Checkpoint Systems Inc - Quarterly Report (10-Q)

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 1-11257

CHECKPOINT SYSTEMS, INC.

(Exact name of Registrant as specified in its Articles of Incorporation)


Pennsylvania		22-1895850


(State of Incorporation)		(IRS Employer Identification No.)

101 Wolf Drive, PO Box 188, Thorofare, New Jersey		08086


(Address of principal executive offices)		(Zip Code)

856-848-1800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of November 2, 2007, there were 39,743,126 shares of the Company’s Common Stock outstanding.

CHECKPOINT SYSTEMS, INC.
FORM 10-Q
Table of Contents


	Page
PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets		3
Consolidated Statements of Operations		4
Consolidated Statements of Shareholders’ Equity		5
Consolidated Statements of Comprehensive Income		6
Consolidated Statements of Cash Flows		7
Notes to Condensed Consolidated Financial Statements		8–16

Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations		17-27

Item 3. Quantitative and Qualitative Disclosure about Market Risk		27

Item 4. Controls and Procedures		27-28

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		28

Item 1A. Risk Factors		28

Item 6. Exhibits		29

SIGNATURES		30

INDEX TO EXHIBITS		31
Rule 13a-14(a)/15d-14(a) Certification of George W. Off
Rule 13a-14(a)/15d-14(a) Certification of W. Craig Burns
Certification pursuant to 18 U.S.C. Section 1350

CHECKPOINT SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(dollar amounts in thousands)


	September 30,			December 31,
	2007			2006*
*ASSETS*
CURRENT ASSETS:
Cash and cash equivalents	$	170,976		$	143,394
Restricted cash		—			2,121
Marketable securities		568			—
Accounts receivable, net of allowance of $13,429 and $12,417		174,521			160,463
Inventories		102,599			94,562
Other current assets		64,723			36,199
Deferred income taxes		9,080			10,858

Total Current Assets		522,467			447,597

REVENUE EQUIPMENT ON OPERATING LEASE, net		4,392			4,325
PROPERTY, PLANT, AND EQUIPMENT, net		70,212			67,717
GOODWILL		203,557			187,288
OTHER INTANGIBLES, net		35,999			33,143
DEFERRED INCOME TAXES		31,896			31,416
OTHER ASSETS		8,830			9,705

TOTAL ASSETS	$	877,353		$	781,191

*LIABILITIES AND STOCKHOLDERS’ EQUITY*
CURRENT LIABILITIES:
Short-term borrowings and current portion of long term debt	$	583		$	6,810
Accounts payable		54,739			49,521
Accrued compensation and related taxes		30,064			27,712
Other accrued expenses		37,312			33,557
Income taxes		11,844			27,811
Unearned revenues		31,833			21,634
Restructuring reserve		3,517			6,786
Accrued pensions — current		4,030			3,730
Other current liabilities		16,752			16,012

Total Current Liabilities		190,674			193,573

LONG-TERM DEBT, LESS CURRENT MATURITIES		15,904			9,724
ACCRUED PENSIONS		88,669			82,602
OTHER LONG-TERM LIABILITIES		18,224			4,125
DEFERRED INCOME TAXES		17,229			16,630
MINORITY INTEREST		860			956
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, issued 41,773,468 and 41,315,581		4,177			4,131
Additional capital		358,646			345,206
Retained earnings		179,350			146,658
Common stock in treasury, at cost, 2,035,912 shares		(20,621	)		(20,621	)
Accumulated other comprehensive income (loss)		24,241			(1,793	)

TOTAL STOCKHOLDERS’ EQUITY		545,793			473,581

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	877,353		$	781,191


*		Derived from the Company’s audited consolidated financial statements at December 31, 2006.

See accompanying notes to the condensed consolidated financial statements.

CHECKPOINT SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(dollar amounts in thousands, except per share data)


	Quarter						Nine Months
	(13 weeks) Ended						(39 weeks) Ended
	September 30,			September 24,			September 30,			September 24,
	2007			2006			2007			2006
Net revenues	$	204,589		$	167,622		$	571,493		$	471,478
Cost of revenues		118,941			96,026			332,571			273,878


Gross profit		85,648			71,596			238,922			197,600
Selling, general, and administrative expenses		62,091			54,373			181,839			163,595
Research and development		5,128			5,057			13,176			14,425
Restructuring expense		31			1,612			685			2,468
Litigation settlement		—			—			—			2,251


Operating income		18,398			10,554			43,222			14,861
Interest income		1,688			1,264			4,080			3,538
Interest expense		367			449			968			1,418
Other gain (loss), net		66			300			(327	)		716


Earnings before income taxes and minority interest		19,785			11,669			46,007			17,697
Income taxes expense (benefit)		5,484			(127	)		12,229			1,266

Minority interest		(46	)		84			(109	)		15


Earnings from continuing operations		14,347			11,712			33,887			16,416
(Loss) earnings from discontinued operations, net of tax		(9	)		(12	)		514			1,506


Net earnings	$	14,338		$	11,700		$	34,401		$	17,922


Basic earnings per share:
Earnings from continuing operations	$	.36		$	.30		$	.85		$	.42
Earnings from discontinued operations, net of tax		—			—			.01			.04


Basic earnings per share	$	.36		$	.30		$	.86		$	.46


Diluted earnings per share:
Earnings from continuing operations	$	.35		$	.29		$	.84		$	.41
Earnings from discontinued operations, net of tax		—			—			.01			.03


Diluted earnings per share	$	.35		$	.29		$	.85		$	.44

See accompanying notes to the condensed consolidated financial statements.

CHECKPOINT SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(amounts in thousands)


															Accumulated
															Other			Total
	Common Stock				Additional		Retained			Treasury Stock					Comprehensive			Stockholders’
	Shares		Amount		Capital		Earnings			Shares		Amount			Income (Loss)			Equity
Balance, December 31, 2006		41,315	$	4,131	$	345,206	$	146,658			2,036	$	(20,621	)	$	(1,793	)	$	473,581
Net earnings								34,401											34,401
Exercise of stock-based compensation		458		46		6,687													6,733
Tax benefit on stock-based compensation						640													640
Stock-based compensation expense						5,035													5,035
Deferred compensation plan						1,078													1,078
Cumulative impact of change in accounting for uncertainties in income taxes (FIN 48 — see note 2)								(1,709	)										(1,709	)
Amortization of pension plan actuarial losses, net of tax																291			291
Unrealized gain adjustment on marketable securities, net of tax																152			152
Foreign currency translation adjustment																25,591			25,591


Balance, September 30, 2007		41,773	$	4,177	$	358,646	$	179,350			2,036	$	(20,621	)	$	24,241		$	545,793

See accompanying notes to the condensed consolidated financial statements.

CHECKPOINT SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(dollar amounts in thousands)


	Quarter				Nine Months
	(13 weeks) Ended				(39 weeks) Ended
	September 30,		September 24,		September 30,		September 24,
	2007		2006		2007		2006
Net earnings	$	14,338	$	11,700	$	34,401	$	17,922
Amortization of pension plan actuarial losses, net of tax		97		—		291		—
Unrealized gain adjustment on marketable securities, net of tax		152		—		152		—
Foreign currency translation adjustment		16,602		5,882		25,591		16,987


Comprehensive income	$	31,189	$	17,582	$	60,435	$	34,909

See accompanying notes to the condensed consolidated financial statements.

CHECKPOINT SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(dollar amounts in thousands)


	September 30,			September 24,
Nine Months Ended (39 Weeks)	2007			2006
Cash flows from operating activities:
Net earnings	$	34,401		$	17,922
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization		13,586			14,183
Deferred taxes		(43	)		(199	)
Stock-based compensation		5,035			4,577
Provision for losses on accounts receivable		1,846			1,599
Excess tax benefit on stock compensation		(599	)		(1,313	)
Gain on sale of discontinued operations		(514	)		(1,299	)
(Gain)/loss on disposal of fixed assets		(483	)		4
(Increase) decrease in current assets, net of the effects of acquired companies:
Accounts receivable		(6,179	)		(594	)
Inventories		(3,575	)		(18,101	)
Other current assets		(25,561	)		11,068
Increase (decrease) in current liabilities, net of the effects of acquired companies:
Accounts payable		2,391			(15,526	)
Income taxes		404			(5,375	)
Unearned revenues		7,905			(3,539	)
Restructuring reserve		(3,505	)		(8,887	)
Other current and accrued liabilities		3,690			(9,269	)


Net cash provided by (used in) operating activities		28,799			(14,749	)


Cash flows from investing activities:
Acquisition of property, plant, and equipment		(9,518	)		(8,311	)
Acquisitions, net of cash acquired		(6,700	)		—
Net cash (outflows)/proceeds from the sale of discontinued operations		(1,451	)		31,859
Decrease in restricted cash		2,121			—
Other investing activities		1,136			174


Net cash (used in) provided by investing activities		(14,412	)		23,722


Cash flows from financing activities:
Proceeds from stock issuances upon exercise		6,772			8,397
Excess tax benefit on stock compensation		599			1,313
Proceeds from short-term debt		2,899			11,597
Payment of short-term debt		(8,848	)		(10,217	)
Proceeds from long-term debt		5,967			—
Payment of long-term debt		(614	)		(15,281	)


Net cash provided by (used in) financing activities		6,775			(4,191	)


Effect of foreign currency rate fluctuations on cash and cash equivalents		6,420			3,426


Net increase in cash and cash equivalents		27,582			8,208
Cash and cash equivalents:
Beginning of period		143,394			113,223

End of period	$	170,976		$	121,431

See accompanying notes to condensed consolidated financial statements.

CHECKPOINT SYSTEMS, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. BASIS OF ACCOUNTING

The consolidated financial statements include the accounts of Checkpoint Systems, Inc. and its majority-owned subsidiaries (Company). All inter-company transactions are eliminated in consolidation. The consolidated financial statements and related notes are unaudited and do not contain all disclosures required by generally accepted accounting principles in annual financial statements. Refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 for the most recent disclosure of the Company’s accounting policies.

The consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to state fairly our financial position at September 30, 2007 and December 31, 2006 and our results of operations for the thirteen and thirty-nine weeks ended September 30, 2007 and September 24, 2006 and cash flows for the thirty-nine week periods ended September 30, 2007 and September 24, 2006. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

Certain reclassifications have been made to the 2006 financial statements and related footnotes to conform to the current year presentation.

Restricted Cash

During the third quarter of 2007, the Company was released from restriction on the cash received from the divestiture of our barcode businesses and the U.S. hand-held labeling and Turn-O-Matic ^® businesses. The cash was released from restriction upon the finalization of working capital adjustments related to the divestiture.

Marketable Securities

At September 30, 2007, the Company has $0.6 million in marketable securities related to common stock received from a customer bankruptcy settlement. Short-term investments classified as available-for-sale securities are recorded at market value using the specific identification method with the unrealized gains and losses reflected in accumulated other comprehensive income until realized.

Warranty Reserves

We provide product warranties for our various products. These warranties vary in length depending on product and geographical region. We establish our warranty reserves based on historical data of warranty transactions.

The following table sets forth the movement in the warranty reserve:


	September 30,
*(dollar amounts in thousands)*	2007
Balance at beginning of fiscal year	$	5,499
Accruals for warranties issued		5,110
Settlement made		(4,417	)
Foreign currency translation adjustment		336


Balance at end of period	$	6,528

New Accounting Pronouncements and Other Standards

We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, on January 1, 2007. As a result of adoption, we recognized a charge of approximately $1.7 million to the January 1, 2007 retained earnings balance. Additionally, we reclassified $13.9 million of the unrecognized tax benefits, and interest and penalties from income taxes to other long-term liabilities on our consolidated balance sheet. As of the adoption date, we had $10.6 million of unrecognized tax benefits, all of which would affect our effective tax rate if recognized. Also as of the adoption date, we had accrued interest expense and penalties related to the unrecognized tax benefits of $3.8 million and $0.3 million respectively.

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements”. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating the impact of adopting FAS 157 on our financial statements.

In February 2007, FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 is effective for fiscal years after November 15, 2007. We are currently evaluating the impact of adopting FAS 159 on our financial statements.

Note 2. INCOME TAXES

We conduct business globally and, as a result, Checkpoint Systems, Inc. or one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as France, Germany, Hong Kong, Japan, Netherlands, Puerto Rico, Spain, and the United States. The Company has completed examinations through 2003 for U.S. Federal income taxes and with a few exceptions, income tax in jurisdictions other than the U.S. through 2001.

We are currently under audit in the following jurisdictions: Australia 1997-2003, Netherlands 2003-2004, and the United Kingdom 2001 and 2003. It is likely that the examination phase of the Australian audit will conclude in 2007 and will result in a settlement. It is not possible to quantify an estimated range of the expected settlement of issues at this time.

Note 3. STOCK-BASED COMPENSATION

Stock-based compensation cost recognized in operating results (included in selling, general, and administrative expenses) under SFAS No. 123R for the three and nine months ended September 30, 2007 was $1.9 million and $5.0 million ($1.4 million and $3.7 million, net of tax) or $.03 per diluted share and $.09 per diluted share. For the three and nine months ended September 24, 2006, the total compensation expense was $1.7 million and $4.6 million ($1.3 million and $3.4 million, net of tax) or $.03 per diluted share and $.08 per diluted share. The associated actual tax benefit realized for the tax deduction from option exercises of share-based payment units equaled $1.0 million and $1.5 million for the nine months ended September 30, 2007 and September 24, 2006, respectively.

Stock Options

Option activity under the principal option plans as of September 30, 2007 and changes during the nine months ended September 30, 2007 were as follows:


						Weighted
						Average
				Weighted-		Remaining		Aggregate
				Average		Contractual		Intrinsic
				Exercise		Term		Value
	Shares			Price		(in years)		(in thousands)
Outstanding at December 31, 2006		3,154,517		$	16.28		6.03	$	15,274
Granted		241,526			23.74
Exercised		(362,189	)		16.52
Forfeited or expired		(168,592	)		25.57


Outstanding at September 30, 2007		2,865,262		$	16.34		6.32	$	30,547


Vested and expected to vest at September 30, 2007		2,754,715		$	16.03		6.22	$	30,159


Exercisable at September 30, 2007		2,316,869		$	14.65		5.76	$	28,365

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter of fiscal 2007 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2007. This amount changes

based on the fair market value of the Company’s stock. Total intrinsic value of options exercised for the nine months ended September 30, 2007 was $2.8 million.

As of September 30, 2007, $2.8 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 1.9 years.

The fair value of share-based payment units was estimated using the Black-Scholes option pricing model. The table below presents the weighted average expected life in years. The expected life computation is based on historical exercise patterns and post-vesting termination behavior. Volatility is determined using changes in historical stock prices. The interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

The following assumptions and weighted average fair values were as follows:


	September 30,			September 24,
Nine months ended	2007			2006
Weighted average fair value of grants	$	8.90		$	11.59
Valuation assumptions:
Expected dividend yield		0.00	%		0.00	%
Expected volatility		36.56	%		41.64	%
Expected life (in years)		4.56			4.54
Risk-free interest rate		4.557	%		4.55 — 5.07	%

Restricted Stock Units

Nonvested service based restricted stock units as of September 30, 2007 and changes during the nine months ended September 30, 2007 were as follows:


				Weighted-
	Number of			Average Vest		Weighted-
	Shares			Date		Average Grant
	(in thousands)			(in years)		Date Fair Value
Nonvested at December 31, 2006		197,672			1.37	$	26.24
Granted		158,812				$	24.68
Vested		(29,637	)			$	28.65
Forfeited		(7,084	)			$	28.40


Nonvested at September 30, 2007		319,763			1.46	$	25.20


Vested and expected to vest at September 30, 2007		203,974			1.34


Vested at September 30, 2007		70,084			—

As of September 30, 2007, there was $4.1 million unrecognized stock-based compensation expense related to nonvested restricted stock units. That cost is expected to be recognized over a weighted-average period of 2.6 years. The total conversion value of released restricted stock units for the nine months ended September 30, 2007 was $0.6 million.

Note 4. INVENTORIES

Inventories consist of the following:

(dollar amounts in thousands)


	September 30,		December 31,
	2007		2006
Raw materials	$	13,468	$	14,420
Work-in-process		5,367		4,467
Finished goods		83,764		75,675


Total	$	102,599	$	94,562

Note 5. GOODWILL AND OTHER INTANGIBLE ASSETS

We had intangible assets with a net book value of $36.0 million and $33.1 million as of September 30, 2007 and December 31, 2006, respectively.

The following table reflects the components of intangible assets as of September 30, 2007 and December 31, 2006:

(dollar amounts in thousands)


			September 30, 2007				December 31, 2006
	Amortizable				Gross				Gross
	Life		Carrying		Accumulated		Carrying		Accumulated
	(years)		Amount		Amortization		Amount		Amortization
Customer lists		20	$	37,482	$	24,675	$	32,583	$	22,116
Trade name		30		30,765		15,087		28,625		13,587
Patents, license agreements		5 to 14		42,799		36,400		40,060		32,761
Other		3 to 6		2,026		911		921		582


Total			$	113,072	$	77,073	$	102,189	$	69,046

Estimated amortization expense for each of the five succeeding years is anticipated to be:

(dollar amounts in thousands)


2007	$	4,048
2008	$	3,993
2009	$	3,613
2010	$	3,117
2011	$	2,774

The changes in the carrying amount of goodwill for the nine months ended September 30, 2007, are as follows:

(dollar amounts in thousands)


			Labeling			Retail
	Security		Services			Merchandising		Total
Balance as of December 31, 2006	$	110,731	$	6,378		$	70,179	$	187,288
Additions during the year		5,355		161			—		5,516
Purchase accounting adjustment		—		(2,900	)		—		(2,900	)
Translation adjustment		7,832		101			5,720		13,653


Balance as of September 30, 2007	$	123,918	$	3,740		$	75,899	$	203,557

In January 2007, the Company purchased the business of Security Systems Technology, Inc., a privately held company, for $0.8 million plus $0.2 million of liabilities acquired. The transaction was paid in cash. The financial statements reflect the preliminary allocations of the purchase price based on estimated fair values at the date of acquisition. This allocation has resulted in acquired goodwill of $0.9 million, which is deductible for tax purposes. The allocation of the purchase price is expected to be completed during the year 2007. The results from the acquisition date through September 30, 2007 are included in the Security segment and were not material to the consolidated financial statements.

In May 2007, the Company purchased the business of SSE Southeast, LLC, for $5.1 million plus $0.8 million of liabilities acquired. The transaction was paid in cash. The financial statements reflect the preliminary allocations of the purchase price based on estimated fair values at the date of acquisition. This allocation has resulted in acquired goodwill of $4.4 million, which is deductible for tax purposes. The allocation of the purchase price is expected to be completed during the year 2007. The results from the acquisition date through September 30, 2007 are included in the Security segment and were not material to the consolidated financial statements.

In the third quarter of 2007, we decreased goodwill $2.9 million due to purchase accounting adjustments. These adjustments increased the fair value of intangible assets acquired in our ADS acquisition from November 2006. As a result, our intangible assets increased $1.9 million and $1.0 million related to customer lists and software, respectively. Additionally, we recorded an adjustment for amortization of $0.5 million in the third quarter 2007 related to these intangibles. During the fourth quarter 2007, we will complete the final purchase accounting adjustments for our ADS acquisition. These adjustments are primarily related to acquired fixed assets.

Pursuant to SFAS 142 “Goodwill and Other Intangible Assets”, we will perform our annual assessment of goodwill by comparing each individual reporting unit’s carrying amount of net assets, including goodwill, to their fair value during the fourth quarter of each fiscal year or earlier if there are indicators of impairment. Future annual assessments could result in impairment charges, which would be accounted for as an operating expense.

Note 6. LONG-TERM DEBT

Long-term debt at September 30, 2007 and December 31, 2006 consisted of the following:

(dollar amounts in thousands)


	September 30,		December 31,
	2007		2006
Senior unsecured credit facility:
$150 million variable interest rate revolving credit facility maturing in 2010	$	15,490	$	9,067
€ 2.7 million capital lease maturing in 2007		128		469
Other capital leases with maturities through 2010		869		1,186


Total		16,487		10,722
Less current portion		583		998


Total long-term portion	$	15,904	$	9,724

During the first quarter of 2007, the senior unsecured revolving credit facility increased by $6.0 million. The proceeds from these borrowings were used to repay the borrowings under our Japanese short-term line of credit.

At December 31, 2006, the Company had a full recourse factoring arrangement with Mitsubishi UFJ Factoring Co., Ltd., in which the arrangements were secured by trade receivables. As of December 31, 2006, the face amount of receivables sold and not yet collected were $0.8 million. During the first quarter of 2007, the remaining full recourse factoring liability was paid in full.

The Senior unsecured credit facility contains certain covenants that include requirements for a maximum ratio of debt to EBITDA, a maximum ratio of interest to EBITDA, and a maximum threshold for capital expenditures. As of September 30, 2007, we were in compliance with all covenants.

Note 7. PER SHARE DATA

The following data shows the amounts used in computing earnings per share and the effect on net earnings from continuing operations and the weighted average number of shares of dilutive potential common stock:

(amounts in thousands, except per share data)


	Quarter				Nine Months
	(13 weeks) Ended				(39 weeks) Ended
	Sept. 30,		Sept. 24,		Sept. 30,		Sept. 24,
	2007		2006		2007		2006
Earnings available to common stockholders:
Earnings available to common stockholders from continuing operations	$	14,347	$	11,712	$	33,887	$	16,416


Shares:
Weighted average number of common shares outstanding		39,667		39,247		39,485		39,090
Shares issuable under deferred compensation arrangements		319		255		306		230


Basic weighted average number of common shares outstanding		39,986		39,502		39,791		39,320
Common shares assumed upon exercise of stock options and awards		976		562		834		955
Shares issuable under deferred compensation arrangements		11		16		13		18


Dilutive weighted average number of common shares outstanding		40,973		40,080		40,638		40,293


Basic earnings per share:
Earnings from continuing operations	$	.36	$	.30	$	.85	$	.42
Earnings from discontinued operations, net of tax		—		—		.01		.04


Basic earnings per share	$	.36	$	.30	$	.86	$	.46


Diluted earnings per share:
Earnings from continuing operations	$	.35	$	.29	$	.84	$	.41
Earnings from discontinued operations, net of tax		—		—		.01		.03


Diluted earnings per share	$	.35	$	.29	$	.85	$	.44

The Long-term Incentive Plan restricted stock units have been excluded due to the performance of vesting criteria not being met. Anti-dilutive potential common shares are not included in our earnings per share calculation. The number of anti-dilutive common share equivalents was as follows:

(share amounts in thousands)

Quarter

Nine Months

(13 weeks) Ended

(39 weeks) Ended

Sept. 30,

Sept. 24,

Sept. 30,

Sept. 24,

2007

2006

2007

2006

Weighted average common share equivalents associated with anti-dilutive stock options and restricted stock units excluded from the computation of diluted EPS:

486

1,484

534

847

Note 8. DISCONTINUED OPERATIONS

On January 30, 2006 the Company completed the sale of its global barcode businesses included in our Labeling Services Segment, and the U.S. hand-held labeling and Turn-O-Matic ^® businesses included in the Retail Merchandising Segment for cash proceeds of $37 million, plus the assumption of $5 million in liabilities. The Company recorded a pre-tax gain of $2.8 million ($1.4 million, net of tax), included in discontinued operations, net of tax in the consolidated statement of operations. The post closing adjustments have been finalized and an additional gain of $0.5 million, net of tax, was recorded in discontinued operations during the second quarter of 2007.

The Company’s discontinued operations reflect the operating results for the disposal group through the date of disposition. The results for the thirteen and thirty-nine weeks ended September 30, 2007 and September 24, 2006 have been reclassified to show the results of operations for the barcode labeling systems and U.S. hand-held labeling and Turn-O-Matic ^® businesses as discontinued operations. Below is a summary of these results:

(dollar amounts in thousands)


	Quarter						Nine Months
	(13 weeks) Ended						(39 weeks) Ended
	Sept. 30,			Sept. 24,			Sept. 30,		Sept. 24,
	2007			2006			2007		2006
Net revenue	$	—		$	132		$	—	$	7,672

Gross profit		—			(4	)		—		1,639
Research and development		—			—			—		—
Selling, general, & administrative expense		—			18			—		1,369
Goodwill impairment		—			—			—		—


Operating (loss) income		—			(22	)		—		270
(Loss) gain on disposal		(9	)		—			787		2,756


(Loss) earnings from discontinued operations before income taxes		(9	)		(22	)		787		3,026
Income taxes		—			(10	)		273		1,520


(Loss) earnings from discontinued operations, net of tax	$	(9	)	$	(12	)	$	514	$	1,506

Note 9. SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments for interest and income taxes for the thirty-nine week periods ended September 30, 2007 and September 24, 2006 were as follows:

(amounts in thousands)


	Nine Months
	(39 weeks) Ended
	Sept. 30,		Sept. 24,
	2007		2006
Interest	$	819	$	1,272
Income tax payments	$	8,741	$	8,235

Note 10. PROVISION FOR RESTRUCTURING

2005 Restructuring Plan

In the second quarter of 2005, we initiated actions focused on reducing our overall operating expenses. This plan included the implementation of a cost reduction plan designed to consolidate certain administrative functions in Europe and a commitment to a plan to restructure a portion of our supply chain manufacturing to lower cost areas. During the fourth quarter of 2006, we continued to review the results of the overall initiatives and achieved additional reductions focused on the reorganization of senior management to focus on key markets and customers. This additional restructuring reduced our management by 25%.

A net charge of $0.7 million was recorded in the first nine months of 2007 in connection with the 2005 Restructuring Plan, primarily related to employee severance.

The total number of employees affected by the restructuring were 761, of which 758 have been terminated. The remaining terminations are expected to be completed by the end of fiscal year 2007. The anticipated total cost is expected to approximate $24 million to $26 million, of which $24 million has been incurred and $21 million has been paid. Termination benefits are planned to be paid one month to 24 months after termination.

Restructuring accrual activity was as follows:

Fiscal 2007
(dollar amounts are in thousands)


	Accrual at				Charge
	Beginning		Charged to		Reversed to			Cash			Exchange		Accrual at
	of Year		Earnings		Earnings			Payments			Rate Changes		9/30/07
Severance and other employee-related charges	$	6,786	$	1,007	$	(285	)	$	(4,201	)	$	210	$	3,517

Note 11. EMPLOYEE BENEFIT PLANS

The components of net periodic benefit cost for the thirteen week and thirty-nine week periods ended September 30, 2007 and September 24, 2006 were as follows:

(dollar amounts in thousands)


	Quarter						Nine Months
	(13 weeks) Ended						(39 weeks) Ended
	Sept. 30,			Sept. 24,			Sept. 30,			Sept. 24,
	2007			2006			2007			2006
Service cost	$	357		$	345		$	1,044		$	1,005
Interest cost		1,025			889			3,012			2,602
Expected return on plan assets		(36	)		(36	)		(106	)		(107	)
Amortization of actuarial loss		119			147			350			425
Amortization of transition obligation		32			30			94			87
Amortization of prior service cost		1			—			2			1


Net periodic pension cost	$	1,498		$	1,375		$	4,396		$	4,013

We expect the cash requirements for funding the pension benefits to be approximately $5.8 million during fiscal 2007, including $4.8 million which was funded during the nine months ended September 30, 2007.

Note 12. CONTINGENT LIABILITIES AND SETTLEMENTS

We are involved in certain legal and regulatory actions, all of which have arisen in the ordinary course of business. Management believes it is remotely possible that the ultimate resolution of such matters will have a material adverse effect on our consolidated results of operations and/or financial condition.

Note 13. BUSINESS SEGMENTS

(dollar amounts in thousands)


	Quarter				Nine Months
	(13 weeks) Ended				(39 weeks) Ended
	Sept. 30,		Sept. 24,		Sept. 30,			Sept. 24,
	2007		2006		2007			2006
Business segment net revenue:
Security	$	149,254	$	123,961	$	402,155		$	339,241
Labeling Services		33,232		23,403		99,395			72,448
Retail Merchandising		22,103		20,258		69,943			59,789


Total revenues		204,589		167,622		571,493			471,478
Business segment gross profit:
Security		64,982		54,757		174,275			144,254
Labeling Services		9,876		7,567		31,440			24,608
Retail Merchandising		10,790		9,272		33,207			28,738


Total gross profit		85,648		71,596		238,922			197,600
Operating expenses		67,250		61,042		195,700			182,739
Interest income, net		1,321		815		3,112			2,120
Other gain (loss), net		66		300		(327	)		716


Earnings from continuing operations before income taxes and minority interest	$	19,785	$	11,669	$	46,007		$	17,697

Note 14. SUBSEQUENT EVENT

On November 1, 2007, we acquired the S3 business from Alpha Security Products. The all-cash transaction is valued at approximately $142 million, plus additional performance-based consideration of $8 million if certain financial performance measures are met. The acquisition included all of the assets associated with Alpha’s S3 business, including the Alpha brand, approximately 150 employees, and its Ohio manufacturing facility.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Information Relating to Forward-Looking Statements

This report includes forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Except for historical matters, the matters discussed are forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, that reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from historical results or those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Information about potential factors that could affect our business and financial results is included in our Annual Report on Form 10-K for the year ended December 31, 2006, and our other Securities and Exchange Commission filings.

Critical Accounting Policies and Estimates

There has been no change to our critical accounting policies and estimates, contained in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K filed for the year ended December 31, 2006.

Overview

Checkpoint Systems, Inc. is a multinational manufacturer and marketer of integrated system solutions for retail security, labeling, and merchandising. We provide technology-driven integrated supply chain solutions to brand, track, and secure goods for retailers and consumer product manufacturers worldwide. We are a leading provider of electronic article surveillance (EAS) systems and tags using radio frequency (RF) and electromagnetic (EM) technology, security source tagging, branding tags and labels for apparel, retail display systems (RDS), and hand-held labeling systems (HLS). Our labeling systems and services are designed to consolidate tag and label requirements to improve efficiency, reduce costs, and furnish value-added solutions for customers across many markets and industries. Applications for printed tags and labels include brand identification, automatic identification (auto-ID), retail security, and pricing and promotional labels. We now operate directly in 31 countries. Products are principally developed and manufactured in-house and sold through direct distribution and reseller channels.

Our results are heavily dependent upon sales to the retail market. Our customers are dependent upon retail sales which are susceptible to economic cycles and seasonal fluctuations. Furthermore, as approximately two-thirds of our revenues and operations are located outside the U.S., fluctuations in foreign currency exchange rates have a significant impact on reported results.

Our business plan is to generate sustained revenue growth through selected investments in product development and marketing. We intend to offset the cost of these investments through product cost and operating expense reductions. Revenue growth may also be generated by acquisitions that are targeted to expand our product offerings and customer base.

We are developing new avenues for growth by expanding into new vertical markets, as demonstrated by the Security Systems Group’s (SSG) entry into the financial services sector with technology and physical security solutions. Our library operations are transitioning from a security-based business into Library Patron Services, a new business model focused on interactive patron services, advertising, and community involvement. While these actions are in the early stages, we believe that these business opportunities have the potential to significantly contribute to revenue and profit growth in the future.

On November 1, 2007, we acquired the S3 business from Alpha Security Products. The all-cash transaction is valued at approximately $142 million, subject to post-closing working capital adjustments, plus additional performance-based consideration of $8 million if certain financial performance measures are met. The acquisition included all of the assets associated with Alpha’s S3 business, including the Alpha brand, approximately 150 employees, and its Ohio manufacturing facility. For the full year 2007, Alpha’s S3 business is expected to generate approximately $65 million in revenue.

On October 29, 2007, we announced a global strategic sales and marketing alliance with 3M Library Systems. Under the terms of this alliance, 3M Library Systems will become the exclusive worldwide reseller and service provider for our line of library security and productivity products. We will continue to expand our patron-based marketing services portfolio and continue selling those offerings directly to libraries worldwide. This alliance will be effective January 1, 2008.

We have also modified our organization to better fit our customers’ needs and address our competitive business environment by reorganizing our two primary lines of business from a regional focus to a global one, to more effectively serve our customers who are continually expanding their global presence. To that end, we have established two global business groups: Shrink Management & Merchandising Solutions and iLabels. These two groups will work together to advance our lead in source tagging capabilities, firmly establish Checkpoint as a full shrink management solutions provider, and leverage our RF experience to provide solutions that make sense for our customers today, with a path to RFID-based solutions for the future. We anticipate changing our management reporting to conform to our new business structure during fiscal 2007. This is anticipated to result in a change in our business segments.

Revenue for the third quarter of 2007 was $204.6 million, a 22.1% increase over the comparable period in 2006. Foreign currency translation had a positive impact on revenue of approximately 5.0% for the quarter ended September 30, 2007. The remaining increase was due to higher revenues in our CheckNet ^® ($9.6 million), CCTV ($9.6 million), and EAS ($9.8 million) businesses. The CheckNet ^® revenue benefited $6.0 million from our acquisition of ADS in November 2006.

Future financial results will be dependent upon our ability to expand the functionality of our existing product lines, develop or acquire new products for sale through our global distribution channels, convert new large chain retailers to RF-EAS, and reduce the cost of our products and infrastructure to respond to competitive pricing pressures.

Our strong base of recurring revenue (revenues from the sale of consumables into the installed base of security systems, and hand-held labeling tools), repeat customer business, and our borrowing capacity should provide us with adequate cash flow and liquidity to execute our business plan.

Results of Operations

(All comparisons are with the previous year, unless otherwise stated.)

Net Revenues

Our unit volume is driven by product offerings, number of direct sales personnel, recurring sales and, to some extent, pricing. Our base of installed systems provides a source of recurring revenues from the sale of disposable tags, labels, and service revenues.

Our customers are substantially dependent on retail sales, which are seasonal, subject to significant fluctuations, and difficult to predict. Such seasonality and fluctuations impact our sales. Historically, we have experienced lower sales in the first half of each year.

Analysis of Statement of Operations

Thirteen Weeks Ended September 30, 2007 Compared to Thirteen Weeks Ended September 24, 2006

The following table presents for the periods indicated certain items in the consolidated statement of operations as a percentage of total revenues and the percentage change in dollar amounts of such items compared to the indicated prior period:


							Percentage
	Percentage of Total Revenues						Change
	September 30,			September 24,			In Dollar Amount
	2007			2006			Fiscal 2007 vs.
Quarter ended	(Fiscal 2007)			(Fiscal 2006)			Fiscal 2006
Net Revenues
Security		73.0	%		74.0	%		20.4	%
Labeling Services		16.2			14.0			42.0
Retail Merchandising		10.8			12.0			9.1


Net revenues		100.0			100.0			22.1
Cost of revenues		58.1			57.3			23.9


Total gross profit		41.9			42.7			19.6
Selling, general, and administrative expenses		30.3			32.4			14.2
Research and development		2.5			3.0			1.4
Restructuring		—			1.0			N/A


Operating income		9.1			6.3			74.3
Interest income		0.8			0.8			33.5
Interest expense		0.2			0.3			(18.3	)
Other gain, net		—			0.2			N/A


Earnings before income taxes and minority interest		9.7			7.0			69.6
Income taxes expense (benefit)		2.7			(0.1)			N/A
Minority interest		—			0.1			N/A


Earnings from continuing operations		7.0			7.0			22.5
(Loss) earnings from discontinued operations, net of tax		—			—			N/A
Net earnings		7.0	%		7.0	%		22.5	%

N/A — Comparative percentages are not meaningful.

Net Revenues

Revenues for the third quarter 2007 compared to the third quarter 2006 increased by $37.0 million or 22.1% from $167.6 million to $204.6 million. Foreign currency translation had a positive impact on revenues of approximately $8.4 million or 5.0% in 2007 as compared to 2006.

(dollar amounts in millions)


					Dollar
					Amount		Percentage
	September 30,		September 24,		Change		Change
	2007		2006		Fiscal 2007		Fiscal 2007
Quarter ended	(Fiscal 2007)		(Fiscal 2006)		vs. Fiscal 2006		vs. Fiscal 2006
Net Revenues:
Security	$	149.3	$	124.0	$	25.3		20.4	%
Labeling Services		33.2		23.4		9.8		42.0
Retail Merchandising		22.1		20.2		1.9		9.1


Net Revenues	$	204.6	$	167.6	$	37.0		22.1	%

Security revenues increased by $25.3 million or 20.4% in the third quarter 2007 as compared to the third quarter 2006. Foreign currency translation had a positive impact of approximately $5.2 million. The remaining revenue growth was primarily due to increases in EAS revenues of $9.8 million coupled with an increase in CCTV revenue of $9.6 million, which included $2.6 million of revenue from newly acquired businesses serving the financial services sector. The increase in EAS was due to increased revenue of $4.8 million in Europe, $2.5 million in Asia Pacific and $1.5 million in the International Americas. The increase in Europe was due primarily to large chain-wide roll-outs in Spain. The increase in Asia was due primarily to large chain-wide roll-outs in Australia and continued growth in our Hong Kong distribution unit. The International Americas revenue growth was due to large chain-wide roll-outs in Mexico. The CCTV revenue growth was due to better results in our U.S. CCTV business as large chain-wide installations increased in 2007 compared to 2006.

Labeling Services revenues increased by $9.8 million or 42.0%. The positive impact of foreign currency translation was approximately $1.5 million. The remaining revenue growth was primarily due to increases in our CheckNet ^® business of $9.6 million, partially offset by a decrease in our Intelligent Library Systems business of $1.3 million. CheckNet ^® business revenue benefited $6.0 million from the ADS acquisition and continued the strong growth of its base business in the third quarter of 2007. Intelligent Library Systems revenues declined due to the transition period for shifting the business strategy to our new Library Patron Services business model.

Retail Merchandising revenues increased by $1.9 million or 9.1%. The positive impact of foreign currency translation was approximately $1.7 million. The remaining revenue growth was due to an increase in our Retail Merchandising Solutions (RMS) business of $0.9 million, partially offset by a decrease of $0.6 million in our Hand Held Labeling Systems (HLS) business. The RMS revenue increase was due primarily to an increase in revenues for our retail display systems in Europe of $0.6 million and Asia Pacific $0.3 million. The HLS revenue decrease was due primarily to lower revenues in our Asia Pacific region.

Gross Profit

Gross profit for the third quarter 2007 was $85.6 million, or 41.9% of net revenues, compared to $71.6 million, or 42.7% of net revenues, for the third quarter 2006. Foreign currency translation had a positive impact on gross profit of approximately $3.4 million in the third quarter of 2007.

Security gross profit for the third quarter 2007 was $65.0 million, or 43.5% of security revenues, compared to $54.8 million, or 44.2% of security revenues, for the third quarter 2006. Security gross profit percentage decreased, as a percentage of security revenue, due to a change in revenue mix.

Labeling Services gross profit as a percentage of labeling revenues decreased to 29.7% in the third quarter 2007 from 32.3% in the third quarter 2006. This decrease in labeling gross profit percentage was due to increased freight costs required to meet the higher demand and pricing pressures in certain regions.

Retail Merchandising gross profit as a percentage of retail merchandising revenues increased to 48.8% in the third quarter 2007 from 45.8% in the third quarter 2006. This increase was due primarily to improved margins in HLS due to lower inventory reserve charges in 2007 compared to 2006, coupled with 2007 positive manufacturing variances resulting from current year efficiencies.

Field service and installation costs for the third quarter 2007 and 2006 were 10.3% and 11.2% of net revenues, respectively. This decrease as a percentage of revenue was due to higher revenues, which allowed us to leverage our fixed costs.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses decreased, as a percentage of revenues, from 32.4% in 2006 to 30.3% in 2007. Foreign currency translation increased selling, general, and administrative expenses by approximately $2.9 million. SG&A expenses generated by the recently acquired ADS operations accounted for $2.2 million of the increase over the prior year. This decrease, on a percentage of revenue basis, was due primarily to lower management expenses of $1.6 million resulting from our restructuring initiatives. Selling, general, and administrative expenses increased $7.7 million, or 14.2%, over the third quarter 2006 to $62.1 million, compared to $54.4 million in 2006. The increase in dollars was due to foreign currency, the ADS acquisition and increased selling and marketing expenses.

Research and Development Expenses

Research and development costs were $5.1 million, or 2.5% of revenues in the third quarter 2007 and $5.1 million, or 3.0% in the third quarter 2006.

Restructuring Expenses

Restructuring expenses were $1.6 million or 1.0% of revenues in the third quarter 2006, without a comparable charge in 2007.

Income Taxes

Our effective tax rate was 27.7% for the third quarter of 2007. Included in the third quarter 2007 tax rate is a deferred tax charge of $3.8 million primarily associated with a statutory tax rate change in Germany. This charge was partially offset by a $2.9 million deferred tax benefit associated with the release of a valuation allowance for state net operating loss carry-forwards. The prior year income tax rate of negative 1.1% was favorably impacted by the release of valuation allowances and tax reserves totaling $3.7 million.

Net Earnings

Net earnings were $14.3 million, or $0.35 per diluted share, in the third quarter of 2007 compared to $11.7 million, or $0.29 per diluted share, in the third quarter of 2006. The weighted average number of shares used in the diluted earnings per share computation were 41.0 million and 40.1 million for the third quarters of 2007 and 2006, respectively.

Thirty-nine Weeks Ended September 30, 2007 Compared to Thirty-nine Weeks Ended September 24, 2006


							Percentage
	Percentage of Total Revenues						Change
	September 30,			September 24,			In Dollar Amount
	2007			2006			Fiscal 2007 vs.
Thirty-nine weeks ended	(Fiscal 2007)			(Fiscal 2006)			Fiscal 2006
Net Revenues
Security		70.4	%		72.0	%		18.5
Labeling Services		17.4			15.3			37.2
Retail Merchandising		12.2			12.7			17.0


Net revenues		100.0			100.0			21.2
Cost of revenues		58.2			58.1			21.4


Total gross profit		41.8			41.9			20.9
Selling, general, and administrative expenses		31.8			34.7			11.2
Research and development		2.3			3.1			(8.7)
Restructuring expense		0.1			0.5			(72.2	)
Legal settlement		—			0.5			N/A


Operating income		7.6			3.1			N/A
Interest income		0.7			0.8			15.3
Interest expense		0.2			0.3			(31.7	)
Other (loss) gain, net		(0.1	)		0.2			N/A


Earnings before income taxes and minority interest		8.0			3.8			N/A
Income taxes expense		2.1			0.3			N/A
Minority interest		—			—


Earnings from continuing operations		5.9			3.5			N/A
Earnings from discontinued operations, net of tax		0.1			0.3			N/A
Net earnings		6.0	%		3.8	%		N/A	%


N/A		— Comparative percentages are not meaningful.

Net Revenues

Revenues for the first nine months of 2007 compared to the same period in 2006 increased by $100.0 million or 21.2% from $471.5 million to $571.5 million. Foreign currency translation had a positive impact on revenues of approximately $23.2 million or 4.9% in the first nine months of 2007 as compared to the first nine months of 2006.

(dollar amounts in millions)


					Dollar
					Amount		Percentage
	September 30,		September 26,		Change		Change
	2007		2006		Fiscal 2007		Fiscal 2007
Thirty-nine weeks ended	(Fiscal 2007)		(Fiscal 2006)		vs. Fiscal 2006		vs. Fiscal 2006
Net Revenues:
Security	$	402.2	$	339.2	$	63.0		18.5	%
Labeling Services		99.4		72.5		26.9		37.2
Retail Merchandising		69.9		59.8		10.1		17.0


Net Revenues	$	571.5	$	471.5	$	100.0		21.2	%

Security revenues increased by $63.0 million or 18.5% in the first nine months of 2007 as compared to the first nine months of 2006. Foreign currency translation had a positive impact of approximately $13.6 million. The remaining growth in revenue was primarily due to an increase of $26.8 million in EAS revenues and $20.5 million in CCTV. EAS revenue increased $13.7 million in Europe, $5.3 million in Asia Pacific, $4.2 million in the U.S., and $3.5 million in International Americas. In addition, the CCTV business increased $20.5 million, primarily in the U.S. The increase in Europe EAS was due to large chain-wide roll-outs primarily in France and Spain. The increase in Asia was due primarily to a large chain-wide roll-out in Australia and continued growth in our Hong Kong distribution unit. The International Americas revenue increased due to large chain-wide roll-outs primarily in Mexico. The U.S. EAS business increase was due primarily to new installations with existing customers. The CCTV business improved due to a larger number of installations with existing customers in 2007 compared to 2006.

Labeling Services revenues increased by $26.9 million or 37.2% over last year’s comparable period. Foreign currency translation had a positive impact of approximately $4.6 million over the first nine months of 2007. The remaining revenue growth was primarily due to an increase in our CheckNet ^® business of $26.7 million partially offset by a decrease in our Intelligent Library Systems business of $4.3 million. CheckNet ^® business revenue benefited $17.2 million due to the ADS acquisition and continued the strong growth of its base business during the first nine months of 2007. Intelligent Library Systems revenues declined due to the transition period for shifting the business strategy to our new Library Patron Services business model.

Retail Merchandising revenues increased by $10.1 million or 17.0%. The positive impact of foreign currency translation was approximately $5.1 million. The remaining increase was due primarily to increases in sales of our retail display systems in Europe of $4.2 million and Asia Pacific of $1.2 million.

Gross Profit

Gross profit in the first nine months of 2007 was $238.9 million, or 41.8% of net revenues, compared to $197.6 million, or 41.9% of net revenues, in the first nine months of 2006. Foreign currency translation had a positive impact of approximately $9.0 million. Gross profit in the first nine months of 2007 increased by $41.3 million, or 20.9%.

Security gross profit in the first nine months of 2007 was $174.3 million, or 43.3% of security revenues, compared to $144.3 million, or 42.5% of Security revenues, in the first nine months of 2006. The increase in Security gross profit percentage was due primarily to improved margins in our EAS business due to higher volumes which allowed us to leverage fixed field service costs.

Labeling Services gross profit as a percentage of labeling revenues decreased to 31.6% in the first nine months of 2007 from 34.0% in the first nine months in 2006. This decrease in labeling gross profit percentage was primarily due to manufacturing inefficiencies and competitive pricing pressures.

The Retail Merchandising gross profit as a percentage of Retail Merchandising revenues decreased to 47.5% in the first nine months of 2007 from 48.1% in the first nine months of 2006. This decrease was due primarily to margin decreases in our HLS business as we converted to an indirect sales model.

Field service and installation costs for the first nine months of 2007 and 2006 were 10.2% and 11.0% of net revenues, respectively. This decrease as a percentage of revenue was due to higher revenues, which allowed us to leverage our fixed costs.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses decreased, as a percentage of revenues, from 34.7% in 2006 to 31.8% in 2007. Foreign currency translation increased selling, general, and administrative expenses by approximately $7.3 million. SG&A expenses generated by the recently acquired ADS operations accounted for $6.1 million of the increase over the prior year. This decrease, on a percentage of revenue basis, was due primarily to lower management expenses of $3.4 million resulting from our restructuring initiatives and higher revenues allowing better leveraging of our sales and marketing expenses. Selling, general, and administrative expenses increased $18.2 million, or 11.2%, over the first nine months of 2006 to $181.8 million, compared to $163.6 million in 2006. The increase in dollars was due to higher foreign currency translations, ADS operations, and increased sales and marketing expense to support our higher revenue base, which was partially offset by lower management expenses resulting from our restructuring initiatives.

Research and Development Expenses

Research and development costs were $13.2 million, or 2.3% of revenues in the first nine months of 2007 and $14.4 million, or 3.1% in the first nine months of 2006.

Restructuring Expenses

Restructuring expenses were $0.7 million, or 0.1% of revenues in the first nine months of 2007 compared to $2.5 million, or 0.5% of revenues in the first nine months of 2006.

Litigation Settlement

Litigation expense was $2.3 million in the first nine months of 2006. This was a result of the settlement of a class action suit arising from the anti-trust litigation with ID Security Systems Canada, Inc.

Income Taxes

The effective tax rate for the thirty-nine weeks ended September 30, 2007 was 26.6%. For the thirty-nine weeks ended September 24, 2006, the effective tax rate was 7.2%. Included the first nine months of 2007 tax rate is a deferred tax charge of $3.8 million primarily associated with a statutory tax rate change in Germany. The company has also recorded a $2.9 million deferred tax benefit associated with the release of a valuation allowance for state net operating loss carry-forwards. The prior year income tax was favorably impacted by the release of valuation allowances and tax reserves totaling $3.7 million.

Net Earnings

Net earnings were $34.4 million, or $0.85 per diluted share, in the first nine months of 2007 compared to $17.9 million, or $0.44 per diluted share, in the first nine months of 2006. The weighted average number of shares used in the diluted earnings per share computation were 40.6 million and 40.3 million for the first nine months of 2007 and 2006, respectively.

Financial Condition

Liquidity and Capital Resources

Our liquidity needs have related to, and are expected to continue to relate to, capital investments, product development costs, future restructurings associated with the rationalization of the business, acquisitions, and working capital requirements. We believe that cash provided from operating activities and funding available under our current credit agreement should be adequate for the foreseeable future to service debt and meet our anticipated cash requirements.

As of September 30, 2007, our cash and cash equivalents were $171.0 million compared to $143.4 million as of December 31, 2006. Our operating activities during the first nine months of 2007 provided approximately $28.8 million compared to a use of $14.7 million during the first nine months of 2006. In 2007, our cash from operating activities was impacted positively compared to the prior year due to improved earnings, a decrease in payments for accounts payable, better inventory management in the current year and reduced payments for restructuring in 2007 compared to 2006. This was partially offset by increased prepaid costs incurred in our CCTV business for contracts not yet completed.

We continue to reinvest in the Company through spending in technology and process improvement. In the first nine months of 2007, our expenditures in research and development amounted to $13.2 million. We estimate our expenditures in research and development during the remainder of 2007 will be approximately $5.0 million.

Our capital expenditures for the first nine months of 2007 totaled $9.5 million, compared to $8.3 million during the first nine months of 2006. We anticipate our capital expenditures, used primarily to upgrade technology and improve our production capabilities, to approximate $6.0 million for the remainder of 2007.

In January 2007, we purchased the business of Security Systems Technology, Inc., a privately held company, for $0.8 million plus $0.2 million of liabilities acquired. The transaction was paid in cash. The financial statements reflect the preliminary allocations of the purchase price based on estimated fair values at the date of acquisition. This allocation has resulted in acquired goodwill of $0.9 million. The allocation of the purchase price is expected to be completed during the year 2007. The results from the acquisition date through September 30, 2007 are included in the Security segment and were not material to the consolidated financial statements.

In May 2007, we purchased the business of SSE Southeast, LLC, for $5.1 million plus $0.8 million of liabilities acquired. The transaction was paid in cash. The financial statements reflect the preliminary allocations of the purchase price based on estimated fair values at the date of acquisition. This allocation has resulted in acquired goodwill of $4.4 million. The allocation of the purchase price is expected to be completed during the year 2007. The results from the acquisition date through September 30, 2007 are included in the Security segment and were not material to the consolidated financial statements.

At December 31, 2006, the Company had a full-recourse factoring arrangement with Mitsubishi UFJ Factoring Co., Ltd., in which the arrangements were secured by trade receivables. As of December 31, 2006, the face amount of receivables sold and not yet collected were $0.8 million. During the first quarter of 2007, the remaining full recourse factoring liability was paid in full.

On September 14, 2007, the Company received cash of $2.2 million from the release of the escrow account related to the Bar-code divestiture. Prior to the release, the escrow account value was recorded as restricted cash on our consolidated balance sheet.

As of September 30, 2007, our working capital was $331.8 million compared to $254.0 million as of December 31, 2006. At the end of the third quarter of 2007, our percentage of total debt to total stockholders’ equity decreased to 3.0% from 3.5% as of December 31, 2006. As of September 30, 2007, we had an available line of credit totaling approximately $133.3 million.

We do not anticipate paying any cash dividends on our common stock in the near future.

Provisions for Restructuring

2005 Restructuring Plan

A net charge of $0.7 million was recorded in the first nine months of 2007 in connection with the 2005 Restructuring Plan, primarily related to employee severance.

Restructuring accrual activity was as follows:

Fiscal 2007
(dollar amounts are in thousands)


					Charge
	Accrual at		Charged		Reversed						Exchange
	Beginning of		to		to			Cash			Rate		Accrual
	Year		Earnings		Earnings			Payments			Changes		at 9/30/07
Severance and other employee-related charges	$	6,786	$	1,007	$	(285	)	$	(4,201	)	$	210	$	3,517

Exposure to Foreign Currency

We manufacture products in the USA, the Caribbean, Europe, and the Asia Pacific region for both the local marketplace, and for export to our foreign subsidiaries. The subsidiaries, in turn, sell these products to customers in their respective geographic areas of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations on inter-company receivables and payables. Additionally, the sourcing of product in one currency and the sales of product in a different currency can cause gross margin fluctuations due to changes in currency exchange rates.

We have used third party borrowings in foreign currencies to hedge a portion of our net investments in and cash flows derived from our foreign subsidiaries. As we reduce our third party foreign currency borrowings, the effect of foreign currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries increases.

We selectively purchase currency forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. This allows us to shift the effect of positive or negative currency fluctuations to a third party. As of September 30, 2007, we had currency forward exchange contracts totaling approximately $9.3 million. The contracts are in the various local currencies covering primarily our Western European, Canadian, and Australian operations. Historically, we have not purchased currency forward exchange contracts where it is not economically efficient, specifically for our operations in South America and Asia.

During the second quarter of 2007, the Company entered into a foreign currency option contract, at a notional amount of €5 million, to mitigate the effect of fluctuating foreign exchange rates on the reporting of a portion of its expected 2007 foreign currency denominated earnings.

Changes in the fair value of this foreign currency option contract, which is not designated as a hedge, are recorded in earnings immediately. The premium paid on the option contract was $73 thousand. As of September 30, 2007, the fair market value on this option was zero.

Off-balance Sheet Arrangements and Contractual Obligations

There have been no material changes to the table presented in our Annual Report on Form 10-K for the year ended December 31, 2006. The table excludes our gross liability for uncertain tax positions, including accrued interest and penalties, which totaled $14.7 million as of January 1, 2007, since we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities.

New Accounting Pronouncements and Other Standards

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes to the market risks as disclosed in Item 7a. “Quantitative And Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K filed for the year ended December 31, 2006.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Checkpoint Systems, Inc.’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2007, the end of the period covered by this report, our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(c), were not effective as a result of the material weakness discussed below.

As previously reported in the Company’s 2006 Annual Report on Form 10-K, management identified the following material weakness in our internal control over financial reporting as of December 31, 2006:

The Company did not maintain effective controls over the financial reporting and close process. Specifically, the Company’s controls to monitor the financial position and results of operations of subsidiaries, and controls to accurately record non-routine and non-systematic transactions in accordance with accounting principles generally accepted in the United States of America, were not effective. This control deficiency contributed to errors resulting in the restatement of the Company’s consolidated financial statements for 2005 and 2004, each of the interim periods in 2005 and the first three quarters of 2006 affecting revenues and cost of revenues. Additionally, this control deficiency could result in a material misstatement in any account or disclosure that would not be prevented or detected.

To remediate the material weakness described above and to enhance our internal control over financial reporting, management is in the process of supplementing its financial reporting and close procedures to enhance the focus on complex transaction activity determined to present a relatively higher degree of risk. Management is also in the process of implementing formal procedures of detailed reviews of subsidiary financial results, conducted by regional controllers and other qualified personnel. Checkpoint’s internal audit function will expand its substantive testing at the subsidiary level with greater emphasis on such transactions. As part of these efforts, management will expand the training of all key finance personnel in corporate, regional and subsidiary reporting teams in the application of accounting principles generally accepted in the United States of America and the company’s accounting policies and procedures. Management has begun to adopt these measures and expects that the remediation of the material weakness will be completed in 2007.

Notwithstanding the material weakness, management believes that the financial statements included in this report fairly present in all material respects our financial position, results of operations and cash flows for the periods presented.

Changes in Internal Control over Financial Reporting

Other than the foregoing changes relating to the ongoing remediation of the material weakness, there have been no changes in the Company’s internal control over financial reporting during the nine months ended September 30, 2007 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Item 1A. RISK FACTORS

Except as described below, there have been no material changes from December 31, 2006 to the significant risk factors and uncertainties known to the Company that, if they were to occur, could materially adversely affect the Company’s business, financial condition, operating results and/or cash flow. For a discussion of the Company’s risk factors, refer to Item 1A. “Risk Factors”, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

The following risk factor, among other possible factors, could cause actual results to differ materially from historical or anticipated results:

•

Our ability to integrate the acquisition of the Alpha S3 business and to achieve our financial and operational goals for Alpha S3.

Item 6. EXHIBITS


Exhibit 2.1		Asset Purchase Agreement by and between Checkpoint Systems, Inc. and Alpha Security Products, Inc., dated November 1, 2007, incorporated by reference to Item 9.01(c) of the Registrant’s Form 8-K, filed with the SEC on November 7, 2007.

Exhibit 2.2		Dutch Assets Sale and Transfer Agreement by and between Checkpoint Meto Benelux B.V., private limited liability organized under the laws of the Netherlands, and Alpha Security Products B.V., a private limited liability organized under the laws of the Netherlands, dated November 1, 2007, incorporated by reference to Item 9.01(c) of the Registrant’s Form 8-K, filed with the SEC on November 7, 2007.

Exhibit 3.1		Articles of Incorporation, as amended, are hereby incorporated by reference to Item 14(a), Exhibit 3(i) of the Registrant’s 1990 Form 10-K, filed with the SEC on March 14, 1991.

Exhibit 3.2		By-Laws, as Amended and Restated, are hereby incorporated by reference to Item 15(c), Exhibit 3.2 of the Registrant’s 2004 10-K, filed with the SEC on March 11, 2005.

Exhibit 31.1		Rule 13a-14(a) Certification of George W. Off, Chairman of the Board, President and Chief Executive Officer.

Exhibit 31.2		Rule 13a-14(a) Certification of W. Craig Burns, Executive Vice President, Chief Financial Officer and Treasurer.

Exhibit 32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


CHECKPOINT SYSTEMS, INC.

/s/ W. Craig Burns		November 8, 2007


W. Craig Burns
Executive Vice President,
Chief Financial Officer and Treasurer

/s/ Raymond D. Andrews		November 8, 2007

Raymond D. Andrews
Vice President, Chief Accounting Officer

INDEX TO EXHIBITS


EXHIBIT		DESCRIPTION

EXHIBIT 31.1		Rule 13a-14(a)/15d-14(a) Certification of George W. Off, Chairman of the Board, President and Chief Executive Officer

EXHIBIT 31.2		Rule 13a-14(a)/15d-14(a) Certification of W. Craig Burns, Executive Vice President, Chief Financial Officer and Treasurer

EXHIBIT 32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 936 of the Sarbanes-Oxley Act of 2002