Company Reports Highest First Quarter Gross
Profit Margin in 21 Years
Organic Merchandise Visibility™ Revenue
Growth of 41%
Company Reaffirms 2015 Guidance
Checkpoint Systems, Inc. (NYSE: CKP) today reported
financial results for the fiscal first quarter ended March 29,
2015. For more details on the Company’s results, please see the
supplemental presentation materials, “First Quarter 2015 Financial
Review,” posted to the Company’s website at
http://ir.checkpointsystems.com and furnished to the SEC on Form
8-K.
First Quarter GAAP Results
Net revenues in the first quarter of 2015 decreased 12.8%, to
$128.5 million from $147.4 million in the first quarter of 2014.
Foreign currency translation effects resulted in an $11.5 million
or 7.8% decrease in net revenues. During the quarter, gross profit
margins were 44.0%, an increase of more than 170 basis points
compared to the same period last year.
Selling, general, and administrative (SG&A) expenses in the
first quarter of 2015 decreased $3.0 million, or 5.6%, to $51.3
million from $54.3 million in the first quarter of 2014.
Operating loss in the first quarter of 2015 was $0.3 million,
$2.5 million below the $2.2 million of income in the same period
last year.
Net loss in the first quarter of 2015 was $0.02 per diluted
share, versus nil per diluted share in the same period last
year.
First Quarter Adjusted Non-GAAP Operating Income, EBITDA and
Earnings per Share
Adjusted Non-GAAP operating income was $1.9 million in the first
quarter of 2015, $2.2 million lower than $4.1 million in the same
period last year. Adjusted EBITDA was $10.0 million in the first
quarter of 2015, $1.8 million lower than $11.8 million in the first
quarter of 2014. Adjusted Non-GAAP net earnings per diluted share
was $0.04 in the first quarter of 2015, flat compared to the same
period last year. (See accompanying Reconciliation of GAAP to
Non-GAAP Financial Measures.)
Checkpoint Systems' President and Chief Executive Officer,
George Babich, said, "Despite lower revenue driven by continued
foreign currency headwinds and the sunset of our significant 2014
EAS hardware rollouts, I am pleased that we were able to report our
highest first quarter gross profit margin in 21 years.”
Mr. Babich added, “As we previously outlined, 2015 will be a
challenging year as we work to secure our next significant rollout
and begin to drive organic revenue growth through our investment
spending on strategic growth initiatives. We are making good
progress on both fronts, and I am gaining confidence that we will
secure at least one signed contract for an additional new hardware
rollout beginning later this year. I am also encouraged that our
spending on certain strategic initiatives will begin to take root
in 2016. In the first quarter alone, we have significantly
increased our rate of investment year-over-year in both R&D and
capital expenditures, up $0.7 million and $2.5 million,
respectively. SG&A spending in constant dollar terms is up
nearly $1 million as well, although masked by the $4 million
SG&A benefit from foreign currency translation effects. We have
added strategic headcounts in sales and product management to
target underserved vertical markets. We have engaged consultants to
complement our in-house expertise to focus on our supply chain
optimization project. We have invested in new equipment and IT
systems to enhance our capabilities and increase automation in our
Apparel Labeling business. These investments reflect our commitment
to organic growth despite the challenging market conditions.”
Mr. Babich concluded, “In addition, we remain committed to
exploring strategic acquisitions and partnerships to round out our
portfolio of products that will help drive topline growth and
improved operating margins.”
Selected Discussion and Analysis of First Quarter 2015
Results
- Net revenues decreased 12.8% to $128.5
million compared with $147.4 million for the first quarter of 2014,
due to an organic decrease of 5.0% and foreign currency effects of
7.8%.
- Merchandise Availability Solutions
(MAS) revenues decreased 12.8% to $81.5 million versus the first
quarter of 2014, principally driven by foreign currency translation
effects of $8.0 million or 8.6%. The organic decline of 4.2% was
attributable to EAS Systems, Alpha® and EAS Consumables, reflecting
the sunset of North American and European chain-wide projects which
occurred in the first quarter of 2014, partially offset by an
increase in RFID solution sales in both North America and
Europe.
- Apparel Labeling Solutions (ALS)
revenues decreased 11.6% to $37.2 million, reflecting a decrease in
the legacy labeling business due to lower tag volumes at certain
key North American and European retailers, certain market share
losses in Europe and Asia and the timing of Chinese New Year.
Foreign currency effects led to a $1.5 million, or 3.6%, decline in
segment revenues.
- Retail Merchandising Solutions (RMS)
revenues decreased 17.1% to $9.8 million, nearly all related to
foreign currency translation effects. Organic revenues declined
just $0.1 million, reflecting the sunset of a major project in
North America, nearly offset by strong retail display sales volumes
in Europe.
- Gross profit margin was 44.0%, more
than 170 basis points higher than the first quarter of 2014.
- MAS gross profit margin was 50.6%, more
than 360 basis points higher than the 47.0% recorded in the first
quarter of 2014. The increase was principally due to the mix of
revenue toward higher margin products and services. Better
professional service absorption more than offset the weaker factory
overhead absorption generated by lower production volumes. This
gross profit margin is not sustainable, as the Euro-based profit in
our supply chain in the first quarter of 2015 was locked-in at
significantly higher rates than exist today. We estimate that MAS
gross profit would have been approximately $2 million lower in the
first quarter of 2015 if the current rates had existed when our
supply chain earned this profit.
- ALS gross profit margin was 31.1%
compared with 33.5% in the first quarter of 2014. The decrease was
principally due to accelerated depreciation for certain machinery
in Asia that will be removed from production, overhead
under-absorption in our factories due to lower sales volumes and
the impact of a later Chinese New Year. ALS margins will continue
to suffer year-over-year from the strengthening U.S. Dollar.
- RMS gross profit margin was 37.7%,
nearly 180 basis points better than 35.9% in the first quarter of
2014. The increase was primarily due to our margin improvement
initiatives and better factory overhead absorption.
- SG&A expenses were $51.3 million
compared with $54.3 million in the first quarter of 2014. The
decrease is related to foreign currency translation effects of just
under $4 million. The benefits of our cost reduction initiatives
were offset by incremental spending related to our strategic
initiatives and management transition costs.
- Operating loss was $0.3 million
compared with $2.2 million of income in the first quarter of
2014.
- Non-GAAP operating income was $1.9
million compared with $4.1 million in the first quarter of 2014.
(See accompanying Reconciliation of GAAP to Non-GAAP Financial
Measures.)
- Adjusted EBITDA was $10.0 million,
compared with $11.8 million in the first quarter of 2014. (See
accompanying Reconciliation of GAAP to Non-GAAP Financial
Measures.)
- Cash used in operating activities was
$0.4 million compared with $8.6 million provided by operating
activities in the first quarter of 2014. Capital expenditures were
$5.8 million in the first quarter of 2015 compared to $3.3 million
in the first quarter of 2014.
Outlook for 2015
Based on an assessment of market conditions, current customers'
orders and commitments, and assuming continuation of current
foreign exchange rates, Checkpoint is reaffirming its guidance for
2015. This guidance does not include the impact of acquisitions,
divestitures, restructuring and one-time or unusual charges
resulting from litigation fees or settlements 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. 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%. When the mix of income or losses shifts from the
U.S. to a country where the income tax rate is in the normal range,
our effective tax rate will increase. Additionally, we continue to
monitor our profitability in the U.S. to determine whether there is
sufficient evidence that may result in a full or partial release of
the U.S. valuation allowance. Should this occur, the current GAAP
tax rate in the U.S. will be significantly impacted. The
combination of these factors can have a material effect on the
amount of reported income tax expense, and therefore our earnings
per share, when compared with the projections that are the basis of
our outlook.
James Lucania, Acting Chief Financial Officer and Treasurer,
said, “Like so many other U.S. multinational corporations,
Checkpoint’s reported top and bottom line results will continue to
be impacted negatively by the strong U.S. Dollar. Though several of
our selling currencies have weakened since we presented our initial
guidance, we believe anticipated new business will offset the lost
revenue from currency translation. Therefore we continue to expect
2015 results within our prior guidance range.”
- Net revenues are expected to be in the
range of $575 million to $625 million, unchanged from prior
guidance.
- Adjusted EBITDA is expected to be in
the range of $55 million to $68 million, unchanged from prior
guidance.
- Non-GAAP diluted net earnings per share
is expected to be in the range of $0.40 to $0.50, assuming an
effective tax rate of approximately 35%, unchanged from prior
guidance.
Checkpoint Systems will host a conference call today, May 6,
2015, at 5:00 p.m. Eastern Time, to discuss its first quarter 2015
results. The 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 merchandise
availability solutions for the retail industry, encompassing loss
prevention and merchandise visibility. Checkpoint provides
end-to-end solutions enabling retailers to achieve accurate
real-time inventory, accelerate the replenishment cycle, prevent
out-of-stocks and reduce theft, thus improving merchandise
availability and the shopper’s experience. Checkpoint's solutions
are built upon 45 years of radio frequency technology expertise,
innovative high-theft and loss-prevention solutions, market-leading
RFID hardware, software, and comprehensive labeling capabilities,
to brand, secure and track merchandise from source to shelf.
Checkpoint's customers benefit from increased sales and profits by
implementing merchandise availability solutions, to ensure the
right merchandise is available at the right place and time when
consumers are ready to buy. 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
accounting policies review and improvement; the impact upon
operations of legal and 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;
our ability to manage growth effectively including our ability to
integrate acquisitions and to achieve our financial and operational
goals for our acquisitions; 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 believe that the most significant risk factors that could
affect our financial performance in the near-term include: (1)
changes in economic or international business conditions including
foreign currency exchange rate and interest rate fluctuations; (2)
our ability to successfully implement our strategic plan; (3) our
ability to manage growth effectively including our ability to
integrate acquisitions and to achieve our financial and operational
goals for our acquisitions, and (4) lower than anticipated demand
by retailers and other customers for our products including slower
commitments of retail customers to chain-wide installations and/or
source tagging adoption or expansion.
For a more detailed discussion of these and other factors, see
“Risk Factors” and “Management’s Discussion and Analysis of Results
of Operations and Financial Condition” in our 2014 Form 10-K, filed
on March 5, 2015 with the Securities and Exchange Commission. The
forward-looking statements included in this document are made only
as of the date of this document, and we undertake no obligation to
update these statements to reflect subsequent events or
circumstances, other than as may be required by law.
Checkpoint Systems, Inc.
Consolidated Balance Sheets
(amounts in thousands)
(unaudited)
March 29,2015
December 28,2014
ASSETS CURRENT ASSETS: Cash and cash equivalents $ 124,205 $
135,537 Accounts receivable, net of allowance of $7,917 and $8,526
100,696 131,720 Inventories 95,579 91,860 Other current assets
21,245 25,928 Deferred income taxes 5,310
5,557 Total Current Assets 347,035
390,602 REVENUE EQUIPMENT ON OPERATING LEASE, net 1,021
1,057 PROPERTY, PLANT, AND EQUIPMENT, net 77,022 76,332 GOODWILL
164,027 173,569 OTHER INTANGIBLES, net 60,980 64,940 DEFERRED
INCOME TAXES 23,088 25,284 OTHER ASSETS 6,264
6,882 TOTAL ASSETS $ 679,437 $ 738,666
LIABILITIES AND EQUITY CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt $ 224 $
236 Accounts payable 36,523 48,928 Dividend payable 21,384 —
Accrued compensation and related taxes 20,205 27,511 Other accrued
expenses 37,208 44,204 Income taxes — 1,278 Unearned revenues 7,208
7,663 Restructuring reserve 4,324 6,255 Accrued pensions — current
3,999 4,472 Other current liabilities 16,058
17,504 Total Current Liabilities 147,133
158,051 LONG-TERM DEBT, LESS CURRENT MATURITIES
65,138 65,161 FINANCING LIABILITY 31,187 33,094 ACCRUED PENSIONS
96,948 108,920 OTHER LONG-TERM LIABILITIES 28,104 30,140 DEFERRED
INCOME TAXES 15,120 15,369 COMMITMENTS AND CONTINGENCIES
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, 45,996,605 and 45,840,171 shares
issued, 41,960,693 and 41,804,259 shares outstanding 4,600 4,584
Additional capital 420,955 441,882 Accumulated deficit (13,076 )
(12,331 ) 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 (45,152 ) (34,684 )
TOTAL STOCKHOLDERS' EQUITY 295,807 327,931
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 679,437
$ 738,666
Checkpoint Systems, Inc.
Consolidated Statements of
Operations
(amounts in thousands, except per share
data)
(unaudited)
Quarter (13 weeks) Ended
March 29,2015
March 30,2014
Net revenues $ 128,542 $ 147,406 Cost of revenues
72,005 85,120 Gross profit 56,537 62,286
Selling, general, and administrative expenses 51,306 54,346
Research and development 4,543 3,882 Restructuring expenses 1,304
1,892 Acquisition costs 79 — Other operating income (361 )
— Operating (loss) income (334 ) 2,166 Interest
income 227 267 Interest expense 938 1,256 Other gain (loss), net
371 (86 ) (Loss) earnings before income taxes
(674 ) 1,091 Income tax expense 71 1,220
Net loss $ (745 ) $ (129 )
Net loss
per common share: Basic loss per share $ (0.02 ) $ — Diluted
loss per share $ (0.02 ) $ —
Dividend declared per share $ 0.50
$ —
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 presentation of our financial results that are
prepared in accordance with GAAP. We use the Non-GAAP measures
presented to evaluate and manage our operations internally. We are
also providing this information to assist investors in performing
additional financial analysis that is consistent with financial
models developed by research analysts who follow us.
We use Adjusted EBITDA in assessing our performance in addition
to net earnings determined in accordance with GAAP. We believe this
Non-GAAP measure serves as an appropriate measure to be used in
evaluating the performance of our business and helps our investors
better compare our operating performance with the operating
performance of our competitors. We define Adjusted EBITDA as
operating income (loss) from plus Non-GAAP adjustments, plus other
gain (loss), net excluding foreign exchange gain (loss), plus
depreciation and amortization expense, plus stock compensation
expense. We reference this Non-GAAP financial measure frequently in
our decision-making because it provides supplemental information
that facilitates internal comparisons to the historical operating
performance of prior periods and external comparisons to
competitors’ historical operating performance. Adjusted EBITDA
should not be considered in isolation from, and is not intended to
represent an alternative measure of, operating results or of cash
flows from operating activities, as determined in accordance with
GAAP. Our definition of Adjusted EBITDA may not be comparable to
similarly titled measurements reported by other companies.
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) Income and Adjusted EBITDA:
March 29,2015
March 30,2014
Net revenues, as reported $ 128,542 $ 147,406
Operating (loss) income, as reported (334 ) 2,166
Non-GAAP Adjustments: Management transition expense
827 — Restructuring expenses 1,304 1,892 Acquisition costs
79 —
Adjusted Non-GAAP operating income
1,876 4,058 Other gain (loss), net (a) — 29 Depreciation and
amortization expense 6,690 6,164 Stock compensation expense
1,459 1,501
Adjusted EBITDA $
10,025 $ 11,752
GAAP operating margin
(0.3
)%
1.5
%
Adjusted Non-GAAP operating margin
1.5
%
2.8
%
(a) Represents other gain (loss), net per
the Consolidated Statement of Operations less foreign exchange gain
(loss).
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 Net (Loss) Earnings:
March 29,2015
March 30,2014
Net loss, as reported $ (745 ) $ (129 )
Non-GAAP Adjustments: Management transition expense, net of
tax 827 — Restructuring expenses, net of tax 1,077 1,418
Acquisition costs, net of tax 79 — Interest expense on financing
liability, net of tax 354 391
Adjusted net earnings $ 1,592 $ 1,680
Reported diluted shares 42,657 41,886 Adjusted
diluted shares 42,976 42,248 Reported net loss per share -
diluted $ (0.02 ) $ — Adjusted net earnings per share - diluted $
0.04 $ 0.04
Checkpoint Systems, Inc.James Lucania, 856-384-2480
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