SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 28, 2008
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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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)
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Pennsylvania
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22-1895850
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(State of Incorporation)
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(IRS Employer Identification No.)
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101 Wolf Drive, PO Box 188, Thorofare, New Jersey
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08086
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(Address of principal executive offices)
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(Zip Code)
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856-848-1800
(Registrants 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,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
þ
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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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 October 31, 2008, there were 38,699,370 shares of the Companys Common Stock outstanding.
CHECKPOINT SYSTEMS, INC.
FORM 10-Q
Table of Contents
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Page
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PART I. FINANCIAL INFORMATION
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Item 1. Condensed Consolidated Financial Statements (Unaudited)
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3
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4
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5
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6
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7
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8-19
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20-32
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32-33
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33
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34
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34
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34
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35
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36
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37
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EX-31.1
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EX-31.2
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EX-32.1
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Rule 13a-14(a)/15d-14(a) Certification of Robert P. van der Merwe, President and Chief Executive Officer
Rule 13a-4(a)/15d-14(a) Certification of Raymond D. Andrews, Senior Vice President and Chief Financial Officer
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 936 of the Sarbanes-Oxley Act of 2002
2
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands)
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September 28,
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December 30,
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2008
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2007*
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ASSETS
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CURRENT ASSETS:
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Cash and cash equivalents
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$
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93,294
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$
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118,271
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Marketable securities
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29
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Accounts receivable, net of allowance of $19,471 and $15,839
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208,480
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221,875
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Inventories
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115,528
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109,329
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Other current assets
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44,385
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42,914
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Deferred income taxes
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15,769
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14,492
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Total Current Assets
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477,456
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506,910
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REVENUE EQUIPMENT ON OPERATING LEASE, net
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2,586
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4,500
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PROPERTY, PLANT, AND EQUIPMENT, net
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88,856
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88,096
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GOODWILL
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296,469
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274,601
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OTHER INTANGIBLES, net
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121,333
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119,294
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DEFERRED INCOME TAXES
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42,832
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28,591
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OTHER ASSETS
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13,842
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9,052
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TOTAL ASSETS
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$
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1,043,374
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$
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1,031,044
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LIABILITIES AND STOCKHOLDERS EQUITY
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CURRENT LIABILITIES:
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Short-term borrowings and current portion of long term debt
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$
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10,576
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$
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3,756
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Accounts payable
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57,551
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76,404
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Accrued compensation and related taxes
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31,426
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38,821
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Other accrued expenses
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41,773
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43,469
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Income taxes
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2,195
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4,827
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Unearned revenues
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22,470
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28,576
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Restructuring reserve
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3,674
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4,224
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Accrued
pensions - current
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4,304
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4,337
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Other current liabilities
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17,549
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20,401
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Total Current Liabilities
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191,518
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224,815
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LONG-TERM DEBT, LESS CURRENT MATURITIES
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130,835
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91,756
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ACCRUED PENSIONS
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80,614
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80,549
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OTHER LONG-TERM LIABILITIES
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36,739
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31,419
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DEFERRED INCOME TAXES
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14,656
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13,200
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MINORITY INTEREST
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890
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977
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COMMITMENTS AND CONTINGENCIES
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STOCKHOLDERS EQUITY:
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Preferred stock, no par value, 500,000 shares authorized, none issued
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Common stock, par value $.10 per share, 100,000,000 shares authorized, issued
42,735,282 and 41,837,525
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4,273
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4,183
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Additional capital
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379,900
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360,684
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Retained earnings
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235,647
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203,717
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Common stock in treasury, at cost, 4,035,912 and 2,035,912 shares
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(71,520
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)
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(20,621
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)
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Accumulated other comprehensive income, net of tax
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39,822
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40,365
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TOTAL STOCKHOLDERS EQUITY
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588,122
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588,328
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
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$
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1,043,374
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$
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1,031,044
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*
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Derived from the Companys audited consolidated financial statements at December 30, 2007.
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See accompanying notes to the condensed consolidated financial statements.
3
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(amounts in thousands, except per share data)
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Quarter
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Nine Months
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(13 weeks) Ended
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(39 weeks) Ended
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September 28,
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September 30,
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September 28,
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September 30,
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2008
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2007
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2008
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2007
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Net revenues
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$
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233,995
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$
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204,589
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$
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679,815
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$
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571,493
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Cost of revenues
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136,364
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118,941
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397,764
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332,571
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Gross profit
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97,631
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85,648
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282,051
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238,922
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Selling, general, and administrative expenses
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73,865
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62,091
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223,695
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181,839
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Research and development
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5,297
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5,128
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16,267
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13,176
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Restructuring expense
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848
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31
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4,848
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685
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Litigation settlement
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467
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467
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Other operating income
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968
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968
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Operating income
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18,122
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18,398
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37,742
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43,222
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Interest income
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677
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1,688
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1,975
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4,080
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Interest expense
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1,522
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367
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4,008
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968
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Other (loss) gain, net
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(1,512
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)
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66
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(2,118
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)
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(327
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)
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Earnings before income taxes and minority interest
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15,765
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19,785
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33,591
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46,007
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Income taxes expense
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2,999
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5,484
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1,778
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12,229
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Minority interest, net of tax
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(10
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)
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(46
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(117
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)
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(109
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Earnings from continuing operations
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12,776
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14,347
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31,930
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33,887
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(Loss) earnings from discontinued operations, net of tax
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(9
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)
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514
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Net earnings
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$
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12,776
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$
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14,338
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$
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31,930
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$
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34,401
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Basic earnings per share:
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Earnings from continuing operations
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$
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.33
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$
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.36
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$
|
.81
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$
|
.85
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Earnings from discontinued operations, net of tax
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.01
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Basic earnings per share
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$
|
.33
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$
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.36
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$
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.81
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$
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.86
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Diluted earnings per share:
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Earnings from continuing operations
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$
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.32
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|
$
|
.35
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|
$
|
.79
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|
|
$
|
.84
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Earnings from discontinued operations, net of tax
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|
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|
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|
|
|
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|
.01
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Diluted earnings per share
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$
|
.32
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|
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$
|
.35
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$
|
.79
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$
|
.85
|
|
|
See accompanying notes to the condensed consolidated financial statements.
4
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Unaudited)
(amounts in thousands)
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Accumulated
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Other
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Total
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Common Stock
|
|
Additional
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Retained
|
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Treasury Stock
|
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Comprehensive
|
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Stockholders
|
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Shares
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Amount
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Capital
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Earnings
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Shares
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Amount
|
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Income (Loss)
|
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Equity
|
|
Balance, December 30, 2007
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41,837
|
|
|
$
|
4,183
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|
|
$
|
360,684
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|
|
$
|
203,717
|
|
|
|
2,036
|
|
|
$
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(20,621
|
)
|
|
$
|
40,365
|
|
|
$
|
588,328
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
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|
31,930
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|
|
|
|
|
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|
|
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31,930
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Exercise of stock-based compensation
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|
898
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|
90
|
|
|
|
8,916
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,006
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|
Tax benefit of stock-based compensation
|
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|
|
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|
|
|
|
|
|
2,145
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,145
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|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
5,874
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,874
|
|
Deferred compensation plan
|
|
|
|
|
|
|
|
|
|
|
2,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,281
|
|
Repurchase of common stock
|
|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
2,000
|
|
|
|
(50,899
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)
|
|
|
|
|
|
|
(50,899
|
)
|
Amortization of pension plan actuarial
losses, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
73
|
|
Change in realized and unrealized
gains on derivative hedges, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,314
|
|
|
|
1,314
|
|
Unrealized gain adjustment on
marketable securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
(16
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,914
|
)
|
|
|
(1,914
|
)
|
|
Balance, September 28, 2008
|
|
42,735
|
|
|
$
|
4,273
|
|
|
$
|
379,900
|
|
|
$
|
235,647
|
|
|
|
4,036
|
|
|
$
|
(71,520
|
)
|
|
$
|
39,822
|
|
|
$
|
588,122
|
|
|
See accompanying notes to the condensed consolidated financial statements.
5
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
Nine Months
|
|
|
|
(13 weeks) Ended
|
|
|
(39 weeks) Ended
|
|
|
September 28,
|
|
September 30,
|
|
September 28,
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net earnings
|
|
$
|
12,776
|
|
|
$
|
14,338
|
|
|
$
|
31,930
|
|
|
$
|
34,401
|
|
Amortization of pension plan actuarial losses, net of tax
|
|
|
24
|
|
|
|
97
|
|
|
|
73
|
|
|
|
291
|
|
Change in realized and unrealized gains on derivative hedges,
net of tax
|
|
|
1,131
|
|
|
|
|
|
|
|
1,314
|
|
|
|
|
|
Unrealized gain adjustment on marketable securities, net of tax
|
|
|
|
|
|
|
152
|
|
|
|
(16
|
)
|
|
|
152
|
|
Foreign currency translation adjustment
|
|
|
(27,512
|
)
|
|
|
16,602
|
|
|
|
(1,914
|
)
|
|
|
25,591
|
|
|
Comprehensive income
|
|
$
|
(13,581
|
)
|
|
$
|
31,189
|
|
|
$
|
31,387
|
|
|
$
|
60,435
|
|
|
See accompanying notes to the condensed consolidated financial statements.
6
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
September 28,
|
|
|
September 30,
|
|
Nine Months Ended (39 Weeks)
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
31,930
|
|
|
$
|
34,401
|
|
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
22,924
|
|
|
|
13,586
|
|
Deferred taxes
|
|
|
(6,485
|
)
|
|
|
(43
|
)
|
Stock-based compensation
|
|
|
5,874
|
|
|
|
5,035
|
|
Provision for losses on accounts receivable
|
|
|
4,818
|
|
|
|
1,846
|
|
Excess tax benefit on stock compensation
|
|
|
(2,176
|
)
|
|
|
(599
|
)
|
Gain on sale of discontinued operations
|
|
|
|
|
|
|
(514
|
)
|
Gain on sale
of Czech Republic subsidiary
|
|
|
(968
|
)
|
|
|
|
|
Gain on disposal of fixed assets
|
|
|
(20
|
)
|
|
|
(483
|
)
|
Asset impairment
|
|
|
401
|
|
|
|
|
|
(Increase) decrease in current assets, net of the effects of acquired companies:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,281
|
|
|
|
(6,179
|
)
|
Inventories
|
|
|
(4,077
|
)
|
|
|
(3,575
|
)
|
Other current assets
|
|
|
2,825
|
|
|
|
(25,561
|
)
|
Increase (decrease) in current liabilities, net of the effects of acquired companies:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(19,500
|
)
|
|
|
2,391
|
|
Income taxes
|
|
|
(154
|
)
|
|
|
404
|
|
Unearned revenues
|
|
|
(459
|
)
|
|
|
7,905
|
|
Restructuring reserve
|
|
|
(538
|
)
|
|
|
(3,505
|
)
|
Other current and accrued liabilities
|
|
|
(8,678
|
)
|
|
|
3,690
|
|
|
Net cash provided by operating activities
|
|
|
26,998
|
|
|
|
28,799
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property, plant, and equipment
|
|
|
(12,287
|
)
|
|
|
(9,518
|
)
|
Acquisitions of businesses, net of cash acquired
|
|
|
(41,437
|
)
|
|
|
(6,700
|
)
|
Cash outflows from the sale of discontinued operations
|
|
|
|
|
|
|
(1,451
|
)
|
Decrease in restricted cash
|
|
|
|
|
|
|
2,121
|
|
Other investing activities
|
|
|
142
|
|
|
|
1,136
|
|
|
Net cash used in investing activities
|
|
|
(53,582
|
)
|
|
|
(14,412
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from stock issuances
|
|
|
9,006
|
|
|
|
6,772
|
|
Excess tax benefit on stock compensation
|
|
|
2,176
|
|
|
|
599
|
|
Proceeds from short-term debt
|
|
|
9,951
|
|
|
|
2,899
|
|
Payment of short-term debt
|
|
|
(3,598
|
)
|
|
|
(8,848
|
)
|
Increase in overdraft borrowings
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
99,491
|
|
|
|
5,967
|
|
Payment of long-term debt
|
|
|
(66,034
|
)
|
|
|
(614
|
)
|
Purchase of treasury stock
|
|
|
(50,899
|
)
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
93
|
|
|
|
6,775
|
|
|
Effect of foreign currency rate fluctuations on cash and cash equivalents
|
|
|
1,514
|
|
|
|
6,420
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(24,977
|
)
|
|
|
27,582
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
118,271
|
|
|
|
143,394
|
|
|
End of period
|
|
$
|
93,294
|
|
|
$
|
170,976
|
|
|
See accompanying notes to the condensed consolidated financial statements.
7
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 30, 2007 for
the most recent disclosure of the Companys accounting policies.
The consolidated financial statements include all adjustments, consisting only of normal recurring
adjustments, necessary to state fairly our financial position at September 28, 2008 and December
30, 2007 and our results of operations for the thirteen and thirty-nine weeks ended September 28,
2008 and September 30, 2007 and cash flows for the thirty-nine
week periods ended
September 28, 2008 and September 30, 2007. The results of operations for the interim periods should
not be considered indicative of results to be expected for the full year.
Reclassifications have been made to Note 14, Business Segments, to conform the 2007 disclosures to
the current year presentation. For more information on this reclassification see Note 19, Business
Segments and Geographic Information, on our Annual Report on Form 10-K for the fiscal year ended
December 30, 2007.
Out of Period Adjustments
During the first quarter of 2008, we identified errors in our financial statements for the fiscal
years ended 1999 through fiscal year 2007. These errors primarily related to the accounting for a
deferred compensation arrangement. We incorrectly accounted for a deferred payment arrangement to a
former executive of the Company, these deferred payments should have been appropriately accounted
for in prior periods. We corrected these errors during the first quarter of 2008, which had the
effect of increasing selling, general and administrative expenses by $1.4 million and reducing net
income by $0.8 million. These prior period errors individually and in the aggregate are not
material to the financial results for previously issued annual financial statements or previously
issued interim financial data prior to fiscal 2008 as well as the nine months ended September 28,
2008. As a result, we have not restated our previously issued annual financial statements or
previously issued interim financial data.
Stock Repurchase Program
In October 2006, our Board of Directors approved a share repurchase program that allows for the
purchase of up to 2 million shares of the Companys common stock. During the first six months of
2008, the Company repurchased 2 million shares of its common stock at an average cost of $25.42,
spending a total of $50.9 million. This completed the repurchase of shares under the Companys
repurchase authorization that was put in place during the fourth quarter of 2006. Common stock
obtained by the Company through the repurchase program has been added to our treasury stock
holdings.
8
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:
(amounts in thousands)
|
|
|
|
|
|
September 28,
|
|
Quarter ended
|
|
2008
|
|
|
Balance at beginning of year
|
|
$
|
8,108
|
|
Accruals for warranties issued
|
|
|
4,914
|
|
Settlement made
|
|
|
(4,307
|
)
|
Foreign currency translation adjustment
|
|
|
(45
|
)
|
|
Balance at end of period
|
|
$
|
8,670
|
|
|
New Accounting Pronouncements and Other Standards
We adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 157, Fair
Value Measurements (FAS 157) on December 31, 2007. This standard defines fair value, establishes
a framework for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. FAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In
February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. FAS
157-2, which deferred the effective date of FAS No. 157 for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually) until January 1, 2009. Accordingly,
our adoption of this standard in 2008 was limited to financial assets and liabilities, which
primarily affects the valuation of our derivative contracts. The adoption of FAS 157 did not have a
material effect on our financial condition or results of operations. We are still in the process of
evaluating this standard with respect to its effect on non-financial assets and liabilities and
therefore have not yet determined the impact that it will have on our financial statements upon
full adoption in 2009. Non-financial assets and liabilities for which we have not applied the
provisions of FAS 157 include those measured at fair value in impairment testing and those
initially measured at fair value in a business combination.
We adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement No. 115 (FAS 159) on December 31, 2007. FAS 159 permits
entities to choose to measure many financial instruments and certain other items at fair value.
Entities that elect the fair value option will report unrealized gains and losses in earnings at
each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument
basis, with few exceptions. FAS 159 also establishes presentation and disclosure requirements to
facilitate comparisons between companies that choose different measurement attributes for similar
assets and liabilities. The adoption of FAS 159 did not have an effect on our financial condition
or results of operations as we did not elect this fair value option, nor is it expected to have a
material impact on future periods as the election of this option for our financial instruments is
expected to be limited.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141R). SFAS 141R establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial effects of the
business combination. For the Company, SFAS No. 141R will be effective for business combinations
occurring after December 28, 2008. We are currently evaluating the potential impact of the adoption
of SFAS 141R on our financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research Bulletin No. 51 (SFAS 160). SFAS 160
establishes accounting and reporting standards for ownership interests in subsidiaries held by
parties other than the parent, the amount of consolidated net income attributable to the parent and
to the noncontrolling interest, changes in a parents ownership interest, and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also
establishes disclosure requirements that clearly identify and distinguish between the interests of
the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years
beginning after
December 15, 2008. We are currently evaluating the potential impact of the adoption of SFAS 160 on
our financial statements.
9
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities (SFAS 161). SFAS 161 changes the disclosure requirements for derivative instruments
and hedging activities. We will be required to provide enhanced disclosures about (a) how and why
derivative instruments are used, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133, Accounting for Derivative Instruments and Certain Hedging
Activities (SFAS 133), and its related interpretations, and (c) how derivative instruments and
related hedged items affect our financial position, financial performance, and cash flows. This
statement is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. We are currently evaluating the potential impact of the adoption
of SFAS 161 on our financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (FAS 162). FAS 162 identifies the sources of accounting principles and the framework
for selecting the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally accepted accounting
principles. FAS 162 directs the hierarchy to the entity, rather than the independent auditors, as
the entity is responsible for selecting accounting principles for financial statements that are
presented in conformity with generally accepted accounting principles. FAS 162 is effective 60 days
following SEC approval of the Public Company Accounting Oversight Board amendments to remove the
hierarchy of generally accepted accounting principles from the auditing standards.
In April 2008, the FASB issued Staff Position FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The intent of FSP FAS
142-3 is to improve the consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under
other accounting principles generally accepted in the United States of America. FSP FAS 142-3 is
effective for financial statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Early adoption is prohibited. We are currently
evaluating the potential impact of the adoption of FSP FAS 142-3 on our financial statements.
In June 2008, the FASB issued Staff Position FSP EITF No. 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP
EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall
be included in the computation of earnings per share pursuant to the two-class method. FSP EITF
03-6-1 is effective for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Upon adoption, a company is required to
retrospectively adjust its earnings per share data (including any amounts related to interim
periods, summaries of earnings and selected financial data) to conform to the provisions in FSP
EITF 03-6-1. Early application of FSP EITF 03-6-1 is prohibited. The adoption of FSP EITF 03-6-1 is
not anticipated to have a material effect on our Consolidated Financial Statements.
Note 2. 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 28, 2008
was $2.0 million and $5.9 million ($1.5 million and $4.1 million, net of tax) or $.04 per diluted
share and $.10 per diluted share. For the three and nine months ended September 30, 2007, the total
compensation expense 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. The associated actual tax benefit realized
for the tax deduction from option exercises of share-based payment units equaled $3.0 million and
$1.0 million for the nine months ended September 28, 2008 and September 30, 2007, respectively.
10
Stock Options
Option activity under the principal option plans as of September 28, 2008 and changes during the
nine months ended September 28, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted -
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
Contractual
|
|
Intrinsic
|
|
|
|
|
|
|
Exercise
|
|
Term
|
|
Value
|
|
|
Shares
|
|
Price
|
|
(in years)
|
|
(in thousands)
|
|
Outstanding at December 30, 2007
|
|
|
3,405,902
|
|
|
$
|
17.45
|
|
|
|
6.21
|
|
|
$
|
28,950
|
|
Granted
|
|
|
275,981
|
|
|
|
23.75
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(687,504
|
)
|
|
|
12.42
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(135,266
|
)
|
|
|
22.66
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 28, 2008
|
|
|
2,859,113
|
|
|
$
|
19.02
|
|
|
|
6.77
|
|
|
$
|
6,577
|
|
|
Vested and expected to vest at September 28, 2008
|
|
|
2,592,061
|
|
|
$
|
18.59
|
|
|
|
6.53
|
|
|
$
|
6,576
|
|
|
Exercisable at September 28, 2008
|
|
|
1,844,634
|
|
|
$
|
16.56
|
|
|
|
5.49
|
|
|
$
|
6,568
|
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the
difference between the Companys closing stock price on the last trading day of the third quarter
of fiscal 2008 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 28, 2008. This amount changes based on the fair market value of the Companys stock.
Total intrinsic value of options exercised for the nine months ended September 28, 2008 and
September 30, 2007 was $8.2 million and $2.8 million, respectively.
As of September 28, 2008, $5.2 million of total unrecognized compensation cost related to stock
options is expected to be recognized over a weighted-average period of 2.5 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 28,
|
|
September 30,
|
Nine months ended
|
|
2008
|
|
2007
|
|
Weighted-average fair value of grants
|
|
$
|
8.73
|
|
|
$
|
8.90
|
|
Valuation assumptions:
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
38.27
|
%
|
|
|
36.56
|
%
|
Expected life (in years)
|
|
|
4.89
|
|
|
|
4.56
|
|
Risk-free interest rate
|
|
|
2.483
|
%
|
|
|
4.557
|
%
|
11
Restricted Stock Units
Nonvested service based restricted stock units as of September 28, 2008 and changes during the nine
months ended September 28, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Weighted-
|
|
|
Number of
|
|
Average Vest
|
|
Average Grant
|
|
|
Shares
|
|
Date
|
|
Date Fair
|
|
|
(in thousands)
|
|
(in years)
|
|
Value
|
|
Nonvested at December 30, 2007
|
|
|
376,386
|
|
|
|
1.48
|
|
|
$
|
32.70
|
|
Granted
|
|
|
206,353
|
|
|
|
|
|
|
$
|
22.95
|
|
Vested
|
|
|
(79,649
|
)
|
|
|
|
|
|
$
|
23.68
|
|
Forfeited
|
|
|
(8,762
|
)
|
|
|
|
|
|
$
|
25.96
|
|
|
Nonvested at September 28, 2008
|
|
|
494,328
|
|
|
|
1.24
|
|
|
$
|
38.75
|
|
|
Vested and expected to vest at September 28, 2008
|
|
|
293,024
|
|
|
|
1.08
|
|
|
|
|
|
|
Vested at September 28, 2008
|
|
|
52,500
|
|
|
|
|
|
|
|
|
|
|
The total fair value of restricted stock awards vested during the first nine months of 2008 was
$1.9 million as compared to $0.6 million in the first nine months of 2007.
As of September 28, 2008, there was $4.2 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 2.3 years.
Note 3. INVENTORIES
Inventories consist of the following:
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
September 28,
|
|
|
December 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Raw materials
|
|
$
|
16,569
|
|
|
$
|
16,352
|
|
Work-in-process
|
|
|
5,680
|
|
|
|
6,497
|
|
Finished goods
|
|
|
93,279
|
|
|
|
86,480
|
|
|
Total
|
|
$
|
115,528
|
|
|
$
|
109,329
|
|
|
12
Note 4. GOODWILL AND OTHER INTANGIBLE ASSETS
We had intangible assets with a net book value of $121.3 million and $119.3 million as of September
28, 2008 and December 30, 2007, respectively.
The following table reflects the components of intangible assets as of September 28, 2008 and
December 30, 2007:
(dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2008
|
|
December 30, 2007
|
|
|
Amortizable
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
Life
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
Accumulated
|
|
|
(years)
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortization
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists
|
|
|
20
|
|
|
$
|
85,270
|
|
|
$
|
30,795
|
|
|
$
|
80,104
|
|
|
$
|
26,535
|
|
Trade name
|
|
|
30
|
|
|
|
31,389
|
|
|
|
16,114
|
|
|
|
31,662
|
|
|
|
15,695
|
|
Patents, license agreements
|
|
|
5 to 14
|
|
|
|
62,432
|
|
|
|
40,662
|
|
|
|
62,716
|
|
|
|
38,076
|
|
Other
|
|
|
3 to 6
|
|
|
|
9,964
|
|
|
|
2,707
|
|
|
|
5,890
|
|
|
|
1,322
|
|
|
Total amortized finite-lived intangible assets
|
|
|
|
|
|
|
189,055
|
|
|
|
90,278
|
|
|
|
180,372
|
|
|
|
81,628
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
|
|
|
|
22,556
|
|
|
|
|
|
|
|
20,550
|
|
|
|
|
|
|
Total identifiable intangible assets
|
|
|
|
|
|
$
|
211,611
|
|
|
$
|
90,278
|
|
|
$
|
200,922
|
|
|
$
|
81,628
|
|
|
Amortization expense for the three and nine months ended September 28, 2008 was $3.3 million and
$9.4 million, respectively. Amortization expense for the three and nine months ended September 30,
2007 was $1.4 million and $3.0 million, respectively.
Estimated amortization expense for each of the five succeeding years is anticipated to be:
|
|
|
|
|
(amounts in thousands)
|
|
|
|
|
2008
|
|
$
|
12,818
|
|
2009
|
|
$
|
13,024
|
|
2010
|
|
$
|
12,261
|
|
2011
|
|
$
|
10,691
|
|
2012
|
|
$
|
9,878
|
|
|
The changes in the carrying amount of goodwill for the nine months ended September 28, 2008, are as
follows:
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shrink
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
Intelligent
|
|
|
Retail
|
|
|
|
|
|
|
Solutions
|
|
|
Labels
|
|
|
Merchandising
|
|
|
Total
|
|
|
Balance as of December 30, 2007
|
|
$
|
139,944
|
|
|
$
|
56,314
|
|
|
$
|
78,343
|
|
|
$
|
274,601
|
|
Acquired during the year
|
|
|
23,546
|
|
|
|
|
|
|
|
|
|
|
|
23,546
|
|
Purchase accounting adjustment
|
|
|
261
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
256
|
|
Translation adjustments
|
|
|
(502
|
)
|
|
|
(514
|
)
|
|
|
(918
|
)
|
|
|
(1,934
|
)
|
|
Balance as of September 28, 2008
|
|
$
|
163,249
|
|
|
$
|
55,795
|
|
|
$
|
77,425
|
|
|
$
|
296,469
|
|
|
In June 2008, the Company purchased the business of OATSystems, Inc., a privately held company, for
approximately $37.2 million, net of cash acquired of $0.9 million, and including the assumption of
$3.2 million of OATSystems, Inc. debt. The transaction was paid in cash. Additionally, we acquired
$3.2 million in liabilities.
The financial statements reflect the preliminary allocations of the OATSystems, Inc. purchase price
based on estimated fair values at the date of acquisition. This allocation has resulted in acquired
goodwill of $22.9 million. We are currently in the process of evaluating whether to make an
Internal Revenue Code Section 338 election to treat the purchase as an asset acquisition rather
than a
stock purchase for tax purposes; therefore, the amount of goodwill that is expected to be
deductible for tax purposes has not yet been determined. If we make the Section 338 election, there
could be a significant impact on deferred taxes and goodwill recorded for book purposes as a result
of the acquisition. The allocation of the purchase price is expected to be completed during fiscal
year 2008. The results from the acquisition date through September 28, 2008 are included in the
Shrink Management Solutions segment and were not material to the consolidated financial statements.
13
In January 2008, the Company purchased the business of Security Corporation, Inc., a privately held
company that provides technology and physical security solutions to the financial services sector,
for $7.5 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
$0.7 million, which is deductible for tax purposes. We also acquired intangibles of $5.2 million
related to customer lists with a useful life of 10 years. The results from the acquisition date
through September 28, 2008 are included in the Shrink Management Solutions segment and were not
material to the consolidated financial statements.
Pursuant to SFAS 142 Goodwill and Other Intangible Assets, we perform an assessment of goodwill
by comparing each individual reporting units carrying amount of net assets, including goodwill, to
their fair value at least annually during the fourth quarter of each fiscal year and whenever
events or changes in circumstances indicate that the carrying value may not be recoverable. Future
annual assessments could result in impairment charges, which would be accounted for as an operating
expense.
Note 5. LONG-TERM DEBT
Long-term debt at September 28, 2008 and December 30, 2007 consisted of the following:
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
September 28,
|
|
|
December 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Senior unsecured credit facility:
|
|
|
|
|
|
|
|
|
$150 million variable interest rate revolving credit facility maturing in 2010
|
|
$
|
130,782
|
|
|
$
|
91,496
|
|
Asialco loans maturing in 2008
|
|
|
|
|
|
|
3,418
|
|
Other capital leases with maturities through 2012
|
|
|
382
|
|
|
|
598
|
|
|
Total
|
|
|
131,164
|
|
|
|
95,512
|
|
Less current portion
|
|
|
329
|
|
|
|
3,756
|
|
|
Total long-term portion
|
|
$
|
130,835
|
|
|
$
|
91,756
|
|
|
The senior unsecured credit facility increased by $39.3 million since December 30, 2007. The
increase in borrowings was primarily used to finance our stock repurchase program and the
OATSystems, Inc. acquisition.
In November 2007, we acquired SIDEP and the remaining interest in Asialco from its minority
shareholders. As part of the acquisition, we acquired $3.4 million (25 million RMB) of outstanding
debt of Asialco. The loan was paid down in May 2008 and was renewed for a 12 month period under the
original terms of the loan agreement. As of September 28, 2008, the outstanding Asialco loan
balance is $3.6 million (25 million RMB) and has a weighted average interest rate of 7.20%. The
loan is collateralized by land and buildings with an aggregate carrying value of $6.1 million at
September 28, 2008. The loan matures in May 2009 and is included in short-term borrowings in the
accompanying consolidated balance sheets.
At September 28, 2008, our existing Japanese local line of credit equaled ¥800 million ($7.6
million) and had an outstanding balance of ¥700 million ($6.6 million) and availability of ¥100
million ($0.9 million). The line of credit expires in March 2009 and is included in short-term
borrowings in the accompanying consolidated balance sheets.
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 28, 2008, we were in compliance with all covenants.
14
Note 6. 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
|
|
|
September 28,
|
|
|
September 30,
|
|
|
September 28,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Earnings available to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings available to common stockholders
|
|
$
|
12,776
|
|
|
$
|
14,347
|
|
|
$
|
31,930
|
|
|
$
|
33,887
|
|
|
Diluted earnings available to common stockholders
|
|
|
12,776
|
|
|
|
14,347
|
|
|
|
31,930
|
|
|
|
33,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
38,617
|
|
|
|
39,667
|
|
|
|
39,193
|
|
|
|
39,485
|
|
Shares issuable under deferred compensation arrangements
|
|
|
316
|
|
|
|
319
|
|
|
|
343
|
|
|
|
306
|
|
|
Basic weighted average number of common shares outstanding
|
|
|
38,933
|
|
|
|
39,986
|
|
|
|
39,536
|
|
|
|
39,791
|
|
Common shares assumed upon exercise of stock options and awards
|
|
|
439
|
|
|
|
976
|
|
|
|
656
|
|
|
|
834
|
|
Shares issuable under deferred compensation arrangements
|
|
|
11
|
|
|
|
11
|
|
|
|
12
|
|
|
|
13
|
|
|
Dilutive weighted-average number of common shares outstanding
|
|
|
39,383
|
|
|
|
40,973
|
|
|
|
40,204
|
|
|
|
40,638
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
.33
|
|
|
$
|
.36
|
|
|
$
|
.81
|
|
|
$
|
.85
|
|
Earnings from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.01
|
|
|
Basic earnings per share
|
|
$
|
.33
|
|
|
$
|
.36
|
|
|
$
|
.81
|
|
|
$
|
.86
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
.32
|
|
|
$
|
.35
|
|
|
$
|
.79
|
|
|
$
|
.84
|
|
Earnings from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.01
|
|
|
Diluted earnings per share
|
|
$
|
.32
|
|
|
$
|
.35
|
|
|
$
|
.79
|
|
|
$
|
.85
|
|
|
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
|
|
|
|
September 28,
|
|
|
September 30,
|
|
|
September 28,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Weighted-average
common share
equivalents
associated with
anti-dilutive stock
options and
restricted stock
units excluded from
the computation of
diluted EPS:
|
|
|
1,359
|
|
|
|
486
|
|
|
|
1,253
|
|
|
|
534
|
|
|
Note 7. 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.
15
Note 8. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes for the thirty-nine week periods ended September 28,
2008 and September 30, 2007 were as follows:
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
(39 weeks) Ended
|
|
|
September 28,
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Interest
|
|
$
|
3,736
|
|
|
$
|
819
|
|
Income tax payments
|
|
$
|
10,799
|
|
|
$
|
8,741
|
|
|
Note 9. PROVISION FOR RESTRUCTURING
Provisions for Restructuring
2005 Restructuring Plan
In the second quarter of 2005, we initiated actions focused on reducing our overall operating
expenses. The 2005 Restructuring Plan included the implementation of a cost reduction initiative
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.
A net charge of $4.8 million was recorded in the first nine months of 2008 related to
restructuring. The charge was composed of $3.6 million of severance accruals in connection with the
2005 Restructuring Plan. Also included in the charge was $0.3 million of additional restructuring
expense related to the consolidation of our SIDEP entities in France, $0.1 million of lease
termination costs, and an asset impairment of $0.4 million in our Japan manufacturing facility. The charge was
partially offset by a $0.3 million release related to the 2004 Restructuring Plan. In addition, we
recorded $0.7 million related to consulting expenses associated with the formulation of our new
restructuring plan.
The total number of employees affected by the restructuring is 827, of which 778 have been
terminated. The remaining terminations are expected to be completed by the end of fiscal year 2008.
The anticipated total cost is expected to be approximately $29 million to $30 million, of which $29
million has been incurred and $26 million has been paid. Termination benefits are planned to be
paid one month to 24 months after termination of employment.
Restructuring accrual activity was as follows:
Fiscal 2008
(amounts are in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual at
|
|
|
|
|
|
Charge
|
|
|
|
|
|
|
|
|
Beginning of
|
|
Charged to
|
|
Reversed to
|
|
Cash
|
|
Exchange
|
|
Accrual at
|
|
|
Year
|
|
Earnings
|
|
Earnings
|
|
Payments
|
|
Rate Changes
|
|
9/28/2008
|
|
Severance and other employee-related charges
|
|
$
|
3,015
|
|
|
$
|
3,694
|
|
|
$
|
(173
|
)
|
|
$
|
(3,554
|
)
|
|
$
|
(4
|
)
|
|
$
|
2,978
|
|
Lease termination costs
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
Acquisition restructuring costs
|
|
|
1,209
|
|
|
|
|
|
|
|
|
|
|
|
(525
|
)
|
|
|
12
|
|
|
|
696
|
|
|
Total
|
|
$
|
4,224
|
|
|
$
|
3,765
|
|
|
$
|
(173
|
)
|
|
$
|
(4,150
|
)
|
|
$
|
8
|
|
|
$
|
3,674
|
|
|
16
Note 10. EMPLOYEE BENEFIT PLANS
The components of net periodic benefit cost for the thirteen week and thirty-nine week periods
ended September 28, 2008 and September 30, 2007 were as follows:
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
Nine Months
|
|
|
|
(13 weeks) Ended
|
|
|
(39 weeks) Ended
|
|
|
|
September 28,
|
|
|
September 30,
|
|
|
September 28,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Service cost
|
|
$
|
277
|
|
|
$
|
357
|
|
|
$
|
844
|
|
|
$
|
1,044
|
|
Interest cost
|
|
|
1,183
|
|
|
|
1,025
|
|
|
|
3,587
|
|
|
|
3,012
|
|
Expected return on plan assets
|
|
|
(18
|
)
|
|
|
(36
|
)
|
|
|
(56
|
)
|
|
|
(106
|
)
|
Amortization of actuarial (gain) loss
|
|
|
(12
|
)
|
|
|
119
|
|
|
|
(34
|
)
|
|
|
350
|
|
Amortization of transition obligation
|
|
|
34
|
|
|
|
32
|
|
|
|
107
|
|
|
|
94
|
|
Amortization of prior service cost
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
Net periodic pension cost
|
|
$
|
1,465
|
|
|
$
|
1,498
|
|
|
$
|
4,450
|
|
|
$
|
4,396
|
|
|
We expect the cash requirements for funding the pension benefits to be approximately $4.9 million
during fiscal 2008, including $3.5 million which was funded during the nine months ended September
28, 2008.
Note 11. FAIR VALUE MEASUREMENT
As discussed in Note 1, we adopted FAS 157 on December 31, 2007, which among other things, requires
enhanced disclosures about assets and liabilities measured at fair value. Our adoption of FAS 157
was limited to financial assets and liabilities, which primarily relate to our derivative
contracts.
We utilize the market approach to measure fair value for our financial assets and liabilities. The
market approach uses prices and other relevant information generated by market transactions
involving identical or comparable assets or liabilities.
FAS 157 includes a fair value hierarchy that is intended to increase consistency and comparability
in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to
valuation techniques that are used to measure fair value that are either observable or
unobservable. Observable inputs reflect assumptions market participants would use in pricing an
asset or liability based on market data obtained from independent sources while unobservable inputs
reflect a reporting entitys pricing based upon their own market assumptions. The fair value
hierarchy consists of the following three levels:
|
|
|
|
|
|
|
Level 1
|
|
-
|
|
Inputs are quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
|
|
|
Level 2
|
|
-
|
|
Inputs are quoted prices for similar assets or liabilities in an active
market, quoted prices for identical or similar assets or liabilities in
markets that are not active, inputs other than quoted prices that are
observable and market-corroborated inputs which are derived principally from
or corroborated by observable market data.
|
|
|
|
|
|
|
|
Level 3
|
|
-
|
|
Inputs are derived from valuation techniques in which one or more significant
inputs or value drivers are unobservable.
|
17
The following table represents our financial assets and liabilities measured at fair value as of
September 28, 2008 and the basis for that measurement:
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
Total Fair
|
|
in Active
|
|
Significant
|
|
|
|
|
Value
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
Measurement
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
September 28,
|
|
Asset
|
|
Inputs
|
|
Inputs
|
|
|
2008
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Derivative assets
|
|
$
|
1,445
|
|
|
$
|
|
|
|
$
|
1,445
|
|
|
$
|
|
|
|
Total assets
|
|
$
|
1,445
|
|
|
$
|
|
|
|
$
|
1,445
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
forward exchange
contracts
|
|
$
|
11
|
|
|
$
|
|
|
|
$
|
11
|
|
|
$
|
|
|
|
Total liabilities
|
|
$
|
11
|
|
|
$
|
|
|
|
$
|
11
|
|
|
$
|
|
|
|
During 2008, we entered into various foreign currency contracts to reduce our
exposure to forecasted 2008 Euro-denominated inter-company revenues. These contracts were
designated as cash flow hedges. The foreign currency contracts mature at various dates from October
2008 to June 2009. The purpose of these cash flow hedges is to eliminate the currency risk
associated with Euro-denominated forecasted revenues due to changes in exchange rates. As of
September 28, 2008, the fair value of these cash flow hedges were reflected as a $1.4 million asset
and are included in other current assets in the accompanying consolidated balance sheets. The total
notional amount of these hedges is $18.8 million (12.3 million Euros) and the unrealized gain
recorded in other comprehensive income was $1.4 million. During the three and nine months ended
September 28, 2008, a $73 thousand benefit related to these foreign currency hedges was recorded to
cost of goods sold as the inventory was sold to external parties. As of September 28, 2008, deferred net gains or losses on derivative instruments included in
accumulated other comprehensive income that are expected to be reclassified as earnings during the
next twelve months is approximately $1.4 million.
During the first quarter of 2008, we entered into an interest rate swap agreement with a notional
amount of $40 million and a maturity date of February 18, 2010. The purpose of this interest rate
swap agreement is to hedge potential changes to our cash flows due to the variable interest nature
of our senior unsecured credit facility. This interest rate swap was designated as a cash flow
hedge under SFAS 133. As of September 28, 2008, the fair value of the interest rate swap agreement
was reflected as a $0.1 million asset and is included in other assets in the accompanying
consolidated balance sheets.
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. 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. As of
September 28, 2008, the fair value of the forward exchange contracts was reflected as an $11
thousand liability and is included in other current liabilities in the accompanying balance sheets.
Note 12. INCOME TAXES
The effective tax rate on continuing operations for the thirty-nine weeks ended September 28, 2008
was 5.3%. During the first nine months of 2008, we recorded a 16.0% benefit primarily associated
with a valuation allowance release, settlement of a tax audit, deferred compensation adjustments,
and ongoing organizational restructuring. A $4.8 million benefit was recorded relating to the
release of a valuation allowance as a result of strategic decisions related to foreign operations
and the related impact of assumptions of future taxable income. A $1.1 million benefit was recorded
relating to the release of unrecognized tax benefits associated with the favorable settlement of an
Australian tax audit. The Australian tax audit adjustment was previously disclosed in our fiscal
year 2007 Form 10-K filing. In addition, we recorded a $2.1 million benefit associated with
deferred compensation adjustments and ongoing organizational restructuring activities.
Note 13. 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.
18
Note 14. BUSINESS SEGMENTS
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
Nine Months
|
|
|
|
(13 weeks) Ended
|
|
|
(39 weeks) Ended
|
|
|
|
September 28,
|
|
|
September 30,
|
|
|
September 28,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Business segment net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
|
$
|
148,894
|
|
|
$
|
118,953
|
|
|
$
|
412,037
|
|
|
$
|
315,388
|
|
Intelligent Labels
|
|
|
62,192
|
|
|
|
63,615
|
|
|
|
195,479
|
|
|
|
186,305
|
|
Retail Merchandising
|
|
|
22,909
|
|
|
|
22,021
|
|
|
|
72,299
|
|
|
|
69,800
|
|
|
Total revenues
|
|
|
233,995
|
|
|
|
204,589
|
|
|
|
679,815
|
|
|
|
571,493
|
|
|
Business segment gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
|
|
62,001
|
|
|
|
49,139
|
|
|
|
167,384
|
|
|
|
126,675
|
|
Intelligent Labels
|
|
|
24,053
|
|
|
|
25,680
|
|
|
|
78,533
|
|
|
|
78,992
|
|
Retail Merchandising
|
|
|
11,577
|
|
|
|
10,829
|
|
|
|
36,134
|
|
|
|
33,255
|
|
|
Total gross profit
|
|
|
97,631
|
|
|
|
85,648
|
|
|
|
282,051
|
|
|
|
238,922
|
|
|
Operating expenses
|
|
|
79,509
|
|
|
|
67,250
|
|
|
|
244,309
|
|
|
|
195,700
|
|
Interest (expense) income, net
|
|
|
(845
|
)
|
|
|
1,321
|
|
|
|
(2,033
|
)
|
|
|
3,112
|
|
Other (loss) gain, net
|
|
|
(1,512
|
)
|
|
|
66
|
|
|
|
(2,118
|
)
|
|
|
(327
|
)
|
|
Earnings before income taxes and minority interest
|
|
$
|
15,765
|
|
|
$
|
19,785
|
|
|
$
|
33,591
|
|
|
$
|
46,007
|
|
|
19
Item 2. MANAGEMENTS 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 30, 2007, 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
Managements Discussion and Analysis of Financial Condition and Results of Operations of our
Annual Report on Form 10-K filed for the year ended
December 30, 2007.
Overview
We are a multinational manufacturer and marketer of identification, tracking, security and
merchandising solutions for the retail industry. 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, and earn revenues primarily from the sale of, electronic
article surveillance (EAS), closed-circuit television (CCTV), custom tags and labels (CheckNet
®
),
hand-held labeling systems (HLS), retail merchandising systems (RMS), and radio frequency
identification (RFID) systems and software. Applications of these products include primarily retail
security, asset and merchandise visibility, automatic identification, and pricing and promotional
labels and signage. Operating directly in 31 countries, we have a global network of subsidiaries
and distributors, and provide customer service and technical support around the world.
Historically, we have reported our results of operations into three segments: Security, Labeling
Services, and Retail Merchandising. During the fourth quarter of 2007, resulting from previously
announced changes in our management structure, we began reporting our segments into three new
segments: Shrink Management Solutions, Intelligent Labels, and Retail Merchandising. The third
quarter of fiscal 2007 has been conformed to reflect the segment change. The gross margins for each
of the segments are set forth in Note 14 Business Segments to the consolidated financial
statements.
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., material
fluctuations in foreign currency exchange rates could have a significant impact on our results.
We believe that some markets we serve are slowing as a result of the unprecedented credit crisis
and projected softening of the global economic environment. In response to anticipated market
conditions, we will continue to be focused on providing customers with innovative products that
will be valuable in addressing shrink, which is particularly important during a difficult economic
environment. We are also moving forward with initiatives to reduce costs and improve working
capital to mitigate the effects of the economy on our business. We believe that the strength of our
core business and our ability to generate positive cash flow will sustain Checkpoint through this
challenging period.
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.
20
During early 2008, we introduced Evolve
TM
, our new state-of-the-art shrink management
platform. Evolve is our next-generation suite of RF and RFID enabled products that provide
enhanced system performance and networking capability information in a more aesthetically pleasing
format. Our business model relies upon customer commitments for our security product installations
to a large number of their stores over a period of several months (large chain-wide installations).
This new product will allow our existing customers to upgrade their security offerings and should
result in increased installations for the future. The enhanced capabilities of the Evolve platform
should also attract interest from new retail customers. As is typical with market introductions of
new products in this industry, we expect the Evolve
TM
roll-out to positively impact our
revenues over an 18-month period starting with existing customers.
During June 2008, we acquired OATSystems, Inc., a leader in RFID-based application software and
middleware. The addition of OATSystems, Inc. will build on our strategy of helping retailer and
suppliers migrate more easily with our Evolve Electronic Article Surveillance platform to
Electronic Product Code (EPC) RFID. As our industry moves to a common EPC standard, we will now be
able to offer solutions that enable retailers and their supply chains to gain deeper visibility of
their assets and merchandise- further reducing shrink and increasing the bottom-line profits by
enhancing on-shelf merchandise availability for consumers.
Additionally, our acquisitions of Alpha S3 and SIDEP in 2007 have expanded our product portfolio.
We anticipate that these acquisitions will help us improve our product offering and, coupled with
our external global distribution chain, provide a platform for continued growth. In addition to
improving our offering of shrink management solutions, the Alpha S3 acquisition adds products for
use with acoustic-magnetic (AM) technology, providing the potential to expand our penetration in
retail customers that are not using our RF EAS solutions.
In August 2008, the Company announced a manufacturing and supply chain restructuring program
designed to accelerate profitable growth in our CheckNet® business and to support incremental
improvements in its EAS hardware and labels businesses. Following additional analysis of its
CheckNet® business, we now expect this program to result in total after-tax restructuring charges
of approximately $3 million, or $0.07 per diluted share, of which $2 million, or $0.04 per diluted
share, is anticipated to be incurred in 2008. The Company continues to expect implementation of
this program to be complete in 2010 and to result in annualized cost savings of approximately $6
million. Through the first nine months of 2008, the Company has incurred total charges relating to
this program of $0.7 million, or $0.02 per diluted share. In addition to the restructuring charges,
the Company now expects costs to expand capacity that are associated with this program to be
approximately $0.03 per diluted share in 2008.
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 prior year period, 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.
21
Analysis of Statement of Operations
Thirteen Weeks Ended September 28, 2008 Compared to Thirteen Weeks Ended September 30, 2007
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
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
In Dollar
|
|
|
|
Percentage of Total Revenues
|
|
|
Amount
|
|
|
|
September 28,
|
|
|
September 30,
|
|
|
Fiscal 2008
|
|
|
|
2008
|
|
|
2007
|
|
|
vs.
|
|
Quarter ended
|
|
(Fiscal 2008)
|
|
|
(Fiscal 2007)
|
|
|
Fiscal 2007
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
|
|
63.6
|
%
|
|
|
58.1
|
%
|
|
|
25.2
|
%
|
Intelligent Labels
|
|
|
26.6
|
|
|
|
31.1
|
|
|
|
(2.2
|
)
|
Retail Merchandising
|
|
|
9.8
|
|
|
|
10.8
|
|
|
|
4.0
|
|
|
Net revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
14.4
|
|
Cost of revenues
|
|
|
58.3
|
|
|
|
58.1
|
|
|
|
14.6
|
|
|
Total gross profit
|
|
|
41.7
|
|
|
|
41.9
|
|
|
|
14.0
|
|
Selling, general and administrative expenses
|
|
|
31.6
|
|
|
|
30.3
|
|
|
|
19.0
|
|
Research and development
|
|
|
2.3
|
|
|
|
2.5
|
|
|
|
3.3
|
|
Restructuring expense
|
|
|
0.4
|
|
|
|
|
|
|
|
N/A
|
|
Litigation settlement
|
|
|
0.2
|
|
|
|
|
|
|
|
N/A
|
|
Other operating income
|
|
|
0.5
|
|
|
|
|
|
|
|
N/A
|
|
|
Operating income
|
|
|
7.7
|
|
|
|
9.1
|
|
|
|
(1.5
|
)
|
Interest income
|
|
|
0.3
|
|
|
|
0.8
|
|
|
|
N/A
|
|
Interest expense
|
|
|
0.7
|
|
|
|
0.2
|
|
|
|
N/A
|
|
Other (loss) gain, net
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
N/A
|
|
|
Earnings before income taxes and minority interest
|
|
|
6.7
|
|
|
|
9.7
|
|
|
|
(20.3
|
)
|
Income taxes expense
|
|
|
1.2
|
|
|
|
2.7
|
|
|
|
N/A
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
Earnings from continuing operations
|
|
|
5.5
|
|
|
|
7.0
|
|
|
|
(11.0
|
)
|
Earnings from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
Net earnings
|
|
|
5.5
|
%
|
|
|
7.0
|
%
|
|
|
(10.9)
|
%
|
|
|
|
|
N/A Comparative percentages are not meaningful.
|
22
Net Revenues
Revenues for the third quarter 2008 compared to the third quarter 2007 increased by $29.4 million
or 14.4% from $204.6 million to $234.0 million. Foreign currency translation had a positive impact
on revenues of approximately $10.6 million or 5.2% in the third quarter of 2008 as compared to the
third quarter of 2007.
(amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
Change
|
|
|
September 28,
|
|
September 30,
|
|
Fiscal 2008
|
|
Fiscal 2008
|
|
|
2008
|
|
2007
|
|
vs.
|
|
vs.
|
Quarter ended
|
|
(Fiscal 2008)
|
|
(Fiscal 2007)
|
|
Fiscal 2007
|
|
Fiscal 2007
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
|
$
|
148.9
|
|
|
$
|
119.0
|
|
|
$
|
29.9
|
|
|
|
25.2
|
%
|
Intelligent Labels
|
|
|
62.2
|
|
|
|
63.6
|
|
|
|
(1.4
|
)
|
|
|
(2.2
|
)
|
Retail Merchandising
|
|
|
22.9
|
|
|
|
22.0
|
|
|
|
0.9
|
|
|
|
4.0
|
|
|
Net Revenues
|
|
$
|
234.0
|
|
|
$
|
204.6
|
|
|
$
|
29.4
|
|
|
|
14.4
|
%
|
|
Shrink Management Solutions revenues increased by $29.9 million, or 25.2%, in the third quarter
2008 as compared to the third quarter 2007. Foreign currency translation had a positive impact of
approximately $6.5 million. The Alpha, SIDEP, and OATSystems acquisitions increased revenues for
the third quarter 2008 by $25.9 million. These increases in revenue were partially offset by
declines in SMS hardware and CCTV of $1.8 million and $0.5 million, respectively. The decrease in
SMS hardware was due primarily to declines in Europe and Latin America, partially offset by
increased revenue in U.S. and Asia. The decline in Europe was primarily attributable to large
chain-wide roll-outs in Spain in 2007 that did not occur to the extent in 2008 and a 2008 decline
in France revenues due to weak economic conditions in the country. This was partially offset by
increases in revenue due to large chain-wide roll-outs in Germany and Belgium. The decline in SMS
hardware revenue in Latin America was due primarily to declines in Mexico due to large roll-outs in
2007 without comparable revenue in 2008. The increase in U.S. was due to a large chain-wide
roll-out in 2008. The increase in Asia was due to continued roll-outs in New Zealand, partially
offset by a decline in Australia and Japan due to difficult comparable revenues in 2007. Our SMS
hardware business is dependent upon new store openings which could continue to be impacted by
current economic trends. Our plan is to partially mitigate this issue by selling new solutions to
existing customers and increase our market share through the innovative products such
as Evolve
TM
. CCTV revenue decreased $0.5 million for the third quarter 2008. This was due
primarily to a decline in U.S. CCTV revenues of $1.8 million partially offset by increases in
Canada, Denmark, and Japan. The U.S. CCTV business decline was composed of a $5.0 million decline
in our U.S. CCTV retail business, partially offset by a $3.2 million increase in our U.S. CCTV
banking business. The banking business revenue increase benefited by $2.7 million due to our
acquisition in January 2008. We anticipate the impact of this current acquisition to continue into
the first quarter 2009. The two prior banking acquisitions from 2007 have become comparable in the
third quarter 2008 and the growth has been negatively impacted due to the economic conditions in
the banking industry. The $5.0 million decline in our U.S. CCTV retail business resulted from
difficult comparables in 2007 coupled with the current economic conditions in the retail industry.
CCTV organic growth has a significant portion of its revenue growth dependent upon new store
openings which could continue to be impacted by current U.S. economic trends. We anticipate Alpha
revenue to continue its growth through the remainder of 2008 and to meet our previously disclosed
annual revenue expectation of over $83 million.
Intelligent Labels revenues decreased by $1.4 million, or 2.2%, in the third quarter 2008 as
compared to the third quarter 2007. This decrease was due primarily to a $3.9 million decline in
EAS labels, coupled with a $1.2 million decline in our Library business. These declines in revenues
were partially offset by a positive impact of $2.2 million due to foreign currency translation and
$1.0 million increase associated with the SIDEP acquisition. The decrease in EAS label revenue in
the third quarter of 2008 was due to general overall volume declines in all regions compared to the
third quarter of 2007. The EAS label decline was impacted by current economic conditions, coupled
with competitive pricing pressures in certain regions. We anticipate that weak economic conditions
could continue to impact our EAS label volumes in future quarters. The decline in our Library
business was due to the transition period for our 3M distributor agreement compared to direct sales
in the prior year. Our CheckNet® business decreased $0.2 million due to a $4.1 million decline in
Europe offset by increases in revenue of $2.7 million and $1.2 million in the U.S. and Asia,
respectively. The decline in Europe is due primarily to economic conditions in the region and a
shift in revenues to Asia for certain customers previously serviced out of Europe. The U.S. revenue
increase is attributable to new customers coupled with growth in existing customers. We anticipate
that weak economic conditions could continue to impact our CheckNet® revenues and that growth in
new customer orders could partially mitigate this impact.
23
Retail Merchandising revenues increased by $0.9 million or 4.0%. The positive impact of foreign
currency translation was approximately $1.9 million. This increase was partially offset by declines
in our RMS business and HLS business of $0.7 million and $0.3 million, respectively. The decline in
RMS was due primarily to declines in Europe and Asia of $0.5 million and $0.2 million, respectively
due to difficult comparables. We anticipate RMS to continue to face difficult revenue comparables
for the remainder of 2008 due to the large remodel work performed in 2007.
Gross Profit
Gross profit for the third quarter of 2008 was $97.6 million, or 41.7% of revenues, compared to
$85.6 million, or 41.9% of revenues, for the third quarter of 2007. Foreign currency translation
had a positive impact on gross profit of approximately $4.2 million in the third quarter of 2008.
Shrink Management Solutions gross profit as a percentage of Shrink Management Solutions revenues
increased to 41.6% in the third quarter of 2008, from 41.3% in the third quarter of 2007. The
increase in Shrink Management Solutions gross profit percentage was due primarily to our Alpha
business and improved margins in our CCTV business partially offset by a decline in our SMS
hardware margins. The increase in margins in CCTV were due primarily to improved project management
during the third quarter of 2008 compared to the third quarter of 2007. SMS hardware margins
declined due to product mix and higher product cost resulting in lower margins primarily in the
U.S. We are currently addressing the margins in the U.S. and anticipate improvement in future
quarters.
Intelligent Labels gross profit as a percentage of Intelligent Labels revenues decreased to 38.7%
in the third quarter 2008, from 40.4% in the third quarter 2007. The decrease in Intelligent Labels
gross profit percentage was due primarily to declines in margins for EAS labels and our Library
business, partially offset by improved margins in our CheckNet® business. The EAS labels margins
were negatively impacted by manufacturing variances that were primarily attributable to volume
declines, production issues resulting in labor inefficiencies and increased scrap, coupled with
higher energy costs. The Library margins were negatively impacted by the 3M deal, which shifted our
business model from direct sales to selling to a distributor with lower margins. We anticipate the
Library margins to continue at their current levels for the remainder of the year due to the
transition from the direct to indirect sales model. The improvement in the CheckNet® margins was
due primarily to higher margins in our U.S. print business and improved margins from our shift of
business from Europe to Asia. We anticipate this shift in operations should continue to benefit our
CheckNet® margins in future quarters
The Retail Merchandising gross profit as a percentage of Retail Merchandising revenues increased to
50.5% in the third quarter of 2008, from 49.2% in the third quarter of 2007, with improved margins
in both our RMS and HLS business.
Selling, General, and Administrative Expenses
Selling, general, and administrative (SG&A) expenses increased $11.8 million, or 19.0%, over the
third quarter of 2007. Foreign currency translation increased SG&A expenses by approximately $2.9
million. SG&A expenses generated by the recently acquired Alpha, SIDEP, and OATSystems operations
coupled with our banking acquisitions accounted for $8.6 million of the increase over the prior
year. The remaining increase was due primarily to increased bad debt expense and management
expense. The increased bad debt expense was due primarily to bankruptcies in certain regions. The
increase in management expense is due to additional costs during the transition period due to the
change in executive management. These expenses increases were partially offset by a reduction in
variable compensation expense compared to the prior year third quarter. In light of the current
economic condition, we are more closely monitoring the aging of individual customer receivable
balances and associated credit risk in an effort to mitigate our exposure to bad debt.
24
Research and Development Expenses
Research and development (R&D) costs were $5.3 million, or 2.3% of revenues, in the third quarter
2008 and $5.1 million, or 2.5%, in the third quarter 2007. R&D expenses generated by the recently
acquired Alpha and SIDEP operations were $1.4 million.
Restructuring Expenses
Restructuring expenses were $0.8 million, or 0.4% of revenues, in the third quarter 2008, without a
comparable charge in 2007.
Litigation Settlement
Litigation Settlement expenses were $0.5 million, or 0.2% of revenues, in the third quarter of
2008, without a comparable charge in 2007. The litigation was due to a contract settlement with a
product manufacturer. This amount was settled in the third quarter of 2008 and we do not anticipate
any additional charges related to this issue.
Other Operating Income
Other operating income was $1.0 million in the third quarter 2008, without a comparable charge in
2007. This income relates to the sale of our Czech Republic subsidiary, which is now operating as a
distributor of our products.
Interest Income
Interest income for the third quarter 2008 decreased $1.0 million from the comparable quarter in
2007. The decrease in interest income was due to lower cash balances during 2008 compared to 2007.
Interest Expense
Interest expense for the third quarter of 2008 increased $1.2 million from the comparable quarter
in 2007. The increase in interest expense was due to higher debt levels in 2008 compared to 2007.
Other Gain (Loss), net
Other gain (loss), net was a loss of $1.5 million in the third quarter of 2008 compared to a gain
of $0.1 million in the third quarter of 2007. The loss in the third quarter of 2008 was due
primarily to losses on foreign currency.
Income Taxes
Our effective tax rate for the third quarter of 2008 was 19.0% as compared to 27.7% for the third
quarter of 2007. Included in the third quarter 2007 tax rate was a net deferred tax charge of $0.9
million primarily associated with changes to statutory tax rates and a valuation allowance release
associated with state net operating loss carry-forwards.
Net Earnings
Net earnings were $12.8 million, or $.32 per diluted share, in the third quarter of 2008 compared
to $14.3 million, or $.35 per diluted share, in the third quarter of 2007. The weighted average
number of shares used in the diluted earnings per share computation were 39.4 million and 41.0
million for the third quarters of 2008 and 2007, respectively.
25
Thirty-nine Weeks Ended September 28, 2008 Compared to Thirty-nine Weeks Ended September 30, 2007
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
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
In Dollar
|
|
|
Percentage of Total Revenues
|
|
Amount
|
|
|
September 28,
|
|
September 30,
|
|
Fiscal 2008
|
|
|
2008
|
|
2007
|
|
vs.
|
Thirty-nine weeks ended
|
|
(Fiscal 2008)
|
|
(Fiscal 2007)
|
|
Fiscal 2007
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
|
|
60.6
|
%
|
|
|
55.2
|
%
|
|
|
30.6
|
%
|
Intelligent Labels
|
|
|
28.8
|
|
|
|
32.6
|
|
|
|
4.9
|
|
Retail Merchandising
|
|
|
10.6
|
|
|
|
12.2
|
|
|
|
3.6
|
|
|
Net revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
19.0
|
|
Cost of revenues
|
|
|
58.5
|
|
|
|
58.2
|
|
|
|
19.6
|
|
|
Total gross profit
|
|
|
41.5
|
|
|
|
41.8
|
|
|
|
18.1
|
|
Selling, general and administrative expenses
|
|
|
32.9
|
|
|
|
31.8
|
|
|
|
23.0
|
|
Research and development
|
|
|
2.4
|
|
|
|
2.3
|
|
|
|
23.5
|
|
Restructuring expense
|
|
|
0.7
|
|
|
|
0.1
|
|
|
|
N/A
|
|
Litigation settlement
|
|
|
0.1
|
|
|
|
|
|
|
|
N/A
|
|
Other operating income
|
|
|
0.1
|
|
|
|
|
|
|
|
N/A
|
|
|
Operating income
|
|
|
5.5
|
|
|
|
7.6
|
|
|
|
(12.7
|
)
|
Interest income
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
N/A
|
|
Interest expense
|
|
|
0.6
|
|
|
|
0.2
|
|
|
|
N/A
|
|
Other gain (loss), net
|
|
|
(0.3
|
)
|
|
|
(0.1
|
)
|
|
|
N/A
|
|
|
Earnings before income taxes and minority interest
|
|
|
4.9
|
|
|
|
8.0
|
|
|
|
(27.0
|
)
|
Income taxes
|
|
|
0.2
|
|
|
|
2.1
|
|
|
|
N/A
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
Earnings from continuing operations
|
|
|
4.7
|
|
|
|
5.9
|
|
|
|
(5.8
|
)
|
Earnings from discontinued operations, net of tax
|
|
|
|
|
|
|
0.1
|
|
|
|
N/A
|
|
|
Net earnings
|
|
|
4.7
|
%
|
|
|
6.0
|
%
|
|
|
(7.2
|
)%
|
|
|
|
|
N/A Comparative percentages are not meaningful.
|
Net Revenues
Revenues for the first nine months of 2008 compared to the same period in 2007 increased by $108.3
million, or 19.0%, from $571.5 million to $679.8 million. Foreign currency translation had a
positive impact on revenues of approximately $44.2 million or 7.7% in the first nine months of 2008
as compared to the first nine months of 2007.
(amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
Change
|
|
|
September 28,
|
|
September 30,
|
|
Fiscal 2008
|
|
Fiscal 2008
|
|
|
2008
|
|
2007
|
|
vs.
|
|
vs.
|
Thirty-nine weeks ended
|
|
(Fiscal 2008)
|
|
(Fiscal 2007)
|
|
Fiscal 2007
|
|
Fiscal 2007
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
|
$
|
412.0
|
|
|
$
|
315.4
|
|
|
$
|
96.6
|
|
|
|
30.6
|
%
|
Intelligent Labels
|
|
|
195.5
|
|
|
|
186.3
|
|
|
|
9.2
|
|
|
|
4.9
|
|
Retail Merchandising
|
|
|
72.3
|
|
|
|
69.8
|
|
|
|
2.5
|
|
|
|
3.6
|
|
|
Net Revenues
|
|
$
|
679.8
|
|
|
$
|
571.5
|
|
|
$
|
108.3
|
|
|
|
19.0
|
%
|
|
26
Shrink Management Solutions revenues increased by $96.6 million, or 30.6%, in the first nine months
of 2008 as compared to the first nine months of 2007. Foreign currency translation had a positive
impact of approximately $24.8 million. The Alpha, SIDEP and OATSystems acquisitions increased
revenues for the first nine months of 2008 by $58.9 million. The remaining increase was primarily
due to a $13.6 million increase in sales of CCTV systems. The CCTV business improved due to
increases in the U.S., Japan, and Canada of $10.8 million, $1.5 million, and $0.8 million,
respectively. The U.S. CCTV revenue increase was due primarily to an increase of $9.8 million in
our U.S. CCTV banking business coupled with an increase of $1.0 million in our U.S. CCTV retail
business. The U.S. CCTV banking business benefited $8.5 million due to recent acquisitions, without
comparable revenues in 2007, coupled with $1.3 million of comparable business growth. The U.S. CCTV
retail business revenue growth was due to large installations with existing customers exceeding
comparable prior year revenues during the first nine months. This revenue increase was partially
offset by a decline in U.S. CCTV retail business revenue for the third quarter 2008 compared to the
third quarter 2007 due to difficult comparables in 2007 coupled with the impact of current economic
conditions on this business. The increase in Japan CCTV revenues was due primarily to growth in the
first quarter of 2008. As previously disclosed, U.S. CCTV business has a significant portion of its
revenue growth dependent upon new store openings which could continue to be impacted by the current
decline in U.S. economic activity. SMS hardware revenues excluding the benefit of foreign currency
translation and acquisitions decreased $0.4 million for the first nine months ended 2008 compared
to 2007. The decrease was due to declines in revenues in Europe and Latin America partially offset
by increases in revenues in Asia and the U.S. The decline in Europe was due primarily to general
overall business declines in France coupled with a decline in our export business. These declines
in Europe revenue were partially offset by an increase in Belgium due to a large chain-wide
roll-out in 2008 without comparable revenue in 2007. The decline in Latin America was due primarily
to a decline in Mexico attributable to large chain-wide roll-outs in 2007 without comparable
revenues in 2008. The increase in Asia was due primarily to large chain-wide roll-outs in New
Zealand and Australia without comparables in 2007, partially offset by a decline in Japan revenue
attributable to large chain-wide roll-outs in 2007 without comparable revenue in 2008. The U.S.
revenue increase was due to a large chain-wide roll-out in 2008 without comparable revenues in
2007. Our SMS hardware business is dependent upon new store openings which could continue to be
impacted by current economic trends. Our plan is to partially mitigate this issue by selling new
solutions to existing customers and increase our market share through the innovative products such
as Evolve
TM
. We anticipate Alpha revenue to continue its growth through the
remainder of 2008 and to meet our previously disclosed annual revenue expectation of over $83
million.
Intelligent Labels revenues increased by $9.2 million, or 4.9% in the first nine months of 2008 as
compared to the first nine months of 2007. The positive impact of foreign currency translation was
approximately $11.0 million. Also benefiting revenue were increases of $6.7 million and $4.6
million for acquisition of SIDEP and our CheckNet® business, respectively. These increases were
partially offset by a decrease in our EAS label business and our Library business of $9.3 million
and $4.1 million, respectively. The increase in our CheckNet® revenues was due primarily to an
increase in revenue in the U.S. and Asia, partially offset by a decline in our Europe revenues. The
U.S. CheckNet® revenue increase was due to increased sales volume with existing large customers and
an increase in new customer orders. We anticipate that weak economic conditions could continue to
impact our CheckNet® revenues and that our growth in new customer order could partially mitigate
this impact. The revenue decline in Europe and growth in Asia is due primarily to a shift in
revenues to Asia for certain customers previously serviced from Europe. The EAS label decline was
impacted by current economic conditions coupled with competitive pressures in certain regions. We
anticipate that weak economic conditions could continue to impact our EAS label volumes in future
quarters. Library revenues declined due to the transition period for our 3M distributor agreement
compared to direct sales in the prior year. We expect this revenue trend to continue in the Library
business for the remainder of 2008 due to the transition from direct sales to selling to a
distributor.
Retail Merchandising revenues increased by $2.5 million or 3.6%. The positive impact of foreign
currency translation was approximately $8.3 million. This increase was partially offset by a
decrease in our revenues from retail display systems of $4.7 million and a decrease in revenues of
HLS of $1.1 million. Our retail display systems decline is due to large remodel work in the first
nine months of 2007 without such comparable revenues in 2008. We anticipate RMS to continue to face
difficult revenue comparables for the remainder of 2008 due to the large remodel work performed in
2007.
Gross Profit
Gross profit in the first nine months of 2008 was $282.1 million, or 41.5% of revenues, compared to
$238.9 million, or 41.8% of revenues, in the first nine months of 2007. Foreign currency
translation had a positive impact of approximately $17.7 million.
Shrink Management Solutions gross profit as a percentage of Shrink Management Solutions revenues
increased to 40.6% in the first nine months of 2008, from 40.2% in the first nine months of 2007.
The increase in Shrink Management Solutions gross profit percentage was due primarily to the
inclusion of Alpha products revenues at higher margin levels.
27
Intelligent Labels gross profit as a percentage of Intelligent Labels revenues decreased to 40.2%
in the first nine months of 2008, from 42.4% in the first nine months of 2007. This decrease was
due primarily to a decrease in EAS label gross margin percentage and the Library business gross
margin percentage for the nine months ended 2008 compared to the nine months ended 2007. These
margin percentage declines are partially offset by an increase in the CheckNet® gross margin
percentage for the first nine months of 2008 compared to 2007. The decline in EAS label margins
was due primarily to manufacturing variances, which were primarily attributable to volume declines
and increased production issues resulting in labor inefficiencies and increased scrap, coupled with
higher energy costs. The Library margins were negatively impacted by the 3M deal, which shifted our
business model from direct sales to distributor revenues with lower margins. The margin percentage
increase in CheckNet® was due primarily to improvement in margin percentages in Europe coupled with
improved margins from our shift of a portion of the business from Europe to Asia.
The Retail Merchandising gross profit as a percentage of Retail Merchandising revenues increased to
50.0% in the first nine months of 2008 from 47.6% in the first nine months of 2007. This increase
in Retail Merchandising gross profit percentage was primarily due to improved margins in our HLS
business.
Selling, General, and Administrative Expenses
Selling, general, and administrative (SG&A) expenses increased $41.9 million, or 23.0%, over the
first nine months of 2007. Foreign currency translation increased SG&A expenses by approximately
$13.5 million. SG&A expenses generated by the recently acquired Alpha, SIDEP, and OATSystems
operations coupled with our banking acquisitions accounted for $22.7 million of the increase over
the prior year. The remaining increase was due to increased management expense, an increase in bad
debt provision incurred during the nine months, $1.4 million of deferred compensation expense
related to prior periods, and increased costs related to the participation in trade shows during
the first quarter of 2008. In light of the current economic condition, we are more closely
monitoring the aging of individual customer receivable balances and associated credit risk in an
effort to mitigate our exposure to bad debt.
Research and Development Expenses
Research and development (R&D) expenses were $16.3 million, or 2.4% of revenues, in the first
nine months of 2008 and $13.2 million, or 2.3% of revenues, in the first nine months of 2007.
Foreign currency translation increased R&D costs by approximately $0.5 million. R&D expenses
generated by the recently acquired Alpha, SIDEP, and OATSystems operations were $2.8 million.
Restructuring Expenses
Restructuring expenses were $4.8 million, or 0.7% of revenues in the first nine months of 2008
compared to $0.7 million or 0.1% of revenues in the first nine months of 2007.
Litigation Settlement
Litigation Settlement expense was $0.5 million in the first nine months of 2008, without a
comparable charge in 2007. The litigation was due to a contract settlement with a product
manufacturer. This amount was settled in the third quarter of 2008 and we do not anticipate any
additional charges related to this issue.
Other Operating Income
Other operating income was $1.0 million, or 0.1% of revenues in the first nine months of 2008,
without a comparable charge in 2007. This income relates to the sale of our Czech Republic
subsidiary, which is now operating as a distributor of our products.
Interest Income
Interest income in the first nine months of 2008 decreased $2.1 million from the comparable period
in 2007. The decrease in interest income was due to lower cash balances during 2008 compared to
2007.
Interest Expense
Interest expense for the first nine months of 2008 increased $3.0 million from the comparable
period in 2007. The increase in interest expense was due to higher debt levels in 2008 compared to
2007.
Other Gain (Loss), net
Other gain (loss), net was a loss of $2.1 million the nine months ended 2008 compared to a net loss
of $0.3 million in the nine months ended 2007. The increase in loss for the nine months ended 2008
was due primarily to losses on foreign currency.
Income Taxes
For the thirty-nine weeks ended September 28, 2008, the effective tax rate was 5.3%. For the
thirty-nine weeks ended September 30, 2007, the effective tax rate was 26.6%. During the first nine
months of 2008, we recorded a 16.0% benefit primarily associated with a valuation allowance
release, settlement of a tax audit, deferred compensation adjustments, and ongoing organizational
restructuring. A $4.8 million benefit was recorded relating to the release of a valuation
allowance as a result of strategic decisions related to foreign operations and the related impact
of assumptions of future taxable income. A $1.1 million benefit was recorded relating to the
release of unrecognized tax benefits associated with the favorable settlement of an Australian tax
audit. The Australian tax audit adjustment was previously disclosed in our 2007 Form 10-K filing.
In addition, we recorded a $2.1 million benefit associated with deferred compensation adjustments
and ongoing organizational restructuring activities.
Net Earnings
Net earnings were $31.9 million, or $0.79 per diluted share, in the first nine months of 2008
compared to $34.4 million, or $0.85 per diluted share, in the first nine months of 2007. The
weighted average number of shares used in the diluted earnings per share computation were 40.2
million and 40.6 million for the first nine months of 2008 and 2007, respectively.
28
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, potential future restructuring related to the
rationalization of the business, acquisitions, and working capital requirements. We have met our
liquidity needs over the last four years primarily through cash generated from operations. We
believe that cash provided from operating activities and funding available under our current credit
agreements should be adequate for the foreseeable future to service debt, meet our capital
investment requirements and other potential restructuring requirements, and product development
requirements. The recent financial and credit crisis has reduced credit availability and liquidity
for some companies; however we believe that the strength of our core business, cash position,
access to credit markets, and our ability to generate positive cash flow will sustain Checkpoint
through this challenging period. We are working to reduce liquidity risk by accelerating efforts to
improve working capital while reducing expenses in areas that will not adversely impact the future
potential of our business. Additionally, we have increased our monitoring of counterparty risk.
As of September 28, 2008, our cash and cash equivalents were $93.3 million compared to $118.3
million as of December 30, 2007. Our operating activities during the first nine months of 2008
provided approximately $27.0 million of cash compared to $28.8 million during the first nine months
of 2007. In 2008, our cash from operating activities was impacted negatively by an increase in
payments for accounts payable and payment of annual bonuses, partially offset by collections of
receivables.
In June 2008, the Company purchased the business of OATSystems, Inc., a privately held company, for
approximately $37.2 million, net of cash acquired of $0.9 million, and including the assumption of
$3.2 million of OATSystems, Inc debt. The transaction was paid in cash. Additionally, we acquired
$3.2 million in liabilities.
In January 2008, the Company purchased the business of Security Corporation, Inc., a privately held
company, for $7.5 million plus $0.8 million of liabilities acquired. The transaction was paid in
cash.
Our capital expenditures for the first nine months of 2008 totaled $12.3 million, compared to $9.5
million during the first nine months of 2007. We anticipate our capital expenditures, used
primarily to upgrade technology and improve our production capabilities, to approximate $5.0
million for the remainder of 2008.
Long-term
debt increased by $35.7 million since December 30, 2007. The increase in borrowings was
primarily used to finance our stock repurchase program and OATSystems, Inc acquisition.
In November 2007, we acquired SIDEP and the remaining interest in Asialco from its minority
shareholders. As part of the acquisition, we acquired $3.4 million (25 million RMB) of outstanding
debt of Asialco. The loan was paid down in May 2008 and was renewed for a 12 month period under the
original terms of the loan agreement. As of September 28, 2008,
the outstanding Asialco
loan balance is $3.6 million (25 million RMB) and has a weighted average interest rate of 7.20%.
The loan is collateralized by land and buildings with an aggregate carrying value of $6.1 million
at September 28, 2008. The loan matures in May 2009 and is included in short-term borrowings in the
accompanying consolidated balance sheets.
29
At September 28, 2008, our existing Japanese local line of credit equaled ¥800 million ($7.6
million) and had an outstanding balance of ¥700 million ($6.6 million) and availability of ¥100
million ($0.9 million). The line of credit expires in March 2009 and is included in short-term
borrowings in the accompanying consolidated balance sheets.
During the first quarter of 2008, we utilized our previously approved stock repurchase program in
which we are authorized to purchase up to two million shares of the Companys common stock. During
the second quarter of 2008, we repurchased two million shares of our common stock at an average
cost of $25.42, spending a total of $50.9 million. Prior to 2008, no shares were repurchased under
this plan. As of September 28, 2008, no shares remain available for purchase under the current
program. Common stock obtained by the Company through the repurchase program has been added to our
treasury stock holdings.
We continue to reinvest in the Company through spending in technology and process improvement. In
the first nine months of 2008, our expenditures in research and development amounted to $16.3
million. We estimate our expenditures in research and development during the remainder of 2008 will
be approximately $5 to $7 million.
As of September 28, 2008, our working capital
was $285.9 million compared to $282.1 million as of
December 30, 2007. At the end of the third quarter of 2008, our percentage of total debt to total
stockholders equity increased to 24.0% from 16.2% as of
December 30, 2007. As of September 28, 2008, we had an available line of credit totaling
approximately $15.9 million.
We do not anticipate paying any cash dividends on our common stock in the near future.
Provisions for Restructuring
2005 Restructuring Plan
In the second quarter of 2005, we initiated actions focused on reducing our overall operating
expenses. The 2005 Restructuring Plan included the implementation of a cost reduction initiative
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.
A net charge of $4.8 million was recorded in the first nine months of 2008 related to
restructuring. The charge was composed of $3.6 million of severance accruals in connection with the
2005 Restructuring Plan. Also included in the charge was $0.3 million of additional restructuring
expense related to the consolidation of our SIDEP entities in France, $0.1 million of lease
termination costs, and an asset impairment of $0.4 million in our Japan manufacturing facility. The charge was
partially offset by a $0.3 million release related to the 2004 Restructuring Plan. In addition, we
recorded $0.7 million related to consulting expenses associated with the formulation of our new
restructuring plan.
The total number of employees affected by the restructuring is 827, of which 778 have been
terminated. The remaining terminations are expected to be completed by the end of fiscal year 2008.
The anticipated total cost is expected to be approximately $29 million to $30 million, of which $29
million has been incurred and $26 million has been paid. Termination benefits are planned to be
paid one month to 24 months after termination of employment Upon completion, the annual savings are
anticipated to be approximately $34 million to $35 million.
30
Restructuring accrual activity was as follows:
Fiscal 2008
(amounts are in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual at
|
|
|
|
|
|
Charge
|
|
|
|
|
|
|
|
|
Beginning of
|
|
Charged to
|
|
Reversed to
|
|
Cash
|
|
Exchange
|
|
Accrual at
|
|
|
Year
|
|
Earnings
|
|
Earnings
|
|
Payments
|
|
Rate Changes
|
|
9/28/2008
|
|
Severance and other employee-related charges
|
|
$
|
3,015
|
|
|
$
|
3,694
|
|
|
$
|
(173
|
)
|
|
$
|
(3,554
|
)
|
|
$
|
(4
|
)
|
|
$
|
2,978
|
|
Lease termination costs
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
Acquisition restructuring costs
|
|
|
1,209
|
|
|
|
|
|
|
|
|
|
|
|
(525
|
)
|
|
|
12
|
|
|
|
696
|
|
|
Total
|
|
$
|
4,224
|
|
|
$
|
3,765
|
|
|
$
|
(173
|
)
|
|
$
|
(4,150
|
)
|
|
$
|
8
|
|
|
$
|
3,674
|
|
|
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 30, 2007. The table excludes our gross liability for uncertain tax
positions, including accrued interest and penalties, which totaled $18.2 million as of September
28, 2008, and $17.6 million as of December 30, 2007, since we cannot predict with reasonable
reliability the timing of cash settlements to the respective taxing authorities.
New Accounting Pronouncements and Other Standards
We adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 157, Fair
Value Measurements (FAS 157) on December 31, 2007. This standard defines fair value, establishes
a framework for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. FAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In
February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. FAS
157-2, which deferred the effective date of FAS No. 157 for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually) until January 1, 2009. Accordingly,
our adoption of this standard in 2008 was limited to financial assets and liabilities, which
primarily affects the valuation of our derivative contracts. The adoption of FAS 157 did not have a
material effect on our financial condition or results of operations. We are still in the process of
evaluating this standard with respect to its effect on nonfinancial assets and liabilities and
therefore have not yet determined the impact that it will have on our financial statements upon
full adoption in 2009. Non-financial assets and liabilities for which we have not applied the
provisions of FAS 157 include those measured at fair value in impairment testing and those
initially measured at fair value in a business combination.
We adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement No. 115 (FAS 159) on December 31, 2007. FAS 159 permits
entities to choose to measure many financial instruments and certain other items at fair value.
Entities that elect the fair value option will report unrealized gains and losses in earnings at
each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument
basis, with few exceptions. FAS 159 also establishes presentation and disclosure requirements to
facilitate comparisons between companies that choose different measurement attributes for similar
assets and liabilities. The adoption of FAS 159 did not have an effect on our financial condition
or results of operations as we did not elect this fair value option, nor is it expected to have a
material impact on future periods as the election of this option for our financial instruments is
expected to be limited.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141R). SFAS 141R establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial effects of the
business combination. For the Company, SFAS No. 141R will be effective for business combinations
occurring after December 28, 2008. We are currently evaluating the potential impact of the adoption
of SFAS 141R on our financial statements.
31
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research Bulletin No. 51 (SFAS 160). SFAS 160
establishes accounting and reporting standards for ownership interests in subsidiaries held by
parties other than the parent, the amount of consolidated net income attributable to the parent and
to the noncontrolling interest, changes in a parents ownership interest, and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also
establishes disclosure requirements that clearly identify and distinguish between the interests of
the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years
beginning after December 15, 2008. We are currently evaluating the potential impact of the adoption
of SFAS 160 on our financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities (SFAS 161). SFAS 161 changes the disclosure requirements for derivative instruments
and hedging activities. We will be required to provide enhanced disclosures about (a) how and why
derivative instruments are used, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133, Accounting for Derivative Instruments and Certain Hedging
Activities (SFAS 133), and its related interpretations, and (c) how derivative instruments and
related hedged items affect our financial position, financial performance, and cash flows. This
statement is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. We are currently evaluating the potential impact of the adoption
of SFAS 161 on our financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (FAS 162). FAS 162 identifies the sources of accounting principles and the framework
for selecting the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally accepted accounting
principles. FAS 162 directs the hierarchy to the entity, rather than the independent auditors, as
the entity is responsible for selecting accounting principles for financial statements that are
presented in conformity with generally accepted accounting principles. FAS 162 is effective 60 days
following SEC approval of the Public Company Accounting Oversight Board amendments to remove the
hierarchy of generally accepted accounting principles from the auditing standards.
In April 2008, the FASB issued Staff Position FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The intent of FSP FAS
142-3 is to improve the consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under
other accounting principles generally accepted in the United States of America. FSP FAS 142-3 is
effective for financial statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Early adoption is prohibited. We are currently
evaluating the potential impact of the adoption of FSP FAS 142-3 on our financial statements.
In June 2008, the FASB issued Staff Position FSP EITF No. 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP
EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall
be included in the computation of earnings per share pursuant to the two-class method. FSP EITF
03-6-1 is effective for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Upon adoption, a company is required to
retrospectively adjust its earnings per share data (including any amounts related to interim
periods, summaries of earnings and selected financial data) to conform to the provisions in FSP
EITF 03-6-1. Early application of FSP EITF 03-6-1 is prohibited. The adoption of FSP EITF 03-6-1 is
not anticipated to have a material effect on our Consolidated Financial Statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except as noted below, 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 30, 2007.
Exposure to Foreign Currency
We manufacture products in the U.S., the Caribbean, Europe, and the Asia Pacific regions for both
the local marketplace, and for export to our foreign subsidiaries. These 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 the inter-company receivables and payables.
Additionally, the sourcing of products in one currency and the sales of products in a different
currency can cause gross margin fluctuations due to changes in currency exchange rates.
32
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 28, 2008, we
had currency forward exchange contracts with a notional amount totaling approximately $14.8
million. The contracts are in various local currencies primarily covering 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.
Hedging Activity
During 2008, we entered into various foreign currency contracts to reduce our
exposure to forecasted 2008 Euro-denominated inter-company revenues. These contracts were
designated as cash flow hedges. The foreign currency contracts mature at various dates from October
2008 to June 2009. The purpose of these cash flow hedges is to eliminate the currency risk
associated with Euro-denominated forecasted revenues due to changes in exchange rates. As of
September 28, 2008, the fair value of these cash flow hedges were reflected as a $1.4 million asset
and are included in other current assets in the accompanying consolidated balance sheets. The total
notional amount of these hedges is $18.8 million (12.3 million Euros) and the unrealized gain
recorded in other comprehensive income was $1.4 million. During the three and nine months ended
September 28, 2008, a $73 thousand benefit related to these foreign currency hedges was recorded to
cost of goods sold as the inventory was sold to external parties. As of September 28, 2008, deferred net gains or losses on derivative instruments included in
accumulated other comprehensive income that are expected to be reclassified as earnings during the
next twelve months is approximately $1.4 million.
During the first quarter of 2008, we entered into an interest rate swap agreement with a notional
amount of $40 million and a maturity date of February 18, 2010. The purpose of this interest rate
swap agreement is to hedge potential changes to our cash flows due to the variable interest nature
of our senior unsecured credit facility. This interest rate swap was designated as a cash flow
hedge under SFAS 133. As of September 28, 2008, the fair value of the interest rate swap agreement
was reflected as a $0.1 million asset and is included in other assets in the accompanying
consolidated balance sheets.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a 15(e) under the Exchange Act) as of the end of the period
covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that the companys disclosure controls and procedures were effective as of
the end of the period covered by this report.
Changes in Internal Controls
There have been no changes in our internal controls over financial reporting that occurred during
the Companys third fiscal quarter of 2008 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
33
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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.
Item 1A. RISK FACTORS
There have been no material changes from December 30, 2007 to the significant risk factors and
uncertainties known to the Company that, if they were to occur, could materially adversely affect
the Companys business, financial condition, operating results and/or cash flow. For a discussion
of the Companys risk factors, refer to Item 1A. Risk Factors, contained in the Companys Annual
Report on Form 10-K for the year ended December 30, 2007.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table presents information related to the repurchases of common stock we made during
the nine months ended
September 28, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number of
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Shares that May Yet Be
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Shares Purchased
|
|
|
Purchased Under the
|
|
Period
|
|
Shares Purchased
|
|
|
Paid per Share
|
|
|
Under the Plan (A)
|
|
|
Program
|
|
|
December 31, 2007 January 27, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
2,000,000
|
|
January 28, 2008 February 24, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
February 25, 2008 March 30, 2008
|
|
|
673,067
|
|
|
|
25.63
|
|
|
|
673,067
|
|
|
|
1,326,933
|
|
March 31, 2008 April 27, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,326,933
|
|
April 28, 2008 May 25, 2008
|
|
|
863,218
|
|
|
|
25.11
|
|
|
|
1,536,285
|
|
|
|
463,715
|
|
May 26, 2008 June 29, 2008
|
|
|
463,715
|
|
|
|
25.68
|
|
|
|
2,000,000
|
|
|
|
|
|
June 30, 2008 July 27, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 28, 2008 August 24, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 25, 2008 September 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,000,000
|
|
|
$
|
25.42
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
(A)
|
|
In October 2006, our Board of Directors approved a share repurchase program that allows for
the purchase of up to two million shares of the Companys common stock. During the first nine
months of 2008, the Company repurchased two million shares of its common stock at an average cost
of $25.42, spending a total of $50.9 million. This completed the repurchase of shares under the
Companys repurchase authorization that was put in place during the fourth quarter of 2006. Common
stock obtained by the Company through the repurchase program has been added to our treasury stock
holdings.
|
34
Item 6. EXHIBITS
|
|
|
Exhibit 3.1
|
|
Articles of Incorporation, as amended, are hereby
incorporated by reference to Exhibit 3.1 of the Registrants
Current Report on Form 8-K, filed with the SEC on December
28, 2007.
|
|
|
|
Exhibit 3.2
|
|
By-Laws, as Amended and Restated, are hereby incorporated by
reference to Exhibit 3.2 of the Registrants Current Report
on Form 8-K, filed with the SEC on December 28, 2007.
|
|
|
|
Exhibit 31.1
|
|
Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) of the Exchange Act, as enacted by Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
Exhibit 31.2
|
|
Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) of the Exchange Act, as enacted by Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
Exhibit 32.1
|
|
Certification of the Chief Executive Officer and the Chief
Financial Officer pursuant to 18 United States Code Section
1350, as enacted by Section 906 of the Sarbanes-Oxley Act of
2002.
|
35
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/ Raymond D. Andrews
|
|
November 6, 2008
|
|
|
|
Raymond D. Andrews
|
|
|
Senior Vice President and Chief Financial Officer
|
|
|
36
INDEX TO EXHIBITS
|
|
|
EXHIBIT
|
|
DESCRIPTION
|
|
|
|
EXHIBIT 31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Robert P. van der Merwe, President and Chief Executive Officer
|
|
|
|
EXHIBIT 31.2
|
|
Rule 13a-4(a)/15d-14(a) Certification of Raymond D. Andrews, Senior Vice President and Chief Financial
Officer
|
|
|
|
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
|
37
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