CKP Checkpoint Systms, Inc.

Checkpoint Systems, Inc. (NYSE: CKP) today reported financial results for the third quarter ended September 26, 2010.

Net revenues for the third quarter of 2010 were $203.3 million compared to net revenues for the third quarter of 2009 of $194.1 million. Net earnings attributable to Checkpoint Systems, Inc. for the third quarter of 2010 were $7.1 million, or $0.17 per diluted share, compared to net earnings attributable to Checkpoint Systems, Inc. for the third quarter of 2009 of $2.6 million, or $0.07 per diluted share. Non-GAAP net earnings attributable to Checkpoint Systems, Inc. for the third quarter of 2010 excluding restructuring expense and the impact of a change in valuation allowances were $12.0 million, or $0.30 per diluted share. Non-GAAP net earnings attributable to Checkpoint Systems, Inc. for the third quarter of 2009 were $6.4 million, or $0.16 per diluted share. (See accompanying Reconciliation of GAAP to Non-GAAP Financial Measures.)

“For the quarter just ended, we continued to realize organic revenue growth in all our business segments and our three major geographies. In particular, strong growth in our Alpha business was driven by retailers who seek solutions that enhance their merchandising and loss prevention. However, our EAS consumables business, which had been very strong through the first half of the year, slowed across most product lines and geographies. We believe this business will be back on track by early 2011. Additionally, our EAS systems business continues to be impacted by the prolonged economic sluggishness in Europe,” said Rob van der Merwe, Chairman, President and Chief Executive Officer of Checkpoint Systems. “Gross margin for the quarter declined, principally due to our Apparel Labeling Solutions business segment where changes in product mix, including the impact of lower margin products from our Brilliant Label business, continued from last quarter.

“Many of the issues that negatively affected the third quarter are projected to continue for the balance of the year and therefore we have updated guidance. At this time we do not believe the higher end of our previous guidance is achievable and we have reflected that in our current guidance,” added van der Merwe.

Mr. van der Merwe concluded, “With today’s third quarter results we are providing broad metrics of a SG&A restructuring plan first announced late last year. The program is expected to reduce SG&A costs by $20.0 million to $25.0 million, with roughly $15.0 million to $17.0 million of the restructuring savings expected to be realized in 2011 and the full benefit in 2012. The cost of the program is expected to be $20.0 million to $25.0 million. Finally, we believe that the impact of current conditions on our business is temporary and that our strategy to focus on the converging fields of shrink management, merchandise visibility and apparel labeling remains sound and provides a solid foundation for future growth.”

Selected analysis and discussion for the third quarter of 2010:

• Net revenues increased 4.8%. Organic growth comprised 5.6% of the increase driven by the Shrink Management Solutions and Apparel Labeling Solutions business segments, notably Alpha High Theft Solutions® and CheckView®. Non-comparable acquisition growth contributed 2.4% of the increase resulting from the acquisition of Brilliant Label Manufacturing, Ltd. Foreign currency effects resulted in a 3.2% net revenues decline driven principally by the strengthened dollar versus the euro.
• Gross profit margin was 40.3% compared to 43.6% for the third quarter of 2009. The decrease was principally due to lower gross margins in the apparel labeling and EAS consumables businesses.
• GAAP operating income was $13.1 million compared to $13.4 million for the third quarter of 2009. Non-GAAP operating income excluding restructuring expense was $14.2 million, or 7.0% of net revenues. Non-GAAP operating income for the third quarter of 2009 was $13.6 million, or 7.0% of net revenues. (See accompanying Reconciliation of GAAP to Non-GAAP Financial Measures.)
• Restructuring expense was $1.2 million due to our previously announced manufacturing restructuring plan and the initial stages of our selling, general, and administrative restructuring plan.
• Effective tax rate was 41.9% compared to 77.6% for the third quarter of 2009.
• Cash flow used in operating activities was $17.1 million compared to cash flow provided by operating activities of $22.5 million for the third quarter of 2009.
• At September 26, 2010, cash and cash equivalents were $164.3 million compared to $162.1 million at December 27, 2009, and total debt was $143.0 million compared to $116.9 million at December 27, 2009. Capital expenditures were $7.5 million for the third quarter of 2010.

Outlook for 2010

Based on an assessment of current market conditions, Checkpoint has updated guidance for 2010. This guidance does not include the impact of unusual charges, such as additional restructuring expense, that the Company may incur during the year and assumes a continuation of current exchange rates.

• Net revenues are expected to be in the range of $825.0 million to $840.0 million.
• Non-GAAP diluted net earnings per share attributable to Checkpoint Systems, Inc. are expected to be in the range of $1.00 to $1.08.
• Non-GAAP operating income margin is expected to be in the range of 6.5% to 6.9%.
• An annualized tax rate is expected to be in the range of 16% to 18%.
• Free cash flow (cash flow from operations less capital expenditures) is expected to be in the range of $10.0 million to $20.0 million.

Checkpoint Systems will host a conference call today, November 2, 2010, at 10:00 AM Eastern Time, to discuss its third quarter 2010 results. The conference call will be simultaneously broadcast live over the Internet. Listeners may access the webcast at http://ir.checkpointsystems.com. A replay will be available following the event.

Checkpoint Systems, Inc.

Checkpoint Systems is a global leader in shrink management, merchandise visibility and apparel labeling solutions. Checkpoint enables retailers and their suppliers to reduce shrink, improve shelf availability and leverage real-time data to achieve operational excellence. Checkpoint solutions are built upon 40 years of RF technology expertise, diverse shrink management offerings, a broad portfolio of apparel labeling solutions, market-leading RFID applications, innovative high-theft solutions and its Web-based Check-Net® data management platform. As a result, Checkpoint customers enjoy increased sales and profits by improving supply-chain efficiencies, by facilitating on-demand label printing and by providing a secure open-merchandising environment enhancing the consumer’s shopping experience. For more information, visit www.checkpointsystems.com.

Caution Regarding Forward-Looking Statements

This press release includes information that constitutes forward-looking statements. Forward-looking statements often address our expected future business and financial performance, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” or “will.” By their nature, forward-looking statements address matters that are subject to risks and uncertainties. Any such forward-looking statements may involve risk and uncertainties that could cause actual results to differ materially from any future results encompassed within the forward-looking statements. Factors that could cause or contribute to such differences include: our ability to integrate our acquisitions and to achieve our financial and operational goals for our acquisitions; changes in international business conditions; foreign currency exchange rate and interest rate fluctuations; lower than anticipated demand by retailers and other customers for our products; slower commitments of retail customers to chain-wide installations and/or source tagging adoption or expansion; possible increases in per unit product manufacturing costs due to less than full utilization of manufacturing capacity as a result of slowing economic conditions or other factors; our ability to provide and market innovative and cost-effective products; the development of new competitive technologies; our ability to maintain our intellectual property; competitive pricing pressures causing profit erosion; the availability and pricing of component parts and raw materials; possible increases in the payment time for receivables as a result of economic conditions or other market factors; changes in regulations or standards applicable to our products; the ability to implement cost reduction in field service, sales, and general and administrative expense, and our manufacturing and supply chain operations without significantly impacting revenue and profits; our ability to maintain effective internal control over financial reporting; and additional matters disclosed in our Securities and Exchange Commission filings. We do not undertake to update our forward-looking statements, except as required by applicable securities laws.

      Checkpoint Systems, Inc. Consolidated Statements of Operations (amounts in thousands, except per share data) (unaudited)   Quarter Nine Months (13 weeks) Ended (39 weeks) Ended September 26,   September 27, September 26,   September 27,       2010   2009   2010   2009   Net revenues $ 203,324 $ 194,078 $ 598,956 $ 534,941 Cost of revenues       121,445     109,404     345,762     306,046 Gross profit 81,879 84,674 253,194 228,895   Selling, general, and administrative expenses 62,774 66,210 202,809 189,724 Research and development 4,868 4,874 14,776 14,811 Restructuring expenses 1,175 153 2,810 1,212 Litigation settlement       −     −     −     1,300 Operating income 13,062 13,437 32,799 21,848 Interest income 842 419 2,208 1,340 Interest expense 1,704 1,878 4,725 5,063 Other gain (loss), net       (88)     (523)     (1,284)     296 Earnings from operations before income taxes 12,112 11,455 28,998 18,421 Income taxes       5,071     8,884     9,487     11,190 Net earnings 7,041 2,571 19,511 7,231 Less: (loss) attributable to noncontrolling interests       (40)     (68)     (116)     (332) Net earnings attributable to Checkpoint Systems, Inc.     $ 7,081   $ 2,639   $ 19,627   $ 7,563 Net earnings attributable to Checkpoint Systems, Inc., per Common Shares:   Basic earnings per share $ 0.18 $ 0.07 $ 0.49 $ 0.19   Diluted earnings per share     $ 0.17   $ 0.07   $ 0.49   $ 0.19       Checkpoint Systems, Inc. Summary Consolidated Balance Sheet (amounts in thousands)   September 26, December 27,     2010   2009 (unaudited)   Cash and Cash Equivalents $ 164,263 $ 162,097 Working Capital $ 304,349 $ 241,809 Current Assets $ 507,712 $ 482,690 Total Debt $ 142,990 $ 116,872 Total Equity $ 583,822 $ 558,554 Total Assets $ 1,029,841 $ 1,024,233  

Reconciliation of Non-GAAP Financial Measures in Accordance with SEC Regulation G

Checkpoint Systems, Inc. reports financial results in accordance with U.S. GAAP and herein provides some Non-GAAP measures. These Non-GAAP measures are not in accordance with, nor are they a substitute for, GAAP measures. These Non-GAAP measures are intended to supplement the Company's presentation of its financial results that are prepared in accordance with GAAP. The Company uses the Non-GAAP measures presented to evaluate and manage the Company's operations internally. The Company is also providing this information to assist investors in performing additional financial analysis that is consistent with financial models developed by research analysts who follow the Company.

Set forth below is a reconciliation of the Non-GAAP financial measures used in this release to the most directly comparable measures based on GAAP.

    Checkpoint Systems, Inc. Reconciliation of GAAP to Non-GAAP Financial Measures (amounts in thousands, except percents) (unaudited)   Quarter Nine Months (13 weeks) Ended (39 weeks) Ended

 

September 26,   September 27, September 26,   September 27,

Reconciliation of GAAP to Non-GAAP Operating Income:

  2010   2009   2010   2009   Net revenues   $ 203,324   $ 194,078   $ 598,956   $ 534,941   GAAP operating income 13,062 13,437 32,799 21,848   Non-GAAP adjustments:   Restructuring expenses 1,175 153 2,810 1,212 Litigation settlement     −     −     −     1,300 Adjusted Non-GAAP operating income   $ 14,237   $ 13,590   $ 35,609   $ 24,360   GAAP operating margin 6.4% 6.9% 5.5% 4.1% Adjusted Non-GAAP operating margin 7.0% 7.0% 5.9% 4.6%       Checkpoint Systems, Inc. Reconciliation of GAAP to Non-GAAP Financial Measures continued (amounts in thousands, except per share data) (unaudited)   Quarter

(13 weeks) Ended

Nine Months

(39 weeks) Ended

 

September 26,   September 27, September 26,   September 27,

Reconciliation of GAAP to Non-GAAP Earnings attributable to Checkpoint Systems, Inc.:

  2010   2009   2010   2009   Earnings attributable to Checkpoint Systems, Inc., as reported   $ 7,081   $ 2,639   $ 19,627   $ 7,563   Non-GAAP adjustments:   Restructuring expenses, net of tax 647 159 2,030 900 Litigation settlement, net of tax − − − 801 Valuation allowance adjustment     4,261     3,595     4,261     3,595 Adjusted net earnings attributable to Checkpoint Systems, Inc.   $ 11,989   $ 6,393   $ 25,918   $ 12,859   Reported diluted shares 40,499 39,753 40,366 39,489   Adjusted diluted shares 40,499 39,753 40,366 39,489   Reported net earnings attributable to Checkpoint Systems, Inc., per share – diluted $ 0.17 $ 0.07 $ 0.49 $ 0.19   Adjusted net earnings attributable to Checkpoint Systems, Inc., per share – diluted $ 0.30 $ 0.16 $ 0.64 $ 0.33