FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
For the quarter ended June 28, 1998
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11257
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Checkpoint Systems, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 22-1895850
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Wolf Drive P.O. Box 188 Thorofare, New Jersey 08086
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(Address of principal executive offices) (Zip Code)
(609) 848-1800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
As of August 05, 1998, there were 32,415,684 shares of the Common Stock
outstanding.
<PAGE>2
CHECKPOINT SYSTEMS, INC.
FORM 10-Q
INDEX
Page No.
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets . . . . . . . . . . . . . . 3
Consolidated Statements of Operations . . . . . . . . . 4
Consolidated Statement of Shareholders' Equity. . . . . 5
Consolidated Statement of Comprehensive Income. . . . . 5
Consolidated Statements of Cash Flows . . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . 10-15
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders . . 16
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 16
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . 16
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<PAGE>3
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 28, Dec. 28,
1998 1997
--------- --------
<S> <C> <C>
ASSETS (Unaudited)
------ (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 55,753 $ 64,138
Accounts receivable, net of allowances
of $5,470,000 and $5,703,000 122,383 136,748
Inventories, net 85,588 77,631
Other current assets 10,998 13,570
Deferred income taxes 5,569 5,593
------- -------
Total current assets 280,291 297,680
REVENUE EQUIPMENT ON OPERATING LEASE, net 21,213 24,718
PROPERTY, PLANT AND EQUIPMENT, net 82,015 58,674
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, NET 73,877 72,304
INTANGIBLES, NET 12,867 14,003
OTHER ASSETS 57,055 49,055
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TOTAL ASSETS $527,318 $516,434
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Short-term borrowings and current portion
of long-term debt $ 9,769 $ 6,957
Accounts payable 17,387 13,200
Accrued compensation and related taxes 7,364 7,745
Income taxes 10,029 13,687
Unearned revenues 12,628 11,413
Other current liabilities 24,450 33,108
------- -------
Total current liabilities 81,627 86,110
LONG-TERM DEBT, LESS CURRENT MATURITIES 45,475 30,855
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
DEFERRED INCOME TAXES 870 1,458
MINORITY INTEREST 410 461
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Preferred Stock, no par value, authorized
500,000 shares, none issued - -
Common Stock, par value $.10 per share,
authorized 100,000,000 shares, issued
36,448,084 and 36,338,228 3,645 3,633
Additional capital 233,035 232,079
Retained earnings 91,838 86,873
Common stock in treasury, at cost,
3,188,700 shares (27,986) (27,986)
Accumulated other comprehensive income (21,596) (17,049)
------ -------
TOTAL SHAREHOLDERS' EQUITY 278,936 277,550
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $527,318 $516,434
======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
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<PAGE> 4
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Quarter (13 Weeks) Ended Six Months (26 Weeks) Ended
------------------------ ---------------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
-------- -------- -------- --------
(Thousands, except per share data)
<S> <C> <C> <C> <C>
Net Revenues $90,578 $81,036 $170,435 $149,214
Cost of Revenues 54,918 46,497 103,220 86,638
------ ------ ------- -------
Gross Profit 35,660 34,539 67,215 62,576
Selling, General
and Administrative
Expenses 29,352 27,649 57,991 54,346
Income from operations 6,308 6,890 9,224 8,230
Interest Income 1,031 2,362 2,190 5,193
Interest Expense 2,586 2,304 5,007 4,753
Other Income, net 684 275 873 2,163
----- ----- ----- -----
Income Before
Income Taxes 5,437 7,223 7,280 10,833
Income Taxes 1,767 2,357 2,366 3,532
Minority Interest 22 - 51 -
----- ----- ----- ------
Net Earnings $3,692 $4,866 $4,965 $7,301
====== ====== ====== ======
Net Earnings Per Share
Basic $ .11 $ .14 $ .15 $ .21
====== ====== ====== ======
Diluted $ .11 $ .14 $ .14 $ .21
====== ====== ====== ======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
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<PAGE>5
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Six Months(26 Weeks) Ended June 28,1998
--------------------------------------------------
Foreign
Currency
Common Additional Retained Adjust- Treasury
Stock Capital Earnings ments Stock Total
------- ---------- -------- -------- -------- -----
(Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 28,
1997 $ 3,633 $232,079 $86,873 $(17,049) $(27,986) $277,550
Net Earnings - - 4,965 - - 4,965
Exercise of Stock
Options 12 956 - - - 968
Other Comprehensive
Income - - - (4,547) - (4,547)
------ -------- ------- ------- ------- -------
Balance at
June 28,1998 $ 3,645 $233,035 $91,838 $(21,596) $(27,986) $278,936
======= ======= ====== ====-=== ======== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Six Months(26 Weeks) Ended June 28,1998
------------------------------------------
(Thousands)
<S> <C>
Net Earnings $4,965
Other Comprehensive Income
Foreign Currency Translation
Adjustments (4,547)
------
Other Comprehensive Income (4,547)
------
Comprehensive Income $ 418
======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
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<PAGE> 6
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months(26 Weeks) Ended
--------------------------
June 28, June 29,
1998 1997
--------- --------
(Thousands)
<S> <C> <C>
Cash inflow (outflow) from operating activities:
Net earnings $ 4,965 $ 7,301
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net book value of rented equipment sold 896 710
Revenue Equipment placed under Operating Lease (2,395) (8,439)
Long-term customer contracts (9,188) (5,439)
Depreciation and amortization 13,112 9,630
Provision for losses on accounts receivable 978 692
(Increase) decrease in current assets:
Accounts receivable 11,990 (24,901)
Inventories (7,590) (8,912)
Other current assets 2,495 (6,624)
Increase (decrease) in current liabilities:
Accounts payable 4,480 4,224
Accrued compensation and related taxes (267) (679)
Income taxes (3,950) 266
Unearned revenues 852 2,159
Other current liabilities (9,104) 1,626
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Net cash provided (used) by
Operating activities 7,274 (28,386)
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Cash inflow (outflow) from investing activities:
Acquisition of property, plant and equipment (8,079) (12,039)
Acquisition, net of cash acquired (25,981) (1,820)
Other investing activities (1,271) (2,706)
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Net cash used by investing activities (35,331) (16,565)
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Cash inflow (outflow) from financing activities:
Proceeds from stock options 968 787
Proceeds from debt 19,541 2,947
Payment of debt (837) (3,418)
Purchase of treasury stock - (8,410)
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Net cash provided (used) by
financing activities 19,672 (8,094)
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Net decrease in cash and cash
equivalents (8,385) (53,045)
Cash and cash equivalents:
Beginning of period 64,138 185,836
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End of period $ 55,753 $132,791
======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
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<PAGE> 7
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF ACCOUNTING
The consolidated financial statements include the accounts of Checkpoint
Systems, Inc. and its majority-owned subsidiaries ("Company"). All material
intercompany transactions are eliminated in consolidation. The consolidated
financial statements and related notes are unaudited and do not contain all
disclosures required by generally accepted accounting principles. Refer to
the Company's Annual Report on Form 10-K for the fiscal year ended December
28, 1997 for the most recent disclosure of the Company's accounting policies.
The consolidated financial statements include all adjustments, necessary to
present fairly the Company's financial position at June 28, 1998 and
December 28, 1997 and its results of operations and changes in cash flows for
the twenty-six week periods ended June 28, 1998 and June 29, 1997.
2. INVENTORIES
<TABLE>
<CAPTION>
June 28, December 28,
1998 1997
-------- ------------
(Thousands)
<S> <C> <C>
Raw materials $10,757 $10,329
Work in process 2,190 2,312
Finished goods 72,641 64,990
------- -------
$85,588 $77,631
======= =======
</TABLE>
Inventories are stated at the lower of cost (first-in, first-out method)
or market. Cost includes material, labor and applicable overhead.
3. LONG TERM CUSTOMER CONTRACTS
Included in Other Assets are unbilled receivables and other assets relating to
long term customer contracts generated primarily from the leasing of the
Company's EAS equipment to retailers under long-term sales-type leasing
arrangements (referred to by management as the Comprehensive Tag Program(tm)).
The duration of these programs typically range from three to five years.
4. INCOME TAXES
Income taxes are provided for on an interim basis at an estimated
effective annual tax rate. The Company's net earnings generated by the
operations of its Puerto Rico subsidiary are exempt from Federal income
taxes under Section 936 of the Internal Revenue Code (as amended under the
Small Business Job Protection Act of 1996) and substantially exempt from
Puerto Rico income taxes. Under current law, this exemption from Federal
income tax will remain in effect through 2001, will be subject to certain
limits during the years 2002 through 2005, and will be eliminated
thereafter. Under Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes", deferred tax liabilities and assets
are determined based on the difference between financial statement and tax
basis of assets and liabilities using enacted statutory tax rates in effect
at the balance sheet date.
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<PAGE> 8
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:
<TABLE>
<CAPTION>
Six Months
Quarter (13 weeks) Ended (26 weeks) Ended
------------------------ -------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands, except per share amounts)
BASIC EARNINGS PER SHARE:
<S> <C> <C> <C> <C>
Net Income $ 3,692 $ 4,866 $ 4,965 $ 7,301
======== ======== ======== ========
Average Common Stock Outstanding 33,249 33,951 33,221 34,255
Basic Earnings Per Share $ .11 $ .14 $ .15 $ .21
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Net Income Available for Common
Stock Dilutive Securities(1) $ 3,692 $ 4,866 $ 4,965 $ 7,301
======== ======== ======== ========
Average Common Stock Outstanding 33,249 33,951 33,221 34,255
Additional Common Shares
Resulting from Stock Options 1,127 972 1,266 1,261
-------- -------- -------- -------
Average Common Stock and
Dilutive Stock Outstanding(1) 34,376 34,923 34,487 35,516
======== ======== ======= =======
Dilutive Earnings Per Share $ .11 $ .14 $ .14 $ .21
======== ======== ======= =======
</TABLE>
(1) Conversion of the subordinated debentures is not included in the above
calculation as the conversion price is anti-dilutive.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes for the thirteen and twenty-six week
periods ended June 28, 1998, and June 29, 1997 was as follows:
<TABLE>
<CAPTION>
Six Months
Quarter (13 weeks) Ended (26 weeks) Ended
------------------------ ----------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Interest $ 3,791 $ 3,960 $ 4,722 $ 4,836
Income Taxes $ 1,388 $ 3,380 $ 4,045 $ 3,876
</TABLE>
-8-
<PAGE>9
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. RESTRUCTURING CHARGE
In December 1997, the Company recorded a pre-tax restructuring charge of
$9,000,000. This charge, relating directly to the Company's international
operations, includes (i) the elimination of approximately 60 positions
($5,450,000); (ii) the lease terminations of six of the Company's sales
facilities and the consolidation of the Company's European research and
development center into the corporate headquarters ($1,500,000); (iii) the
costs associated with the termination of two master reseller agreements in Asia
and Southern Europe ($1,550,000); and (iv) costs associated with the
consolidation of inventory to the European distribution center ($500,000). At
June 28, 1998, $5,572,000 of restructuring remains in Other Current Liabilities.
The restructuring activity is expected to be substantially complete prior to
the end of 1998.
8. ACQUISITIONS
On February 2, 1998, the Company acquired the assets of Tokai Electronics Co.,
Ltd., a Japanese manufacturer of radio frequency tags, for approximately $27
million. The Company had held a one-third interest in Tokai since 1995.
9. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the FASB issued SFAS No. 131,"Disclosures about Segments of an
Enterprise and Related Information". The provisions of SFAS No. 131 establish
standards for the way that enterprises report information about operating
segments in annual financial statements and require that selected information
about operating segments in interim financial statements be reported. It
also establishes standards for related disclosure about products and services,
geographic areas, and major customers. The Company is reviewing this
standard of disclosure for adoption in its 1998 annual report.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities. The provisions of SFAS No. 133
establishes new procedures accounting for derivatives and hedging activities
and amends a number of existing standards. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999. Although the Company has not
fully completed its evaluation of the impact of this new standard, we do not
anticipate the adoption of this standard to have a material effect on the
Company's consolidated financial statements.
-9-
<PAGE> 10
Item 2.
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This report may include information that could constitute forward-looking
statements made pursuant to the safe harbor provision of the Private
Securities Litigation Reform Act of 1995. Any such forward-looking statements
may involve risk and uncertainties that could cause actual results to differ
materially from any future results encompassed within forward-looking
statements.
RESULTS OF OPERATIONS
- ---------------------
Second Quarter 1998 Compared to Second Quarter 1997
- ------------------------------------------------------------
Overview
During the second quarter of 1998, revenues increased by approximately $9.5
million (or 11.8%) over the second quarter of 1997. The increase in revenues
was due primarily to increased sales of the Company's Electronic Article
Surveillance ("EAS") product line in the Company's international retail markets
and an increase in sales of the CCTV/Fire and Burglar product lines within the
domestic retail markets and to a lesser extent the increased sales of CCTV/Fire
and Burglar products in the international markets. Cost of revenues, as a
percentage of sales increased by 3.2% (from 57.4% to 60.6%) when compared to
last year's quarter. Selling, general and administrative ("SG&A") expenses
increased $1.7 million but decreased as a percentage of revenues by 1.7%
(from 34.1% to 32.4%). Income from operations decreased $0.6 million (from
$6.9 million to $6.3 million). Net earnings for the second quarter of 1998
decreased $1.2 million (from $4.9 million to $3.7 million). Earnings per share
were $.11 for the second quarter of 1998 versus $.14 achieved in the second
quarter of 1997. Per share amounts for all periods reflect diluted earnings
per share, unless otherwise noted.
Net Revenues
Net revenues for the second quarter of 1998 increased $9.5 million
(or 11.8%) over the second quarter of 1997 (from $81.0 million to $90.5
million). North American (the United States and Canada) and International
net revenues accounted for approximately 55.6% and 44.4%, respectively, of
total net revenues compared to 57.3% and 42.7% for last year's similar
quarter. North American EAS net revenues decreased by $0.2 million (or 0.6%).
International EAS net revenues increased $4.5 million (or 13.3%). Sales of the
Company's Worldwide CCTV/Fire and Burglar products increased $4.8 million or
36.9% (from $13.0 million to $17.8 million) over the prior year's quarter.
The Company's Access Control product line had sales growth of 11.1% (from
$2.7 million to $3.0 million) compared to the prior year's second quarter.
Cost of Revenues
Cost of revenues increased $8.4 million (or 18.1%) over the second quarter of
1997 (from $46.5 million to $54.9 million). As a percentage of net
revenues, cost of revenues increased 3.2% (from 57.4% to 60.6%). The
increase in the Company's cost of sales is primarily attributable to: (i) the
increase in sales of CCTV/Fire and Burglar products which result in higher
-10 -
<PAGE>11
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
product costs when compared to the Company's EAS products; (ii) the costs
associated with excess capacity in the Puerto Rico and Japan manufacturing
facilities resulting from the recent expansion; (iii) an increase in field
service costs to support existing and future revenues; (iv) higher costs of
disposable labels manufactured in Japan; and (v) an increase in Research and
Development activities associated with the development of RF-EAS/ID Products.
Selling, General and Administrative Expenses
SG&A expenses increased $1.7 million (or 6.1%) over the second quarter of
1997 (from $27.7 million to $29.4 million). As a percentage of net revenues,
SG&A expenses decreased by 1.7% (from 34.1% to 32.4%). The higher expenses
(in dollars) reflect an $0.8 million increase in selling, marketing and
customer service costs to support existing and future revenues, and a $0.9
million increase in general and administrative costs.
Other Income, net
Other income, net for the second quarter of 1998 increased by $0.4 million
over the second quarter of 1997. Other income, net for the second quarter of
1998 included $1.3 million of proceeds from the final settlement of an 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 $0.6
million. Other income, net for the second quarter of 1997 was comprised of a
foreign exchange gain of $0.3 million.
Interest Expense and Interest Income
Interest expense for the second quarter of 1998 increased by $0.3 million
over the comparable quarter in 1997 from $2.3 million to $2.6 million. Interest
income for the second quarter of 1998 decreased by $1.4 million from the
comparable quarter in 1997 (from $2.4 million to $1.0 million) resulting from a
direct reduction in cash and cash investments primarily related to (i) the net
cash used in operations for the remainder of 1997, (ii) the cost of expanding
the Company's manufacturing facility in Ponce, Puerto Rico during 1997, (iii)
the purchase of Treasury stock in 1997; and (iv) the acquisition of the assets
of Tokai Electronics Co., Ltd., in February 1998.
Income Taxes
The effective tax rate of 32.5% is the same as the effective tax rate during
the second quarter of 1997.
Net Earnings
Net earnings for the current quarter were $3.7 million or $.11 per share
versus $4.9 million or $.14 per share for the prior year's second quarter.
Exposure to International Operations
Approximately 96% of the Company's international sales during the second
quarter of 1998 were made in local currencies. Sales denominated in
currencies other than U.S. dollars increased the Company's potential exposure
to currency fluctuations which can affect results. Management cannot predict,
with any degree of certainty, changes in currency exchange rates and
therefore, the future impact that such changes may have on its operations.
-11-
<PAGE>12
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
First Half 1998 Compared to First Half 1997
- -------------------------------------------
Overview
During the first half of 1998, revenues increased by approximately $21.2
million (or 14.2%) over the first half of 1997. The increase in revenues
was due primarily to increased sales of the Company's Electronic Article
Surveillance ("EAS") product line in both the North American (the United States
and Canada) and International retail markets and CCTV/Fire and Burglar
product lines within the domestic retail markets and to a lesser extent the
increased sales of CCTV/Fire and Burglar products in the international markets.
Cost of revenues, as a percentage of sales, increased by 2.5% (from 58.1% to
60.6%) when compared to last year's first half. Selling, general and
administrative ("SG&A") expenses increased $3.6 million but decreased as a
percentage of revenues by 2.4% (from 36.4% to 34.0%). Income from operations
increased $1.0 million (from $8.2 million to $9.2 million). Net earnings for the
first half of 1998 decreased $2.3 million (from $7.3 million to $5.0 million).
Earnings per share were $.14 for the first half of 1998 versus $.21 achieved in
the first half of 1997.
Net Revenues
Net revenues for the first half of 1998 increased $21.2 million (or 14.2%)
over the first half of 1997 (from $149.2 million to $170.4 million). North
American and International net revenues accounted for approximately 57.2% and
42.8%, respectively, of total net revenues compared to 55.2% and 44.8% for last
year's similar half. North American EAS net revenues increased by $5.2 million
(or 9.3%). International EAS net revenues increased $3.3 million (or 5%).
Sales of the Company's Worldwide CCTV/Fire and Burglar products increased $11.1
million or 48.7% (from $22.8 million to $33.9 million) over the prior year's
first half. The Company's Access Control product line had sales growth of 21.6%
(from $5.1 million to $6.2 million) compared to the prior year's first half.
Cost of Revenues
Cost of revenues increased approximately $16.6 million (or 19.2%) over the
first half of 1997 (from $86.6 million to $103.2 million). As a percentage
of net revenues, cost of revenues increased 2.5% (from 58.1% to 60.6%). The
increase in the Company's cost of sales is primarily attributable to: (i) the
increase in sales of CCTV/Fire and Burglar products which result in higher
product costs when compared to the Company's EAS products; (ii) the costs
associated with excess capacity in the Puerto Rico manufacturing facility
resulting from the recent expansion; (iii) an increase in field service costs
to support existing and future revenues; (iv) higher costs of disposable
labels manufactured in Japan; and (v) an increase in Research and Development
activities associated with the development of RF-EAS/ID Products.
-12-
<PAGE>13
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Selling, General and Administrative Expenses
SG&A expenses increased $3.6 million (or 6.6%) over the first half of
1997 (from $54.4 million to $58.0 million). As a percentage of net revenues,
SG&A expenses decreased by 2.4% (from 36.4% to 34.0%). The higher expenses
(in dollars) reflect a $2.1 million increase in selling, marketing and
customer service costs to support existing and future revenues, and a $1.5
million increase in general and administrative costs.
Other Income, net
Other income, net for the first half of 1998 decreased by $1.3 million
compared to the first half of 1997. Other income, net of $0.8 million for
the second half 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 $0.5 million. Other income, net of $2.2 million
for the first half of 1997 includes: (i) a payment of $1.3 million from
Mitsubishi Materials Corporation in connection with the establishment of a
joint product research and development project; (ii) an insurance claim of
$1.0 million related to the loss of business income caused by a fire at the
Company's warehouse facility in France; and (iii) a net foreign exchange loss
of $0.1 million.
Interest Expense and Interest Income
Interest expense for the first half of 1998 increased $0.2 million over the
first half of 1997 (from $4.8 million to $5.0 million). Interest income for
the first half of 1998 decreased by $3.0 million from the comparable half
in 1997 (from $5.2 million to $2.2 million) resulting from a direct reduction
in cash and cash investments primarily related to (i) the net cash used in
operations for the remainder of 1997, (ii) the costs relating to the expansion
of the Company's manufacturing facility in Ponce, Puerto Rico during the
second half of 1997, (iii) the purchase of Treasury stock; and (iv) the
acquisition of the assets of Tokai Electronics Co., Ltd., in February 1998.
Income Taxes
The effective tax rate of 32.5% is the same as the effective tax rate during
the first half of 1997.
Net Earnings
Net earnings for the current half were $5.0 million or $0.14 per share
versus $7.3 million or $.21 per share for the prior year's first half.
-13-
<PAGE>14
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Exposure to International Operations
Approximately 96% of the Company's international sales during the first
half of 1998 were made in local currencies. Sales denominated in
currencies other than U.S. dollars increased the Company's potential exposure
to currency fluctuations which can affect results. Management cannot predict,
with any degree of certainty, changes in currency exchange rates and
therefore, the future impact that such changes may have on its operations.
Year 2000
The Company is reviewing its major financial and manufacturing applications to
determine their year 2000 compliance. The Company expects no material impact
on its internal information systems from the year 2000 issue. The Company
has recently initiated communications with its significant suppliers to
determine the extent that the Company may be impacted by third parties'
failure to address the issue. The Company will continue to monitor and
evaluate the impact of the year 2000 on its operations.
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity needs have related to, and are expected to continue
to relate to, capital investments, acquisitions and working capital
requirements. The Company has met its liquidity needs over the last three
years primarily through funds provided by long-term borrowings, the issuance
of convertible subordinated debt, and through two separate issuances of
Common Stock in underwritten public offerings.
The Company's operating activities during the first six months of 1998
generated approximately $7.3 million compared to $28.4 million consumed during
the first six months of 1997. This change from the prior year was primarily the
result of a decrease in accounts receivable offset primarily by increases in
inventory levels and the Company's continued investment in the Comprehensive
Tag Program, which provides equipment financing to retail customers utilizing
the Company's EAS systems in exchange for a multi-year agreement to purchase
disposable labels.
The Company's capital expenditures during the first six months of 1998
totaled $8.1 million compared to $12.0 million during the first six months
of 1997. For fiscal year 1998 the Company anticipates that its capital
expenditure requirements will approximate $13.0 million.
-14-
<PAGE>15
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
During 1997, the Board of Directors approved the purchase of up to 10% or
approximately 3.5 million shares of the Company's common stock at an average
cost not to exceed $14.00 per share. As of July 30, 1998, the Company has
purchased 2,434,000 shares of common stock for an average price of $12.86 per
share. The timing of additional purchases of common shares will depend on a
variety of factors including price.
The Company has an existing $100 million multi-currency unsecured revolving
credit facility. At June 28, 1998, 2.45 billion Japanese yen (approximately
$18.9 million) was outstanding under this credit agreement. These borrowings,
along with approximately $8 million from cash on hand, were utilized in February
1998, to acquire the assets of Tokai Electronics Co., Ltd., a Japanese
manufacturer of radio frequency tags, for approximately $27 million.
Management believes that its anticipated cash needs for the foreseeable
future can be funded from cash and cash equivalents on hand and the unused
portion of the $100 million bank line of credit.
The Company exports products for international sales to its foreign
subsidiaries. The subsidiaries, in turn, sell these products to customers
in their respective geographic areas of operation, generally in local
currencies. This method of sales and resale gives rise to the risk of gains
or losses as a result of currency exchange rate fluctuations.
In order to reduce the Company's exposure resulting from currency
fluctuations, the Company has been selectively purchasing currency exchange
forward contracts on a regular basis. These contracts guarantee a
predetermined exchange rate at the time the contract is purchased. This
allows the Company to shift the risk, whether positive or negative, of
currency fluctuations from the date of the contract to a third party.
As of June 28, 1998, the Company had currency exchange forward contracts
totaling approximately $30.7 million. The contracts are in the various local
currencies covering primarily the Company's Western European operations along
with the Company's Australian operations. The Company's operations in
Argentina, Brazil, Canada, Japan, and Mexico were not covered by currency
exchange forward contracts at June 28, 1998.
The Company has never paid a cash dividend (except for a nominal cash
distribution in April 1997, to redeem the rights outstanding under the
Company's 1988 Shareholders' Rights Plan). The Company does not anticipate
paying any cash dividend in the near future and is limited by existing
covenants in the Company's debt instruments to the amount of dividends which
may be paid.
-15-
<PAGE> 16
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Registrant's Annual Meeting of Shareholders was held on
April 22, 1998.
(b) The following Class I directors were elected at the meeting:
Roger D. Blackwell and Richard J. Censits. Voting results for
the election of director nominees were as follows:
<TABLE>
<CAPTION>
Roger D. Blackwell Richard J. Censits
------------------ ------------------
<S> <C> <C>
For 32,795,568 For 32,816,590
Withheld 277,082 Withheld 256,060
---------- ----------
Total 33,072,650 Total 33,072,650
========== ==========
</TABLE>
The names of the other directors continuing in office after the meeting are:
Robert O. Aders, David W. Clark, Jr., Kevin P. Dowd, Elisa Margaona,
Raymond R. Martino and Albert E. Wolf.
The Board of Directors elected a new director, William P. Lyons, Jr., at its
meeting held on July 23, 1998.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
- ------ -----------
27 Financial Data Schedule (Electronic filings only)
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the second quarter of 1998.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHECKPOINT SYSTEMS, INC.
/s/ Jeffrey A. Reinhold
- ----------------------- August 12, 1998
Vice President - Finance,
Chief Financial Officer and Treasurer
/s/ W. Craig Burns
- ------------------------ August 12, 1998
Vice President, Corporate Controller
and Chief Accounting Officer
-16-
<PAGE> 17
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000215419
<NAME> CHECKPOINT SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-END> JUN-28-1998
<CASH> 55,753
<SECURITIES> 0
<RECEIVABLES> 122,383
<ALLOWANCES> 5,470
<INVENTORY> 85,588
<CURRENT-ASSETS> 280,291
<PP&E> 165,422
<DEPRECIATION> 62,194
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<CURRENT-LIABILITIES> 81,627
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0
0
<COMMON> 3,645
<OTHER-SE> 278,936
<TOTAL-LIABILITY-AND-EQUITY> 527,318
<SALES> 90,578
<TOTAL-REVENUES> 90,578
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<OTHER-EXPENSES> (1,715)
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