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No. of Recommendations: 10
The Business

Checkpoint CKP is involved with labeling and security. They sell electronic article surveillance systems and tags using radio frequency (RF) and electromagnetic (EM) technology, security source tagging, branding tags and labels for apparel, barcode labeling systems, retail display systems, and hand-held labeling systems. They rely heavily on foreign business and have achieved substantial international growth,primarily through acquisitions. They now operate directly in 30 countries. Products are principally developed and manufactured in-house and sold through direct distribution.

The Company's products and services can be segmented into three groups:

Security

The company's largest business is retail security. Its diversified security product lines are designed to help retailers prevent inventory losses caused by theft (both by
customers and employees) and reduce selling costs through lower staff requirements. Offering both its own proprietary RF-EAS and EM-EAS technologies, they hold a greater than 40% share of worldwide electronic article surveillance system installations. Systems for closed-circuit television (CCTV), fire and intrusion, and access control, also fall within the security business segment. Retail security represents approximately 64% of the Company's business.

Electronic Article Surveillance

EAS systems have been designed to act as a deterrent to control the problem of
merchandise theft in retail stores and libraries. The Company offers a wide variety of RF-EAS (radio frequency) and EM-EAS(electromagnetic). EAS systems are primarily comprised of sensors and deactivation units, which respond to or act upon tags and labels. Tags can be embedded in products or packaging at the point-of-manufacture.

Closed circuit television, Fire and Intrusion Systems

Checkpoint's video surveillance products consist of fixed and high-speed pan/tilt/zoom camera systems, programmable switcher controls, time-lapse recording, and remote tele-surveillance.

The company's custom-designed fire and intrusion systems provide protection against internal and external theft, completing the line of loss prevention solutions. The systems can be included in the Company's US-based 24-hour Central Station Monitoring Service.

Access Control Systems

Electronic access control systems protect restricted areas by granting access only to authorized personnel at specified times. These software-driven electronic access control systems offer integrated facility control for small to large building complexes and
include features to protect people and track assets.


Labeling Services

Labeling services is the company's second largest business, generating approximately 22% of the revenues in 2003. Services range from full-color branding labels to tracking labels and, ultimately, fully-integrated labels that include an EAS or a radio frequency identification (RFID) circuit.

Increasingly, the market seeks to move toward more sophisticated tag solutions that incorporate RFID components (walmart for instance)that will automate many aspects of supply chain tracking.

The company sells both turnkey in-house barcode printing systems (laser and thermal printers) and a worldwide service bureau network (Check-Net) that can supply customers with integrated custom tags and labels with variable data. In addition, these tags and labels can be further integrated with RF substrates for EAS functions. The
printing systems can be either thermal printing technologies or high-speed laser
printers. Laser printers offer superior print quality and high throughput for such applications as price marking and product identification, integrated tags and labels, shelf mark labels, pick tickets, tracking or inventory labeling, and shipping and compliance labels. The thermal and laser printers generate a recurring revenue stream from consumables, documents, and service contracts.

Check-Net is a global service bureau network of 29 locations worldwide which supplies customers with customized retail apparel tags and labels at the manufacturing location. A service bureau imprints variable pricing and article identification data and barcoding information onto price and apparel branding tags. Check-Net's web-enabled capabilities provide on-time, on-demand printing of custom labels with variable data.

RFID

Radio frequency identification is an auto-ID technology. RFID tags, or "intelligent tags," contain an integrated circuit (IC) powered by a radio frequency antenna. Tags can be variably coded, and RFID readers can capture data from multiple tags simultaneously, without line-of-sight requirements. To date, Checkpoint has been mainly involved with RFID-based intelligent library applications. The Intelligent Library System was released in 1999 and is currently installed in more than 100 libraries, primarily in the USA. In 2003, in response to the ongoing efforts of industry groups to introduce the Electronic Product Code (EPC) RFID tag to the retail supply chain, they made a decision to expand RFID development and sales. Most recently they landed a contract with CVS Pharmacies. Checkpoint will provide chain-wide installation of radio frequency Electronic Article Surveillance (EAS) technology.

They will outfit all 5,300 CVS stores with its Liberty PX antennas, providing CVS with Digital RF EAS solution.

RFID System Solutions

On February 12, 1997, they entered into a ten-year joint research and development agreement with Mitsubishi Metals for RFID applications. The agreement provides for cross licensing of certain RFID applications during the term and for five years following the termination of the agreement. Checkpoint sold approximately 3.4 billion disposable tags in 2003 and has the capacity to produce approximately 7 billion disposable tags per year. The principal raw materials and components used in the manufacture of RFID are electronic components and circuit boards for its systems; and aluminum foil, resins, paper, and ferric chloride solutions for the Company's disposable tags. Cost is going to be a major factor in who gets the business in RFID. The cost of the library tags is upwards of $0.50 and the cost of tags for retail will be around $0.05. The company has not commented on their intention or capability concerning this application.

Retail Merchandising

Retail merchandising includes hand-held label applicators and tags,promotional
displays, and queuing systems. Hand-held labeling systems include a complete line of hand-held price marking and label application solutions. This allows Checkpoint to sell to a segment of the retail market that has not converted to the more advanced BCS and EAS technologies. Many of the products in this business segment represent high-margin items with a high level of recurring sales of associated consumables such as labels. As a result of retailers introducing scanning, the company's retail products are serving a declining market. Retail merchandising represents approximately 14% of the business.

Customers

They sell mainly to supermarkets, drug stores, hypermarkets, and mass merchandiser market segments. Some of its customers include: Barnes & Noble, Best Buy, Circuit City Stores, Esprit, Home Depot, Kohl's Department Stores, Linens `n Things, MarMaxx, Sears, Target Corporation, Walgreen Co., and Winn Dixie, Inc. in the USA; Safeway and Shoppers Drug Mart/Pharmaprix in Canada; Gigante in Mexico; Pague Menos in Brazil; B&Q in the United Kingdom; Alcampo, Carrefour, El Corte Ingles, and Mercadona in Spain; Carrefour, Casino, FNAC, and Intermarche in France; Metro Group in Germany; Woolworths in Australia; Don Quixote in Japan; and Ahold in Europe.

Competitors

Tyco International Ltd., Sentry Technology Corporation, Ketec, Inc., Casi Rusco,
Honeywell, Lenel Systems, Avery Dennison, Paxar Intermec Technologies, Zebra Technologies, Contact, Garvey, Hallo, Prix, and Sato.
In RFID add Texas Instruments, Philips and privately held companies like Alien Technologies.

Backlog

Backlog of orders was approximately $52.7 million at December 28, 2003 compared to approximately $39.0 million at December 29, 2002. Substantially all of the backlog at the end of 2003 will be delivered during 2004. The amount of backlog is not indicative of trends in the company's business. The security business generally follows the retail cycle so that revenues are weighted toward the last half of the calendar year as retailers prepare for the holiday season.


2003 2002 2001 2000 1999
Backlog $52,703 $38,955 $40,100 $38,800 $34,100


Acquisitions and Restructuring

Acquisitions

2002 Thomeko $0.7 M
2001 A.W. Printing $13.0 M
1999 Meto AG $260.5 M +$4.63 M in transaction costs
1998 Tokai RFID $28.0 M
1997 Evagard $1.6 M
1997 D&D Security $1.0 M
1997 Checkout Security $1.2 M
1997 2M Holding $2.3 M

In 1993 and 1995, the company completed two key acquisitions which gave it direct access into Western Europe. They acquired ID Systems International BV and ID Systems Europe BV in 1993 and Actron Group Limited in 1995. These companies engaged in the manufacture, distribution, and sale of EAS systems throughout Europe.

In December 1999, they acquired Meto AG, a German multinational corporation and a leading provider of value-added labeling solutions for article identification and security. The acquisition doubled the company's revenues to $690 M.8 from $ 370.5

In December 1995, as a result of the Actron acquisition, the Company announced a restructuring plan to reorganize its workplace on an international basis to eliminate redundancies. In connection with the restructuring, approximately 28 manufacturing and field service positions in the Company's international operations were eliminated. The company incurred a charge of $1,410,000 in connection with this restructuring.

Charges and Restructuring
1997
Restructuring charges net $8.5 M

**the elimination of approximately 60 positions ($4,850,000)
**the lease terminations of six sales facilities and the consolidation of the Company's European research and development center to the corporate headquarters ($1,500,000)
**the costs associated with the termination of two master re-seller agreements in Asia and Southern Europe($1,550,000)
**costs associated with the consolidation of inventory to the European distribution center ($500,000).
** $600,000 reversal related to the expedited settlement of the employee termination costs in France, which was less than originally anticipated.

1998

Restructuring and extraordinary charges (6,692)

There was a reversal of $600,000 and this unexplained $6 million credit.

1999
Impairment of long-lived assets Restructuring and extraordinary charges 12,648

** $10.9 million largely for severance costs for approximately 135 employees
($3.1 million), lease termination costs for 15 office/warehouse facilities ($3.3 million) and asset impairments ($4.5 million). The charge for asset impairments relates to leasehold improvements on abandoned facilities and related computer hardware and software as well as previously acquired goodwill.

**$20.7 million associated with severance (for approximately 289 employees) and lease termination costs of the acquired company was recorded as an increase to goodwill.

**The restructuring activity is expected to be substantially completed by mid 1999 (not so far)

2000
Impairment of long-lived assets 7,110
Restructuring and extraordinary charges 2,205

**additional severance costs for approximately 90 employees ($1.8 million) **lease termination costs for one office/warehouse facility ($0.4 million)
**an asset impairment charge of $7.2 million relating to the realignment of its manufacturing processes.
** $5.0 million of severance costs for approximately 72 employees and $0.4 million of additional lease termination costs relating to the acquired company were recorded as an increase to goodwill in connection with the completion of the Meto restructuring plan.

2001
Restructuring charges, net $10,963

** $11.1 million and asset impairments of $7.5 million related to the consolidation of some of its US and Caribbean manufacturing facilities and the rationalization of certain underperforming sales offices. Included in the charges are severance costs for approximately 347 employees ($9.8 million), lease termination costs for three manufacturing facilities and two warehouses ($1.4 million), and an asset impairment charge ($7.4 million).
**In 2001, the termination of certain contracts related to the 1999 and 2000
restructuring plans was renegotiated on more favorable terms than expected.
These changes in estimates resulted in the reversal of $1.4 million of restructuring accrual.

2002
**$1.8 million for severance costs and an asset write-off of $0.5 million related to leasehold improvements abandoned due to leaving a facility.
**The charges are related to cost reductions in hand-held labeling and barcode labeling manufacturing.
**$0.5 million of severance costs in other operating expense/(income) related to the rationalization of an underperforming sales office.

** changes in management in 2002 led to modification of the 2001 restructuring plans to reduce the future cash outlays. The principal modification was to move a manufacturing facility to a location closer than originally planned. This resulted in the retention of certain employees and resulted in the reversal of $2.6 million of the restructuring accrual in 2002. Of this amount, $1.7 million was credited to cost of revenues and $0.9 million to other operating expense/(income).

2002: The completion of the transitional goodwill impairment test resulted in a goodwill impairment charge of $72.9 million
1) The impairment of $4.8 million in the security segment resulted from the economic downturn that occurred in South America
2) $27.3 million impairment in the labeling services segment is primarily attributable to revenues not achieving growth expectations from the date of acquisition of Meto AG in December 1999.
3) $40.8 million impairment in the retail merchandising segment is attributable to declining revenues as hand-held labeling products are replaced by scanning technology.

The expected future decline in retail merchandising revenues will lead to future
impairments of the goodwill associated with this segment.

2003
Total charges net--Restructuring charges $7.124 M

**added to cost of revenues restructuring charges of $1.9 million for severance costs and an asset impairment charge of $1.5 million($1.1 million write-down of a manufacturing facility in Japan + a $0.4 million write-down of equipment in Puerto Rico
**The severance costs relate to cost reductions in hand-held labeling and electronic article surveillance manufacturing. Due to changes in product mix, the company reviewed and modified the 2001 restructuring plan to reduce costs in EAS manufacturing. The principal modification was to close a different manufacturing plant than the one originally planned. This resulted in an increase in severance costs of $0.2 million and the reversal of $0.1 million of lease termination costs.
** $5.6 million of severance charges related to the shared services initiative being implemented in Europe.
** retention of certain employees included in the original plans resulted in the reversal of $0.3 million of the restructuring accrual in 2003.

There is a pattern here of yearly write downs deducted from earnings. They are usually for severance charges and consolidation or closing of facilities. There is also a lot of impairment of goodwill. They have made acquisitions every year since 1997 and have more in 1999 than any other year. Biggest charges(except the goodwill in 2002) were 1999 and 2001. It would seem that they are not good at merging businesses. On the other hand, their really dismal returns on equity, capital and assets are beginning to improve. The 1999 acquisition of Meto AG improved revenue significantly in 2000 but revenue declined the next two years. It did not come close to the pre-acquisition levels however, and took a significant turn for the better in 2003. That acquisition appears to be paying its way.

The reversals raise a red flag--are they playing with reserves and bringing money back to the income statement to make things look better? It's tempting to think they are cheating, but since the charges seem legitimate and are ongoing and they continue to carry a reserve every year, it's possible they are plausible. They were credited to cost revenue or deducted from the reserve.
In 2002 it increased EBIT by $2.6 million, but EBIT was substantially increased without the reversal.

Financial Statements

Income statement ratios


2003 2002 2001 2000 1999

gross margins 41% 41% 39% 39% 39%
operating margins 6% 6% 2% 1% 3%
net margins 4% -7% 1% 0% 2%
growth revenue 13% -3% -5% 85% ---
growth gross 13% 2% -6% 86% ---
growth operating 18% 175% 154% -52% ---
growth net 163% -817% 344% -141% ---
growth COGS 13% -6% -4% 85% ---
growth SGA 12% -1% -8% 97% ---
growth EPS diluted 169% -667% 333% -141% ---
growth EPS 156% -848% 200% -71% ---
inventory/COGS 19% 21% 23% 29% 44%
growth depreciation 1% -29% -8% 71% ---
tax rate 34% 41% 50% 56% 28%
increase in interest -26% -31% -10% 146% ---

**During 2003, revenues increased by $83.8 million or 13.1% from $639.5 million to $723.3 million. Foreign currency translation had a positive impact on revenues of $65.9 million for the full year 2003.
**Security revenues were up 70% and there was a large positive impact of foreign currency. The US saw declining EAS sales but stronger RFID sales to libraries

**Retail products from labeling were disappointing and only gained due to currency translations. Handheld devices are particularly underperforming. The company expects this to get worse as retailers update to scanning equipment. Checkpoint needs to be the company providing the equipment for the updates.

**During 2003, gross profit increased $33.4 million from $262.6 million to $296.0 million. The benefit of foreign currency translation on gross profit was approximately $27.2 million.

**The gross profit percentage decreased from 41.1% to 40.9%.

**Research and development costs represented 2.1% of revenues in 2003 and
1.4% in 2002. The increased focus is to expand the functionality of our RF-EAS
products and develop the compatibility of RF-EAS and RFID.

**Gross profit in 2003 included a net restructuring charge of $1.8 million and an asset impairment charge of $1.5 million. In 2002, gross profit included a net restructuring charge of $0.1 million and an asset impairment charge of $0.5 million. If they ever stop the restructuring, they may actually make some money.

**Security gross profit, as a percentage of net revenues, increased from 43.8% in 2002 to 44.0% in 2003. Improvements in manufacturing efficiencies and the
benefits of the weakening US dollar on products sourced in US dollars but sold
in a different currency were partially offset by the restructuring and asset
impairment charges and an increase in technology expenditure.

Gross profit, as a percentage of net revenues, for labeling services decreased from 29.1% in 2002 to 28.5% in 2003. The decrease in gross profit percentage was principally due to competitive pricing pressure in 2003. The retail merchandising gross profit percentage decreased 1.4% (from 47.4% to 46.0%) in 2003. The decrease was principally due to the restructuring charges

** Interest expense decreased $4.1 million due to debt repayment. Interest income decreased by $0.4 million as a result of lower interest rates on cash
investments. They are paying down debt regularly.

Balance sheet ratios

2003 2002 2001 2000 1999

current ratio 1.25 1.56 1.67 1.70 1.74
quick ratio 0.37 0.28 0.23 0.12 0.37
AR growth 3% -9% -17% -4% ---
DSO 69.3 75.8 80.8 93.2 180.39
inventory days 69.1 77.6 83.0 106.8 159.83
growth in payables 32% 10% 2% -8% ---
growth in inventory 1% -12% -25% 23% ---
CCC 84.9 107.6 124.8 163.3 266.2
ROE 9% -23% 3% -1% 3%
ROA 4% -7% 1% 0% 1%
ROIC 6% 5% 1% 0% 1%
debt/equity 44.5% 92.9% 122.1% 162.0% 172.4%
debt/capital 31% 48% 55% 62% 63%
book value 9.4 6.8 7.5 7.8 8.4
cash/share $3.17 $1.67 $1.37 $0.93 $2.90
NC WC 45.9 74.3 114.3 163.1 134.1
change in NC WC -28.4 -39.9 -48.8 29 134.1
increase in LT debt -122.5 -73.3 -84.9 -48.2 395.2
increase/decrease total shares 2.1 0.9 1.5 0.1 30.2
payable days outstanding 53.64 45.9 39.0 36.6 74.0

**Returns pretty bad but improving as restructuring bears fruit?
**Extending payables
**Book value increasing
**DSO and inventory control improving significantly--good trend
**Debt paid down and even lower first quarter 2004--see section on debt
**Liquidity needs have related to, and are expected to continue to relate to, capital investments, acquisitions, and working capital requirements. The continuing acquisitions is a little troubling. I would expect that to mean that charges and reversals are going to be a normal unpredictable part of business, which makes it impossible to know how much they will earn every year.

**The company has met its liquidity needs over the last four years primarily through funds provided by long-term borrowings and, more recently, through cash generated from operations. This is a positive trend as debt gets paid down and they remain cash flow positive also. The balance sheet seems to improve every year.

Cash flow statement ratios

2003 2002 2001 2000 1999
growth in operating cash flow -7% 7% 3113% -96%
operating cash/revenue 14% 17% 16% 0% 23%
operating cash/debt+interest 1.1 3.0 1.9 0.05 1.5
growth capex 70% -22% -133% -112%
capex/operating cash 12% 7% 9% 903% 84%
free cash flow 89.1 102.5 93.2 32.1 - 161.1
common shares 34.8 32.7 31.8 30.3 30.2
free cash flow/share $2.56 $3.14 $2.93 $1.06 $(5.33)

**operating activities during fiscal 2003 generated approximately $101.8 million compared to approximately $110.0 million during 2002. In 2003,
the cash generated from the reduction in accounts receivable and inventories,
was partially offset by an increase in accounts payable.
**operating cash is sufficient to pay capex
**operating cash is not being consumed out of proportion to revenue.
**free cash flow positive for 4 years

Litigation

The bad outcome of the large lawsuit pending resolution could cost Checkpoint $79 million. They are charged with attempted monopolization and conspiracy to monopolize. In addition, the jury held against the company on two tort claims related to tortious interference and unfair competition. Judgment was entered on the verdict in favor of the plaintiff in the amount of $79.2 million plus attorneys' fees and costs to be determined by the Court.

Both ID Security Systems Canada Inc. and Checkpoint have filed appeals. Based on input from outside legal counsel, management is of the opinion that the Judge's Order is consistent with the law as it relates to the antitrust issues, and is not consistent with the law as it relates to the tortious interference and unfair competition aspects of the case. Accordingly, no liability has been recorded for this litigation. They have posted a bond to cover the charges of monopolization. However, it is possible that the charges will be reinstated(re:antitrust) through the Canadian company's appeal and Checkpoint might have to pay $79 million.

This payment could cause them to be in violation of loan covenants and that would mean immediate repayment of loans as well as the judgment. This could make the 2004 financials look ugly.

Checkpoint anticipates that any final judgment would be paid in the second half of 2004 and it is probable that the company will have sufficient financial resources in the form of cash and borrowing capacity, due to the cash flow generated during the intervening period, to satisfy any judgment. They have paid down a great deal of the loan and the convertibles have mostly been called and converted or paid. It is possible they have been attempting to batten down the hatches in case this goes against them. I would be inclined to wait for the judgment or hedge my position in the company if I owned it.

Debt

They have a Euro 244.0 million note (in connection with an acquisition) They paid one unscheduled payment of EUR 13.5 million (approximately $14.4 million)on the Euro 244.0M and they paid $7.0 million on a $25.0 million term loan to fully satisfy the outstanding balance. At December 28, 2003, EUR 36.9 million (approximately $45.9 million) was outstanding under the multi-currency term loan. The outstanding borrowings under the revolving credit facility were JPY 300 million (approximately $2.8 million).

The above loan agreements contain certain restrictive covenants which, among
other things, require maintenance of specified minimum financial ratios including debt to earnings, interest coverage, fixed charge coverage, and net worth. These agreements also prohibit them from paying cash dividends.

Debt structure since redemption and conversion of the convertibles:

EUR 244 million variable interest rate term loan maturing in 2006 $ 45.8 M
$100 million multi-currency variable
interest rate revolving credit facility maturing in 2006 2.8 M
Balance of notes(convertibles) 23.3 M

Total $71.6 M


November 1995: private placement of $120.0 million of convertible subordinated debentures with an annual interest rate of 5.25% convertible into common stock at a conversion price of $18.375 per share (equivalent to approximately 54.42 shares of common stock for each $1,000 principal amount

*mature on November 1, 2005,
*redeemable at any time prior to maturity,
*September 23, 2003 they called $35.0 million
*$30.3 million were converted into 1.648 million shares of common stock and $4.7 million were redeemed for cash.

*bondholders elected to convert their bonds into shares during the fourth quarter 2003. The principal amount was $1.2 million, which reduced the outstanding balance $83.8 million.

On February 18, 2004, they called an additional $60.0 million of the
convertible subordinated debentures for redemption on April 13, 2004. The called debentures are convertible at any time prior to the close of business on April 8, 2004.

On April 14, 2004 the holders of $47.2 million of the $60.0 million of aggregate principal amount of its existing 5 1/4% Convertible Subordinated Debentures due 2005 called for redemption on April 13, 2004, elected to convert their notes into 2,569,797 shares of the company's common stock at a conversion price of $18.375 per share. The shares of Company common stock issuable as a result of the conversion will be freely-tradeable, unrestricted shares.

The Notes were converted on April 8, 2004. Following the conversion, Checkpoint will have approximately 37.6 million shares of common stock outstanding. On April 13, 2004, $12.8 million of the Notes were automatically redeemed for cash, completing the planned $60.0 million redemption. Following the redemption, the principal balance of the notes outstanding will be $23.3 million.

Options

The weighted average fair value per share of options granted during 2003, 2002, and 2001 was $3.13, $4.82, and $5.40, respectively.

The following schedules summarize stock option activity and status:

2003 2002 2001
--------- --------- ---------
Outstanding at beginning of year 3,810,203 3,690,702 4,940,038
Granted 938,500 1,236,500 977,000
Exercised (439,901) (855,645) (1,541,121)
Cancelled or forfeited (961,211) (261,354) (685,215)
--------- --------- ---------
Outstanding at end of year 3,347,591 3,810,203 3,690,702
========= ========= =========
Exercisable at end of year 1,944,470 2,531,205 2,510,877

========= ========= =========
9.7% dilution total options
Total value $10.3 M
Per share $0.30
The 938,500 granted are worth $2.9 million. If they had been expensed, revenue would have decreased to $720.4 or a 9.9% decrease.


An underfunded pension plan

There is a $66 million deficit. The company only pays in what it has to payout the last two years. Perhaps there is no gain from contributing more at present. It is cheaper for them to “borrow” from the pension plan than to take on debt. There may come a time when they will need to make more significant contributions.

They have several defined benefit pension plans, principally in Europe. The plans covered approximately 20% of the total workforce.
                                        

December 28, December 29,
2003 2002
----------- -----------
(Thousands)

Change in benefit obligation
Net benefit obligation at beginning of year $56,050 $46,018
------- -------
Net benefit obligation at end of year $66,854 $56,050
------- -------
Change in plan assets
Fair value of plan assets at beginning of year $ 85 $ 68
Employer contributions 3,273 3,042
Gross benefits paid (3,273) (3,042)
Foreign currency exchange rate changes 20 17
------- -------
Fair value of plan assets at end of year $ 105 $ 85

At least they are not expecting to make 10% off the plan. The 5% return expected is good news here.
The weighted average rate assumptions used in determining pension costs and the projected benefit obligation are as follows:
                                                 
2003 2002
------------ ------------
Discount rate (1) 5.75% 5.75%
Expected rate of return on plan assets (2) 5.00% 5.75%
Expected rate of increase in future
compensation levels 3.00% 3.00%
for 2003 was 5.00%.



Valuation
It is difficult to predict what may happen in the future given the somewhat twisted convoluted earnings of the past 5 years. How can you predict growth if they take constant unpredictabe charges for restructuring? I think they do a particularly clumsy job of integrating companies. I have never seen so much rearrangement of employees and facilities and such a tangle of charges and reverses. Initially, I considered jettisoning the whole thing, but decided maybe they were not being duplicitous--merely inefficient. Given the past 5 years, I hope they consider future purchases more thoroughly before buying. They have increased revenue dramatically since 1999. On the plus side, they are improving all of the return ratios and inventory and accounts receivables are under good control. They are also paying down debt at an accelerated pace. All positives.

The second negative(after restructuring) is the underfunded pension plan. It is cheaper to let the deficit ride and pay out what is due as it is due. This could go on indefinitely, I suppose, unless they have to meet funding percentage guidelines. They make no comment in the footnotes that this shortfall is in violation. It is a $66 million potential debt that may have to be paid.

The third negative is the $79 million law suit overhanging them. If the ruling goes against them, the payout will hurt earnings results and they have no reserve for it. It will be paid out of revenue. They may also be in violation of loan covenants if they end up paying for a negative decision. Luckily, debt levels are fairly low at present. They have taken the opportunity to pay off the notes ahead of schedule--possibly anticipating the decision may go against them.

The positives are they are in a business that may be on the brink of explosive growth. They have years of experience with RFID. They supply libraries with tags to track book checkouts. They charge a much higher price for these chips than the retail chips will command. Library chips are $0.50 and up and the retail chips are going to have to come in around $0.05 to be attractive to businesses. The margins on a $0.05 chip are going to require huge output of chips to make money. It is not clear if Checkpoint will go after that market. There is a lot of competition from the likes of Philips and Texas Instruments as well as a hoard of smaller public companies: Zebra and private companies like Alien Technologies. It may not be necessary for them to master the 5¢ chip if they can keep their niche with the higher priced models. The new contract with CVS pharmacies does not give the details of the RFID system that will be installed or whether they will supply chips and at what price. The company has a strong business in other security products and the higher ticket items like scanners.

They are increasing revenue and margins are improving. Growth from 2002 to 2003 in revenue was 13%. Because of the charges in 2002 to goodwill impairment, growth in net is not meaningful. Without the charge, growth in net from 2002 to 2003 would be 13.7%. If and when the restructuring ends, the returns will be better.

Debt is decreasing, margins increasing, returns improving, growth at around 13%, a relevant business for the future are all things that make Checkpoint worth consideration.

Assumptions for DCF

$18.06-$0.30= $17.76
10% growth 5 years
9.97 %cost of equity
beta 1
3% stable growth
Capex, wc, depreciation grow at rate of company
Capex exceeds depreciation by 100%

or if components of growth are considered individually:

$19.94-$0.30= $19.64
10% outside estimate of growth 5 years weighted 80%
30% historical growth 5 years weighted 10%
16% fundamental growth weighted 10%
Beta 1
Cost of equity 9.97
Capex, depreciation, wc grow at rate of earnings
3% stable growth
Capex exceeds depreciation 100% stable

Given that the performance is uneven and the average charges have been $7 million per year, at least a 10-15% discount would be in order. If further acquisitions degrade returns, 10% growth may prove optimistic. A price around $15.00 might provide more safety.

A positive earnings surprise is predicted from Starmine of 4%.

Estimates Summary (FQ 06-04)
Consensus $ 0.25  
SmartEstimate $ 0.26  
Predicted Surprise +4.0%   
Low : High $0.21 : $0.30  
Total Analysts 4  
Expected Report Date 26-Jul-04  

Other numbers

Price on Jul 9: 17.30   

Market Cap 650.00M
Enterprise Value 694.64M
Trailing P/E 20.12
Forward P/E 15.18
PEG Ratio (5 yr expected): 1.89
Price/Sales 0.84
Price/Book 1.78
Enterprise Value/Revenue 0.93
Enterprise Value/EBITDA 8.24

Return on Assets 4.33%
Return on Equity 11.01%
Free Cashflow 69.91M
52-Week High 22.45
52-Week Low 14.17
50-Day Moving Average 16.86
200-Day Moving Average 18.27

% Held by Insiders 0.46%
% Held by Institutions 79.55%
Shares Short 1.17M



Compensation

Securities
Salary Bonus Underlying
Name and Principal Position Year ($) ($) (1) Options(#) Other ($)


George W. Off 2003 772,820 762,375 60,000 0
Chairman of the Board, 2002 372,427 0 420,000 267,592
President and

W. Craig Burns 2003 393,245 415,735(3) 60,000 0
Executive Vice President, 2002 377,579 922,254(4) 50,000 0
Chief Financial Officer 2001 275,265 0 100,000 0
and Treasurer

John E. Davies, Jr. 2003 308,773 433,600 60,000 0
Executive Vice President 2002 270,970 0 25,000 0
Americas and Asia Pacific 2001 232,113 0 15,000 0

Per H. Levin 2003 315,579 294,010 60,000 62,813
Executive Vice President, 2002 249,427 753,671 20,000 51,322
General Manager of Europe 2001 236,571 348,632 35,000 48,676

Neil D. Austin(6) 2003 142,086 18,625 7,500 0
(Former) Vice President, 2002 229,375 0 10,000 0
General Counsel and 2001 229,376 0 15,000 0
Secretary

John R. Van Zile 2003 137,328 83,837 25,000 13,000
Senior Vice President,
General Counsel and
Arthur W. Todd 2003 195,294 63,609 15,000 0
Vice President, Corporate 2002 179,159 0 15,000 0
Controller and Chief 2001 166,385 0 15,000 0
Accounting Officer

Most of the compensation seems reasonable and not a reason to dislike the stock. Insider ownership is disappointingly low.

I would wait for a discount on this one. I wouldn't be a buyer(at least not without a hedge) until the lawsuit is resolved. In fact since they are not paying a dividend, there is no reason to buy until you like the price. The contract with CVS is good news and the backlog is increasing and at least is some reassurance of future business. The toehold in RFID places them in a business that has some potential. The competition is likely to be fierce. They are not great at integrating acquisitions as far as I can tell. I have evaluated other companies that do a fair amount of buying and have never seen such a mess of restructuring charges. I can't argue with the positive impact of the 1999 Meto AG acquisition. So they do appear to know what they are doing at least part of the time. The uncertain nature of the future charges and the lawsuit are the two biggest concerns and are good reasons to demand a discount for that risk and wait for your price.

>^..^<
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