FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
For the quarter ended September 27, 1998
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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 November 02, 1998, there were 31,236,184 shares of the Common Stock
outstanding.
2
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 Statement of Comprehensive Income. . . . . 5
Consolidated Statements of Cash Flows . . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . 10-17
Part II. OTHER INFORMATION
Item 5. Other Information. . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 18
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . 18
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
Sept. 27, Dec. 28,
1998 1997
--------- --------
ASSETS (Unaudited)
------ (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 40,138 $ 64,138
Accounts receivable, net of allowances
of $5,774,000 and $5,703,000 137,676 136,748
Inventories, net 83,723 77,631
Other current assets 11,390 13,570
Deferred income taxes 5,705 5,593
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Total current assets 278,632 297,680
REVENUE EQUIPMENT ON OPERATING LEASE, net 22,627 24,718
PROPERTY, PLANT AND EQUIPMENT, net 82,478 58,674
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, NET 73,542 72,304
INTANGIBLES, NET 11,542 14,003
OTHER ASSETS 53,905 49,055
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TOTAL ASSETS $522,726 $516,434
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Short-term borrowings and current portion
of long-term debt $ 9,509 $ 6,957
Accounts payable 16,033 13,200
Accrued compensation and related taxes 8,735 7,745
Income taxes 12,219 13,687
Unearned revenues 13,171 11,413
Other current liabilities 25,653 33,108
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Total current liabilities 85,320 86,110
LONG-TERM DEBT, LESS CURRENT MATURITIES 44,718 30,855
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
DEFERRED INCOME TAXES 872 1,458
MINORITY INTEREST 440 461
COMMITMENTS AND CONTINGENCIES - -
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
36,456,590 and 36,338,228 3,646 3,633
Additional capital 233,085 232,079
Retained earnings 98,558 86,873
Common stock in treasury, at cost,
5,039,300 shares and 3,188,700 shares (47,171) (27,986)
Accumulated other comprehensive income (16,742) (17,049)
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TOTAL SHAREHOLDERS' EQUITY 271,376 277,550
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $522,726 $516,434
======= =======
See accompanying notes to Consolidated Financial Statements.
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter (13 Weeks) Ended Nine Months (39 Weeks) Ended
------------------------ ---------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
-------- -------- -------- --------
(Thousands, except per share data)
Net Revenues $94,042 $87,959 $264,477 $237,173
Cost of Revenues 54,602 50,373 157,822 137,011
------ ------ ------- -------
Gross Profit 39,440 37,586 106,655 100,162
Selling, General
and Administrative
Expenses 28,582 28,551 86,573 82,897
------ ------ ------ -------
Income from operations 10,858 9,035 20,082 17,265
Interest Income 1,329 1,899 3,519 7,092
Interest Expense 2,179 2,302 7,186 7,055
Other Income/
(expense) net (7) 226 866 2,389
----- ----- ----- -----
Income Before
Income Taxes 10,001 8,858 17,281 19,691
Income Taxes 3,250 2,879 5,616 6,411
Minority Interest (31) 71 20 71
----- ----- ----- ------
Net Earnings $6,720 $6,050 $11,685 $13,351
====== ====== ====== ======
Net Earnings Per Share
Basic $ .21 $ .18 $ .36 $ .39
====== ====== ====== ======
Diluted $ .20 $ .17 $ .35 $ .38
====== ====== ====== ======
See accompanying notes to Consolidated Financial Statements.
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Nine Months(39 Weeks) Ended September 27,1998
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Accum.
Other
Common Additional Retained Comprehen- Treasury
Stock Capital Earnings sive Income* Stock Total
------- ---------- -------- -------- -------- -----
(Thousands)
Balance,
December 28,
1997 $ 3,633 $232,079 $86,873 $(17,049) $(27,986) $277,550
Net Earnings - - 11,685 - - 11,685
Exercise of Stock
Options 13 1,006 - - - 1,019
Purchase of
Treasury Stock (19,185) (19,185)
Other Comprehensive
Income - - - 307 - 307
------ -------- ------- -------- --------- -------
Balance at
Sept. 27,1998 $ 3,646 $233,085 $98,558 $ (16,742) $(47,171) $271,376
======= ======== ======= ========== ========= ========
* Consists of foreign currency translation adjustments.
See accompanying notes to Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
Nine Months(39 Weeks) Ended September 27,1998
---------------------------------------------
(Thousands)
Net Earnings $11,685
Other Comprehensive Income
Foreign Currency Translation
Adjustments 307
------
Other Comprehensive Income 307
------
Comprehensive Income $ 11,992
======
See accompanying notes to Consolidated Financial Statements.
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months(39 Weeks) Ended
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Sept. 27, Sept. 28,
1998 1997
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(Thousands)
Net earnings $ 11,685 $ 13,351
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net book value of rented equipment sold 983 776
Revenue Equipment placed under Operating Lease (6,027) (12,270)
Long-term customer contracts (5,224) (5,772)
Depreciation and amortization 19,393 16,731
Provision for losses on accounts receivable 1,511 1,089
(Increase) decrease in current assets:
Accounts receivable (1,532) (41,143)
Inventories (4,148) (21,029)
Other current assets 2,267 (6,917)
Increase (decrease) in current liabilities:
Accounts payable 2,744 1,090
Accrued compensation and related taxes 940 (492)
Income taxes (2,052) 1,859
Unearned revenues 1,211 1,802
Other current liabilities (8,324) 6,905
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Net cash provided (used) by
Operating activities 13,427 (44,020)
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Cash inflow (outflow) from investing activities:
Acquisition of property, plant and equipment (9,651) (19,118)
Acquisition, net of cash acquired (27,584) (3,903)
Other investing activities 287 (3,114)
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Net cash used by investing activities (36,948) (26,135)
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Cash inflow (outflow) from financing activities:
Proceeds from stock options 1,019 1,149
Proceeds from debt 19,541 2,948
Payment of debt (1,854) (4,959)
Purchase of treasury stock (19,185) (9,349)
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Net cash provided (used) by
financing activities (479) (10,211)
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Net decrease in cash and cash
equivalents (24,000) (80,366)
Cash and cash equivalents:
Beginning of period 64,138 185,836
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End of period $ 40,138 $105,470
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See accompanying notes to Consolidated Financial Statements.
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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 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
28, 1997 for the most recent disclosure of the Company's accounting policies.
The consolidated financial statements include all adjustments, necessary to
present fairly the Company's financial position at September 27, 1998 and
December 28, 1997 and its results of operations and changes in cash flows for
the thirty-nine week periods ended September 27, 1998 and September 28, 1997.
2. INVENTORIES
September 27, December 28,
1998 1997
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(Thousands)
Raw materials $ 9,604 $10,329
Work in process 2,365 2,312
Finished goods 71,754 64,990
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$83,723 $77,631
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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. LONG TERM CUSTOMER CONTRACTS
Included in Other Assets are unbilled receivables and other assets relating
to long term customer contracts generated primarily from the leasing of the
Company's EAS equipment to retailers under long-term sales-type leasing
arrangements (referred to by management as the Comprehensive Tag Program(tm)).
The duration of these programs typically range from three to five years.
4. 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.
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. 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
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Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
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(In thousands, except per share amounts)
BASIC EARNINGS PER SHARE:
Net Income $ 6,720 $ 6,050 $ 11,685 $ 13,351
======== ======== ======== ========
Average Common Stock Outstanding 32,031 33,935 32,825 34,149
Basic Earnings Per Share $ .21 $ .18 $ .36 $ .39
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Net Income Available for Common
Stock Dilutive Securities(1) $ 7,783 $ 6,050 $ 11,685 $ 13,351
======== ======== ======== ========
Average Common Stock Outstanding 32,031 33,935 32,825 34,149
Additional Common Shares
Resulting from Stock Options 482 1,018 1,077 1,179
Resulting from Convertible
Debenture 6,528 - - -
-------- -------- -------- -------
Average Common Stock and
Dilutive Stock Outstanding(1) 39,041 34,953 33,902 35,328
======== ======== ======= =======
Dilutive Earnings Per Share $ .20 $ .17 $ .35 $ .38
======== ======== ======= =======
(1) Includes the dilutive effect of the assumed conversion of the
subordinated debentures for the three months ended September 27, 1998.
Conversion of the subordinated debentures is not included for the other
periods as the conversion price is anti-dilutive.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes for the thirteen and thirty-nine
week periods ended Sept. 27, 1998, and Sept. 28, 1997 was as follows:
Nine Months
Quarter (13 weeks) Ended (39 weeks) Ended
------------------------ --------------------
Sept. 27, Sept. 28, Sept, 27, Sept. 28,
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
Interest $ 967 $ 895 $ 5,689 $ 5,731
Income Taxes $ 2,010 $ 1,184 $ 6,055 $ 5,060
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. RESTRUCTURING CHARGE
In December 1997, the Company recorded a pre-tax restructuring charge of
$9,000,000. This charge, relating directly to the Company's international
operations, includes (i) the elimination of approximately 60 positions
($5,450,000); (ii) the lease terminations of six of the Company's sales
facilities and the consolidation of the Company's European research and
development center into the corporate headquarters ($1,500,000); (iii) the
costs associated with the termination of two master reseller agreements in
Asia and Southern Europe ($1,550,000); and (iv) costs associated with the
consolidation of inventory to the European distribution center ($500,000).
At September 27, 1998, $3,932,000 of restructuring remains in Other Current
Liabilities. The restructuring activity is expected to be substantially
completed in early 1999.
8. ACQUISITIONS
On February 2, 1998, the Company acquired the assets of Tokai Electronics Co.,
Ltd., a Japanese manufacturer of radio frequency tags, for approximately
$27,000,000. The Company had held a one-third interest in Tokai since 1995.
9. SUBSEQUENT EVENTS
On October 23, 1998, the Board of Directors approved the purchase of up to
$20 million of the Company's outstanding common stock at an average cost not
to exceed $14 per share. The stock will be repurchased in the open market or
in other appropriate transactions under applicable regulations. The timing of
repurchases and number of shares actually repurchased will depend on a variety
of factors including price.
10. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the FASB issued SFAS No. 131,"Disclosures about Segments of an
Enterprise and Related Information". The provisions of SFAS No. 131 establish
standards for the way that enterprises report information about operating
segments in annual financial statements and require that selected information
about operating segments in interim financial statements be reported. It also
establishes standards for related disclosure about products and services,
geographic areas, and major customers. The Company is reviewing this standard
of disclosure for adoption in its 1998 annual report.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities. The provisions of SFAS No. 133
establishes new procedures accounting for derivatives and hedging activities
and amends a number of existing standards. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999. Although the Company has not
fully completed its evaluation of the impact of this new standard, we do not
anticipate the adoption of this standard to have a material effect on the
Company's consolidated financial statements.
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Item 2.
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Forward Looking Statements
This report may include information that could constitute forward-looking
statements made pursuant to the safe harbor provision of the Private
Securities Litigation Reform Act of 1995. Any such forward-looking
statements may involve risk and uncertainties that could cause actual
results to differ materially from any future results encompassed within
forward-looking statements.
RESULTS OF OPERATIONS
- ---------------------
Third Quarter 1998 Compared to Third Quarter 1997
- ------------------------------------------------------------
Overview
During the third quarter of 1998, revenues increased by approximately
$6.1 million (or 6.9%) over the third quarter of 1997. The increase in
revenues was due primarily to (i) increased sales of the Company's CCTV/Fire
and Burglar product lines within both the North American and international
retail markets and (ii) an overall increase in sales of the Company's
Electronic Article Surveillance ("EAS") product line within the North
American retail market partially offset by a decrease in EAS revenue within
the international retail market. Cost of revenues, as a percentage of sales
increased by 0.8% (from 57.3% to 58.1%) when compared to last year's third
quarter. Selling, general and administrative ("SG&A") expenses remained
constant when compared to last year's third quarter, but decreased as a
percentage of revenues by 2.1%(from 32.5% to 30.4%). Income from operations
increased $1.8 million (from $9.0 million to $10.8 million). Net earnings for
the third quarter of 1998 increased $0.7 million (from $6.0 million to
$6.7 million). Earnings per share were $.20 for the third quarter of 1998
versus $.17 achieved in the third quarter of 1997. Per share amounts for all
periods reflect diluted earnings per share, unless otherwise noted.
Net Revenues
Net revenues for the third quarter of 1998 increased $6.1 million (or 6.9%)
over the third quarter of 1997 (from $87.9 million to $94.0 million). North
American (the United States and Canada) and International net revenues
accounted for approximately 63.6% and 36.4%, respectively, of total net
revenues compared to 60.7% and 39.3% for last year's similar quarter. North
American EAS net revenues increased by $4.9 million (or 13.0%). International
EAS net revenues decreased $3.0 million (or 8.8%). Sales of the Company's
Worldwide CCTV/Fire and Burglar products increased $4.5 million or 34.1%
(from $13.2 million to $17.7 million) over the prior year's quarter. Sales of
the Company's Access Control product line decreased 21.2% (from $3.3 million
to $2.6 million) compared to the prior year's third quarter.
Cost of Revenues
Cost of revenues increased $4.2 million (or 8.4%) over the third quarter of
1997 (from $50.4 million to $54.6 million). As a percentage of net revenues,
cost of revenues increased 0.8% (from 57.3% to 58.1%). The increase in the
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CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Cost of Revenues
Company's cost of revenues is primarily attributable to: (i) an increase in
field service costs to support existing and future revenues; (ii) the
increase in sales of CCTV/Fire and Burglar products which result in higher
product costs when compared to the Company's EAS products; (iii) higher costs
of disposable labels manufactured in Japan; and (iv) the costs associated with
excess capacity in the Puerto Rico manufacturing facility resulting from the
recent expansion. The increase in cost of revenues was partially offset by the
effects of an increase in sales of disposable tags which carry a lower product
cost than the Company's other EAS, CCTV, Fire and Burglar products.
Selling, General and Administrative Expenses
SG&A expenses remained constant when compared to last year's third quarter.
As a percentage of net revenues, SG&A expenses decreased by 2.1% (from 32.5%
to 30.4%).
Other Income, net
Other income, net, consisting entirely of net foreign exchange gains and
losses, decreased by $0.2 million when compared to the third quarter of 1997.
Interest Expense and Interest Income
Interest expense for the third quarter of 1998 decreased by $0.1 million
over the comparable quarter in 1997 from $2.3 million to $2.2 million.
Interest income for the third quarter of 1998 decreased by $0.6 million from
the comparable quarter in 1997 (from $1.9 million to $1.3 million) resulting
from a direct reduction in cash and cash investments primarily related to
(i) cash used to support operations in 1997, (ii) the cost of expanding the
Company's manufacturing facility in Ponce, Puerto Rico during 1997, (iii) the
continued purchase of Treasury stock during the second half of 1997 and the
third quarter of 1998; and (iv) the acquisition of the assets of Tokai
Electronics Co., Ltd., in February 1998.
Income Taxes
The effective tax rate of 32.5% is the same as the effective tax rate during
the third quarter of 1997.
Net Earnings
Net earnings for the current quarter were $6.7 million or $.20 per share
versus $6.1 million or $.17 per share for the prior year's third quarter.
Exposure to International Operations
Approximately 94% of the Company's international sales during the third
quarter of 1998 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. 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.
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CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
First Nine Months of 1998 Compared to First Nine Months of 1997
- ---------------------------------------------------------------
Overview
During the first nine months of 1998, revenues increased by approximately
$27.3 million (or 11.5%) over the first nine months of 1997. The increase
in revenues was due primarily to increased sales of the Company's Electronic
Article Surveillance ("EAS") product line in both the North American (the
United States and Canada) and International retail markets and CCTV/Fire and
Burglar product lines within the domestic retail markets and to a lesser
extent the increased sales of CCTV/Fire and Burglar products in the
international markets. Cost of revenues, as a percentage of sales, increased
by 1.9% (from 57.8% to 59.7%) when compared to last year's first nine months.
Selling, general and administrative ("SG&A") expenses increased $3.7 million
but decreased as a percentage of revenues by 2.3% (from 35.0% to 32.7%).
Income from operations increased $2.8 million (from $17.3 million to
$20.1 million). Net earnings for the first nine months of 1998 decreased
$1.7 million (from $13.4 million to $11.7 million). Earnings per share were
$0.35 for the first nine months of 1998 versus $0.38 achieved in the first
nine months of 1997.
Net Revenues
Net revenues for the first nine months of 1998 increased $27.3 million
(or 11.5%) over the first nine months of 1997 (from $237.2 million to
$264.5 million). North American and International net revenues accounted for
approximately 59.5% and 40.5%, respectively, of total net revenues compared
to 57.3% and 42.7% for last year's similar period. North American EAS net
revenues increased by $10.1 million (or 10.8%). International EAS net
revenues increased $0.3 million. Sales of the Company's Worldwide CCTV/Fire
and Burglar products increased $15.6 million or 43.4% (from $36.0 million to
$51.6 million) over the prior year's first nine months. The Company's Access
Control product line had sales growth of 6.0% (from $8.3 million to
$8.8 million) compared to the prior year's first nine months.
Cost of Revenues
Cost of revenues increased approximately $20.8 million (or 15.2%) over the
first nine months of 1997 (from $137.0 million to $157.8 million). As a
percentage of net revenues, cost of revenues increased 1.9% (from 57.8% to
59.7%). The increase in the Company's cost of sales is primarily attributable
to: (i) the increase in sales of CCTV/Fire and Burglar products which result
in higher product costs when compared to the Company's EAS products; (ii) the
costs associated with excess capacity in the Puerto Rico manufacturing
facility resulting from the recent expansion; (iii) an increase in field
service costs to support existing and future revenues; (iv) higher costs of
disposable labels manufactured in Japan; and (v) an increase in Research and
Development activities associated with the development of RF-EAS/ID Products.
The increase in cost of revenues was partially offset by the effects of an
increase in sales of disposable tags which carry a product cost lower than
the Company's other EAS, CCTV, Fire and Burglar products.
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CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Selling, General and Administrative Expenses
SG&A expenses increased $3.7 million (or 4.4%) over the first nine months of
1997 (from $82.9 million to $86.6 million). As a percentage of net revenues,
SG&A expenses decreased by 2.3% (from 35.0% to 32.7%). The higher expenses
(in dollars) reflect a $1.4 million increase in selling, marketing and
customer service costs to support existing and future revenues, and a
$2.3 million increase in general and administrative costs.
Other Income, net
Other income, net for the first nine months of 1998 decreased by $1.5 million
compared to the first nine months of 1997. Other income, net of $0.9 million
for the nine months of 1998 included $1.3 million of proceeds from the final
settlement of the insurance claim relating to the loss of business income
caused by a fire at the Company's warehouse facility in France, offset by a
net foreign exchange loss of $0.4 million. Other income, net of $2.4 million
for the nine months of 1997 includes: (i) a payment of $1.3 million from
Mitsubishi Materials Corporation in connection with the establishment of a
joint product research and development project; (ii) an insurance claim of
$1.0 million related to the loss of business income caused by a fire at the
Company's warehouse facility in France; and (iii) a net foreign exchange gain
of $0.1 million.
Interest Expense and Interest Income
Interest expense for the first nine months of 1998 increased $0.1 million
over the first nine months of 1997 (from $7.1 million to $7.2 million).
Interest income for the first nine months of 1998 decreased by $3.6 million
from the comparable nine months in 1997 (from $7.1 million to $3.5 million)
resulting from a direct reduction in cash and cash investments primarily
related to (i) cash used to support operations in 1997, (ii) the costs
relating to the expansion of the Company's manufacturing facility in Ponce,
Puerto Rico during the second half of 1997, (iii) the continued purchase of
Treasury stock during the second half of 1997 and the third quarter of 1998;
and (iv) the acquisition of the assets of Tokai Electronics Co., Ltd., in
February 1998.
Income Taxes
The effective tax rate of 32.5% is the same as the effective tax rate during
the first nine months of 1997.
Net Earnings
Net earnings for the first nine months were $11.7 million or $0.35 per share
versus $13.4 million or $.38 per share for the prior year's first nine months.
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CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Exposure to International Operations
Approximately 96% of the Company's international sales during the first
nine months of 1998 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. 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.
Year 2000
---------
Year 2000 Readiness
The Company's year 2000 readiness plan is primarily directed towards ensuring
business continuity by mitigating any year 2000 computer failures that could
interrupt business processes, damage customer service, and/or cause financial
loss. The plan addresses the year 2000 effect on the following areas:
(i) information systems; (ii) the Company's product offerings; and (iii)
internal and external supply chain readiness which includes the Company's
internal manufacturing processes.
The Company is involved in an ongoing assessment of year 2000 readiness and is
undergoing a company-wide program of adapting its computer systems and
applications for the year 2000. The Company's primary applications software
has been procured through third party vendors, and the Company has begun to
address potential year 2000 deficiencies through updates provided by the
vendors. The Company's other information systems and applications software,
some of which are not year 2000 compliant, are in the process of being
evaluated.
As a result of an evaluation of the Company's product lines for year 2000
compliance, the Company's primary products, comprising of EAS products, are
not date dependant and therefore, will not require modifications. The
Company's Access Control products were determined to be compliant, except for
a few products, which are intended to be modified, at minimal costs by
year-end 1998. The Company's CCTV and fire and burglar alarm products are
generally purchased from outside vendors and the Company is currently working
with such vendors to determine compliance.
The Company plans to begin an assessment of year 2000 issues associated with
its various business partners, including vendors and service providers, and
intends to work with these third parties to identify and mitigate common
risks.
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CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
These various third party and non-information technology assessments are
scheduled to commence in the current fiscal quarter. The Company also
recognizes the potential for year 2000 issues in external areas such as
telephone and communication systems, utilities, banks and alarm systems.
Costs
Costs associated with the year 2000 compliance have not been material to
date, and the total costs to achieve year 2000 compliance are being
evaluated. Currently, management estimates the cost to test and remedy
the Company's information systems to be approximately $1.5 million. This
estimate includes the acceleration of hardware purchases of
approximately $.8 million and other expenses consisting primarily of
outside year 2000 consulting services of $.7 million. However, there can
be no assurance that costs will not exceed this level. The Company has
yet to determine the potential cost, if any, associated with the
Company's product offerings and supply chain readiness.
Risks
The variety, nature and complexity of year 2000 issues, the dependence
on technical skills and expertise of Company employees and independent
contractors and issues associated with the readiness of third parties
are factors which could result in the Company's efforts toward year 2000
compliance being less than fully effective.
The failure to correct a material year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely effect the
Company's results of operations, liquidity and financial condition. Due
to the general uncertainty inherent in the year 2000 problem, resulting
in part from the uncertainty of the year 2000 readiness of third-party
suppliers and customers, the Company is unable to provide assurance at
this time that the consequences of Year 2000 failures will not have a
material impact on the Company's results of operations, liquidity or
financial condition. The execution of the Company's year 2000 plan is
expected to significantly reduce the Company's level of uncertainty
associated with the year 2000 problem.
Contingency Plans
The Company believes that its program of assessment, correction and
testing, along with selected system upgrades will enable it to
successfully meet the year 2000 challenge. After completion of the
assessment and remediation process, the Company will formalize a
contingency plan to address potential failures associated with year 2000
compliance.
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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, the issuance of convertible subordinated debt, and proceeds
from two separate issuances of Common Stock in underwritten public
offerings.
The Company's operating activities during the first nine months of 1998
generated approximately $13.4 million of cash compared to $44.0 million
consumed during the first nine months of 1997. This change from the
prior year was primarily the result of a decreased investment in working
capital and long term customer contracts.
The Company's capital expenditures during the first nine months of 1998
totaled $9.7 million compared to $19.1 million during the first nine
months of 1997. For fiscal year 1998 the Company anticipates that its
capital expenditure requirements will approximate $13.0 million.
During 1997, the Board of Directors approved the purchase of up to 10%
or approximately 3.5 million shares of the Company's common stock at an
average cost not to exceed $14.00 per share. As of November 2, 1998,
the Company has purchased 3,441,300 shares of common stock for an
average price of $12.02 per share.
On October 23, 1998, the Board of Directors authorized the purchase of
up to $20 million of the Company's outstanding common stock at an
average cost not to exceed $14.00 per share. As of November 2, 1998, the
Company has purchased 193,100 shares of common stock for an average
price of $11.46 per share.
The Company has an existing $100 million multi-currency unsecured
revolving credit facility. At September 27, 1998, 2.45 billion Japanese
yen (approximately $18.3 million) was outstanding under this credit
agreement. These borrowings, along with approximately $8 million from
cash on hand, were utilized in February 1998, to acquire the assets of
Tokai Electronics Co., Ltd., a Japanese manufacturer of radio frequency
tags, for approximately $27 million.
Management believes that its anticipated cash needs for the foreseeable
future can be funded from cash and cash equivalents on hand and the
unused portion of the $100 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 sales and resale gives rise to the
risk of gains or losses as a result of currency exchange rate
fluctuations.
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CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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 27, 1998, the Company had currency exchange forward
contracts totaling approximately $26.4 million. The contracts are in
the various local currencies covering primarily the Company's Western
European operations along with the Company's Australian and Canadian
operations. The Company's operations in Argentina, Brazil, Japan, and
Mexico were not covered by currency exchange forward contracts at
September 27, 1998.
The Company also holds a series of put options denominated in Australian
and Canadian dollars which gives the Company the right but not the
obligation to convert the Australian and Canadian dollars at a specified
exchange rate in to U.S. dollars. 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 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 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 to the amount of
dividends which may be paid.
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PART II. OTHER INFORMATION
Item 5. Other Information
Shareholders of the Company are entitled to submit proposals
on matters appropriate for shareholder action consistent with
regulations of the Securities and Exchange Commission ("SEC") and the
Company's bylaws. Should a shareholder wish to have a proposal
considered for inclusion in the proxy statement for the Company's 1999
annual meeting, under Rule 14a-8 of the Securities and Exchange Act of
1934, as amended (the "Exchange Act"), such proposal must be received by
the Company on or before November 26, 1998.
In connection with the Company's 1999 annual meeting and
pursuant to recently amended Rule 14a-4 under the Exchange Act, if the
shareholder's notice is not received by the Company on or before
February 6, 1999, the Company (through management proxy holders) may
exercise discretionary voting authority when the proposal is raised at
the annual meeting without reference to the matter in the proxy
statement.
The above summary, which sets forth only the procedures by
which business may be properly brought before and voted upon at the
Company's annual meeting, is qualified in its entirety by reference to
the Company's bylaws.
All shareholder proposals and notices should be directed to:
Checkpoint Systems, Inc., Attention: Corporate Secretary, 101 Wolf
Drive, Thorofare, NJ 08086.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the third quarter of 1998.
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
- ----------------------- November 12, 1998
Vice President - Finance,
Chief Financial Officer and Treasurer
/s/ W. Craig Burns
- ------------------------ November 12, 1998
Vice President, Corporate Controller
and Chief Accounting Officer
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