Checkpoint Systems' CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Checkpoint Systems (CKP)

Checkpoint Systems, Inc. (NYSE:CKP)

Q4 2012 Earnings Call

March 5, 2013 08:30 am ET


George Babich – President & Chief Executive Officer

Ray Andrews – Senior Vice President & Chief Financial Officer

Annette Geraghty – Investor Relations Specialist


Chris McGinnis – Sidoti & Company

Warner Grantham – Intrepid Capital


Greetings, and welcome to the Checkpoint Systems Q4 and Full Year 2012 Conference Call. (Operator instructions.) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Annette Geraghty, Investor Relations Specialist at Checkpoint Systems. Thank you, you may begin.

Annette Geraghty

Thank you, Christine. Good morning and welcome to Checkpoint Systems Q4 and full year 2012 conference call. With me today are George Babich, President and Chief Executive Officer; and Ray Andrews, Senior Vice President and Chief Financial Officer.

If you have not yet received a copy of this morning’s earnings release it is available on our company’s website at Additionally, an archived version of this call will become available on the site after the call is completed.

I would remind you that statements made on this call reflecting our future plans and strategies are forward-looking based on current expectations and assumptions. These expectations and assumptions are subject to risks and uncertainty which could affect our future plans. Checkpoint’s actual results and the timing and occurrence of expected events could differ materially from our plans due to a number of factors such as changes in the global economy and changes in the legal environment, as well as those risk factors disclosed in the earnings release and in our filings with the Securities and Exchange Commission.

Please be aware that all information disclosed and discussed in this call is as of March 5, 2013. Checkpoint undertakes no duty to update any forward-looking statements to conform them to actual results or changes in the company’s expectations. Now I will turn the call over to George Babich.

George Babich

Thank you, Annette, and good morning and thank you for joining us today. We certainly appreciate you being with us and trust that you had an opportunity to read the Q4 earnings release that we issued earlier this morning. We have a lot to cover on the call and we will do our best to walk you through the results so that hopefully by the end you have a clear understanding of how we performed in Q4 and importantly how the operational improvements made in the second half of the year helped to put us on an improved path into 2013.

I’ll begin by touching on the decision to sell our US- and Canadian-based CheckView business, then I’ll provide an update and overview on Q4 performance, an update on our expanded global restructuring programs including Project LEAN, then a summary of what was accomplished on the various initiatives that we launched in 2012; and I’ll finish with some comments regarding our 2013 guidance. I’ll then turn the call over to Ray who will walk you through the details of the Q4 performance including our global restructuring programs, working capital initiatives and further details on our guidance for this year. Following Ray’s comments we’ll open the call up to your questions.

So first, turning to CheckView, which is comprised of the fire and burglar alarm business as well as the CCTV business that is located in the United States and Canada – last night we announced that we’ve engaged an investment banker and are in discussions with a potential buyer interested in leveraging the expertise, the customer relationships, retail monitoring center and other assets residing in CheckView. I’d like to share with you our thought process in reaching that decision.

As you know, last May we launched an extensive evaluation of the strategic fit of each Checkpoint business. At the conclusion of the review, in addition to the sweeping restructuring that we launched we refined our go-forward strategy. The result was to slightly shift our focus from a shrink management company to focus on providing retailers with solutions to improve merchandise availability in their stores. We’re doing this by leveraging our EAS business, our core EAS business and rapidly expanding RFID capabilities. At the same time we’re restructuring Apparel Labeling and enhancing our operations to embed RFID circuits into variable data labels and tags for inventory management.

In light of the refined strategy, the Board of Directors gave careful consideration to the fit of CheckView’s portfolio within the new Checkpoint. After much discussion, the Board concluded that CheckView would better serve its customers as an independent, entrepreneurial and more focused organization. The divestiture of CheckView will allow Checkpoint to focus on pursuing its redefined strategy to more rapidly increase shareholder value.

Obviously we have many customers to whom we provide all of our products and services including CheckView. We’ve been in contact with those customers to assure them that the divestiture of CheckView will enable focused attention and investment in both the CheckView business and Checkpoint’s core businesses which will in turn yield the best results for them, our customers. We will work closely with the acquirer as well as our customers to ensure a smooth transition. Checkpoint will continue to provide CheckView’s CCTV services in Asia in conjunction with our EAS systems when customers require a combination of security solutions. This will be handled through our operations in Japan.

Now I’d like to move on to the Q4 results which report US and Canadian CheckView as discontinued operations. As stated in this morning’s press release, 2012 net revenues and free cash flow exceeded the high end of our guidance provided in November and operating income was just under the high end of guidance provided since July. All three lines of businesses delivered better-than-expected revenues in Q4. The previously-announced realignment of the global sales organization increased our focus and execution and clearly contributed to a solid finish for the year and momentum entering 2013.

The 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. In addition, our commitment to better manage working capital resulted in free cash flow that significantly exceeded expectations for Q4 and the full year. Undoubtedly, the restructuring and cost savings programs initiated under our expanded global restructuring plan including Project LEAN were instrumental in improving second half results. Progress was made in each line of business as we stabilized the new organizational structure and continued to cut costs, improve execution, and increase productivity.

Turning to revenue, total Checkpoint revenue for the quarter was $200.2 million, or 11% lower than last year’s Q4. Foreign currency exchange impact to the revenue was approximately $3.6 million, so on a constant currency basis revenue was $21.3 million or 9.5% lower than last year. While all three lines of businesses were ahead of our expectations, the decline in constant currency revenue was spread across all three segments – Shrink Management Solutions was lower by 9.7%, ALS lower by 3.1% and RMS lower by 24.8%.

Clearly the economic uncertainty and soft markets, especially in Europe, present an ongoing challenge to top line growth and nearly all the Q4 year-over-year revenue decline is attributable to the European markets. However, as I said, revenue in the quarter was above our expectations and was clearly helped by the new sales compensation plans focused on EAS consumables and alpha products as well as our focused efforts to capture global opportunities in the RFID market and our merchandise visibility solutions.

Looking at revenue by business for a minute here, our Shrink Management Solutions benefited from gradual economic improvements in North America where business in general was stronger across a broad range of retailers. Our EAS system conversions and rollouts continued with major retailers in the US and also in Europe where we are executing large rollouts with major retailers in Germany and the UK.

These rollouts reflect the exceptional capabilities built into our EAS hardware systems; in particular, the fact that our technology can be readily extended to provide RFID for merchandise visibility. This kind of flexibility is a distinct advantage for Checkpoint, enabling us to offer customers different system formats depending on their need for either theft protection, inventory management, or both.

In that vein, I’m pleased to report that our merchandise visibility business also exceeded our expectations in the quarter and our list of customer engagements is growing. As you know, Checkpoint is unique in being able to offer a complete portfolio of products and services to implement RFID and our technology is tailored for retail, a market Checkpoint knows and understands having served it for over 40 years.

Merchandise visibility, comprising our RFID business, continues to gain traction with retailers worldwide. We continue to secure new tests, expand existing tests and are working to convert expanded tests into rollouts. The increased demand from retailers is driven primarily by our hardware systems, software suite, label and tag capability through ALS and our worldwide field service capability. Customers continue to express their desire to transition from RF for EAS to RFID for EAS, allowing them product protection, inventory management and improved sales through our on-shelf availability solution of products and services.

Turning to the other product lines within SMS, we clearly have a more focused effort to market our EAS consumables and alpha products. These are two highly innovative businesses where Checkpoint has historically been on the cutting edge. Over the years we have worked hand-in-hand with our customers to develop many breakthrough solutions that provide excellent protection against theft as well as providing the value-added features the customer wants.

Last quarter I mentioned that we had developed detailed plans for each of our businesses to address operating issues associated with our EAS labels and alpha products. I also mentioned that the streamlined organizational structure and new incentive compensation plans would increase the focus on these important product lines and that we expect these changes to generate gradual improvements in both EAS labels and in alpha sales beginning in Q4. I’m pleased to report that we have in fact begun to see year-over-year improvements for labels, hard tags, and alpha products in our North American markets. We believe that these initiatives will continue to drive improved results worldwide throughout 2013.

Last, I would point to increasing business with domestic retailers in Asia and Latin America which represent important growth markets for us going forward. To that end, I also mentioned last quarter that we’re sharpening our focus, increasing our R&D spending and developing new products specifically suited to local requirements. We expect there to be significant synergies with those products across China, Latin America and India in the months and years to come.

Turning now to Apparel Labeling Solutions, higher-than-expected revenue was driven by increases in open vendor nominations and from our integrated RF labels and tags. As you may recall, in ALS our redefined strategy leverages Checkpoint’s Check-Net service for integrating RF and RFID circuits into apparel labels. This service, which includes print shops throughout the world is considered one of the best in the business.

Although ALS revenue was lower than in Q4 2011 due to lower sales of woven labels in our shift to key account focus, we were encouraged by the results. They point to a more stable organization in which the service issues which caused customers to pull back early in 2012 clearly subsided by year end. We were also pleased to see that our sales with our top retailers were notably higher than in the previous Q4.

While there’s been a rationalization in our woven label business I would emphasize once again that we continue to offer apparel customers all the labeling solutions they need to effectively merchandise their products; and in the case of woven labels we do this by also partnering with qualified suppliers as necessary.

Turning to Retail and Merchandising Solutions, we were pleased to see revenue came in slightly ahead of expectations in Q4. However, with the majority of the RMS business located in the somewhat unpredictable European economy revenue growth in this line of business will continue to be challenged in 2013 despite our focus on developing new growth initiatives. In summary on the revenue, rest assured that we have developed initiatives to drive increases in revenue in each line of business. These initiatives will take more time to affect but we expect gradual improvement in our top line performance as we saw beginning in Q4.

Looking at gross profit margins from continuing operations, we were pleased to see solid results in ALS, RMS and most SMS businesses. In general, the improvement reflected stronger revenues and greater stability throughout our operations despite margins being slightly lower than last year’s Q4. The decrease in SMS margins was primarily in EAS consumables and merchandise visibility, where product mix and high margin sales in 2011 were factors during the quarter. As expected, operational improvements and the planned reduction of less profitable businesses resulted in notably improved margins in ALS.

Turning to operating expenses, operating expenses again from continuing operations decreased 14% in the quarter versus last year and 11% year-over-year. The decrease resulted from a combination of incremental savings from our restructuring programs and very, very tight expense control. Of the $9.7 million decrease in SG&A during the quarter, $7.1 million was incremental savings from the expanded global restructuring plan which included the previously disclosed SG&A restructuring plan and Project LEAN. Of the $30.7 million decrease in operating expenses for the full year, $19.9 million came from these restructuring programs.

Regarding Project LEAN, as you’ll recall this project was added last year to supplement the previously announced restructuring plans. Project LEAN responds to the company’s transformed strategy and is targeted to establish a leaner, more focused company. The vast majority of the savings in Project LEAN come from additional headcount reductions with the bulk of the reduction realized through attrition and restructuring of ALS manufacturing and a remainder due to streamlining SMS sales, customer service, and field service operations. Overall, our expanded global restructuring plans are on track to realize the full $102 million in savings in 2013.

I’d like to turn for a minute to working capital. We made excellent progress in Q4, generating $39 million in free cash flow and $49.8 million for the full year. Improvements were made in managing inventories in all three of our lines of business, accounts receivable and accounts payable that resulted in a net improvement of cash flow of $34.6 million since June. In the second half of the year we were able to continue funding our restructuring without additional borrowing and we paid down debt by $22 million.

Ray will provide greater detail on gross profit margins, operating expenses, restructuring and working capital during his comments. But before I turn it over to Ray I’d like to comment on the full year in general terms. Clearly as the year advanced and we moved into Q4, a number of the initiatives introduced during 2012 helped us to finish stronger than we began. Some of these programs are completed, some are still in progress albeit moving steadily toward completion. I’ll briefly run through the major programs to give you a sense of where they stand today and how they are benefitting our operations.

There are six major programs I’d like to discuss. First, we eliminated the customer management matrix, aligning sales by line of business. I can’t overstate the significance of doing this. It’s provided much needed focus and accountability which in turn has made us much more responsive to our customers and more efficient in handling our business. Our global sales team has clearly defined roles, they know their products, and they’re motivated to sell.

Second, at the same time we moved our leaders into roles that leveraged their considerable expertise. Our businesses are now being led by individuals whose skillsets are proven and unequivocally suited to the businesses that they run.

Third, Apparel Label Solutions – we are making excellent progress in this line of business. Manufacturing consolidation in Asia is almost complete and this was a huge undertaking; and we are rapidly optimizing certain operations, installing new state-of-the-art equipment in countries where it makes sense to invest. We expect operational stability by the middle of 2013.

Fourth, we continue to track and streamline our global operations including corporate to be in line with our new business model. A lean business requires exceptional performance from employees and we’re making sure that the experience and skills are matched to the task.

Fifth, we continue to make productivity improvements not only in manufacturing but in all areas of the business. All of us today are motivated to find ways to work more efficiently in order to be a more responsive, nimble, and cost effective organization. There is no question our employees today are energized to do what’s right and to do it well.

And finally sixth, we continue to introduce new programs to drive sales and there is greater emphasis than in the recent past on developing business in un-penetrated regions and vertical markets.

Undoubtedly, 2012 was a challenging year for all of us but today, with the hard lifting almost done, we are beginning to see real progress and 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. And throughout the organization, we 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 for years to come. Looking ahead, retailers all over the world have the same fundamental need to have available sufficient quantity and selection of merchandise to enable customers to buy what they want when they want to shop. Checkpoint’s strength lies in developing solutions for enterprise-wide applications 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 exciting customers in 2013.

With respect to our guidance for 2013, adjusting for the divestiture of CheckView and other businesses and product lines that we exited in 2012, and then normalizing the 2012 base results accordingly, our guidance remains in line with (inaudible) outlook. Revenue is projected to grow nearly 3% over the 2012 adjusted guidance and 1% over our 2012 actual results. Gross profit margins are expected to improve by approximately 290 basis points and operating expenses are projected to be lower by at least 10%.

Now I’ll turn it over to Ray to review the numbers in greater detail including our 2013 guidance, and then we’ll open the call up to your questions.

Ray Andrews

Thanks, George. We will file our Form 10(q) later today that will provide additional details beyond my comments this morning. All of my references this morning will relate to Q4 activity from continuing operations unless I state otherwise. Continuing operations exclude the results of the US- and Canada-based CheckView business. This has resulted in the reporting of reduced revenue and improved gross margin from continuing operations in both current and prior period results.

Revenues from continuing operations declined 11.1% year-over-year. Year-over-year differences in foreign currency exchange rates accounted for a 1.6% decline in revenue; organic revenue declined by 9.5%. Gross profit margins in the quarter were 39.3% compared with 41.1% last year. I’ll provide more detail as I review each segment’s results.

Shrink Management Solutions segment revenues from continuing operations declined 9.7% on a constant dollar basis. The decline was largely driven by a hard tag at source [in] European sales, EAS systems sales in all geographies, and weakness in alpha and EAS label sales in Europe and Asia-Pacific. The decline was impacted by a very strong quarter for this segment in 2011 particularly EAS systems and hard tag at source. This was partially offset by increased 2012 revenues in alpha in the US and in merchandise visibility in Europe.

Gross profit margin for the segment was 41.8% compared to 46.7% last year. The decline was primarily attributable to merchandise visibility and EAS consumables. Gross margins in 2011 benefited from a high margin [out] systems licensing agreements compared to 2012 where merchandise visibility margins returned to a more normal range. A similar trend applies to EAS consumables where gross margins in 2011 were driven by the final phase of a hard tag at source deployment in Southern Europe that would not be replicated in 2012. EAS labels gross margins were also impacted by similar year-over-year trends.

Our Apparel Labeling Solutions segment revenues showed a year-over-year decline of 3.1%. This primarily resulted from decreased sales in the US and international Americas partially offset by increases in Europe and Asia. The decline is partially attributable to actions to eliminate low margin and smaller customers and right-size our woven label capacity. We expect these programs, as well as additional actions, to reduce our apparel labeling manufacturing footprint, to continue to impact the segment’s 2013 revenues. This impact will be partially offset by revenue increases resulting from improved operational performance and the capabilities that we are retaining.

The gross profit margin for the segment was 29.4% compared to 23.7% last year. The increase was primarily due to actions to eliminate lower-margin products and customers, rationalize manufacturing capacity and improve inventory management resulting in reduced inventory reserves. These gross margin improvements (inaudible) in restructuring and cost reduction programs. The Project LEAN programs in Apparel Labeling were initiated mid-year and will continue into the first half of 2013. We expect this to result in further improvement of year-over-year margin performance as 2013 progresses.

Retail Merchandising Solutions segment revenues declined by 24.8% on a constant dollar basis due to the ongoing impact of our shifting a portion of the business from direct sales to a distributor model as well as soft market conditions in Europe which has impacted both our handheld labeling and retail display businesses. The gross profit margin for the segment was 50% for the quarter compared to 46% last year.

Moving on to selling, general and administrative expenses, expenses for the quarter were $61.4 million compared to $71.1 million last year. Foreign exchange effects reduced SG&A expenses by $3.2 million. Year-over-year cost reductions in SG&A from the advanced global restructuring programs totaled $7.1 million. The year-over-year improvements in bad debt expense offset the impact of additional payroll expense that resulted from having a 53rd week in 2012.

Now I’m going to provide an update on our restructuring program. As George noted we launched a new profit improvement plan, Project LEAN, in Q2. The expanded global restructuring plan, which includes the global restructuring plan including Project LEAN and the SG&A restructuring plan, is expected to continue to generate approximately a $102 million in savings when the plans are fully implemented in 2013. Incremental cost savings realized through Q4 were $28.6 million with $19.9 million of the savings attributable to S&A cost reduction actions. This is in addition to $17 million of savings realized in 2011 of which $15 million was attributable to SG&A. Of the expected 2013 savings in a range of $56 million, approximately 60% will apply to SG&A expense and 40% to improvements in cost of goods sold.

Restructuring expense in Q4 was $1.3 million, of which $400,000 was attributable to non-cash asset impairments. To aid the expanded global restructuring plans we recorded $66.0 million in expense including $44.8 million in severance and other employee-related charges as well as $14.3 million in non-cash asset impairments associated with facilities rationalizations and closures. These programs will impact over 2400 employees with over 1850 positions eliminated through the end of Q4 2012.

While we are firmly committed to achieving the overall $102 million savings target, the expanded global restructuring plan has a wide ranging scope and some details may change as we execute specific programs. Remember, the savings attributable to the plan is expected to cost between $70 million and $75 million.

Moving on to taxes, GAAP income taxes from continuing operations for the quarter are $8.3 million. Income taxes were effected by accounting for the impact of the valuation allowance on US deferred tax assets. The valuation allowance on US deferred tax assets results in a GAAP tax rate on US pre-tax income or losses of essentially 0%. If and when the mix of income or losses shifts from the US to a country where the income tax rate is in a normal range that in some cases approaches 30% this can have a significant impact on the amount of reported income tax expense. This effect was a key factor in generating higher-than-expected income taxes in Q4 and for the full year.

Turning to cash flow, cash flow provided by operations was $41 million in the quarter. Capital expenditures were $2 million and free cash flow is $39 million. In July we announced the implementation of a new working capital initiative that’s expected to generate $58 million to $60 million in improvements by June, 2013. The initiatives focus on improving forecasting and product management, supply chain processes to reduce inventory levels facilitated by our new business structure, improving the customer to cash process execution to improve collections and reduce accounts receivables balances, and more effective management of vendor payment terms and increased accounts payable balances from previous levels.

When compared to balances at the end of Q2 this year, inventories were reduced by $38.7 million and accounts payable increased by $12.2 million. These initiatives coupled with improved cash management and rigorous expense control determined cash sufficient to facilitate a $22.3 million debt reduction in Q3 as well as cash balances at the end of the year of $118.8 million.

We finished Q4 well within our remitted debt covenant leverage ratio with the trailing 12 months leverage ratio of adjusted EBITDA to total debt of 4.2 which is well below the 5.5 limit defined in the July, 2012, debt amendment. On October 10, we received $4.7 million in compensation from our insurance provider from the loss resulting from the fraudulent activity in our Canadian operations that was discovered in December, 2011. As this is a one-time event the recovery is eliminated from our non-GAAP operating results.

We also received a total of $3.4 million in proceeds from the sale of nonstrategic operations including the equity of our Suzhou China apparel labeling subsidiary and the October 1 sale of our Banking Security Systems Integration business. The financial results of the Banking Security Systems Integration business reported Q4 revenue of $200,000 and an operating loss of also $200,000 that are reported under discontinued operations.

Moving on to our actions to remediate for material weakness, as of December 25, 2011, company management concluded that we did not maintain effective control to prevent or detect management override of controls in foreign subsidiaries that were not integrated into our shared service environments in the US 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 the material weakness. This will be reflected in the 10(k) to be issued later today.

Now I’ll provide an update on 2013 guidance. Our 2013 outlook is based on our evaluation of country and regional market conditions derived from forecasts and supporting information gathered from our operating units around the world. Our outlook is based on an assessment of market conditions and trends and current foreign exchange rates. During 2013, events could occur to create further unpredictable changes that are not anticipated in our outlook such as changing economic conditions impacting retailer demand for our products or significant changes in exchange rates.

This guidance does not include the impact of acquisitions, divestitures, restructuring and one-time or unusual charges resulting from things like debt financing, refinancing, litigation, certain tax reserves and gains or losses generated by non-retained 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 the US pre-tax income or loss of essentially zero as I mentioned earlier. Again, if the mix of income or losses shifts from the US 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 from continuing operations are expected to be in the range of $665 million to $685 million. This represents a 0.9% year-over-year growth when comparing the $675 million midpoint of 2013 guidance to 2012 results after adjusting the 2012 base for $22 million in revenue reductions resulting from eliminating the nonstrategic products and services in our Apparel Labeling Solutions, Retail Merchandising Solutions, and library businesses. We expect that 2013 revenue growth is 2.8% when compared to the midpoint of 2012 guidance after the adjustments.

Gross profit margins are expected to be in the range of 41.8% to 42.8%. 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 the nonstrategic products and sales units in our Apparel Labeling Solutions, Retail Merchandising Solutions, and library businesses.

Operating expenses are expected to be in the range of $233 million to $243 million. When compared to the $238 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. We’ve provided tables in the earnings release that outline how these improvement numbers were calculated.

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. is expected to be in the range of $0.65 to $0.75 per share. Free cash flow, cash flow from operations less capital expenditures, is expected to be in the range of $50 million to $60 million. Capital expenditures for the year are expected to be approximately $19 million and depreciation and amortization is expected to be between $29 million and $30 million.

The company expects that increase revenue will primarily be driven by growth in the RFID or merchandise visibility business. Anticipated improvements in gross margins and operating expenses are driven by all profit improvement initiatives. I also want to note that the company expects Q1 results to follow the trend experienced in recent years where results are impacted by seasonal trends in retail purchasing activity including the impact on the Apparel Labeling business from Chinese New Year that result in lower revenue than in the other quarters of the year. Typically we report approximately 20% of annual revenue in Q1.

Gross margins are expected to be impacted by the lower top line volume in the quarter. We also expect that the expanded global restructuring plan will result in improving gross margins and operating expenses as the year progresses. Now I’ll turn the call back over to George.

George Babich

Thanks, Ray. At this point I’d like to turn the call back over to the operator, Christine, to open the call up to questions. Thank you.

Question-and-Answer Session


Thank you. We will now be conducting the question-and-answer session. (Operator instructions.) Thank you. Our first question comes from the line of Chris McGinnis with Sidoti & Company. Please proceed with your question.

Chris McGinnis – Sidoti & Company

Good morning. Congratulations on a solid end of the year. Just quickly on CheckView and maybe some timing if you can give that to us, on timing of what’s happening and how far you’re into the negotiations or the thought of selling the business.

George Babich

Yeah, we did launch this in 2012 and it went through the usual process, Chris, that you go through. And there was actually a good amount of interest and we selected one potential acquirer and gave a 30-day exclusive for them to look at the business in more detail. And so we’re in the midst of doing that as we speak; we’ll see how that plays out. Should that play out favorably then we would expect to close this in the next couple of months. If we have to go back to others then obviously it would take a little bit longer.

Chris McGinnis – Sidoti & Company

Can you, maybe just on the RFID, I know it’s I believe supposed to pick up in the back half of the year with a larger win. Can you walk through how that’s progressing and I guess how that plays into the guidance for top line growth this year?

George Babich

Yeah, the top line growth for the company remains essentially as I laid it out in July and August 2nd I guess in our earnings call, and at the end of Q3 in the beginning of November. Given this economic environment, the difficulty in predicting retailer and consumer behavior, we are essentially assuming a flat business for our legacy core businesses – the SMS, the ALS business, the RMS business – and that the growth for 2013 will be driven by the RFID business.

Obviously we have plans in place to try and grow all of our businesses and we’ll continue to strive to do that, but the progress that we’re making in RFID with the tests I would say is good and we have entered into an agreement with a European customer to begin in the middle of the year a pretty substantial rollout of hardware and tags. So I think that’s very positive, and we’re also negotiating with other customers where the tests have grown into expanded tests to look to launch some additional rollouts, another rollout during the course of this year but it’s too early in the stage of discussions with them to be able to give any more clarity as to what that might be and when that might be.

Chris McGinnis – Sidoti & Company

Just on the pilots and the move into a larger expanded pilot I guess, or program – how many do you have and can you still take more in at this point or are you kind of full?

George Babich

Well, we can take more in and this is kind of the classic funnel, right? So it’s like with R&D projects – we try to load up the tests. You never know which one of the tests with a particular retailer will resonate and at what pace that it will resonate, so we’re north of 20 tests as we speak and adding a pretty substantial one into that for 2013. So we’ve got a pretty substantial number of tests going on around the world.

The resourcing for that continues to be a challenge because there is good demand by the retailers and we have to stay one step ahead of them and anticipating what they might do, and bringing resources onboard to ensure that we’re completely and appropriately staffed for these expanded tests or rollouts. So it’s a constant balancing act. We look at it every day but we’re very encouraged that retailers are seeing the benefits that RFID can bring.

Chris McGinnis – Sidoti & Company

Thank you, I’ll jump back in the queue.


(Operator instructions.) Our next question comes from the line of Warner Grantham with Intrepid Capital. Please proceed with your question.

Warner Grantham – Intrepid Capital

Good morning. What was headcount at quarter end?

Ray Andrews

Headcount at quarter end, I don’t have the exact number on me but I think it’s approximately 5100, and that will be in the 10(k).

Warner Grantham – Intrepid Capital

Gotcha. And then there was a large increase in the accrued pension item on the balance sheet, I was just curious if there was a reason for that and then if any pension adjustments are included in restructuring expenses.

Ray Andrews

The key there is a change in the discount rate would have driven that increase in the balance. No change in any plan, and those plans are in Europe – no plans in the US.

Warner Grantham – Intrepid Capital

All [frozen C], right?

Ray Andrews


Warner Grantham – Intrepid Capital

Okay, but does any of that flow through the restructuring expenses?

Ray Andrews

No, it has not.

Warner Grantham – Intrepid Capital

Okay. And then the press release mentioned the $19.9 million in SG&A savings in 2012 on top of the $15.0 million in 2011, so there’s roughly $35.0 million over 2010 but if you look at reported SG&A it doesn’t seem to decline as much. I’m just trying to bridge the gap, if you can help me reconcile the reported savings with reported results?

Ray Andrews

I think there are other factors driving operating expenses including sales commissions, operations expense particularly what we saw here with the increased revenue we saw in Q4. So they’re key drivers in terms of the expense base.

Warner Grantham – Intrepid Capital

Okay. Do you think we could expect commissions to increase going forward? You mentioned the new sales initiatives or aligning employees on the new sales targets.

Ray Andrews

We’ve taken a look at our overall compensation packages and are thinking through what we’ll do for this year, and we’ve taken a step to more closely align them with the market. And our belief is overall that will be neutral to an improvement.

Warner Grantham – Intrepid Capital

Okay. And have you thought about including any data for investors on the merchandise visibility sales or RFID in the future? It seems like that’s kind of where your emphasis has moved to, and other than the cost savings that might be a point investors can track over time to see how sales are growing.

George Babich

This is George. We haven’t obviously disclosed it. It’s still a relatively new business for us. It is doubling in size year-over-year and I think at some point in time we’ve got to just give some thought to when we do that, because as you said it is strategic for us. But at this point it’s still a little early in the game.

Warner Grantham – Intrepid Capital

Alright, and last one if you don’t mind – the call this morning began at 8:30 which I believe is a little earlier than it has historically. And then I guess the press release was put out an hour before – I was just curious if there wasn’t a reason for that is it possible to provide investors with more time to digest results before future calls?

George Babich

Yeah, that’s a good point, it’s a fair point. We wanted to move the call up to 8:30 to get information to investors before the markets opened. We could get the press release out earlier, it’s a fair point.

Warner Grantham – Intrepid Capital

Is there, I mean you put out the CheckView press release after close yesterday. Were you not allowed to put out the, is that the reason the earnings report wasn’t released at the same time?

George Babich

Well, we put out the, we announced that the earnings release would go out at 7:30 today and we wanted to stick with that. We made a decision to put out a pre-release on CheckView only so that we could have a discussion with the employees and customers before they read about it in a 7:30 earnings release this morning. So we separated it for that reason. We could get the earnings release out earlier, fair point.

Warner Grantham – Intrepid Capital

Okay, thanks for taking my questions. That’s all.


Mr. Babich, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

George Babich

Okay, thanks Christine. In closing, I trust that you saw the appointment of our new Board member Marc Giles that we announced yesterday. Marc’s experience in leading industrial technology businesses particularly through turnaround situations I believe will be very valuable as Checkpoint secures its future as a new lean organization dedicated to advancing technological innovation for our customers.

I’d also like to thank the entire Checkpoint team for continuing to work with remarkable determination to complete the turnaround and get Checkpoint back on a growth trajectory. Adjusting to the scale of the changes that have taken place over the past ten months has required a mix of courage, focus, imagination and many, many, many, many long days. I commend our employees for taking on the extra responsibility and for adapting to the changes.

Finally, I’m delighted to have been asked by our Board of Directors to be Checkpoint’s permanent CEO. It’s an honor to have the opportunity to lead this company. And while we have much left to do we are gaining traction and we have a solid start to the year, and I’m excited about the prospects going forward. So thank you for participating and I look forward to speaking with you again next quarter. Have a great day and goodbye.

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