<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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 0-5610
PAXAR CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 13-5670050
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 CORPORATE PARK DRIVE, WHITE PLAINS, N.Y. 10604
(Address of principal executive offices)
914 697-6800
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes /x/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. (September 30, 1998)
Common Stock, $0.10 par value: 47,912,360 shares
<PAGE> 2
PART 1. FINANCIAL INFORMATION
The financial statements included herein have been prepared by Paxar Corporation
(the "Company"), without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. While certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, the Company believes that the
disclosures made herein are adequate to make the information presented not
misleading. It is recommended that these condensed financial statements be read
in conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
In the opinion of the Company, all adjustments, consisting only of normal
recurring accruals and adjustments, necessary to present fairly the financial
information contained herein, have been included.
2
<PAGE> 3
ITEM 1: FINANCIAL STATEMENTS
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30 NINE MONTHS ENDED SEPT. 30
--------------------------- --------------------------
1998 1997 1998 1997
------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales $ 153.8 $ 148.8 $ 460.1 $ 413.6
Costs and expenses:
Cost of products sold 93.8 90.8 280.2 253.0
Selling, general and administrative expense 39.3 35.1 119.2 96.2
Research and engineering expense 2.6 4.1 8.3 10.5
Amortization of intangibles 1.4 2.1 4.0 3.9
Integration/restructuring costs -- -- -- 2.1
------- ------- ------- -------
Operating income 16.7 16.7 48.4 47.9
Interest expense, net 1.1 3.5 10.9 9.6
------- ------- ------- -------
Income before taxes 15.6 13.2 37.5 38.3
Taxes on income 4.6 4.0 12.0 12.3
------- ------- ------- -------
Income before extraordinary item 11.0 9.2 25.5 26.0
Extraordinary item, net of income taxes
of $5.1 -- -- -- (8.6)
------- ------- ------- -------
Net income $ 11.0 $ 9.2 $ 25.5 $ 17.4
======= ======= ======= =======
Average common shares outstanding:
Basic 48.2 48.2 48.5 48.0
======= ======= ======= =======
Diluted 48.9 49.8 49.6 49.3
======= ======= ======= =======
Basic earnings per common share:
Before extraordinary item $ 0.23 $ 0.19 $ 0.53 $ 0.54
Extraordinary item -- -- -- (0.18)
------- ------- ------- -------
Net income $ 0.23 $ 0.19 $ 0.53 $ 0.36
======= ======= ======= =======
Diluted earnings per common share:
Before extraordinary item $ 0.22 $ 0.18 $ 0.51 $ 0.53
Extraordinary item -- -- -- (0.18)
------- ------- ------- -------
Net income $ 0.22 $ 0.18 $ 0.51 $ 0.35
======= ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 4
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPT. 30, 1998 DEC. 31, 1997
-------------- -------------
(UNAUDITED)
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 18.1 $ 13.7
Short-term investments 8.3 2.2
Receivables, less allowance for doubtful accounts of $5.2
in 1998 and $4.4 in 1997 103.9 102.4
Inventories 97.2 97.4
Deferred income taxes 6.9 6.9
Other current assets 10.9 11.6
------ ------
Total current assets 245.3 234.2
Property, plant and equipment, at cost 301.8 273.2
Accumulated depreciation (108.7) (86.1)
------ ------
Net property, plant and equipment 193.1 187.1
Long-term investments -- 3.0
Goodwill 158.7 165.4
Other assets 10.4 8.7
------ ------
$607.5 $598.4
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to banks $ 0.9 $ 2.5
Notes payable -- 5.9
Current maturities of long-term debt 1.0 21.7
Accounts payable and accrued liabilities 82.5 82.8
Accrued taxes on income 11.8 --
------ ------
Total current liabilities 96.2 112.9
Long-term debt 215.2 211.4
Deferred income taxes 24.8 24.2
Other liabilities 5.7 6.1
Shareholders' equity:
Preferred Stock, $0.01 par value, 5,000,000 shares
authorized, none issued and outstanding -- --
Common Stock, $0.10 par value, 200,000,000 shares authorized, 47,912,360 and
48,419,554 shares issued and outstanding, in 1998 and 1997, respectively
4.9 4.8
Paid-in capital 112.8 109.3
Treasury Stock (9.3) --
Retained earnings 160.0 134.5
Foreign currency translation adjustments (2.8) (4.8)
------ ------
Total shareholders' equity 265.6 243.8
------ ------
$607.5 $598.4
====== ======
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 5
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEPT. 30, 1998 SEPT. 30, 1997
-------------- --------------
(IN MILLIONS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 25.5 $ 17.4
------ ------
Adjustments to reconcile net income to net cash provided by operations:
Extraordinary item -- 8.6
Depreciation and amortization 24.1 22.0
Deferred income taxes 0.6 1.2
Other -- 1.3
Changes in assets and liabilities, net of businesses acquired:
Receivables (3.6) (4.8)
Inventories 0.2 (16.3)
Other current assets 0.7 (0.7)
Accounts payable and accrued liabilities 1.2 (4.3)
Taxes on income 7.3 0.1
Other (0.4) (3.6)
------ ------
30.1 3.5
------ ------
Net cash provided by operating activities 55.6 20.9
------ ------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (29.0) (22.1)
Increase of short-term investments (6.1) (1.2)
Acquisition related 11.2 (81.6)
Other 2.2 3.3
------ ------
Net cash used in investing activities (21.7) (101.6)
------ ------
FINANCING ACTIVITIES:
(Decrease)/increase in short-term debt (28.1) 2.1
Additions to long-term debt 234.8 151.0
Reductions in long-term debt (231.0) (58.4)
Purchase of common stock (9.3) (9.8)
Exercise of stock options/Stock Purchase Plan 3.5 3.4
Other -- (1.4)
------ ------
Net cash (used in)/provided by financing
activities (30.1) 86.9
------ ------
OTHER ACTIVITIES:
Effect of exchange rate changes on cash 0.6 (0.5)
------ ------
Increase in cash 4.4 5.7
Cash at beginning of year 13.7 5.3
------ ------
Cash at end of period $ 18.1 $ 11.0
====== ======
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1: GENERAL
The accounting policies followed during interim periods are in conformity with
generally accepted accounting principles and are consistent with those applied
for annual periods as described in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997. Other than Balance Sheet amounts as of
December 31, 1997, all amounts contained herein are unaudited.
Reclassifications:
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
NOTE 2: BUSINESS ACQUISITIONS
Monarch:
On June 29, 1995, the Company acquired a 49% interest in Monarch Marking
Systems, Inc. ("Monarch"), which had been accounted for using the equity method.
On March 3, 1997, the Company acquired the remaining 51% of Monarch for a total
purchase price of $132, consisting of cash, notes, stock, options and warrants.
The acquisition was accounted for as a purchase with assets acquired and
liabilities assumed recorded at their estimated fair values at the date of
acquisition. The excess of the purchase price and transaction costs over the
fair value of net assets acquired was recorded as goodwill. The resulting
goodwill of $143.9 (including $13.5 related to the initial 1995 investment) is
being amortized over 40 years.
The fair value of assets acquired and liabilities assumed is as follows:
<TABLE>
<S> <C>
Current assets $ 96.2
Property, plant and equipment 44.1
Goodwill 143.9
Other assets 11.8
Current liabilities (37.6)
Long-term debt (105.8)
Other (5.1)
------
Net assets 147.5
Initial investment (June 1995) (20.1)
------
$127.4
======
</TABLE>
In September 1998, the Company received $14.5, including interest of $3.3 from
Pitney Bowes (the former owner of Monarch) in settlement of litigation regarding
the original purchase price and other disputed amounts. This resulted in a net
reduction of goodwill in the amount of $4.6.
The operating results of Monarch are included in the accompanying consolidated
statements of income beginning March 3, 1997. The following unaudited pro forma
results of operations assume the acquisition occurred as of January 1,1997.
These pro forma results do not purport to be indicative of the results of
operations which may result in the future.
<TABLE>
<CAPTION>
SEPT. 30, 1997
---------------
<S> <C>
Sales $453.2
------
Income before extraordinary item $19.8
-----
Net income $11.2
-----
Basic earnings per share:
Before extraordinary item $0.41
Extraordinary item (0.18)
-----
Net Income $0.23
-----
</TABLE>
6
<PAGE> 7
<TABLE>
<S> <C>
Diluted earnings per share:
Before extraordinary item $0.40
Extraordinary item (0.18)
-----
Net Income $0.22
-----
</TABLE>
IIMAK:
On October 28, 1997 the Company completed the acquisition of International
Imaging Materials, Inc. ("IIMAK"), which has been accounted for as a pooling of
interests. As such, the financial statements have been restated to include the
results of IIMAK for all periods presented.
NOTE 3: INVENTORIES
The components of inventories are set forth below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------- -----------------
<S> <C> <C>
Raw materials $47.8 $56.3
Work-in-Process 11.4 8.6
Finished goods 38.0 32.5
----- -----
$97.2 $97.4
===== =====
</TABLE>
NOTE 4: LONG TERM DEBT
A summary of long-term debt is set forth below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------- -----------------
<S> <C> <C>
Bank credit facility $ 56.4 $222.2
Private Placement debt 150.0 --
Economic Development
Revenue Bonds due 2011 8.0 8.0
Other 1.8 2.9
------ ------
216.2 233.1
Less current maturities 1.0 21.7
------ ------
$215.2 $211.4
====== ======
</TABLE>
On August 11, 1998, the Company entered into unsecured ten-year $150 Senior Note
agreements with institutional lenders, primarily insurance companies. The Senior
Notes bear interest at 6.74%, payable semi-annually. The proceeds were used to
repay the term loan and a portion of the indebtedness outstanding under the
Company's existing revolving credit facility before it was amended.
NOTE 5: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
A summary of accounts payable and accrued liabilities is set forth below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------- -----------------
<S> <C> <C>
Accounts payable $32.9 $31.9
Accrued payroll costs 18.2 11.9
Other accrued liabilities 31.4 39.0
----- -----
$82.5 $82.8
===== =====
</TABLE>
In December 1997, the Company approved a plan to sever 132 people from the
Monarch, Miamisburg, Ohio operation as part of the integration/restructuring
program. At December 31, 1997, other accrued liabilities included $4.6 of
accrued severance costs. During the nine months ended September 30, 1998, $3.8
had been paid representing costs associated with the severance of 125 people.
7
<PAGE> 8
NOTE 6: SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes is set forth below:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPT. 30
----------------------------------
<S> <C> <C>
1998 1997
---- ----
Interest $8.4 $6.7
Income Taxes $3.0 $3.9
</TABLE>
NOTE 7: COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, effective in 1998, requires
the disclosure of comprehensive income to reflect changes in equity that result
from transactions and economic events from nonowner sources. Comprehensive
income for the periods presented below include foreign currency translation
items. There was no tax expense or tax benefit associated with the foreign
currency translation items.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPT. 30
----------------------------------
<S> <C> <C>
1998 1997
---- ----
Net income $25.5 $17.4
Foreign currency translation adjustments 2.0 (4.3)
----- -----
Comprehensive income $27.5 $13.1
===== =====
</TABLE>
NOTE 8: EARNINGS PER COMMON SHARE
The reconciliation of basic and diluted per-share computation is as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPT. 30
----------------------------------
1998 1997
---- ----
<S> <C> <C>
Net income $25.5 $17.4
===== =====
Average common shares (basic) 48.5 48.0
Options and warrants 1.1 1.3
----- -----
Adjusted average common shares (diluted) 49.6 49.3
==== ====
Earnings per common share:
Basic $0.53 $0.36
===== =====
Diluted $0.51 $0.35
===== =====
</TABLE>
NOTE 9: ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Pursuant to the provisions of the $280 credit agreement entered into on March 3,
1997, the Company entered into interest rate hedge agreements to manage exposure
to variations in interest rates. The transactions involved the exchange of fixed
and floating interest payment obligations without exchange of debt instruments.
Interest differentials under these agreements are reflected in the results of
operations as adjustments to interest expense when they are paid or received.
The Company also recognizes gain or loss on these agreements as an adjustment of
interest expense when the related variable rate debt is less than the notional
amount of the hedges. Since the agreements are negotiated with creditworthy
counter-parties, the Company considers the risk of their nonperformance to be
remote.
During 1997, the Company entered into three interest rate hedge agreements with
a notional value of $100. At September 30, 1998, the Company had hedge
agreements with notional value of $80. The fair value of those agreements, based
on estimates provided by financial institutions, was a loss of $2.1 and $0.9 at
September 30, 1998 and December 31, 1997, respectively. The notional value of
the agreements exceeded the amount of variable rate debt outstanding at
September 30, 1998. The fair value of the agreements related to underlying
variable rate debt ($1.5) has been deferred. The change in fair value related to
the notional value of the agreements not having
8
<PAGE> 9
related variable rate debt is reflected in earnings in the period during which
the change occurs ($0.6 at September 30, 1998).
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Statement 133 is
effective for fiscal years beginning after June 15, 1999.
The Company has not yet quantified the impacts of adopting Statement 133 on the
financial statements and has not determined the timing or method of its adoption
of Statement 133. However, based on current interest rate levels, the income
statement treatment of derivative contracts would not have a material impact on
the Company's results of operations.
9
<PAGE> 10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ALL AMOUNTS IN THE FOLLOWING DISCUSSION ARE STATED IN MILLIONS, EXCEPT SHARE AND
PER SHARE DATA.
OPERATING RESULTS
On March 3, 1997, the Company acquired the remaining 51% of Monarch Marking
Systems, Inc. ("Monarch") that it did not previously own. The acquisition has
been accounted for as a purchase, and, accordingly, the results of operations
include the results of Monarch since the date of acquisition. On October 28,
1997, the Company acquired International Imaging Materials, Inc. ("IIMAK"),
which has been accounted for as a pooling of interests. As required with a
pooling of interests, historical financial information has been restated to
combine the financial statements of the Company and IIMAK for all periods.
The following table shows each element of the income statement as a percent of
sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Sept. 30 Nine Months Ended Sept. 30
--------------------------- --------------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 61.0 61.0 60.9 61.2
Selling, general and
Administrative expense 25.6 23.6 25.9 23.3
Research and engineering
Expense 1.6 2.8 1.8 2.5
Amortization of intangibles 0.9 1.4 0.9 0.9
Integration/restructuring costs -- -- -- 0.5
------ ------ ------ ------
Operating income 10.9 11.2 10.5 11.6
Interest expense, net 0.7 2.4 2.4 2.3
------ ------ ------ ------
Income before taxes 10.2 8.8 8.2 9.3
Taxes on income 3.0 2.6 2.6 3.0
------ ------ ------ ------
Income before extraordinary item 7.2 6.2 5.5 6.3
Extraordinary item -- -- -- (2.1)
------ ------ ------ ------
Net income 7.2 6.2% 5.5% 4.2%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH SEPTEMBER 30, 1997
Sales in the third quarter 1998 were $153.8 compared to $148.8 in 1997, an
increase of 3%. Domestic sales were $98.3 compared to $96.0 in the third quarter
1997. Foreign-based and export sales were $55.5 in the 1998 and $52.8 in the
1997 third quarter.
Cost of products sold for the three months ended September 30, 1998 were $93.8
compared to $90.8 in 1997. As a percent of sales, such costs were 61% for the
three months ended September 30, 1998 and 1997.
Selling, general and administrative expense ("SG&A") increased to $39.3 for the
three months ended September 30, 1998, from $35.1 for the three months ended
September 30, 1997. As a percent of sales, SG&A were 25.6% for September 30,1998
compared to 23.6% for September 30, 1997.
Research and engineering expense ("R&E") decreased from $4.1 for the three
months ended September 30, 1997 to $2.6 for the three months ended September 30,
1998 due to personnel reductions driven by the elimination of non-strategic
initiatives. As a percent of sales, R&E was 1.6% for the September 30, 1998 and
2.8% for September 30, 1997 three-month period.
10
<PAGE> 11
Operating income for the three months ended September 30, 1998 and 1997 was
$16.7. The operating margin for the three months ended September 30, 1998 was
10.9% compared to 11.2% for the three months ended September 30, 1997.
Interest expense, net, decreased to $1.1 for the three months ended September
30, 1998, from $3.5 in the three months ended September 30, 1997. Included in
interest expense, net, for third quarter, 1998, was $3.3 interest income
received in connection with settlement of the dispute with Pitney Bowes
regarding the original purchase price and other disputed amounts related to the
acquisition of Monarch Marking Systems, Inc. (Refer to Note 2 of Notes to
Consolidated Financial Statements.) Excluding that income item, interest
expense increased by $0.9 to $4.4 in 1998, resulting from $0.6 cost in 1998
related to the change in fair value of interest rate derivatives and increased
cost related to fixed rate borrowings under the $150, 6.74% Senior Notes issued
in August 1998, offset somewhat by lower borrowing levels and lower interest
rates related to variable rate borrowings in 1998.
Income before taxes was $15.6 (10.2% of sales) for the three months ended
September 30, 1998 as compared with $13.2 (8.8% of sales) for the three months
ended September 30, 1997.
The effective income tax rate was 29% for the three months ended September 30,
1998 compared to 30% for the three months ended September 30, 1997. The overall
effective tax rate was impacted by many factors including different statutory
rates on foreign income.
Net income for the three months ended September 30, 1998 was $11.0 (7.2% of
sales) compared to $9.2 (6.2% of sales) for the three months ended September 30,
1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH SEPTEMBER 30, 1997
Sales for the nine months ended September 30, 1998 reached $460.1 compared to
$413.6 in 1997. Domestic sales were $286.8 compared to $263.5 in the nine months
ended September 30, 1997. Foreign-based and export sales were $173.3 compared to
$150.1 in the nine months ended September 30, 1997. Had Monarch been
consolidated from January 1, 1997 the pro forma sales for the nine months ended
September 30, 1997 would have been $453.2.
Cost of products sold for the nine months ended September 30, 1998 was $280.2
compared to $253.0. As a percent of sales, such costs were 60.9% for the nine
months ended September 30, 1998 compared to 61.2% for the nine months ended
September 30, 1997.
SG&A was $119.2 for the nine months ended September 30, 1998, compared to $96.2
for the nine months ended September 30, 1997. The nine months ended September
30, 1997 reflects the consolidation of Monarch from the date of acquisition,
March 3, 1997. As a percent of sales, SG&A was 25.9% for September 30, 1998
compared to 23.3% for September 30, 1997.
R&E decreased from $10.5 for the nine months ended September 30, 1997 to $8.3
for the nine months ended September 30, 1998. The nine months ended September
30, 1997 reflects the consolidation of Monarch from the date of acquisition,
March 3, 1997. As a percent of sales, R&E was 1.8% for September 30, 1998 and
2.5% for the September 30, 1997 nine month period.
Operating income for the nine months ended September 30, 1998 was $48.4 compared
to $47.9 for the nine months ended September 30, 1997. The operating margin for
the nine months ended September 30, 1998 was 10.5 % compared to 11.6 % for the
nine months ended September 30, 1997.
Interest expense, net, increased to $10.9 for the nine months ended September
30, 1998 from $9.6 for the nine months ended September 30, 1997. Interest
expense, net, for the nine months ended September 30, 1998 included a $2.2
non-recurring charge resulting from unauthorized interest rate speculation and
$3.3 interest income resulting from settlement of the dispute with Pitney Bowes
regarding the original purchase price and other disputed amounts related to the
acquisition of Monarch Marking Systems, Inc. Interest expense net of those
nonrecurring items increased to $12.0 in the nine months ended September 30,
1998 from $9.6 in the nine months ended September 30,
11
<PAGE> 12
1997. The increase resulted from interest expense associated with the additional
debt related to the purchase of Monarch Marking Systems, Inc., the $0.6 cost in
1998 related to the change in fair value of interest rate derivatives and
increased cost related to fixed rate borrowings under the $150, 6.74% Senior
Notes issued in August 1998, offset somewhat by lower borrowing levels and lower
interest rates related to variable rate borrowings in 1998.
Income before taxes was $37.5 (8.2% of sales) for the nine months ended
September 30, 1998 compared with $38.3 (9.3% of sales) for the nine months ended
September 30, 1997.
The effective income tax rate was 32% for the nine months ended September 30,
1998 and 1997. The overall effective tax rate was impacted by many factors
including different statutory rates on foreign income.
Income before extraordinary item was $25.5 for the nine months ended September
30, 1998 compared to $26.0 for the nine months ended September 30, 1997.
The extraordinary item of $8.6 (net of income taxes $5.1) resulted from the
early redemption of Monarch's 12-1/2% Senior Notes during the three months
ended June 30, 1997.
Net income for the nine months ended September 30, 1998 was $25.5 (5.5% of
sales) compared to $17.4 (4.2% of sales) for the nine months ended September 30,
1997.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents summary cash flow information for the periods
indicated:
<TABLE>
<CAPTION>
(in millions)
Nine Months Ended September 30,
1998 1997
------- -------
<S> <C> <C>
Net cash provided by operating activities $ 55.6 $ 20.9
Net cash used by investing activities (21.7) (101.6)
Net cash (used in) provided by financing activities (30.1) 86.9
------- -------
Total change in cash(a) $ 3.8 $ 6.2
======= =======
</TABLE>
(a) Before exchange rate effects.
OPERATING ACTIVITIES
Cash provided by operating activities is the Company's primary source of funds
to finance operating needs and internal growth opportunities. The net cash
provided by operating activities was $55.6 for the nine months ended September
30, 1998 compared to $20.9 in 1997.
Depreciation and amortization was $24.1 for the nine months ended September 30,
1998 compared to $22.0 for the nine months ended September 30, 1997. The
increase is due mainly to the acquisition of Monarch, which resulted in
increases to depreciation and goodwill amortization.
INVESTING ACTIVITIES
During the first nine months of 1998 capital expenditures were $29.0 compared to
$22.1 in 1997. All new capital projects are carefully analyzed and, other than
projects for employee safety and environmental improvement, are required to make
a positive contribution on a net present value basis, generating an advantageous
internal rate of return on invested capital. The Company currently anticipates
capital expenditures of approximately $35.0 for the year ending December 31,
1998.
On March 3, 1997, the Company acquired the remaining 51% of Monarch for a total
purchase price of $132, consisting of cash, notes, stock, options and warrants.
The acquisition was accounted for as a purchase with assets acquired and
liabilities assumed recorded at their estimated fair values at the date of
acquisition. The Company
12
<PAGE> 13
financed the cash portion of the purchase price with the proceeds of the term
loan under a $280 credit facility with Fleet Bank, N.A. and Wachovia Bank of
Georgia, N.A. as lead lenders.
On February 25, 1998, the Company acquired a 70% interest in the business of
Teslo Tekstil Urunleri Sanayii ve Ticaret A.S., located in Istanbul, Turkey, for
approximately $1.5. The Company has an option to acquire the remaining 30%
interest in Teslo from the minority shareholders.
The Company intends to augment its growth rate by the acquisition of
complementary or related businesses.
FINANCING ACTIVITIES
The table below shows the components of total capital for the periods indicated:
<TABLE>
<CAPTION>
(in millions)
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Due to banks $ 0.9 $ 2.5
Notes payable -- 5.9
Current maturities of long-term debt 1.0 21.7
Long-term debt 215.2 211.4
------ ------
Total debt 217.1 241.5
Shareholders' equity 265.6 243.8
------ ------
Total capital $482.7 $485.3
====== ======
Total debt as a percent of total capital 45% 50%
</TABLE>
On March 3, 1997, the Company entered into an unsecured six-year, $280 credit
agreement ($140 term loan, $140 revolving credit facility) with Fleet Bank, N.A.
and other participating banks. On August 11, 1998, the Company and the banks
amended and restated the credit agreement to provide a $200 unsecured revolving
credit facility for five years from the date of the amendment. Borrowings under
the agreement bear interest at rates referenced to the London Interbank Offered
Rate (LIBOR) with applicable margins varying in accordance with the Company's
attainment of specified financial thresholds or, at the Company's option, the
Prime Rate (as defined), and are guaranteed by certain domestic subsidiaries of
the Company.
On August 11, 1998, the Company entered into unsecured ten-year $150 Senior Note
agreements with institutional lenders, primarily insurance companies. The Senior
Notes bear interest at 6.74%, payable semi-annually. The proceeds were used to
repay the term loan and a portion of the indebtedness outstanding under the
revolving credit facility before it was amended.
OTHER
Stock Repurchase:
On July 30, 1998, the Company announced a plan to purchase, from time to time,
up to $25 of the Company's common stock on the open market as conditions
warrant. The repurchased shares will be available for issuance under employee
stock option and purchase plans and other financing activities. As of September
30, 1998 the Company had repurchased 1,005,500 shares.
Asian Currency and Economic Situation:
The Company has worldwide operations, including operations in Asia. While the
currency situation is causing some pricing pressure on products sold in the U.S.
it is also creating opportunities for increased sales in Asia itself. On the
whole, the current economic situation in Asia is not expected to have a material
adverse impact upon the operations of the Company.
Year 2000:
The Company is actively addressing the Year 2000 ("Y2K") issue, which stems from
certain computer programs and embedded computer micro-controllers being unable
to distinguish between the year 1900 and the year 2000. Each significant
operating entity within the Company has designated an individual under the
general supervision of
13
<PAGE> 14
the Company, to monitor Y2K compliance. Reports are prepared quarterly and
reviewed by the Company's Audit Committee of the Board of Directors.
State of Readiness
The Company began its internal Y2K analysis and upgrades in 1997. The Company
believes that its Information Technology ("IT") systems will be approximately
75% compliant by the end of 1998. The remainder of the Company will be compliant
in the first half of 1999 with the balance of 1999 being dedicated to testing of
major systems.
Cost to Address Y2K Issues
The Company has been resolving, and expects to continue to resolve, its Y2K
issues principally through hardware and software system upgrades and the
installation of new computer systems that are Y2K compliant. These upgrades and
new systems were the result of scheduled purchases that the Company has made in
the ordinary course of business to meet its expanding business needs. These
upgrades and new systems have either been expensed or capitalized and the cost
impacts are currently reflected in the Company's operating budget. No material
costs specifically relating to Y2K compliance have been identified or are
expected.
The Company has also reviewed non-IT systems in the products its sells and the
products it uses in its own manufacturing processes. Non-IT systems are those
with embedded technology such as micro controllers. Non-IT systems are in
several products the company sells. The company believes that the products it
sells are Y2K compliant. Manufacturing equipment used by the company that
contains embedded systems has also been reviewed and the Company believes that
it is Y2K compliant.
Risks to the Company
The Company is conducting inquiries regarding Y2K compliance programs of its key
suppliers and customers. No assurance can be given at this time that the
Company's customers and suppliers will be Y2K compliant. A worst case scenario
for the Company's operations would involve the failure of public utilities such
as power generation and telephone companies. These catastrophic events would
affect not only the Company but its vendors and customers as well. The Company
intends to review the Y2K status with its utilities.
Contingency Plans
The Company is developing contingency plans relating to its suppliers and its
ability to communicate with its customers. The Company is not developing a
contingency plan for catastrophic events that would affect entire geographic
regions where it does business.
Euro Conversion:
As part of the European Economic Monetary Union (EMU), a single currency
("Euro") will replace the national currencies of most of the European countries
in which the Company conducts business. The conversion rates between the Euro
and the participating nations' currencies will be fixed as of January 1, 1999,
with the participating national currencies being removed from circulation over
the next three years. During this transition period, the Euro and the local
currency will jointly circulate. The Company's European operations are preparing
to be able to be fully Euro compliant by the end of calendar year 1999, well in
advance of the completion date of January 1, 2002. To the extent that certain
customers request Euro invoices, before the full phase-in of the Company's Euro
compliant system, these individual requests may be accommodated by the Company
under its existing IT System. The cost to convert the Company's software and
business processes to become Euro compliant is not expected to be material.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company experiences market risk relative to changes in interest rates. A 56
basis point change in interest rates (10% of the Company's weighted average
interest rate on its revolving credit facility) effecting the Company's floating
rate debt instruments would have an insignificant impact on the Company's pretax
earnings and cash flows over the next fiscal year. Such a move in interest rates
would have no effect on the fair value of the Company's
14
<PAGE> 15
floating rate debt instruments. A 56 basis point increase in interest rates over
the life of the interest rate derivatives would cause the fair value of the
derivatives to decrease from a liability of $2.1 to $1.4. A 56 basis point
decrease would cause the fair value to increase from a liability of $2.1 to
$2.8.
CAUTIONARY STATEMENT PURSUANT TO "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
Except for historical information, the Company's reports to the Securities and
Exchange Commission on Form 10-K and 10-Q and periodic press releases, as well
as other public documents and statements, contain "forward-looking statements"
within the meaning of the federal securities laws. Forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those expressed or implied by the statements, regarding, among
others:
- - Economic and other business conditions that could affect demand for the
Company's products in the United States or international markets.
- - The mix of products sold and the profit margins thereon.
- - Order cancellation or reduced bookings by customers or distributors.
- - Competitive product offerings and pricing actions
- - The availability and pricing of key raw materials.
- - Productivity improvements in manufacturing.
- - Dependence on key members of management.
- - The current economic situation in Asia.
- - Schedules and completion dates of Y2K compliance activity.
- - The ability of the Company to complete the upgrades of its IT systems.
- - The ability of suppliers and customers to be Y2K compliant.
- - The accuracy of Y2K information provided by suppliers and customers.
Readers are cautioned not to place undue reliance on forward-looking statements.
The Company undertakes no obligation to republish or revise forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrences of unanticipated events.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a result of the September 29, 1995 acquisition of Monarch Marking Systems
from Pitney Bowes Inc., a dispute arose over the calculation of the purchase
price. In accordance with the terms of the Purchase Agreement, the parties
submitted the dispute to binding arbitration. On September 6, 1996, the
arbitrator determined that the purchase price should be reduced by $11.2. The
New York Supreme Court, New York County, upheld the arbitrator's decision, and a
judgment in the amount of $12.8 (including interest) was entered on March 11,
1997. Pitney Bowes appealed the Order and Judgement to the New York Supreme
Court, Appellate Division. On May 14, 1998, a four-member panel of the Appellate
Division, New York Supreme Court, unanimously affirmed the trial court's
decision. Pitney Bowes sought leave to appeal to New York State's highest court,
the New York State Court of Appeals. The Company filed an opposition to the
motion. On August 27, 1998 the New York State Court of Appeals denied Pitney
Bowes' motion for appeal. In September 1998, the Company received $14.5 from
Pitney Bowes in settlement of the litigation; with $11.2 representing the amount
attributable to the purchase price adjustment, and $3.3 representing accumulated
interest.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
b) The Note Purchase Agreements between the Company and the purchasers of the
Company's 6.74% Senior Notes due 2008 issued on August 11, 1998, require
the Company to maintain a minimum amount of net worth as specified in the
Agreements. Although the Company has not paid cash dividends and does not
anticipate paying such dividends in the foreseeable future, the net worth
maintenance requirement of the Note Purchase Agreements could have the
effect of limiting the amount of cash dividends that the Company could pay
from time to time.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit Index
27.1 Financial Data Schedule
b) Reports on Form 8-K
On August 26, 1998, the Company filed a Report on Form 8-K dated August
11, 1998, reporting that it had entered into an Amended and Restated Credit
Agreement with Fleet Bank, N.A. and other banks and financial institutions,
providing for an unsecured five-year $200 million revolving credit facility. The
Company also reported that it had sold an aggregate of $150 million of unsecured
6.74% Senior Notes to 18 institutional lenders, primarily insurance companies,
pursuant to the terms of a Note Purchase Agreement, dated as of August 4, 1998,
with each such lender.
16
<PAGE> 17
PAXAR CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements 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
-----------------------------
Registrant
/s/ John Fitzgerald
-----------------------------
Signature
John Fitzgerald
-----------------------------
Full Name of Signing Officer
(Chief Accounting Officer),
-----------------------------
Vice President and Controller
-----------------------------
Title of Signing Officer
November 13, 1998
-----------------------------
Date
17
<PAGE> 18
EXHIBIT INDEX
-------------
Exhibit No. Description
27 Financial Data Schedule
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 18,100
<SECURITIES> 0
<RECEIVABLES> 103,900
<ALLOWANCES> 0
<INVENTORY> 97,200
<CURRENT-ASSETS> 245,300
<PP&E> 301,800
<DEPRECIATION> 108,700
<TOTAL-ASSETS> 607,500
<CURRENT-LIABILITIES> 96,200
<BONDS> 0
0
0
<COMMON> 4,900
<OTHER-SE> 260,700
<TOTAL-LIABILITY-AND-EQUITY> 607,500
<SALES> 460,100
<TOTAL-REVENUES> 460,100
<CGS> 280,200
<TOTAL-COSTS> 280,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,900
<INCOME-PRETAX> 37,500
<INCOME-TAX> 12,000
<INCOME-CONTINUING> 25,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,500
<EPS-PRIMARY> 0
<EPS-DILUTED> 0.51
</TABLE>
