Checkpoint Systems, Inc. Announces Fourth Quarter and Full-Year 2012 Results
2012 Net Revenues and Free Cash Flow Exceed Guidance
2012 Adjusted non-GAAP Operating Margin at the High End of Guidance
Company Provides 2013 Guidance, In-Line with Previous Outlook
Results Reflect Decision to Sell U.S. and Canadian CheckView ® Business
THOROFARE, N.J.--(BUSINESS WIRE)-- Checkpoint Systems, Inc.
Fourth Quarter GAAP Results - Continuing Operations:
Net revenues from continuing operations in the fourth quarter of 2012 decreased 11.1%, 9.5% on a constant currency basis, to $200.2 million from $225.1 million in the fourth quarter of 2011. Gross profit margins were 39.3% compared with 41.1% in the 2011 fourth quarter. SG&A expenses of $61.4 million decreased by $9.7 million, or 13.6% compared with the same period last year, driven by $7.1 million of incremental savings from the global restructuring programs, as well as continued tight expense control.
The operating loss of $19.7 million decreased $28.0 million from the same period last year, even though the 2012 loss included a non-cash $38.3 million goodwill impairment in Retail Merchandising Solutions as well as restructuring, litigation settlement and acquisition expenses. These were partially offset by an insurance settlement received against fraudulent activities in Checkpoint's Canadian operations discovered in 2011, a gain on the sale of our non-strategic Suzhou, China subsidiary, and tax valuation allowance adjustments.
Net loss from continuing operations was $0.76 per diluted share compared with a loss of $0.35 per diluted share in the same period last year. In addition to the items noted above, the loss from continuing operations was impacted in both 2012 and 2011 by a valuation allowance on U.S. deferred tax assets recorded in 2011 that creates higher than normal volatility in income tax expense, depending on the mix of pre-tax income and losses in the countries in which Checkpoint operates.
Fourth Quarter Adjusted non-GAAP Operating Income and Earnings per Share - Continuing Operations:
Adjusted non-GAAP operating income from continuing operations was $14.0 million in the fourth quarter of 2012, compared with $18.2 million in the same period last year. Adjusted non-GAAP net income from continuing operations was $0.09 per share compared with a net loss from continuing operations of $0.12 per share in the fourth quarter of 2011. These results exclude the impact of goodwill impairment in Retail Merchandising Solutions, as well as restructuring, litigation settlement and acquisition expenses. Also excluded are the impacts of an insurance settlement received against fraudulent activities in our Canadian operations discovered in 2011, a gain on the sale of our non-strategic Suzhou, China subsidiary, and tax valuation allowance adjustments.
Checkpoint Systems' President and Chief Executive Officer, George Babich, said, "All three lines of business delivered better than expected revenues in the fourth quarter 2012. The previously announced realignment of the Global Sales organization increased our focus and execution and clearly contributed to a solid finish for the year, providing momentum entering 2013. Higher than expected revenue coupled with solid gross profit margins and reduced operating expenses drove operating income margins to the high end of our expectations and previous guidance. In addition, our commitment to better manage working capital resulted in free cash flow of $39 million that significantly exceeded expectations for the fourth quarter and full year."
Mr. Babich continued, "Undoubtedly, the restructuring and cost savings programs initiated under our profit improvement plan, Project LEAN, were instrumental in improving fourth quarter results. Progress was made in each line of business as we stabilized the new organizational structure, continued to cut costs, improve execution and increase productivity. Previously announced new sales compensation plans that were put in place to drive sales of our electronic article surveillance consumable and Alpha® products have begun to take effect. Our plans to capture global opportunities in the radio frequency identification (RFID) market continue to make progress as our Merchandise Visibilty™ Solutions business adds more tests throughout the world. And importantly, significant progress was made in Apparel Labeling Solutions, which underwent massive changes in 2012 to support our redefined strategy."
The Company continues to expect that restructuring and cost savings initiatives that are part of the Expanded Global Restructuring Plan, which includes Global Restructuring Plan, including Project LEAN,and the SG&A Restructuring Plan will generate annual savings of approximately $102 million by the end of 2013. Incremental 2012 cost savings realized through the fourth quarter were $28.6 million, with $19.9 million of savings attributable to SG&A cost reduction actions. This is in addition to $17 million of total savings realized in 2011, of which $15 million was attributable to SG&A.
GAAP restructuring expenses in the fourth quarter were $1.3 million, of which $0.4 million is attributable to non-cash asset impairments. To date, the Expanded Global Restructuring Plan, has recorded $66.0 million in expenses, including $44.8 million in severance and other employee-related charges, $6.8 million in other non-employee related restructuring costs as well as $14.3 million in non-cash asset impairments associated with facilities rationalization and closures. To-date, cumulative headcount reductions from the Expanded Global Restructuring Plan total 1,850 of the approximately 2,400 employees expected to be affected by the plan.
Working Capital, Free Cash Flow and Debt Covenants
Operating income coupled with the impact of working capital initiatives introduced in the second quarter of 2012 generated $39.0 million in free cash flow in the fourth quarter and $49.8 million for the full year. Fourth quarter cash flow was enhanced by the receipt of a $4.7 million insurance settlement against fraudulent activity in Checkpoint's Canadian operations discovered in December 2011. This, plus $3.4 million in proceeds from the sale of non-strategic operations including our Suzhou, China subsidiary and the Banking Security Systems Integration business unit more than offset the $7.2 million in fourth quarter cash expenditures for restructuring, resulting in a cash balance of $118.8 million at year end.
Ray Andrews, Senior Vice President and Chief Financial Officer noted, "Fourth quarter operating results and tight cash and working capital management enabled us to complete the quarter well within the Company's amended debt covenant ratios while not increasing debt. Our focus on improving inventory, accounts receivable and accounts payable resulted in a net improvement in cash flow of $34.6 million since June 2012. This is excellent progress toward our goal of a $50 million to $60 million improvement by June 2013."
Remediation of Material Weakness
Mr. Andrews noted, "As of December 25, 2011, Company management concluded that we did not maintain effective controls to prevent or detect management override of controls at foreign subsidiaries that were not integrated into our shared service environments in the United States and Europe. The Company's actions during 2012 to implement a program to enhance the annual risk assessment process and treasury controls as well as increase the frequency and scope of detailed reviews of financial transactions and reconciliations at all of our subsidiaries remediated and cured the material weakness."
Mr. Babich commented, "Following an extensive review of Checkpoint's portfolio in 2012, the company's Board of Directors determined that the U.S. and Canadian CheckView® business will better serve its customers as an independent, entrepreneurial and more focused organization. An investment banker has been engaged to assist in the sale of the CheckView® business and discussions are taking place with a potential buyer interested in leveraging the expertise, customer relationships, retail monitoring center and other assets residing in CheckView® in a strong and nimble standalone platform. Checkpoint will continue to pursue its redefined strategy to provide solutions that improve merchandise availability in retail stores. I am confident that this divestiture will enable focused attention and investment in both the CheckView® business and Checkpoint's core businesses, which in turn will yield the best results for our customers. Checkpoint is dedicated to support CheckView® throughout the sale process and the CheckView® team is 100% committed to ensure an orderly transition with full continuity of service to our customers."
Mr. Babich concluded, "With the turnaround well underway, we ended 2012 stronger than we began. Today, our organization is correctly aligned to support each of our ongoing lines of business. Managers are being equipped with the tools they need to gain greater visibility into their businesses to drive improved performance. Throughout the organization, we will continue to make productivity improvements to make us more efficient and nimble. And, most importantly, we remain committed to invest prudently in the businesses and technologies that help lead to profitable growth."
"Looking ahead, retailers all over the world have the same fundamental need to have available sufficient quantity and selection of merchandise to enable consumers to buy what they want when they want to shop. Checkpoint's strength lies in developing solutions for enterprise-wide application, to help retailers track and protect their merchandise and ultimately sell more. Our Merchandise Visibility™ business, which includes RFID solutions for inventory management, performed well in 2012 and is gaining momentum as we enter 2013. We believe our solution set is second to none and we look forward to expanding this business with new and existing customers in 2013. While we have much left to do, I am excited about our prospects going forward."
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 Fourth Quarter 2012 Results
- Net revenues from continuing operations decreased 11.1% to $200.2 million, principally due to 9.5% organic decline in all segments. Foreign currency effects resulted in a 1.6% decrease in net revenues, driven principally by the strengthened dollar versus the euro.
- Gross profit margin was 39.3% compared with 41.1% for the fourth quarter of 2011. The decrease was principally due to lower gross margins in Shrink Management Solutions, notably in the EAS consumables and Merchandise Visibility (RFID) businesses where high margin transactions in 2011 were not repeated in 2012.
- Selling, general and administrative (SG&A) expenses were $61.4 million compared with $71.1 million in the fourth quarter of 2011. The fourth quarter of 2012 included savings totaling $7.1 million from the Expanded Global Restructuring Plan, including Project LEAN.
- Operating loss from continuing operations was $19.7 million compared with income of $8.3 million in the fourth quarter of 2011. Adjusted non-GAAP operating income from continuing operations excluding goodwill impairment expenses, restructuring expenses and other items was $14.0 million, or 7.0% of net revenues, compared with adjusted non-GAAP operating income of $18.2 million, or 8.1% of net revenues in the fourth quarter of 2011. (See accompanying Reconciliation of GAAP to Non-GAAP Financial Measures.)
- Restructuring expense was $1.3 million ($0.4 million non-cash) resulting from the implementation of the Expanded Global Restructuring Plan. Restructuring expense for this plan totals $66.0 million ($14.3 million non-cash) since inception.
- Income tax expense was $8.3 million compared with $20.8 million in the fourth quarter of 2011. Income taxes and effective income tax rates in both years were impacted by the valuation allowance on U.S. deferred tax assets initially recorded in the third quarter of 2011.
- Cash flow provided by operating activities was $41.0 million compared with $5.5 million in the fourth quarter of 2011.
- At December 30, 2012, cash and cash equivalents were $118.8 million compared with $93.5 million at December 25, 2011, and total debt was $113.3 million compared with $150.5 million at December 25, 2011. Capital expenditures were $2.0 million in the fourth quarter of 2012.
2012 Fiscal Year Guidance
The table below details the previously provided fiscal year 2012 guidance adjusted for the CheckView® discontinued operations.
|(amounts in millions, except percents)||2012 Original Guidance||
|2012 Adjusted Guidance|
|Non-GAAP operating income||0.6||%||1.0||%||(1.4||)%||0.8||%||1.3||%|
|Non-GAAP income taxes||$||7.5||$||5.5||$||0.2||$||7.3||$||5.3|
|Non-GAAP diluted loss per share attributable to Checkpoint Systems, Inc.||$||(0.19||)||$||(0.27||)||$||(0.03||)||$||(0.16||)||$||(0.24||)|
Outlook for 2013
Based on an assessment of current market conditions, and assuming continuation of current foreign exchange rates, Checkpoint is providing guidance for 2013. 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 the Company 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 US 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 $665.0 million to $685.0 million. This represents 0.9% year over year growth when comparing the $675.0 million midpoint of 2013 guidance to 2012 results, after adjusting the 2012 base for $22.0 million in revenue reductions resulting from eliminating non-strategic products and sales units in our Apparel Labeling Solutions, Retail Merchandising Solutions and Library businesses. The expected 2013 revenue growth is 2.8% when compared to the midpoint of 2012 guidance, after the adjustments noted above. The tables below show how the growth rates were calculated. Our previously communicated 2013 outlook was an increase of 2% to 3%.
- Gross profit margins are expected to be in the range of 41.8% to 42.8%. As outlined in the table below, this is a 290 basis point improvement in gross profit margins when comparing the 42.3% midpoint of 2013 guidance to 2012 results, after adjusting the 2012 base for $7.6 million in gross profit reductions resulting from eliminating non-strategic products and sales units in our Apparel Labeling Solutions, Retail Merchandising Solutions and Library businesses. Our previously communicated 2013 outlook was an improvement of 300 basis points.
- Operating expenses are expected to be in the range of $233.0 million to $243.0 million. As outlined in the table below, when compared to the $238.0 million midpoint of 2013 guidance this represents a 10.3% reduction in operating expenses after increasing the 2012 adjusted non-GAAP base by $3.1 million to restore R&D expenditures to $19.5 million, consistent with our normal historical level of R&D spending. Our previously communicated 2013 outlook was an operating expense reduction of approximately 10%.
- Non-GAAP operating income margin is expected to be in the range of 6.8% to 7.3%.
- Full year non-GAAP effective income tax rate is expected to be approximately 27% to 29%.
- 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.
- Free cash flow (cash flow from operations less capital expenditures) is expected to be in the range of $50.0 million to $60.0 million.
The Company expects that increased revenue will primarily be driven by growth in the RFID business. Anticipated improvements in gross margins and operating expenses are driven by all profit improvement initiatives.
The table below provides a bridge between 2012 full year net revenues, gross profit, gross margin, adjusted non-GAAP operating expense and adjusted non-GAAP operating income to 2013 guidance, after the adjustments to the 2012 base described in the Outlook for 2013.
|(amounts in millions, except percents)||
2012 Full Year
|Net revenues (c)||$||690.8||$||(22.0||)||$||668.8||$||675.0||$||6.2||0.9||%|
|Gross profit (d)||$||270.8||$||(7.6||)||$||263.2||$||285.5||$||22.3|
|Adjusted non-GAAP operating expense (a)||$||262.1||$||3.1||$||265.2||$||238.0||$||(27.2||)||(10.3||)%|
|Adjusted non-GAAP operating income||$||8.7||$||(10.7||)||$||(2.0||)||$||47.6||$||49.6|
The table below provides a bridge between the midpoint of 2012 guidance and the midpoint of 2013 guidance, after the adjustments to the 2012 base described in the Outlook for 2013 for full year net revenues, gross profit, gross margin and adjusted non-GAAP operating expense.
|(amounts in millions, except percents)||
|Net revenues (c)||$||678.5||$||(22.0||)||$||656.5||$||675.0||$||18.5||2.8||%|
|Gross profit (d)||$||267.8||$||(7.6||)||$||260.2||$||285.5||$||25.3|
|Adjusted non-GAAP operating expense (e)||$||260.3||$||3.1||$||263.4||$||238.0||$||(25.4||)||(9.6||)%|
(a) Adjusted non-GAAP operating expense for the full year 2012 is derived by the difference between gross profit and adjusted non-GAAP operating income.
(b) Excludes CheckView® Discontinued Operations.
(c) After adjusting the 2012 base for $22.0 million in revenue reductions resulting from eliminating non-strategic products and sales units in our Apparel Labeling Solutions, Retail Merchandising Solutions and Library businesses.
(d) After adjusting the 2012 base for $7.6 million in gross profit reductions resulting from eliminating non-strategic products and sales units in our Apparel Labeling Solutions, Retail Merchandising Solutions and Library businesses.
(e) After increasing the adjusted non-GAAP 2012 base by $3.1 million to restore R&D expenditures to $19.5 million, consistent with our normal historical level for R&D spend.
Checkpoint Systems will host a conference call today, March 5, 2013, at 8:30 a.m. Eastern Time, to discuss its fourth quarter and full-year 2012 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.
Financial Summary (a)
(amounts in millions, except per share data)
|Quarter Ended||Twelve Months Ended|