FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
For the quarter ended September 29, 1996
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11257
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Checkpoint Systems, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 22-1895850
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Wolf Drive P.O. Box 188 Thorofare, New Jersey 08086
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(Address of principal executive offices) (Zip Code)
(609) 848-1800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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As of November 12, 1996 there were 34,254,426 shares of the Common Stock
outstanding.
<PAGE> 1
CHECKPOINT SYSTEMS, INC.
FORM 10-Q
INDEX
Page No.
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-18
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 19
<PAGE>2
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
Sept. 29, Dec. 31,
1996 1995
----------- ------------
ASSETS (Unaudited)
------ (Thousands)
CURRENT ASSETS
Cash and cash equivalents $195,401 $ 77,456
Accounts receivable, net of allowances
of $2,916,000 and $1,906,000 87,399 73,065
Inventories 47,571 54,941
Other current assets 8,622 7,479
Deferred income taxes 1,719 1,718
------- -------
Total current assets 340,712 214,659
REVENUE EQUIPMENT ON OPERATING LEASE, net 18,310 15,280
PROPERTY, PLANT AND EQUIPMENT, net 38,721 40,745
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED 64,819 61,456
INTANGIBLES 15,071 14,930
OTHER ASSETS 25,930 15,081
------- -------
TOTAL ASSETS $503,563 $362,151
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 14,516 $ 16,643
Accrued compensation and related taxes 6,192 5,762
Income taxes 5,897 4,921
Unearned revenues 10,801 8,155
Other current liabilities 17,275 27,102
Short-term borrowings and current portion
of long-term debt 2,734 4,002
------- -------
Total current liabilities 57,415 66,585
LONG-TERM DEBT, LESS CURRENT MATURITIES 34,090 35,674
5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES
WITH A SCHEDULED MATURITY IN 2005 120,000 120,000
DEFERRED INCOME TAXES 2,239 2,234
SHAREHOLDERS' EQUITY
Preferred Stock, no par value, authorized
500,000 shares, none issued
Common Stock, par value $.10 per share,
authorized 100,000,000 shares, issued
35,635,626 and 30,019,758 3,564 3,002
Additional capital 225,394 83,126
Retained earnings 72,712 58,198
Common stock in treasury, at cost,
1,598,000 shares (5,664) (5,664)
Foreign currency adjustments (6,187) (1,004)
------ -------
TOTAL SHAREHOLDERS' EQUITY 289,819 137,658
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $503,563 $362,151
======= =======
See accompanying notes to consolidated financial statements.
<PAGE>3
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter (13 Weeks) Ended Nine Months (39 Weeks)ended
------------------------ --------------------------
Sept. 29, Sept. 24, Sept. 29, Sept. 24,
1996 1995 1996 1995
----------- ----------- ----------- -----------
(Thousands, except per share data)
Net Revenues $73,765 $52,802 $215,551 $139,906
Cost of Revenues 43,701 28,033 125,716 77,102
------ ------ -------- -------
Gross Profit 30,064 24,769 89,835 62,804
Selling, General
and Administrative
Expenses 22,952 17,773 67,910 48,928
------ ------ -------- -------
Operating Income 7,112 6,996 21,925 13,876
Interest Income 2,807 523 5,570 1,017
Interest Expense 2,368 971 7,113 3,020
Foreign Exchange
Gain (Loss) 302 (48) 936 (268)
----- ------ ------ -------
Earnings Before
Income Taxes 7,853 6,500 21,318 11,605
Income Taxes 2,495 1,971 6,804 3,503
------ ------ ------- ------
Net Earnings $ 5,358 $ 4,529 $14,514 $8,102
====== ====== ====== ======
Net Earnings Per
Share $ .15 $ .15 $ .43 $ .31
====== ====== ====== ======
See accompanying notes to Consolidated Financial Statements.
<PAGE> 4
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Nine Months(39 Weeks) Ended September 29, 1996
---------------------------------------------------
Foreign
Common Additional Retained Treasury Currency
Stock Capital Earnings Stock Adjust. Total
------- ------- -------- -------- ------- ------
(Thousands)
Balance,
December 31,
1995 $ 3,002 $83,126 $58,198 $(5,664) $(1,004) $137,658
Net Earnings 14,514 14,514
Exercise of Stock
Options 102 6,798 6,900
Stock Issuance
Associated with
Equity Offering 460 135,470 135,930
Foreign Currency
Adjustments (5,183) (5,183)
------ ------- ------ ------- ------ -------
Balance at
Sept. 29, 1996 $ 3,564 $225,394 $72,712 $(5,664) $(6,187) $289,819
====== ======= ======= ====== ====== =======
See accompanying notes to Consolidated Financial Statements
<PAGE> 5
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months(39 Weeks) Ended
--------------------------
Sept. 29, Sept. 24,
1996 1995
--------- --------
(Thousands)
Cash inflow (outflow) from operating activities:
Net earnings $14,514 $8,102
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net book value of rented equipment sold 3,316 690
Revenue Equipment placed under Operating Lease (11,174) (8,569)
Long-term customer contracts (9,931) (837)
Depreciation and amortization 13,104 9,029
Provision for losses on accounts receivable 1,010 261
(Increase) decrease in current assets:
Accounts receivable (15,555) (14,084)
Inventories 6,662 (8,637)
Other current assets (959) (1,695)
Increase (decrease) in current liabilities:
Accounts payable (2,856) (4,527)
Accrued compensation and related taxes (22) 2,236
Income taxes 830 1,012
Unearned revenues 2,452 (31)
Other current liabilities (11,999) 1,412
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Net cash used by operating activities (10,608) (15,638)
------- -------
Cash inflow (outflow) from investing activities:
Acquisition of property, plant and equipment (7,191) (6,186)
Acquisition, net of cash acquired (1,370) (10,061)
Other investing activities (4,640) (2,391)
------- -------
Net cash used by investing activities (13,201) (18,638)
------- -------
Cash inflow (outflow) from financing activities:
Proceeds from stock options 6,900 3,702
Proceeds from sale of common stock 135,930 54,666
Proceeds of debt - 40,000
Payment of debt (1,076) (45,175)
------- -------
Net cash provided by financing activities 141,754 53,193
------- -------
Net increase (decrease) in cash and cash
equivalents 117,945 18,917
Cash and cash equivalents:
Beginning of period 77,456 944
------- -------
End of period $195,401 $ 19,861
======= =======
See accompanying notes to consolidated financial statements.
<PAGE>6
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF ACCOUNTING
The consolidated financial statements include the accounts of Checkpoint
Systems, Inc. and its wholly-owned subsidiaries ("Company"). All material
intercompany transactions are eliminated in consolidation. The
consolidated financial statements and related notes are unaudited and do
not contain all disclosures required by generally accepted accounting
principles. Refer to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 for the most recent disclosure of the
Company's accounting policies.
The consolidated financial statements include all adjustments, consisting
only of normal recurring accruals, necessary to present fairly the Company's
financial position at September 29, 1996 and December 31, 1995 and its
results of operations and changes in cash flows for the thirteen
and thirty-nine week periods ended September 29, 1996 and September 24, 1995.
2. INVENTORIES
September 29, December 31,
1996 1995
----------- ------------
(Thousands)
Raw materials $11,430 $ 7,282
Work in process 602 275
Finished goods 35,539 47,384
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$47,571 $54,941
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Inventories are stated at the lower of cost (first-in, first-out method)
or market. Cost includes material, labor and applicable overhead.
3. INCOME TAXES
Income taxes are provided for on an interim basis at an estimated
effective annual tax rate. The Company's net earnings generated by the
operations of its Puerto Rico subsidiary are exempt from Federal income
taxes under Section 936 of the Internal Revenue Code (as amended under the
Small Business Job Protection Act of 1996) and substantially exempt from
Puerto Rico income taxes. Under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes", deferred tax
liabilities and assets are determined based on the difference between
financial statement and tax basis of assets and liabilities using
enacted statutory tax rates in effect at the balance sheet date.
<PAGE>7
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. PER SHARE DATA
Per share data is based on the weighted average number of common and
common equivalent shares (stock options) outstanding during the periods.
The number of shares used in the per share computations for the thirteen
and thirty-nine week periods ended September 29, 1996 and September 24, 1995
were 36,123,000 and 33,440,000 (1996) and 29,582,000 and 26,454,000 (1995),
respectively after giving retroactive effect to the February 22, 1996 stock
split.
5. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for the thirteen and thirty-nine week period ended
September 29, 1996 and September 24, 1995, respectively, included interest
payments of $880,000 and $5,618,000(1996) and $879,000 and $2,264,000
(1995), and income taxes paid of $173,000 and $5,506,000(1996) and $6,000 and
$1,806,000 (1995).
6. INTANGIBLES
Intangibles consist of patents, licenses, customer lists, and software
development costs. The costs relating to the acquisition of patents and
licenses are amortized on a straight-line basis over their economic/legal
useful lives, which range from five to ten years. Accumulated
amortization approximated $3,643,000 and $1,806,000 at September 29,1996
and December 31, 1995, respectively.
The costs of internally developed software are expensed until the
technological feasibility of the software has been established.
Thereafter, all software development costs are capitalized and
subsequently reported at the lower of unamortized cost or net realizable
value. The costs of capitalized software are amortized over the products'
estimated useful lives or five years, whichever is shorter. Capitalized
software development costs, net of accumulated amortization, totaled
$2,650,000 and $1,519,000 as of September 29, 1996 and December 31, 1995,
respectively.
7. ACQUISITIONS
On March 21, 1996, the Company purchased all of the capital stock of
Mercatec Sistemas e Comercio de Equipamentos Electronicos Ltds. ("Mercatec").
Mercatec is a leading supplier of EAS systems and CCTV systems to retailers
in Brazil with approximately $3,000,000 in annual sales. The purchase
price, including acquisition costs, was $1,400,000.
<PAGE> 8
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. ACQUISITIONS (continued)
On November 30, 1995, the Company purchased all of the capital stock of
Actron Group Limited ("Actron") which is engaged in the manufacture,
distribution and sale of security products and services. The purchase
price of the capital stock was approximately $54,000,000. This
acquisition was accounted for under the purchase method and, accordingly,
the results of operations of this business have been included with those
of the Company since the date of acquisition. The purchase price resulted
in an excess of acquisition cost over net assets acquired of approximately
$40,000,000 which is being amortized over thirty years.
In connection with the acquisition of Actron, accruals of $10,401,000
were established to integrate Actron's operations with the Company's
existing sales and production locations. Included in this accrual are:
(i)costs associated with the elimination of approximately 70 manufacturing
and field service and selling and administrative positions from the Actron
operation (approximately $7.7 million), and (ii) costs related to the closure
of redundant sales locations and ancillary costs (approximately $2.7 million).
During the first nine months of 1996, approximately $8,700,000 had been
charged against the accrual including approximately $6,000,000 for
severance costs. The remaining portion of the accrual is included in the
"Other Current Liabilities" section of the Company's consolidated balance
sheet. The integration of Actron's operations is substantially completed
with remaining costs expected to be incurred in the fourth quarter of 1996.
Actual charges to complete the integration may differ from the above
estimates. Such differences will increase (decrease) the excess of
purchase price over net assets acquired.
The following table represents unaudited combined results of operations
for the first nine months of 1996 (actual) and 1995 (as if the acquisition
of Actron had occurred at the beginning of fiscal year 1995). The following
results are not necessarily indicative of what would have occurred had the
acquisition been consummated as of that date or of future results:
Nine Months (39 weeks) Ended
-----------------------------
September 29, September 24,
1996 1995
------------- -------------
(Thousands, except per share data)
Net revenues.................... .......$ 215,551 $177,298
Net earnings............................$ 14,514 $ 1,917
Earnings per common share...............$ 0.43 $ 0.07
<PAGE> 9
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. ACCOUNTING FOR FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company's balance sheet accounts of foreign subsidiaries are
translated into U.S. dollars at the rate of exchange in effect at the
balance sheet dates. Revenues, costs and expenses of the Company's
foreign subsidiaries are translated into U.S. dollars at the average rate
of exchange in effect during each reporting period. The resulting
translation adjustment is recorded as a separate component of
stockholders' equity. In addition, gains or losses on long-term
intercompany transactions are excluded from the results of operations and
accumulated in the aforementioned separate component of consolidated
stockholders' equity. All other foreign transaction gains and losses are
included in the results of operations.
The Company has purchased certain foreign currency forward contracts in
order to hedge anticipated rate fluctuations in Europe and Canada.
Transaction gains or losses resulting from these contracts are recognized
over the contract period.
9. SUBORDINATED CONVERTIBLE DEBENTURES
On April 19, 1996, the Company completed its Shelf Registration Statement
on Form S-3 covering the resale of $47,250,000 5.25% Convertible
Subordinated Debentures due 2005("Debentures") and 2,571,428 shares of the
Company's common stock, $.10 par value per share, issuable upon conversion
of the debentures. The Registration Statement also covered the registration
of 350,000 shares of the Company's Common Stock presently issuable upon
exercise of certain options granted by the Company.
10. EQUITY OFFERING
The Company completed the sale of 4.6 million shares of Common Stock
during the second quarter of this year pursuant to an underwritten public
offering. The net proceeds received by the Company from this offering
were approximately $136 million. The proceeds of the offering are
expected to be used for general corporate purposes including the following:
(i) for potential strategic acquisitions and related start-up operations to
enhance both product line diversification within the Company's core business
and greater distribution opportunities and alliances and (ii) to provide the
necessary capital to enable the Company to internally finance the leasing of
equipment to retailers under long-term leases.
<PAGE> 10
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
11. CONTINGENCIES
On February 14, 1996, the United States Federal Trade Commission ("FTC")
began an investigation of the retail security systems industry. The probe
was launched under the premise of anticompetitive practices within the
industry whereby certain retail-trade groups limited the autonomy of
smaller retailers by supporting specific security systems. The Company,
along with Sensormatic Electronics Corporation, Minnesota Mining and
Manufacturing, and other industry participants, received subpoenas
requesting certain documents and communications necessary for the
investigation. The Company has furnished various documents to the FTC
pursuant to the subpoenas. The Company does not believe that any legal or
regulatory infraction will be found on its part.
<PAGE> 11
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Third Quarter 1996 Compared to Third Quarter 1995
- ---------------------------------------------------
Overview
During the third quarter of 1996 revenues increased by approximately
$21.0 million (or 39.7%) over the third quarter of 1995. The increase
in revenues was due primarily from increased sales of the Company's EAS
product line within the Company's international distribution channels which
was positively impacted by the Company's acquisition of Actron (completed in
November of 1995). Cost of revenues were higher than in the third quarter of
1995 as a percentage of sales (from 53.1% to 59.2%). The increase in cost of
revenues was primarily the result of i) higher field service costs resulting
from increased service personnel, primarily from the Actron acquisition,
combined with domestic chain wide rollouts, ii) sales of acquired Actron
inventory which carry a higher product cost, and iii) a loss of manufacturing
efficiencies caused by Hurricane Hortense which forced the closure of the
Company's production facility in Ponce, Puerto Rico for eight days. Selling,
general and administrative ("SG&A") expenses increased $5.2 million but
declined as a percentage of revenues by 2.6% (from 33.7% to 31.1%). Income
from operations increased $.1 million (from $7.0 million to $7.1 million).
Net earnings for the third quarter of 1996 increased by $.9 million (from
$4.5 million to $5.4 million) resulting in earnings per share of $.15 for the
third quarter of 1996. Earnings per share of $.15 was also achieved in last
year's third quarter.
Net Revenues
Net revenues for the third quarter of 1996 increased approximately $21.0
million (or 39.7%) over the third quarter of 1995 (from $52.8 million to
$73.8 million). Domestic and international net revenues accounted for
approximately 52.0% and 48.0%, respectively, of total net revenues compared
to 66.6% and 33.4% for last year's similar quarter. Domestic retail
Electronic Article Surveillance ("EAS") net revenues increased $2.7 million
(or 12.0%) primarily as a result of increased unit sales resulting from
various chain wide installations. International EAS net revenues increased
$17.4 million (or 98.9%) as a result of: higher unit sales volume generated
by the Company's operations in Europe ($11.7 million) which was primarily
impacted by the Company's acquisition of Actron which was completed in
November of 1995. In addition, the Company's Canadian, Mexican and
Argentinean operations realized sales increases of $.5 million, $1.2 million
and $.9 million respectively. Sales of the Company's Security Systems Group
products (formerly Alarmex) and CCTV product lines increased slightly (from
$9.6 million to $9.8 million) over the prior year's quarter. The Company's
Access Control product line had sales growth of 42.0% (from $1.7 million to
$2.3 million) compared to the prior year's third quarter.
<PAGE> 12
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Third Quarter 1996 Compared to Third Quarter 1995
- ---------------------------------------------------
Cost of Revenues
Cost of revenues increased approximately $15.7 million (or 56.1 %) over the
third quarter of 1995 (from $28.0 million to $43.7 million). As a percentage
of net revenues, cost of revenues increased 6.1% (from 53.1% to 59.2%)
compared to the prior year's third quarter. The increase in cost of revenues
was primarily the result of i) higher field service costs resulting from
increased service personnel, primarily from the Actron acquisition, combined
with domestic chain wide rollouts, ii) sales of acquired Actron inventory
which carry a higher product cost, and iii) a loss of manufacturing
efficiencies caused by Hurricane Hortense which forced the closure of the
Company's production facility in Ponce, Puerto Rico for eight days.
Selling, General and Administrative Expenses
SG&A expenses increased $5.2 million (or 29.2%) over the third quarter of
1995 (from $17.8 million to $23.0 million). As a percentage of net revenues,
however, SG&A expenses decreased by 2.6% (from 33.7% to 31.1%). The higher
expenses (in dollars) were due to: (i) approximately $2.4 million increase in
variable selling costs to support the increase in revenues (ii) approximately
$2.1 million increase in general and administrative costs, and (iii)
approximately $.7 million related to the amortization of goodwill and
intangibles generated from the Actron acquisition.
Interest Expense and Interest Income
Interest expense for the third quarter of 1996 increased $1.4 million
(from $1.0 million to $2.4 million) primarily as a result of interest on the
$120 million 5.25% convertible subordinated debentures issued in October of
1995. Interest income for the third quarter of 1996 increased by $2.3 million
(from $.5 million to $2.8 million) as a result of the cash investment of the
remaining proceeds of the $120 million debentures previously mentioned
combined with the proceeds from the Company's equity offering during the
second quarter of 1996 (see "Management's Discussion and Analysis - Liquidity
and Capital Resources" for additional information).
Income Taxes
The effective tax rate of 31.8% is higher than the effective tax rate during
the third quarter of 1995 of 30.3%. This is primarily due to (i) higher
taxable income attributable to foreign jurisdictions where tax rates are
marginally higher than the U.S., and (ii) higher charges for amortization of
goodwill and intangibles resulting from the Actron acquisition which are not
tax deductible.
<PAGE> 13
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Net Earnings
Net earnings were $5.4 million or $.15 per share versus $4.5 million or $.15
per share for the prior year's third quarter. The weighted average number of
common and common equivalent shares used in the earnings per share computation
for the third quarter of 1996 has increased substantially compared to the
prior year's quarter (from 29.6 million to 36.1 million) primarily due to (i)
shares issued during the second quarter of 1996 in connection with the
Company's secondary equity offering previously mentioned (4,600,000), and
(ii) the exercise of stock options and an increase in common stock equivalents
(stock options outstanding).
Exposure To International Operations
Approximately 83.2% of the Company's international sales during the third
quarter of 1996 were made in local currencies. Sales denominated in
currencies other than U.S. dollars increased the Company's potential exposure
to currency fluctuations which can affect results. During the third quarter
of 1996, currency exchange gains amounted to approximately $.3 million
compared to a loss of $.1 million in the third quarter of 1995. Management
cannot predict with any degree of certainty the future impact that changes
in currency exchange rates will have on its operations.
RESULTS OF OPERATIONS
- ---------------------
First Nine Months of 1996 Compared to First Nine Months of 1995
- ---------------------------------------------------------------
Overview
During the first nine months of 1996 revenues increased by approximately
$75.7 million (or 54.1%) over the first nine months of 1995. The increase
in revenues was due primarily from increased sales of the Company's EAS
product line both domestically and internationally with the acquisition of
Actron (completed in November of 1995) contributing significantly to the
international revenue increase. Cost of revenues were higher during the
first nine months compared to the similar period of 1995 as a percentage of
sales (from 55.1% to 58.3%). The increase in cost of revenues was primarily
the result of (i) sales of acquired Actron inventory which carry a higher
product cost, and (ii) higher field service costs resulting from increased
service personnel primarily from the Actron acquisition combined with
domestic chain wide rollouts. Selling, general and administrative ("SG&A")
expenses increased $19.0 million but declined as a percentage of revenues by
3.5% (from 35.0% to 31.5%). Income from operations increased $8.0 million
(from $13.9 million to $21.9 million). Net earnings for the first nine
months of 1996 increased by $6.4 million (from $8.1 million to $14.5 million)
resulting in earnings per share of $.43 for the first nine months of 1996
versus $.31 achieved during the first nine months of the prior year.
<PAGE> 14
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Net Revenues
Net revenues for the first nine months of 1996 increased approximately $75.7
million (or 54.0%) over the first nine months of 1995 (from $139.9 million to
$215.6 million). Domestic and international net revenues accounted for
approximately 50.2% and 49.8%, respectively, of total net revenues compared
to 64.1% and 35.9% for last year's similar period. Domestic retail Electronic
Article Surveillance ("EAS") net revenues increased $15.5 million (or 27.7%)
primarily as a result of increased unit sales resulting from various chain
wide installations. International EAS net revenues increased $55.6 million
(or 112%) as a result of: higher unit sales volume generated by the Company's
operations in Europe ($38.2 million) which was primarily impacted by the
Company's acquisition of Actron. In addition, the Company's Canadian, Mexican
and Argentinean operations realized sales increases of $6.6 million,
$.8 million and $1.9 million, respectively. The Company's sales strategy
continues to be focused on increasing its penetration of the worldwide hard
goods retail EAS market in order to promote source tagging. To achieve this
objective the Company has been offering volume discounts on the EAS hardware
to those retail customers willing to make chain wide commitments. The Company
anticipates that this sales strategy will continue throughout 1997 and
therefore limit the Company's ability to improve gross profit margins above
current levels. Sales of the Company's Security Systems Group products
(formerly Alarmex) and CCTV product lines increased 13.3% (from $25.0 million
to $28.3 million) over the prior year's first nine months. The Company's
Access Control product line had sales growth of 21.9% (from $4.9 million to
$6.0 million) compared to the prior year's first nine months.
First Nine Months of 1996 Compared to First Nine Months of 1995
- ---------------------------------------------------------------
Cost of Revenues
Cost of revenues increased approximately $48.6 million (or 63.0%) over the
first nine months of 1995 (from $77.1 million to $125.7 million). As a
percentage of net revenues, cost of revenues increased 3.2% (from 55.1%
to 58.3%) compared to the first nine months of the prior year. The increase
in cost of revenues was primarily the result of (i) sales of acquired Actron
inventory which carry a higher product cost, and (ii) higher field service
costs resulting from increased service personnel primarily from the Actron
acquisition combined with domestic chain wide rollouts.
Selling, General and Administrative Expenses
SG&A expenses increased $19.0 million (or 38.9%) over the first nine months of
1995 (from $48.9 million to $67.9 million). As a percentage of net revenues,
however, SG&A expenses decreased by 3.5% (from 35.0% to 31.5%). The higher
expenses (in dollars) were due to: (i) approximately $9.9 million increase in
variable selling costs to support the increase in revenues (ii) approximately
$7.0 million increase in general and administrative costs, and (iii)
approximately $2.1 million related to the amortization of goodwill and
intangibles generated from the Actron acquisition.
<PAGE> 15
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Interest Expense and Interest Income
Interest expense for the first nine months of 1996 increased $4.1 million
(from $3.0 million to $7.1 million) primarily as a result of interest on the
$120 million 5.25% convertible subordinated debentures issued in October of
1995. Interest income for the first nine months of 1996 increased by $4.6
million (from $1.0 million to $5.6 million) as a result of the cash investment
of the remaining cash proceeds of the $120 debentures previously mentioned
combined with the proceeds from the Company's equity offering during the
second quarter of 1996 (see "Management's Discussion and Analysis - Liquidity
and Capital Resources" for additional information).
Income Taxes
The effective tax rate of 31.9% is higher than the effective tax rate during
the first nine months of 1995 of 30.2%. This is primarily due to (i) higher
taxable income attributable to foreign jurisdictions where tax rates are
marginally higher than the U.S., and (ii) higher charges for amortization of
goodwill and intangibles resulting from the Actron acquisition which are not
tax deductible.
On August 20, 1996, the Small Business Job Protection Act of 1996 was signed
into law. The Act generally repeals the Puerto Rico Possessions tax credit
(Sec 936) for taxable years beginning after December 31, 1995. However, the
Act provides grandfather rules for corporations which are existing credit
claimants.
For corporations that are existing credit claimants with respect to a
possession and that use the wage credit method, the possession tax credit
attributable to business income from the possession continues to be determined
as under present law for taxable years beginning after December 31, 1995 and
before January 1, 2002. For taxable years beginning after December 31, 2001
and before January 1, 2006, the corporation's possession business income that
is eligible for the wage credit is subject to an income cap. For taxable years
beginning in 2006 and thereafter, the credit is eliminated. This act does not
have a material impact on the current financial position of the Company or
the effective tax rate for fiscal years 1996 and 1997.
Net Earnings
Net earnings were $14.5 million or $.43 per share versus $8.1 million or $.31
per share for the prior year's first nine months. The weighted average number
of common and common equivalent shares used in the earnings per share
computation for the first nine months of 1996 has increased substantially
compared to the prior year's period (from 26.5 million to 33.4 million)
primarily due to (i) shares issued during the second quarter of 1996 in
connection with the Company's secondary equity offering previously mentioned
(4,600,000), and (ii) the exercise of stock options and an increase in common
stock equivalents (stock options outstanding).
<PAGE> 16
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Exposure To International Operations
Approximately 80.6% of the Company's international sales during the first
nine months of 1996 were made in local currencies. Sales denominated in
currencies other than U.S. dollars increased the Company's potential exposure
to currency fluctuations which can affect results. During the first nine
months of 1996, currency exchange gains amounted to approximately $.9 million
compared to a loss of $.3 million during the first nine months of 1995.
Management cannot predict with any degree of certainty the future impact that
changes in currency exchange rates will have on its operations.
Acquisition
Subsequent to the third quarter the Company announced that it had signed a
letter of intent to acquire Vysion Systems, Inc. a leading CCTV systems
integrator and solutions provider for the Canadian retail industry. The
acquisition, which is subject to customary due diligence and related matters,
is expected to be completed by November 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's liquidity needs have related to, and are expected to continue
to relate to, capital investments, acquisitions and working capital
requirements. The Company has met its liquidity needs over the last three
years primarily through funds provided by long-term borrowings and, in fiscal
1995, through the issuance of common stock in an underwritten public offering
and the issuance of convertible subordinated debt.
During the second quarter of 1996 the Company completed an underwritten public
offering of 4.6 million common shares generating proceeds (after expenses of
the offering) to the Company of approximately $136 million. The proceeds of
the offering are expected to be used for general corporate purposes including
the following: (i) for potential strategic acquisitions and related start-up
operations to enhance both product line diversification within the Company's
core business and greater distribution opportunities and alliances and (ii)
to provide the necessary capital to enable the Company to internally finance
the leasing of equipment to retailers under long-term leases.
The Company's operating activities during the first nine months of 1996
consumed approximately $10.6 million compared to $15.6 million during the
first nine months of 1995. This use of cash was primarily the result of (i)
an increase in accounts receivable resulting from increased sales, (ii) the
use of customer financing programs under both operating leases and long term
financing arrangements, and (iii) payments made on accounts payable acquired
as part of the Actron transaction and restructuring costs that the Company
initiated as part of the integration of its European operations.
<PAGE> 17
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
- -------------------------------
The Company's capital expenditures during the first nine months of 1996
totaled $7.2 million compared to $6.2 million during the first nine months
of 1995. The Company expects to continue to make investments in property,
plant and equipment at levels higher than the last several years. These
capital expenditures will generally relate to expanding, improving and
maintaining plant efficiency at the Company's various production facilities
located in the Caribbean and enhancing distribution capabilities and
efficiencies worldwide. As part of this expansion the Company plans
to increase the current annual production capacity of disposable labels from
billion to 5 billion by the second half of 1997. In addition, and as part of
its continuing strategy to expand international direct distribution, the
Company is currently in the process of establishing its own centralized
Western European distribution center which will become operational in
November of 1996. Total capital spending in 1996 is expected to
approximate $14 million.
Management believes that its anticipated cash needs for the foreseeable
future can be funded from cash and cash equivalents on hand and a currently
available and unused $60 million bank line of credit.
The Company exports products for international sales to its foreign
subsidiaries. The subsidiaries, in turn, sell these products to customers
in their respective geographic areas of operation, generally in local
currencies. This method of sale and resale gives rise to the risk of gain
or losses as a result of currency exchange rate fluctuations.
In order to reduce the Company's exposure resulting from currency
fluctuations the Company has been purchasing currency exchange forward
contracts on a regular basis. These contracts guarantee a predetermined
exchange rate at the time the contract is purchased. This allows the
Company to shift the risk, whether positive or negative, of currency
fluctuations from the date of the contract to a third party. As of
September 29, 1996 the Company had currency exchange forward contracts
totaling approximately $12.5 million. The contracts are in the various
local currencies covering primarily the Company's Western European operations
along with the Company's Canadian operations. The Company's operations in
Argentina, Mexico, Australia and Brazil were not covered by currency exchange
forward contracts at September 29, 1996.
The Company is considering increasing the amount of currencies covered by
forward exchange contracts during fiscal 1996. In addition, the Company
continues to evaluate the use of currency options in order to reduce the
impact that exchange rate fluctuations have on the Company's gross margins
for sales made by the Company's international operations. The combination
of forward exchange contracts and currency options could limit the Company's
risks associated with significant exchange rate fluctuations. The Company had
no currency options outstanding as of September 29, 1996.
The Company has never paid a cash dividend and has no plans to do so in the
foreseeable future. Certain covenants in the Company's debt instruments
limit the amounts available for cash dividends.
<PAGE> 18
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the third quarter of 1996.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHECKPOINT SYSTEMS, INC.
/s/Jeffrey A. Reinhold
- ---------------------- November 13, 1996
Jeffrey A. Reinhold
Vice President - Finance,
Chief Financial Officer and Treasurer
/s/Mitchell T. Codkind
- ----------------------- November 13, 1996
Mitchell T. Codkind
Vice President, Corporate Controller
and Chief Accounting Officer
<PAGE> 19
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