FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
For the quarter ended June 25, 2000
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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)
(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
-- --
As of August 1, 2000, there were 30,207,734 shares of the Common Stock
outstanding.
1
CHECKPOINT SYSTEMS, INC.
FORM 10-Q
INDEX
Page No.
--------
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 14-19
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 20
2
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
June 25, Dec. 26,
2000 1999
-------- --------
ASSETS (Unaudited)
(Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 63,105 $ 87,718
Accounts receivable, net of allowances
of $13,469,000 and $10,479,000 161,050 184,378
Inventories, net 109,942 99,148
Other current assets 29,065 27,346
Deferred income taxes 17,706 21,210
-------- --------
Total current assets 380,868 419,800
REVENUE EQUIPMENT ON OPERATING LEASE, net 16,250 18,665
PROPERTY, PLANT AND EQUIPMENT, net 119,577 128,881
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, net 310,599 316,536
INTANGIBLES, net 12,604 14,211
OTHER ASSETS 48,903 46,780
-------- --------
TOTAL ASSETS $888,801 $944,873
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and
current portion
of long-term debt $ 46,086 $ 47,680
Accounts payable 43,391 45,892
Accrued compensation and
related taxes 18,694 25,750
Income taxes 22,725 35,370
Unearned revenues 26,404 18,338
Restructuring reserve 16,404 27,047
Other current liabilities 45,435 36,537
-------- --------
Total current liabilities 219,139 236,614
LONG-TERM DEBT, LESS CURRENT MATURITIES 234,992 263,595
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
OTHER LONG TERM LIABILITIES 63,616 67,893
MINORITY INTEREST 446 976
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
36,565,464 and 36,522,584 3,656 3,652
Additional capital 233,970 233,617
Retained earnings 106,516 111,224
Common stock in treasury, at cost,
6,359,200 shares (64,410) (64,410)
Other comprehensive loss (29,124) (28,288)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 250,608 255,795
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $888,801 $944,873
======== ========
See accompanying notes to Consolidated Financial Statements
3
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
-------------------- --------------------
June 25, June 27, June 25, June 27,
2000 1999 2000 1999
------- -------- ------- -------
(In thousands, except per share amounts)
Net revenues $166,919 $87,305 $329,480 $169,059
Cost of revenues 97,279 51,615 193,835 102,242
-------- ------- -------- --------
Gross Profit 69,640 35,690 135,645 66,817
Selling, general and
administrative expenses 55,964 28,006 118,231 55,311
Integration expenses 3,992 -- 5,578 --
-------- ------- -------- --------
Income from operations 9,684 7,684 11,836 11,506
Interest income 1,063 1,145 2,530 2,203
Interest expense 5,787 2,228 11,892 4,511
Other expense, net (1,754) (616) (2,010) (1,249)
-------- ------- -------- --------
Income before taxes 3,206 5,985 464 7,949
Income tax expense 1,282 1,825 185 2,424
Minority Interest 10 (14) 33 13
-------- ------- -------- --------
Earnings before cumulative
effect $ 1,934 $ 4,146 $ 312 $ 5,538
======== ======= ======= =======
Cumulative effect of change
in accounting principle -- -- (5,020) --
-------- ------- -------- --------
Net earnings (loss) $ 1,934 $ 4,146 $(4,708) $ 5,538
======== ======= ======= =======
Earnings (loss) per share
before cumulative effect
of change in accounting
principle:
Basic $ 0.06 $ 0.14 $ 0.01 $ 0.18
======== ======= ======= =======
Diluted $ 0.06 $ 0.14 $ 0.01 $ 0.18
======== ======= ======= =======
Earnings (loss) per share:
Basic $ 0.06 $ 0.14 $(0.16) $ 0.18
======== ======= ======= =======
Diluted $ 0.06 $ 0.14 $(0.16) $ 0.18
======== ======= ======= =======
See accompanying notes to Consolidated Financial Statements
4
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Six Months(26 Weeks) Ended June 25, 2000
----------------------------------------------------
Other
Compre-
Addit- hensive
Common ional Retained Income Treasury
Stock Capital Earnings (Loss) Stock Total
------ ------- -------- ------ -------- -----
(Thousands)
Balance,
December 26, 1999 $3,652 $233,617 $111,224 $(28,288) $(64,410) $255,795
Net earnings (4,708) (4,708)
Exercise of stock
options 4 353 357
Foreign currency
translation adjustment (836) (836)
------ -------- -------- --------- --------- --------
Balance
June 25, 2000 $3,656 $233,970 $106,516 $(29,124) $(64,410) $250,608
====== ======== ======== ========= ========= ========
See accompanying notes to Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
-------------------- --------------------
June 25, June 27, June 25, June 27,
2000 1999 2000 1999
------- -------- ------- -------
(Thousands)
Net earnings (loss) $ 1,934 $4,146 (4,708) $ 5,538
Foreign currency translation
adjustment, net of tax (3,062) (2,850) (836) (14,727)
------ ------ ------ ------
Comprehensive loss $(1,128) $ 1,296 $(5,544) $ (9,189)
====== ====== ====== ======
See accompanying notes to Consolidated Financial Statements.
5
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months(26 Weeks) Ended
--------------------------
June 25, June 27,
2000 1999
-------- --------
(Thousands)
Cash inflow (outflow) from operating activities:
Net earnings (loss) $(4,708) $ 5,538
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Revenue equipment placed under operating lease 1,435 (3,247)
Long-term customer contracts 4,647 4,030
Depreciation and amortization 25,414 12,552
(Increase) decrease in current assets:
Accounts receivable 15,618 12,540
Inventories (14,198) 8,706
Other current assets (4,986) (2,428)
Increase (decrease) in current liabilities:
Accounts payable (721) 3,032
Accrued compensation and related taxes (7,056) 461
Income taxes (12,645) (255)
Unearned revenues 8,066 3,754
Restructuring reserve (10,643) -
Other current liabilities 4,348 1,242
------- -------
Net cash provided by operating activities 4,571 45,925
------- -------
Cash inflow (outflow) from investing activities:
Acquisition of property, plant and equipment (9,533) (3,840)
Other investing activities (5,483) (1,269)
------- -------
Net cash used in investing activities (15,016) (5,109)
------- -------
Cash inflow (outflow) from financing activities:
Proceeds from stock options 357 143
Proceeds from debt 378 -
Payment of debt (12,750) (4,821)
------- -------
Net cash used in financing activities (12,015) (4,678)
------- -------
Effect of foreign currency rate on cash
and cash equivalents (2,153) (1,108)
------- -------
Net increase (decrease) in cash and cash
equivalents (24,613) 35,030
Cash and cash equivalents:
Beginning of period 87,718 35,934
------- -------
End of period $ 63,105 $ 70,964
======= =======
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 majority-owned subsidiaries ("Company"). All
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
footnote 10 and the Company's Annual Report on Form 10-K for the fiscal year
ended December 26, 1999 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 25, 2000 and December 26, 1999 and its results of
operations and changes in cash flows for the twenty six week periods ended June
25, 2000 and June 27, 1999.
Certain reclassifications have been made to the 1999 financial statements and
related footnotes to conform to the 2000 presentation.
2. INVENTORIES
June 25, December 26,
2000 1999
-------- ------------
(Thousands)
Raw materials $11,786 $14,544
Work in process 5,975 10,984
Finished goods 92,181 73,620
------- ------
$109,942 $99,148
======= =======
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. 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.
7
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
In July 2000, The German parliament passed a broad set of tax reforms. As of
this date, the reforms have not been "enacted" and, under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", changes in
tax laws and rates are not recognized prior to the enactment date. Enactment is
expected to occur in the third quarter of 2000. The effect of the changes on the
deferred tax provision in the year of enactment will involve re-measurement of
the German deferred tax assets and liabilities to reflect the new tax rate.
Management is currently evaluating the potential impact of the changes in the
German tax law.
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 Six Months
(13 weeks) Ended (26 weeks) Ended
-------------------- --------------------
June 25, June 27, June 25, June 27,
2000 1999 2000 1999
------- -------- ------- -------
(In thousands, except per share amounts)
BASIC EARNINGS PER SHARE:
Earnings before
cumulative effect of change
in accounting principal $ 1,934 $ 4,146 $ 312 $ 5,538
======== ======== ======= =======
Net earnings (loss) $ 1,934 $ 4,146 $ (4,708) $ 5,538
======== ======== ======= =======
Average common stock
outstanding 30,207 30,132 30,198 30,129
Basic earnings per
share before cumulative
effect of change in
accounting principal $ .06 $ .14 $ .01 $ .18
======== ======== ======= ========
Basic earnings (loss)
per share $ .06 $ .14 $ (.16) $ .18
======== ======== ======= ========
8
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
DILUTED EARNINGS PER SHARE:
Earnings before
cumulative effect
of change in accounting
principal available for
common stock and
diluted securities $ 1,934 $ 4,146 $ 312 $ 5,538
======== ======== ======= ========
Net earnings (loss) available
for common stock and diluted
Securities (1) $ 1,934 $ 4,146 $(4,708) $ 5,538
======== ======== ======= ========
Average common stock
outstanding 30,207 30,132 30,198 30,129
Additional common shares
resulting from Stock Options(2) 364 372 - 418
-------- -------- ------- --------
Average common stock and
dilutive stock outstanding (1) 30,571 30,504 30,198 30,547
Diluted earnings per
share before cumulative
effect of change in
accounting principal $ .06 $ .14 $ .01 $ .18
======== ======== ======= ========
Dilutive earnings (loss)
per share $ .06 $ .14 $ (.16) $ .18
======== ======== ======= ========
(1) Conversion of the subordinated debentures is not included in the above
calculation as the conversion price is anti-dilutive.
(2) Additional common shares resulting from stock options are not included in
the six months ended June 25, 2000 calculation as they are anti-dilutive.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes for the thirteen and twenty-six week
periods ended June 25, 2000, and June 27, 1999 were as follows:
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
---------------------- ---------------------
June 25, June 27, June 25, June 27,
2000 1999 2000 1999
-------- -------- -------- --------
(In thousands)
Interest $ 5,813 $ 3,767 $10,133 $ 4,643
Income Taxes $ 4,920 $ 550 $11,622 $ 879
9
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. ACQUISTION OF METO AG
On December 10, 1999, the Company consummated its acquisition of 98.57% of the
outstanding shares of Meto AG pursuant to a cash tender offer. The aggregate
purchase price for the shares acquired was $260.5 million, plus transaction
costs of $4,635,000. The Company has recently increased its ownership to 100%
through the German process of integration. An additional $1.25 million is
expected to be paid for the minority shares acquired in the integration process.
In connection with the acquisition, the Company entered into a new $425 million
credit facility provided by several lenders. The credit facility includes a $275
million term note and a $150 million revolving line of credit. The terms of the
new credit facility required the Company to retire all existing senior debt. In
connection with the senior debt restructuring, Checkpoint incurred $7.2 million
in placement fees which have been capitalized and are being amortized over the
term of the new facility.
The following unaudited pro forma information presents the results of operations
of the Company as if the acquisition of Meto had taken place on December 27,
1998.
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
---------------------- ---------------------
June 25, June 27, June 25, June 27,
2000 1999 2000 1999
(actual) (pro forma) (actual) (pro forma)
-------- ----------- -------- -----------
(Thousands, except per share data)
Net revenues $166,919 $187,357 $329,480 $367,644
Net earnings (loss) $ 1,934(1) $ 3,732 $ (4,708)(2) $ 6,110
Diluted earnings (loss)
per share $ .06 $ .12 $ (.16) $ .20
(1) Amount includes after tax integration expenses of $2,395.
(2) Amount includes an after-tax cumulative effect of change in accounting
principal of $(5,020) and after-tax integration expenses of $3,347.
10
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The pro forma results of operations are for comparative purposes only and
reflect increased amortization and interest expense resulting from the
acquisition described above, but do not include any potential cost savings from
combining the acquired businesses with the Company's operations. Consequently,
the pro forma results do not reflect the actual results of operations had the
acquisitions occurred on the dates indicated, and are not intended to be a
projection of future results or trends.
8. PROVISION FOR RESTRUCTURING
A restructuring reserve was established in 1999 for costs related to the
integration of Meto AG. A portion of these costs resulted in a before-tax charge
of $11.8 million ($0.27 per-share after tax) largely for severance costs for
approximately 135 employees ($3.1 million), lease termination costs for 15
office/warehouse facilities ($3.3 million), asset impairments ($4.5 million) and
other integration expenses ($0.9 million) of Checkpoint Systems, the acquiring
company. An additional $20.7 million associated with severance costs for
approximately 289 employees of the acquired company, and lease termination costs
of the acquired company was recorded as an increase to goodwill. Most of the 424
employees affected were in the support services, including selling, technical
and administrative staff functions.
At December 26, 1999, the restructuring reserve totaled $27.0 million. During
the six months ended June 25, 2000 approximately $10.6 million (primarily cash
paid for severance) was charged against the restructuring reserve recorded in
1999, leaving a restructuring reserve balance of approximately $16.4 million as
a liability on the balance sheet. In connection with the restructuring program,
338 employees have been terminated as of June 25, 2000.
Additional charges for restructuring are expected during the remainder of year
2000 as the Company continues to evaluate and align its business portfolio with
its stated goal.
The restructuring activity is expected to be substantially complete by the end
of year 2000.
11
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. BUSINESS SEGMENTS
Effective December 27, 1998 the Company adopted provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Statement requires the Company to disclose selected segment information on an
interim basis. With the recent acquisition of Meto AG, the Company has revised
its segments to conform with the combined company. As a result, the Company has
reclassified the prior period segment information to conform with the current
period presentation. This information is set forth below:
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
---------------------- ---------------------
June 25, June 27, June 25, June 27,
2000 1999 2000 1999
-------- -------- -------- --------
(In Thousands)
Business segment net revenue:
Loss Prevention $101,912 $ 87,276 $195,896 $168,940
Auto ID 34,529 29 71,383 $ 119
Retail Merchandising 30,478 - 62,201 -
------- ------- ------- -------
Total $166,919 $ 87,305 $329,480 $169,059
======== ======= ======= =======
Business segment gross
margin(loss):
Loss Prevention $ 41,485 $ 35,681 78,768 $ 66,852
Auto ID 11,330 9 22,781 $ (35)
Retail Merchandising 16,825 - 34,096 -
------- ------- ------- -------
Total $ 69,640 $ 35,690 135,645 $ 66,817
======= ======= ======= =======
10. 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 year 2000, the cumulative effect of the change in
accounting method was a non-cash reduction in net earnings of $5,020,000, or
$0.17 per diluted share.
12
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
11. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In 1998, the Financial Accounting Standards Board 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. 137, is scheduled to be
effective for fiscal years beginning after June 15, 2000. The Company expects to
adopt this standard as required in fiscal year 2001 and, because of continual
business-driven changes to its derivatives and hedging programs, has not fully
assessed its potential impact on its financial position or results of
operations.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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. These
forward-looking statements include information, for example, about possible
future results of operations, and risks associated with international
operations. While the Company believes that these statements are reasonable as
of the date made, investors should not place undue reliance on forward-looking
statements since they involve risks and uncertainties that could cause actual
results to differ materially from any anticipated future results encompassed
within the forward-looking statements. Factors that might cause results to
differ significantly from those expressed in the forward-looking statements
include, but are not limited to: technological changes which may impact both
existing and new products; conditions in international markets which may result
in higher costs or adverse currency exchange rate fluctuations; and general
economic and business conditions which may be less favorable than anticipated.
RESULTS OF OPERATIONS
- ---------------------
The table below reflects sales and income from operations for the quarter and
six months ended June 27, 1999 on a pro forma basis, and earnings from
operations for the quarter and six months ended June 25, 2000 excluding
integration costs. The acquisition of Meto AG in 1999, which was accounted for
using the purchase method, significantly impacted the comparability of results
for the quarter and six months ended June 25, 2000. Accordingly, pro forma
revenues and income from operations for the quarter and six months ended June
27, 1999 are provided to facilitate comparisons. The pro forma results include
Meto AG as if the acquisition had occurred on December 27, 1998. Pro forma
adjustments have been made primarily to reflect an increase in goodwill
amortization related to the Meto acquisition. Cost savings from combining
operations with the Company have not been reflected. Consequently, the pro forma
results do not reflect the actual results of operations had the acquisition
occurred on the date indicated, and are not intended to be a projection of
future results or trends.
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
---------------------- ---------------------
June 25, June 27, June 25, June 27,
2000 1999 2000 1999
-------- -------- -------- --------
(Pro Forma) (Pro Forma)
(In Thousands)
Net revenues $166,919 $187,357 $329,480 $367,644
Cost of revenues 97,279 110,680 193,835 218,618
-------- -------- -------- --------
Gross profit 69,640 76,677 135,645 149,026
Selling, general and
administrative expenses 55,964 64,145 118,231 126,956
-------- -------- -------- --------
Income from operations
before integration expenses $ 13,676 $ 12,532 $ 17,414 $ 22,070
======== ======== ======== ========
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The discussion that follows speaks to the comparisons in the above table through
income from operations before integration expenses. Comparisons of all other
income and expense items refer to the Consolidated Statements of Operations.
Second Quarter 2000 Compared to Second Quarter 1999
- -------------------------------------------------
Net Revenues
Net revenues for the second quarter of 2000 decreased $20.4 million (or 10.9%)
over the second quarter of 1999 (from $187.4 million to $166.9 million). This
decrease in revenue, primarily in Europe, is attributable to the impact of
foreign currency exchange rates for the quarter ($10.1 million) and business
disruptions resulting from the integration of the Meto operations.
Cost of Revenues
Cost of revenues decreased approximately $13.4 million (or 12.1%) over the
second quarter of 1999 (from $110.7 million to $97.3 million). As a percentage
of net revenues, cost of revenues decreased from 59.1% to 58.3%. The decrease in
the Company's cost of revenues is attributable to: (i) a favorable product mix;
(ii) a decrease in field service costs; and (iii) utilization improvements
experienced within the Company's manufacturing operations during the quarter.
Selling, General and Administrative Expenses
SG&A expenses decreased $8.1 million (or 12.8%) over the second quarter of
1999 (from $64.1 million to $56.0 million). This reduction in SG&A expenses is a
direct result of the Company's integration efforts. As a percentage of net
revenues, SG&A expenses decreased from 34.2% to 33.5%. Included in SG&A is
approximately $2.9 million of goodwill amortization expense related to the
acquisition of Meto AG.
Other Expense, net
Other expense, net for the second quarter of 2000 represented a net foreign
exchange loss of $1.8 million and for the second quarter of 1999 represented a
net foreign exchange loss of $0.6 million.
Interest Expense and Interest Income
Interest expense for the second quarter of 2000 increased $3.6 million from the
comparable quarter in 1999 (from $2.2 million to $5.8 million). The increase in
interest expense is directly attributable to the increased borrowings associated
with the acquisition of Meto AG in December 1999. Interest income for the second
quarter 2000 decreased by $0.1 million from the comparable quarter in 1999 (from
$1.1 million to $1.0 million).
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Income Taxes
The effective tax rate for the second quarter of 2000 was 40.0%. The effective
tax rate during the second quarter of 1999 was 30.5%. The higher tax rate
reflects the effect of the increase in nondeductible goodwill amortization
related to the acquisition of Meto AG in December 1999.
Net Earnings (loss)
Net earnings for the current quarter were $1.9 million or $.06 per share versus
$4.1 million or $.14 per share for the prior year's second quarter.
First Half 2000 compared to First Half 1999
- -------------------------------------------
Net Revenues
Net revenues for the first half of 2000 decreased $38.1 million (or 10.4%) over
the first half of 1999 (from $367.6 million to $329.5 million). This decrease in
revenue, primarily in Europe, is attributable to the impact of foreign currency
exchange rates for the first half of 2000 ($19.9 million) and business
disruptions resulting from the integration of the Meto operations.
Cost of Revenues
Cost of revenues decreased approximately $24.8 million (or 11.3%) over the
first half of 1999 (from $218.6 million to $193.8 million). As a percentage of
net revenues, cost of revenues decreased from 59.4% to 58.8%. The decrease in
the Company's cost of revenues is attributable to: (i) a favorable product mix;
(ii) a decrease in field service costs; and (iii) utilization improvements
experienced within the Company's manufacturing operations during the quarter.
Selling, General and Administrative Expenses
SG&A expenses decreased $8.7 million (or 6.9%) over the first half of
1999 (from $126.9 million to $118.2 million). This reduction in SG&A expenses is
a direct result of the Company's integration efforts. As a percentage of net
revenues, SG&A expenses increased from 34.5% to 35.9%. Included in SG&A is
approximately $5.6 million of goodwill amortization expense related to the
acquisition of Meto AG.
Other Expense, net
Other expense, net for the first half of 2000 represented a net foreign exchange
loss of $2.0 million and for the first half of 1999 represented a net foreign
exchange loss of $1.2 million.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Interest Expense and Interest Income
Interest expense for the first half of 2000 increased $7.4 million from the
comparable period in 1999 (from $4.5 million to $11.9 million). The increase in
interest expense is directly attributable to the increased borrowings associated
with the acquisition of Meto AG in December 1999. Interest income for the first
half of 2000 decreased by $0.3 million from the comparable period in 1999 (from
$2.2 million to $2.5 million).
Income Taxes
The effective tax rate for the first half of 2000 was 40.0%. The effective tax
rate during the first half of 1999 was 30.5%. The higher tax rate reflects the
effect of the increase in nondeductible goodwill amortization related to the
acquisition of Meto AG in December 1999.
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 year 2000, the
cumulative effect of the change in accounting method was a non-cash reduction in
net earnings of $5.0 million, or $0.17 per diluted share.
Net Earnings (loss)
Net earnings (loss) for the first half of 2000 was ($4.7) million or ($.16) per
share versus $5.5 million or $.18 per share for the comparable prior year
period.
Exposure to International Operations
Approximately 64.9% of the Company's sales are made in currencies other than
U.S. dollars. Sales denominated in currencies other than U.S. dollars increases
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.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
- -------------------------------
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, cash reserves due to an earlier
secondary issuance of common stock in an underwritten public offering, and more
recently 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 during the first half of 2000 generated
approximately $18.6 million, before the payment of restructuring costs and after
tax integration expenses of $3.3 million, compared to approximately $45.9
million during 1999. This change from the prior year was primarily attributable
to a decrease in earnings and an increased investment in working capital.
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 June 25,
2000, 233.3 million Euro (approximately $218.7 million) and $23.9 million were
outstanding under the term loan and 2.23 billion Japanese Yen (approximately
$21.1 million) was outstanding under the revolving credit facility.
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 and the availability under
the $150 million, six and one-half year revolving credit facility.
Capital Expenditures
The Company's capital expenditures during the first half of fiscal 2000 totaled
$9.5 million compared to $3.8 million during the first half of fiscal 1999. 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 $15.0 million in 2000.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Exposure to International Operations
The Company manufactures product in the US, the Caribbean, Europe and Asia
Pacific for both the local marketplace as well as 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 June 25, 2000, the Company had currency exchange forward contracts
totaling approximately $60.5 million. The contracts are in the various local
currencies covering primarily the Company's operations located within the
European Monetary Union. Historically, the Company has not purchased currency
exchange forward contracts for its operations in South America and Asia Pacific.
The Company has entered into a foreign exchange option contract for the
conversion of 3.0 million Euros into USD with an expiration date of May 2001.
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
In July 2000, The German parliament passed a broad set of tax reforms. As of
this date, the reforms have not been "enacted" and, under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", changes in
tax laws and rates are not recognized prior to the enactment date. Enactment is
expected to occur in the third quarter of 2000. The effect of the changes on the
deferred tax provision in the year of enactment will involve re-measurement of
the German deferred tax assets and liabilities to reflect the new tax rate.
Management is currently evaluating the potential impact of the changes in the
German tax law.
19
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
The annual Meeting of Shareholders was held on May 4, 2000. The shareholders
voted on the election of two Class III directors as follows:
Kevin P. Dowd Alan R. Hirsig
--------------------- ---------------------
For 28,330,799 For 29,306,069
Withheld 1,594,209 Withheld 618,939
---------- ----------
Total 29,925,008 Total 29,925,008
========== ==========
The names of the other directors continuing in office after the meeting are:
Roger D. Blackwell, Richard J. Censits, David W. Clark, Jr., Alan R. Hirsig,
William P. Lyons, Jr.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
Number Description
-------- -------------------------------
27 Financial Data Schedule
(Electronic filings only)
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the second quarter
of 2000.
SIGNATURES
Pursuant to 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.
________________________ August 9, 2000
/s/ W. Craig Burns
Vice President, Finance,
Chief Financial Officer and Treasurer
________________________ August 9, 2000
/s/ Arthur W. Todd
Vice President, Corporate Controller
and Chief Accounting Officer
20