<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, 1999
-------------------------------------------------
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)
<TABLE>
<CAPTION>
NEW YORK 13-5670050
-------- ----------
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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, 1999)
Common Stock, $0.10 par value: 46,708,922 shares
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
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, 1998.
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
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $166.6 $153.8 $488.4 $460.1
Cost of sales 101.4 93.6 299.7 281.6
------ ------ ------ ------
Gross profit 65.2 60.2 188.7 178.5
Selling, general and administrative expense 44.8 42.1 133.3 126.1
Amortization of intangibles 1.7 1.4 4.7 4.0
Restructuring and other special charges - - 5.0 -
------ ------ ------ ------
Operating income 18.7 16.7 45.7 48.4
Interest expense, net 3.6 1.1 11.1 10.9
------ ------ ------ ------
Income before taxes 15.1 15.6 34.6 37.5
Taxes on income 5.3 4.6 12.2 12.0
------ ------ ------ ------
Net income $ 9.8 $ 11.0 $ 22.4 $ 25.5
====== ====== ====== ======
Average common shares outstanding:
Basic 46.3 48.2 46.8 48.5
==== ==== ==== ====
Diluted 46.6 48.9 47.3 49.6
==== ==== ==== ====
Basic earnings per common share $0.21 $0.23 $0.48 $0.53
===== ===== ===== =====
Diluted earnings per common share $0.21 $0.22 $0.47 $0.51
===== ===== ===== =====
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 4
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 22.0 $ 14.8
Short-term investments 9.3 4.4
Receivables, less allowances of $7.6 in 1999 and $5.0 in
1998 120.9 99.6
Inventories 92.7 97.0
Other current assets 14.3 13.3
----- -----
Total current assets 259.2 229.1
Property, plant and equipment, at cost 348.4 300.4
Accumulated depreciation (144.2) (106.8)
------ ------
Net property, plant and equipment 204.2 193.6
Goodwill 158.5 157.8
Other assets 15.0 12.7
------ ------
$ 636.9 $ 593.2
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to banks $ 49.2 $ 1.9
Current maturities of long-term debt 0.3 0.7
Accounts payable and accrued liabilities 96.2 82.8
Accrued taxes on income 8.4 4.5
------ ------
Total current liabilities 154.1 89.9
Long-term debt 178.2 204.5
Deferred income taxes 19.9 20.1
Other liabilities 5.0 5.3
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,
46,708,922 and 47,941,696 shares issued and outstanding in 1999
and 1998, respectively 4.7 4.9
Paid-in capital 92.8 116.9
Retained earnings 190.5 168.1
Accumulated other comprehensive loss (8.3) (3.4)
Treasury stock at cost 1,434,400 shares in 1998 -- (13.1)
------ ------
Total shareholders' equity 279.7 273.4
------ ------
$ 636.9 $ 593.2
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 5
PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 22.4 $ 25.5
------- -------
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 27.6 24.1
Deferred income taxes (0.2) 0.6
Changes in assets and liabilities, net of
business acquired:
Receivables (11.9) (3.6)
Inventories 9.5 0.2
Other current assets (0.9) 0.7
Accounts payable and accrued liabilities 1.2 1.2
Taxes on income 3.7 7.3
Other (0.2) (0.4)
---- ----
28.8 30.1
---- ----
Net cash provided by operating activities 51.2 55.6
---- ----
INVESTING ACTIVITIES:
(Increase) in short-term investments (4.8) (6.1)
Purchases of property, plant and equipment (21.0) (29.0)
Acquisition related (25.5) 11.2
Other 1.8 2.2
----- -----
Net cash used in investing activities (49.5) (21.7)
----- -----
FINANCING ACTIVITIES:
Increase/(decrease) in short-term debt 46.8 (28.1)
Additions to long-term debt 363.3 234.8
Reductions in long-term debt (392.2) (231.0)
Purchase/retirement of common stock (15.9) (9.3)
Exercise of stock options/Stock Purchase Plan 4.5 3.5
------ ------
Net cash provided by/(used in) financing
activities 6.5 (30.1)
----- -----
OTHER ACTIVITIES:
Effect of exchange rate changes on cash (1.0) 0.6
----- -----
Increase in cash 7.2 4.4
Cash at beginning of year 14.8 13.7
------- -------
Cash at end of period $ 22.0 $ 18.1
======= =======
</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, 1998. Other than Balance Sheet amounts as of
December 31, 1998, all amounts herein are unaudited.
Reclassifications:
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
NOTE 2: BUSINESS ACQUISITION
On February 2, 1999, the Company acquired the apparel identification business of
Ferguson International PLC ("Ferguson"). The acquisition price was $24.3,
subject to a final price adjustment based upon the net assets of the business
acquired on the transaction date. The acquisition has been accounted for as a
purchase with assets and liabilities assumed recorded at their estimated fair
values at the date of acquisition. The final purchase price allocation is in the
process of being finalized. The excess of the purchase price and transaction
costs over the fair value of net assets acquired will be recorded as goodwill.
NOTE 3: INVENTORIES
The components of inventories are set forth below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Raw materials $38.2 $49.3
Work-in-Process 10.9 11.8
Finished goods 43.6 35.9
----- -----
$92.7 $97.0
===== =====
</TABLE>
NOTE 4: DUE TO BANKS
A summary of amounts due to banks is set forth below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Bank overdrafts $ 3.2 $ 1.8
Uncommitted Credit Facility (a) 46.0 -
Other foreign - 0.1
------ -----
$ 49.2 $ 1.9
====== =====
</TABLE>
(a) On March 12, 1999, the Company entered into an agreement with a bank under
which the bank provides an unsecured, uncommitted facility for the Company to
borrow up to $50 at negotiated interest rates for defined periods. The agreement
requires the Company to have availability under its revolving credit agreement
equal to the amount borrowed under this facility. There was $46 outstanding
under this facility at September 30, 1999, at an interest rate of 5.275%.
6
<PAGE> 7
NOTE 5: LONG-TERM DEBT
A summary of long-term debt is set forth below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
6.74% Senior Notes due 2008 $ 150.0 $ 150.0
Unsecured bank credit facility 11.7 45.8
Economic Development Revenue Bonds due 2011 8.0 8.0
Industrial Revenue Development Bond due 2019 8.0 -
Other 0.8 1.4
------ -----
178.5 205.2
Less current maturities 0.3 0.7
------ -----
$ 178.2 $ 204.5
======= =======
</TABLE>
NOTE 6: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
A summary of accounts payable and accrued liabilities is set forth below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Accounts payable $39.3 $34.8
Accrued payroll costs 18.4 19.2
Other accrued liabilities 38.5 28.8
---- ----
$96.2 $82.8
===== =====
</TABLE>
NOTE 7: SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes is set forth below:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
--------------------------
SEPTEMBER 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Interest $14.1 $8.4
Income Taxes $ 2.6 $3.0
</TABLE>
NOTE 8: 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 non-owner sources. Comprehensive
income for the periods presented below includes foreign currency translation
items. There was no tax expense or tax benefit associated with the foreign
currency translation items.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Net income $22.4 $25.5
Foreign currency translation adjustments (4.9) 2.0
----- -----
Comprehensive income $17.5 $27.5
===== =====
</TABLE>
7
<PAGE> 8
NOTE 9: EARNINGS PER COMMON SHARE
The reconciliation of basic and diluted per-share computations is as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Net income $22.4 $25.5
===== =====
Average common shares (basic) 46.8 48.5
Options and warrants 0.5 1.1
---- ----
Adjusted average common shares (diluted) 47.3 49.6
==== ====
Earnings per common share:
Basic $0.48 $0.53
===== =====
Diluted $0.47 $0.51
===== =====
</TABLE>
NOTE 10: BUSINESS SEGMENTS
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," was issued effective for fiscal years ending after
December 15, 1998.
The Company revised its presentation of business segment information
beginning with reports issued for the period ended June 30, 1999. Effective June
30, 1999, the reporting for the Printing Solutions segment was discontinued.
This single segment has been replaced by the following two segments: (1)
Identification and Bar Code Solutions; and (2) Thermal Transfer Ribbons. The
Company believes the disaggregation of the former Printing Solutions segment
into its constituent parts is appropriate because the new presentation conforms
to the Company's current management and reporting structure.
The Company operates the following business segments: Apparel
Identification, Identification and Bar Code Solutions, Thermal Transfer Ribbons,
and International. The Company evaluates performance based on operating income
of its business segments before corporate expenses, amortization, non-recurring
charges, interest, income taxes and extraordinary items.
The Company's Apparel Identification operations manufacture products for
and provide services specifically to the apparel and textile industries.
Hot-stamp systems, consisting mainly of printers and related supplies and
services, are sold to Company customers for in-plant label printing. Electronic
printing systems, consisting of printers and related supplies and services, are
used by customers to print data on labels and tags to provide accurate product,
inventory and point of sale information for integration with sophisticated data
systems. Labels and tags are attached to apparel by manufacturers and retailers
to identify and promote their products, allow automated data collection and
provide brand identification and consumer information such as country of origin,
size, fabric content and care instructions. Labels are attached to garments
early in the manufacturing process and must withstand all production processes
and remain legible through washing and dry cleaning by the end user. The
Company's products also include tags and labels for sheets, towels, pillow cases
and other white goods. The Company's Apparel Identification operations are
primarily located in North America. A significant portion of the Company's
products are delivered to apparel manufacturers located in Asia and Mexico whose
products are sold in the U.S.
The Company's Identification and Bar Code Solutions operations manufacture,
market and distribute (i) electronic bar code printers, which are used in a wide
range of retail and industrial applications, including inventory management and
distribution systems, and (ii) hand-held, mechanical labeling devices that print
pressure-sensitive (i.e., adhesive-backed) price and other identification labels
and affix them onto merchandise for retailers. The Company manufactures and
markets other supplies used in both its mechanical labelers and bar code
printers and provides comprehensive service to its installed base of machines.
8
<PAGE> 9
The Company's Thermal Transfer Ribbons operation is the largest
manufacturer in North America of thermal transfer ribbons for numerous diverse
applications. These thermal transfer ribbons are used in bar code printers to
print single-color and multi-color tags and labels for use in manufacturing and
factory automation systems, shipping and distribution systems, and retail price
tag, packaging and medical applications. In addition, the Company manufactures
thermal transfer ribbons for facsimile machines, signage and a wide variety of
other applications.
Service to the Company's customers requires the Company to manufacture its
goods and services globally. For this reason the Company offers the products of
its Apparel Identification, Identification and Bar Code Solutions and Thermal
Transfer Ribbons operations through its International operation. The Company's
International operation either manufactures or offers for sale items
manufactured by the other business segments. Its customers are those in the
apparel industry and the retail supply chain principally in Europe.
The following table shows the financial information of the Company's
business segments. "Corporate" represents amounts not attributable or allocated
to the business segments, including corporate administrative expenses, and
restructuring and other special charges.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales to unaffiliated customers:
Apparel Identification $ 58.8 $ 54.4 $171.1 $161.6
Identification and Bar Code Solutions 43.8 43.6 122.5 127.0
Thermal Transfer Ribbons 20.0 21.4 60.2 62.7
International 44.0 34.4 134.6 108.8
---- ---- ----- -----
Total $166.6 $153.8 $488.4 $460.1
====== ====== ====== ======
Inter-segment sales:
Apparel Identification $ 2.3 $ 3.3 $ 7.2 $ 10.3
Identification and Bar Code Solutions 3.6 2.7 10.3 10.1
Thermal Transfer Ribbons 3.7 2.9 9.8 8.1
International 1.3 0.2 3.3 1.5
--- ----- ----- ----
Total $ 10.9 $ 9.1 $ 30.6 $ 30.0
====== ====== ====== ======
Segment operating income:
Apparel Identification $ 11.3 $ 10.2 $ 31.5 $ 27.8
Identification and Bar Code Solutions 7.9 6.8 18.6 16.4
Thermal Transfer Ribbons 3.4 2.2 9.0 6.9
International 2.4 2.0 8.7 7.9
Corporate and other (4.6) (3.1) (17.4) (6.6)
Amortization (1.7) (1.4) (4.7) (4.0)
---- ----- ---- ----
Total $ 18.7 $ 16.7 $ 45.7 $ 48.4
====== ====== ====== ======
</TABLE>
NOTE 11: RESTRUCTURING AND OTHER SPECIAL CHARGES
The Company adopted a plan to streamline its U.S. and U.K. businesses. During
the nine months ended September 30, 1999, the Company recorded $5.0 of
restructuring and other special charges. Included in the total charge is
severance of $3.3 and $1.1 of costs associated with the consolidation of certain
facilities. Substantially all these costs had been paid as of September 30,
1999. The Apparel Identification business segment consolidated its woven and
printed label operations, which resulted in the elimination of approximately 20
managerial and administrative personnel. The Identification and Bar Code
business segment reduced headcount by approximately 65 salaried positions.
9
<PAGE> 10
NOTE 12: ACCOUNTING FOR DERIVATIVE INSTRUMENTS
At September 30, 1999, the Company had a derivative instrument with notional
value of $65.0. The fair value of that agreement, based on estimates provided by
financial institutions, was a loss of $0.6 at September 30, 1999, for which the
Company has made full provision in the accounts.
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, 2000.
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 and derivative
activity, the Company believes that the adoption of this statement would not
have a material impact on the Company's results of operations.
10
<PAGE> 11
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
The following table shows each element of the income statement as a percent of
sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 60.9 60.9 61.4 61.2
----- ----- ----- -----
Gross profit 39.1 39.1 38.6 38.8
Selling, general and administrative expense 26.9 27.3 27.3 27.4
Amortization of intangibles 1.0 0.9 1.0 0.9
Restructuring and other special charges - - 1.0 -
----- ----- ----- -----
Operating income 11.2 10.9 9.3 10.5
Interest expense, net 2.1 0.7 2.2 2.4
----- ----- ----- -----
Income before taxes 9.1 10.2 7.1 8.1
Taxes on income 3.2 3.0 2.5 2.6
----- ----- ----- -----
Net income 5.9% 7.2% 4.6% 5.5%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH SEPTEMBER 30, 1998
Sales for the three months ended September 30, 1999 increased to $166.6 compared
with $153.8 in the three months ended September 30, 1998. The increase was due
primarily to the acquisition of the apparel identification business of Ferguson
International PLC ("Ferguson"). (See Note 2 of Notes to Consolidated Financial
Statements.) Sales by the Company's Thermal Transfer Ribbon business decreased
7% for the three months ended September 30, 1999, compared with September 30,
1998; while sales of the Apparel Identification business increased by 8% and the
International business segment increased by 28%. Sales by the Company's
Identification and Bar Code Solutions were essentially flat for the three months
ended September 30, 1999, compared with September 30, 1998. (See Note 10 of
Notes to Consolidated Financial Statements.)
Cost of sales for the three months ended September 30, 1999 increased to $101.4
compared with $93.6 for the three months ended September 30, 1998. As a percent
of sales, such costs were 60.9% for the three months ended September 30, 1999
and September 30,1998.
Gross profit increased to $65.2 for the three months ended September 30, 1999
compared with $60.2 for the three months ended September 30, 1998. The gross
profit margin was 39.1% for both the three months ended September 30, 1999 and
September 30, 1998.
Selling, general and administrative expense ("SG&A") increased to $44.8 for the
three months ended September 30, 1999, compared with $42.1 for the three months
ended September 30, 1998. As a percent of sales, SG&A was 26.9% for the three
month period ended September 30, 1999 compared with 27.3% for the three month
period ended September 30, 1998. The increase in SG&A was due primarily to the
acquisition of the apparel identification business of Ferguson International PLC
("Ferguson"). (See Note 2 of Notes to Consolidated Financial Statements.)
11
<PAGE> 12
Operating income increased to $18.7 for the three months ended September 30,
1999 compared with $16.7 for the three months ended September 30, 1998. The
operating margin was 11.2% for the three months ended September 30, 1999
compared with 10.9% in the three months ended September 30, 1998.
Interest expense, net, increased to $3.6 for the three months ended September
30, 1999, from $1.1 for the three months ended September 30, 1998. Interest
expense for the three months ended September 30, 1998 included $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
Monarch acquisition.
Income before taxes was $15.1 (9.1% of sales) for the three months ended
September 30, 1999, as compared with $15.6 (10.2% of sales) for the three months
ended September 30, 1998.
The effective income tax rate was 35% for the three months ended September 30,
1999, compared with 29% for the three months ended September 30, 1998.
Net income for the three months ended September 30, 1999 was $9.8 (5.9% of
sales), compared with $11.0 (7.2% of sales) for the three months ended September
30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH SEPTEMBER 30, 1998
Sales for the nine months ended September 30, 1999 increased to $488.4 compared
with $460.1 in the nine months ended September 30, 1998. The increase was due
primarily to the acquisition of Ferguson's apparel identification business. (See
Note 2 of Notes to Consolidated Financial Statements.) Sales by the Company's
Identification and Bar Code Solutions and Thermal Transfer Ribbons business
segment decreased for the nine months ended September 30, 1999, compared with
September 30, 1998, while those of the Apparel Identification business segment
increased by 6% and the International business segment increased by 24%. (See
Note 10 of Notes to Consolidated Financial Statements.)
Cost of sales for the nine months ended September 30, 1999 increased to $299.7,
compared with $281.6 for the nine months ended September 30, 1998. As a percent
of sales, such costs were 61.4% for September 30, 1999, compared with 61.2% for
September 30,1998.
Gross profit increased to $188.7 for the nine months ended September 30, 1999,
compared with $178.5 for the nine months ended September 30, 1998. The gross
profit margin was 38.6% for the nine months ended September 30, 1999, compared
with 38.8% for the nine months ended September 30, 1998.
12
<PAGE> 13
SG&A increased to $133.3 for the nine months ended September 30, 1999, compared
with $126.1 for the nine months ended September 30, 1998. The increase was due
primarily to the acquisition of Ferguson's apparel identification business. (See
Note 2 of Notes to Consolidated Financial Statements.) As a percent of sales,
SG&A was 27.3% for September 30, 1999, compared with 27.4% for September 30,
1998.
During the nine months ended September 30, 1999, the Company recorded $5.0 of
restructuring and other special charges in connection with its plan to
streamline its U.S. and U.K. businesses. Included in the total charge are
severance of $3.3 and $1.1 of costs associated with the consolidation of certain
facilities. Substantially all these costs had been paid as of September 30,
1999. The Apparel Identification business segment consolidated its woven and
printed label operations, which resulted in the elimination of approximately 20
managerial and administrative personnel. The Identification and Bar Code
Solutions business segment reduced headcount by approximately 65 salaried
positions.
Operating income decreased to $45.7 for the nine months ended September 30,
1999, compared with $48.4 for the nine months ended September 30, 1998. The
operating margin was 9.3% for the nine months ended September 30, 1999, compared
with 10.5% for the nine months ended September 30, 1998. Before restructuring
and other special charges, operating income for the nine months ended September
30, 1999 was $50.7 or 10.4% of sales.
Interest expense, net, increased to $11.1 (2.2% of sales) for the nine months
ended September 30, 1999, from $10.9 (2.4% of sales) for the nine months ended
September 30, 1998. Interest expense for the nine months ended September 30,
1998 included $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 Monarch acquisition, as well as $2.2 interest
expense related to unauthorized trading in interest rate derivatives.
Income before taxes decreased to $34.6 (7.1% of sales) for the nine months ended
September 30, 1999, as compared with $37.5 (8.1% of sales) for the nine months
ended September 30, 1998.
The effective income tax rate was 35% for the nine months ended September 30,
1999 compared with 32% for the nine months ended September 30, 1998. The overall
effective tax rate was impacted by many factors including the expiration of
certain tax incentives in Italy during 1999.
Net income for the nine months ended September 30, 1999 was $22.4 (4.6% of
sales), compared with $25.5 (5.5% of sales) for the nine months ended September
30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents summary cash flow information for the periods
indicated:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1999 1998
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 51.2 $ 55.6
Net cash used by investing activities (49.5) (21.7)
Net cash provided by /(used in) financing activities 6.5 (30.1)
------- -------
Total change in cash (a) $ 8.2 $ 3.8
======= =======
</TABLE>
(a) Before exchange rate effects.
OPERATING ACTIVITIES
Cash provided by operating activities continues to be the Company's primary
source of funds to finance operating needs and internal growth opportunities.
The net cash provided by operating activities was $51.2 for the nine months
ended September 30, 1999, compared with $55.6 for the same period in 1998.
13
<PAGE> 14
Depreciation and amortization was $27.6 for the nine months ended September 30,
1999, compared with $24.1 for the nine months ended September 30, 1998.
INVESTING ACTIVITIES
During the nine months ended September 30, 1999 capital expenditures were $21.0,
compared with $29.0 for the nine months ended September 30, 1998. 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 $30 for the year ending December 31, 1999.
On February 2, 1999, the Company acquired Ferguson's apparel identification
business. The acquisition price was $24.3 subject to a final price adjustment
based upon the net assets of the business acquired on the transaction date. The
acquisition has been accounted for as a purchase with assets and liabilities
assumed recorded at their estimated fair values at the date of acquisition.
The Company intends to continue its growth, in part by acquisitions of
complementary or related businesses, and believes that further acquisitions
would be of important strategic value.
FINANCING ACTIVITIES
The table below shows the components of total capital for the periods indicated:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Due to banks $ 49.2 $ 1.9
Current maturities of long-term debt 0.3 0.7
Long-term debt 178.2 204.5
----- -----
Total debt $227.7 $207.1
Shareholders' equity 279.7 273.4
----- -----
Total capital $507.4 $480.5
====== ======
Total debt as a percent of total capital 44.9% 43.1%
====== ======
</TABLE>
Total debt increased to $227.7 at September 30, 1999, from $207.1 at December
31, 1998. The increase is primarily attributable to the acquisition of the
Ferguson assets and the repurchase of shares under the Company's stock
repurchase plan, offset by repayments of debt using cash flow from operations.
At September 30, 1999, total debt as a percent of total capital was 44.9%
compared with 43.1% at December 31, 1998.
On March 12, 1999, the Company entered into an agreement with a bank under which
the bank provides an unsecured uncommitted facility for the Company to borrow up
to $50 at negotiated interest rates for defined periods. The agreement requires
the Company to maintain availability under its revolving credit agreement equal
to the amount borrowed under this facility. There was $46 outstanding under this
facility at September 30, 1999, at an interest rate of 5.2575%.
OTHER MATTERS
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 as conditions warrant. On February 12,
1999, the Company announced it had increased the stock repurchase plan from the
initial $25 to $40. During the quarter ended September 30, 1999, the Company
cancelled the treasury stock purchased under the stock repurchase plan. Since
July 30, 1998, the Company repurchased 3,265,100 shares at an average price of
$8.8613 per share.
14
<PAGE> 15
YEAR 2000
The Company is actively addressing the Year 2000 ("Y2K") compliance issue,
which stems from the inability of certain computer programs and embedded
computer micro-controllers to distinguish between the year 1900 and the year
2000 and recognize the year 2000 as a leap year. Each operating entity within
the Company has designated an individual under the general supervision of the
Company President, to ensure that each unit achieves timely Y2K readiness. The
Company's Audit Committee of the Board of Directors reviews progress quarterly.
STATE OF READINESS. The Company began its internal Y2K assessments and upgrades
in 1997. The Company brought nearly all its information technology ("IT")
systems into compliance during the first half of 1999. The Company is devoting
the remainder of 1999 to completing remediation of the few remaining
non-compliant applications and testing the readiness of its systems and major
vendors.
The Company has also assessed non-IT systems in the products it 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 in
products the Company sells are Y2K compliant. Manufacturing equipment used by
the Company that contains embedded systems has also been assessed, and any
required remediation has been performed. All systems will continue to be tested
during the remainder of 1999.
COST TO ADDRESS Y2K ISSUES. The Company continues 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 as appropriate, and the impact
of such costs is currently reflected in the Company's operating results. The
Company believes that costs specifically relating to Y2K compliance will be less
than $0.5, and such costs are not deemed to be material.
RISKS TO THE COMPANY AND CONTINGENCY PLANS. The Company is conducting inquiries
regarding Y2K compliance programs of its key customers and suppliers, including
power and telecommunications utilities. No assurance can be given at this time
that the Company's customers and suppliers will be Y2K compliant. However, the
Company has a contingency plan to qualify alternative vendors, including their
Y2K readiness, for those key vendors who cannot demonstrate Y2K readiness. The
Company is also developing contingency plans relating to its ability to
communicate with its customers. The Company will rely on its existing business
continuity plans as a contingency plan for its internal information processing
systems.
EURO CONVERSION
As part of the European Economic Monetary Union (EMU), a single currency
(the "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 were fixed as of January 1,
1999, with the participating national currencies scheduled to be removed from
circulation over the next three years. During this transition period, the Euro
and the local currencies will jointly circulate. The Company's European
operations are preparing to be fully Euro compliant by the end of calendar year
1999, well in advance of the conversion date of January 1, 2002. To the extent
that certain customers request invoices expressed in Euro before the full
phase-in of the Company's Euro-compliant systems, these individual requests can
be accommodated by the Company under its existing IT system. The conversion of
the Company's software and business processes to become Euro-compliant is an
integral part of its customary systems upgrades, and the cost related to
achieving Euro-compliance is expected to be immaterial.
15
<PAGE> 16
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 Form 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:
- rate of migration of garment manufacturing industry moving from
the United States and Western Europe
- worldwide 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
- 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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company experiences market risk relative to interest rates. A 10% change in
interest rates affecting 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 floating rate debt instruments. A 10% increase in
interest rates over the life of the interest rate derivative would cause the
fair value of the derivative to increase from a liability of $0.6 to a liability
of $0.9. A 10% decrease would cause the fair value to decrease from a liability
of $0.6 to a liability of $0.5.
16
<PAGE> 17
PAXAR CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Paxar Corporation
-----------------
Registrant
By: /s/ John Fitzgerald
------------------------
John Fitzgerald
Vice President and Controller
(Principal Accounting Officer)
November 10, 1999
-----------------
Date
17
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000075681
<NAME> PAXAR CORPORATION
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 22,000
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</TABLE>
