FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
For the quarter ended September 26, 1999
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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 2, 1999, there were 30,163,384 shares of the Common Stock
outstanding.
CHECKPOINT SYSTEMS, INC.
FORM 10-Q
INDEX
Page No.
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets . . . . . . . . . . . . . . 3
Consolidated Statements of Operations . . . . . . . . . 4
Consolidated Statement of Shareholders' Equity. . . . . 5
Consolidated Statements of Comprehensive Income . . . . 5
Consolidated Statements of Cash Flows . . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . 10-18
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 19
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . 19
-2-
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
Sept. 26, Dec. 27,
1999 1998
--------- --------
ASSETS (Unaudited)
------ (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 83,707 $ 35,934
Accounts receivable, net of allowances
of $5,679,000 and $5,556,000 122,924 135,078
Inventories, net 65,072 78,625
Other current assets 11,958 10,748
Deferred income taxes 5,023 4,464
------- -------
Total current assets 288,684 264,849
REVENUE EQUIPMENT ON OPERATING LEASE, net 21,957 24,188
PROPERTY, PLANT AND EQUIPMENT, net 85,255 85,762
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, NET 69,913 72,388
INTANGIBLES, NET 9,886 10,917
OTHER ASSETS 41,111 49,559
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TOTAL ASSETS $516,806 $507,663
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Short-term borrowings and current portion
of long-term debt $13,444 $ 10,453
Accounts payable 22,343 17,346
Accrued compensation and related taxes 8,529 8,295
Income taxes 13,956 11,784
Unearned revenues 15,406 11,288
Other current liabilities 19,341 19,422
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Total current liabilities 93,019 78,588
LONG-TERM DEBT, LESS CURRENT MATURITIES 40,298 45,976
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
DEFERRED INCOME TAXES 811 712
MINORITY INTEREST 462 451
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
36,522,584 and 36,471,584 3,652 3,647
Additional capital 233,618 233,180
Retained earnings 116,337 104,558
Common stock in treasury, at cost,
6,359,200 shares (64,410) (64,410)
Accumulated other comprehensive loss (26,981) (15,039)
------ -------
TOTAL SHAREHOLDERS' EQUITY 262,216 261,936
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $516,806 $507,663
======= =======
See accompanying notes to Consolidated Financial Statements.
-3-
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter (13 Weeks) Ended Nine Months (39 Weeks) Ended
------------------------ ---------------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1999 1998 1999 1998
-------- -------- -------- --------
(Thousands, except per share data)
Net Revenues $90,742 $94,042 $259,801 $264,477
Cost of Revenues 53,704 54,602 155,946 157,822
------ ------ ------- -------
Gross Profit 37,038 39,440 103,855 106,655
Selling, General
and Administrative
Expenses 27,114 28,582 82,425 86,573
------ ------ ------ ------
Income from operations 9,924 10,858 21,430 20,082
Interest Income 1,455 1,329 3,658 3,519
Interest Expense 2,229 2,179 6,740 7,186
Other Income/
(expense) net (135) (7) (1,384) 866
------ ------ ------ ------
Income Before
Income Taxes 9,015 10,001 16,964 17,281
Income Taxes 2,750 3,250 5,174 5,616
Minority Interest (24) (31) (11) 20
------ ------ ------ ------
Net Earnings $6,241 $6,720 $11,779 $11,685
====== ====== ====== ======
Net Earnings Per Share
Basic $ .21 $ .21 $ .39 $ .36
====== ====== ====== ======
Diluted $ .20 $ .20 $ .39 $ .35
====== ====== ====== ======
See accompanying notes to Consolidated Financial Statements.
-4-
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Nine Months(39 Weeks) Ended September 26,1999
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Accum.
Other
Addi- Compre-
Common tional Retained hensive Treasury
Stock Capital Earnings Loss* Stock Total
------- -------- -------- -------- -------- -----
(Thousands)
Balance,
December 27,
1998 $ 3,647 $233,180 $104,558 $(15,039) $(64,410) $261,936
Net Earnings - - 11,779 - - 11,779
Exercise of Stock
Options 5 438 - - - 443
Foreign Currency
Translation
Adjustment - - - (11,942) - (11,942)
------ -------- -------- -------- -------- --------
Balance at
Sept. 26, 1999 $ 3,652 $233,618 $116,337 $(26,981) $(64,410) $262,216
======= ======== ======== ========= ======== ========
* Consists of foreign currency translation adjustments.
See accompanying notes to Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
Nine Months(39 Weeks) Ended September 26,1999
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(Thousands)
Quarter (13 Weeks) Ended Nine Months (39 Weeks) Ended
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Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1999 1998 1999 1998
--------- --------- --------- ---------
Net Earnings $ 6,241 $ 6,720 $11,779 $11,685
Foreign Currency
Translation
Adjustments, net of tax 2,785 4,854 (11,942) 307
------- ------- ------- -------
Comprehensive
Income/(Loss) $ 9,026 $11,574 $ (163) $11,992
======= ======= ======= =======
See accompanying notes to Consolidated Financial Statements.
-5-
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months(39 Weeks) Ended
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Sept. 26, Sept. 27,
1999 1998
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(Thousands)
Net earnings $ 11,779 $ 11,685
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net book value of rented equipment sold 2,251 983
Revenue Equipment placed under Operating Lease (7,612) (6,027)
Long-term customer contracts 7,347 (5,224)
Depreciation and amortization 19,048 19,393
Provision for losses on accounts receivable 1,214 1,511
(Increase) decrease in current assets:
Accounts receivable 6,857 (1,169)
Inventories 10,950 (3,785)
Other current assets (1,706) 2,267
Increase (decrease) in current liabilities:
Accounts payable 5,488 2,744
Accrued compensation and related taxes 588 940
Income taxes 2,181 (2,052)
Unearned revenues 4,381 1,211
Other current liabilities 76 (8,324)
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Net cash provided by
operating activities 62,842 14,153
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Cash inflow (outflow) from investing activities:
Acquisition of property, plant and equipment (5,920) (9,651)
Acquisition, net of cash acquired - (27,584)
Other investing activities (1,816) 287
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Net cash used by investing activities (7,736) (36,948)
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Cash inflow (outflow) from financing activities:
Proceeds from stock options 442 1,019
Proceeds from debt - 19,541
Payment of debt (6,434) (1,854)
Purchase of treasury stock - (19,185)
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Net cash used by
financing activities (5,992) (479)
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Effect of foreign currency rate
fluctuations on cash and cash equivalents (1,341) (726)
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Net increase/(decrease) in cash and cash
equivalents 47,773 (24,000)
Cash and cash equivalents:
Beginning of period 35,934 64,138
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End of period $ 83,707 $ 40,138
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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 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 27, 1998
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 26, 1999 and
December 27, 1998 and its results of operations and changes in cash flows for
the thirty-nine week periods ended September 26, 1999 and September 27, 1998.
2. INVENTORIES
September 26, December 27,
1999 1998
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(Thousands)
Raw materials $ 7,283 $ 6,661
Work in process 1,185 1,821
Finished goods 56,604 70,143
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$65,072 $78,625
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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. 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)
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. 26, Sept. 27, Sept. 26, Sept. 27,
1999 1998 1999 1998
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(In thousands, except per share amounts)
BASIC EARNINGS PER SHARE:
Net Income $ 6,241 $ 6,720 $ 11,779 $ 11,685
======== ======== ======== ========
Average Common Stock Outstanding 30,162 32,031 30,140 32,825
Basic Earnings Per Share $ .21 $ .21 $ .39 $ .36
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Net Income Available for Common
Stock Dilutive Securities(1) $ 7,336 $ 7,783 $ 11,779 $ 11,685
======== ======== ======== ========
Average Common Stock Outstanding 30,162 32,031 30,140 32,825
Additional Common Shares
Resulting from Stock Options 380 482 405 1,077
Resulting from Convertible
Debenture 6,528 6,528 - -
-------- -------- -------- -------
Average Common Stock and
Dilutive Stock Outstanding(1) 37,070 39,041 30,545 33,902
======== ======== ======= =======
Dilutive Earnings Per Share $ .20 $ .20 $ .39 $ .35
======== ======== ======= =======
(1) Includes the dilutive effect of the assumed conversion of the
subordinated debentures for the three months ended September 26, 1999 and
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. 26, 1999, and Sept. 27, 1998 was as follows:
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
--------------------- ---------------------
Sept. 26, Sept. 27, Sept, 26, Sept. 27,
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands)
Interest $ 677 $ 967 $ 5,320 $ 5,689
Income Taxes $ 237 $ 2,010 $ 1,116 $ 6,055
-8-
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. BUSINESS SEGMENTS
Effective December 27, 1998 the Company adopted the 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; this information is set forth below:
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
--------------------- ---------------------
Sept 26, Sept 27, Sept 26, Sept 27,
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands)
Business segment net revenue:
Electronic Article
Surveillance(1) $ 73,816 $ 77,843 $213,823 $214,573
Domestic CCTV, Fire, Burglary 13,222 13,589 35,731 41,110
Access Control 3,704 2,610 10,247 8,794
------- ------- ------- -------
Total $ 90,742 $ 94,042 $259,801 $264,477
======== ======== ======== ========
Business segment operating
income (loss):
Electronic Article
Surveillance(1) $ 7,686 $ 9,622 $ 17,418 $ 16,523
Domestic CCTV, Fire, Burglary 1,616 1,410 2,890 3,602
Access Control 1,134 409 2,792 1,698
RFID - Development (512) (583) (1,670) (1,741)
------- ------- ------- -------
Total $ 9,924 $ 10,858 $ 21,430 $ 20,082
======== ======== ======== ========
(1) Electronic Article Surveillance (EAS) segment numbers include the
Company's manufacturing and corporate activity. Additionally, included in
the EAS amounts are (i) the Company's foreign CCTV, Fire and Burglary
which represents approximately 4.9% and 4.3%, and 4.9% and 4.0% of the
Company's total consolidated revenue for the thirteen week and thirty-nine
week periods ended Sept. 26, 1999 and Sept. 27, 1998, respectively and
(ii) the Company's initial RFID sales activity which approximated $0.4
million for the nine months ended Sept. 26, 1999.
8. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
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 for 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, 2000. Although the Company has not
fully completed its evaluation of the impact of this new standard, the Company
does not anticipate that the adoption of this standard will have a material
effect on the Company's consolidated financial statements.
-9-
Item 2.
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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, the impact of Year 2000 compliance issues, 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; Year 2000 compliance which is dependent on the
technical skills and expertise of Company employees, and third party vendors
including materials and product suppliers, banks, and utility providers; and
general economic and business conditions which may be less favorable than
anticipated.
RESULTS OF OPERATIONS
- ---------------------
Third Quarter 1999 Compared to Third Quarter 1998
- -------------------------------------------------
Overview
During the third quarter of 1999, revenues decreased by approximately
$3.3 million (or 3.5%) from those in the third quarter of 1998. Cost of
revenues, as a percentage of sales increased by 1.1% (from 58.1% to 59.2%) when
compared to last year's third quarter. Selling, general and administrative
("SG&A") expenses decreased $1.5 million when compared to last year's third
quarter, and decreased as a percentage of revenues by 0.5%(from 30.4% to 29.9%).
Income from operations decreased $0.9 million (from $10.8 million to $9.9
million). Net earnings for the third quarter of 1999 decreased $0.5 million
(from $6.7 million to $6.2 million). Diluted earnings per share were $.20 for
the third quarter of 1999 which is comparable to the third quarter of 1998.
Net Revenues
Net revenues for the third quarter of 1999 decreased $3.3 million (or 3.5%) from
those in the third quarter of 1998 (from $94.0 million to $90.7 million).
Electronic Article Surveillance (EAS) revenues decreased $4.0 million or 5%
(from $77.8 million to 73.8 million). This decrease in EAS revenues was
primarily a result of reduced sales in the North American market partially
offset by an increase in EAS revenues in the Company's International markets.
Sales of the Company's Domestic CCTV/Fire and Burglar products decreased $0.4
million or 2.9% (from $13.6 million to $13.2 million) when compared to the third
quarter of 1998. The Company's Access Control product line had a sales increase
of 42.0% (from $2.6 million to $3.7 million) compared to the prior year's third
quarter.
-10-
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Cost of Revenues
Cost of revenues decreased $0.9 million (or 1.6%) over the third quarter of 1998
(from $54.6 million to $53.7 million). As a percentage of net revenues,
cost of revenues increased from 58.1% to 59.2%. The increase is primarily
attributable to the product mix within the EAS segment. During the third quarter
of 1999, the company sold a higher percentage of its lower margin EAS product
when compared to prior periods.
Selling, General and Administrative Expenses
SG&A expenses decreased $1.5 million when compared to last year's third quarter.
As a percentage of net revenues, SG&A expenses decreased by 0.5% (from 30.4% to
29.9%). The lower expenses (in dollars) are directly a result of the domestic
cost reduction program implemented in the third quarter of 1998. These savings
were partially offset by an increase in information technology expenses.
Interest Expense and Interest Income
Interest expense of $2.2 million for the third quarter of 1999 was comparable to
the third quarter in 1998. Interest income for the third quarter of 1999
increased by $0.2 million from the comparable quarter in 1998 (from $1.3 million
to $1.5 million).
Other Income, net
Other income, net, consisting entirely of net foreign exchange gains and losses,
increased by $0.1 million when compared to the third quarter of 1998.
Income Taxes
The effective tax rate for the third quarter of 1999 was 30.5%. The effective
tax rate during the third quarter of 1998 was 32.5%. The lower tax rate resulted
from the reduction of foreign losses for which no tax benefit was recorded.
Net Earnings
Net earnings for the current quarter were $6.2 million or $.20 per diluted share
versus $6.7 million or $.20 per diluted 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 1999 were made in currencies other than U.S. dollars. 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.
-11-
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
First Nine Months of 1999 Compared to First Nine Months of 1998
- ---------------------------------------------------------------
Overview
During the first nine months of 1999, revenues decreased by approximately
$4.7 million (or 1.8%) from those in the first nine months of 1998. Cost of
revenues, as a percentage of sales, increased by 0.3% (from 59.7% to 60.0%) when
compared to last year's first nine months. Selling, general and administrative
("SG&A") expenses decreased $4.1 million and decreased as a percentage of
revenues by 1.0% (from 32.7% to 31.7%). Income from operations increased $1.3
million (from $20.1 million to $21.4 million). Net earnings for the first nine
months of 1999 increased $0.1 million (from $11.7 million to $11.8 million).
Diluted earnings per share were $0.39 for the first nine months of 1999 versus
$0.35 achieved in the first nine months of 1998.
Net Revenues
Net revenues for the first nine months of 1999 decreased $4.7 million (or 1.8%)
when compared to the first nine months of 1998 (from $264.5 million to $259.8
million). EAS revenues decreased $0.8 million or 0.4% (from $214.6 million to
$213.8 million). The decrease in EAS revenues was a result of decreased EAS
sales in the North American markets partially offset by an increase in sales
within the Company's international markets. Sales of the Company's domestic
CCTV/Fire and Burglar products decreased $5.4 million or 13.1% (from $41.1
million to $35.7 million) when compared to the first nine months of 1998. The
Company's Access Control product line had a sales increase of 16.0% (from $8.8
million to $10.2 million) when compared to the first nine months of 1998.
Cost of Revenues
Cost of revenues decreased approximately $1.9 million (or 1.2%) from those in
the first nine months of 1998 (from $157.8 million to $155.9 million). As a
percentage of net revenues, cost of revenues increased 0.3% (from 59.7% to
60.0%).
-12-
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Selling, General and Administrative Expenses
SG&A expenses decreased $4.2 million (or 4.8%) when compared to the first nine
months of 1998 (from $86.6 million to $82.4 million). As a percentage of net
revenues, SG&A expenses decreased from 32.7% to 31.7%. The lower expenses (in
dollars) are directly attributable to (i) the domestic cost reduction program
implemented in the third quarter of 1998 which resulted in headcount reductions
in marketing and customer service as well as cost reductions in general and
administrative expenses; and (ii) the savings associated with the restructuring
of the Company's foreign subsidiaries which began in the first quarter of 1998
and resulted in headcount reductions in sales, marketing and customer service.
These savings were partially offset by an increase in information technology
expenses.
Interest Expense and Interest Income
Interest expense for the first nine months of 1999 decreased $0.5 million
when compared to the first nine months of 1998 (from $7.2 million to $6.7
million). Interest income for the first nine months of 1999 increased by $0.2
million from the comparable nine months in 1999 (from $3.5 million to $3.7
million).
Other Income/(Loss), net
Other income/(loss), net for the first nine months of 1999 represented a net
foreign exchange loss of $1.4 million. Other income/(loss), net of $0.9 million
for the first 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.
Income Taxes
The effective tax rate for the third quarter of 1999 was 30.5%. The effective
tax rate during the third quarter of 1998 was 32.5%. The lower tax rate resulted
from the reduction of foreign losses for which no tax benefit was recorded.
Net Earnings
Net earnings for the first nine months were $11.8 million or $0.39 per diluted
share versus $11.7 million or $.35 per diluted share for the prior year's first
nine months.
-13-
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Exposure to International Operations
Approximately 95.2% of the Company's international sales during the first
nine months of 1999 were made in currencies other than U.S. dollars. 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.
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, through a secondary issuance of
common stock in a underwritten public offering, and more recently through cash
generated from operations.
The Company's operating activities during the first nine months of 1999
generated approximately $62.8 million in cash flow compared to approximately
$14.2 million generated during the first nine months of 1998. This change from
the prior year was primarily the result of a decreased investment in working
capital and long-term customer contracts.
In August 1999, the Company launched a cash tender offer to acquire all of the
outstanding shares of Meto AG (Meto), a worldwide provider of value-added
labeling solutions, headquartered in Heppenheim, Germany. The total purchase
price for the shares will be approximately $275 million.
The completion of the offer is conditioned upon the tender of at least 95% of
Meto's outstanding shares, U.S. and European regulatory approvals and other
customary conditions. As of October 20, 1999, the expiration date of the
acceptance period for its cash tender offer to acquire all outstanding shares of
Meto, the Company has received 98.3% acceptance for the outstanding shares. The
offer has been extended until November 30, 1999, to allow time to receive
clearance from the German competition authorities, which the Company anticipates
receiving by the end of November. Of all the approvals required prior to
closing, only Germany is outstanding.
To complete the transaction, the Company intends to utilize cash reserves and
proceeds from credit facilities to be provided by First Union Capital Markets.
The facilities, totaling $425 million, will consist of a $275 million six and
one-half year term loan and a $150 million six and one-half year revolving
credit facility. In addition to utilizing the facilities to purchase the
outstanding shares of Meto AG, the Company intends to refinance approximately
$45 million of it's existing debt and approximately $14.5 million of Meto debt.
Subsequent to the completion of the acquisition, the refinancing of debt, and
the payment of transaction fees, the Company will have in excess of $100 million
available under the revolving credit facility.
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CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The Company's Comprehensive Tag Program(TM) (Comp Tag) is a financial
marketing/sales program designed to remove capital investment costs as an
obstacle to the potential customer's decision to purchase an EAS system. This
program is offered to large potential customers in strategic vertical markets
who are considering chain-wide EAS installations. Through the Comp Tag program,
the Company internally finances the leasing of equipment to retailers under
long-term non-cancelable contracts, usually three to five years. Customers pay a
premium price for an agreed-upon minimum number of tags shipped on a quarterly
or other periodic basis. The comprehensive tag price reflects the cost of
hardware, disposable RF tags, installation and interest.
Comp Tag agreements that meet all the necessary requirements for sales-type
leasing as defined under SFAS No. 13, are recognized as a sale upon shipment of
the EAS hardware. If the terms and conditions specified in the Comp Tag
agreement do not meet all the necessary requirements for sales-type lease
accounting, then the accounting rules require operating lease treatment. The
cash flow impact is independent of the accounting used for the Consolidated
Statements of Operations. In the majority of cases, the Company is able to
recover equipment and installation costs between 18-24 months under the
five-year contract and within a shorter period of time for contracts which run
three or four years. The impact of the Comp Tag agreement is reflected on the
statement of cash flows under two captions: (i) long-term customer contracts for
those meeting sales-type lease accounting; or (ii) revenue equipment placed
under operating lease. Comp Tag contracts under the sales-type lease accounting
method are included in Other Assets on the Consolidated Balance Sheet. Comp Tag
contracts under the operating lease accounting method are included in Revenue
Equipment on Operating Lease on the Consolidated Balance Sheet.
The Company's management has determined that the risks of the Comp Tag Program
(i.e. cash outlay, credit risk, equipment, and tag monitoring costs) are far
outweighed by the acceleration of chain-wide installations, which drive market
share and faster acceptance of source tagging by manufacturers. This in turn,
reduces the retailers' costs of hand applying labels, thereby further increasing
the favorable impact to the retailers' bottom line.
The Company has an existing $100 million multi-currency long term unsecured
revolving credit facility. At September 26, 1999, 2.22 billion Japanese Yen
(approximately $20.0 million) was outstanding under this credit agreement.
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.
Capital Expenditures
The Company's capital expenditures during the first nine months of 1999 totaled
$5.9 million compared to $9.7 million during the first nine months of 1998. The
higher expenditures during the first nine months of 1998, were a direct result
of the costs associated with the 1998 completion of the plant expansion at the
Company's main manufacturing facility located in Ponce, Puerto Rico. The Company
anticipates its capital expenditures to approximate $8.0 million in 1999.
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CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Exposure to International Operations
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.
Furthermore, approximately 20% of the Company's disposable tags offered for sale
are manufactured in Japan. As the material and production costs are denominated
in Japanese Yen, the related product costs are subject to exchange rate
fluctuations.
In order to reduce the Company's exposure resulting from currency fluctuations,
the Company has been selectively purchasing currency exchange forward contracts
on a regular basis. These contracts guarantee a predetermined exchange rate at
the time the contract is purchased. This allows the Company to shift the risk,
whether positive or negative, of currency fluctuations from the date of the
contract to a third party.
As of September 26, 1999, the Company had currency exchange forward contracts
totaling approximately $35.6 million. The contracts are in the various local
currencies covering primarily the Company's Western European operations along
with the Company's Canadian, and Australian operations. The Company's operations
in Japan, Argentina, Mexico and Brazil were not covered by currency exchange
forward contracts at September 26, 1999.
During the second quarter of 1999, the Company entered into a foreign exchange
option contract for the conversion of 6.0 million Euros into USD with an
expiration date of May 2000.
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.
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 has completed its assessment of year 2000 readiness. The Company's
primary applications software has been procured through third party vendors, and
the Company has substantially completed its process of addressing potential year
2000 deficiencies through updates provided by the vendors. As of September 26,
1999, the Company estimates that the remediation phase is 95% completed for most
of its primary applications. The Company expects the remainder of the
remediation phase to be completed for its primary applications prior to the end
of November 1999. The Company's non-mission critical information systems and
applications software have been evaluated and remediation efforts are currently
underway for those non-mission critical systems which are not year 2000 ready.
Contingency plans have been developed for all systems in the event the
remediation extends beyond November.
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CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
As a result of an evaluation of the Company's product lines for year 2000
readiness, the Company has determined that its primary products, comprised of
EAS products, are not date dependant and therefore, will not require
modifications. The Company's current Access Control products, which are date
dependant, are determined to be year 2000 ready. Certain of the Company's Access
Control Products, which are no longer offered for sale, were determined as not
being year 2000 ready. The Company has offered, through it's website at
http://www.checkpointacpg.com/y2kinfo.htm, an upgrade path for such
non-compliant products. The Company's CCTV and Fire and Burglar alarm products
are generally purchased from outside vendors and the Company is working with
such vendors to determine readiness. The Company has assessed the internal year
2000 readiness of its Central Station monitoring service, which has been
determined to be year 2000 ready. However, such systems might be affected by
third party products and/or services upon which the Company's Central Station
fire and burglar monitoring systems rely. The Company is currently obtaining
year 2000 readiness certifications from these third party vendors.
The Company has created a website to communicate the readiness of its products,
services and business processes. The goal is to provide the Company's customers
with up-to-date information about the Year 2000 Readiness effort. This website,
located at http://www.checkpointsystems.com/www_checkpoint_y2k.html, provides
the latest year 2000-readiness information and status. The information provided
by the outside vendors regarding the Company's CCTV and Fire and Burglar
products are also posted on this website.
The Company has substantially completed its assessment of year 2000 issues
associated with its various business partners, including vendors and service
providers, and is working with these third parties to identify and mitigate
common risks. The Company also recognizes the potential for year 2000 issues in
external areas such as telephone and communication systems, utilities, banks and
alarm systems and has contacted all mission critical business partners to obtain
year 2000 readiness certifications.
Costs
Currently, management estimates the cost to test and remedy the Company's
information systems to be approximately $2.6 million. This estimate includes the
acceleration of hardware and software purchases of approximately $1.5 million
and other expenses consisting primarily of outside year 2000 consulting services
of $1.1 million. However, there can be no assurance that the costs will not
exceed this level. Through September 26, 1999, the Company has incurred $1.2
million in capitalized hardware and software purchases and $.9 million in year
2000 consulting services. The Company is currently determining the potential
cost associated with the Company's product offerings and supply chain readiness.
The Company does not expect these costs to be material.
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.
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CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The failure to correct a material year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. As of the date of this filing, the Company has not received any
information from its vendors or suppliers, or developed any information
internally, indicating that a material adverse impact on its business, results
of operations, liquidity, or financial condition is considered likely due to
year 2000 matters. While the Company believes that it is unlikely to experience
a material adverse effect, the Company is unable to provide assurances 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 meet successfully the
year 2000 challenge. In conjunction with the remediation process, contingency
plans have been completed for certain critical areas while other areas are in
various stages of development. These contingency plans include, but are not
limited to, manufacturing, finance, supply chain and customer service. The
various contingency plans in place, or under development, would be utilized in
the event that operations are adversely affected by the year 2000 problem.
Forward Looking Statement
The foregoing year 2000 discussion includes forward-looking statements of the
Company's efforts and management's expectations relating to year 2000 readiness.
The Company's ability to achieve year 2000 compliance and the level of
incremental costs associated therewith, could be adversely affected as a result
of the numerous factors described in the above discussion.
-18-
PART II. OTHER INFORMATION
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 third quarter of 1999.
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 10, 1999
Senior Vice President,
Chief Financial Officer and Treasurer
/s/ W. Craig Burns
- ------------------------ November 10, 1999
Vice President, Corporate Controller
and Chief Accounting Officer
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