FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 3, 2001, there were 30,542,906 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 Loss 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 17
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
April 1, Dec. 31,
2001 2000
-------- --------
ASSETS (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 40,702 $ 28,121
Accounts receivable, net of allowances
of $11,979,000 and $12,427,000 157,530 176,479
Inventories, net 120,271 122,267
Other current assets 26,760 35,620
Deferred income taxes 7,922 8,668
-------- --------
Total current assets 353,185 371,155
REVENUE EQUIPMENT ON OPERATING LEASE, net 14,914 21,744
PROPERTY, PLANT AND EQUIPMENT, net 118,373 123,417
GOODWILL, net 236,805 245,241
OTHER INTANGIBLES, net 72,272 78,070
OTHER ASSETS 27,696 32,378
-------- --------
TOTAL ASSETS $823,245 $872,005
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and
current portion
of long-term debt $ 35,979 $ 38,070
Accounts payable 34,945 41,996
Accrued compensation and
related taxes 16,350 16,862
Income taxes 30,764 30,793
Unearned revenues 24,759 26,354
Restructuring reserve 13,064 17,707
Other current liabilities 47,539 46,299
-------- --------
Total current liabilities 203,400 218,081
LONG-TERM DEBT, LESS CURRENT MATURITIES 214,926 227,011
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
OTHER LONG TERM LIABILITIES 53,631 57,953
DEFERRED INCOME TAXES 9,084 10,734
MINORITY INTEREST 556 547
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
36,695,860 and 36,642,740 3,670 3,664
Additional capital 234,691 234,407
Retained earnings 112,011 108,458
Common stock in treasury, at cost,
6,359,200 shares (64,410) (64,410)
Accumulated other comprehensive loss (64,314) (44,440)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 221,648 237,679
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $823,245 $872,005
======== ========
See accompanying notes to Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter (13 Weeks) Ended
------------------------
April 1, March 26,
2001 2000
------- -------
(Thousands, except per share data)
Net revenues $163,728 $163,424 (1)
Cost of revenues 96,583 97,419 (1)
-------- --------
Gross profit 67,145 66,005
Selling, general and
administrative expenses 56,318 63,853
-------- --------
Operating income 10,827 2,152
Interest income 825 1,467
Interest expense 6,106 6,105
Other income/(loss), net 295 (256)
-------- --------
Income/(loss) before taxes 5,841 (2,742)
Income tax expense/(benefit) 2,278 (1,097)
Minority interest 10 (23)
-------- --------
Earnings/(loss) before cumulative effect 3,553 (1,622)
Cumulative effect of change
in accounting principle - (5,020)
-------- --------
Net earnings/(loss) $ 3,553 $ (6,642)
======== ========
Earnings/(loss) per share before
cumulative effect of change in
accounting principle:
Basic $ 0.12 $ (0.05)
======== ========
Diluted $ 0.12 $ (0.05)
======== ========
Earnings/(loss) per share:
Basic $ 0.12 $ (0.22)
======== ========
Diluted $ 0.12 $ (0.22)
======== ========
(1) Amounts have been reclassified to conform with Emerging Issues Task Force
(EITF) 00-10, Accounting for Shipping and Handling Fees and Costs.
See accompanying notes to Consolidated Financial Statements
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Three Months (13 Weeks) Ended April 1,2001
----------------------------------------------------
Accum-
ulated
Other
Addit- Compre-
Common ional Retained hensive Treasury
Stock Capital Earnings (Loss) Stock Total
------ ------- -------- ------ -------- -----
(Thousands)
Balance,
December 31, 2000 $3,664 $234,407 $108,458 $(44,440) $(64,410) $237,679
(Common shares:
issued 36,642,740
reacquired 6,359,200)
Net earnings 3,553 3,553
Exercise of Stock
Options 6 284 290
(53,120 shares)
Foreign currency
translation adjustment (19,874) (19,874)
------ -------- -------- --------- --------- --------
Balance
April 1, 2001 $3,670 $234,691 $112,011 $(64,314) $(64,410) $221,648
(Common shares: ====== ======== ======== ========= ========= ========
issued 36,695,860
reacquired 6,359,200)
See accompanying notes to Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
Three Months (13 Weeks) Ended
-----------------------------
April 1, March 26,
2001 2000
-------- --------
(Thousands)
Net earnings/(loss) $ 3,553 $ (6,642)
Foreign currency translation
adjustment, net of tax (19,874) 2,226
------ ------
Comprehensive loss $(16,321) $ (4,416)
====== ======
See accompanying notes to Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months (13 Weeks) Ended
-----------------------------
April 1, March 26,
2001 2000
-------- --------
(Thousands)
Cash flows from operating activities:
Net earnings/(loss) $ 3,553 $(6,642)
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Revenue equipment under operating lease 1,062 (949)
Long-term customer contracts (503) 1,411
Depreciation and amortization 11,531 12,351
(Increase)/decrease in current assets
net of the effects of acquired companies:
Accounts receivable 9,008 14,183
Inventories (1,715) (5,313)
Other current assets 5,939 797
Increase/(decrease) in current liabilities
net of the effects of acquired companies:
Accounts payable (6,585) (1,680)
Accrued compensation and related taxes (53) (3,003)
Income taxes 1,761 (8,660)
Unearned revenues 3,346 6,864
Restructuring reserve (3,884) (4,743)
Other current liabilities 2,850 1,027
------- -------
Net cash provided by operating activities 26,310 5,643
------- -------
Cash flows from investing activities:
Acquisition of property, plant and equipment (2,376) (4,029)
Acquisitions, net of cash acquired (13,458) -
Other investing activities 1,331 (5,363)
------- -------
Net cash used in investing activities (14,503) (9,392)
------- -------
Cash flows from financing activities:
Proceeds from stock issuances 290 300
Proceeds of debt 5,236 -
Payment of debt (3,160) (7,409)
------- -------
Net cash provided by/(used in)
financing activities 2,366 (7,109)
------- -------
Effect of foreign currency rate fluctuations
on cash and cash equivalents (1,592) (1,105)
------- -------
Net increase/(decrease) in cash and cash
equivalents 12,581 (11,963)
Cash and cash equivalents:
Beginning of period 28,121 87,718
------- -------
End of period $ 40,702 $ 75,755
======= =======
See accompanying notes to Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF ACCOUNTING
The consolidated financial statements include the accounts of Checkpoint
Systems, Inc. and its majority-owned subsidiaries ("Company"). All
inter-company transactions are eliminated in consolidation. The consolidated
financial statements and related notes are unaudited and do not contain all
disclosures required by generally accepted accounting principles. Refer to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000
for the most recent disclosure of the Company's accounting policies.
The consolidated financial statements include all adjustments, consisting only
of normal recurring accruals, necessary to present fairly the Company's
financial position at April 1, 2001 and December 31, 2000 and its results of
operations and changes in cash flows for the thirteen week periods ended April
1, 2001 and March 26, 2000.
Certain reclassifications have been made to the 2000 financial statements and
related footnotes to conform to the 2001 presentation.
2. INVENTORIES
April 1, December 31,
2001 2000
-------- ------------
(Thousands)
Raw materials $ 12,471 $ 10,921
Work in process 6,617 6,819
Finished goods 101,183 104,527
------- -------
$120,271 $122,267
======= =======
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Cost includes material, labor and applicable overhead.
3. INCOME TAXES
Income taxes are provided for on an interim basis at an estimated effective
annual tax rate. The Company's net earnings generated by the operations of its
Puerto Rico subsidiary are exempt from Federal income taxes under Section 936 of
the Internal Revenue Code (as amended under the Small Business Job Protection
Act of 1996) and substantially exempt from Puerto Rico income taxes. Under
current law, this exemption from Federal income tax will remain in effect
through 2001, will be subject to certain limits during the years 2002 through
2005, and will be eliminated thereafter. Under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes", deferred tax
liabilities and assets are determined based on the difference between financial
statement and tax basis of assets and liabilities using enacted statutory tax
rates in effect at the balance sheet date.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. PER SHARE DATA
The following data shows the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock:
Quarter (13 weeks) Ended
------------------------
April 1, March 26,
2001 2000
-------- --------
(Thousands, except per
share amounts)
BASIC EARNINGS/(LOSS) PER SHARE:
Earnings/(loss) before cumulative effect
of change in accounting principle $ 3,553 $ (1,622)
======== ========
Net earnings/(loss) $ 3,553 (6,642)
======== ========
Average common stock outstanding 30,332 30,189
Basic earnings/(loss) per share before
cumulative effect of change in
accounting principle $ .12 $ (.05)
======== ========
Basic earnings/(loss) per share $ .12 $ (.22)
======== ========
DILUTED EARNINGS/(LOSS) PER SHARE:
Earnings/(loss) before cumulative effect
of change in accounting principle
available for common stock and
diluted securities $ 3,553 $ (1,622)
======== ========
Net earnings/(loss) available for common
stock and diluted securities (1) $ 3,553 $ (6,642)
======== ========
Average common stock outstanding 30,332 30,189
Additional common shares resulting
from stock options 452 - (2)
-------- --------
Average common stock and dilutive
stock outstanding (1) 30,784 30,189
======== ========
Diluted earnings/(loss) per share before
cumulative effect of change in
accounting principle $ .12 $ (.05)
======== ========
Dilutive earnings/(loss) per share $ .12 $ (.22)
======== ========
(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 first quarter 2000 calculation as they are anti-dilutive.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for the thirteen week periods ended April 1, 2001, and March 26,
2000, respectively, included payments for interest of $4.3 million in both
periods and income taxes of $1.1 million and $6.7 million, respectively.
6. ACQUISITION OF A.W. PRINTING, INC.
On January 9, 2001, the Company acquired A.W. Printing, Inc., a leading provider
of high quality tags, labels and packaging products for the apparel industry.
The acquisition was a cash transaction valued at approximately $13 million.
The acquisition was accounted for under the purchase method. The results of the
operations are included in the consolidated financial statements since the date
of acquisition. The purchase price plus direct acquisition costs have been
allocated on the basis of estimated fair value at the date of acquisition,
pending final determination of the fair value of certain acquired assets and
liabilities.
7. PROVISION FOR RESTRUCTURING
Accrual Accrual
at Charged Increase at
March 26, to in Cash End of
2000 Earnings Goodwill Payments 2000
--------- -------- -------- -------- -------
(Thousands)
Severance and
other employee
related charges $16,114 $ 1,766 $ 5,014 $(11,138) $11,756
Lease termination
costs 6,190 439 366 (1,044) 5,951
------- ------- ------- -------- -------
$22,304 $ 2,205 $ 5,380 $(12,182) $17,707
======= ======= ======= ======== =======
Accrual Accrual
at Charged Increase at
Beginning to in Cash April 1,
of 2001 Earnings Goodwill Payments 2001
--------- -------- -------- -------- -------
Severance and
other employee
related charges $11,756 $ - $ - $ (4,007) $ 7,749
Lease termination
costs 5,951 - - (636) 5,315
------- ------- ------- -------- -------
$17,707 $ - $ - $ (4,643) $13,064
======= ======= ======= ======== =======
At the end of the first quarter 2001, 514 of the 586 planned employee
terminations had been completed and substantially all of the office/warehouses
included in the restructuring plan had been vacated.
Termination benefits are being paid out over a period of 1 to 24 months after
termination.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. BUSINESS SEGMENTS
Quarter (13 weeks) Ended
----------------------------
April 1, March 26,
2001 2000
-------- --------
(Thousands)
Business segment net revenue:
Security $ 92,309 $ 94,391 (1)
Labeling Services 37,320 37,222 (1)
Retail Merchandising 34,099 31,811 (1)
------- -------
Total $163,728 $163,424
======= =======
Business segment gross profit:
Security $ 37,789 $ 37,283
Labeling Services 10,950 11,451
Retail Merchandising 18,406 17,271
------- -------
Total $ 67,145 $ 66,005
======= =======
(1) Amounts have been reclassified to conform with Emerging Issues Task Force
(EITF) 00-10, Accounting for Shipping and Handling Fees and Costs.
9. ADOPTION OF SFAS 133
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes a new model for the
accounting and reporting of derivative and hedging transactions. The statement
amends a number of existing standards and, as amended by SFAS No. 138, became
effective for fiscal years beginning after June 15, 2000. As required, the
Company adopted this standard as of January 1, 2001.
This standard requires that all derivative instruments be reported on the
balance sheet at fair value. For instruments designated as fair value hedges,
changes in the fair value of the instrument will largely be offset on the income
statement by changes in the fair value of the hedge item. For instruments
designated as cash flow hedges, the effective portion of the hedge is reported
in other comprehensive income until it is assigned to earnings in the same
period in which the hedged item has an impact on earnings. For instruments
designated as a hedge of net investment in foreign operating units not using the
US dollar as its functional currency, changes in the fair value of the
instrument will be offset in other comprehensive income to the extent that they
are effective as economic hedges. Changes in the fair value of derivative
instruments, including embedded derivatives, that are not designated as a hedge
will be recorded each period in current earnings along with any ineffective
portion of hedges.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The Company's adoption of SFAS No. 133 on January 1, 2001 did not change
management's risk policies and practices. In compliance with the standard, the
Company continues to record changes in value on the statement of operations.
The Company's major market risk exposures are movements in foreign currency
exchange and interest rates. The Company's policy generally is to hedge major
foreign currency exposures through foreign exchange forward contracts. These
contracts are entered into with major financial institutions thereby minimizing
the risk of credit loss. The Company's policy is to manage interest rates
through the use of interest rate caps. The Company does not hold or issue
derivative financial instruments for speculative or trading purposes. The
Company is subject to other foreign exchange market risk exposure as a result of
non-financial instrument anticipated foreign currency cash flows which are
difficult to reasonably predict.
The Company enters into currency exchange forward contracts to hedge
short-term receivables from its foreign sales subsidiaries which are denominated
in currencies other than the US dollar. The terms of the currency exchange
forward contracts are rarely more than one year. The Company also entered into a
range forward option in Euros, which provides the Company with limited
protection against exchange rate volatility for converting Euros into US
dollars. Unrealized and realized gains and losses on these contracts and options
are included in other income/(loss), net. Counter-parties to these contracts are
major financial institutions, and credit loss from counter-party non-performance
is not anticipated.
In connection with the Company's floating rate debt under the senior
collateralized multi-currency credit facility, the Company purchased interest
rate caps to reduce the risk of significant Euro interest rate increases. The
fair value and premiums paid for the instruments were not material. The interest
rate caps are marked to market and the changes recorded in earnings.
10. NEW ACCOUNTING PRONOUNCEMENTS AND OTHER STANDARDS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. The SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements. In accordance with SEC Staff Accounting Bulletin No. 101, the
Company changed its accounting method for recognizing revenue on the sale of
equipment where post-shipment obligations exist. Previously, the Company
recognized revenue for equipment when title transferred, generally upon
shipment. Beginning with the first quarter of year 2000, the Company began
recognizing revenue when installation is complete or other post-shipment
obligations have been satisfied. During the first quarter of 2000, the
cumulative effect of the change in accounting method was a non-cash reduction in
net earnings of $5.0 million, net of income tax benefit of $2.7 million or $0.16
per diluted share.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The Emerging Issues Task Force (EITF) of the FASB reached consensus in 2000 on
EITF 00-10, Accounting for Shipping and Handling Fees and Costs. This new
accounting guidance was effective for the fourth quarter of 2000 and relates
primarily to the classification of certain costs in the Company's Consolidated
Statements of Operations with restatements of prior reporting required. The
Company has reclassified a total of $0.9 million in shipping and handling fees
to net revenues from cost of revenues in Q1 2000 as a result of adopting this
standard.
The EITF reached a consensus in 2000 on Issue 00-14, Accounting for Certain
Sales Incentives. The standard addresses the income statement classification of
certain selling costs. Prior period restatements are required. In April 2001,
the EITF reached a consensus to defer the effective date to quarters beginning
after December 15, 2001. The Company does not expect the standard to result in a
material reclassification in any period.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information relating to Forward-Looking Statements
This report includes forward-looking statements made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995. Except for
historical matters, the matters discussed are forward-looking statements, within
the meaning of Section 27A of the Securities Act of 1933, as amended, that
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from
historical results or those anticipated. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The following risk factors, among other possible factors,
could cause actual results to differ materially from historical or anticipated
results: (1) changes in international business conditions; (2) foreign currency
exchange rate and interest rate fluctuations; (3) lower than anticipated demand
by retailers and other customers for the Company's products, particularly in the
current economic environment; (4) slower commitments of retail customers to
chain-wide installations and/or source tagging adoption or expansion; (5)
possible increases in per unit product manufacturing costs due to less than full
utilization of manufacturing capacity as a result of slowing economic conditions
or other factors; (6) the Company's ability to provide and market innovative and
cost-effective products; (7) competitive pricing pressures causing profit
erosion; (8) the availability and pricing of component parts and raw materials;
(9) possible increases in the payment time for receivables, as a result of
economic conditions or other market factors; (10) changes in regulations or
standards applicable to the Company's products; and (11) unanticipated
liabilities or expenses. More information about potential factors that could
affect the Company's business and financial results is included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000, and the
Company's other Securities and Exchange Commission filings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
- ---------------------
First Quarter 2001 Compared to First Quarter 2000
- -------------------------------------------------
The table below reflects the income from operations for the quarters ended April
1, 2001, and March 26, 2000.
Quarter (13 weeks) Ended
----------------------------
April 1, March 26,
2001 2000
-------- ---------
(Thousands)
Net Revenues $163,728 $163,424 (1)
Cost of revenues 96,583 97,419 (1)
-------- --------
Gross Profit 67,145 66,005
Selling, general and administrative
expenses 56,318 62,267
-------- --------
Income from operations before
integration expenses 10,827 3,738
Integration expenses - 1,586
-------- --------
Income from operations after
Integration expenses $ 10,827 $ 2,152
======== ========
(1) Amounts have been reclassified to conform with Emerging Issues Task
Force(EITF) 00-10, Accounting for Shipping and Handling Fees and Costs.
The discussion that follows speaks to the comparisons in the above table through
income from operations before integration expenses. Comparisons of all other
income and expense items refer to the Consolidated Statements of Operations.
Net Revenues
Net revenues for the first quarter of 2001 increased $0.3 million (or 0.2%)
over the first quarter of 2000 (from $163.4 million to $163.7 million).
Excluding the impact of foreign exchange of approximately $8.7 million, revenue
increased 5.5% over the comparable 2000 quarter.
Cost of Revenues
Cost of revenues decreased from $97.4 million to $96.6 million. As a percentage
of net revenues, cost of revenues decreased 0.6% (from 59.6% to 59.0%). The
decrease in the Company's cost of revenues as a percentage of sales is
attributable to a favorable product mix and a decrease in field service costs.
These reduced costs were largely offset by approximately $1.0 million of
negative manufacturing variances following the Company's effort to decrease
inventory levels by reducing manufacturing production schedules for the first
six months of 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Selling, General and Administrative Expenses
SG&A expenses decreased $5.9 million (or 9.6%) over the first quarter of
2000 (from $62.2 million to $56.3 million). As a percentage of net revenues,
SG&A expenses decreased by 3.7% (from 38.1% to 34.4%). The reduction is the
result of the integration of Meto operations, partially offset by $1.6 million
of pre-tax charges related to the exit of certain business segments in Belgium
as well as costs associated with executive management changes that were
implemented in the first quarter of 2001.
Other Income/(Loss), net
Other income/(loss), net for the first quarter of 2001 represented a net foreign
exchange gain of $0.3 million and for the first quarter of 2000 represented a
net foreign exchange loss of $0.3 million.
Interest Expense and Interest Income
Interest expense of $6.1 million for the first quarter of 2001 was consistent
with the first quarter of 2000. Interest income for the first quarter 2001
decreased by $0.7 million from the comparable quarter in 2000 (from $1.5 million
to $0.8 million).
Income Taxes
The effective tax rate for the first quarter of 2001 was 39.0%. The effective
tax rate during the first quarter of 2000 was 40.0%. The lower tax rate reflects
the improvement in the profitability of the foreign subsidiaries in 2001, which
results in less non-benefited losses.
Cumulative Effect Of Change In Accounting Principle
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. The SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements. In accordance with SEC Staff Accounting Bulletin No. 101, the
Company changed its accounting method for recognizing revenue on the sale of
equipment where post-shipment obligations exist. Previously, the Company
recognized revenue for equipment when title transferred, generally upon
shipment. Beginning with the first quarter of year 2000, the Company began
recognizing revenue when installation is complete or other post-shipment
obligations have been satisfied. During the first quarter of 2000, the
cumulative effect of the change in accounting method was a non-cash reduction in
net earnings of $5.0 million, net of income tax benefit of $2.7 million or $0.16
per diluted share.
Net Earnings/(Loss)
Net earnings/(loss) for the current quarter were $3.6 million or $.12 per share
versus ($6.6) million or ($.22) per share for the prior year's first quarter.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Exposure to International Operations
Approximately 64.3% 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.
FINANCIAL CONDITION
- -------------------
Liquidity and Capital Resources
The Company's liquidity needs have related to, and are expected to continue to
relate to, capital investments, acquisitions and working capital requirements.
The Company has met its liquidity needs over the last three years primarily
through funds provided by long-term borrowings and through cash generated from
operations. The Company believes that cash provided from operating activities
and funding available under its current credit agreements should be adequate for
its presently foreseeable working capital and capital investment requirements.
The Company's operating activities during the first quarter of 2001 generated
approximately $26.3 million compared to $5.6 million in 2000. This change from
the prior year was primarily attributable to the improvement in earnings, a
reduction in tax payments in the first quarter and a $2.1 million reduction in
payments of restructuring and integration expenses ($3.9 million in 2001 and
$6.0 million in 2000).
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 April 1,
2001, 214 million Euro (approximately $187.2 million) and $19.0 million were
outstanding under the term loan. The outstanding borrowings under the revolving
line of credit facility were 2.23 billion Japanese Yen (approximately $17.6
million), 6 million Euro (approximately $5.2 million) and $5.0 million. On March
15, 2001 the $150 million revolving line of credit was reduced at the Company's
request to $100 million.
The Company has never paid a cash dividend (except for a nominal cash
distribution in April 1997, to redeem the rights outstanding under the Company's
1988 Shareholders' Rights Plan). The Company does not anticipate paying any cash
dividend in the near future and is limited by existing covenants in the
Company's debt instruments with regard to paying dividends.
Management believes that its anticipated cash needs for the foreseeable future
can be funded from cash and cash equivalents on hand, the availability under the
$100 million revolving credit facility, and cash generated from future
operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Capital Expenditures
The Company's capital expenditures during the first quarter of fiscal 2001
totaled $2.4 million compared to $4.0 million during the first quarter of fiscal
2000. The higher expenditures during 2000 were primarily a result of an
increased investment in the Company's global IT infrastructure combined with an
investment in manufacturing equipment located in Puerto Rico. The Company
anticipates its capital expenditures to approximate $16 million in 2001.
Exposure to International Operations
The Company manufactures product in the US, the Caribbean, Europe and Asia
Pacific for both the local marketplace and for export to its foreign
subsidiaries. The subsidiaries, in turn, sell these products to customers in
their respective geographic area 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 April 1, 2001, the Company had currency exchange forward contracts
totaling approximately $29.5 million. The contracts are in the various local
currencies covering primarily the Company's Western European operations along
with the Company's Canadian and Australian operations. Historically, the Company
has not purchased currency exchange forward contracts for its operations in
South America and the Asia Pacific region.
During 2000, the Company entered into a foreign exchange option contract for the
conversion of 3.0 million Euros into US dollars 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to the market risks as disclosed in item
7a of the Company's Annual Report on Form 10-K filed for the year ending
December 31, 2000, which is incorporated herein by reference.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99 - Item 7a. "Quantitative and Qualitative Disclosures about
Market Risk" of Form 10-K filed for the year ending December
31, 2000.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the first quarter of
2001.
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/ W. Craig Burns
- ----------------------- May 16, 2001
Executive Vice President,
Chief Financial Officer and Treasurer
/s/ Arthur W. Todd
- ------------------------ May 16, 2001
Vice President, Corporate Controller
and Chief Accounting Officer