Checkpoint Systems, Inc. (NYSE: CKP) today reported
financial results for the first quarter ended March 31, 2013. These
results reflect the U.S. and Canadian CheckView® business as
discontinued operations.
First Quarter GAAP Results - Continuing Operations:
Net revenues from continuing operations in the first quarter of
2013 increased 3.2%, 3.8% on a constant dollar basis, to $148.8
million from $144.2 million in the first quarter of 2012. Gross
profit margins were 36.2% compared with 36.8% in the 2012 first
quarter. Selling, general and administrative (SG&A) expenses of
$55.3 million decreased by $10.3 million, or 15.7% compared with
the same period last year, driven by $9.6 million of additional
cost reductions from the global restructuring programs, as well as
continued tight expense control.
The operating loss of $1.3 million improved $18.2 million from
the same period last year. The 2013 loss included restructuring
expenses and acquisition costs offset by the reversal of a
litigation settlement reserve associated with a patent infringement
lawsuit. The acquisition costs are due to legal costs incurred in
connection with ongoing arbitration of an EBITDA contingent payment
related to the acquisition of the Shore to Shore businesses in May
2011. The 2012 loss included restructuring expenses, legal and
forensic costs that resulted from the investigation of fraud in our
Canadian subsidiary, and acquisition costs.
Net loss from continuing operations was $0.09 per diluted share
compared with a loss of $0.26 per diluted share in the same period
last year.
First Quarter Adjusted non-GAAP Operating Income and Earnings
per Share - Continuing Operations:
Adjusted non-GAAP operating loss from continuing operations was
$5.7 million in the first quarter of 2013, compared with a loss of
$17.0 million in the same period last year. Adjusted non-GAAP net
loss from continuing operations was $0.21 per share compared with a
net loss from continuing operations of $0.21 per share in the first
quarter of 2012. The 2013 results exclude the impact of
restructuring expenses, acquisition costs, and the reversal of a
litigation settlement reserve. The 2012 results exclude the impact
of restructuring expenses, legal and forensic costs that resulted
from the investigation of fraud in our Canadian subsidiary, and
acquisition costs. Unlike the first quarter of 2012, first quarter
2013 results do not include the tax benefit on losses from U.S.
operations due to a change in tax accounting methodology that we
first began to apply in the second quarter of 2012.
Checkpoint Systems' President and Chief Executive Officer,
George Babich, said, “We were pleased to see better than expected
top-line growth in the first quarter attributable to increased
focus and better execution that resulted in market share gains in
SMS, and the completed consolidation of our ALS manufacturing
operations in China, now running at capacity. Despite seasonally
slow retail purchasing activity, revenues in Shrink Management
Solutions (SMS) grew a healthy 9.4% on a constant dollar basis,
driven by electronic article surveillance (EAS) systems rollouts at
major retailers in Europe and strong sales of Alpha® high-theft
solutions in North America. Apparel Labeling Solutions (ALS)
revenue slowed as expected due to the steps taken in 2012 to
rationalize our customer base and reduce in-house woven label
production. Lower revenues in Retail Merchandising Solutions (RMS)
reflected ongoing economic uncertainty in Europe as well as our
decision to move to an indirect sales model in certain northern
European countries.”
Mr. Babich continued, “Gross margins in the quarter were
impacted by two large EAS systems rollouts in Europe that
unfavorably affected product mix in SMS. This impact was partially
offset by improved manufacturing efficiencies across our SMS
operations and significantly improved margins in ALS, driven by
Project LEAN. In the 2012 first quarter, SMS gross margins
conversely were driven by favorable product mix and customer mix in
EAS systems and Alpha, respectively.”
Mr. Babich concluded, “Checkpoint began 2013 leaner and stronger
than a year ago. Now that the sale of the U.S. and Canadian
CheckView® business is complete, our core SMS portfolio is 100%
aligned with our strategy to provide solutions that improve
merchandise availability in retail stores. Today our global team is
energized to win new business and delight customers with
best-in-class products and service. I am encouraged by what was
accomplished in the first quarter, and remain optimistic that we
can achieve our operational objectives and financial goals for the
full year.”
Global Restructuring
We continue to expect that restructuring and cost savings
initiatives under the Expanded Global Restructuring Plan will
generate annual savings in cost of goods sold and SG&A of
approximately $102 million by the end of 2013. The restructuring
initiatives lowered costs in the first quarter of 2013 by an
additional $15.3 million when compared with the reductions achieved
through the first quarter of 2012, with $9.6 million of the
additional reductions attributable to SG&A. Cost reductions
since the inception of the restructuring plan total $60.9 million,
with $44.9 million attributable to SG&A.
GAAP restructuring expenses in the first quarter of 2013 were
$2.0 million, of which $0.7 million is attributable to non-cash
asset impairments. To date, the Expanded Global Restructuring Plan
has recorded $68.0 million in expenses, including $45.1 million in
severance and other employee-related charges, $7.9 million in
non-employee- related restructuring costs as well as $15.0 million
in non-cash asset impairments associated with facilities
rationalization and closures. To date, headcount reductions from
the Expanded Global Restructuring Plan total 2,066 of the
approximately 2,400 positions expected to be affected by the
plan.
Working Capital, Free Cash Flow and Debt Covenants
The impact of working capital initiatives introduced in the
second quarter of 2012 generated $11.6 million in free cash flow in
the first quarter of 2013. Our focus on improving inventory,
accounts receivable and accounts payable resulted in a net
improvement in those components of cash flow of $64.1 million since
June 2012.
Ray Andrews, Senior Vice President and Chief Financial Officer
noted, “First quarter operating results and continued tight cash
and working capital management enabled us to complete the quarter
well within our amended debt covenant ratios while not increasing
debt, and we expect this to continue through the year. Allowing for
the forecasted use of working capital to support expected
second-quarter revenue growth, we believe we are well positioned to
achieve our goal of a $50 million to $60 million improvement by
June 2013.”
RFID License Agreement with Round Rock Research
Checkpoint has entered into a license agreement with Round Rock
Research, LLC, a technology research and patent licensing company
that has asserted its patents against several users of RFID
technology. The agreement provides various legal protections to
Checkpoint and its customers, including protection to Checkpoint
customers that buy (or have bought) their RFID solution from
Checkpoint. Checkpoint acted quickly and decisively to reach this
agreement to enable its customers to move forward with their RFID
plans free from this legal and business concern.
Information about Checkpoint Systems' use of non-GAAP financial
information is provided under "Reconciliation of Non-GAAP Financial
Measures in Accordance with SEC Regulation G” below.
Selected Discussion and Analysis of First Quarter 2013
Results
- Net revenues increased 3.2% to $148.8
million, principally due to a 3.8% increase in organic growth.
Foreign currency effects resulted in a 0.6% decrease in net
revenues, driven principally by the strengthened dollar versus the
euro.
- Gross profit margin was 36.2% compared
with 36.8% for the first quarter of 2012. The decrease was
principally due to lower gross margins in SMS, notably in the EAS
systems and Alpha® businesses partially offset by significantly
higher ALS margins.
- SG&A expenses of $55.3 million
compared with $65.6 million in the first quarter of 2012. The first
quarter of 2013 included cost reductions totaling $9.6 million from
the expanded Global Restructuring Plan, including Project
LEAN.
- Operating loss was $1.3 million
compared with a loss of $19.5 million in the first quarter of 2012.
The first quarter of 2013 included a $6.6 million benefit related
to a favorable decision in the All-Tag Security S.A., et al
litigation. As a result, we reversed previously accrued charges for
attorneys' fees and costs of the defendants.
- Non-GAAP operating loss excluding
restructuring expenses, acquisition costs, and the reversal of a
litigation settlement reserve was $5.7 million, or 3.8% of net
revenues, compared with non-GAAP operating loss of $17.0 million,
or 11.8% of net revenues, in the first quarter of 2012. (See
accompanying Reconciliation of GAAP to Non-GAAP Financial
Measures.)
- Restructuring expense was $2.0 million
($0.7 million non-cash) resulting from the implementation of
Project LEAN and the continued efforts of the expanded Global
Restructuring Plan. Restructuring expense for these plans totals
$68.0 million ($15.0 million non-cash) since inception.
- The effective tax rate for the first
quarter of 2013 was negative 8.0%. The effective tax rate for the
first quarter of 2012 was a benefit of 48.3%. Income taxes and
effective tax rates in both years were impacted by the valuation
allowance on U.S. deferred tax assets. The significant change in
the effective tax rate was due to the mix of income between
subsidiaries and the use of the discrete method in accounting for
the first quarter of 2013 U.S. operations results, which excludes
any benefit from year-to-date losses incurred by our U.S.
operations. The discrete method of accounting for U.S. losses from
U.S. operations was implemented beginning in the second quarter of
2012. In the first quarter of 2012 the effective tax rate included
the benefit from year-to-date losses from U.S. operations.
- Cash flow provided by operating
activities was $13.0 million compared with $6.5 million in the
first quarter of 2012.
- At March 31, 2013, cash and cash
equivalents were $131.1 million compared with $118.8 million at
December 30, 2012, and total debt was $112.8 million compared
with $113.3 million at December 30, 2012. Capital expenditures
were $1.4 million in the first quarter of 2013.
Outlook for 2013
Based on an assessment of current market conditions, and
assuming continuation of current foreign exchange rates, Checkpoint
is updating certain components of guidance for 2013, with the
changes noted below. This guidance does not include the impact of
acquisitions, divestitures, restructuring and one-time or unusual
charges resulting from debt refinancing, litigation, certain tax
reserves and gains or losses generated by non-routine operating
matters which we may record during the year.
Projected income taxes for the year can be impacted by changes
in the mix of pre-tax income and losses in the countries in which
we operate, which can also impact earnings per share. The valuation
allowance on U.S. deferred tax assets results in a GAAP tax rate on
U.S. pre-tax income or losses of essentially 0%. If the mix of
income or losses shifts from the U.S. to a country where the income
tax rate is in the normal range, that in some cases approaches 30%,
this can have a significant impact on the amount of reported income
tax expense when compared to the projections that are the basis of
our outlook.
- Net revenues are expected to be in the
range of $675 million to $695 million. Prior guidance was net
revenues in the range of $665 million to $685 million.
- Gross profit margins are expected to be
in the range of 41.2% to 42.2%. Prior guidance was gross profit
margins in the range of 41.8% to 42.8%.
- Operating expenses are expected to be
in the range of $233 million to $243 million which is unchanged
from prior guidance.
- Non-GAAP operating income is expected
to be $45 million to $50 million, which is unchanged from prior
guidance. Prior guidance was operating income margins of 6.8% to
7.3%, equivalent to $45 million to $50 million.
- Full year non-GAAP effective income tax
rate is expected to be approximately 27% to 29% which is unchanged
from prior guidance.
- Non-GAAP diluted net earnings per share
attributable to Checkpoint Systems, Inc. are expected to be in the
range of $0.65 to $0.75 which is unchanged from prior
guidance.
- Free cash flow (cash flow from
operations less capital expenditures) is expected to be in the
range of $50 million to $60 million which is unchanged from prior
guidance.
Financial Summary (a) (Unaudited)
Quarter (13 weeks) Ended
(amounts in millions, except per share data)
March 31, 2013 March 25,
2012 Net revenues $ 148.8
$ 144.2
From
Continuing
Operations
From Discontinued
Operations
Total
Company
March 31, 2013
March 25, 2012 March 31, 2013
March 25, 2012 March 31,
2013 March 25, 2012 Quarter
As Reported (GAAP) Net loss (b) $ (3.7 ) $
(10.6 ) $ (2.6 ) $ (0.4 ) $ (6.3 ) $ (11.0 ) Diluted loss per share
(b) $ (0.09 ) $ (0.26 ) $ (0.06 ) $ (0.01 ) $ (0.15 ) $ (0.27 )
Non-GAAP (c) Net loss (b) $ (8.4 ) $ (8.5 ) $ (2.6 ) $ (0.4 ) $
(11.0 ) $ (8.9 ) Diluted loss per share (b) $
(0.21 ) $ (0.21 ) $ (0.06 ) $ (0.01 ) $
(0.27 ) $ (0.22 ) (a) See
accompanying reconciliation of GAAP to Non-GAAP financial measures.
(b) Attributable to Checkpoint Systems, Inc. (c) 2013 excludes
restructuring expenses, acquisition costs, and the reversal of a
litigation settlement reserve.
Checkpoint Systems will host a conference call today, May 7,
2013, at 8:30 a.m. Eastern Time, to discuss its first quarter 2013
results. The conference call will be simultaneously broadcast live
over the Internet. Listeners may access a webcast of the call 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: the impact upon operations of legal
and tax compliance matters or internal controls review, improvement
and remediation, including the detection of wrongdoing, improper
activities, or circumvention of internal controls; our ability to
successfully implement our strategic plan; the impact of our
working capital improvement initiatives; our ability to manage
growth effectively including our ability to integrate acquisitions
and to achieve our financial and operational goals for our
acquisitions; our ability to manage risks associated with business
divestitures; changes in economic or 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; our ability to comply with covenants and
other requirements of our debt agreements; changes in regulations
or standards applicable to our products; our ability to
successfully implement global cost reductions in operating expenses
including, 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-;
risks generally associated with information systems upgrades and
our company-wide implementation of an enterprise resource planning
(ERP) system 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 Balance Sheets (amounts in thousands)
(unaudited) March
31, 2013 December 30, 2012 *
ASSETS CURRENT ASSETS: Cash and cash equivalents $ 131,079 $
118,829 Accounts receivable, net of allowance of $12,366 and
$13,242 141,505 177,173 Inventories 83,854 82,154 Other current
assets 26,289 36,147 Deferred income taxes 9,087 8,930 Assets of
discontinued operations held for sale 21,528
29,864 Total Current Assets
413,342 453,097 REVENUE EQUIPMENT ON
OPERATING LEASE, net 1,737 1,748 PROPERTY, PLANT, AND EQUIPMENT,
net 101,506 107,184 GOODWILL 179,287 182,741 OTHER INTANGIBLES, net
72,196 74,950 DEFERRED INCOME TAXES 25,929 26,843 OTHER ASSETS
12,338 13,246 TOTAL
ASSETS $ 806,335 $ 859,809
LIABILITIES AND EQUITY CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt $ 5,936
$ 4,367 Accounts payable 61,554 68,929 Accrued compensation and
related taxes 27,034 28,258 Other accrued expenses 45,528 54,425
Income taxes — 2,560 Unearned revenues 7,957 17,035 Restructuring
reserve 6,356 9,579 Accrued pensions — current 4,541 4,687 Other
current liabilities 19,385 25,855 Liabilities of discontinued
operations held for sale 8,741
9,688 Total Current Liabilities 187,032
225,383 LONG-TERM DEBT, LESS CURRENT
MATURITIES 106,897 108,921 ACCRUED PENSIONS 92,625 95,839 OTHER
LONG-TERM LIABILITIES 33,814 36,540 DEFERRED INCOME TAXES 15,353
15,580 COMMITMENTS AND CONTINGENCIES CHECKPOINT SYSTEMS, INC.
STOCKHOLDERS’ EQUITY: Preferred stock, no par value, 500,000 shares
authorized, none issued — — Common stock, par value $.10 per share,
100,000,000 shares authorized, issued 44,944,529 and 44,763,404
shares 4,494 4,476 Additional capital 427,323 424,715 Retained
earnings 12,108 18,392 Common stock in treasury, at cost, 4,035,912
and 4,035,912 shares (71,520 ) (71,520 ) Accumulated other
comprehensive income, net of tax (2,254 )
795 TOTAL CHECKPOINT SYSTEMS, INC. STOCKHOLDERS’
EQUITY 370,151 376,858 NON-CONTROLLING INTERESTS
463 688 TOTAL EQUITY
370,614 377,546 TOTAL LIABILITIES AND
EQUITY $ 806,335 $ 859,809
* Derived from the Company’s audited Consolidated Financial
Statements at December 30, 2012.
Checkpoint Systems, Inc.
Consolidated Statements of Operations (amounts in
thousands, except per share data) (unaudited)
Quarter (13 weeks) Ended
March 31, 2013 March 25, 2012
Net revenues $ 148,835 $ 144,194 Cost of revenues
94,894 91,173 Gross profit
53,941 53,021 Selling, general, and administrative expenses 55,287
65,603 Research and development 4,693 4,454 Restructuring expenses
2,016 1,718 Litigation settlement (6,584 ) — Acquisition costs 161
14 Other expense — 745 Other operating income
330 — Operating loss (1,302 ) (19,513 )
Interest income 399 500 Interest expense 2,059 1,935 Other gain
(loss), net (545 ) (150 ) Loss from
continuing operations before income taxes (3,507 ) (21,098 ) Income
taxes expense (benefit) 279
(10,196 ) Net loss from continuing operations (3,786 ) (10,902 )
Loss from discontinued operations, net of tax expense (benefit) of
$134 and ($80) (2,556 ) (368 ) Net loss
(6,342 ) (11,270 ) Less: loss attributable to non-controlling
interests (58 ) (279 ) Net loss
attributable to Checkpoint Systems, Inc. $
(6,284 ) $ (10,991 )
Basic loss attributable to
Checkpoint Systems, Inc. per share: Loss from continuing
operations $ (0.09 ) $ (0.26 ) Loss from discontinued operations,
net of tax (0.06 ) (0.01 )
Basic
loss attributable to Checkpoint Systems, Inc. per share
$ (0.15 ) $ (0.27 )
Diluted loss
attributable to Checkpoint Systems, Inc. per share: Loss from
continuing operations $ (0.09 ) $ (0.26 ) Loss from discontinued
operations, net of tax (0.06 ) (0.01 )
Diluted loss attributable to Checkpoint Systems, Inc. per
share $ (0.15 ) $ (0.27 )
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 (13 weeks) Ended Reconciliation of
GAAP to Non-GAAP Operating Loss : March
31, 2013 March 25, 2012 Net
Revenues $ 148,835 $ 144,194
GAAP operating loss (1,302 ) (19,513 )
Non-GAAP Adjustments: Restructuring expenses 2,016 1,718
Litigation settlement (6,584 ) — Acquisition costs 161 14 Other
income (a) — 745 Adjusted
Non-GAAP operating loss $ (5,709 ) $
(17,036 )
GAAP operating margin
(0.9
)%
(13.5
)%
Adjusted Non-GAAP operating margin
(3.8
)%
(11.8
)%
(a) Represents the income statement
impacts of the legal and forensic costs incurred due to the
improper and fraudulent activities of a certain former employee of
the Company’s Canada sales subsidiary.
Checkpoint Systems, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
continued (amounts in thousands, except per share data)
(unaudited) Quarter (13 weeks) Ended
Reconciliation of GAAP to Non-GAAP loss from continuing
operations attributable to Checkpoint Systems, Inc.:
March 31, 2013 March 25,
2012 Loss from continuing operations attributable to
Checkpoint Systems, Inc., as reported $ (3,728
) $ (10,623 ) Non-GAAP Adjustments:
Restructuring expenses, net of tax 1,681 1,557 Litigation
settlement, net of tax (6,584 ) — Acquisition costs, net of tax 161
14 Other expense, net of tax (a) —
549 Adjusted net loss from continuing operations
attributable to Checkpoint Systems, Inc. $
(8,470 ) $ (8,503 ) Reported diluted shares 41,188
40,812 Adjusted diluted shares 41,188 40,812 Reported net
loss from continuing operations attributable to Checkpoint Systems,
Inc., per share - diluted $ (0.09 ) $ (0.26 ) Adjusted net loss
from continuing operations attributable to Checkpoint Systems,
Inc., per share - diluted $ (0.21 ) $ (0.21 )
(a) Represents the income statement
impacts of the legal and forensic costs incurred due to the
improper and fraudulent activities of a certain former employee of
the Company’s Canada sales subsidiary.
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