Checkpoint Systems (CKP) Updates on SG&A, Restructuring Plan; Cuts Q3, FY11 Outlook
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Checkpoint Systems, Inc. (NYSE: CKP) today announced that it is providing details of an expanded global SG&A and manufacturing restructuring plan, updating financial guidance for the full year 2011 and providing financial guidance for the third quarter 2011.
Rob van der Merwe, Chairman, President and Chief Executive Officer of Checkpoint Systems, said, “Commencing in the third quarter we started to experience significant changes in retailer behavior most notably in Europe. In some cases, large retailers abruptly stopped their automatic ordering processes from their suppliers and in other cases, held back on placing orders pending the reduction in new material input costs, such as cotton. The ongoing global economic uncertainty combined with unpredictable retailer behavior has convinced us that a conservative view of the market is required and that the Company needs to be immediately restructured to meet that view.
“As a result, we are revising our guidance for the balance of the year and embarking on an expanded and more wide-reaching global restructuring plan designed to reduce costs by approximately $58 million annually.”
The Company is announcing an immediate expansion of its previous SG&A restructuring plan to include manufacturing and other cost reduction initiatives. This expanded global plan will impact over 1,000 existing employees compared to 204 contemplated in the original plan. The Company has already taken steps to eliminate three senior executive positions and will continue to aggressively take out layers of management. Included in this expanded plan is the incremental closing of four production facilities and the shifting of eight countries to an indirect sales model, all of which supplements the consolidation of back office and administrative functions that was scheduled in the original plan. The expanded plan is projected to result in cost savings in 2012 of approximately $49 million compared to $20 million to $25 million in the original plan, with an annualized run rate of approximately $58 million by 2013. In 2013, SG&A will receive approximately 60 percent of the run rate savings and the balance will improve cost of revenues. The expanded plan is expected to cost $54 million, of which $16 million is non-cash.
In addition, the second phase of the ERP system implementation in Europe will be postponed to 2013 to reduce cost and redirect resources to more immediate priorities.
Guidance:
For the full year 2011, the Company expects net revenues to be in the range of $860 million to $880 million, versus $927.61 million on the Street. Non-GAAP diluted net earnings per share attributable to Checkpoint Systems, Inc. are expected to be in the range of $0.32 to $0.43, versus the $1.27 consensus view. Non-GAAP operating income margin is expected to be in the range of 3.7% to 4.4%. An annualized tax rate is expected to be in the range of 47% to 50%. Negative free cash flow is expected to be in the range of $10 million to $20 million. Included in this guidance is a valuation allowance that is expected to effect net earnings per share by approximately $0.25. This valuation allowance on US deferred tax assets, which impacted the above tax rate range, is the result of the recent weakening of Checkpoint’s global financial performance. GAAP earnings will be effected by approximately $48 million, or $1.18 per share.
The Company expects third quarter 2011 net revenues to be approximately $218 million, versus $244.55 million sought by the Street. Non-GAAP diluted net earnings per share attributable to Checkpoint Systems, Inc. are expected to be approximately $0.28 pending finalization of the income tax calculation. The Street was looking for EPS of $0.49. In the quarter, the impact of the valuation allowance on non-GAAP year-to-date income taxes is expected to result in a tax benefit that will be offset in the fourth quarter. This has been reflected in the full year guidance.
Rob van der Merwe, Chairman, President and Chief Executive Officer of Checkpoint Systems, said, “Commencing in the third quarter we started to experience significant changes in retailer behavior most notably in Europe. In some cases, large retailers abruptly stopped their automatic ordering processes from their suppliers and in other cases, held back on placing orders pending the reduction in new material input costs, such as cotton. The ongoing global economic uncertainty combined with unpredictable retailer behavior has convinced us that a conservative view of the market is required and that the Company needs to be immediately restructured to meet that view.
“As a result, we are revising our guidance for the balance of the year and embarking on an expanded and more wide-reaching global restructuring plan designed to reduce costs by approximately $58 million annually.”
The Company is announcing an immediate expansion of its previous SG&A restructuring plan to include manufacturing and other cost reduction initiatives. This expanded global plan will impact over 1,000 existing employees compared to 204 contemplated in the original plan. The Company has already taken steps to eliminate three senior executive positions and will continue to aggressively take out layers of management. Included in this expanded plan is the incremental closing of four production facilities and the shifting of eight countries to an indirect sales model, all of which supplements the consolidation of back office and administrative functions that was scheduled in the original plan. The expanded plan is projected to result in cost savings in 2012 of approximately $49 million compared to $20 million to $25 million in the original plan, with an annualized run rate of approximately $58 million by 2013. In 2013, SG&A will receive approximately 60 percent of the run rate savings and the balance will improve cost of revenues. The expanded plan is expected to cost $54 million, of which $16 million is non-cash.
In addition, the second phase of the ERP system implementation in Europe will be postponed to 2013 to reduce cost and redirect resources to more immediate priorities.
Guidance:
For the full year 2011, the Company expects net revenues to be in the range of $860 million to $880 million, versus $927.61 million on the Street. Non-GAAP diluted net earnings per share attributable to Checkpoint Systems, Inc. are expected to be in the range of $0.32 to $0.43, versus the $1.27 consensus view. Non-GAAP operating income margin is expected to be in the range of 3.7% to 4.4%. An annualized tax rate is expected to be in the range of 47% to 50%. Negative free cash flow is expected to be in the range of $10 million to $20 million. Included in this guidance is a valuation allowance that is expected to effect net earnings per share by approximately $0.25. This valuation allowance on US deferred tax assets, which impacted the above tax rate range, is the result of the recent weakening of Checkpoint’s global financial performance. GAAP earnings will be effected by approximately $48 million, or $1.18 per share.
The Company expects third quarter 2011 net revenues to be approximately $218 million, versus $244.55 million sought by the Street. Non-GAAP diluted net earnings per share attributable to Checkpoint Systems, Inc. are expected to be approximately $0.28 pending finalization of the income tax calculation. The Street was looking for EPS of $0.49. In the quarter, the impact of the valuation allowance on non-GAAP year-to-date income taxes is expected to result in a tax benefit that will be offset in the fourth quarter. This has been reflected in the full year guidance.
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