FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11257
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Checkpoint Systems, Inc.
- ----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 22-1895850
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Wolf Drive P.O. Box 188 Thorofare, New Jersey 08086
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(Address of principal executive offices) (Zip Code)
(856) 848-1800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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
-- --
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of October 22, 2001, there were 31,661,280 shares of the Common Stock
outstanding.
CHECKPOINT SYSTEMS, INC.
FORM 10-Q
INDEX
Page No.
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Shareholders' Equity 5
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-20
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 21
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
INDEX TO EXHIBITS 23
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
Sept. 30, Dec. 31,
2001 2000
-------- --------
(Unaudited)
ASSETS (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 47,685 $ 28,121
Accounts receivable, net of allowances
of $12,710,000 and $12,427,000 153,980 176,479
Inventories, net 107,434 122,267
Other current assets 26,207 35,620
Deferred income taxes 7,349 8,668
------- -------
Total current assets 342,655 371,155
REVENUE EQUIPMENT ON OPERATING LEASE, net 12,901 21,744
PROPERTY, PLANT AND EQUIPMENT, net 115,483 123,417
GOODWILL, net 240,762 245,241
OTHER INTANGIBLES, net 70,465 78,070
OTHER ASSETS 31,245 32,378
------- -------
TOTAL ASSETS $813,511 $872,005
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and
current portion
of long-term debt $ 39,650 $ 38,070
Accounts payable 33,865 41,996
Accrued compensation and
related taxes 16,156 16,862
Income taxes 22,011 30,793
Unearned revenues 25,381 26,354
Restructuring reserve 8,201 17,707
Other current liabilities 45,577 46,299
------- -------
Total current liabilities 190,841 218,081
LONG-TERM DEBT, LESS CURRENT MATURITIES 184,979 227,011
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
OTHER LONG-TERM LIABILITIES 55,716 57,953
DEFERRED INCOME TAXES 9,960 10,734
MINORITY INTEREST 662 547
SHAREHOLDERS' EQUITY
Preferred stock, no par value, authorized
500,000 shares, none issued
Common Stock, par value $.10 per share, 3,801 3,664
Authorized 100,000,000 shares, issued
38,012,780 and 36,642,740
Additional capital 245,944 234,407
Retained earnings 122,550 108,458
Common stock in treasury, at cost,
6,359,200 shares (64,410) (64,410)
Accumulated other comprehensive loss (56,532) (44,440)
------- -------
TOTAL SHAREHOLDERS' EQUITY 251,353 237,679
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $813,511 $872,005
======= =======
See accompanying notes to Consolidated Financial Statements
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
-------------------- --------------------
Sept. 30, Sept. 24, Sept. 30, Sept. 24,
2001 2000 2001 2000
------- -------- ------- --------
(Thousands, except per share amounts)
Net revenues $155,322 $171,225(1) $481,232 $502,540(1)
Cost of revenues 92,560 99,642(1) 285,000 295,312(1)
------- ------- ------- -------
Gross Profit 62,762 71,583 196,232 207,228
Selling, general and
administrative expenses 50,074 54,264 157,167 172,495
Integration expenses - 3,084 - 8,662
------- ------- ------- -------
Operating income 12,688 14,235 39,065 26,071
Interest income 589 863 2,099 3,393
Interest expense 5,261 6,088 17,090 17,980
Other (loss)/income, net (767) (278) (787) (2,288)
------- ------- ------- -------
Earnings before income taxes 7,249 8,732 23,287 9,196
Income taxes 2,827 3,493 9,082 3,678
Minority interest (61) (31) (113) 2
------- ------- ------- -------
Earnings before cumulative
effect of change in
accounting principle $ 4,361 $ 5,208 $14,092 $ 5,520
======= ======= ======= =======
Cumulative effect of change
in accounting principle - - - (5,020)
------- ------- ------- -------
Net earnings $ 4,361 $ 5,208 $14,092 $ 500
======= ======= ======= =======
Earnings per share before
cumulative effect of change
in accounting principle:
Basic $ .14 $ .17 $ .45 $ .18
====== ====== ====== ======
Diluted $ .14 $ .17 $ .44 $ .18
====== ====== ====== ======
Net earnings per share:
Basic $ .14 $ .17 $ .45 $ .02
====== ====== ====== ======
Diluted $ .14 $ .17 $ .44 $ .02
====== ====== ====== ======
(1) Amounts have been reclassified to conform with Emerging Issues Task
Force (EITF) 00-10, Accounting for Shipping and Handling Fees and Costs.
See accompanying notes to Consolidated Financial Statements
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Nine Months(39 Weeks) Ended Sept. 30, 2001
-----------------------------------------------------
Accumu-
lated
Other
Addit- Compre-
Common ional Retained hensive Treasury
Stock Capital Earnings (Loss) Stock Total
------ ------- -------- ------ -------- -----
(Thousands)
Balance,
December 31, 2000 $3,664 $234,407 $108,458 $(44,440) $(64,410) $237,679
(Common shares:
issued 36,642,740
reacquired 6,359,200)
Net earnings 14,092 14,092
Exercise of stock
options 137 11,537 11,674
(1,370,040 shares)
Foreign currency
translation adjustment (12,092) (12,092)
------ -------- -------- --------- --------- --------
Balance,
September 30, 2001 $3,801 $245,944 $122,550 $(56,532) $(64,410) $251,353
====== ======== ======== ========= ========= ========
(Common shares:
issued 38,012,780
reacquired 6,359,200)
See accompanying notes to Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
-------------------- --------------------
Sept. 30, Sept. 24, Sept. 30, Sept. 24,
2001 2000 2001 2000
-------- -------- -------- --------
(Thousands)
Net earnings $ 4,361 $ 5,208 $ 14,092 $ 500
Foreign currency translation
adjustment, net of tax 7,947 (4,131) (12,092) (7,193)
------ ----- ------ -----
Comprehensive income/(loss) $ 12,308 $ 1,077 $ 2,000 $ (6,693)
====== ===== ====== =====
See accompanying notes to Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months(39 Weeks) Ended
--------------------------
Sept. 30, Sept. 24,
2001 2000
-------- --------
(Thousands)
Cash flows from operating activities:
Net earnings $ 14,092 $ 500
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Revenue equipment under operating lease 989 (2,081)
Long-term customer contracts (3,599) 6,757
Depreciation and amortization 33,017 36,530
(Increase)/decrease in current assets net
of the effects of acquired companies:
Accounts receivable 15,912 (2,559)
Inventories 11,934 (22,287)
Other current assets 6,749 (10,401)
Increase/(decrease) in current liabilities
net of the effects of acquired companies:
Accounts payable (8,512) (694)
Accrued compensation and related taxes (881) (8,379)
Income taxes (5,304) (8,878)
Unearned revenues 3,424 8,743
Restructuring reserve (8,908) (15,619)
Other current liabilities 2,473 14,425
------- -------
Net cash provided/(used) by operating
activities 61,386 (3,943)
------- -------
Cash flows from investing activities:
Acquisition of property, plant and equipment (7,551) (10,642)
Acquisitions, net of cash acquired (13,486) -
Other investing activities 1,343 (5,929)
------- -------
Net cash used in investing activities (19,694) (16,571)
------- -------
Cash flows from financing activities:
Proceeds from stock issuances 11,674 364
Proceeds of debt 6,686 379
Payment of debt (39,926) (30,836)
------- -------
Net cash used in financing activities (21,566) (30,093)
------- -------
Effect of foreign currency rate fluctuations
on cash and cash equivalents (562) (3,856)
------- -------
Net increase/(decrease) in cash and cash
equivalents 19,564 (54,463)
Cash and cash equivalents:
Beginning of period 28,121 87,718
------- -------
End of period $ 47,685 $ 33,255
======= =======
See accompanying notes to Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF ACCOUNTING
The consolidated financial statements include the accounts of Checkpoint
Systems, Inc. and its majority-owned subsidiaries ("Company"). All
inter-company transactions are eliminated in consolidation. The consolidated
financial statements and related notes are unaudited and do not contain all
disclosures required by generally accepted accounting principles. Refer to
the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2000 for the most recent disclosure of the Company's accounting policies.
The consolidated financial statements include all adjustments, consisting
only of normal recurring accruals, necessary to present fairly the Company's
financial position at September 30, 2001 and December 31, 2000 and its
results of operations and changes in cash flows for the thirty-nine week
periods ended September 30, 2001 and September 24, 2000.
Certain reclassifications have been made to the 2000 financial statements and
related footnotes to conform to the 2001 presentation.
2. INVENTORIES
September 30, December 31,
2001 2000
------------ ------------
(Thousands)
Raw materials $ 10,793 $ 10,921
Work in process 5,622 6,819
Finished goods 91,019 104,527
------- -------
$107,434 $122,267
======= =======
Inventories are stated at the lower of cost (first-in, first-out method)
or market. Cost includes material, labor and applicable overhead.
3. INCOME TAXES
Income taxes are provided for on an interim basis at an estimated
effective annual tax rate. The Company's net earnings generated by the
operations of its Puerto Rico subsidiary are exempt from Federal income
taxes under Section 936 of the Internal Revenue Code (as amended under the
Small Business Job Protection Act of 1996) and substantially exempt from
Puerto Rico income taxes. Under current law, this exemption from Federal
income tax will remain in effect through 2001, will be subject to certain
limits during the years 2002 through 2005, and will be eliminated
thereafter. Under Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes", deferred tax liabilities and assets
are determined based on the difference between financial statement and tax
basis of assets and liabilities using enacted statutory tax rates in effect
at the balance sheet date.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. PER SHARE DATA
The following data shows the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock:
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
-------------------- --------------------
Sept. 30, Sept. 24, Sept. 30, Sept. 24,
2001 2000 2001 2000
-------- -------- -------- --------
(Thousands, except per share amounts)
BASIC EARNINGS PER SHARE:
Earnings before cumulative
effect of change in
accounting principle $ 4,361 $ 5,208 $ 14,092 $ 5,520
======== ======== ======== ========
Net earnings $ 4,361 $ 5,208 $ 14,092 $ 500
======== ======== ======== ========
Average common stock
outstanding 31,654 30,211 31,064 30,203
Basic earnings per
share before cumulative
effect of change in
accounting principle $ .14 $ .17 $ .45 $ .18
======== ======== ======== ========
Basic earnings
per share $ .14 $ .17 $ .45 $ .02
======== ======== ======== ========
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
-------------------- --------------------
Sept. 30, Sept. 24, Sept. 30, Sept. 24,
2001 2000 2001 2000
-------- -------- -------- --------
(Thousands, except per share amounts)
DILUTED EARNINGS PER SHARE:
Earnings before cumulative
effect of change in
accounting principle
available for common stock
and diluted securities $ 5,322 $ 6,153 $ 16,974 $ 5,520
======== ======== ======== ========
Net earnings available for
common stock and diluted
securities $ 5,322 $ 6,153 $ 16,974 $ 500(1)
======== ======== ======== ========
Average common stock
outstanding 31,654 30,211 31,064 30,203
Additional common shares
resulting from stock options 666 360 611 439
resulting from convertible
debentures 6,528 6,528 6,528 -
-------- -------- -------- --------
Average common stock and
dilutive stock outstanding 38,848 37,099 38,203 30,642(1)
Diluted earnings per
share before cumulative
effect of change in
accounting principle $ .14 $ .17 $ .44 $ .18
======== ======== ======== ========
Dilutive earnings per share $ .14 $ .17 $ .44 $ .02
======== ======== ======== ========
(1) Conversion of the subordinated debentures is not included in the above
calculation as the conversion price is anti-dilutive.
5. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes for the thirteen and thirty-nine
week periods ended September 30, 2001, and September 24, 2000 were as follows:
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
---------------------- ---------------------
Sept. 30, Sept. 24, Sept. 30, Sept. 24,
2001 2000 2001 2000
-------- -------- -------- --------
(Thousands)
Interest $ 3,758 $ 6,674 $ 15,144 $ 16,807
Income Taxes $ 199 $ 469 $ 12,732 $ 12,091
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. ACQUISITION OF A.W. PRINTING, INC.
On January 9, 2001, the Company acquired A.W. Printing, Inc., a leading
provider of high quality tags, labels and packaging products for the apparel
industry. The acquisition was a cash transaction valued at approximately $13
million.
The acquisition was accounted for under the purchase method. The results of
the operations are included in the consolidated financial statements since
the date of acquisition. The purchase price plus direct acquisition costs
have been allocated on the basis of estimated fair value at the date of
acquisition, pending final determination of the fair value of certain
acquired assets and liabilities.
7. PROVISION FOR RESTRUCTURING
Accrual Cash Accrual
at Charged Increase Payments at
Beginning to in (and Exchange Sept. 30,
of 2001 Earnings Goodwill Rate Changes) 2001
--------- -------- -------- ------------ -------
(Thousands)
Severance and
other employee
related charges $11,756 $ - $ - $ (8,142) $ 3,614
Lease termination
costs 5,951 - - (1,364) 4,587
------- ------- ------- -------- -------
$17,707 $ - $ - $ (9,506) $ 8,201
======= ======= ======= ======== =======
The provision for restructuring was established in 1999, and updated in 2000,
primarily for the severance and lease termination costs related to the
acquisition of Meto AG in December 1999.
At the end of the third quarter 2001, 546 of the 586 planned employee
terminations had been completed and substantially all of the
office/warehouses included in the restructuring plan had been vacated.
Termination benefits are being paid out over a period of 1 to 24 months after
termination.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. BUSINESS SEGMENTS
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
---------------------- ---------------------
Sept. 30, Sept. 24, Sept. 30, Sept. 24,
2001 2000 2001 2000
-------- --------- -------- ---------
(Thousands)
Business segment net revenue:
Security $ 93,535 $106,165(1) $285,116 $302,846(1)
Labeling Services 31,915 35,195(1) 103,855 107,400(1)
Retail Merchandising 29,872 29,865(1) 92,261 92,294(1)
------- ------- ------- -------
Total $155,322 $171,225 $481,232 $502,540
======== ======= ======= =======
Business segment gross profit:
Security $ 37,247 $ 44,522 $114,992 $123,290
Labeling Services 9,426 10,464 30,932 $ 33,245
Retail Merchandising 16,089 16,597 50,308 50,693
------- ------- ------- -------
Total $ 62,762 $ 71,583 $196,232 $207,228
======= ======= ======= =======
(1) Amounts have been reclassified to conform with Emerging Issues Task
Force (EITF) 00-10, Accounting for Shipping and Handling Fees and Costs.
9. ADOPTION OF SFAS 133
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes a new model for the
accounting and reporting of derivative and hedging transactions. The
statement amends a number of existing standards and, as amended by SFAS No.
138, became effective for fiscal years beginning after June 15, 2000. As
required, the Company adopted this standard as of January 1, 2001.
This standard requires that all derivative instruments be reported on the
balance sheet at fair value. For instruments designated as fair value
hedges, changes in the fair value of the instrument will largely be offset on
the income statement by changes in the fair value of the hedge item. For
instruments designated as cash flow hedges, the effective portion of the
hedge is reported in other comprehensive income until it is assigned to
earnings in the same period in which the hedged item has an impact on
earnings. For instruments designated as a hedge of net investment in foreign
operating units not using the US dollar as its functional currency, changes
in the fair value of the instrument will be offset in other comprehensive
income to the extent that they are effective as economic hedges. Changes in
the fair value of derivative instruments, including embedded derivatives,
that are not designated as a hedge will be recorded each period in current
earnings along with any ineffective portion of hedges.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The Company's adoption of SFAS No. 133 on January 1, 2001 did not change
management's risk policies and practices. In compliance with the standard,
the Company continues to record changes in value on the statement of
operations.
The Company's major market risk exposures are movements in foreign currency
exchange and interest rates. The Company's policy generally is to hedge
major foreign currency exposures through foreign exchange forward contracts.
These contracts are entered into with major financial institutions thereby
minimizing the risk of credit loss. The Company's policy is to manage
interest rates through the use of various interest rate caps and swaps. The
Company does not hold or issue derivative financial instruments for
speculative or trading purposes. The Company is subject to other foreign
exchange market risk exposure as a result of non-financial instrument
anticipated foreign currency cash flows which are difficult to reasonably
predict.
The Company enters into currency exchange forward contracts to hedge
short-term receivables from its foreign sales subsidiaries which are
denominated in currencies other than the US dollar. The terms of the
currency exchange forward contracts are rarely more than one year. The
Company also entered into a range forward option in Euros, which provides the
Company with limited protection against exchange rate volatility for
converting Euros into US dollars. Unrealized and realized gains and losses
on these contracts and options are included in other (loss)/income, net.
Counter-parties to these contracts are major financial institutions, and
credit loss from counter-party non-performance is not anticipated.
In connection with the Company's floating rate debt under the senior
collateralized multi-currency credit facility, the Company purchased interest
rate caps to reduce the risk of significant Euro interest rate increases.
The fair value and premiums paid for the instruments were not material. The
interest rate caps are marked to market and the changes recorded in earnings.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
10. NEW ACCOUNTING PRONOUNCEMENTS AND OTHER STANDARDS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. The SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in the
financial statements. In accordance with SEC Staff Accounting Bulletin No.
101, the Company changed its accounting method for recognizing revenue on the
sale of equipment where post-shipment obligations exist. Previously, the
Company recognized revenue for equipment when title transferred, generally
upon shipment. Beginning with the first quarter of year 2000, the Company
began recognizing revenue when installation is complete or other post-
shipment obligations have been satisfied. During the first quarter of 2000,
the cumulative effect of the change in accounting method was a non-cash
reduction in net earnings of $5.0 million, net of income tax benefit of $2.7
million or $0.16 per diluted share.
The Emerging Issues Task Force (EITF) of the FASB reached consensus in 2000
on EITF 00-10, Accounting for Shipping and Handling Fees and Costs. This new
accounting guidance was effective for the fourth quarter of 2000 and relates
primarily to the classification of certain costs in the Company's
Consolidated Statements of Operations with restatements of prior reporting
required. The Company has reclassified a total of $1.0 million and $2.9
million for the third quarter and nine-months ended September 30, 2000 ,
respectively, in shipping and handling fees to net revenues from cost of
revenues as a result of adopting this standard.
The EITF reached a consensus in 2000 on Issue 00-14, Accounting for Certain
Sales Incentives. The standard addresses the income statement classification
of certain selling costs. Prior period restatements are required. In April
2001, the EITF reached a consensus to defer the effective date to quarters
beginning after December 15, 2001. The Company does not expect the standard
to result in a material reclassification in any period.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141 (SFAS 141), Business Combinations and Statement
of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other
Intangible Assets. For the Company, these statements will become generally
effective December 31, 2001, although business combinations initiated after
July 1, 2001 are subject to the non-amortization and purchase accounting
provisions. The Company has not completed its evaluation of the impact of
these new pronouncements on its financial statements.
The FASB issued Statement of Financial Accounting Standards No. 143 (SFAS
143), Accounting for Asset Retirement Obligations on August 15, 2001 and
Statement of Financial Accounting Standards No. 144 (SFAS 144), Accounting
for the Impairment or Disposal of Long-Lived Assets on October 3, 2001. The
statements become effective for the Company on December 30, 2002 and December
31, 2001 respectively. The effects of these pronouncements on the Company's
financial statements are currently being assessed.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information relating to Forward-Looking Statements
This report includes forward-looking statements made pursuant to the safe
harbor provision of the Private Securities Litigation Reform Act of 1995.
Except for historical matters, the matters discussed are forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933,
as amended, that reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties which could cause actual results
to differ materially from historical results or those anticipated. Readers
are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. The Company undertakes no
obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. The
following risk factors, among other possible factors, could cause actual
results to differ materially from historical or anticipated results: (1)
changes in international business conditions; (2) foreign currency exchange
rate and interest rate fluctuations; (3) lower than anticipated demand by
retailers and other customers for the Company's products, particularly in the
current economic environment; (4) slower commitments of retail customers to
chain-wide installations and/or source tagging adoption or expansion; (5)
possible increases in per unit product manufacturing costs due to less than
full utilization of manufacturing capacity as a result of slowing economic
conditions or other factors; (6) the Company's ability to provide and market
innovative and cost-effective products; (7) competitive pricing pressures
causing profit erosion; (8) the availability and pricing of component parts
and raw materials; (9) possible increases in the payment time for
receivables, as a result of economic conditions or other market factors; (10)
changes in regulations or standards applicable to the Company's products; and
(11) unanticipated liabilities or expenses. More information about potential
factors that could affect the Company's business and financial results is
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000, and the Company's other Securities and Exchange Commission
filings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
- ---------------------
The table below reflects sales and operating income for the quarter and nine
months ended September 30, 2001 and September 24, 2000.
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
-------------------- ---------------------
Sept. 30, Sept. 24, Sept. 30, Sept. 24,
2001 2000 2001 2000
-------- -------- -------- --------
(In Thousands)
Net revenues $155,322 $171,225(1) $481,232 $502,540(1)
Cost of revenues 92,560 99,642(1) 285,000 295,312(1)
-------- -------- -------- --------
Gross profit 62,762 71,583 196,232 207,228
Selling, general and
administrative expenses 50,074 54,264 157,167 172,495
-------- -------- -------- --------
Operating income before
integration expenses 12,688 17,319 39,065 34,733
Integration expenses - 3,084 - 8,662
-------- -------- -------- --------
Operating income after
integration expenses $ 12,688 $ 14,235 $ 39,065 $ 26,071
======== ======== ======== ========
(1) Amounts have been reclassified to conform with Emerging Issues Task Force
(EITF) 00-10, Accounting for Shipping and Handling Fees and Costs.
The discussion that follows speaks to the comparisons in the above table
through operating income before integration expenses. The integration
expenses included above consist primarily of consulting, legal and marketing
costs incurred in connection with integrating Meto/Checkpoint operations.
Comparisons of all other income and expense items refer to the Consolidated
Statements of Operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Third Quarter 2001 Compared to Third Quarter 2000
- ---------------------------------------------------
Net Revenues
Net revenues for the third quarter of 2001 decreased $15.9 million (or 9.3%)
over the third quarter of 2000 (from $171.2 million to $155.3 million).
Excluding the impact of foreign exchange of approximately $1.9 million, net
revenues decreased 8.2% over the comparable 2000 quarter. The decrease in
revenue was caused by lower sales volumes in the United States labeling
services business and in South America due to a further deterioration in
economic conditions in the third quarter of 2001.
Cost of Revenues
Cost of revenues decreased approximately $7.0 million (or 7.0%) over the
third quarter of 2000 (from $99.6 million to $92.6 million). As a percentage
of net revenues, cost of revenues increased from 58.2% to 59.6%. The
increase in the Company's cost of revenues as a percentage of sales is
attributable to negative manufacturing variances of approximately $1.6
million following the Company's effort to decrease inventory levels by
reducing manufacturing production schedules.
Selling, General and Administrative Expenses
SG&A expenses decreased $4.2 million (or 7.7%) over the third quarter of
2000 (from $54.3 million to $50.1 million). As a percentage of net revenues,
SG&A expenses increased from 31.7% to 32.2%. The increased percentage is a
result of decreased net revenues while certain SG&A costs remained fixed.
Other (Loss)/Income, net
Other (loss)/income, net represented a net foreign exchange loss of $0.8
million and $0.3 million for the third quarter of 2001 and of 2000,
respectively.
Interest Expense and Interest Income
Interest expense for the third quarter of 2001 decreased $0.8 million from
the comparable quarter in 2000 (from $6.1 million to $5.3 million) due to
debt repayment and declining Euro interest rates. Interest income for the
third quarter of 2001 decreased by $0.3 million from the comparable quarter
in 2000 (from $0.9 million to $0.6 million).
Income Taxes
The effective tax rate for the third quarter of 2001 was 39.0%. The
effective tax rate during the third quarter of 2000 was 40.0%. The lower tax
rate reflects the improvement in the profitability of the foreign
subsidiaries in 2001, which results in less non-benefited losses.
Net Earnings
Net earnings for the third quarter were $4.4 million or $.14 per diluted
share. Net earnings for the third quarter of 2000 before integration
expenses were $7.1 million or $.22 per diluted share. Including integration
expenses, net earnings for the third quarter of 2000 were $5.2 million or
$.17 per diluted share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
First Nine Months 2001 compared to First Nine Months 2000
- -------------------------------------------------------------
Net Revenues
Net revenues for the first nine months of 2001 decreased $21.3 million (or
4.2%) over the first nine months of 2000 (from $502.5 million to $481.2
million). Excluding the impact of foreign exchange of approximately $18.3
million, net revenues decreased 0.6% over the first nine months of 2000. The
decrease in revenue was caused by further weakening in the retail and apparel
industries during the quarter that impacted sales volume at our United States
labeling services business. Also, slowing economic conditions in South
America affected revenue and profit contributions from that region.
Cost of Revenues
Cost of revenues decreased approximately $10.3 million (or 3.5%) over the
first nine months of 2000 (from $295.3 million to $285.0 million). As a
percentage of net revenues, cost of revenues increased from 58.8% to 59.2%.
The increase in the Company's cost of revenues as a percentage of sales is
attributable to an increase in negative manufacturing variances of
approximately $4.5 million following the Company's effort to decrease
inventory levels by reducing manufacturing production schedules. This was
partially offset by a reduction in field service costs.
Selling, General and Administrative Expenses
SG&A expenses decreased $15.3 million (or 8.9%) over the first nine months of
2000 (from $172.5 million to $157.2 million). As a percentage of net
revenues, SG&A expenses decreased from 34.3% to 32.7%. The reduction is a
result of the integration of the Meto operations and cost saving measures
carried out in the fourth quarter of 2000. Included in the first nine months
of 2001 is $1.6 million of pre-tax charges related to the exit of certain
business segments in Belgium as well as costs associated with executive
management changes that were implemented in the first quarter of 2001.
Other (Loss)/Income, net
Other (loss)/income, net represented a net foreign exchange loss of $0.8
million and $2.3 million for the first nine months of 2001 and of 2000,
respectively.
Interest Expense and Interest Income
Interest expense for the first nine months of 2001 decreased $0.9 million
from the comparable period in 2000 (from $18.0 million to $17.1 million) due
primarily to debt repayment. Interest income for the first nine months of
2001 decreased by $1.3 million from the comparable period in 2000 (from $3.4
million to $2.1 million).
Income Taxes
The effective tax rate for the first nine months of 2001 was 39.0%. The
effective tax rate during the first nine months of 2000 was 40.0%. The lower
tax rate reflects the improvement in the profitability of the foreign
subsidiaries in 2001, which results in less non-benefited losses.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Cumulative Effect Of Change In Accounting Principle
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. The SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in the
financial statements. In accordance with SEC Staff Accounting Bulletin No.
101, the Company changed its accounting method for recognizing revenue on the
sale of equipment where post-shipment obligations exist. Previously, the
Company recognized revenue for equipment when title transferred, generally
upon shipment. Beginning with the first quarter of year 2000, the Company
began recognizing revenue when installation is complete or other post-
shipment obligations have been satisfied. During the first quarter of 2000,
the cumulative effect of the change in accounting method was a non-cash
reduction in net earnings of $5.0 million, net of income tax benefit of $2.7
million, or $0.16 per diluted share.
Net Earnings
Net earnings for the first nine months of 2001 were $14.1 million or $.44 per
diluted share. Net earnings for the first nine months of 2000 before
integration expenses and cumulative effect of change in accounting principle
were $10.7 million or $.35 per diluted share. Including integration expenses
and the cumulative effect of change in accounting principle, net earnings for
the first nine months of 2000 were $0.5 million or $.02 per diluted share.
Exposure to International Operations
Approximately 63% of the Company's sales are made in currencies other than
U.S. dollars. Sales denominated in currencies other than U.S. dollars
increase the Company's potential exposure to currency fluctuations which can
affect results. Management cannot predict, with any degree of certainty,
changes in currency exchange rates and therefore, the future impact that such
changes may have on its operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
FINANCIAL CONDITION
- -------------------
Liquidity and Capital Resources
The Company's liquidity needs have related to, and are expected to continue
to relate to, capital investments, acquisitions and working capital
requirements. The Company has met its liquidity needs over the last three
years primarily through funds provided by long-term borrowings and through
cash generated from operations. The Company believes that cash provided from
operating activities and funding available under its current credit
agreements, should be adequate for its presently foreseeable working capital
and capital investment requirements.
The Company's operating activities generated approximately $61.4 million
during the first nine months of 2001 and used approximately $3.9 million in
the same period in 2000. This change from the prior year was primarily
attributable to the improvement in earnings and the reduction in accounts
receivable, inventories, and restructuring costs. Included in cash flow from
operations for the first nine months of 2001 were $10.0 million of tax
payments related to the satisfaction of a legacy Meto German tax liability
and $8.9 million of restructuring liability payments.
In December 1999, the Company completed the acquisition of Meto AG. In
connection with the acquisition, the Company entered into a new $425 million
six and one-half year senior collateralized multi-currency credit facility
with a consortium of twenty-one banks led by the Company's principal lending
bank. The credit facility, which expires on March 31, 2006, includes a $275
million equivalent multi-currency term note and a $150 million equivalent
multi-currency revolving line of credit. Interest rates on the new facility
reset quarterly and are based on the Eurocurrency base rate plus an
applicable margin. At September 30, 2001, 195.4 million Euro (approximately
$177.8 million) and $9.5 million were outstanding under the term loan. The
outstanding borrowings under the revolving line of credit facility were 2.23
billion Japanese Yen (approximately $18.6 million). On March 15, 2001, the
$150 million revolving line of credit was reduced at the Company's request to
$100 million.
The Company has never paid a cash dividend (except for a nominal cash
distribution in April 1997, to redeem the rights outstanding under the
Company's 1988 Shareholders' Rights Plan). The Company does not anticipate
paying any cash dividend in the near future and is limited by existing
covenants in the Company's debt instruments with regard to paying dividends.
Management believes that its anticipated cash needs for the foreseeable
future can be funded from cash and cash equivalents on hand, the availability
under the $100 million revolving credit facility, and cash generated from
future operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Capital Expenditures
The Company's capital expenditures during the first nine months of fiscal
2001 totaled $7.6 million compared to $10.6 million during the first nine
months of fiscal 2000. The higher expenditures during 2000 were primarily a
result of an increased investment in the Company's global IT infrastructure
combined with an investment in manufacturing equipment located in Puerto
Rico. The Company anticipates its capital expenditures to approximate $10
million in 2001.
Exposure to International Operations
The Company manufactures product in the US, the Caribbean, Europe and Asia
Pacific for both the local marketplace and for export to its foreign
subsidiaries. The subsidiaries, in turn, sell these products to customers in
their respective geographic areas of operation, generally in local
currencies. This method of sale and resale gives rise to the risk of gains
or losses as a result of currency exchange rate fluctuations.
In order to reduce the Company's exposure resulting from currency
fluctuations, the Company has been selectively purchasing currency exchange
forward contracts on a regular basis. These contracts guarantee a
predetermined exchange rate at the time the contract is purchased. This
allows the Company to shift the risk, whether positive or negative, of
currency fluctuations from the date of the contract to a third party.
As of September 30, 2001, the Company had currency exchange forward contracts
totaling approximately $20.5 million. The contracts are in the various local
currencies covering primarily the Company's Western European operations along
with the Company's Canadian and Australian operations. Historically, the
Company has not purchased currency exchange forward contracts for its
operations in South America and the Asia Pacific region.
The Company will continue to evaluate the use of currency options in order to
reduce the impact that exchange rate fluctuations have on the Company's net
earnings from sales made by the Company's international operations. The
combination of forward exchange contracts and currency options should reduce
the Company's risks associated with significant exchange rate fluctuations.
OTHER MATTERS
- -------------
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141 (SFAS 141), Business Combinations and Statement
of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other
Intangible Assets. For the Company, these statements will become generally
effective December 31, 2001, although business combinations initiated after
July 1, 2001 are subject to the non-amortization and purchase accounting
provisions. While the Company has not completed its evaluation of the impact
of these new pronouncements on its financial statements, it is expected that
future earnings will benefit by approximately $10 million to $12 million due to
the cessation of amortization of both goodwill and intangible assets related
to assembled workforce.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to the market risks as disclosed in
item 7a of the Company's Annual Report on Form 10-K filed for the year ending
December 31, 2000, which is incorporated herein by reference.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10(iii)A. Employment Agreement with Michael E. Smith
First Amendment to Employment Agreement with
Michael E. Smith
Second Amendment to Employment Agreement with
Michael E. Smith
Third Amendment to Employment Agreement with
Michael E. Smith
Employment Agreement with William J. Reilly, Jr.
First Amendment to Employment Agreement with
William J. Reilly, Jr.
Second Amendment to Employment Agreement with
William J. Reilly, Jr.
Third Amendment to Employment Agreement with
William J. Reilly, Jr.
Employment Agreement with W. Craig Burns
First Amendment to Employment Agreement with
W. Craig Burns
Employment Agreement with Neil D. Austin
Employment Agreement with Arthur W. Todd
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the third
quarter of 2001.
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.
CHECKPOINT SYSTEMS, INC.
/s/ W. Craig Burns
- ----------------------- November 14, 2001
Executive Vice President,
Chief Financial Officer and Treasurer
/s/ Arthur W. Todd
- ------------------------ November 14, 2001
Vice President, Corporate Controller
and Chief Accounting Officer
INDEX TO EXHIBITS
-----------------
EXHIBIT DESCRIPTION
- ------- -----------
EXHIBIT 10(iii)A. Employment Agreement with Michael E. Smith
First Amendment to Employment Agreement with
Michael E. Smith
Second Amendment to Employment Agreement with
Michael E. Smith
Third Amendment to Employment Agreement with
Michael E. Smith
Employment Agreement with William J. Reilly, Jr.
First Amendment to Employment Agreement with
William J. Reilly, Jr.
Second Amendment to Employment Agreement with
William J. Reilly, Jr.
Third Amendment to Employment Agreement with
William J. Reilly, Jr.
Employment Agreement with W. Craig Burns
First Amendment to Employment Agreement with
W. Craig Burns
Employment Agreement with Neil D. Austin
Employment Agreement with Arthur W. Todd