Checkpoint Systems, Inc. Announces Fourth Quarter and Full Year 2004 R

Checkpoint Systems, Inc. Announces Fourth Quarter and Full Year 2004 Results

    Business Editors

    THOROFARE, N.J.--(BUSINESS WIRE)--March 8, 2005--Checkpoint Systems, Inc. (NYSE:CKP) today reported financial results for the fourth quarter and year ended December 26, 2004.
    The GAAP reported net loss for the fourth quarter 2004 was $29.3 million, or $0.78 per diluted share, compared to net earnings of $4.5 million, or $0.13 per diluted share, for the fourth quarter 2003. Excluding impairment and restructuring charges, net of tax, the Company's net income for the fourth quarter 2004 was $0.30 per diluted share, compared to $0.27 per diluted share in the fourth quarter 2003. (See attached table for "Reconciliation of GAAP to Non-GAAP Measures".)
    In the fourth quarter 2004, the Company recorded a non-cash impairment charge of $45.0 million net of tax, or $1.19 per diluted share, related to the impairment of goodwill, intangibles, and fixed assets in the Company's Labeling Services segment. The results for the fourth quarter 2004 also included a restructuring charge reversal of $2.0 million net of tax, or $0.05 per diluted share. The fourth quarter 2003 included restructuring and asset impairment charges of $5.8 million net of tax, or $0.14 per diluted share.
    Revenue for the fourth quarter 2004 was $216.4 million, compared to $213.9 million for the fourth quarter 2003, an increase of 1.2%. Foreign exchange had a positive impact on revenue of approximately $10.4 million, or 4.9%, in the fourth quarter 2004, as compared to the fourth quarter 2003.
    "Our fourth quarter results reflect the growth and profitability of our US security business," commented George Off, Chairman and Chief Executive Officer of Checkpoint. "We were encouraged with the results from our US electronic article surveillance (EAS) and closed circuit television (CCTV) businesses which delivered revenue growth of 21% and 6%, respectively. The strong growth in our US EAS business was driven by the ongoing rollout of our RF EAS technology with CVS/pharmacy. Our US CCTV business began facing more difficult prior year comparables, but still delivered outstanding results. However, declines in our Labeling Services segment have masked the Company's overall earnings potential. In the fourth quarter, we recorded a significant impairment charge related to our Labeling Services segment as these businesses have declined in revenue and profitability and the competitive pressures remain. Furthermore, our European businesses continue to face the challenges of operating in a soft retail economy, and recorded revenue declines of almost 13% in the quarter, on a constant Dollar basis. Although our reported net loss was $0.55 per diluted share for the full year 2004, our operating results, excluding the impairment, restructuring charges, and litigation settlement, delivered earnings of $0.93 per diluted share as compared to $0.97 in 2003." (See attached table for "Reconciliation of GAAP to Non-GAAP Measures".)

    Strategic Direction:

    Mr. Off continued, "Over the last three months, we have undertaken a strategic evaluation of our business lines and operations globally. Our goal is to significantly improve operating margins, increase shareholder value, and strengthen customer focus. As a result, we have decided to concentrate on our core businesses, exit unprofitable businesses, reconfigure our supply chain operations, and improve our sales productivity. Through these measures, we believe we can achieve operating margins of 15% by year-end 2007, which will dramatically improve our financial performance.
    Due to the success and profitability of our EAS and CCTV businesses, management has made the decision to focus on these businesses for investment and growth. Conversely, our barcode systems businesses have declined in revenue and profitability over the past few years and management has decided to exit these businesses. Our barcode systems businesses, which represent the majority of the Labeling Services segment, generated revenue of $100.6 million and approximately 27% gross profit in 2004. Excluding the benefits of foreign exchange, revenue from the barcode systems businesses declined 7.3% in 2004 compared to 2003. This decision represents the first action resulting from a comprehensive review of all of our products and operations."
    While the Company has decided to exit the barcode systems businesses, the timing or specific means of exiting these businesses have not yet been determined. Various options will continue to be analyzed and certain options may incur additional charges and costs. The Company will provide further details as the rationalization and restructuring plans become finalized.

    Financial highlights for the fourth quarter 2004:

--	Gross profit for the fourth quarter 2004 was $94.2 million, or 43.5% of revenue, compared to $92.0 million, or 43.0% of revenue, for the fourth quarter 2003. Beginning with the fourth quarter and for the full year 2004, the Company has reclassified research and development (R&D) to operating expenses and reclassified royalties relating to products from operating expenses up to cost of revenues. All prior periods have been reclassified for comparability.
--	Selling, general, and administrative expenses (SG&A) were $69.4 million, or 32.1% of revenue, for the fourth quarter 2004, compared to $69.1 million, or 32.3% of revenue, in the same period last year.
--	Research and development expenses, which are included as an operating expense, were $9.2 million, or 4.2% of revenue, in the fourth quarter 2004, compared to $5.8 million, or 2.7% of revenue, in the fourth quarter 2003.
--	Other operating expenses for the fourth quarter of year 2004 include impairment charges of $51.4 million related to the write-down of the Company's goodwill, intangibles, and fixed assets in the Labeling Services segment reduced by a reversal of $3.0 million of restructuring charges related to the 2003 and 2002 restructuring programs. Other operating expenses in 2003 consisted of $8.6 million of restructuring and impairment charges.
--	The GAAP reported operating loss was $32.8 million in the fourth quarter 2004, compared to operating income of $8.4 million, or 3.9% of revenue, in the fourth quarter 2003.
--	Operating income, excluding other operating expenses described above, was $15.7 million, or 7.2% of revenue, in fourth quarter of 2004, compared to $17.0 million, or 8.0% of revenue, in the fourth quarter of year 2003. (See attached table for "Reconciliation of GAAP to Non-GAAP Measures".) The reduction in operating margins is attributable to a 150 basis point increase in research and development expenditure in 2004.
--	Cash flow from operations for the fourth quarter 2004 was $54.4 million versus $73.3 million in the fourth quarter 2003.
--	As of December 26, 2004, cash and cash equivalents were $102.7 million, working capital was $166.9 million, and total debt was $72.8 million. Capital expenditures in the fourth quarter were $3.7 million.

    Craig Burns, Executive Vice President, Chief Financial Officer and Treasurer, commented, "In the fourth quarter, we redeemed the remaining $23.3 million of the convertible debentures. We ended the year with a strong balance sheet providing us with the financial flexibility to reduce costs and rationalize our business while at the same time investing for growth. We are also pleased to announce that on March 4, 2005 we closed on a new $150.0 million multi-currency, unsecured revolving credit facility. We borrowed $60.0 million under the new facility at closing to extinguish the remaining balance under the Senior Secured facility, which has been terminated. The terms and conditions under the new five-year facility should provide us with the financing necessary to execute our business plan."
    Mr. Off concluded, "Our goal is to significantly expand our operating margins and to focus on our growth opportunities. During 2005, we expect to take the necessary steps to position Checkpoint for long-term growth and profitability. Although we are cautious given the uncertain economic environment in Europe, which accounts for approximately 49% of our total sales, we expect revenue growth of 5% to 7% and earnings of $1.15 to $1.25 per diluted share for the full year 2005. We are also targeting free cash flow of $45 million to $55 million for the full year 2005. Since we have yet to determine the timing, method, and any associated costs regarding the exit of the barcode systems businesses, this guidance excludes any costs associated with exiting those businesses, and only assumes revenue growth on the remaining product lines. We will update guidance as the details of our rationalization and restructuring plans are finalized. Due to the timing of expenses, we expect the first quarter earnings per share will represent only approximately 10% of the full year earnings per share."

    Financial highlights for full year 2004:

    -- Reported revenue of $778.7 million, compared to $723.3 million
    in the full year 2003. Foreign exchange had a positive impact
    on revenue of approximately $42.2 million for the full year
    2004 compared to 2003.

    -- Gross profit for 2004 was $337.6 million, or 43.4% of revenue,
    compared to $310.3 million, or 42.9% in 2003.

    -- Selling, general, and administrative expenses were $253.3
    million in 2004, or 32.5% of revenue, compared to $233.1
    million, or 32.2% of revenue, in 2003. Research and
    development was $29.0 million, or 3.7% of revenue, compared to
    $15.9 million, or 2.2% of revenue, in 2003.

    -- The reported operating loss was $13.1 million for the full
    year 2004, compared to operating income of $52.7 million for
    the full year 2003. Excluding "other operating expenses"
    detailed below, operating income was $55.3 million, or 7.1% of
    revenue, compared to $61.3 million, or 8.5% of revenue, in
    2004. (See attached table for "Reconciliation of GAAP to
    Non-GAAP Measures".) The 140 basis point drop in operating
    margin in year 2004 can be attributed to the 150 basis point
    increase in research and development expenses.

    -- Included in other operating expenses and the operating loss
    for 2004 were impairment charges of $51.4 million, a charge in
    the amount of $19.95 million for the litigation settlement
    with ID Security Systems Canada Inc. (ID Systems), and a $3.0
    million restructuring charge reversal, while the prior year
    operating income included asset impairment and restructuring
    charges of $8.6 million.

    -- The GAAP reported net loss for the year 2004 was $20.2
    million, or $0.55 per diluted share, compared to a net income
    of $29.2 million, or $0.82 per fully diluted share, for the
    full year 2003. Excluding other operating expenses, as
    detailed above, net earnings were $35.8 million, or $0.93 per
    diluted share, compared to $34.9 million, or $0.97 per diluted
    share in 2003.

    Checkpoint Systems will host a conference call today, March 8, 2005, at 10 a.m. Eastern Time, to discuss its fourth quarter 2004 results. The conference call will be simultaneously broadcast live over the Internet. Listeners may access the live webcast at the Company's homepage, www.checkpointsystems.com, by clicking on the "Conference Calls" link or entering the "Investors" section of this site. Please allow 15 minutes prior to the call to visit the site and download and install any necessary audio software. The webcast will be archived at the Company's homepage beginning approximately 90 minutes after the call ends until the next quarterly conference call.

    Checkpoint Systems, Inc. is a multinational manufacturer and marketer of integrated systems solutions for retail security, labeling, and merchandising. Checkpoint is a leading provider of EAS and RFID systems, source tagging, hand-held labeling systems, retail merchandising systems, and barcode labeling systems. Applications include automatic identification, retail security and pricing, and promotional labels. Operating directly in 30 countries, Checkpoint has a global network of subsidiaries and provides professional customer service and technical support around the world. Checkpoint Systems, Inc.'s website is located at www.checkpointsystems.com.

    Safe Harbor Statement

    This press release may include information that could constitute forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. 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 those matters disclosed in the Company's Security and Exchange Commission filings.

Checkpoint Systems, Inc. Consolidated Statements of Operations (Thousands except per share amounts) (unaudited)

Quarter Ended Twelve Months Ended (13 Weeks) (52 Weeks)

Dec. 26, Dec. 28, Dec. 26, Dec. 28, 2004 2003 2004 2003 --------- --------- --------- ---------

Net revenues $216,419 $213,896 $778,679 $723,262 Cost of revenues(1) 122,170 121,938 441,079 412,951 --------- --------- --------- --------- Gross profit 94,249 91,958 337,600 310,311

Selling, general, and administrative expenses 69,404 69,141 253,345 233,133 Research and development expenses(2) 9,173 5,811 28,962 15,860 Goodwill impairments 34,696 - 34,696 - Asset impairments 16,748 1,507 16,748 1,507 Restructuring expenses (3,016) 7,125 (3,016) 7,125 Litigation settlement - - 19,950 - --------- --------- --------- --------- Operating (loss) income (32,756) 8,374 (13,085) 52,686

Interest income 387 456 1,567 1,487 Interest expense 1,413 2,473 6,980 11,076 Other gain, net 382 509 219 1,319 --------- --------- --------- --------- (Loss) earnings before income taxes and minority interest (33,400) 6,866 (18,279) 44,416

Income taxes (4,109) 2,343 1,823 15,160 Minority interest 5 29 90 103 --------- --------- --------- --------- Net (loss) earnings $(29,296) $4,494 $(20,192) $29,153 ========= ========= ========= =========

Net (loss) earnings per share: Basic $(0.78) $0.13 $(0.55) $0.88 Diluted $(0.78) $0.13 $(0.55) $0.82

Weighted average common stock outstanding 37,706 34,244 36,823 33,142 Weighted average common stock and dilutive stock outstanding 37,706(3) 40,447 36,823(4) 39,936

Footnotes:

(1) Research and development expenses have been reclassified from cost of revenues to operating expenses. Royalties relating to products have been reclassified from operating expenses to cost of revenues.

(2) Research and development expenses have been reclassified from cost of revenues to operating expenses

(3) The additional 703 common shares resulting from stock options and the assumed conversion of 1,029 common shares from the subordinated debentures are not included as they are anti-dilutive

(4) The additional 781 common shares resulting from stock options and the assumed conversion of 2,187 common shares from the subordinated debentures are not included as they are anti-dilutive

Checkpoint Systems, Inc. Summary Consolidated Balance Sheet (Thousands)

December 26, December 28, 2004 2003 ---- ---- (unaudited) (preliminary)

Cash and Cash Equivalents $102,694 $110,376 Working Capital $166,912 $ 76,890 Current Assets $400,582 $374,102 Total Debt $ 72,767 $145,791 Shareholders' Equity $378,763 $323,290 Total Assets $766,948 $773,322

    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.

    The reconciliation set forth below is provided in accordance with Regulation G and reconciles the non-GAAP financial measures with the most directly comparable GAAP financial measures.

Checkpoint Systems, Inc. Reconciliation of GAAP to Non-GAAP Financial Measures (Thousands except per share amounts) (unaudited)

Quarter Ended Twelve Months Ended (13 Weeks) (52 Weeks)

Dec. 26, Dec. 28, Dec. 26, Dec. 28, 2004 2003 2004 2003 --------- --------- --------- ---------

Reconciliation of GAAP to Non- GAAP Operating Margin:

Net revenues $216,419 $213,896 $778,679 $723,262 ========= ========= ========= =========

GAAP operating (loss) income $(32,756) $8,374 $(13,085) $52,686

Non-GAAP adjustments:

Loss from settlement of lawsuit with ID Security Systems Canada Inc. -- -- 19,950 --

Impairment charges related to the Labeling Services operating segment 51,444 -- 51,444 --

Restructuring (reversal) expense and related asset impairment charges (3,016) 8,632 (3,016) 8,632 --------- --------- --------- ---------

Adjusted Non-GAAP operating income before taxes and minority interest $15,672 $17,006 $55,293 $61,318 ========= ========= ========= =========

GAAP operating margin N/M 3.9% N/M 7.3%

Adjusted Non-GAAP operating margin 7.2% 8.0% 7.1% 8.5%

Checkpoint Systems, Inc. Reconciliation of GAAP to Non-GAAP Financial Measures continued (Thousands except per share amounts) (unaudited)

Quarter Ended Twelve Months Ended (13 Weeks) (52 Weeks)

Dec. 26, Dec. 28, Dec. 26, Dec. 28, 2004 2003 2004 2003 --------- -------- --------- --------

Reconciliation of GAAP to Non-GAAP Net Income:

Net (loss) income, as reported $(29,296) $4,494 $(20,192) $29,153

Non-GAAP adjustments:

(Gain) loss from settlement of lawsuit with ID Security Systems Canada Inc., net of tax (1,900) -- 12,968 --

Impairment charges related to the Labeling Services operating segment, net of tax 44,986 -- 44,986 --

Restructuring (reversal) expense and related asset impairment charges, net of tax (1,960) 5,783 (1,960) 5,783 --------- -------- --------- --------

Adjusted net income $11,830 $10,277 $35,802 $34,936 ========= ======== ========= ========

Reported diluted shares 37,706 40,447 36,823 39,936

Adjusted diluted shares 39,438 40,447 39,791 39,936

Reported earnings per share - diluted $(0.78) $0.13 $(0.55) $0.82

Adjusted earnings per share - diluted $0.30 $0.27 $0.93 $0.97

--30--JM/ny*

CONTACT: Company Contact: Checkpoint Systems, Inc. Craig Burns, 856-848-1800 or Investor Relations Contacts: Financial Dynamics Christine Mohrmann, Jim Olecki 212-850-5600

KEYWORD: NEW JERSEY INDUSTRY KEYWORD: HARDWARE RETAIL MANUFACTURING SOFTWARE EARNINGS CONFERENCE CALLS SOURCE: Checkpoint Systems, Inc.

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