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Checkpoint Systems Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: November 1, 2011 05:13PM
Checkpoint Systems Inc. (CKP) filed Quarterly Report for the period ended 2011-09-25.
Highlight of Business Operations:At September 25, 2011, the financial statements reflected the preliminary allocation of the purchase price based on estimated fair values at the date of acquisition, including $17.3 million in Property, Plant, and Equipment, $7.2 million in Accounts Receivable, and $2.2 million in Inventories. This preliminary allocation resulted in acquired goodwill of $50.9 million and intangible assets of $10.5 million. The intangible assets were composed of a non-compete agreement ($0.3 million), customer lists ($9.8 million), and trade names ($0.4 million). The useful lives were 5 years for the non-compete agreement, 10 years for the customer lists, and 7.5 months for the trade names. The Company continues to evaluate certain assets and liabilities related to this business combination. Additional information, which existed as of the acquisition date but was at that time unknown to the Company, may become known during the remainder of the measurement period. Changes to amounts recorded as assets or liabilities may result in a corresponding adjustment to goodwill. Also, the allocation of the purchase price remains open for final valuation results, quantification of acquired income and non-income based tax exposures, and certain information related to deferred income taxes. The measurement period is expected to be completed by May of 2012. The tax deductible portion of the acquired goodwill will also be determined during the measurement period. The results from the acquisition date through September 25, 2011 are included in the Apparel Labeling Solutions segment and were not material to the Consolidated Financial Statements (revenues of $17.8 million and net earnings of $0.7 million).
Beginning in the second quarter of 2008, we entered into various foreign currency contracts to reduce our exposure to forecasted Euro-denominated inter-company revenues. These contracts were designated as cash flow hedges. The foreign currency contracts mature at various dates from October 2011 to August 2012. The purpose of these cash flow hedges is to eliminate the currency risk associated with Euro-denominated forecasted inter-company revenues due to changes in exchange rates. These cash flow hedging instruments are marked to market and the changes are recorded in other comprehensive income. Amounts recorded in other comprehensive income are recognized in cost of goods sold as the inventory is sold to external parties. Any hedge ineffectiveness is charged to other gain (loss), net on our Consolidated Statements of Operations. As of September 25, 2011, the fair value of these cash flow hedges were reflected as a $0.9 million asset and a $92 thousand liability and are included in other current assets and other current liabilities in the accompanying Consolidated Balance Sheets. The total notional amount of these hedges is $24.3 million (€17.3 million) and the unrealized gain recorded in other comprehensive income was $0.4 million (net of taxes of $0.1 million), of which $0.2 million (net of taxes of $44 thousand) is expected to be reclassified to earnings over the next twelve months. During the three and nine months ended September 25, 2011, a $0.7 million and $1.2 million expense related to these foreign currency hedges was recorded to cost of goods sold as the inventory was sold to external parties, respectively. The Company recognized $0 and $0.1 million of hedge ineffectiveness during the three and nine months ended September 25, 2011, respectively.
Shrink Management Solutions (SMS) revenues increased $3.5 million, or 2.4%, during the third quarter of 2011 compared to the third quarter of 2010. Foreign currency translation had a positive impact of approximately $7.1 million. The decrease in Shrink Management Solutions, after considering the foreign currency translation positive impact, was due to revenue declines of $4.5 million in Alpha® and $0.7 million in EAS consumables. These decreases were offset by increases in the other SMS businesses including CheckView® and EAS systems of $1.0 million and $0.4 million, respectively.
Shrink Management Solutions revenues increased $4.0 million, or 1.0%, during the first nine months of 2011 compared to the first nine months of 2010. Foreign currency translation had a positive impact of approximately $16.7 million. After considering the impact of the foreign currency translation, the increase in EAS systems of $4.0 million, was offset by decreases in other SMS businesses including $3.0 million in Alpha®, and $14.6 million in EAS consumables.
During the first nine months of 2011, gross profit decreased $15.7 million, or 6.2%, from $253.2 million to $237.5 million. The positive impact of foreign currency translation on gross profit was approximately $7.4 million. Gross profit, as a percentage of net revenues, decreased from 42.3% to 38.1%.
Stocks Discussed: CKP,