------- --------
Effect of exchange rate changes on cash
flows 1.3 (5.9) 1.9
-------- -------- --------
(Decrease)/increase in cash and cash
equivalents (8.0) (43.8) 27.6
Cash and cash equivalents at beginning of
year 48.2 92.0 64.4
-------- -------- --------
Cash and cash equivalents at end of year $ 40.2 $ 48.2 $ 92.0
======== ======== ========
The accompanying notes are an integral part of the financial statements.
35
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 72% of its sales
outside the United States. For the years ended December 31, 2006, 2005 and 2004,
the Company's operations were organized into three geographic segments
consisting of (1) operations principally in the U.S., Canada, and 8 countries in
Latin America ("Americas"); (2) operations in 18 countries in Europe, the Middle
East and Africa ("EMEA"); and (3) operations in 11 countries in the Asia Pacific
region ("Asia Pacific"). The Company's entire array of products and services
were offered for sale across each of those geographic segments. As of December
31, 2006, the Company had 103 manufacturing facilities and sales offices located
in 40 countries and employed approximately 12,100 people worldwide. In addition,
the Company sells its products through independent distributors in 31 countries
in which it does not sell directly to the final customer.
On November 15, 2006, the Company announced a change in its operating
segments reflecting the culmination of the business realignment announced in
October 2005. The Company's operations will be organized into two
product-focused segments consisting of 1) Global Apparel Solutions and 2) Global
Supply Chain Solutions. These changes will be effective for fiscal year 2007;
the three segments discussed in Note 9 are presented in the way we internally
managed and monitored performance at the business group level in fiscal years
2006, 2005, and 2004.
Note 2: 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 $146.4, net of allowances of $12.3, and $128.9, net of allowances of $10.7,
at December 31, 2006 and 2005, respectively.
36
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 $9.7 and $9.1 as
of December 31, 2006 and 2005, respectively. The value of all other inventories
determined using the first-in, first-out method was $109.8 and $90.1 as of
December 31, 2006 and 2005, respectively.
On an ongoing basis, the Company evaluates the composition of its
inventories and the adequacy of its allowance for slow-turning and obsolete
products. Market value of aged inventory is determined based on historical sales
trends, current market conditions, changes in customer demand 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.
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
$112.0, $114.8 and $153.9 in 2006, 2005 and 2004, respectively.
The fair value of outstanding forward foreign exchange contracts at
December 31, 2006 and 2005, for delivery of various currencies at various future
dates and the changes in fair value recognized in income in 2006, 2005 and 2004,
were not material. The notional value of outstanding forward foreign exchange
contracts at December 31, 2006 and 2005, was $10.9 and $7.5, 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"
("SFAS 141"), and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 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.
37
Impairment of Long-Lived Assets
The Company periodically reviews its long-lived assets for impairment by
comparing the carrying values of the assets with their estimated future
undiscounted cash flows. If it is determined that an impairment loss has
occurred, the loss is recognized during that period. The impairment loss is
calculated as the difference between asset carrying values and fair value as
determined by prices of similar items and other valuation techniques (discounted
cash flow analysis), giving consideration to recent operating performance and
pricing trends. Asset impairment analysis related to certain fixed assets in
connection with the Company's restructuring initiatives requires management's
best estimate of net realizable value, which includes an assessment of asset
life and pricing trends impacting those assets and, where appropriate, quoted
market prices. Management's analysis is, in part, sensitive to its estimates of
salvage value for certain assets as well as the continuing relevance of quoted
market prices of assets and other factors of fair value. Changes in management's
estimates could impact the amount of the Company's impairment charges, as well
as depreciation expense recorded on certain assets. Impairment charges related
to long-lived assets approximated $1.0, $4.7 and $2.3, respectively, in 2006,
2005 and 2004.
Investments
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; where market value is readily determinable, they are accounted for in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Impairment losses on the Company's investments are charged
to income for other-than-temporary declines in fair value. During 2006, the
Company recognized a $5.0 impairment charge related to an other-than-temporary
decline in fair value of its common stock investment in International Imaging
Materials, Inc. ("IIMAK"). The impairment charge was recorded in other income
(loss), net, on the accompanying consolidated statements of income. Investments,
which are included in other assets in the accompanying consolidated balance
sheets, approximated $14.5 and $18.3, as of December 31, 2006 and December 31,
2005, respectively, all of which represent the Company's remaining investment in
IIMAK.
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 7).
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment
and includes freight billed to customers. In addition, in accordance with Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition, revised and updated,"
the Company recognizes revenues from fixed price service contracts on a pro-rata
basis over the life of the contract as they are generally performed evenly over
the contract period. Revenues derived from other service contracts are
recognized when the services are performed.
SAB No. 104 requires that four basic criteria be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the fee is fixed or determinable;
and (4) collectibility is reasonably assured. 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, 2006, 2005 and 2004, the provision for sales
returns and allowances accounted for as a reduction to gross sales was not
material.
38
Research and Development
Research and development costs are expensed as incurred. The Company's
research and development expenses were approximately $7.8, $7.4 and $7.1 for
2006, 2005 and 2004, 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 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. With the subsequent filing of the Company's
2005 U.S. federal corporate income tax return, it was determined that foreign
tax credits associated with the repatriation exceeded original estimates and a
tax benefit of $1.0 was recorded in the third quarter of 2006.
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.
Foreign Currency Translation
As of December 31, 2006 and 2005, accumulated other comprehensive income
primarily consisted of cumulative foreign currency translation adjustments. The
net assets of the Company's foreign operations are translated into U.S dollars
using the exchange rates at each balance sheet date. Results of operations are
translated using the average exchange rate prevailing throughout the period. The
U.S. dollar results that arise from such translations are included in cumulative
currency translation adjustments in accumulated other comprehensive income. At
December 31, 2006 and December 31, 2005, the cumulative foreign translation
adjustment was $24.3 and $10.0, respectively. No incremental U.S income taxes
are provided for these translation adjustments since the Company considers
undistributed earnings of foreign subsidiaries to be permanently invested. Gains
and losses resulting from foreign currency transactions are included in net
income. Foreign currency transactions resulted in losses of $1.3, $0.1 and $0.2,
respectively, for the years ended December 31, 2006, 2005 and 2004.
39
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
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123R, "Share-Based Payment" ("SFAS 123R"), which
replaces SFAS 123, "Accounting for Stock-Based Compensation", by eliminating the
choice to account for employee stock options under Accounting Principle Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). SFAS 123R
requires that new, modified and unvested share-based awards to employees, such
as stock options and restricted stock, be recognized in the financial statements
based on the estimated fair value of such awards at date of grant and recognized
as compensation expense over the vesting period. The fair value of each option
award is estimated using the Black-Scholes option pricing model taking into
account certain key assumptions. The primary assumptions that the Company
considered when determining the fair value of each option award included 1) the
expected term of awards granted, 2) the expected volatility of the Company's
stock price, 3) the risk-free interest rate applied and 4) an estimate for
expected forfeitures. The expected term of awards granted is based upon the
historical exercise patterns of the participants in the Company's plans, and
expected volatility is based on the historical volatility of the Company's
stock, commensurate with the expected term of the respective awards. The
risk-free rate for the expected term of the awards is based on the U.S. Treasury
yield curve in effect at the time of grant. In addition, the Company estimates
forfeitures when recognizing compensation expense and will adjust estimated
forfeitures over the requisite service period to the extent actual forfeitures
differ, or are expected to differ, from such estimates.
Pro Forma Information Under SFAS 123 for Periods Prior to 2006
Prior to January 1, 2006, employee stock options were accounted for under
the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25. Compensation expense was generally not recorded in the financial
statements. For the years ended December 31, 2005 and 2004, had the Company
accounted for all employee stock-based compensation based on the estimated grant
date fair values, as defined by SFAS 123, the Company's net income and earnings
per share would have been adjusted to the following pro forma amounts:
December 31, December 31,
2005 2004
--------------- --------------
Net income, as reported $23.0 $47.4
Add: Stock-based employee compensation expense included in the
determination of net income as reported, net of related tax effects 0.6 0.1
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)
--------------- --------------
Pro forma net income $20.6 $43.7
=============== ==============
Earnings per share:
Basic - as reported $0.57 $1.20
Basic - pro forma $0.51 $1.10
Diluted - as reported $0.56 $1.17
Diluted - pro forma $0.50 $1.08
Recent Accounting Pronouncements
Effective January 1, 2006, the Company adopted SFAS No. 151, "Inventory
Costs - an amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the
guidance in Accounting Research Bulletin ("ARB") No. 43, Chapter 4, "Inventory
Pricing" and requires that the items such as idle facility expense, freight,
handling costs and wasted material (spoilage) be recognized as current-period
charges regardless of whether they meet the criterion of "so abnormal" under
Paragraph 5 of ARB No. 43, Chapter 4. In addition, SFAS 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 151 are
effective for inventory costs incurred during fiscal years beginning January 1,
2006. The Company's adoption of SFAS 151 did not have a material impact on the
Company's results of operations or financial condition.
40
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No.109" ("FIN
48"), which prescribes accounting for and disclosure of uncertainty in tax
positions. This interpretation defines the criteria that must be met for the
benefits of a tax position to be recognized in the financial statements and the
measurement of tax benefits recognized. The provisions of FIN 48 are effective
as of the beginning of the Company's 2007 fiscal year, with the cumulative
effect of the change in accounting principle recognized as an adjustment to
opening retained earnings. The Company is currently evaluating the impact of
adopting FIN 48 on the consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with GAAP, and expands disclosures about fair value
measurements. The standard applies whenever other standards require, or permit,
assets or liabilities to be measured at fair value. This statement is effective
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. Early adoption is permitted. We are currently evaluating the
requirements of SFAS 157 and have not yet determined the impact on the
consolidated financial statements.
In September 2006, the FASB issued SFAS 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statement No. 87, 88, 106, and 132(R)" ("SFAS 158"). SFAS 158 requires
recognition of the funded status of a benefit plan in the statement of financial
position. SFAS 158 also requires the recognition in other comprehensive income
of certain gains and losses that arise during the period but are deferred under
pension accounting rules, as well as modifies the timing of reporting, and adds
certain disclosures. SFAS 158 provides recognition and disclosure elements to be
effective as of the first fiscal year ending after December 15, 2006 and
measurement elements to be effective for the fiscal years ending after December
15, 2008. The adoption of SFAS 158 did not have a material impact on the
Company's results of operations or financial condition.
Note 3: Inventories
The components of inventories are as follows:
At December 31, 2006 2005
--------------- ------- -------
Raw materials $64.6 $49.2
Work-in-process 9.1 9.3
Finished goods 64.2 57.8
------- -------
137.9 116.3
Allowance for obsolescence (18.4) (17.1)
------- -------
$119.5 $99.2
======= =======
If all inventories were reported on a first-in, first-out basis,
inventories would be approximately $2.2 and $2.1 higher at December 31, 2006 and
2005, respectively.
41
Note 4: Property, Plant and Equipment
A summary of property, plant and equipment is as follows:
At December 31, 2006 2005
--------------- ------- -------
Machinery and equipment $344.3 $313.0
Building and leasehold improvements 70.7 65.9
Land 6.0 5.3
------- -------
421.0 384.2
Accumulated depreciation (241.3) (218.1)
-------- -------
$179.7 $166.1
======== =======
Years
Estimated useful lives:
Buildings.................................. 10 to 50
Building and leasehold improvements........ 1 to 50
Machinery and equipment.................... 1 to 25
Depreciation expense was $34.1 in 2006, $32.4 in 2005 and $32.1 in 2004.
Note 5: Goodwill and Other Intangibles
In accordance with SFAS No. 142, the Company completed its annual goodwill
impairment assessment during the fourth quarter of 2006, 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, 2006, 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, 2006, 2005 and 2004 are as follows:
Americas EMEA Asia Pacific Total
-------- ------ ------------ --------
Balance, January 1, 2004 $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 7.0 10.0
Translation adjustments -- (5.9) -- (5.9)
-------- ------ ------------ --------
Balance, December 31, 2005 122.4 73.8 27.7 223.9
Acquisitions -- 4.4 -- 4.4
Translation adjustments -- 5.1 -- 5.1
-------- ------ ------------ --------
Balance, December 31, 2006 $122.4 $83.3 $27.7 $233.4
======== ====== ============ ========
On December 29, 2006, the Company acquired the business and manufacturing
assets of Alternate Labels and Printing Limited, a manufacturer of printed,
woven labels and graphics tags, for a cash payment of $1.3. In connection with
the acquisition, the Company recognized goodwill of $0.9 based on the
preliminary allocation of purchase price to the fair value of the net assets
acquired.
On March 16, 2006, the Company acquired the business and assets of
Adhipress S.A. ("Adhipress"), a supplier of price tickets and merchandising tags
for $3.3. Additional cash purchase consideration of up to $0.9 will be due if
Adhipress achieves certain financial performance targets over a two-year period
commencing April 1, 2006. In connection with this acquisition, the Company
recognized goodwill of $3.5, and other intangibles of $0.8 based on its
allocation of the purchase price to the acquired assets and liabilities. The
consolidated statements of earnings reflect the results of operations for
Adhipress since the effective date of purchase.
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, during 2005, the Company
acquired the remaining 50% interest of a joint venture in India for $10.5
42
("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 $7.0
based on its allocation of purchase price to the fair value of net assets
acquired.
The consolidated statements of earnings reflect the results of operation
for each of Adhipress and Alternate Labels and Printing since their respective
effective date of purchase. The pro forma impact of these acquisitions was not
significant.
The Company's other intangible is as follows:
At December 31, 2006 2005
--------------- ------ ------
Noncompete agreement $1.7 $1.7
Customer Relationships 0.8 -
------ ------
2.5 1.7
Accumulated amortization (1.8) (1.3)
------ ------
$0.7 $0.4
====== ======
Note 6: Accounts Payable and Accrued Liabilities
A summary of accounts payable and accrued liabilities is as follows:
At December 31, 2006 2005
--------------- ------- -------
Accounts payable $62.4 $50.3
Accrued payroll costs 20.9 19.6
Accrued restructuring costs 5.8 7.4
Trade programs 7.2 4.7
Advance service contracts 3.7 4.4
Accrued commissions 2.6 2.5
Accrued professional fees 3.3 3.1
Accrued interest 0.2 0.2
Other accrued liabilities 28.7 26.6
------- -------
$134.8 $118.8
======= =======
Note 7: Long-Term Debt
A summary of long-term debt is as follows:
At December 31, 2006 2005
--------------- ------- -------
Revolving credit facility $30.1 $84.1
Economic Development Revenue Bonds 13.0 13.0
Other 0.3 0.6
------- -------
Total debt 43.4 97.7
Less: current maturities of long-term debt (8.0) -
------- -------
$35.4 $97.7
======= =======
Maturities of long-term debt are as follows:
Years ending December 31,
Years ending December 31,
------------------------------
2007 $ 8.0
2010 30.3
Thereafter 5.1
-------
$43.4
=======
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.
43
In November 2005, the Company replaced its existing three-year $50
revolving credit facility with a 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, 2006, the interest rate on outstanding borrowings
under this Agreement had a weighted average interest rate of 5.45%.
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. In addition, under the Credit Agreement, the Company cannot pay
in excess of $50.0 in cash dividends during any 12-month period, and cannot pay
in excess of $100.0 in cash dividends over its five-year term.
Average borrowings under the Credit Agreement during 2006 were $79.8 at an
average interest rate of 5.09%. Average borrowings under the revolving credit
facility in 2005 and 2004 were $10.0 and $3.8 at average interest rates of
5.03%, and 2.10%, respectively. The borrowings outstanding under the Credit
Agreement at December 31, 2006 and 2005 were $30.1 and $84.1 respectively.
Facilities financed by economic development revenue bonds have been
accounted for as plant and equipment and the related bonds are recorded as debt.
In connection with the 2005 Restructuring Program, one of the facilities
financed by these bonds will be closed in 2007 and, accordingly, the amount
related to that facility is classified as a current maturity of long term debt.
The balance of the bonds is recorded as long-term debt. The variable rate bonds
for the years ended December 31, 2006 and 2005 had weighted average interest
rates of 3.46% and 2.5%, respectively. The rate on these bonds was 3.97% at
December 31, 2006.
Net interest expense was $3.8 in 2006, $9.3 in 2005 (excluding the impact
of the $7.4 of prepayment charges), and $10.7 in 2004.
Note 8: Income Taxes
The components of the provision for income taxes are as follows:
At December 31, 2006 2005 2004
--------------- ---- ---- ----
Federal
Current $8.6 $(7.9) $(2.8)
Deferred 2.9 8.3 0.5
Foreign
Current 11.5 10.1 10.5
Deferred 0.9 1.9 6.1
State 0.9 0.1 0.1
--------- -------- -------
$24.8 $12.5 $14.4
========= ======== =======
44
The deferred tax assets and liabilities are as follows:
At December 31, 2006 2005 2004
--------------- ---- ---- ----
Deferred tax assets:
Tax credit and tax loss carryforwards $25.7 $30.7 $17.9
Other accrued liabilities and allowances 0.9 3.4 7.6
Deferred compensation 6.3 3.6 3.4
--------- -------- --------
Total gross deferred tax assets 32.9 37.7 28.9
Valuation allowance (20.2) (18.4) (13.9)
--------- -------- --------
Net deferred tax assets 12.7 19.3 15.0
Deferred tax liabilities:
Depreciation and other property basis
differences (6.4) (4.1) (7.9)
Other (5.7) (11.8) (13.9)
---------- --------- --------
Net deferred tax assets/(liabilities) $0.6 $3.4 $(6.8)
========== ========= ========
At December 31, 2006, the Company had foreign tax loss carryforwards of
$81.0, which will be available to reduce future tax liabilities. Of the $81.0 of
foreign tax loss carryforwards, $67.9 have an indefinite life, and the remaining
$13.1 begin to expire in 2007. 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, 2006, a valuation allowance of $20.2 existed for
certain tax credit and 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, 2006 2005 2004
--------------- ---- ---- ----
Federal statutory tax rate 35.0% 35.0% 35.0%
State income tax, net of federal income tax
benefit 0.7 0.2 0.1
Foreign taxes at different rates (11.6) (18.9) (9.1)
Tax credit and tax loss carryforwards not
benefited 5.9 1.2 1.0
Repatriation, net of foreign tax credits (1.2) 13.5 --
Accruals no longer required (2.1) -- (3.1)
Impact of FAS 123 0.6 -- --
Capital loss carryforward not benefited 2.1 -- --
All other, net 1.0 4.3 (0.6)
--------- -------- --------
30.4% 35.3% 23.3%
========= ======== ========
The Company reviewed the status of ongoing and completed tax examinations
during 2006, 2005, and 2004, and reduced the income tax provisions in 2006 and
2004 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. With the subsequent filing of the Company's
2005 U.S. federal corporate income tax return, it was determined that foreign
tax credits associated with the repatriation exceeded original estimates and a
tax benefit of $1.0 was recorded in the third quarter of 2006. A provision has
not been established for undistributed foreign earnings of $180.6 not
repatriated at December 31, 2006, as those earnings are considered permanently
reinvested in the foreign operations. At December 31, 2006 the estimated U.S.
tax liability on the undistributed earnings was $31.2. Total foreign-based
pre-tax income was approximately $48.5, $55.0, and $65.4 for 2006, 2005 and
2004, respectively.
45
Note 9: Segment Information
For the years ended December 31, 2006, 2005 and 2004, the Company's
operations were organized into three geographic segments consisting of:
(1) The Company's operations principally in the U.S., Canada,
8 countries in Latin America ("Americas");
(2) Operations in 18 countries in Europe, the Middle East and Africa
("EMEA"); and
(3) Operations in 11 countries in the Asia Pacific region ("Asia
Pacific")
Information regarding the operations of the Company in these segments is
set forth below. The segments discussed herein are presented in the way we
internally managed and monitored performance at the business group level in
fiscal years 2006, 2005, and 2004. Each of the 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. On November 15, 2006, the Company announced a change in its
operating segments reflecting the culmination of the business realignment
announced in October 2005. The Company's operations will be organized into two
product-focused segments consisting of 1) Global Apparel Solutions and 2) Global
Supply Chain Solutions. These changes will be effective for fiscal year 2007.
Years ended December 31, 2006 2005 2004
------------------------ ---- ---- ----
Sales to unaffiliated customers:
Americas $332.7 $331.0 $355.2
EMEA 216.1 209.5 219.9
Asia Pacific 332.0 268.6 229.3
--------- --------- ---------
Total $880.8 $809.1 $804.4
========= ========= =========
Intersegment sales:
Americas $71.2 $67.2 $61.7
EMEA 59.0 46.9 49.7
Asia Pacific 39.7 27.9 20.7
Eliminations (169.9) (142.0) (132.1)
---------- ---------- ---------
Total $ -- $ -- $ --
========== ========== =========
Operating Income (a):
Americas (b) $32.1 $21.6 $41.3
EMEA (b) 2.1 4.4 16.6
Asia Pacific (b) 48.8 45.2 38.6
----------- ---------- ---------
83.0 71.2 96.5
Corporate expenses (b) (33.0) (20.8) (25.3)
Gain on lawsuit settlement 39.4 -- --
Amortization of other intangible assets (0.5) (0.3) (0.3)
----------- ---------- ---------
Operating income 88.9 50.1 70.9
Other income (loss), net(c) (3.5) 2.1 1.6
Interest expense, net(d) (3.8) (16.7) (10.7)
----------- ---------- ---------
Income before taxes $81.6 $35.5 $61.8
=========== ========== =========
(a) Certain reclassifications have been made to prior years' operating income
to conform to the presentation used in the current period.
(b) Americas, EMEA, Asia and Corporate expenses include
integration/restructuring costs of $2.0, $4.9, $0.2 and $2.9, respectively,
in 2006 and $8.6, $5.6, $0.0 and $0.9, respectively, in 2005.
(c) Includes a $5.0 impairment charge in 2006 related to an
other-than-temporary impairment in one of the Company's long-term
investments.
(d) Includes prepayment charges-debt retirement of $7.4 in 2005.
46
2006 2005 2004
---- ---- ----
Depreciation and amortization:
Americas $11.8 $12.7 $14.0
EMEA 9.9 8.9 9.7
Asia Pacific 11.5 9.7 7.1
--------- ------- -------
33.2 31.3 30.8
Corporate 1.4 1.4 1.6
--------- -------- --------
Total $34.6 $32.7 $32.4
========= ======== ========
Capital expenditures:
Americas $10.8 $6.8 $7.1
EMEA 10.3 8.5 8.9
Asia Pacific 23.0 17.1 22.3
--------- -------- --------
44.1 32.4 38.3
Corporate 0.6 0.5 0.4
--------- -------- --------
Total $44.7 $32.9 $38.7
========= ======== ========
At December 31, 2006 2005
--------------- ---- ----
Long-lived assets:
Americas $177.4 $180.9
EMEA 138.3 124.5
Asia Pacific 91.8 80.3
--------- --------
407.5 385.7
Corporate 6.3 4.7
--------- --------
Total $413.8 $390.4
========= ========
At December 31, 2006 2005
--------------- ---- ----
Total assets:
Americas $273.9 $272.5
EMEA 252.7 224.1
Asia Pacific 196.9 172.0
--------- --------
723.5 668.6
Corporate 47.5 59.0
--------- --------
Total $771.0 $727.6
========= ========
The following table presents sales by product:
Years ended December 31, 2006 2005 2004
------------------------ ---- ---- ----
Apparel Identification Products $622.5 $562.4 $566.2
Bar Code and Pricing Solutions 258.3 246.7 238.2
--------- -------- --------
Total $880.8 $809.1 $804.4
========= ======== ========
The Company derived sales in the United States of $246.0, or 27.9 % of
total sales in 2006, $248.1, or 30.7% of total sales in 2005, and $271.2, or
33.7% of total sales in 2004. In addition, long-lived assets in the United
States as of December 31, 2006 and 2005 amounted to $148.4 and $157.3,
respectively.
No one customer accounted for more than 10% of the Company's revenues or
accounts receivable in 2006, 2005, or 2004.
47
Note 10: Supplemental Cash Flow Information
Cash paid for interest and income taxes is as follows:
Years ended December 31, 2006 2005 2004
------------------------ ---- ---- ----
Interest $3.8 $15.6 $10.7
Income taxes 22.5 12.5 9.3
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 7).
Note 11: Stock-Based Compensation
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
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.
In 2006, 2005 and 2004, the Company received proceeds of $8.4, $15.2 and
$3.8, respectively, from 630,352, 1,281,000 and 514,000 common shares issued
upon the exercise of options granted to employees and directors.
As of December 31, 2006, 3,261,000 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 2,037,000 shares of common stock were
reserved for future grants under the 2000 Plan. In addition, under the 1990
Plan, 29,000 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.
In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment." This
standard amends SFAS No. 123, "Accounting for Stock-Based Compensation", and
concludes that services received from employees in exchange for stock-based
compensation result in a cost to the employer that must be recognized in the
financial statements. The cost of such awards is measured at fair value at the
date of grant. The Company adopted SFAS No. 123(R) effective January 1, 2006,
and is applying the modified prospective method, whereby compensation cost will
be recognized for the unvested portion of awards granted prior to January 1,
2006, as well as for awards granted after adoption. Such costs are recognized in
the Company's financial statements over the remaining vesting periods. Under
this method, prior periods are not revised for comparative purposes. As a result
of the adoption of this standard, the Company recorded a pre-tax charge of $3.9
in 2006, or approximately $.07 per share. The related income tax benefit
recognized in the statement of income was approximately $0.7 for the year ended
December 31, 2006.
The fair value of each stock option grant in 2006 was estimated on the date
of grant using the Black-Scholes option-pricing model. The primary assumptions
that the Company considered when determining the fair value of each option award
included 1) the expected term of awards granted, 2) the expected volatility of
the Company's stock price, 3) the risk-free interest rate applied and 4) an
estimate for expected forfeitures. The expected term of awards granted is based
upon the historical exercise patterns of the participants in the Company's
plans, and expected volatility is based on the historical volatility of the
Company's stock, commensurate with the expected term of the respective awards.
The risk-free rate for the expected term of the awards is based on the U.S.
Treasury yield curve in effect at the time of grant. The table below illustrates
the aforementioned weighted average assumptions for 2006.
48
The following summarizes the assumptions used in the Black-Scholes
option-pricing model:
2006 2005 2004
---- ---- ----
Risk-free interest rate 4.6% 3.7% 3.5%
Expected years until exercise 4.9 5.0 6.0
Expected stock volatility 37.1% 43.3% 44.8%
Dividend yield 0.0 0.0 0.0
Weighted average fair value per share $7.96 $7.71 $6.90
The Company estimated forfeitures in the range of 7-9% based on historical
experience, and will adjust estimated forfeitures over the requisite service
period to the extent actual forfeitures differ, or are expected to differ, from
such estimates.
As of December 31, 2006, there was approximately $3.7 of unrecognized
compensation cost related to non-vested stock options. Approximately $1.8 is
expected to be recognized in 2007, $1.2 in 2008 and $0.7 in 2009.
The following table summarizes information concerning outstanding and
exercisable options by two ranges of exercise prices as of December 31, 2006:
Options Outstanding Options Exercisable
------------------------------------------------------------ ----------------------------------------
Weighted-average
Range of exercise Number outstanding remaining Weighted-average Number exercisable Weighted-average
prices as of 12/31/06 contractual life exercise price as of 12/31/06 exercise price
------ -------------- ---------------- -------------- -------------- --------------
$7.37 - $12.89 0.7 3.6 $9.89 0.7 $9.89
$12.90 - $22.02 2.6 6.4 $16.32 1.6 $15.92
--------------- --------------
3.3 5.7 $14.68 2.3 $14.22
=============== ==============
The weighted average remaining contractual life of stock options
exercisable as of December 31, 2006 was 5 years.
The following is a summary of the stock option activity during the years
ended December 31, 2006, 2005 and 2004:
2006 2005 2004
------------------------------ ------------------------------ ------------------------------
Weighted- Weighted- Weighted-
average average average
Shares exercise price Shares exercise price Shares exercise price
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning of
year 3.7 $14.43 4.3 $13.16 4.7 $12.54
----------------------------
Granted 0.3 $20.23 0.7 $17.88 0.6 $14.56
Exercised (0.6) $13.66 (1.2) $11.89 (0.5) $8.52
Forfeited (0.1) $16.15 (0.1) $14.53 (0.5) $14.03
----------- ---------- ----------
Outstanding at year-end 3.3 $14.68 3.7 $14.43 4.3 $13.16
=========== =========== ==========
The aggregate intrinsic value of stock options outstanding as of December
31, 2006 was approximately $27.7. The aggregate intrinsic value of stock options
exercisable as of December 31, 2006 was approximately $20.4 The total intrinsic
value of options exercised during the years ended December 31, 2006, 2005 and
2004 was approximately $4.5, $10.7 and $2.9, respectively.
49
Performance Awards
During 2006 and 2005, the Company granted certain key executives
performance-based awards, which enable them to receive payment in shares of the
Company's common stock, based on certain performance criteria, as defined in the
plans. 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 $1.5 and $0.3 in 2006 and
2005, respectively. Approximately $1.8 is expected to be recognized in 2007 and
$1.2 is expected to be recognized in 2008. Compensation expense for performance
based awards is determined based on estimates of future performance of the
Company. As such, to the extent actual results differ from estimated results,
unrecognized performance based compensation cost will be adjusted accordingly.
Restricted Stock
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 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 $0.3 and $0.2 in 2006 and 2005, respectively. In
addition, compensation expense related to certain other restricted shares
awarded approximated $0.4 during 2006. The total unamortized future compensation
expense related to all restricted shares was approximately $1.3 as of December
31, 2006. Approximately $0.6 is expected to be recognized in 2007, $0.5 in 2008,
and $0.2 in 2009.
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 2006
and 2005 and 20% for 2004. The Company may sell up to 1,819,000 shares under
this plan and, as of December 31, 2006, 436,958 shares were available for future
purchases. The total number of shares and the average fair value of shares
issued under this plan were 71,842 and $20.21, 47,663 and $18.28, and 27,500 and
$14.01 in 2006, 2005 and 2004, respectively. The Company recognized compensation
expense related to this plan of $0.2, $0.1 and $0.1 in 2006, 2005 and 2004,
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 2006 or 2004. Since the inception
of the stock repurchase program, the Company has repurchased 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, 2006, the
Company had $22.0 available under its $150 stock repurchase program
authorization. The Company may continue to repurchase its shares under the
existing authorization, depending on market conditions and cash availability.
Note 12: Earnings per Common Share
The reconciliation of basic and diluted weighted average common shares
outstanding, in millions, is as follows:
Years ended December 31, 2006 2005 2004
------------------------ ---- ---- ----
Weighted average common shares (basic) 41.0 40.3 39.6
Options and restricted stock 0.8 1.0 1.0
------ ------ -----
Adjusted weighted average common shares
(diluted) 41.8 41.3 40.6
====== ====== =====
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 shares of common stock at December 31, 2005 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, 2006 and 2004.
50
Note 13: 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 $2.9, $2.7 and
$2.9 in 2006, 2005 and 2004, respectively.
Note 14: Post-Employment Benefit Costs
The Company is obligated to provide post-employment benefits to certain
former executives. Accordingly, the Company recognized $1.5, $0.9, and $0.6 of
post-employment benefit costs in 2006, 2005 and 2004, respectively. The discount
rate used to determine the post-employment benefit costs was 5.75% in 2006,
2005, and 2004. 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, 2006, 2005 and 2004.
The unfunded projected benefit obligation and the unfunded accumulated
benefit obligation were as follows:
At December 31, 2006 2005
--------------- ---- ----
Projected benefit obligation $12.3 $11.3
Accumulated benefit obligation $12.3 $10.7
The adoption of FAS 158 had no impact as the Company records the full
liability under the plan.
Note 15: Gain on Settlement of Patent Litigation
On September 14, 2006, the Company settled a patent infringement lawsuit
against Zebra Technologies Corporation ("Zebra") in the U.S. District Court for
the Southern District of Ohio. The Company's suit alleged violation of eight of
its patents involving more than 50 Zebra products. The settlement, net of legal
and other costs, resulted in a gain of approximately $39.4 (with an after-tax
impact of $24.3 on net income, or $.58 per diluted share) for the year ended
December 31, 2006, and is included as a separate component of operating income
in the accompanying consolidated statements of income. In connection with the
settlement, approximately $1.7 of previously expensed and paid legal fees were
reimbursed to the Company by counsel, and classified as a reduction in selling,
general and administrative expenses for the year ended December 31, 2006.
Note 16: Commitments and Contingencies
Total rental expense for all operating leases amounted to $13.0 in 2006,
$11.6 in 2005 and $11.7 in 2004.
Minimum rental commitments for all non-cancelable operating leases are as
follows:
Years ending December 31,
-------------------------
2007 $12.1
2008 8.9
2009 6.7
2010 5.6
2011 4.2
Thereafter 7.5
----------
$45.0
==========
The Company accrues severance expense for employees of its Italian
subsidiaries, as required by Italian law. As of December 31, 2006 and 2005, the
amounts were $3.4 and $2.8, 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 $8.4 in 2007 and $0.1 in 2008. 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.
51
The Company had outstanding stand-by letters of credit of $17.1 at December
31, 2006.
The Company has been named a potentially responsible party relating to
contamination that occurred at certain super-fund sites. Management, including
internal counsel, currently believes that the ultimate resolution of such
matters taken as a whole, and after considering such factors as 1) available
levels of insurance coverage, 2) the Company's proportionate share, in certain
cases, as a named potential responsible party, and 3) the dormant nature of
certain matters, will not have a materially adverse effect upon its results of
operations or financial condition. It is possible that new information or future
developments could require the Company to reassess its potential exposure
related to these environmental matters.
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 17: 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 realignment of the Company's design
and customer service organization in response to the aforementioned production
migration activities. The 2005 Restructuring Program is expected to be
substantially completed during 2007. The 2005 Restructuring Program contemplates
significant headcount reductions in the Company's U.S. locations and, to a
lesser extent, headcount reductions in Western Europe. The Company expects to
incur total pre-tax, non-recurring charges, upon completion, in the range of $25
to $33, including approximately $5 to $8 of non-cash charges. During the years
ended December 31, 2006 and 2005, the Company recognized charges of $10.0 and
$8.7, respectively, in connection with the 2005 Restructuring Program. These
charges were related to program management services, severance and retention
programs, asset impairment charges and other facility closure costs. In the
aggregate, the Company has recognized charges of approximately $18.7 in
connection with the 2005 Restructuring Program, of which, approximately $15.5
represents cash costs.
In April 2005, the Company announced initiatives to improve margins and
lower costs in its EMEA region, primarily relating to workforce reductions and
transportation costs. The initiative was undertaken in light of 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 the
aggregate, during 2005, the Company recorded pre-tax charges of $4.8 in
connection with these initiatives, which were completed 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 completed at the end of 2005.
The Company did not incur any integration/restructuring charges in 2004.
All integration/restructuring and other costs are identified on a separate
line on the Company's income statement as a component of operating income.
52
The following table presents the changes in accruals pertaining to the
Company's restructuring and related initiatives for the year ended December 31,
2006:
Beginning Ending Balance
Balance Restructuring December 31,
January 1, 2006 Expenses Payments 2006
--------------- ------------- ---------- --------------
Severance $5.0 $2.7 $(3.4) $4.3
Other costs 2.4 6.9 (7.8) 1.5
--------------- ------------- ---------- --------------
$7.4 $9.6 $(11.2) $5.8
=============== ============= ========== ==============
In addition, during 2006, the Company recorded asset impairment charges of
$0.4 related to the 2005 Restructuring Program.
Note 18: Related Party Transaction
The Company leases a manufacturing facility in Sayre, Pennsylvania, owned
beneficially by the Company's previous Chairman, and certain of his family
members and a trust. During 2004, the lease was extended through December 31,
2011, and amended to revise certain terms, including termination provisions. In
connection with the 2005 Restructuring Program, in the fourth quarter 2006, the
Company ceased using this facility and recorded a charge of approximately $0.7,
representing the estimated fair value of the costs that the Company will
continue to incur without economic benefit. The annual rental expenses amounted
$0.1 in 2006, 2005, and 2004.
Note 19: Condensed Quarterly Financial Data (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2006
Sales $199.6 $233.3 $217.1 $230.8
Gross profit 74.2 89.6 77.7 82.4
Operating income 7.8 20.0 49.6 11.5
Net income (loss) 5.2 14.6 27.5 9.5
Basic earnings (loss) per
share 0.13 0.36 0.67 0.23
Diluted earnings (loss) per
share 0.13 0.35 0.66 0.23
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 5.4 14.4 4.1 (0.8)
Basic earnings per share 0.14 0.36 0.10 (0.02)
Diluted earnings per share 0.13 0.35 0.10 (0.02)
2006
----
o The first, second, third and fourth quarters include
integration/restructuring and other costs of $3.0, $1.6, $1.8 and
$3.6, respectively, and charges related to the impact of FAS 123(R) of
$0.8, $0.9, $1.3, and $0.9, respectively.
o The third quarter includes a gain on lawsuit settlement of $39.4 and a
$5.0 impairment charge related to one of the Company's long-term
investments.
2005
----
o The first, second, third and fourth quarters include
integration/restructuring and other costs of $0.8, $1.8, $1.9 and
$10.6, respectively.
o The third quarter includes $4.4 of taxes on repatriation of foreign
earnings.
o The fourth quarter includes $7.4 of debt prepayment costs and $0.4 of
taxes on repatriation of foreign earnings.
53
PAXAR CORPORATION AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2006, 2005 and 2004
(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, 2006 $10.7 $2.2 $0.3 $0.9 $12.3
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
Additions
Charged
Allowance for inventory Balance at to Costs
obsolescence Beginning and Balance at
Description of Year Expenses Other (1) Deductions (2) End of Year
--------------------------------------------------------------------------------------------------------
Year ended December 31, 2006 $17.1 $6.2 -- $4.9 $18.4
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
Additions
Valuation allowance for Charged
deferred tax assets Balance at to Costs
Beginning and Balance at
Description Description of Year Expenses Other Deductions End of Year
---------------------------------------------------------------------------------------------------------
Year ended December 31, 2006 $18.4 $2.8 $-- $ 1.0 $20.2
Year ended December 31, 2005 13.9 4.5 -- -- 18.4
Year ended December 31, 2004 13.8 0.1 -- -- 13.9
----------
(1) Allowance related to acquisitions.
(2) Write-offs, recoveries, currency exchange and other.
54
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: February 28, 2007
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/ Robert P. van der Merwe By: /s/ Thomas R. Loemker
------------------------------------------ ------------------------------------------
Robert P. van der Merwe Thomas R. Loemker
Chairman of the Board of Directors Director
President and Chief Executive Officer Dated: February 28, 2007
(Principal Executive Officer)
Dated: February 28, 2007
By: /s/ Jack Becker By: /s/ James C. McGroddy
------------------------------------------ ------------------------------------------
Jack Becker James C. McGroddy
Director Director
Dated: February 28, 2007 Dated: February 28, 2007
By: /s/ Leo Benatar By: /s/ David E. McKinney
------------------------------------------ ------------------------------------------
Leo Benatar David E. McKinney
Director Director
Dated: February 28, 2007 Dated: February 28, 2007
By: /s/ Joyce F. Brown By: /s/ James R. Painter
------------------------------------------ ------------------------------------------
Joyce F. Brown James R. Painter
Director Director
Dated: February 28, 2007 Dated: February 28, 2007
By: /s/ Arthur Hershaft By: /s/ Roger M. Widmann
------------------------------------------ ------------------------------------------
Arthur Hershaft Roger M. Widmann
Director Director
Dated: February 28, 2007 Dated: February 28, 2007
By: /s/ Victor Hershaft By: /s/ Anthony S. Colatrella
------------------------------------------ ------------------------------------------
Victor Hershaft Anthony S. Colatrella
Director Vice President and Chief Financial Officer
Dated: February 28, 2007 (Principal Financial Officer)
Dated: February 28, 2007
By: /s/ David L. Kolb By: /s/ Richard A. Maue
------------------------------------------ ------------------------------------------
David L. Kolb Richard A. Maue
Director Vice President and Controller
Dated: February 28, 2007 (Principal Accounting Officer)
Dated: February 28, 2007
55