<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
For the quarter ended September 24, 2000
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11257
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Checkpoint Systems, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 22-1895850
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Wolf Drive P.O. Box 188 Thorofare, New Jersey 08086
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(Address of principal executive offices) (Zip Code)
(856) 848-1800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
As of October, 31 2000, there were 30,283,540 shares of the Common Stock
outstanding.
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CHECKPOINT SYSTEMS, INC.
FORM 10-Q
INDEX
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Shareholders' Equity 5
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-19
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 20
2
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
Sept. 24, Dec. 26,
2000 1999
-------- --------
ASSETS (Unaudited)
(Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 33,255 $ 87,718
Accounts receivable, net of allowances
of $16,326,000 and $10,479,000 173,507 184,378
Inventories, net 113,779 99,148
Other current assets 30,386 27,346
Deferred income taxes 19,904 21,210
------- -------
Total current assets 370,831 419,800
REVENUE EQUIPMENT ON OPERATING LEASE, net 15,501 18,665
PROPERTY, PLANT AND EQUIPMENT, net 115,249 128,881
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, net 284,621 316,536
INTANGIBLES, net 11,677 14,211
OTHER ASSETS 43,584 46,780
-------- --------
TOTAL ASSETS $841,463 $944,873
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and
current portion
of long-term debt $ 38,891 $ 47,680
Accounts payable 41,989 45,892
Accrued compensation and
related taxes 14,860 25,750
Income taxes 22,439 35,370
Unearned revenues 26,489 18,338
Restructuring reserve 11,428 27,047
Other current liabilities 45,381 36,537
------- -------
Total current liabilities 201,477 236,614
LONG-TERM DEBT, LESS CURRENT MATURITIES 209,058 263,595
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
OTHER LONG TERM LIABILITIES 60,989 67,893
MINORITY INTEREST 472 976
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, no par value, authorized
500,000 shares, none issued - -
Common stock, par value $.10 per share,
authorized 100,000,000 shares, issued
36,566,934 and 36,522,584 3,657 3,652
Additional capital 233,977 233,617
Retained earnings 111,724 111,224
Common stock in treasury, at cost,
6,359,200 shares (64,410) (64,410)
Other comprehensive loss (35,481) (28,288)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 249,467 255,795
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $841,463 $944,873
======== ========
See accompanying notes to Consolidated Financial Statements
3
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter Nine Months
(13 Weeks) Ended (39 Weeks) Ended
---------------------- ---------------------
Sept. 24, Sept. 26, Sept. 24, Sept. 26,
2000 1999 2000 1999
-------- -------- -------- --------
(In thousands, except per share amounts)
Net revenues $170,194 $90,742 $499,674 $259,801
Cost of revenues 98,611 53,704 292,446 155,946
------- ------ ------- -------
Gross profit 71,583 37,038 207,228 103,855
Selling, general and
administrative expenses 54,264 27,114 $172,495 82,425
Integration expenses 3,084 - 8,662 -
------- ------ ------- -------
Income from operations 14,235 9,924 26,071 21,430
Interest income 863 1,455 3,393 3,658
Interest expense 6,088 2,229 17,980 6,740
Other expense, net (278) (135) (2,288) (1,384)
------ ------ ------- ------
Income before taxes 8,732 9,015 9,196 16,964
Income tax expense 3,493 2,750 3,678 5,174
Minority interest (31) (24) 2 (11)
------ ------ ------- ------
Earnings before cumulative effect $5,208 $ 6,241 $ 5,520 $11,779
====== ====== ======= ======
Cumulative effect of change
in accounting principle - - (5,020) -
------ ------ ------- ------
Net earnings $5,208 $ 6,241 $ 500 $11,779
====== ====== ======= ======
Earnings per share before
cumulative effect of change
in accounting principle:
Basic $ .17 $ .21 $ .18 $ .39
====== ====== ====== ======
Diluted $ .17 $ .20 $ .18 $ .39
====== ====== ====== ======
Earnings per share:
Basic $ .17 $ .21 $ .02 $ .39
====== ====== ====== ======
Diluted $ .17 $ .20 $ .02 $ .39
====== ====== ====== ======
See accompanying notes to Consolidated Financial Statements
4
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Nine Months(39 Weeks) Ended September 24, 2000
----------------------------------------------------
Other
Compre-
Addit- hensive
Common ional Retained Income Treasury
Stock Capital Earnings (Loss) Stock Total
------ ------- -------- ------ -------- -----
(Thousands)
Balance,
December 26, 1999 $3,652 $233,617 $111,224 $(28,288) $(64,410) $255,795
Net earnings 500 500
Exercise of stock
options 5 360 365
Foreign currency
translation adjustment (7,193) (7,193)
------ -------- -------- -------- -------- --------
Balance
September 24, 2000 $3,657 $233,977 $111,724 $(35,481) $(64,410) $249,467
====== ======== ======== ======== ======== ========
See accompanying notes to Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
-------------------- --------------------
Sept 24, Sept 26, Sept 24, Sept 26,
2000 1999 2000 1999
------- ------- ------- -------
(Thousands)
Net earnings $ 5,208 $ 6,241 500 $11,779
Foreign currency translation
adjustment, net of tax (4,131) 2,785 (7,193) (11,942)
------ ------ ------ ------
Comprehensive income (loss) $ 1,077 $ 9,026 $(6,693) $ (163)
====== ====== ====== ======
See accompanying notes to Consolidated Financial Statements.
5
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months (39 Weeks) Ended
----------------------------
Sept 24, Sept 26,
2000 1999
-------- --------
(Thousands)
Cash inflow (outflow) from operating activities:
Net earnings $ 500 $11,779
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Revenue equipment placed under operating lease (2,081) (5,361)
Long-term customer contracts 6,757 7,347
Depreciation and amortization 36,530 19,048
(Increase) decrease in current assets:
Accounts receivable (2,559) 8,071
Inventories (22,287) 10,950
Other current assets (10,401) (1,706)
Increase (decrease) in current liabilities:
Accounts payable (694) 5,488
Accrued compensation and related taxes (8,379) 588
Income taxes (8,878) 2,181
Unearned revenues 8,743 4,381
Restructuring reserve (15,619) -
Other current liabilities 14,425 76
------- -------
Net cash (used)/provided by operating
Activities (3,943) 62,842
------- -------
Cash inflow (outflow) from investing activities:
Acquisition of property, plant and equipment (10,642) (5,920)
Other investing activities (5,929) (1,816)
------- -------
Net cash used in investing activities (16,571) (7,736)
------- -------
Cash inflow (outflow) from financing activities:
Proceeds from stock options 364 442
Proceeds from debt 379 -
Payment of debt (30,836) (6,434)
------- -------
Net cash used in financing activities (30,093) (5,992)
------- -------
Effect of foreign currency rate on cash
and cash equivalents (3,856) (1,341)
------- -------
Net increase (decrease) in cash and cash
equivalents (54,463) 47,773
Cash and cash equivalents:
Beginning of period 87,718 35,934
------- -------
End of period $ 33,255 $ 83,707
======= =======
See accompanying notes to Consolidated Financial Statements.
6
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF ACCOUNTING
The consolidated financial statements include the accounts of Checkpoint
Systems, Inc. and its majority-owned subsidiaries ("Company"). All
intercompany transactions are eliminated in consolidation. The consolidated
financial statements and related notes are unaudited and do not contain all
disclosures required by generally accepted accounting principles. Refer to
footnote 10 and the Company's Annual Report on Form 10-K for the fiscal year
ended December 26, 1999 for the most recent disclosure of the Company's
accounting policies.
The consolidated financial statements include all adjustments, consisting only
of normal recurring accruals, necessary to present fairly the Company's
financial position at September 24, 2000 and December 26, 1999 and its results
of operations and changes in cash flows for the thirty-nine week periods ended
September 24, 2000 and September 26, 1999.
Certain reclassifications have been made to the 1999 financial statements and
related footnotes to conform to the 2000 presentation.
2. INVENTORIES
September 24, December 26,
2000 1999
------------- ------------
(Thousands)
Raw materials $12,132 $14,544
Work in process 6,572 10,984
Finished goods 95,075 73,620
------- ------
$113,779 $99,148
======= =======
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Cost includes material, labor and applicable overhead.
3. LONG TERM CUSTOMER CONTRACTS
Included in Other Assets are unbilled receivables and other assets relating to
long term customer contracts generated primarily from the leasing of the
Company's EAS equipment to retailers under long-term sales-type leasing
arrangements. The duration of these programs typically ranges from three to five
years.
4. INCOME TAXES
Income taxes are provided for on an interim basis at an estimated effective
annual tax rate. The Company's net earnings generated by the operations of its
Puerto Rico subsidiary are exempt from Federal income taxes under Section 936 of
the Internal Revenue Code (as amended under the Small Business Job Protection
Act of 1996) and substantially exempt from Puerto Rico income taxes. Under
current law, this exemption from Federal income tax will remain in effect
through 2001, will be subject to certain limits during the years 2002 through
2005, and will be eliminated thereafter. Under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes", deferred tax
liabilities and assets are determined based on the difference between financial
statement and tax basis of assets and liabilities using enacted statutory tax
rates in effect at the balance sheet date.
7
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
In July 2000, The German parliament passed a broad set of tax reforms. The
reforms were "enacted" in October 2000 and, under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", changes in
tax laws and rates are not recognized prior to the enactment date. The effect of
the changes on the deferred tax provision will occur in the fourth quarter of
2000 and will involve re-measurement of the German deferred tax assets and
liabilities to reflect the new tax rate. Management is currently evaluating the
potential impact of the changes in the German tax law.
5. PER SHARE DATA
The following data shows the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock:
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
------------------- --------------------
Sept 24, Sept 26, Sept 24, Sept 26,
2000 1999 2000 1999
-------- -------- -------- --------
(In thousands, except per share amounts)
BASIC EARNINGS PER SHARE:
Earnings before
cumulative effect of change
in accounting principle $ 5,208 $ 6,241 $ 5,520 $11,779
======== ======== ======== =======
Net earnings $ 5,208 $ 6,241 $ 500 $11,779
======== ======== ======== =======
Average common stock
outstanding 30,211 30,162 30,203 30,140
Basic earnings per
share before cumulative
effect of change in
accounting principle $ .17 $ .21 $ .18 $ .39
======== ======== ======== =======
Basic earnings
per share $ .17 $ .21 $ .02 $ .39
======== ======== ======== =======
8
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
------------------- --------------------
Sept 24, Sept 26, Sept 24, Sept 26,
2000 1999 2000 1999
-------- -------- -------- --------
(In thousands, except per share amounts)
DILUTED EARNINGS PER SHARE:
Earnings before
cumulative effect
of change in accounting
principle available for
common stock and
diluted securities $ 6,153 $ 7,336 $ 5,520 $11,779
======== ======== ======= ========
Net earnings available
for common stock and diluted
securities $ 6,153 $ 7,336 $ 500(1) $ 11,779
======== ======== ======= ========
Average common stock
outstanding 30,211 30,162 30,203 30,140
Additional common shares:
resulting from stock options 360 380 439 405
resulting from convertible
debentures 6,528 6,528 - -
-------- -------- ------- --------
Average common stock and
dilutive stock outstanding 37,099 37,070 30,642(1) 30,545
Diluted earnings per
share before cumulative
effect of change in
accounting principle $ .17 $ .20 $ .18 $ .39
======== ======== ======= ========
Dilutive earnings
per share $ .17 $ .20 $ .02 $ .39
======== ======== ======= ========
(1) Conversion of the subordinated debentures is not included in the above
calculation as the conversion price is anti-dilutive.
9
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes for the thirteen and thirty-nine
week periods ended September 24, 2000, and September 26, 1999 were as follows:
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
-------------------- --------------------
Sept 24, Sept 26, Sept 24, Sept 26,
2000 1999 2000 1999
-------- -------- -------- --------
(In thousands)
Interest $ 6,674 $ 677 $16,807 $ 5,320
Income Taxes $ 469 $ 237 $12,091 $ 1,116
7. ACQUISITION OF METO AG
On December 10, 1999, the Company consummated its acquisition of 98.57% of the
outstanding shares of Meto AG pursuant to a cash tender offer. The Company has
recently increased its ownership to 100% through the German process of
integration. The final aggregate purchase price for the shares was $263.9
million, of which $2.3 million was paid in October 2000. The accrued transaction
costs at September 24, 2000 were $5.3 million. The acquisition was accounted for
under the purchase method of accounting. The Company is still finalizing the
purchase price allocation and anticipates additional adjustments to the purchase
price allocation in the fourth quarter 2000.
In connection with the acquisition, the Company entered into a new $425 million
senior secured credit facility provided by several lenders. The credit facility
includes a $275 million term note and a $150 million revolving line of credit.
The terms of the new credit facility required the Company to retire all existing
senior debt. In connection with the senior debt restructuring, Checkpoint
incurred $7.2 million in placement fees which have been capitalized and are
being amortized over the term of the new facility.
The following unaudited pro forma information presents the results of operations
of the Company as if the acquisition of Meto had taken place on December 27,
1998.
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
-------------------- ---------------------
Sept 24, Sept 26, Sept 24, Sept 26,
2000 1999 2000 1999
(actual) (pro forma) (actual) (pro forma)
-------- --------- -------- ---------
(Thousands, except per share data)
Net revenues $170,194 $178,887 $499,674 $546,351
Net earnings $ 5,208(1) $ 1,378 $ 500(2) $ 6,099
Diluted earnings
per share $ .17 $ .05 $ .02 $ .20
(1) Amount includes after tax integration expenses of $1,850.
(2) Amount includes an after-tax cumulative effect of change in accounting
principle of $(5,020) and after-tax integration expenses of $5,197.
10
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The pro forma results of operations are for comparative purposes only and
reflect increased amortization and interest expense resulting from the
acquisition described above but do not include any potential cost savings from
combining the acquired businesses with the Company's operations. Consequently,
the pro forma results do not reflect the actual results of operations had the
acquisitions occurred on the dates indicated and are not intended to be a
projection of future results or trends.
8. PROVISION FOR RESTRUCTURING
A restructuring reserve was established in 1999 for costs related to the
integration of Meto AG. A portion of these costs resulted in a before-tax charge
of $11.8 million ($0.27 per-share after tax) largely for severance costs for
approximately 135 employees ($3.1 million), lease termination costs for 15
office/warehouse facilities ($3.3 million), asset impairments ($4.5 million) and
other integration expenses ($0.9 million) of Checkpoint Systems, the acquiring
company. An additional $20.7 million associated with severance costs for
approximately 289 employees of the acquired company, and lease termination costs
of the acquired company was recorded as an increase to goodwill. Most of the 424
employees affected were in support services, including selling, technical and
administrative staff functions.
At December 26, 1999, the restructuring reserve totaled $27.0 million. During
the nine months ended September 24, 2000 approximately $15.6 million (primarily
cash paid for severance) was charged against the restructuring reserve recorded
in 1999, leaving a restructuring reserve balance of approximately $11.4 million
as a liability on the balance sheet. In connection with the restructuring
program, 351 employees have been terminated as of September 24, 2000.
Additional charges for restructuring are expected in the fourth quarter 2000 as
the Company continues to evaluate and align its manufacturing operations.
The restructuring activity accrued in December 1999 is expected to be
substantially complete by the end of 2000.
11
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. BUSINESS SEGMENTS
Effective December 27,1998 the Company adopted provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Statement requires the Company to disclose selected segment information on an
interim basis. With the recent acquisition of Meto AG, the Company has revised
its segments to conform with the combined company. As a result, the Company has
reclassified the prior period segment information to conform with the current
period presentation. This information is set forth below:
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
--------------------- ---------------------
Sept 24, Sept 26, Sept 24, Sept 26,
2000 1999 2000 1999
-------- -------- -------- --------
(In Thousands)
Business segment net revenue:
Loss Prevention $105,593 $ 90,416 $301,489 $259,356
Auto ID 34,884 326 106,267 445
Retail Merchandising 29,717 - 91,918 -
------- ------- ------- -------
Total $170,194 $ 90,742 $499,674 $259,801
======== ======= ======= =======
Business segment gross
margin(loss):
Loss Prevention $ 44,522 $ 37,339 $123,290 $104,191
Auto ID 10,464 (301) 33,245 (336)
Retail Merchandising 16,597 - 50,693 -
------- ------- ------- -------
Total $ 71,583 $ 37,038 $207,228 $103,855
======= ======= ======= =======
10. CHANGE IN ACCOUNTING PRINCIPLE
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. The SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements.
In accordance with SEC Staff Accounting Bulletin No. 101, the Company changed
its accounting method for recognizing revenue on the sale of equipment where
post-shipment obligations exist. Previously, the Company recognized revenue for
equipment when title transferred, generally upon shipment. Beginning with the
first quarter of year 2000, the Company began recognizing revenue when
installation is complete or other post-shipment obligations have been satisfied.
During the first quarter of year 2000, the cumulative effect of the change in
accounting method was a non-cash reduction in net earnings of $5,020,000, or
$0.17 per diluted share.
12
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
11. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes a new model for the accounting and
reporting of derivative and hedging transactions. The statement amends a number
of existing standards and, as amended by SFAS No. 137, is scheduled to be
effective for fiscal years beginning after June 15, 2000. The Company expects to
adopt this standard as required in fiscal year 2001 and, because of continual
business-driven changes to its derivatives and hedging programs, has not fully
assessed its potential impact on its financial position or results of
operations.
On October 12, 2000 the Emerging Issues Task Force of the Financial Accounting
Standards Board issued EITF 00-10 "Accounting for Shipping and Handling Fees and
Costs". The Company currently nets the amounts billed to customers for shipping
and handling with the costs and classifies both as "Cost of Revenues". In the
fourth quarter 2000, the Company will apply the consensus and reclassify the
amounts billed to customers for shipping and handling as revenue. In line with
the consensus, comparative financial statements for prior periods will be
reclassified. The Company has not yet determined the amount of the
reclassification.
13
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This report includes forward-looking statements made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include information, for example, about possible
future results of operations, and risks associated with international
operations. While the Company believes that these statements are reasonable as
of the date made, investors should not place undue reliance on forward-looking
statements since they involve risks and uncertainties that could cause actual
results to differ materially from any anticipated future results encompassed
within the forward-looking statements. Factors that might cause results to
differ significantly from those expressed in the forward-looking statements
include, but are not limited to: technological changes which may impact both
existing and new products; conditions in international markets which may result
in higher costs or adverse currency exchange rate fluctuations; and general
economic and business conditions which may be less favorable than anticipated.
RESULTS OF OPERATIONS
---------------------
The table below reflects sales and income from operations for the quarter and
nine months ended September 26, 1999 on a pro forma basis, and earnings from
operations for the quarter and nine months ended September 24, 2000 excluding
integration costs. The acquisition of Meto AG in 1999, which was accounted for
using the purchase method, significantly impacted the comparability of results
for the quarter and nine months ended September 24, 2000. Accordingly, pro forma
revenues and income from operations for the quarter and nine months ended
September 26, 1999 are provided to facilitate comparisons. The pro forma results
include Meto AG as if the acquisition had occurred on December 27, 1998. Pro
forma adjustments have been made primarily to reflect an increase in goodwill
and intangible amortization related to the Meto acquisition. Cost savings from
combining operations with the Company have not been reflected. Consequently, the
pro forma results do not reflect the actual results of operations had the
acquisition occurred on the date indicated, and are not intended to be a
projection of future results or trends.
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
--------------------- ---------------------
Sept 24, Sept 26, Sept 24, Sept 26,
2000 1999 2000 1999
-------- -------- -------- --------
(Pro Forma) (Pro Forma)
(In Thousands)
Net revenues $170,194 $178,887 $499,674 $546,531
Cost of revenues 98,611 107,545 292,446 326,163
-------- -------- -------- --------
Gross profit 71,583 71,342 207,228 220,368
Selling, general and
administrative expenses 54,264 62,737 172,495 191,081
-------- -------- -------- --------
Income from operations
before integration
expenses $ 17,319 $ 8,605 $ 34,733 $ 29,287
======== ======== ======== ========
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The discussion that follows speaks to the comparisons in the above table through
income from operations before integration expenses. Comparisons of all other
income and expense items refer to the Consolidated Statements of Operations.
Third Quarter 2000 Compared to Third Quarter 1999
-------------------------------------------------
Net Revenues
Net revenues for the third quarter of 2000 decreased $8.7 million (or 4.9%) over
the third quarter of 1999 (from $178.9 million to $170.2 million). Excluding the
effect of foreign currency exchange rates, revenue increased by $4.2 million,
primarily in the Auto ID business segment. Management expects the strength of
the U.S. dollar versus foreign currencies to continue to negatively impact
revenue for the remainder of the year.
Cost of Revenues
Cost of revenues decreased approximately $8.9 million (or 8.3%) over the
third quarter of 1999 (from $107.5 million to $98.6 million). As a percentage of
net revenues, cost of revenues decreased from 60.1% to 57.9%. The decrease in
the Company's cost of revenues is attributable to: (i) a favorable product mix;
(ii) a decrease in field service costs; and (iii) product cost reductions from
utilization improvements experienced within the Company's manufacturing
operations during the quarter.
Selling, General and Administrative Expenses
SG&A expenses decreased $8.5 million (or 13.5%) over the third quarter of
1999 (from $62.8 million to $54.3 million). Foreign currency exchange rates
accounted for $3.7 million of the decrease. As a percentage of net revenues,
SG&A expenses decreased from 35.1% to 31.9%. This reduction in SG&A expenses as
a percentage of net revenues is a direct result of the Company's integration
efforts. Included in SG&A in 1999 and 2000 is $2.8 million of goodwill and
acquired intangible amortization expense related to the acquisition of Meto AG.
Other Expense, net
Other expense, net represented a net foreign exchange loss of $0.3 million for
the third quarter of 2000 and $0.1 million for the third quarter of 1999.
Interest Expense and Interest Income
Interest expense for the third quarter of 2000 increased $3.9 million from the
comparable quarter in 1999 (from $2.2 million to $6.1 million). The increase in
interest expense is directly attributable to the increased borrowings associated
with the acquisition of Meto AG in December 1999. Interest income for the third
quarter 2000 decreased by $0.6 million from the comparable quarter in 1999 (from
$1.5 million to $0.9 million) due to lower cash investments.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Income Taxes
The effective tax rate for the third quarter of 2000 was 40.0%. The effective
tax rate during the third quarter of 1999 was 30.5%. The higher tax rate
reflects the effect of the increase in non-deductible goodwill amortization
related to the acquisition of Meto AG in December 1999 and the higher proportion
of earnings derived in non-U.S. jurisdictions.
Net Earnings
Net earnings for the quarter before integration expenses were $7.1 million or
$.22 per diluted share in 2000 versus $6.2 million or $.20 per diluted share in
1999. Including integration expenses, net earnings for the third quarter 2000
were $5.2 million or $.17 per diluted share.
First Nine Months 2000 compared to First Nine Months 1999
---------------------------------------------------------
Net Revenues
Net revenues for the first nine months of 2000 decreased $46.9 million (or 8.6%)
over the first nine months of 1999 (from $546.5 million to $499.7 million). This
decrease in revenue, primarily in Europe, is attributable to the impact of
foreign currency exchange rates for the first nine months of 2000 ($25.9
million) and business disruptions resulting from the integration of the Meto
operations.
Cost of Revenues
Cost of revenues decreased approximately $33.7 million (or 10.3%) over the
first nine months of 1999 (from $326.2 million to $292.5 million). As a
percentage of net revenues, cost of revenues decreased from 59.7% to 58.5%. The
decrease in the Company's cost of revenues is attributable to: (i) a favorable
product mix; (ii) a decrease in field service costs; and (iii) product cost
reductions due to utilization improvements experienced within the Company's
manufacturing operations.
Selling, General and Administrative Expenses
SG&A expenses decreased $18.6 million (or 9.7%) over the first nine months of
1999 (from $191.1 million to $172.5 million). $7.6 million of the decrease is
attributable to the impact of foreign currency exchange rates. As a percentage
of net revenues, SG&A expenses decreased from 35.0% to 34.5% as the Company's
integration efforts impacted favorably in the second and third quarters of 2000.
Included in SG&A in 1999 and 2000 is $8.4 million of goodwill and acquired
intangible amortization expense related to the acquisition of Meto AG.
Other Expense, net
Other expense, net represented a net foreign exchange loss of $2.3 million for
the first nine months of 2000 and $1.4 million for the first nine months of
1999.
16
<PAGE>
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 2000 increased $11.3 million from
the comparable period in 1999 (from $6.7 million to $18.0 million). The increase
in interest expense is directly attributable to the increased borrowings
associated with the acquisition of Meto AG in December 1999. Interest income for
the first nine months of 2000 decreased by $0.3 million from the comparable
period in 1999 (from $3.7 million to $3.4 million).
Income Taxes
The effective tax rate for the first nine months of 2000 was 40.0%. The
effective tax rate during the first nine months of 1999 was 30.5%. The higher
tax rate reflects the effect of the increase in non-deductible goodwill
amortization related to the acquisition of Meto AG in December 1999 and the
higher proportion of earnings derived in non-U.S. jurisdictions.
Cumulative Effect Of Change In Accounting Principle
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. The SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements. In accordance with SEC Staff Accounting Bulletin No. 101, the
Company changed its accounting method for recognizing revenue on the sale of
equipment where post-shipment obligations exist. Previously, the Company
recognized revenue for equipment when title transferred, generally upon
shipment. Beginning with the first quarter of year 2000, the Company began
recognizing revenue when installation is complete or other post-shipment
obligations have been satisfied. During the first quarter of year 2000, the
cumulative effect of the change in accounting method was a non-cash reduction in
net earnings of $5.0 million, or $0.17 per diluted share.
Net Earnings
Net earnings for the first nine months before integration expenses and
cumulative effect of change in accounting principle were $10.7 million or $.35
per diluted share in 2000 versus $11.8 million or $.39 per diluted share in
1999. Including integration expenses and the cumulative effect of change in
accounting principle, net earnings for the first nine months 2000 were $0.5
million or $.02 per diluted share.
Exposure to International Operations
Approximately 65% of the Company's sales are made in currencies other than U.S.
dollars. Sales denominated in currencies other than U.S. dollars increase the
Company's potential exposure to currency fluctuations which can affect results.
Management expects the strength of the U.S. dollar versus foreign currencies to
continue to negatively impact revenue and earnings for the remainder of the
year.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
-------------------------------
Financial Condition
Liquidity and Capital Resources
The Company's liquidity needs have related to, and are expected to continue to
relate to, capital investments, acquisitions and working capital requirements.
The Company has met its liquidity needs over the last three years primarily
through funds provided by long-term borrowings, cash reserves due to an earlier
secondary issuance of common stock in an underwritten public offering, and more
recently through cash generated from operations. The Company believes that cash
provided from operating activities and funding available under its current
credit agreements, should be adequate for its presently foreseeable working
capital and capital investment requirements.
The Company's operating activities during the first nine months of 2000
generated approximately $16.9 million, before the payment of restructuring costs
and after tax integration expenses of $5.2 million, compared to approximately
$62.8 million during 1999. This change from the prior year was primarily
attributable to a decrease in earnings and an increased investment in working
capital.
In December 1999, the Company completed the acquisition of Meto AG. In
connection with the acquisition, the Company entered into a new $425 million six
and one-half year senior collateralized multi-currency credit facility with a
consortium of twenty-one banks led by the Company's principal lending bank. The
credit facility, which expires on March 31, 2006, includes a $275 million
equivalent multi-currency term note and a $150 million equivalent multi-currency
revolving line of credit. Interest rates on the new facility are reset quarterly
and are based on the Eurocurrency base rate plus an applicable margin. At
September 24, 2000, 225.2 million Euro (approximately $197.4 million) and $20.1
million were outstanding under the term loan and 2.23 billion Japanese Yen
(approximately $20.6 million) was outstanding under the revolving credit
facility.
The Company has never paid a cash dividend (except for a nominal cash
distribution in April 1997, to redeem the rights outstanding under the Company's
1988 Shareholders' Rights Plan). The Company does not anticipate paying any cash
dividend in the near future and is limited by existing covenants in the
Company's debt instruments with regard to paying dividends.
Management believes that its anticipated cash needs for the foreseeable future
can be funded from cash and cash equivalents on hand and the availability under
the $150 million, six and one-half year revolving credit facility.
Capital Expenditures
The Company's capital expenditures during the first nine months of fiscal 2000
totaled $10.6 million compared to $5.9 million during the first nine months of
fiscal 1999. The higher expenditures during 2000 were primarily a result of the
Meto acquisition, an increased investment in the Company's global IT
infrastructure and an investment in manufacturing equipment located in Puerto
Rico. The Company anticipates its capital expenditures to approximate $15
million in 2000.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Exposure to International Operations
The Company manufactures product in the US, the Caribbean, Europe and Asia
Pacific for both the local marketplace as well as for export to its foreign
subsidiaries. The subsidiaries, in turn, sell these products to customers in
their respective geographic areas of operation, generally in local currencies.
This method of sale and resale gives rise to the risk of gains or losses as a
result of currency exchange rate fluctuations.
In order to reduce the Company's exposure resulting from currency fluctuations,
the Company has been selectively purchasing currency exchange forward contracts
on a regular basis. These contracts guarantee a predetermined exchange rate at
the time the contract is purchased. This allows the Company to shift the risk,
whether positive or negative, of currency fluctuations from the date of the
contract to a third party.
As of September 24, 2000, the Company had currency exchange forward contracts
totaling approximately $61.4 million. The contracts are in the various local
currencies covering primarily the Company's operations located within the
European Monetary Union. Historically, the Company has not purchased currency
exchange forward contracts for its operations in South America and Asia Pacific.
The Company has entered into a foreign exchange option contract for the
conversion of 3.0 million Euros into USD with an expiration date of May 2001.
The Company will continue to evaluate the use of currency options in order to
reduce the impact that exchange rate fluctuations have on the Company's net
earnings from sales made by the Company's international operations. The
combination of forward exchange contracts and currency options should reduce the
Company's risks associated with significant exchange rate fluctuations.
Other
In July 2000, The German parliament passed a broad set of tax reforms. The
reforms were "enacted" in October 2000 and, under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", changes in
tax laws and rates are not recognized prior to the enactment date. The effect of
the changes on the deferred tax provision will occur in the fourth quarter of
2000 and will involve re-measurement of the German deferred tax assets and
liabilities to reflect the new tax rate. Management is currently evaluating the
potential impact of the changes in the German tax law.
19
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
Number Description
-------- -------------------------
27 Financial Data Schedule
(Electronic filings only)
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the third quarter of
2000.
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Checkpoint Systems, Inc.
____________________________________ November 8, 2000
/s/ W. Craig Burns
Vice President, Finance,
Chief Financial Officer and Treasurer
____________________________________ November 8, 2000
/s/ Arthur W. Todd
Vice President, Corporate Controller
and Chief Accounting Officer
20
