FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
For the quarter ended June 30, 1996
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11257
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Checkpoint Systems, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 22-1895850
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(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)
(609) 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
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As of August 5, 1996 there were 34,001,026 of the Common Stock outstanding.
1
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 Cash Flows 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-18
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 19
2
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1996 1995
----------- ------------
ASSETS (Unudited)
------ (Thousands)
CURRENT ASSETS
Cash and cash equivalents $201,633 $ 77,456
Accounts receivable, net of allowances
of $2,487,000 and $1,906,000 81,295 73,065
Inventories 49,167 54,941
Other current assets 10,504 7,479
Deferred income taxes 1,718 1,718
------- -------
Total current assets 344,317 214,659
REVENUE EQUIPMENT ON OPERATING LEASE, net 20,085 15,280
PROPERTY, PLANT AND EQUIPMENT, net 37,284 40,745
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED 64,904 61,456
INTANGIBLES 15,109 14,930
OTHER ASSETS 19,291 15,081
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TOTAL ASSETS $500,990 $362,151
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 17,884 $ 16,643
Accrued compensation and related taxes 6,093 5,762
Income taxes 4,151 4,921
Unearned revenues 9,192 8,155
Other current liabilities 19,575 27,102
Short-term borrowings and current portion
of long-term debt 3,057 4,002
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Total current liabilities 59,952 66,585
LONG-TERM DEBT, LESS CURRENT MATURITIES 34,795 35,674
5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES
WITH A SCHEDULED MATURITY IN 2005 120,000 120,000
DEFERRED INCOME TAXES 2,234 2,234
SHAREHOLDERS' EQUITY
Preferred Stock, no par value, authorized
500,000 shares, none issued
Common Stock, par value $.10 per share,
authorized 100,000,000 shares, issued
35,584,576 and 30,019,758 3,558 3,002
Additional capital 224,901 83,126
Retained earnings 67,354 58,198
Common stock in treasury, at cost,
1,598,000 shares (5,664) (5,664)
Foreign currency adjustments (6,140) (1,004)
------ -------
TOTAL SHAREHOLDERS' EQUITY 284,009 137,658
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $500,990 $362,151
======= =======
See accompanying notes to consolidated financial statements.
3
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter (13 Weeks) Ended Six Months (26 Weeks)ended
------------------------ --------------------------
June 30, June 25, June 30, June 25,
1996 1995 1996 1995
------- ------- ---------- ---------
(Thousands, except per share data)
Net Revenues $74,792 $49,744 $141,786 $87,104
Cost of Revenues 42,459 27,800 82,015 49,069
------ ------ -------- -------
Gross Profit 32,333 21,944 59,771 38,035
Selling, General
and Administrative
Expenses 22,699 16,528 44,958 31,155
------ ------ -------- -------
Operating Income 9,634 5,416 14,813 6,880
Interest Income 1,744 325 2,763 494
Interest Expense 2,402 993 4,745 2,049
Foreign Exchange
Gain (Loss) 156 66 634 (220)
----- ------ ------ -------
Earnings Before
Income Taxes 9,132 4,814 13,465 5,105
Income Taxes 2,922 1,445 4,309 1,532
------ ------ ------- ------
Net Earnings $ 6,210 $ 3,369 $9,156 $3,573
====== ====== ====== ======
Net Earnings Per
Share $ .19 $ .12 $ .29 $ .14
====== ====== ====== ======
See accompanying notes to Consolidated Financial Statements.
4
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Six Months(26 Weeks) Ended June 30, 1996
---------------------------------------------------
Foreign
Common Additional Retained Treasury Currency
Capital Earnings Stock Adjust. Total
------- ------- -------- -------- ------- ------
(Thousands)
Balance,
December 31,
1995 $ 3,002 $83,126 $58,198 $(5,664) $(1,004) $137,658
Net Earnings 9,156 9,156
Exercise of Stock
Options 96 6,208 6,304
Stock Issuance
Associated with
Equity Offering 460 135,567 136,027
Foreign Currency
Adjustments (5,136) (5,136)
------ ------- ------ ------- ------ -------
Balance at
June 30, 1996 $ 3,558 $224,901 $67,354 $(5,664) $(6,140) $284,009
====== ======= ======= ====== ====== =======
See accompanying notes to Consolidated Financial Statements
5
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months(26 Weeks) Ended
--------------------------
June 30, June 25,
1996 1995
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(Thousands)
Cash inflow (outflow) from operating activities:
Net earnings $9,156 $3,573
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net book value of rented equipment sold 706 447
Revenue Equipment placed under Operating Lease (7,412) (6,178)
Long-term customer contracts (2,933) (349)
Depreciation and amortization 8,124 6,794
Provision for losses on accounts receivable 963 275
(Increase) decrease in current assets:
Accounts receivable (10,299) (6,758)
Inventories 5,073 (3,643)
Other current assets (3,180) (499)
Increase (decrease) in current liabilities:
Accounts payable 977 373
Accrued compensation and related taxes 241 833
Income taxes (831) (278)
Unearned revenues 900 (70)
Other current liabilities (9,075) 672
Net cash used by operating activities (7,590) (4,808)
------ -------
Cash inflow (outflow) from investing activities:
Acquisition of property, plant and equipment (5,447) (5,841)
Acquisition, net of cash acquired (1,409) (10,061)
Other investing activities (3,331) (2,538)
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Net cash used by investing activities (10,187) (18,440)
------ ------
Cash inflow (outflow) from financing activities:
Proceeds from stock options 6,304 1,024
Proceeds from sale of common stock 136,027 54,707
Proceeds of debt - 40,000
Payment of debt (377) (44,146)
------ -------
Net cash provided by financing activities 141,954 51,585
------- -------
Net increase (decrease) in cash and cash
equivalents 124,177 28,337
Cash and cash equivalents:
Beginning of period 77,456 944
------- -------
End of period $201,633 $ 29,281
======= =======
See accompanying notes to consolidated financial statements.
6
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 wholly-owned subsidiaries ("Company"). All material
intercompany 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, 1995 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 June 30, 1996 and December 31, 1995 and its results of
operations and changes in cash flows for the thirteen and twenty-six week
periods ended June 30, 1996 and June 25, 1995.
2. INVENTORIES
June 30, December 31,
1996 1995
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(Thousands)
Raw materials $12,275 $ 7,282
Work in process 566 275
Finished goods 36,326 47,384
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$49,167 $54,941
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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 and substantially
exempt from Puerto Rico income taxes. 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.
4. PER SHARE DATA
Per share data is based on the weighted average number of common and
common equivalent shares (stock options) outstanding during the periods.
The number of shares used in the per share computations for the thirteen
and twenty-six week periods ended June 30, 1996 and June 25, 1995 were
33,239,000 and 32,098,000 (1996) and 27,176,000 and 24,890,000 (1995),
respectively after giving retroactive effect to the February 22, 1996
stock split.
7
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for the thirteen and twenty-six week period ended June 30,
1996 and June 25, 1995, respectively, included interest payments of
$3,900,140 and $4,738,240(1996) and $818,000 and $1,385,000 (1995), and
income taxes paid of $1,767,000 and $5,333,000(1996) and $300,000 and
$1,800,000 (1995).
6. INTANGIBLES
Intangibles consist of patents, licenses, customer lists, and software
development costs. The costs relating to the acquisition of patents and
licenses are amortized on a straight-line basis over their economic/legal
useful lives, which range from five to ten years. Accumulated
amortization approximated $2,823,000 and $1,806,000 at June 30, 1996
and December 31, 1995, respectively.
The costs of internally developed software are expensed until the
technological feasibility of the software has been established.
Thereafter, all software development costs are capitalized and
subsequently reported at the lower of unamortized cost or net realizable
value. The costs of capitalized software are amortized over the products'
estimated useful lives or five years, whichever is shorter. Capitalized
software development costs, net of accumulated amortization, totaled
$2,230,000 and $1,519,000 as of June 30, 1996 and December 31, 1995,
respectively.
7. ACQUISITION
On March 21, 1996, the Company purchased all of the capital stock of
Mercatec Sistemas e Comercio de Equipamentos Electronicos Ltds.("Mercatec").
Mercatec is a leading supplier of EAS systems and CCTV systems to retailers
in Brazil with approximately $3,000,000 in annual sales. The purchase price,
including acquisition costs, was approximately $1,400,000.
On November 30, 1995, the Company purchased all of the capital stock of
Actron Group Limited ("Actron") which is engaged in the manufacture,
distribution and sale of security products and services. The purchase
price of the capital stock was approximately $54,000,000. This acquisition
was accounted for under the purchase method and, accordingly, the results of
operations of this business have been included with those of the Company since
the date of acquisition. The purchase price resulted in an excess of
acquisition cost over net assets acquired of approximately $41,544,000 which
is being amortized over thirty years.
In connection with the acquisition of Actron, accruals of $10,401,000
were established to integrate Actron's operations with the Company's
existing sales and production locations. Included in this accrual are:
(i)costs associated with the elimination of approximately 70 manufacturing
and field service and selling and administrative positions from the Actron
operation (approximately $7.7 million), (ii) costs related to the closure
8
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. ACQUISITION (continued)
of redundant sales locations (approximately $1.8 million), and (iii) ancillary
costs (approximately $.9 million). During the first six months of 1996,
approximately $1,196,000 of the ancillary costs and approximately $2,089,000
of the severance costs had been charged against the accrual. The remaining
portion of the accrual is included in the "Other Current Liabilities" section
of the Company's consolidated balance sheet. The integration of Actron's
operations is substantially completed with remaining costs expected to be
incurred in the third quarter of 1996. Actual charges to complete the
integration may differ from the above estimates. Such differences will
increase (decrease) the excess of purchase price over net assets acquired.
The following table represents unaudited combined results of operations
for the first six months of 1996 (actual) and 1995 (as if the acquisition
of Actron had occurred at the beginning of fiscal year 1995). The following
results are not necessarily indicative of what would have occurred had the
acquisition been consummated as of that date or of future results:
Six Months (26 weeks) Ended
-----------------------------
June 30, June 25,
1996 1995
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(Thousands, except per share data)
Net revenues.................... .......$ 141,786 $112,332
Net earnings............................$ 9,156 $ (728)
Earnings per common share...............$ 0.29 $ (.03)
8. ACCOUNTING FOR FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company's balance sheet accounts of foreign subsidiaries are
translated into U.S. dollars at the rate of exchange in effect at the
balance sheet dates. Revenues, costs and expenses of the Company's
foreign subsidiaries are translated into U.S. dollars at the average rate
of exchange in effect during each reporting period. The resulting
translation adjustment is recorded as a separate component of
stockholders' equity. In addition, gains or losses on long-term
intercompany transactions are excluded from the results of operations and
accumulated in the aforementioned separate component of consolidated
stockholders' equity. All other foreign transaction gains and losses are
included in the results of operations.
The Company has purchased certain foreign currency forward contracts in
order to hedge anticipated rate fluctuations in Europe and Canada.
Transaction gains or losses resulting from these contracts are recognized
over the contract period.
9
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. SUBORDINATED CONVERTIBLE DEBENTURES
On April 19, 1996, the Company completed its Shelf Registration Statement
on Form S-3 covering the resale of $47,250,000 5.25% Convertible
Subordinated Debentures due 2005("Debentures") and 2,571,428 shares of the
Company's common stock, $.10 par value per share, issuable upon conversion
of the debentures. The Registration Statement also covered the registration
of 350,000 shares of the Company's Common Stock presently issuable upon
exercise of certain options granted by the Company.
10. EQUITY OFFERING
The Company completed the sale of approximately 4.6 million shares of Common
Stock during the second quarter of this year pursuant to an underwritten
public offering. The net proceeds received by the Company from this offering
were approximately $136 million. The proceeds of the offering are expected to
be used for general corporate purposes including the following: (i) for
potential strategic acquisitions and related start-up operations to enhance
both product line diversification within the Company's core business and
greater distribution opportunities and alliances and (ii) to provide the
necessary capital to enable the Company to internally finance the leasing of
equipment to retailers under long-term leases.
11. CONTINGENCIES
On February 14, 1996, the United States Federal Trade Commission ("FTC")
began an investigation of the retail security systems industry. The probe
was launched under the premise of anticompetitive practices within the
industry whereby certain retail-trade groups limited the autonomy of
smaller retailers by supporting specific security systems. The Company,
along with Sensormatic Electronics Corporation, Minnesota Mining and
Manufacturing, and other industry participants, received subpoenas
requesting certain documents and communications necessary for the
investigation. The Company has furnished various documents to the FTC
pursuant to the subpoenas. The Company does not believe that any legal or
regulatory infraction will be found on its part.
10
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- - - ---------------------
Second Quarter 1996 Compared to Second Quarter 1995
- - - ---------------------------------------------------
Overview
During the second quarter of 1996 revenues increased by approximately
$25.1 million (or 50.4%) over the second quarter of 1995. The increase
in revenues was due primarily from increased sales of the Company's EAS
product line both domestically and internationally with the international
increase impacted by the Company's recent acquisition of Actron. Cost of
revenues were higher than in the second quarter of 1995 as a percentage of
sales (from 55.9% to 56.8%). The increase in cost of revenues was primarily
the result of higher field service costs resulting from increased service
personnel, primarily from the Actron acquisition, combined with domestic
chain wide rollouts. Selling, general and administrative ("SG&A") expenses
increased $6.2 million but declined as a percentage of revenues by 2.8% (from
33.2% to 30.4%). Income from operations increased $4.2 million (from $5.4
million to $9.6 million). Net earnings for the second quarter of 1996
increased by $2.8 million (from $3.4 million to $6.2 million) resulting in
earnings per share of $.19 for the second quarter of 1996 versus $.12
achieved in last year's second quarter.
Net Revenues
Net revenues for the second quarter of 1996 increased approximately $25.1
million (or 50.4%) over the second quarter of 1995 (from $49.7 million to
$74.8 million). Domestic and international net revenues accounted for
approximately 53.2% and 46.8%, respectively, of total net revenues compared
to 62.3% and 37.7% for last year's similar quarter. Domestic retail
Electronic Article Surveillance ("EAS") net revenues increased $6.7 million
(or 36.0%) primarily as a result of increased unit sales resulting from
various chain wide installations. International EAS net revenues increased
$15.5 million (or 83.5%) as a result of: higher unit sales volume generated
by the Company's operations in Europe ($12.5 million) which was primarily
impacted by the Company's recent acquisition of Actron. In addition, the
Company's Canadian and Argentinean operations realized significant sales
increases of $2.1 million and $.7 million, respectively. Sales of the
Company's Security Systems Group products (formerly Alarmex) and CCTV product
lines increased 26.1% (from $9.0 million to $11.3 million) over the prior
year's quarter. The Company's Access Control product line had sales growth of
18.6% (from $2.0 million to $2.3 million) compared to the prior year's second
quarter.
11
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Second Quarter 1996 Compared to Second Quarter 1995
- - - ---------------------------------------------------
Cost of Revenues
Cost of revenues increased approximately $14.7 million (or 52.7 %) over the
second quarter of 1995 (from $27.8 million to $42.5 million). As a percentage
of net revenues, cost of revenues increased .9% (from 55.9% to 56.8%) compared
to the prior year's second quarter. The increase in cost of revenues was
primarily the result of higher field service costs resulting from increased
service personnel, primarily from the Actron acquisition, combined with
domestic chain wide rollouts. During the quarter the Company closed Actron's
high cost European manufacturing facility and moved a significant portion of
the production to the Company's lower cost Caribbean based facilities with the
balance subcontracted to several European based manufacturers. The Company
expects to sell the remaining Actron inventory of approximately $2.0 million
during the third quarter.
Selling, General and Administrative Expenses
SG&A expenses increased $6.2 million (or 37.3%) over the second quarter of
1995 (from $16.5 million to $22.7 million). As a percentage of net revenues,
however, SG&A expenses decreased by 2.8% (from 33.2% to 30.4%). The higher
expenses (in dollars) were due to: (i) approximately $2.6 million increase in
variable selling costs to support the increase in revenues (ii) approximately
$2.9 million increase in general and administrative costs, and (iii)
approximately $.7 million related to the amortization of goodwill and
intangibles generated from the Actron acquisition.
Interest Expense and Interest Income
Interest expense for the second quarter of 1996 increased $1.4 million
(from $1.0 million to $2.4 million) primarily as a result of interest on the
$120 million 5.25% convertible subordinated debentures issued in October of
1995. Interest income for the second quarter of 1996 also increased by $1.4
million (from $.3 million to $1.7 million) as a result of the cash investment
of the remaining proceeds of the $120 million debentures previously mentioned
combined with the proceeds from the Company's equity offering during the
second quarter of 1996 (see "Management's Discussion and Analysis - Liquidity
and Capital Resources" for additional information).
Income Taxes
The effective tax rate of 32.0% is higher than the effective tax rate during
the second quarter of 1995 of 30.0%. This is primarily due to (i) higher
taxable income attributable to foreign jurisdictions where tax rates are
marginally higher than the U.S., and (ii) higher charges for amortization of
goodwill and intangibles resulting from the Actron acquisition which are not
tax deductible.
12
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Net Earnings
Net earnings were $6.2 million or $.19 per share versus $3.4 million or $.12
per share for the prior year's second quarter. The weighted average number of
common and common equivalent shares used in the earnings per share computation
for the second quarter of 1996 has increased substantially compared to the
prior year's quarter (from 27.2 million to 33.2 million) primarily due to (i)
shares issued during the second quarter of 1996 in connection with the
Company's secondary equity offering previously mentioned (4,600,000), and (ii)
the exercise of stock options and an increase in common stock equivalents
(stock options outstanding).
Exposure To International Operations
Approximately 85.2% of the Company's international sales during the second
quarter of 1996 were made in local currencies. Sales denominated in
currencies other than U.S. dollars increased the Company's potential exposure
to currency fluctuations which can affect results. During the second quarter
of 1996, currency exchange gains amounted to approximately $.2 million compared
to a gain of $.1 million in the second quarter of 1995. Management cannot
predict with any degree of certainty the future impact that changes in
currency exchange rates will have on its operations.
13
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
- - - ---------------------
First Half 1996 Compared to First Half 1995
- - - ------------------------------------------
Overview
During the first half of 1996 revenues increased by approximately $54.7
million (or 62.8%) over the first half of 1995. The increase in revenues was
due primarily from increased sales of the Company's EAS product line both
domestically and internationally with the recent acquisition of Actron
contributing significantly to the international revenue increase. Cost of
revenues were higher during the first half compared to the similar period of
1995 as a percentage of sales (from 56.3% to 57.8%). The increase in cost of
revenues was primarily the result of (i) sales of Actron products which carry
a lower gross margin, and (ii) higher field service costs resulting from
increased service personnel primarily from the Actron acquisition combined
with domestic chain wide rollouts. Selling, general and administrative ("SG&A")
expenses increased $13.8 million but declined as a percentage of revenues by
4.1% (from 35.8% to 31.7%). Income from operations increased $7.9 million
(from $6.9 million to $14.8 million). Net earnings for the first half of 1996
increased by $5.6 million (from $3.6 million to $9.2 million) resulting in
earnings per share of $.29 for the first half of 1996 versus $.14 achieved in
last year's first half.
Net Revenues
Net revenues for the first half of 1996 increased approximately $54.7
million (or 62.8%) over the first half of 1995 (from $87.1 million to $141.8
million). Domestic and international net revenues accounted for approximately
49.2% and 50.8%, respectively, of total net revenues compared to 62.6% and
37.4% for last year's similar period. Domestic retail Electronic Article
Surveillance ("EAS") net revenues increased $12.8 million (or 38.4%) primarily
as a result of increased unit sales resulting from various chain wide
installations. International EAS net revenues increased $38.2 million (or
119%) as a result of: higher unit sales volume generated by the Company's
operations in Europe ($29.9 million) which was primarily impacted by the
Company's recent acquisition of Actron. In addition, the Company's Canadian
and Argentinean operations realized significant sales increases of $6.1 million
and $1.1 million, respectively. Sales of the Company's Security Systems Group
products (formerly Alarmex) and CCTV product lines increased 20.8% (from $15.4
million to $18.6 million) over the prior year's first half. The Company's
Access Control product line had sales growth of 12.2% (from $3.4 million to
$3.9 million) compared to the prior year's first half.
14
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
First Half 1996 compared to First Half 1995
- - - ------------------------------------------
Cost of Revenues
Cost of revenues increased approximately $32.9 million (or 67.1%) over the
first half of 1995 (from $49.1 million to $82.0 million). As a percentage
of net revenues, cost of revenues increased 1.5% (from 56.3% to 57.8%)
compared to the prior year's first half. The increase in cost of revenues
was primarily the result of (i) sales of Actron products which carry a
lower gross margin, and (ii) higher field service costs resulting from
increased service personnel primarily from the Actron acquisition combined
with domestic chain wide rollouts.
Selling, General and Administrative Expenses
SG&A expenses increased $13.8 million (or 44.3%) over the first half of 1995
(from $31.2 million to $45.0 million). As a percentage of net revenues,
however, SG&A expenses decreased by 4.1% (from 35.8% to 31.7%). The higher
expenses (in dollars) were due to: (i) approximately $6.0 million increase in
variable selling costs to support the increase in revenues (ii) approximately
$6.4 million increase in general and administrative costs, and (iii)
approximately $1.4 million related to the amortization of goodwill and
intangibles generated from the Actron acquisition.
Interest Expense and Interest Income
Interest expense for the first half of 1996 increased $2.7 million (from
$2.1 million to $4.8 million) primarily as a result of interest on the $120
million 5.25% convertible subordinated debentures issued in October of 1995.
Interest income for the first half of 1996 increased by $2.3 million (from $.5
million to $2.8 million) as a result of the cash investment of the remaining
cash proceeds of the $120 debentures previously mentioned combined with the
proceeds from the Company's equity offering during the second quarter of 1996
(see "Management's Discussion and Analysis - Liquidity and Capital Resources"
for additional information).
Income Taxes
The effective tax rate of 32.0% is higher than the effective tax rate during
the first half of 1995 of 30.0%. This is primarily due to (i) higher taxable
income attributable to foreign jurisdictions where tax rates are marginally
higher than the U.S., and (ii) higher charges for amortization of goodwill
and intangibles resulting from the Actron acquisition which are not tax
deductible.
On August 2, 1996, Congress passed the Small Business Job Protection Act of
1996. The Bill is awaiting the President's signature. The Act generally repeals
the Puerto Rico and Possessions tax credit (Sec 936) for taxable years
beginning after December 31, 1995. However, the Act provides grandfather rules
for corporations which are existing credit claimants.
15
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Income Taxes(Cont.)
For corporations that are existing credit claimants with respect to a
possession and that use the wage credit method, the possession tax credit
attributable to business income from the possession continues to be determined
as under present law for taxable years beginning after December 31, 1995 and
before January 1, 2002. For taxable years beginning after December 31, 2001
and before January 1, 2006, the corporation's possession business income that
is eligible for the wage credit is subject to an income cap. For taxable years
beginning in 2006 and thereafter, the credit is eliminated.
Management is currently analyzing the proposed legislation to determine its
impact on the Company. However, management believes that, if enacted, the
legislation will not have a material impact on the current financial position
of the Company. Furthermore, management anticipates that the proposed
legislation will not have a material impact on the Company's effective tax rate
for fiscal years 1996 and 1997.
Net Earnings
Net earnings were $9.2 million or $.29 per share versus $3.6 million or $.14
per share for the prior year's first half. The weighted average number of
common and common equivalent shares used in the earnings per share
computation for the first half of 1996 has increased substantially compared
to the prior year's period (from 24.9 million to 32.1 million) primarily due to
(i) shares issued during the second quarter of 1996 in connection with the
Company's secondary equity offering previously mentioned (4,600,000), and (ii)
the exercise of stock options and an increase in common stock equivalents
(stock options outstanding).
Exposure To International Operations
Approximately 79.3% of the Company's international sales during the first
half of 1996 were made in local currencies. Sales denominated in
currencies other than U.S. dollars increased the Company's potential exposure
to currency fluctuations which can affect results. During the first half of
1996, currency exchange gains amounted to approximately $.6 million compared
to a loss of $.2 million in the first half of 1995. Management cannot predict
with any degree of certainty the future impact that changes in currency
exchange rates will have on its operations.
16
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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, in fiscal
1995, through the issuance of common stock in an underwritten public offering
and the issuance of convertible subordinated debt.
During the second quarter of 1996 the Company completed an underwritten public
offering of 4.6 million common shares generating proceeds (after expenses of
the offering) to the Company of approximately $136 million. The proceeds of
the offering are expected to be used for general corporate purposes including
the following: (i) for potential strategic acquisitions and related start-up
operations to enhance both product line diversification within the Company's
core business and greater distribution opportunities and alliances and (ii) to
provide the necessary capital to enable the Company to internally finance the
leasing of equipment to retailers under long-term leases.
The Company's operating activities during the first half of 1996 consumed
approximately $7.6 million compared to $4.8 million during the first half
of 1995. This use of cash was primarily the result of (i) an increase in
accounts receivable resulting from increased sales, and (ii) payments made
on accounts payable acquired as part of the Actron transaction and
restructuring costs that the Company initiated as part of the integration
of its European operations.
The Company's capital expenditures during the first half of 1996 totaled
$5.4 million compared to $5.8 million during the first half of 1995.
Notwithstanding the slight reduction between the comparative periods, the
Company expects to continue to make investments in property, plant and
equipment at levels higher than the last several years. These capital
expenditures will generally relate to expanding, improving and maintaining
plant efficiency at the Company's various production facilities located in
the Caribbean and enhancing distribution capabilities and efficiencies
worldwide. As part of this expansion the Company plans to increase the
current annual production capacity of disposable labels from 3 billion to 5
billion by the second half of 1997. In addition, and as part of its
continuing strategy to expand international direct distribution, the Company
is currently in the process of establishing its own centralized Western
European distribution center which is expected to be operational during the
third quarter of 1996. Total capital spending in 1996 is expected to
approximate $14 million.
17
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
- - - -------------------------------------------
Management believes that its anticipated cash needs for the foreseeable future
can be funded from cash and cash equivalents on hand and a currently available
and unused $60 million bank line of credit.
The Company exports products for international sales 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 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 June 30,
1996 the Company had currency exchange forward contracts totaling
approximately $8.3 million. The contracts are in the various local
currencies covering primarily the Company's Western European operations
along with the Company's Canadian operations. The Company's operations in
Argentina, Mexico, Australia and Brazil were not covered by currency exchange
forward contracts at June 30, 1996.
The Company is considering increasing the amount of currencies covered by
forward exchange contracts during fiscal 1996. In addition, the Company
continues to evaluate the use of currency options in order to reduce the impact
that exchange rate fluctuations have on the Company's gross margins for sales
made by the Company's international operations. The combination of forward
exchange contracts and currency options could limit the Company's risks
associated with significant exchange rate fluctuations. The Company had no
currency options outstanding as of June 30, 1996.
The Company has never paid a cash dividend and has no plans to do so in the
foreseeable future. Certain covenants in the Company's debt instruments
prohibit the amounts available for cash dividends.
18
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the second quarter of 1996.
SIGNATURE
---------
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/Jeffrey A. Reinhold August 14, 1996
Vice President - Chief Financial
Officer and Treasurer
/s/Mitchell T. Codkind August 14, 1996
Vice President, Corporate Controller
and Chief Accounting Officer
19