SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2008
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
(Registrant’s telephone number,
including area code)
Securities to be registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
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to be so registered
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each class is to be registered
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Common Stock Purchase Rights
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New York Stock Exchange
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.10 Per Share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.
Yes
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No
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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
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
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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
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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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
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No
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As of June 29, 2008, the aggregate market value of the Common Stock held by non-affiliates of the
Registrant was approximately $102,604,894.
As of February 19, 2009, there were 38,811,078 shares of the Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for its 2009 Annual Meeting of Shareholders
are incorporated by reference into Part III of this Form 10-K.
CHECKPOINT SYSTEMS, INC.
FORM 10-K
Table of Contents
2
PART I
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, that involve risks and uncertainties and reflect the
Company’s judgment as of the date of this report. Forward-looking statements often address our
expected future business and financial performance, and often contain words such as “expect,”
“forecast,” “anticipate,” “intend,” “plan,” “believe,” “seek,” or “will.” By their nature,
forward-looking statements address matters that are subject to risks and uncertainties. Any such
forward-looking statements may involve risk and uncertainties that could cause actual results to
differ materially from any future results encompassed within the forward-looking statements.
Factors that could cause or contribute to such differences include: changes in our senior
management and other matters relating to implementation of our succession plan; our ability to
integrate recent acquisitions and to achieve related financial and operational goals; changes in
international business and economic conditions; foreign currency exchange rate and interest rate
fluctuations; lower than anticipated demand by retailers and other customers for our products;
slower commitments of retail customers to chain-wide installations and/or source tagging adoption
or expansion; possible increases in per unit product manufacturing costs due to less than full
utilization of manufacturing capacity as a result of slowing economic conditions or other factors;
our ability to provide and market innovative and cost-effective products; the development of new
competitive technologies; our ability to maintain our intellectual property; competitive pricing
pressures causing profit erosion; the availability and pricing of component parts and raw
materials; possible increases in the payment time for receivables as a result of economic
conditions or other market factors; changes in regulations or standards applicable to our products;
the ability to implement cost reduction in field service, sales, and general and administrative
expense, and our manufacturing and supply chain operations without significantly impacting revenue
and profits; our ability to maintain effective internal control over financial reporting; a failure
to manage our growth effectively; and additional matters discussed more fully in this report under
Item 1A. “Risk Factors Related to Our Business” and Item 7. “Management’s Discussion and Analysis.”
We do not undertake to update our forward-looking statements, except as required by applicable
securities laws.
Checkpoint Systems, Inc. is a leading global manufacturer and provider of technology-driven
end-to-end loss prevention, merchandising and labeling solutions to the retail and apparel
industry. We provide solutions to brand, track, and secure goods for retailers, apparel
manufacturers and consumer product manufacturers worldwide.
Retailers and manufacturers are increasingly focused on identifying and protecting assets that are
moving through the supply chain. On the sales floor, retailers need to make sure that the right
merchandise is in stock to satisfy customers and boost sales. To address this market opportunity,
we have built the necessary infrastructure to be a single global source for shrink management, and
merchandise tracking and visibility and apparel labeling solutions.
We are a leading provider of electronic article surveillance (EAS) systems and tags using radio
frequency (RF) and electromagnetic (EM) technology, source tagging security solutions, secure
merchandising solutions using RF and acoustic-magnetic (AM) technology, branding tags and labels
for apparel. In Europe, we are a leading provider of retail display systems (RDS) and hand-held
labeling systems (HLS). We are also a leading provider and installer of store monitoring solutions,
including fire alarms, intrusion alarms and digital video recorders for the retail environment in
the U.S. Our labeling systems and services are designed to consolidate tag and label requirements
to improve efficiency, reduce costs, and furnish value-added solutions for customers across many
markets and industries. Applications for printed tags and labels include brand identification,
automatic identification (auto-ID), retail shrink management, and pricing and promotional labels.
We have achieved substantial international growth, primarily through acquisitions, and now operate
directly in 30 countries. Products are principally developed and manufactured in-house and sold
through direct distribution and reseller channels.
COMPANY HISTORY
Founded in 1969, we were incorporated in Pennsylvania as a wholly-owned subsidiary of Logistics
Industries Corporation (Logistics). In 1977, Logistics, pursuant to the terms of its merger into
Lydall, Inc., distributed our common stock to Logistics’ shareholders as a dividend.
Historically, we expanded our business both domestically and internationally through acquisitions,
internal growth using wholly-owned subsidiaries, and the utilization of independent distributors.
In 1993 and 1995, we completed two key acquisitions which gave us direct access into Western
Europe. We acquired ID Systems International BV and ID Systems Europe BV in 1993 and Actron Group
Limited in 1995. These companies engaged in the manufacture, distribution, and sale of EAS systems
throughout Europe.
3
In December 1999, we acquired Meto AG, a German multinational corporation and a leading provider of
value-added labeling solutions for article identification and security. The acquisition doubled our
revenues and provided us with an increased breadth of product offerings and global reach.
In January 2001, we acquired A.W. Printing Inc., a Houston, Texas-based printer of tags, labels,
and packaging material for the apparel industry.
In January 2006, we completed the sale of our barcode systems business to SATO, a global leader in
barcode printing, labeling, and Electronic Product Code (EPC)/Radio Frequency Identification (RFID)
solutions.
In November 2006, we acquired ADS Worldwide (ADS). Based in Hull, England, ADS is an established
supplier of tags, labels and trim to apparel manufacturers, retailers and brands around the world.
ADS provides us with new technological and production capabilities and is in line with our strategy
to grow our Check-Net
®
apparel labeling business to create increased value for our
customers and stockholders.
In November 2007, we acquired the Alpha S3 business from Alpha Security Products, Inc. Based in
Charlotte, North Carolina, the Alpha S3 business offers a comprehensive line of security solutions
designed to protect high-theft merchandise in an open-display retail environment. The Alpha S3
product portfolio combines well with our source tagging program, and is in line with our strategy
to provide retailers a comprehensive line of shrink management solutions.
In November 2007, we also acquired SIDEP, an established supplier of EAS systems operating in
France and China, and Shanghai Asialco Electronics Co. Ltd. (Asialco), a China-based manufacturer
of RF-EAS labels. With facilities in Shanghai, China, Asialco significantly increases our label
manufacturing capacity in Asia. SIDEP and Asialco will help us meet the growing demand in Asian
markets.
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.
During June 2008, we acquired OATSystems, Inc., a recognized leader in RFID-based application
software. The addition of OATSystems, Inc. will build on our strategy to help retailers and
suppliers with our Evolve
TM
EAS platform to more easily migrate to EPC RFID.
As our industry moves to a common EPC standard, we will be able to offer solutions that enable
retailers and their suppliers to gain deeper visibility of assets and merchandise — further
reducing shrink and increasing bottom-line profits while enhancing the on-shelf availability of
merchandise for consumers.
Products and Offerings
We report results of operations in three segments: Shrink Management Solutions, Intelligent Labels,
and Retail Merchandising. The margins for each of the segments and the identifiable assets
attributable to each reporting segment are set forth in Note 19 “Business Segments and Geographic
Information” to the consolidated financial statements.
Each of these segments offer an assortment of products and services that in combination are
designed to provide a comprehensive, single source solution to help retailers, manufacturers, and
distributors identify, track, and protect their assets throughout the entire supply chain. Each
segment and their respective products and services are described below.
SHRINK MANAGEMENT SOLUTIONS
Our largest business is providing shrink management and merchandise visibility solutions to
retailers. Our diversified line of security products is designed to help retailers prevent
inventory losses caused by theft (both by customers and employees), reduce selling costs through
lower staff requirements and boost sales by having the right goods available when customers are
ready to buy. Our products facilitate the open display of consumer goods, which allows retailers to
maximize sales opportunities through impulse buying. Offering our own proprietary RF-EAS and EM-EAS
technologies, we believe that we hold a significant share of worldwide EAS systems installations.
EAS systems revenues accounted for 35%, 38%, and 39% of our 2008, 2007, and 2006 total revenues,
respectively. The installation of store monitoring solutions including fire, intrusion and
CCTV/digital recording systems (CheckView™) also fall within the shrink management solutions
segment. For 2008, 2007, and 2006, the CheckView™ business represented 17%, 18%, and 17% of our
revenues, respectively. No other product group in this segment accounted for as much as 10% of our
revenues.
These broad and flexible product lines, marketed and serviced by our extensive sales and service
organizations, have helped us emerge as a preferred supplier to premier retailers around the world.
Shrink Management Solutions represented approximately 62% of total revenues in 2008.
4
Electronic Article Surveillance
We have designed EAS systems to act as a deterrent to control the problem of merchandise theft in
retail stores. Our diversified product lines are designed to help reduce both customer and employee
theft, reduce inventory shrinkage, and enable retailers to capitalize on consumer impulse buying by
openly displaying high-margin and high-cost items.
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.
We offer a wide variety of RF-EAS and EM-EAS solutions to meet the varied requirements of retail
store configurations for multiple market segments worldwide. Our EAS systems are primarily
comprised of sensors and deactivation units, which respond to or act upon our tags and labels. We
also market an extensive line of reusable security tags that protect apparel items as well as
entertainment products. The November 2007 acquisition of the Alpha S3 business expanded our product
offering of shrink management solutions to retailers by providing a line of products specifically
designed to protect high-theft merchandise in an open-display retail environment. Our EAS products
are designed and built to comply with applicable Federal Communications Commission (FCC) and
European Community (EC) regulations governing RF, signal strengths, and other factors.
CheckView™ — CCTV, Fire and Intrusion Systems
We provide complete store monitoring solutions, including fire alarms, intrusion alarms and digital
video recording systems for retail environments. Our video surveillance solutions address
shoplifting and internal theft as well as customer and employee safety and security needs. The
product line consists of closed circuit television products and services including fixed and
high-speed pan/tilt/zoom camera systems, programmable switcher controls, time-lapse recording, and
remote video surveillance.
Our fire and intrusion systems provide life safety and property protection, completing the line of
loss prevention solutions. In addition to the system installations, we offer a U.S.-based 24-hour
Central Station Monitoring Service.
In 2008, we expanded our systems solution offering in the U.S. by entering the financial services
sector, providing branch banks with physical and electronic security solutions.
INTELLIGENT LABELS
Intelligent labels is our second largest business, generating approximately 28% of our revenues in
2008. We offer a wide variety of EAS-RF and EAS-EM labels that provide security solutions that can
be matched to specific retail requirements. Under our source tagging program, tags can be embedded
in products or packaging at the point-of-manufacture. All participants in the retail supply chain
are concerned with maximizing efficiency. Reducing time-to-market requires refined production and
logistics systems to ensure just-in-time delivery, as well as shorter development, design, and
production cycles. Services range from full-color branding labels to tracking labels and,
ultimately, fully-integrated labels that include an EAS or a RFID circuit. This integration is
based on the critical objective of supporting the rapid delivery of goods to market while reducing
losses, whether through misdirection, tracking failure, theft or counterfeiting, and to reduce
labor costs by tagging and labeling products at the source. We support these objectives with our
high-quality tag and label production, a global service bureau network of e-commerce-enabled print
capabilities (Check-Net
®
), and EAS and RFID technologies. The market is beginning to
move toward more sophisticated tag solutions that incorporate RFID components and that will
automate many aspects of supply chain tracking and facilitate many new merchandising enhancements
for suppliers and consumers. EAS-RF and EAS-EM label revenues represented 12%, 14% and 16% of our
total revenues for 2008, 2007, and 2006, respectively. Check-Net
®
revenues represented
15%, 15%, and 13% of our total revenues for 2008, 2007, and 2006, respectively. No other product in
this segment represented more than 10% of revenues.
5
Electronic Article Surveillance Labels
We produce EAS-RF and EAS-EM labels that work in combination with our EAS systems to control the
problem of merchandise theft in retail stores. Our diversified product line of discrete, disposable
labels and one-time-use hard tags are designed to enable retailers to protect a diverse array of
easily-pocketed, high shrink merchandise. While EAS labels can be applied in retail stores and
distribution centers, an increasing percentage of our customers are taking advantage of our source
tagging program. With source tagging, EAS labels and one-time-use hard tags are configured to the
merchandise and specific security requirements of the customer and applied at the point of
manufacture. Our paper thin EAS labels have characteristics that are easily integrated with
high-speed automated application systems. In November, 2007 we expanded our EAS-RF label
manufacturing capacity with the acquisition of Asialco. Asialco, which is based in Shanghai, China,
provides additional capacity to support the growing Asia market.
Check-Net
®
Check-Net
®
is Checkpoint’s web-enabled apparel labeling solutions platform and network of 25
service bureaus located in 23 countries that supplies customers with customized retail apparel tags
and labels, typically to the location where the retail goods are manufactured. Checkpoint’s order
entry and data management capabilities provide for on-demand printing of variable pricing and
article identification data and barcode information onto price and apparel branding tags. We also
offer a product line that integrates our EAS-RF security labels into customized retail apparel
tags.
Checkpoint’s web-enabled capabilities provide on-time, on-demand printing of custom labels with
variable data. Our Check-Net
®
service bureau network is one of the most extensive in the
industry, and its ability to offer integrated branding, barcode, and EAS security tags places it
among just a handful of suppliers of this caliber in the world. Our printing capacity and service
bureau network expanded in November 2006 with the acquisition of ADS.
In addition to our own label integration and service bureau capabilities, we have strategic working
relationships with other label integrators.
Intelligent Library Systems
We have established a product line of sophisticated RFID-based intelligent library solutions that
offer strong features and benefits compared to competitive offerings. In October 2007, we announced
a global strategic sales and marketing alliance with 3M Library Systems, who will become the
exclusive worldwide reseller and service provider for our line of library security and productivity
products.
RFID Tags and Labels
The company produces RFID tags and labels, leveraging its high volume, low cost RF circuit
production and manufacturing knowledge. In October 2006, we announced our intention to focus our
RFID initiative on our core retail customers and our library business.
RETAIL MERCHANDISING
Our retail merchandising business includes hand-held label applicators and tags, promotional
displays, and queuing systems. These traditional products broaden our reach among retailers. Many
of the products in this business segment represent high-margin items with a high level of recurring
sales of associated consumables such as labels. As a result of the increasing use of scanning
technology in retail, our HLS products are serving a declining market. Retail merchandising, which
is focused on European and Asian markets, represents approximately 10% of our business, with no
product group in this segment accounting for as much as 10% of our revenues.
Hand-held Labeling Systems
Hand-held labeling systems include a complete line of hand-held price marking and label application
solutions, primarily sold to retailers. Sales of labels, consumables, and service generate a
significant source of recurring revenues. As retail scanning becomes widespread, in-store retail
price marking applications have continued to decline. Our HLS products possess a market leading
position in several European countries. These systems are no longer sold in the U.S. as a result of
the divesture to SATO in January 2006.
Retail Display Systems
Retail display systems include a wide range of products for customers in certain retail sectors,
such as supermarkets and do-it-yourself (DIY), where high-quality signage and in-store price
promotion are important. Product categories include traditional retail promotional systems for
in-store communication and electronic graphics systems, and customer queuing systems.
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BUSINESS STRATEGY
Our business strategy focuses on providing end-to-end shrink management and merchandise visibility
solutions and apparel labeling solutions that help retailers, manufacturers, and distributors
identify, track, and protect their assets. We believe that innovative new products and expanded
product offerings will provide significant opportunities to enhance the value of legacy products
while expanding the product base in existing customer accounts. We intend to maintain our
leadership position in certain key hard goods markets (supermarkets, drug stores, mass
merchandisers, and music/electronics), expand our market share in the soft goods markets (apparel),
and maximize our position in under-penetrated markets. We also intend to continue to capitalize on
our installed base of large global retailers to promote source tagging. Furthermore, we plan to
leverage our knowledge of RF and identification technologies to assist retailers and manufacturers
in realizing the benefits of RFID.
To achieve these objectives, we plan to work to continually enhance and expand our technologies and
products, and provide superior service to our customers. We are focused on providing our customers
with a wide variety of integrated shrink management solutions, labeling, and retail merchandising
solutions characterized by superior quality, ease of use, good value, and enhanced merchandising
opportunities for the retailer, manufacturer, and distributor.
We continue to evaluate our sales productivity, manufacturing and supply chain efficiency, and our
overhead structure and have taken actions where we have identified specific opportunities to
improve profitability.
Principal Markets and Marketing Strategy
Through our Shrink Management Solutions business segment, we market EAS systems, software and other
security solutions, and CheckView™ products and services primarily to worldwide retailers in the
hard goods market and soft goods market. We enjoy significant market share, particularly in the
supermarket, drug store, hypermarket, and mass merchandiser market segments.
Shoplifting and employee theft are major causes of shrinkage. Data collection systems have
highlighted the shrinkage problem to retailers. As a result, retailers recognize that the
implementation of effective electronic security solutions can significantly reduce shrinkage and
increase profitability.
In addition to providing retail security solutions, we provide a wide variety of integrated shrink
management and merchandise visibility solutions, labeling solutions, and retail merchandising
solutions to manufacturers and retailers worldwide. This entails a broadened focus within the
entire retail supply chain by providing branding, tracking, and shrink management solutions to
retail stores, distribution centers, and consumer product and apparel manufacturers worldwide.
We are focused on providing our customers with a wide variety of integrated solutions to help them
“Sell More and Lose Less.” Our ongoing marketing strategy includes the following:
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open new, and expand existing retail accounts with new products that will increase
penetration through integrated value-added solutions for labeling, security, and
merchandising;
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establish business-to-business web-based capabilities to enable retailers and
manufacturers to initiate and track their orders through the supply chain on a global basis;
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expand market opportunities to manufacturers and distributors, including source tagging
and value-added labeling;
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continue to promote source tagging around the world with extensive integration and
automation capabilities using new EAS, RFID, and auto-ID technologies; and
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assist retailers in understanding the benefits and implementation of the new EPC using
RFID technology.
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We market
our products primarily:
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by providing total loss prevention solutions to the retailer;
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by helping retailers sell more merchandise by avoiding stock-outs and making merchandise
available to consumers;
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by serving as a single point of contact for auto-ID and EAS labeling and ticketing needs;
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through direct sales efforts and targeted trade show participation;
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through superior service and support capabilities; and
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by emphasizing source tagging benefits.
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7
We focus on partnering with retail suppliers worldwide in our source tagging program. Ongoing
strategies to increase acceptance of source tagging are as follows:
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increase installation of EAS equipment on a chain-wide basis with leading retailers
around the world;
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offer integrated tag solutions, including custom tag conversion that addresses the needs
of branding, tracking, and loss prevention;
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assist retailers in promoting source tagging with vendors;
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broaden penetration of existing accounts by promoting our in-house printing, global
service bureau network (Check-Net
®
), and labeling solution capabilities;
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support manufacturers and suppliers to speed implementation;
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expand RF tag technologies and products to accommodate the needs of the packaging
industry; and
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develop compatibility with EPC/RFID technologies.
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MANUFACTURING, RAW MATERIALS, AND INVENTORY
Electronic Article Surveillance
We manufacture our EAS systems and labels, including Alpha S3 products, in facilities located in
Puerto Rico, Japan, China, the U.S. and the Dominican Republic. Our manufacturing strategy for EAS
products is to rely primarily on in-house capability for core components and to outsource
manufacturing to the extent economically beneficial. We manage the integration of our in-house
capability and our outsourced manufacturing in a way that provides significant control over costs,
quality, and responsiveness to market demand, which we believe results in a distinct competitive
advantage.
We involve customers, engineering, manufacturing, and marketing in the design and development of
our products. For RF sensor production, we purchase raw materials from outside suppliers and
assemble electronic components at our facilities in the Dominican Republic for the majority of our
sensor product lines. The manufacture of some RF sensors sold in Europe and all EM hardware is
outsourced. For our EAS disposable tag production, we purchase raw materials and components from
suppliers and complete the manufacturing process at our facilities in Puerto Rico, Japan, and
China. We sold approximately 4 billion disposable tags in 2008 and have the capacity to produce
approximately 6 billion disposable tags per year. For our Alpha S3 secured merchandising
production, we purchase raw materials and components from suppliers and complete the manufacturing
process at our facilities in the U.S. as well as using outsourced manufacturing in China. The
principal raw materials and components used by us in the manufacture of our products are electronic
components and circuit boards for our systems; aluminum foil, resins, paper, and ferric chloride
and hydrochloric acid solutions for our disposable tags; and polymer resin for our Alpha S3
products. While most of these materials are purchased from several suppliers, there are alternative
sources for all such materials. The products that are not manufactured by us are sub-contracted to
manufacturers selected for their manufacturing and assembly skills, quality, and price.
CheckView™ — CCTV, Fire and Intrusion Systems
We are primarily an integrator of CCTV, fire and intrusion components manufactured by others. In
the U.S., we use in-house capabilities to assemble products such as the pan/tilt/zoom dome camera
and other products such as the Advanced Public View (APV) CCTV system. The software component of
the system is added during product assembly at our operational facilities.
Check-Net
®
and Retail Merchandising
We manufacture labels, tags, and hand-held tools. Our main production facilities are located in
Germany, the Netherlands, the U.S., the U.K., and Malaysia. Local production facilities are also
situated in Hong Kong, China and Turkey. Manufacturing in Germany is focused on HLS labels and
print heads for HLS tools. Our facilities in the Netherlands, the U.S., and the U.K. manufacture
labels and tags for laser overprinting. The Malaysian facility produces standard bodies for HLS
tools for Europe, complete hand-held tools for
the rest of the world, and labels for the local market. With the acquisition of ADS in November
2006, we acquired label manufacturing facilities in the U.K., Hong Kong, China, and Turkey.
8
DISTRIBUTION
For our major product lines, we principally sell our products to end customers using our direct
sales force of more than 500 sales people. To improve our sales efficiency, we also distribute
products through an independent network of resellers. This distribution channel supports and
services smaller customers. This indirect channel, which has primarily sold EAS solutions, will be
broadened and expanded to include more product lines as we focus on improved sales productivity.
Electronic Article Surveillance
We sell our EAS systems, labels, and Alpha S3 products principally throughout North America, South
America, Europe, and the Asia Pacific region. In North America, we market our EAS products through
our own sales personnel and independent representatives.
Internationally, we market our EAS products principally through foreign subsidiaries which sell
directly to the end-user and through independent distributors. Our international sales operations
are currently located in 14 European countries and in Argentina, Australia, Brazil, Canada, Puerto
Rico, Hong Kong, India, Japan, Malaysia, China, Mexico, and New Zealand.
Foreign distributors sell our products to both the retail and library markets. Pursuant to written
distribution agreements, we generally appoint an independent distributor as an exclusive
distributor for a specified term and for a specified territory. In October 2007, we announced a
global strategic sales and marketing alliance with 3M Library Systems, who will become the
exclusive worldwide reseller and service provider for our line of library security and productivity
products.
CheckView™ — CCTV, Fire and Intrusion Systems
We market CCTV systems and services in selected countries throughout the world using our own sales
staff. These products and services are provided to our EAS retail customers, as well as non-EAS
retailers. Fire and intrusion systems are marketed exclusively in the U.S. through a direct sales
force.
Check-Net
®
and Retail Merchandising
We have customers worldwide in the Check-Net
®
and retail merchandising businesses. These
customers are primarily found within the retail sector and retail supply chain. Major customers
include companies within industries such as food retailing, DIY, department stores, and apparel
retailers.
Large national and international customers are handled centrally by key account sales specialists
supported by appropriate business specialists. Smaller customers are served by either a general
sales force capable of representing all products or, if the complexity or size of the business
demands, a dedicated business specialist.
BACKLOG
Our backlog of orders was approximately $51.8 million at December 28, 2008 compared to
approximately $73.5 million at December 30, 2007. We anticipate that substantially all of the
backlog at the end of 2008 will be delivered during 2009. In the opinion of management, the amount
of backlog is not indicative of trends in our business. Our security business generally follows the
retail cycle so that revenues are weighted toward the last half of the calendar year as retailers
prepare for the holiday season.
TECHNOLOGY
We believe that our patented and proprietary technologies are important to our business and future
growth opportunities, and provide us with distinct competitive advantages. We continually evaluate
our domestic and international patent portfolio, and where the cost of maintaining the patent
exceeds its value, such patent may not be renewed. The majority of our revenues are derived from
products or technologies which are patented or licensed. There can be no assurance, however, that a
competitor could not develop products comparable to ours. Our competitive position is also
supported by our extensive manufacturing experience and know-how.
PATENTS & LICENSING
On October 1, 1995, we acquired certain patents and improvements thereon related to EAS products
and manufacturing processes from Arthur D. Little, Inc. for which we pay annual royalties. Our
payment obligation terminated on December 31, 2008, and since then we have held a royalty free
license.
We also license technologies relating to RFID applications, EAS products, certain sensors, magnetic
labels, and fluid tags. These license arrangements have various expiration dates and royalty terms,
but are not considered by us to be material.
9
Check-Net
®
and Retail Merchandising
We focus our in-house development efforts on product areas where we believe we can achieve and
sustain a competitive cost and positioning advantage, and where delivery service is critical. We
also develop and maintain technological expertise in areas that are believed to be important for
new product development in our principal business areas. We have a base of technology expertise in
the printing, electronics, and software areas and are particularly focused on EAS and labeling
capabilities to support the development of higher value-added labels.
SEASONALITY
Our business is subject to seasonal influences, which generally causes us to realize higher levels
of sales and income in the second half of the year. Our business’ seasonality substantially follows
the retail cycle of our customers, which generally has revenues weighted towards the last half of
the calendar year in preparation for the holiday season.
COMPETITION
Electronic Article Surveillance
Currently, EAS systems and labels are sold to two principal markets: retail establishments and
libraries. Our principal global competitor in the EAS industry is Tyco International Ltd. (Tyco),
through its ADT security division. Tyco is a diversified manufacturing and service company with
interests in electronics, fire and security, healthcare, plastics and adhesives, and engineered
products and services. Tyco’s 2008 revenues were approximately $20.2 billion.
Within the U.S. market, additional competitors include Sentry Technology Corporation and Ketec,
Inc. in EAS systems and labels, and All-Tag Security in EAS-RF labels, principally in the retail
market. Within our international markets, mainly Europe, NEDAP Retail Support and Tyco are our most
significant competitors. The largest competitors of the Alpha S3 secured merchandising product line
include Clear-vu and Amaray.
We believe that our product line offers a more diverse range of products than our competition with
a variety of disposable and reusable tags and labels, integrated scan/deactivation capabilities,
and RF source tagging embedded into products or packaging. As a result, we compete in marketing our
products primarily on the basis of their versatility, reliability, affordability, accuracy, and
integration into operations. This combination provides many system solutions and allows for
protection against a variety of retail merchandise theft. Furthermore, we believe that our
manufacturing know-how and efficiencies relating to disposable tags give us a cost advantage over
our competitors.
CheckView™ — CCTV, Fire and Intrusion Systems
Our CCTV, fire and intrusion products, which are sold domestically through our Checkpoint Security
Systems Group, and CCTV products sold internationally through our international sales subsidiaries,
compete primarily with similar products offered by Pelco and Tyco. We compete based on our superior
service and believe that our offerings provide our retail and non-retail customers with distinctive
system features.
Check-Net
®
We sell our Check-Net
®
services, including tags and labels, to the retail market. Major
competitors for our label products are Avery Dennison Corporation and SML Group. Several
competitive labeling service companies are also customers as they purchase EAS circuits from us to
integrate into their label offerings.
Retail Merchandising
We face no single competitor across our entire retail merchandising product range or across all
international markets. HL Display AB is our largest competitor in the retail display systems
market, primarily in Europe. In the HLS segment, we compete with Contact, Garvey Products Inc.,
Hallo, Avery Dennison Corporation, and Prix.
10
OTHER MATTERS
Research and Development
We spent approximately $22.6 million, $18.2 million, and $19.4 million, in research and development
activities during 2008, 2007, and 2006, respectively. The emphasis of these activities is the
continued broadening of the product lines offered by us, cost reductions of the current product
lines, and an expansion of the markets and applications for our products. We believe that our
future growth in revenues will be dependent, in part, on the products and technologies resulting
from these efforts.
Another important source of new products and technologies has been the acquisition of companies and
products. The November 2007 acquisition of the Alpha S3 business has enhanced our ability to
introduce new products specifically targeted to high-theft merchandise in an open-display retail
environment. We continue to assess acquisitions of related businesses or products consistent with
our overall product and marketing strategies.
The 2008 acquisition of OATSystems, Inc. will build on our strategy of helping retailers and
suppliers migrate more easily with our Evolve™ Electronic Article Surveillance platform to 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.
We continue to develop and expand our product lines with improvements in disposable tag
performance, disposable tag manufacturing processes, and wide-aisle RF-EAS detection sensors with
integration of remote and wireless internet connectivity and RFID integration.
Employees
As of December 28, 2008, we had 3,878 employees, including seven executive officers, 134 employees
engaged in research and development activities, and 577 employees engaged in sales and marketing
activities. In the United States, 11 of our employees are represented by a union. In Europe,
approximately 302 of our employees are represented by various unions or work councils.
Financial Information About Geographic and Business Segments
We operate both domestically and internationally in the three distinct business segments described
previously. The financial information regarding our geographic and business segments, which
includes net revenues and gross profit for each of the years in the three-year period ended
December 28, 2008, and long-lived assets as of December 28, 2008, December 30, 2007, and December
31, 2006, is provided in Note 19 to the Consolidated Financial Statements.
Available Information
Our internet website is at www.checkpointsystems.com. Investors can obtain copies of our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act as soon as reasonably practicable after we have filed such materials with, or
furnished them to, the Securities and Exchange Commission (SEC). We will also furnish a paper copy
of such filings free of charge upon request. Investors can also read and copy any materials filed
by us with the SEC at the SEC’s Public Reference Room which is located at 100 F Street, NE,
Washington, DC 20549. Information about the operation of the Public Reference Room can be obtained
by calling the SEC at 1-800-SEC-0330. Our filings can also be accessed at the SEC’s internet
website: www.sec.gov.
We have posted the Code of Ethics, the Governance Guidelines, and each of the Committee Charters on
our website at www.checkpointsystems.com, and will post on our website any amendments to, or
waivers from, the Code of Ethics applicable to any of our directors or executive officers. The
foregoing information will also be available in print upon request.
11
Executive Officers of the Company
The following table sets forth certain current information concerning the executive officers of the
Company, including their ages, position, and tenure as of the date hereof:
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Tenure
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with
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Position with the Company and
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Name
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Age
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Company
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Date of Election to Position on
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Robert P. van der Merwe
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56
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2 years
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Chairman since December 2008, President and Chief Executive Officer
since December 2007
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Raymond D. Andrews
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55
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3 years
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Senior Vice President and Chief Financial Officer since December 2007
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Per H. Levin
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51
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14 years
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President, Shrink Management and Merchandise Visibility Solutions
since March 2006
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Bernard Gremillet
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56
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5 years
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Executive Vice President, Global Customer Management since August
2007
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John R. Van Zile
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56
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5 years
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Senior Vice President, General Counsel and Secretary since June 2003
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Farrokh
K. Abadi
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47
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5 years
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Senior Vice President, and Chief
Innovation Officer since April 2008
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Steven Davidson
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51
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1 year
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President, Global Apparel Labeling Solutions since October 2008
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Mr. van der Merwe was appointed President and Chief Executive Officer of the Company on December
27, 2007. In December 2008, Mr. van der Merwe was appointed the Company’s Chairman of the Board and
has been a member of the Board of Directors since October 2007. He previously served as President
and Chief Executive Officer of Paxar Corporation, a global leader in providing innovative
merchandising systems to retailers and apparel customers. He became Chairman of the Board of Paxar
in January 2007, and served in these capacities until Paxar’s sale to Avery Dennison in June 2007.
Prior to joining Paxar, Mr. van der Merwe held numerous executive positions with Kimberly-Clark
Corporation from 1980 to 1987 and from 1994 to 2005, including the positions of Group President of
Kimberly-Clark’s global consumer tissue business and Group President of Europe, Middle East and
Africa. Earlier in his career, Mr. van der Merwe held managerial positions in South Africa at Xerox
Corporation and Colgate Palmolive.
Mr. Andrews was appointed Senior Vice President and Chief Financial Officer on December 6, 2007.
Mr. Andrews was Senior Vice President and Chief Accounting Officer of the Company from August 2005
until December 2007. He previously served as Controller of INVISTA S.a’r.l., a subsidiary of Koch
Industries, where he oversaw the company’s accounting operations in North and South America, Europe
and Asia. Prior to the acquisition by Koch Industries, Mr. Andrews was Director of Accounting
Operations of INVISTA Inc. From 1998 to 2002, Mr. Andrews served as Controller for DuPont
Pharmaceuticals Company and then Bristol-Myers Squibb Pharma Company, a subsidiary of Bristol-Myers
Squibb, when that company acquired DuPont Pharmaceuticals in 2001. Prior to being appointed
Controller, he held positions of increasing responsibility at DuPont Merck Pharmaceutical Company
and the DuPont Company. Mr. Andrews is a Certified Public Accountant.
Mr. Levin was appointed President, Shrink Management and Merchandise Visibility Solutions in March
2006. He was President of Europe from June 2004 until March 2006, Executive Vice President, General
Manager, Europe from May 2003 until June 2004, Vice President, General Manager, Europe from
February 2001 until May 2003. Mr. Levin was Regional Director, Southern Europe from 1997 to 2001
and joined the Company in January 1995 as Managing Director of Spain.
Mr. Gremillet was appointed Executive Vice President Global Customer Management in January 2009.
Previously, he was Executive Vice President Geographies since August 2007. Prior to that Mr.
Gremillet was President, Europe and Latin America from March 2006 to August 2007. Mr. Gremillet was
Western Mediterranean Unit Manager from March 2004 until March 2006 and was an independent
consultant to Checkpoint from February 2003 to March 2004. Mr. Gremillet was Corporate Director of
Engineering and Technology at Repsol YPF SA, from December 1999 to May 2002 and Senior Vice
President Downstream at YPF SA in 1999. He held a variety of positions, including Vice President
Marketing and Development for Oilfield Services from July 1995 to June 1997 and Vice President and
General Manager for Latin America from July 1989 to June 1993 during his 22 years with Schlumberger
from 1975 to 1997.
Mr. Van Zile has been Senior Vice President, General Counsel and Secretary since joining the
Company in June 2003. Prior to joining the Company, Mr. Van Zile served as Executive Vice
President, General Counsel and Secretary of Exide Corporation from September 2000 until October
2002, and was Vice President and General Counsel from November 1996 until September 2000. Prior to Exide Corporation, Mr. Van Zile
held positions of increasing legal responsibility at GM-Hughes Electronics Corporation and Coltec
Industries.
Mr. Abadi was appointed Senior Vice President
and Chief Innovation Officer in October 2008. Mr. Abadi retains responsibility for the Company’s
procurement and systems supply chain. He also served as Senior Vice President, Worldwide Operations from
April 2006 until October 2008 and Vice President and General Manager, Worldwide Research and
Development from November 2004 until April 2006. Prior to joining Checkpoint, Mr. Abadi was
Senior Vice President of Global Cross-Industry Practices at Atos Origin from February 2004 until
November 2004. Mr. Abadi held various senior management positions with Schlumberger for over eighteen
years.
12
Mr. Davidson joined Checkpoint in 2008 as President, Global Apparel Labeling Solutions. Previously,
he spent 16 years with the Braitrim Group, a company providing products and services to global
apparel retailers and garment manufacturers. While with the Braitrim Group, Mr. Davidson made a
significant contribution to building their $180 million business, including establishing Sales and
Marketing and Manufacturing infrastructures throughout Asia. Following the acquisition of Braitrim
by the Spotless Group in 2002, Mr. Davidson remained with the larger organization in the capacity
of Managing Director, EMEA, for Spotless Retailer Services. Mr. Davidson’s previous experience
includes Senior Management positions at TCI Marketing Consultancy, K Shoes Group in the UK, and
Unilever.
Item 1A. RISK FACTORS
The risks described below are among those that could materially and adversely affect the Company’s
business, financial condition or results of operations. These risks could cause actual results to
differ materially from historical experience and from results predicted by any forward-looking
statements related to conditions or events that may occur in the future.
Current
economic conditions could adversely impact our business and results of operations.
Our operations and results depend significantly on global market worldwide economic conditions,
which have experienced a recent deterioration. Current economic factors include diminished
liquidity and tighter credit conditions, leading to decreased credit availability, as well as
declines in economic growth and employment levels. As a result of these market conditions, the
cost and availability of credit has been and may continue to be adversely affected by illiquid
credit markets and wider credit spreads. These conditions may increase the difficulty for us to
accurately forecast and plan future business. Customer demand could be impacted by decreased
spending by businesses and consumers alike, and competitive pricing pressures could increase.
Additionally, the disruption in the credit markets may also adversely affect the availability of
financing to support our strategy for future growth through acquisitions. We are unable to predict
the length or severity of the current economic conditions. A continuation or further deterioration
of these economic factors may have a material and adverse effect on our results of operations,
financial condition, and liquidity, and the liquidity and financial condition of our customers,
including our ability to refinance maturing liabilities and access the capital markets to meet
liquidity needs.
We have significant foreign operations, which are subject to political, economic and other risks
inherent in operating in foreign countries.
We are a multinational manufacturer and marketer of identification, tracking security, and
merchandising solutions for the retail industry. We have significant operations outside of the
U.S. We currently operate directly in 30 countries, and our international operations generate
approximately 65% of our revenue. We expect net revenue generated outside of the U.S. to continue
to represent a significant portion of total net revenue. Business operations outside of the U.S.
are subject to political, economic and other risks inherent in operating in certain countries, such
as:
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the difficulty in enforcing agreements, collecting receivables and protecting
assets through foreign legal systems;
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trade protection measures and import or export licensing requirements;
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difficulty in staffing and managing widespread operations and the application
of foreign labor regulations;
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compliance with a variety of foreign laws and regulations;
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changes in the general political and economic conditions in the countries
where we operate, particularly in emerging markets;
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the threat of nationalization and expropriation;
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increased costs and risks of doing business in a number of foreign
jurisdictions;
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changes in enacted tax laws;
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limitations on repatriation of earnings; and
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fluctuations in equity and revenues due to changes in foreign currency
exchange rates.
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Changes in the political or economic environments in the countries in which we operate, as well as
the impact of economic conditions on underlying demand for our products could have a material
adverse effect on our financial condition, results of operations or cash flows.
13
Volatility in currency exchange rates and interest rates may adversely affect our financial
condition, results of operations or cash flows.
We are exposed to a variety of market risks, including the effects of changes in currency exchange
rates and interest rates. See Part 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our net revenue derived from sales in non-U.S. markets is approximately 65% of our total net
revenue, and we expect revenue from non-U.S. markets to continue to represent a significant portion
of our net revenue. When the U.S. dollar strengthens in relation to the currencies of the foreign
countries where we sell our products, our U.S. dollar reported revenue and income will decrease.
Changes in the relative values of currencies occur regularly and, in some instances, may have a
significant effect on our results of operations. Our financial statements reflect recalculations
of items denominated in non-U.S. currencies to U.S. dollars, our functional currency.
We monitor these exposures as an integral part of our overall risk management program. In some
cases, we enter into contracts to reduce the risks of currency fluctuations on short-term
inter-company receivables and payables, and on projected future billings in non-functional
currencies and use third-party borrowings in foreign currencies to hedge a portion of our net
investments in, and cash flows derived from, our foreign subsidiaries. Nevertheless, changes in
currency exchange rates and interest rates may have a material adverse effect on our financial
condition, results of operations, or cash flows.
Our business could be materially adversely affected as a result of lower than anticipated demand by
retailers and other customers for our products, particularly in the current economic environment.
Our business is heavily dependent on the retail marketplace. Changes in the economic environment
including the liquidity and financial condition of our customers or reductions in retailer spending
could adversely affect our revenues and results of operations. If a decreased consumer spending
trend develops, retailers could respond by reducing their spending on new store openings and loss
prevention budgets. This reduction could directly impact our SMS business, as a reduction in new
store openings will lower demand for EAS security and CCTV installations. Additionally, lower loss
prevention budgets could reduce the amount retailers will be willing to spend to upgrade existing
store technology. Label demand could also be impacted due to lower loss prevention budgets as
retailers may reduce the percentage of items covered. Additionally, our label volume increases as
more items are sold through the retailer and lower demand decreases the volume related to the items
tagged by the retailer. As retail sales volumes decline, label demand may also decline. A
decrease in the demand for our products resulting from reduced spending by retailers due to fewer
store openings, reduced loss prevention budgets and slower adoption of our new technology could
have a material adverse effect on our revenues and results of operations.
Our business could be materially adversely affected as a result of slower commitments of retail
customers to chain-wide installations and/or source tagging adoption or expansion.
Our revenues are dependent on our ability to maintain and increase our system installation base.
The SMS system installation base leads to additional revenues, which we term as “recurring
revenues,” through the sale of sensor tags and maintenance services. In addition, we partner with
manufacturers to include our sensor tags into the product during manufacturing, an approach known
as source tagging.
The level of commitments for chain-wide installations may decline due to decreased consumer
spending that results in reduced spending on loss prevention by our retail customers, our failure
to develop new technology that entices the customer to maintain their commitment to our loss
prevention products and services, and competing technologies. A reduction in the commitment for
chain-wide installations may also impact our ability to expand utilization of our source tagging
program. A reduction in commitments to chain-wide installations and utilization of our source
tagging program could have an adverse effect on our revenues and results of operations.
The markets we serve are highly competitive and we may be unable to compete effectively if we are
unable to provide and market innovative and cost-effective products at competitive prices.
We face competition around the world, including competition from other large, multinational
companies and other regional companies. Some of these companies may have substantially greater
financial and other resources than the Company. We face competition in several aspects of our
business. In the SMS EAS and Alpha S3 businesses and Intelligent Labels EAS business, we compete
primarily on the basis of integrated security solutions and diversified, sophisticated, and quality
product lines targeted at meeting the loss prevention needs of our retail customers. In our
CheckView™ business, we compete primarily on the basis of efficient installation capability that is in place in North America. In the Check-Net
®
Service
Bureau business, we compete primarily on the capability to effectively and quickly deliver retail
customer specified labels to manufacturing sites in multiple countries. It is possible that our
competitors will be able to offer additional products, services, lower prices, or other incentives
that we cannot offer or that will make our products less profitable. It is also possible that our
competitors will offer incentive programs or will market and advertise their products in a way that
will impact customers’ preferences, and we may not be able to compete effectively.
We may be unable to anticipate the timing and scale of our competitors’ activities and initiatives,
or we may be unable to successfully counteract them, which could harm our business. In addition,
the cost of responding to our competitors’ activities may affect our financial performance in the
relevant period. Our ability to compete also depends on our ability to attract and retain key
talent, protect patent and trademark rights, and develop innovative and cost-effective products. A
failure to compete effectively could adversely affect our growth and profitability.
14
Our long term success is largely dependent upon our ability to develop new technologies, and if we
are unable to successfully develop those technologies, our business could be materially adversely
affected.
Our growth depends on continued sales of existing products, as well as the successful development
and introduction of new products, which face the uncertainty of retail and consumer acceptance and
reaction from competitors. In addition, our ability to create new products and to sustain existing
products is affected by whether we can:
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develop and fund technological innovations, such as those related to our next
generation EAS product solutions, continued investment in evolving RFID technologies, and
other innovative security device, software, and systems initiatives;
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receive and maintain necessary patent and trademark protection; and
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successfully anticipate customer needs and preferences.
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The failure to develop and launch successful new products could hinder the growth of our business.
Research and development for each of our operating segments is complex and uncertain and requires
innovation and anticipation of market trends. Also, delay in the development or launch of a new
product could compromise our competitive position, particularly if our competitors announce or
introduce new products and services in advance of us.
An inability to acquire, protect or maintain our intellectual property and patents could harm our
ability to compete or grow.
We have a number of patents that will expire in the next several years. Because our products
involve complex technology and chemistry, we rely on protections of our intellectual property and
proprietary information to maintain a competitive advantage. The expiration of these patents will
reduce the barriers to entry into our existing lines of business and may result in loss of market
share and a decrease in our competitive abilities, thus having a potential adverse effect on our
financial condition, results of operations and cash flows.
Our business could be materially adversely affected as a result of possible increases in per unit
product manufacturing costs as a result of slowing economic conditions or other factors.
Our manufacturing capacity is designed to meet our current and future anticipated demands. If our
product demand decreases as a result of economic conditions and other factors, it could increase
our cost per unit. If an increase in our cost per unit is passed on to our customers, it may
decrease our competitive position, which may have an adverse effect on our revenues and results of
operations. If an increase per unit is not passed on to our customers, it may reduce our gross
margins, which may have an adverse effect on our results of operations. Our EAS and service bureau
label manufacturing has various low price competitors globally. In order for us to maintain and
improve our market position, we need to continuously monitor and seek to improve our manufacturing
effectiveness while maintaining our high quality standard. If we are unsuccessful in our efforts to
improve manufacturing and supply chain effectiveness, then our cost per unit may increase which
could have an adverse impact on our results of operations.
If we cannot obtain sufficient quantities of raw materials and component parts required for our
manufacturing activities at competitive prices and quality and on a timely basis, our financial
condition, results of operations or cash flows may suffer.
We purchase materials and component parts from third parties for use in our manufacturing
operations. Our ability to grow earnings will be affected by inflationary and other increases in
the cost of component parts and raw materials, including electronic components, circuit boards,
aluminum foil, resins, paper, and ferric chloride and hydrochloric acid solutions. Inflationary
and other increases in the costs of raw materials, labor, and energy have occurred in the past and
are expected to recur, and our performance depends in part on our ability to pass these cost
increases on to customers in the prices for our products and to effect improvements in
productivity. We may not be able to fully offset the effects of higher component parts and raw
material costs through price increases, productivity improvements or cost reduction programs. If
we cannot obtain sufficient quantities of these items at competitive prices and quality and on a
timely basis, we may not be able to produce sufficient quantities of product to satisfy market
demand, product shipments may be delayed, or our material or manufacturing costs may increase. A
disruption to our supply chain could adversely affect our sales and profitability. Any of these
problems could result in the loss of customers and revenue, provide an opportunity for competing
products to gain market acceptance and otherwise adversely affect our financial condition, results
of operations, or cash flows.
15
Possible increases in the payment time for receivables as a result of economic conditions or other
market factors could have a material effect on our results from operations and anticipated cash
from operating activities.
The majority of our customer base is in the retail marketplace. Although we have a rigorous
process to administer credit granted to customers and believe our allowance for doubtful accounts
is adequate, we have experienced, and in the future may experience, losses as a result of our
inability to collect our accounts receivable. During the past several years, various retailers have
experienced significant financial difficulties, which in some cases have resulted in bankruptcies,
liquidations and store closings. The financial difficulties of a customer could result in reduced
business with that customer. We may also assume higher credit risk relating to receivables of a
customer experiencing financial difficulty. If these developments occur, our inability to shift
sales to other customers or to collect on our trade accounts receivable from a major customer could
substantially reduce our income and have a material adverse effect on our results of operations and
cash flows from operating activities.
Changes in legislation or governmental regulations, policies or standards applicable to our
products may have a significant impact on our ability to compete in our target markets.
We operate in regulated industries. Our U.S. operations are subject to regulation by federal,
state, and local governmental agencies with respect to safety of operations and equipment, labor
and employment matters, and financial responsibility. Our EAS products are subject to FCC
regulation, and our international operations are regulated by the countries in which they operate,
including regulation of the Conformité Européene (CE) in Europe. Failure to comply with laws or
regulations could result in substantial fines or revocation of our operating permits or licenses.
If laws and regulations change and we fail to comply, our financial condition, results of
operations, or cash flows could be materially and adversely affected.
Our ability to implement cost reductions in field services, selling, general and administrative
expenses, and our manufacturing and supply chain operations may have a significant impact on our
business and future revenues and profits.
We are in the process of taking actions to rationalize our field service, improve our sales
productivity, reduce our general and administrative expenses, and reconfigure our manufacturing and
supply chain operations. Such rationalization actions require management judgment on the
development of cost reduction strategies and precision on the execution of those strategies. We may
not realize, in full or in part, the anticipated benefits from these initiatives, and other events
and circumstances, such as difficulties, delays, or unexpected costs may occur, which could result
in our not realizing all or any of the anticipated benefits. We also cannot predict whether we will
realize improved operating performance as a result of any cost reduction strategies. Further, in
the event the market continues to fluctuate, we may not have the appropriate level of resources and
personnel to react to the change. We are also subject to the risk of business disruption in
connection with our restructuring initiatives, which could have a material adverse effect on our
business and future revenues and profits.
Our ability to integrate the acquisitions of the Alpha S3, SIDEP/Asialco, and OATSystems businesses
and to achieve our financial and operational goals for these businesses could have an impact on
future revenues and profits.
We are in the process of integrating our Alpha S3, SIDEP/Asialco, and OATSystems businesses into
our operations. In 2007, we acquired the Alpha S3 business, and we are working to take advantage
of the business to utilize our existing sales force to grow revenue. In 2007, we also acquired the
SIDEP/Asialco business, and we are attempting to integrate that business to optimize worldwide
manufacturing capabilities and improve the quality and profitability of the acquired product lines.
In June 2008, we acquired OATSystems, which will facilitate complementary merchandise protection
and inventory management applications solutions that will enable retailers and their supply chains
to gain deeper inventory visibility.
Various risks, uncertainties and costs are associated with the acquisitions. Effective integration
of systems, key business processes, controls, objectives, personnel, management practices, product
lines, markets, customers, supply chain operations, and production facilities can be difficult to
achieve and the results are uncertain, particularly across our internationally diverse
organization. We may not be able to retain key personnel of an acquired company and we may not be
able to successfully execute integration strategies or achieve projected performance targets set
for the business segment into which an acquired company is integrated. Our ability to execute the
integration plans could have an impact on future revenues and profits and may adversely affect our
financial condition,
results of operations or cash flows. There can be no assurance that these acquisitions or others
will be successful and contribute to our profitability.
16
If we fail to manage our growth effectively, our business could be harmed.
Our strategy is to maximize value by achieving growth both organically and through acquisitions.
Our ability to effectively manage and control any future growth may be limited. To manage any
growth, our management must continue to improve our operational, information and financial systems,
procedures and controls and expand, train, retain and manage our employees. If our systems,
procedures and controls are inadequate to support our operations, any expansion could decrease or
stop, and investors may lose confidence in our operations or financial results. If we are unable to
manage growth effectively, our business and operating results could be adversely affected, and any
failure to develop and maintain adequate internal controls over financial reporting could cause the
trading price of our shares to decline substantially.
An impairment in the carrying value of goodwill or other assets could negatively affect our
consolidated results of operations and net worth.
Pursuant to accounting principles generally accepted in the United States, we are required to
annually assess our goodwill, intangibles and other long-lived assets to determine if they are
impaired. In addition, interim reviews must be performed whenever events or changes in
circumstances indicate that impairment may have occurred. If the testing performed indicates that
impairment has occurred, the Company is required to record a non-cash impairment charge for the
difference between the carrying value of the goodwill or other intangible assets and the implied
fair value of the goodwill or other intangible assets in the period the determination is made.
Disruptions to our business, end market conditions and protracted economic weakness, unexpected
significant declines in operating results of reporting units, divestitures and market
capitalization declines may result in additional charges for goodwill and other asset impairments.
We have significant intangible assets, including goodwill with an indefinite life, which are
susceptible to valuation adjustments as a result of changes in such factors and conditions. We
assess the potential impairment of goodwill on an annual basis, as well as when interim events or
changes in circumstances indicate that the carrying value may not be recoverable. We assess
definite lived intangible assets when events or changes in circumstances indicate that the carrying
value may not be recoverable.
Our annual goodwill impairment test resulted in an estimated goodwill impairment charge of $59.6
million in the quarter ended December 28, 2008, primarily related to the Intelligent Labels and
Retail Merchandising segments. Although our analysis regarding the fair value of the remaining
goodwill indicates that it exceeds its carrying value, materially different assumptions regarding
the future performance of our businesses or significant declines in our stock price could result in
additional goodwill impairment losses. We expect to finalize the goodwill impairment analysis in
the first quarter of 2009 and any adjustment to the estimated impairment will be recorded in that
period. We also evaluate other assets on our balance sheet whenever events or changes in
circumstances indicate that their carrying value may not be recoverable. As a result of changes in
circumstances related to the customer relationship intangible related to the Asialco acquisition,
we recorded an impairment charge of $2.6 million in the quarter ended December 28, 2008. Although
our analysis regarding the fair value of the remaining assets indicates that it exceeds their
carrying value, materially different assumptions regarding the future performance of our businesses
could result in significant asset impairment losses.
The Company’s future results may be affected by various legal and regulatory proceedings.
We cannot predict with certainty the outcome of litigation matters, government proceedings and
other contingencies and uncertainties that may arise out of the conduct of our business, including
matters relating to intellectual property, employment, commercial and other matters. Resolution of
such matters can be prolonged and costly, and the ultimate results or judgments are uncertain due
to the inherent uncertainty in litigation and other proceedings. Moreover, our potential
liabilities are subject to change over time due to new developments, changes in settlement strategy
or the impact of evidentiary requirements, and we may be required to pay damage awards or
settlements, or become subject to damage awards or settlements, that could have a material adverse
effect on our results of operations, financial condition, and liquidity.
The failure to effectively maintain and upgrade our information systems could adversely affect our
business.
Our business depends significantly on effective information systems, and we have many different
information systems for our various businesses. Our information systems require an ongoing
commitment of significant resources to maintain and enhance existing systems and develop new
systems in order to keep pace with continuing changes in information processing technology,
evolving industry and regulatory standards, and changing customer preferences. In addition, we may
from time to time obtain significant portions of our systems-related or other services or
facilities from independent third parties, which may make our operations vulnerable to such third
parties’ failure to perform adequately. Our failure to maintain effective and efficient
information systems, or our failure to efficiently and effectively consolidate our information
systems to eliminate redundant or obsolete
applications, could have a material adverse effect on our business, financial condition and results
of operations. Additionally, any disruption or failure of such networks, systems, or other
technology may disrupt our operations, cause customer dissatisfaction, and loss of customer
revenues.
17
As a global business, we have a relatively complex tax structure, and there is a risk that tax
authorities will disagree with our tax positions.
Since we conduct operations worldwide through our foreign subsidiaries, we are subject to complex
transfer pricing regulations in the countries in which we operate. Transfer pricing regulations
generally require that, for tax purposes, transactions between us and our foreign affiliates be
priced on a basis that would be comparable to an arm’s length transaction and that contemporaneous
documentation be maintained to support the tax allocation. Although uniform transfer pricing
standards are emerging in many of the countries in which we operate, there is still a relatively
high degree of uncertainty and inherent subjectivity in complying with these rules. To the extent
that any foreign tax authorities disagree with our transfer pricing policies, we could become
subject to significant tax liabilities and penalties.
Our tax returns are subject to review by taxing authorities in the jurisdictions in which we
operate. Although we believe that we have provided for all tax exposures, the ultimate outcome of a
tax review could differ materially from our provisions.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Our principal corporate offices are located at 101 Wolf Drive, Thorofare, New Jersey. As of
December 28, 2008, we owned or leased approximately 2.2 million square feet of space worldwide
which is used primarily for sales, distribution, manufacturing, and general administration. These
facilities include offices located throughout North and South America, Europe, Asia, and Australia.
Our principal manufacturing facilities are located in China, the Dominican Republic, Germany,
Japan, Malaysia, the Netherlands, Puerto Rico, India, Hong Kong, Bangladesh, the U.K. and the U.S.
We believe our current manufacturing capacity will support our needs for the foreseeable future.
|
|
|
|
|
Item 3.
|
|
LEGAL PROCEEDINGS
|
We are involved in certain legal and regulatory actions, all of which have arisen in the ordinary
course of business, except for the matters described in the following paragraphs. Management
believes that the ultimate resolution of such matters is unlikely to have a material adverse effect
on our consolidated results of operations and/or financial condition, except as described below.
Matters related to ID Security Systems Canada Inc. versus Checkpoint Systems, Inc.
On June 22, 2006, we settled the follow-on purported class action suits that were filed in
connection with the ID Security Systems Canada Inc. litigation. The purported class action
complaints generally alleged a claim of monopolization. The settlement was for $1.45 million in
cash and credits for the purchase of 90 million radio frequency label tags. As a result, we
recorded a pre-tax charge to earnings of $2.3 million in fiscal 2006.
As a portion of the settlement is in the form of vouchers for the future purchases of tags, the
settlement is anticipated to impact revenue and margin over the term of the redemption period for
the vouchers.
Matter related to All-Tag Security S.A., et al
The Company originally filed suit on May 1, 2001, alleging that the disposable, deactivatable radio
frequency security tag manufactured by All-Tag Security S.A. and All-Tag Security Americas, Inc.’s
(jointly “All-Tag”) and sold by Sensormatic Electronics Corporation (Sensormatic) infringed on a
U.S. Patent No. 4,876,555 (Patent) owned by the Company. On April 22, 2004, the United States
District Court for the Eastern District of Pennsylvania granted summary judgment to defendants
All-Tag and Sensormatic on the ground that the Company’s Patent was invalid for incorrect
inventorship. The Company appealed this decision. On June 20, 2005, the Company won an appeal when
the Federal Circuit reversed the grant of summary judgment and remanded the case to the District
Court for further proceedings. On January 29, 2007 the case went to trial. On February 13, 2007, a
jury found in favor of the defendants on infringement, the validity of the Patent and the
enforceability of the Patent. On June 20, 2008, the Court entered judgment in favor of defendants
based on the jury’s infringement and enforceability findings. On February 10, 2009 the Court
granted defendants’ motions for attorneys’ fees under Section 285 of the Patent Statute. The
district court will have to quantify the amount of attorneys’ fees to be awarded, but it is
expected that defendants will request approximately $5.7 million plus interest.
The Company recognized this amount during the fourth fiscal quarter ended December 28, 2008 in
litigation settlements on the consolidated statement of operations. The Company intends to appeal
any award of legal fees.
18
|
|
|
|
|
Item 4.
|
|
SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
|
No matter was submitted during the fourth quarter of 2008 to a vote of stockholders.
PART II
|
|
|
|
|
Item 5.
|
|
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol CKP. The
following table sets forth, for the periods indicated, the high and low sale prices for our common
stock as reported on the NYSE Composite Tape.
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Price Per
|
|
|
|
|
Share
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
Fiscal year ended December 28, 2008
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
28.38
|
|
|
$
|
21.49
|
|
|
Second Quarter
|
|
$
|
28.10
|
|
|
$
|
20.80
|
|
|
Third Quarter
|
|
$
|
23.43
|
|
|
$
|
17.32
|
|
|
Fourth Quarter
|
|
$
|
18.99
|
|
|
$
|
9.01
|
|
|
Fiscal year ended December 30, 2007
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
23.74
|
|
|
$
|
18.19
|
|
|
Second Quarter
|
|
$
|
28.00
|
|
|
$
|
21.70
|
|
|
Third Quarter
|
|
$
|
29.91
|
|
|
$
|
22.47
|
|
|
Fourth Quarter
|
|
$
|
30.50
|
|
|
$
|
21.24
|
|
Holders of Record
As of February 19, 2009, there were 663 holders of record of our common stock.
Dividends
We have never paid a cash dividend on our common stock (except for a nominal cash distribution in
April 1997 to redeem the rights outstanding under our 1988 Shareholders’ Rights Plan). We do not
anticipate paying any cash dividends in the near future. We have retained, and expect to continue
to retain, our earnings for reinvestment into the business. The declaration and payment of
dividends in the future, and their amounts, will be determined by the Board of Directors in light
of conditions then existing, including our earnings, our financial condition and business
requirements (including working capital needs), and other factors.
19
Issuer Purchases of Equity Securities
The following table presents information related to the repurchases of common stock we made during
the twelve months ended December 28, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Shares that May Yet
|
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Shares Purchased
|
|
|
Be Purchased Under
|
|
|
Period
|
|
Shares Purchased
|
|
|
Paid per Share
|
|
|
Under the Plan (A)
|
|
|
the 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
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
September 29, 2008 — October 26, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
October 27, 2008 — November 23, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
November 24, 2008 — December 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 allowed for
the purchase of up to 2 million shares of the Company’s 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 Company’s
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.
Recent Sales of Unregistered Securities
There has been no sale of unregistered securities in fiscal 2008, 2007 or 2006.
Equity Compensation Plan Information
The following table sets forth our shares authorized for issuance under our equity compensation
plan at December 28, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
Equity
|
|
|
compensation
|
|
|
|
|
|
|
|
compensation
|
|
|
plans not
|
|
|
|
|
|
|
|
plans approved
|
|
|
approved by
|
|
|
|
|
|
|
|
by shareholders
|
|
|
shareholders
|
|
|
Total
|
|
|
|
|
Number of securities to be issued upon exercise of outstanding options
|
|
|
2,610,326
|
(1)
|
|
|
270,000
|
(2)
|
|
|
2,880,326
|
|
|
Weighted average exercise price of outstanding options
|
|
$
|
18.45
|
|
|
$
|
22.71
|
|
|
$
|
18.85
|
|
|
Number of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected above)
|
|
|
1,573,746
|
|
|
|
—
|
|
|
|
1,573,746
|
|
|
|
|
(1)
|
|
Includes stock options and performance based restricted stock units.
|
|
|
|
(2)
|
|
Inducement options granted to newly elected President and CEO of Checkpoint in connection with his hire in fiscal 2007.
|
20
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on the Common Stock of the
Company for the period beginning December 28, 2003 and ending on December 28, 2008, with the
cumulative total return on the Center for Research in Security Prices Index (CRSP Index) for
NYSE/AMEX/NASDAQ Stock market, and the CRSP Index for NASDAQ Electronic Components and Accessories,
assuming the investment of $100 in the Company’s Stock, the CRSP Index for NYSE/AMEX/NASDAQ Stock
market, and the CRSP Index for NASDAQ Electronic Components and Accessories and the reinvestment of
all dividends.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NASDAQ
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic
|
|
|
|
|
Checkpoint
|
|
|
NYSE/AMEX/NASDAQ Stock
|
|
|
Components And
|
|
|
Year
|
|
Systems, Inc.
|
|
|
Market Index
|
|
|
Accessories Index
|
|
|
|
|
2003
|
|
|
100.00
|
|
|
|
100.00
|
|
|
|
100.00
|
|
|
2004
|
|
|
95.45
|
|
|
|
112.29
|
|
|
|
79.11
|
|
|
2005
|
|
|
130.34
|
|
|
|
119.19
|
|
|
|
82.75
|
|
|
2006
|
|
|
106.82
|
|
|
|
138.24
|
|
|
|
78.74
|
|
|
2007
|
|
|
137.40
|
|
|
|
145.43
|
|
|
|
91.43
|
|
|
2008
|
|
|
52.03
|
|
|
|
87.10
|
|
|
|
46.66
|
|
This Stock Performance Graph shall not be deemed incorporated by reference by any general statement
incorporating by reference this annual report into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise be deemed filed
under such Acts.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2008
Notes:
|
A.
|
|
Note: Data complete through last fiscal year.
|
|
|
|
B.
|
|
Note: Corporate Performance Graph with peer group uses peer group only performance (excludes only company).
|
|
|
|
C.
|
|
Note: Peer group indices use beginning of period market capitalization weighting.
|
|
|
|
D.
|
|
Note: Data and graph are calculated from CRSP Total Return Index for the NYSE/AMEX/NASDAQ Stock Market
(U.S. Companies), Center for Research in Security Prices (CRSP), Graduate School of Business, The
University of Chicago.
|
21
|
|
|
|
|
Item 6.
|
|
SELECTED FINANCIAL DATA
|
The following tables set forth our selected financial data and should be read in conjunction with
Management’s Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and Notes thereto included elsewhere herein.
(dollar amounts are in thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 28,
|
|
|
Dec. 30,
|
|
|
Dec. 31,
|
|
|
Dec. 25,
|
|
|
Dec. 26,
|
|
|
Year ended
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
STATEMENT OF OPERATIONS DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
917,082
|
|
|
$
|
834,156
|
|
|
$
|
687,775
|
|
|
$
|
717,992
|
|
|
$
|
670,453
|
|
|
(Loss) earnings from continuing operations before income
taxes
|
|
$
|
(29,209
|
)
|
|
$
|
70,576
|
|
|
$
|
41,975
|
|
|
$
|
40,127
|
|
|
$
|
21,031
|
|
|
Income taxes
|
|
$
|
719
|
|
|
$
|
12,174
|
|
|
$
|
6,987
|
|
|
$
|
11,661
|
|
|
$
|
2,064
|
|
|
(Loss) earnings from continuing operations
|
|
$
|
(29,805
|
)
|
|
$
|
58,409
|
|
|
$
|
35,019
|
|
|
$
|
28,413
|
|
|
$
|
18,823
|
|
|
Discontinued operations, net of tax
|
|
$
|
—
|
|
|
$
|
359
|
|
|
$
|
903
|
|
|
$
|
8,108
|
|
|
$
|
(37,448
|
)
|
|
Net (loss) earnings
|
|
$
|
(29,805
|
) (1)
|
|
$
|
58,768
|
(2)
|
|
$
|
35,922
|
(3)
|
|
$
|
36,521
|
(4)
|
|
$
|
(18,625
|
) (5)
|
|
(Loss) earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(.76
|
)
|
|
$
|
1.46
|
|
|
$
|
.89
|
|
|
$
|
.75
|
|
|
$
|
.51
|
|
|
Diluted
|
|
$
|
(.76
|
)
|
|
$
|
1.43
|
|
|
$
|
.87
|
|
|
$
|
.72
|
|
|
$
|
.50
|
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(.76
|
)
|
|
$
|
1.47
|
|
|
$
|
.91
|
|
|
$
|
.96
|
|
|
$
|
(.51
|
)
|
|
Diluted
|
|
$
|
(.76
|
)
|
|
$
|
1.44
|
|
|
$
|
.89
|
|
|
$
|
.93
|
|
|
$
|
(.50
|
)
|
|
Depreciation and amortization
|
|
$
|
30,788
|
|
|
$
|
21,059
|
|
|
$
|
19,504
|
|
|
$
|
22,539
|
|
|
$
|
26,316
|
|
|
|
|
(1)
|
|
Includes a $59.6 million goodwill impairment charge
($58.5 million,
net of tax), a $6.4 million restructuring charge ($4.6 million, net of
tax), a $6.2 million litigation settlement charge ($3.8 million, net
of tax), a $3.0 million intangible asset impairment charge ($2.2
million, net of tax), a $1.5 million fixed asset impairment charge
($1.1 million, net of tax), and a $1.0 million gain from the sale of
our Czech subsidiary ($1.0 million, net of tax).
|
|
|
|
(2)
|
|
Includes a $2.7 million ($2.0 million, net of tax) restructuring
charge, a $4.4 million ($2.9 million, net of tax) charge related to
the CEO transition, and a $2.6 million ($2.5 million, net of tax) gain
from the sale of our Austrian subsidiary.
|
|
|
|
(3)
|
|
Includes a $7.0 million ($4.8 million, net of tax) restructuring
charge, a $2.3 million ($1.5 million, net of tax) litigation
settlement charge, and a $1.8 million ($1.1 million, net of tax) gain
from the settlement of a capital lease. Also included in discontinued
operations is a $2.8 million ($1.4 million, net of tax) gain on the
divestment of our barcode business.
|
|
|
|
(4)
|
|
Includes a $12.6 million ($8.5 million, net of tax) restructuring
charge, a $1.4 million ($1.4 million, net of tax) asset impairment
charge, $2.0 million of additional tax expense related to our tax
restructuring and dividend repatriation under the American Jobs
Creation Act, and a $0.7 million ($0.7 million, net of tax) goodwill
impairment charge.
|
|
|
|
(5)
|
|
Includes a $34.7 million ($34.7 million, net of tax) goodwill
impairment, a $20.0 million ($13.0 million, net of tax) litigation
settlement, $16.7 million ($10.3 million, net of tax) asset
impairment, and a $3.0 million ($2.0 million, net of tax)
restructuring charge reversal.
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 28,
|
|
|
Dec. 30,
|
|
|
Dec. 31,
|
|
|
Dec. 25,
|
|
|
Dec. 26,
|
|
|
(dollar amounts are in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
AT YEAR END
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
282,752
|
|
|
$
|
297,056
|
|
|
$
|
254,024
|
|
|
$
|
208,255
|
|
|
$
|
168,382
|
|
|
Total debt
|
|
$
|
145,286
|
|
|
$
|
95,512
|
|
|
$
|
16,534
|
|
|
$
|
39,745
|
|
|
$
|
73,998
|
|
|
Stockholders’ equity
|
|
$
|
504,314
|
|
|
$
|
588,328
|
|
|
$
|
473,581
|
|
|
$
|
396,420
|
|
|
$
|
379,645
|
|
|
Total assets
|
|
$
|
985,716
|
|
|
$
|
1,031,044
|
|
|
$
|
781,191
|
|
|
$
|
739,245
|
|
|
$
|
769,685
|
|
|
FOR THE YEAR ENDED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
15,217
|
|
|
$
|
13,363
|
|
|
$
|
11,520
|
|
|
$
|
10,846
|
|
|
$
|
11,342
|
|
|
Cash provided by operating activities
|
|
$
|
77,206
|
|
|
$
|
66,971
|
|
|
$
|
22,386
|
|
|
$
|
44,618
|
|
|
$
|
23,280
|
|
|
Cash (used in) provided by investing activities
|
|
$
|
(54,704
|
)
|
|
$
|
(106,151
|
)
|
|
$
|
7,963
|
|
|
$
|
(8,521
|
)
|
|
$
|
(10,338
|
)
|
|
Cash
(used in) provided by financing activities
|
|
$
|
(4,460
|
)
|
|
$
|
7,164
|
|
|
$
|
(6,945
|
)
|
|
$
|
(18,283
|
)
|
|
$
|
(24,503
|
)
|
|
RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on net sales(a)
|
|
|
(3.25
|
)%
|
|
|
7.05
|
%
|
|
|
5.22
|
%
|
|
|
5.09
|
%
|
|
|
(2.78
|
)%
|
|
Return on average equity(b)
|
|
|
(5.46
|
)%
|
|
|
11.07
|
%
|
|
|
8.26
|
%
|
|
|
9.41
|
%
|
|
|
(5.30
|
)%
|
|
Return on average assets(c)
|
|
|
(2.96
|
)%
|
|
|
6.49
|
%
|
|
|
4.73
|
%
|
|
|
4.84
|
%
|
|
|
(2.41
|
)%
|
|
Current ratio(d)
|
|
|
2.34
|
|
|
|
2.42
|
|
|
|
2.31
|
|
|
|
1.99
|
|
|
|
1.72
|
|
|
Percent of total debt to capital(e)
|
|
|
22.37
|
%
|
|
|
13.97
|
%
|
|
|
3.37
|
%
|
|
|
9.11
|
%
|
|
|
16.31
|
%
|
|
|
|
(a)
|
|
“Return on net sales” is calculated by dividing net earnings (loss) after the cumulative effect
of change in accounting principle by net sales.
|
|
|
|
(b)
|
|
“Return on average equity” is calculated by dividing net earnings (loss) after the cumulative
effect of change in accounting principle by average equity.
|
|
|
|
(c)
|
|
“Return on average assets” is calculated by dividing net earnings (loss) after the cumulative
effect of change in accounting principle by average assets.
|
|
|
|
(d)
|
|
“Current ratio” is calculated by dividing current assets by current liabilities.
|
|
|
|
(e)
|
|
“Percent of total debt to capital” is calculated by dividing total debt by total debt and equity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 28,
|
|
|
Dec. 30,
|
|
|
Dec. 31,
|
|
|
Dec. 25,
|
|
|
Dec. 26,
|
|
|
(amounts are in thousands, except employee data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Other Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding — diluted
|
|
|
39,408
|
(1)
|
|
|
40,724
|
|
|
|
40,233
|
|
|
|
39,075
|
|
|
|
37,604
|
(2)
|
|
Number of employees
|
|
|
3,878
|
|
|
|
3,930
|
|
|
|
3,213
|
|
|
|
3,955
|
|
|
|
4,260
|
|
|
Backlog
|
|
$
|
51,799
|
|
|
$
|
73,462
|
|
|
$
|
54,899
|
|
|
$
|
52,234
|
|
|
$
|
63,026
|
|
|
|
|
(1)
|
|
Excludes 518 common shares from stock options and awards
and 22 common shares from deferred compensation arrangements as they
are anti-dilutive due to our net loss for the year.
|
|
|
|
(2)
|
|
Excludes 2,187 common shares from the assumed conversion of the subordinated debentures as it is anti-dilutive.
|
23
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following section highlights significant factors impacting the consolidated operations and
financial condition of the Company and its subsidiaries. The following discussion should be read in
conjunction with Item 6. “Selected Financial Data” and Item 8. “Financial Statements and
Supplementary Data.”
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), store monitoring solutions (CheckView™), custom tags and labels
(Check-Net
®
), 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 30 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. Fiscal 2006
has been conformed to reflect the segment change. The margins for each of the segments and the
identifiable assets attributable to each reporting segment are set forth in Note 19 “Business
Segments and Geographic Information” 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., fluctuations
in foreign currency exchange rates have a significant impact on reported results.
We believe that some markets we serve are slowing as a result of the unprecedented credit crisis
and on-going softening of the global economic environment. In response to anticipated market
conditions, we will continue to focus 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.
During early 2008, we introduced Evolve™, 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 recognized leader in RFID-based application
software. The addition of OATSystems, Inc. will build on our strategy of helping retailers and
suppliers migrate more easily with our Evolve™ Electronic Article Surveillance platform to 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. OATSystems, Inc. employs 49 people.
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.
24
In August 2008, we announced a manufacturing and supply chain restructuring program designed to
accelerate profitable growth in our Check-Net
®
business and to support incremental improvements in
its EAS hardware and labels businesses. We anticipate this program to result in total restructuring
charges of approximately $3 million to $4 million, or $0.06 to $0.08 per diluted share, of which
$1.5 million, or $0.03 per diluted share, has been incurred in 2008. We continue to expect
implementation of this program to be complete in 2010 and to result in annualized cost savings of
approximately $6 million.
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 and services from monitoring and maintenance),
repeat customer business, and our borrowing capacity should provide us with adequate cash flow and
liquidity to execute our business plan.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with generally accepted
accounting principles (GAAP) in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosure of contingent assets and
liabilities.
Note 1 of the notes to the consolidated financial statements describes the significant accounting
policies used in the preparation of the consolidated financial statements. Certain of these
significant accounting policies are considered to be critical accounting policies. A critical
accounting policy is defined as one that is both material to the presentation of our consolidated
financial statements and requires management to make difficult, subjective or complex judgments
that could have a material effect on our financial condition or results of operations.
Specifically, these policies have the following attributes: (1) we are required to make assumptions
about matters that are highly uncertain at the time of the estimate; and (2) different estimates we
could reasonably have used, or changes in the estimate that are reasonably likely to occur, would
have a material effect on our financial condition or results of operations. Estimates and
assumptions about future events and their effects cannot be determined with certainty. On an
on-going basis, we evaluate our estimates on historical experience and on various other assumptions
believed to be applicable and reasonable under the circumstances. These estimates may change as new
events occur, as additional information is obtained and as our operating environment changes. These
changes have historically been minor and have been included in the consolidated financial
statements as soon as they became known. Senior management reviews the development and selection of
our accounting policies and estimates with the Audit Committee. The critical accounting policies
have been consistently applied throughout the accompanying financial statements.
We believe the following accounting policies are critical to the preparation of our consolidated
financial statements:
Revenue Recognition.
We recognize revenue in accordance with Staff Accounting Bulletin (“SAB”) No.
104, “Revenue Recognition,” which states that revenue is realized or realizable and earned when all
of the following criteria are met: persuasive evidence of an arrangement exists; delivery has
occurred or services have been rendered; the price to the buyer is fixed or determinable; and
collectability is reasonably assured. We enter into contracts to sell our products and services,
and, while the majority of our sales agreements contain standard terms and conditions, there are
agreements that contain multiple elements or non-standard terms and conditions. As a result,
significant contract interpretation is sometimes required to determine the appropriate accounting,
including whether the deliverables specified in a multiple element arrangement should be treated as
separate units of accounting for revenue recognition purposes, and, if so, how the price should be
allocated among the elements and when to recognize revenue for each element. Unearned revenue is
recorded when payments are received in advance of performing our service obligations and is
recognized over the service period.
For arrangements with multiple elements, we determine the fair value of each element and then
allocate the total arrangement consideration among the separate elements. We recognize revenue
when installation is complete or other post-shipment obligations have been satisfied. Equipment
leased to customers under sales-type leases is accounted for as the equivalent of a sale. The
present value of such lease revenues is recorded as net revenues, and the related cost of the
equipment is charged to cost of revenues. The deferred finance charges applicable to these leases
are recognized over the terms of the leases. Rental revenue from equipment under operating leases
is recognized over the term of the lease. Installation revenue from EAS equipment is recognized
when the systems are installed. Service revenue is recognized, for service contracts, on a
straight-line basis over the contractual period, and, for non-contract work, as services are
performed. Software license fee revenues are recognized in accordance with Statement of Position
(“SOP”) 97-2, “Software Revenue Recognition”, as amended by SOP 98-9, “Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain Transactions.” Revenues from software license
agreements are recognized when persuasive evidence of an agreement exists, delivery of the product
has occurred, no significant vendor obligations are remaining to be fulfilled, the fee is fixed and
determinable, and collection is probable. Revenue from software contracts that require significant
production, modification, customization, or implementation is recognized in accordance with SOP
81-1, “Accounting For Performance of
25
Construction-Type and Certain Production-Type Contracts”. Revenue from these arrangements for both
licenses and professional services are recognized together using the percentage of completion
method based upon the ratio of labor incurred to total estimated labor to complete each contract.
In instances where there is a term license combined with services, revenue is recognized ratably
over the term. We record estimated reductions to revenue for customer incentive offerings,
including volume-based incentives and rebates. We record revenues net of an allowance for
estimated return activities. Return activity was immaterial to revenue and results of operations
for all periods presented.
We believe the following judgments and estimates have a significant effect on our consolidated
financial statements:
Allowance for Doubtful Accounts.
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. These allowances are based
on specific facts and circumstances surrounding individual customers as well as our historical
experience. The adequacy of the reserves for doubtful accounts is continually assessed by
periodically evaluating each customer’s receivable balance, considering our customers’ financial
condition and credit history, and considering current economic conditions. Historically, our
reserves have been adequate to cover all losses associated with doubtful accounts. If the financial
condition of our customers were to deteriorate, impairing their ability to make payments,
additional allowances may be required. If economic or political conditions were to change in the
countries where we do business, it could have a significant impact on the results of operations,
and our ability to realize the full value of our accounts receivable. Furthermore, we are dependent
on customers in the retail markets. Economic difficulties experienced in those markets could have a
significant impact on our results of operations and our ability to realize the full value of our
accounts receivables. If our historical experiences changed by 10%, it would require an increase or
decrease of $0.4 million to our reserve.
Inventory Valuation.
We write down our inventory for estimated obsolescence or unmarketable items
equal to the difference between the cost of the inventory and the estimated net realizable value
based upon assumptions of future demand and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs may be required. If
our estimates were to change by 10%, it would cause a change in inventory value of $0.7 million.
Valuation of Long-lived Assets.
Our long-lived assets include property, plant, and equipment,
goodwill, and identified intangible assets. With the exception of goodwill and indefinite-lived
intangible assets, long-lived assets are depreciated or amortized over their estimated useful
lives, and are reviewed for impairment whenever changes in circumstances indicate the carrying
value may not be recoverable. Recoverability is determined based upon our estimates of future
undiscounted cash flows. If the carrying value is determined to be not recoverable an impairment
charge would be necessary to reduce the recorded value of the assets to their fair value. The fair
value of the long-lived assets other than goodwill is based upon appraisals, quoted market prices
of similar assets, or discounted cash flows.
Goodwill and indefinite-lived intangible assets are subject to tests for impairment at least
annually or whenever events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. We test for impairment on an annual basis as of fiscal month end
October of each fiscal year, relying on a number of factors including operating results, business
plans, and anticipated future cash flows. Our management uses its judgment in assessing whether
goodwill has become impaired between annual impairment tests. Reporting units are primarily
determined as the geographic areas comprising our business segments, except in situations when
aggregation of the reporting units is appropriate pursuant to FAS 142. Recoverability of goodwill
is evaluated using a two-step process. The first step involves a comparison of the fair value of a
reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds the
fair value, then the second step of the process involves a comparison of the implied fair value and
carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a
reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an
amount equal to the excess.
The implied fair value of our reporting units is dependent upon our estimate of future discounted
cash flows and other factors. Our estimates of future cash flows include assumptions concerning
future operating performance and economic conditions and may differ from actual future cash flows.
Estimated future cash flows are adjusted by an appropriate discount rate derived from our market
capitalization plus a suitable control premium at the date of evaluation. The financial and credit
market volatility directly impacts our fair value measurement through our weighted average cost of
capital that we use to determine our discount rate and through our stock price that we use to
determine our market capitalization. Therefore, changes in the stock price may also affect the
amount of impairment recorded. Market capitalization is determined by multiplying the shares
outstanding on the assessment date by the average market price of our common stock over a 30-day
period before each assessment date. We use this 30-day duration to consider inherent market
fluctuations that may affect any individual closing price. We believe that our market
capitalization alone does not fully capture the fair value of our business as a whole, or the
substantial value that an acquirer would obtain from its ability to obtain control of our business.
As such, in determining fair value, we add a control premium to our market capitalization. To
estimate the control premium, we considered our unique competitive advantages that would likely
provide synergies to a market participant. In addition, we considered external market factors which
we believe contributed to the decline and volatility in our stock price that did not reflect our
underlying fair value.
We have not made any material changes in the methodology used in the assessment of whether or not
goodwill is impaired during the past three fiscal years. Determining the fair value of a reporting
unit is a matter of judgment and often involves the use of significant
26
estimates and assumptions. The use of different assumptions would increase or decrease estimated
discounted future cash flows and could increase or decrease an impairment charge. If the use of
these assets or the projections of future cash flows change in the future, we may be required to
record impairment charges. An erosion of future business results in any of the business units could
create impairment in goodwill or other long-lived assets and require a significant charge in future
periods. (See Notes 1 and 5 of the Consolidated Financial Statements.)
Income Taxes.
In determining income for financial statement purposes, we must make certain
estimates and judgments. These estimates and judgments affect the calculation of certain tax
liabilities and the determination of recoverability of certain of the deferred tax assets, which
arise from temporary differences between tax and financial statement recognition of revenue and
expense. We record a valuation allowance to reduce our deferred tax assets to the amount that it is
more likely than not to be realized. In assessing the realizability of deferred tax assets, we
consider future taxable income by tax jurisdictions and tax planning strategies. If we were to
determine that we would be able to realize deferred tax assets in the future in excess of the net
recorded amount, an adjustment to the valuation allowance would increase income in the period such
determination was made. Likewise, should we determine that we would not be able to realize all or
part of our net deferred tax assets in the future, an adjustment to the valuation allowance would
decrease income in the period such determination was made. (See Note 13 of the Consolidated
Financial Statements.)
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the
future. We are not aware of any such changes that would have a material effect on our results of
operations, cash flows or financial position.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the
application of complex tax regulations in a multitude of jurisdictions across our global
operations. We record tax liabilities for the anticipated settlement of tax audit issues in the
U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which,
additional taxes will be due. Our income tax expense includes amounts intended to satisfy income
tax assessments that result from these audit issues in accordance with Financial Accounting
Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109” (FIN 48). Determining the income tax expense for these
potential assessments and recording the related assets and liabilities requires management
judgments and estimates. Due to the complexity of some of these uncertainties, the ultimate
resolution may result in a payment that is different from our estimate of tax liabilities. If
payment of these amounts ultimately proves to be greater or less than the recorded amounts, the
change of the liabilities would result in tax expense or benefit being recognized in that period.
We evaluate our uncertain tax positions in accordance with FIN 48. We believe that our reserve for
uncertain tax positions, including related interest, is adequate.
Pension Plans.
We have various unfunded pension plans outside the U.S. These plans have
significant pension costs and liabilities that are developed from actuarial valuations. Inherent in
these valuations are key assumptions including discount rates, expected return on plan assets,
mortality rates, and merit and promotion increases. We are required to consider current market
conditions, including changes in interest rates, in selecting these assumptions. Changes in the
related pension costs or liabilities may occur in the future due to changes in the assumptions. A
change in discount rates of 0.25% would have less than a $0.1 million effect on pension expense.
Stock Compensation.
We recognize stock-based compensation expense for all share-based payment
awards granted after December 25, 2005 and granted prior to but not yet vested as of December 25,
2005, in accordance with Statement of Financial Accounting Standards (SFAS) 123R “Share-Based
Payment” (SFAS 123R). Under the fair value recognition provisions of SFAS 123R, we recognize
share-based compensation, net of an estimated forfeiture rate, and only recognize compensation cost
for those shares expected to vest. For awards granted after the SFAS 123R adoption date we
recognize the expense on a straight-line basis over the requisite service period of the award. For
non-vested awards granted prior to the adoption date, we continue to use the ratable expense
allocation method. Prior to SFAS 123R adoption, we accounted for share-based payments under
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and
accordingly, recognized compensation expense only when we granted options with a discounted
exercise price.
Determining the fair value of share-based payment awards requires the input of highly subjective
assumptions, including the expected life of the share-based payment awards and stock price
volatility. The assumptions used in calculating the fair value of share-based payment awards
represent management’s best estimates, but these estimates involve inherent uncertainties and the
application of management judgment. As a result, if factors change and we use different
assumptions, our share-based compensation expense could be materially different in the future. In
addition, we are required to estimate the expected forfeiture rate and only recognize expense for
those shares expected to vest. If our actual forfeiture rate is materially different from our
estimate, the share-based compensation expense could be significantly different from what we have
recorded in the current period. A change in the estimated forfeiture rate of 10% would have a $0.2
million effect on stock compensation expense. As of December 28, 2008, there was $5.2 million and
$4.3 million of unrecognized stock-based compensation expense related to nonvested stock options
and restricted stock units, respectively. Such costs are expected to be recognized over a
weighted-average period of 2.3 years. (See Note 8 to the Consolidated Condensed Financial
Statements for further discussion on share-based compensation.)
27
Liquidity and Capital Resources
Our liquidity needs have related to, and are expected to continue to relate to, acquisitions,
capital investments, product development costs, potential future restructuring related to the
rationalization of the business, and working capital requirements. We have met our liquidity needs
over the last four years primarily through cash generated from operations. Based on an analysis of
liquidity utilizing conservative assumptions for 2009, we believe that cash provided from operating
activities and funding available under our current credit agreements should be adequate to service
debt and working capital needs, meet our capital investment requirements, other potential
restructuring requirements, and product development requirements.
The recent financial and credit crisis has reduced credit availability and liquidity for many
companies. We believe, however, that the strength of our core business, cash position, access to
credit markets, and our ability to generate positive cash flow will sustain us through this
challenging period. We are working to reduce our 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. We
evaluate the creditworthiness of all existing and potential counterparties for all debt,
investment, and derivative transactions and instruments. Our policy allows us to enter into
transactions with nationally recognized financial institutions with an S&P rating of “A” or higher.
The maximum exposure permitted to any single counterparty is $50.0 million. Counterparty credit
ratings and credit exposure are monitored monthly and reviewed quarterly by our Treasury Risk
Committee.
As of December 28, 2008, our cash and cash equivalents were $132.2 million compared to $118.3
million as of December 30, 2007. Cash and cash equivalents
increased in 2008 primarily due to $77.2
million in cash from operating activities, partially offset by $54.7 million of cash used in
investing activities. Cash from operating activities improved $10.2 million in 2008 compared to 2007
due primarily to improvements in accounts receivables and a decrease in inventory offset by a
negative cash impact related to lower accounts payable and lower earnings. The improvement in
accounts receivable in 2008 resulted primarily from large chain-wide installation revenue billed at
the end of 2007 and collected in 2008 coupled with a concentrated effort to improve working capital
through enhanced collection efforts and increased monitoring of inventory levels. The decline in
inventory and accounts payable were the result of lower revenue and backlog at the end of 2008
compared to 2007. Cash used in investing activities was $51.4 million less in 2008 compared to
2007. This was due primarily to the amount paid in the acquisition of Alpha and SIDEP in 2007
compared to the OATSystems acquisition in 2008. Our percentage of total debt to stockholders’ equity
in 2008 increased to 28.8% from 16.2% as a result of the impact of the fourth quarter loss on
equity and an increase in debt to fund acquisitions and repurchase of stock. As of December 28,
2008, our working capital was $282.8 million compared to $297.1 million as of December 30, 2007.
During the first half of 2008, we executed our previously approved stock repurchase program in
which we are authorized to purchase up to two million shares of the Company’s common stock. In
total, 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 December
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 our investment in our technology and process
improvement. In 2008, our investment in research and development amounted to $22.6 million, as
compared to $18.2 million in 2007. These amounts are reflected in the cash generated from
operations, as we expense our research and development as it is incurred. In 2009, we anticipate
spending of approximately $24 million on research and development to support achievement of our
strategic plan.
Our capital expenditures during fiscal 2008 totaled $15.2 million, compared to $13.4 million during
fiscal 2007. We anticipate capital expenditures to be used primarily to upgrade technology and
improve our production capabilities to approximately $18 million in 2009.
We have various unfunded pension plans outside the U.S. These plans have significant pension costs
and liabilities that are developed from actuarial valuations. For fiscal 2008, our contribution to
these plans was $4.7 million. Our funding expectation for 2009 is $4.8 million. We believe our
current cash position, cash generated from operations, and the availability of cash under our
revolving line of credit will be adequate to fund these requirements. The contractual obligation
table details our anticipated funding requirements related to pension obligations for the next ten
years.
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
$1.3 million in liabilities.
In January 2008, the Company purchased the business of Security Corporation, Inc., a privately held
company, for $7.9 million plus $1.0 million of liabilities acquired. The transaction was paid in
cash.
28
On November 1, 2007, Checkpoint Systems, Inc. and one of its direct subsidiaries (collectively, the
“Company”) and Alpha Security Products, Inc. and one of its direct subsidiaries (collectively, “the
Seller”) entered into an Asset Purchase Agreement and a Dutch Assets Sale and Transfer Agreement
(collectively, the “Agreements”) under which the Company purchased all of the assets of Alpha’s S3
business (the “Acquisition”) for approximately $142 million, subject to a post-closing working
capital adjustment, plus additional performance-based contingent payments up to a maximum of $8
million plus interest thereon. The purchase price was funded by $67 million of cash and $75 million
of borrowings under our senior unsecured credit facility. Subject to the Agreements, contingent
payments were earned if the revenue derived from the S3 business exceeded $70 million during the
period from December 31, 2007, until December 28, 2008. In the event that the revenue derived from
the S3 business exceeded $83 million during such period, the Seller was entitled to a maximum
payment of $8 million. During the fourth fiscal quarter ended December 28, 2008, revenues for the
S3 business exceeded the minimum contingency payment thresholds. An accrual of $6.8 million is
recognized at December 28, 2008 for the contingent payment, with a corresponding increase to
goodwill recorded on the acquisition. Payment of the $6.8 million is required to occur before
February 28, 2009.
In November 2007, we purchased SIDEP, a provider of RF-EAS products. Upon closing, we also acquired
the remaining minority interests in a SIDEP subsidiary, Shanghai Asialco Electronics Co., Ltd.
(Asialco), a China-based manufacturer of RF-EAS labels. The total purchase price for these
acquisitions was $27.9 million, net of cash acquired. The purchase agreement was structured with
deferred payments to the minority interest owners of Asialco of $9.3 million. These payments will
be paid over a three-year period from the date of acquisition and were recorded as a liability on
the date of acquisition. As part of the acquisition, we acquired $3.4 million (RMB25 million) of
outstanding debt of Asialco. The loans were paid down in April and May 2008 and were renewed for 12
month periods under the original terms of the loan agreement. As of December 28, 2008, the
outstanding Asialco loan balance is $3.6 million (RMB25 million) and has an interest rate of 5.31%.
The loans are collateralized by land and buildings with an aggregate carrying value of $6.0 million
at December 28, 2008. The loans mature at various times through May 2009.
On September 14, 2007, the Company received cash of $2.2 million from the release of the escrow
account related to the Bar-code divestiture. Prior to the release, the escrow account value was
recorded as restricted cash on our consolidated balance sheet.
In May 2007, the Company purchased the business of SSE Southeast, LLC, for $5.1 million plus $1.0
million of liabilities acquired. The transaction was paid in cash.
In January 2007, the Company purchased the business of Security Systems Technology, Inc., a
privately held company, for $0.8 million plus $0.3 million of liabilities acquired. The transaction
was paid in cash.
At December 31, 2006, the ¥1.0 billion ($8.4 million) short-term revolving loan facility had an
outstanding balance of ¥600 million ($5.0 million) and availability of ¥400 million ($3.4 million).
During the first quarter of 2007, we repaid the loan facility with proceeds from our unsecured
revolving credit facility and cash from operations.
At December 28, 2008, our $8.8 million
(¥800 million) Japanese local line of credit had an outstanding balance of $7.7 million (¥700 million)
and availability of $1.1 million (¥100 million). The line of credit expires in March 2009. We expect
to renew the line of credit upon its maturity.
On March 4, 2005, we entered into a new $150.0 million five-year senior unsecured multi-currency
revolving credit agreement (“Credit Agreement”) with a syndicate of lenders. The Credit Agreement
replaced the $375.0 million senior collateralized multi-currency credit facility arranged in
December 1999. Borrowings under the Credit Agreement bear interest rates of LIBOR plus an
applicable margin ranging from 0.75% to 1.75% and/or prime plus 0.00% to 0.50%. The interest rate
matrix is based on our leverage ratio of funded debt to EBITDA, as defined by the Credit Agreement.
Under the Credit Agreement, we pay an unused line fee ranging from 0.18% to 0.30% per annum on the
unused portion of the commitment. At December 28, 2008, we had $133.6 million outstanding under
this facility. Our available line of credit under this agreement is $15.2 million. Our availability
under this facility was reduced by letters of credit totaling $1.2 million. There are no
restrictions on our ability to draw down on the available portion of our line of credit.
The senior unsecured credit facility increased by $42.1 million since December 30, 2007. The
increase in borrowings was primarily used to finance our stock repurchase program and the
OATSystems, Inc. acquisition.
We are currently in the process of negotiating a renewal of our Credit Agreement. We anticipate
this renewal to be completed during the first half of 2009.
The Credit Agreement 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. At December 28, 2008, we were in compliance with all of our debt covenants. Based
upon our projections, we currently do not anticipate any issues with meeting our existing debt
covenants during fiscal 2009.
29
We have never paid a cash dividend (except for a nominal cash distribution in April 1997 to redeem
the rights outstanding under our 1988 Shareholders’ Rights Plan). We do not anticipate paying any
cash dividends in the near future.
As we continue to implement our strategic plan in a volatile global economic environment, our focus
will remain on operating our business in a manner that addresses the reality of the current
economic marketplace without sacrificing the capability to effectively execute our strategy when
economic conditions and the retail environment stabilize. Based upon an analysis of liquidity
using our current forecast, management believes that our anticipated cash needs can be funded from
cash and cash equivalents on hand, the availability of cash under the $150.0 million revolving
credit facility, and cash generated from future operations for the 2009 fiscal year.
Off-Balance Sheet Arrangements
We do not utilize material off-balance sheet arrangements apart from operating leases that have, or
are reasonably likely to have, a current or future effect on our financial condition, changes in
financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or
capital resources. We use operating leases as an alternative to purchasing certain property, plant,
and equipment. Our future rental commitment under all non-cancelable operating leases was $42.7
million as of December 28, 2008. The scheduled timing of these rental commitments is detailed in
our “Contractual Obligations” section.
Contractual Obligations
Our contractual obligations and commercial commitments at December 28, 2008 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligation
|
|
|
|
|
|
Due in less
|
|
|
Due in
|
|
|
Due in
|
|
|
Due after
|
|
|
(dollar amounts in thousands)
|
|
Total
|
|
|
than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
|
|
Long-term debt (1)
|
|
$
|
138,400
|
|
|
$
|
4,098
|
|
|
$
|
134,302
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Capital leases (2)
|
|
|
372
|
|
|
|
258
|
|
|
|
98
|
|
|
|
16
|
|
|
|
—
|
|
|
Operating leases
|
|
|
42,723
|
|
|
|
14,613
|
|
|
|
17,288
|
|
|
|
7,721
|
|
|
|
3,101
|
|
|
Pension obligations (3)
|
|
|
50,793
|
|
|
|
4,375
|
|
|
|
9,420
|
|
|
|
10,136
|
|
|
|
26,862
|
|
|
Acquisition obligation (4)
|
|
|
14,216
|
|
|
|
9,476
|
|
|
|
4,740
|
|
|
|
—
|
|
|
|
—
|
|
|
Inventory purchase commitments (5)
|
|
|
10,241
|
|
|
|
6,421
|
|
|
|
3,799
|
|
|
|
21
|
|
|
|
—
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
256,745
|
|
|
$
|
39,241
|
|
|
$
|
169,647
|
|
|
$
|
17,894
|
|
|
$
|
29,963
|
|
|
|
|
|
|
Commercial Commitments
|
|
|
|
|
|
Due in less
|
|
|
Due in
|
|
|
Due in
|
|
|
Due after
|
|
|
(dollar amounts in thousands)
|
|
Total
|
|
|
than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
|
|
Standby letters of credit
|
|
$
|
1,181
|
|
|
$
|
1,181
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Surety bonds
|
|
|
2,387
|
|
|
|
2,285
|
|
|
|
102
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Total commercial commitments
|
|
$
|
3,568
|
|
|
$
|
3,466
|
|
|
$
|
102
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
(1)
|
|
Includes interest payments through maturity of $4,804.
|
|
|
|
(2)
|
|
Includes interest payments through maturity of $34.
|
|
|
|
(3)
|
|
Amounts represent undiscounted projected benefit payments to our
unfunded plans over the next 10 years. The expected benefit payments
are estimated based on the same assumptions used to measure our
accumulated benefit obligation at the end of 2008 and include benefits
attributable to estimated future employee service of current
employees.
|
|
|
|
(4)
|
|
The acquisition obligation represents $5.4 million of deferred
payments to the minority shareholders of Shanghai Asialco Electronics
Co., Ltd., a subsidiary of SIDEP coupled with a $2.0 million deferred
payment on a non-compete contract related to the acquisition.
Additionally, the acquisition obligation includes the $6.8 million
contingent liability related to our acquisition of the Alpha S3
business.
|
|
|
|
(5)
|
|
Inventory purchase commitments represent the Company’s legally binding
agreements to purchase fixed or minimum quantities of goods at
determinable prices.
|
The table above excludes our gross liability for uncertain tax positions, including accrued
interest and penalties, which totaled $18.5 million as of December 28, 2008, since we cannot
predict with reasonable reliability the timing of cash settlements to the respective taxing
authorities.
30
Pension Plans
We maintain several defined benefit pension plans, principally in Europe. The majority of these
pension plans are unfunded. Our pension expense for 2008 was $5.7 million. Included in pension
expense in 2008 is a pension settlement of $37,000. Our pension expense for 2007 was $5.5 million.
Included in pension expense in 2007 is a pension settlement of
$0.5 million.
We review our pension assumptions annually. Our assumptions for the year ended December 28, 2008,
were a discount rate of 5.75%, an expected return of 3.75% and an expected rate of increase in
future compensation of 2.77%. In developing the discount rate assumption, we considered the
estimated plan durations of each of our plans and selected a rate of a corresponding length of
time. The source of the discount rate was obtained by comparing the yields available on AA rated
corporate bonds in the Eurozone, specifically the iboxx AA 10+ index. This resulted in a discount
rate of 5.75% for 2008 and 5.50% for 2007. The expected rate of the return was developed using the
historical rate of returns of the foreign government bonds currently held. This resulted in the
selection of a long-term rate of return on plan assets of 3.75% for 2008 and 4.25% for 2007.
As of December 31, 2006, we have adopted the recognition provisions of SFAS 158 “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB
Statement No. 87, 88, 106 and 132(R)” and as a result, we recognized the previously unrecognized
losses into the accrued pension liability with an offsetting charge to accumulated other
comprehensive income. The total amount recognized for losses in accumulated other comprehensive
income as of December 31, 2006 was $14.7 million. As of December 25, 2005, these amounts were
unrecognized and amounted to $14.5 million. The primary component of the unrecognized losses are
actuarial losses, a transition obligation, and prior period service costs. The change in actuary
losses during 2008 was attributable to changes in the discount rate as the bond yields have
increased. Unrecognized losses are amortized over the average remaining service period of the
employees expected to receive the benefit in accordance with pension accounting rules. The weighted
average remaining service period is approximately 13 years. The impact of recognizing the actuarial
gains on 2008, 2007, and 2006 pension expense are $0.1 million, $0.6 million, and $0.7 million,
respectively. The total projected amortization for these gains in 2009 is approximately $0.1
million.
Exposure to Foreign Currency
We manufacture products in the U.S., the Caribbean, the U.K., 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.
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 December 28, 2008, we
had currency forward exchange contracts with a notional amount totaling approximately $9.7 million.
The contracts are in various local currencies primarily covering our Western European, Canadian,
Japan, and Australian operations. Historically, we have not purchased currency forward exchange
contracts where it is not economically efficient, specifically for our operations in South America
and Asia.
During the second quarter of 2007, the Company entered into a foreign currency option contract, at
a notional amount of
€
5 million, to mitigate the effect of fluctuating foreign exchange rates on
the reporting of a portion of its expected 2007 foreign currency denominated earnings. Changes in
the fair value of this foreign currency option contract, which was not designated as a hedge, are
recorded in earnings immediately. The premium paid on the option contract was $73,000. The foreign
currency option contract expired on December 28, 2007. The fair market value on this option at the
expiration date was zero.
31
Hedging Activity
During 2008, we entered into various foreign currency contracts to reduce our exposure to
forecasted 2008 and 2009 Euro-denominated inter-company revenues. These contracts were designated
as cash flow hedges. The foreign currency contracts mature at various dates from January 2009 to
September 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 December 28,
2008, the fair value of these cash flow hedges were reflected as a $48,000 liability and are
included in other current liabilities in the accompanying consolidated balance sheets. The total
notional amount of these hedges is $15.1 million (
€
10.7 million) and the unrealized gain recorded
in other comprehensive income was $1.5 million. During the year ended December 28, 2008, a $0.6
million benefit related to these foreign currency hedges was recorded to cost of goods sold as the
inventory was sold to external parties. As of December 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 $1.5 million. During the
year ended December 28, 2008, a $0.6 million benefit related to these foreign currency hedges was
recorded to cost of goods sold as the inventory was sold to external parties. We recognized no gain
or loss during the year ended December 28, 2008 for hedge ineffectiveness.
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 December 28, 2008, the fair value of the interest rate swap agreement
was reflected as a $0.9 million liability and is included in other long-term liabilities in the
accompanying consolidated balance sheets. We recognized no gain or loss during the year ended
December 28, 2008 for hedge ineffectiveness.
Provision for Restructuring
Restructuring expense for the periods ended December 28, 2008, December 30, 2007, and December 31,
2006 were as follows:
(dollar amounts are in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Fiscal 2008
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Manufacturing Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
|
$
|
699
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Consulting fees
|
|
|
838
|
|
|
|
—
|
|
|
|
—
|
|
|
2005 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
|
|
4,563
|
|
|
|
1,215
|
|
|
|
7,915
|
|
|
Acquisition integration costs
|
|
|
519
|
|
|
|
—
|
|
|
|
—
|
|
|
Pension curtailment
|
|
|
—
|
|
|
|
(420
|
)
|
|
|
(339
|
)
|
|
Pension termination benefit expense
|
|
|
—
|
|
|
|
—
|
|
|
|
226
|
|
|
Lease termination costs
|
|
|
—
|
|
|
|
2,051
|
|
|
|
—
|
|
|
2003 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
|
|
(253
|
)
|
|
|
(145
|
)
|
|
|
(409
|
)
|
|
Lease termination costs
|
|
|
76
|
|
|
|
—
|
|
|
|
(386
|
)
|
|
|
|
Total
|
|
$
|
6,442
|
|
|
$
|
2,701
|
|
|
$
|
7,007
|
|
|
|
Restructuring accrual activity for the periods ended December 28, 2008, and December 30, 2007, were
as follows:
(dollar amounts are in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual at
|
|
|
Charged
|
|
|
Reversed
|
|
|
|
|
|
|
Exchange
|
|
|
|
|
|
|
|
Beginning
|
|
|
to
|
|
|
to
|
|
|
Cash
|
|
|
Rate
|
|
|
Accrual at
|
|
|
Fiscal 2008
|
|
of Year
|
|
|
Earnings
|
|
|
Earnings
|
|
|
Payments
|
|
|
Changes
|
|
|
12/28/08
|
|
|
|
|
Manufacturing Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
|
$
|
—
|
|
|
$
|
701
|
|
|
$
|
(2
|
)
|
|
$
|
(37
|
)
|
|
$
|
(10)
|
|
|
$
|
652
|
|
|
2005 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
|
|
3,015
|
|
|
|
5,362
|
|
|
|
(799
|
)
|
|
|
(4,141
|
)
|
|
|
(135
|
)
|
|
|
3,302
|
|
|
Acquisition restructuring costs
|
|
|
1,209
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(612
|
)
|
|
|
(29
|
)
|
|
|
568
|
|
|
|
|
Total
|
|
$
|
4,224
|
|
|
$
|
6,063
|
|
|
$
|
(801
|
)
|
|
$
|
(4,790
|
)
|
|
$
|
(174
|
)
|
|
$
|
4,522
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual at
|
|
|
|
|
|
|
Charged
|
|
|
Reversed
|
|
|
|
|
|
|
Exchange
|
|
|
|
|
|
|
|
Beginning
|
|
|
Acquisition
|
|
|
to
|
|
|
to
|
|
|
Cash
|
|
|
Rate
|
|
|
Accrual at
|
|
|
Fiscal 2007
|
|
of Year
|
|
|
Restructuring
|
|
|
Earnings
|
|
|
Earnings
|
|
|
Payments
|
|
|
Changes
|
|
|
12/30/07
|
|
|
|
|
2005 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
|
$
|
6,786
|
|
|
$
|
—
|
|
|
$
|
2,096
|
|
|
$
|
(881
|
)
|
|
$
|
(5,287
|
)
|
|
$
|
301
|
|
|
$
|
3,015
|
|
|
Acquisition restructuring costs (1)
|
|
|
—
|
|
|
|
1,125
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
84
|
|
|
|
1,209
|
|
|
|
|
Total
|
|
$
|
6,786
|
|
|
$
|
1,125
|
|
|
$
|
2,096
|
|
|
$
|
(881
|
)
|
|
$
|
(5,287
|
)
|
|
$
|
385
|
|
|
$
|
4,224
|
|
|
|
|
(1)
|
|
During 2007, restructuring costs of $1.2 million included as a
cost of the SIDEP acquisition ($1.1 million related to employee
severance and $0.1 million related to the cost to abandon
facilities) were accounted for under Emerging Issues Task Force
Issue No. 95-3 “Recognition of Liabilities in Connection with
Purchase Business Combinations.” These costs were recognized as an
assumed liability in the acquisition and were included in the
purchase price allocation at November 9, 2007.
|
Manufacturing Restructuring Plan
In August 2008, we announced a manufacturing and supply chain restructuring program designed to
accelerate profitable growth in our Check-Net
®
business and to support incremental improvements in
our EAS hardware and labels businesses.
For the year ended December 28, 2008, a net charge of $1.5 million was recorded in connection with
the Manufacturing Restructuring Plan. The charge was composed of $0.7 million of severance accruals
and $0.8 million of consulting fees.
The total number of employees affected by the Manufacturing Restructuring Plan were 18, of which 3
have been terminated. The remaining terminations are expected to be completed by the end of fiscal
year 2010. The anticipated total cost is expected to approximate $3.0 million to $4.0 million, of
which $1.5 million has been incurred and $0.9 million has been paid. Termination benefits are
planned to be paid one month to 24 months after termination. Upon completion, the annual savings
are anticipated to be approximately $6 million.
2005 Restructuring Plan
In the second quarter of 2005, we initiated actions focused on reducing our overall operating
expenses. This plan included the implementation of a cost reduction plan designed to consolidate
certain administrative functions in Europe and a commitment to a plan to restructure a portion of
our supply chain manufacturing to lower cost areas. During fourth quarter 2006, we continued to
review the results of the overall initiatives and added an additional reduction focused on the
reorganization of senior management to focus on key markets and customers. This additional
restructuring reduced our management by 25%.
For the year ended December 28, 2008, a net charge of $5.1 million was recorded in connection with
the 2005 Restructuring Plan. The charge was composed of $4.6 million of severance accruals and $0.5
million related to SIDEP acquisition integration costs.
A net charge of $2.8 million was recorded in 2007 in connection with the 2005 Restructuring Plan.
The charge was composed of $1.2 million of severance accruals and $2.0 million of lease termination
and related costs, partially offset by $0.4 million related to settlements on pension liabilities
resulting from employees who left due to the restructuring plan.
A net charge of $7.8 million was recorded in 2006 in connection with the 2005 Restructuring Plan.
Included in the net charge was $7.2 million related to severance and a $0.7 million litigation
settlement accrual related to employees previously terminated according to the restructuring plan
in certain countries. Also included in the net charge was a $0.3 million pension curtailment gain
related to employees previously terminated according to the restructuring plan in certain countries
and an expense of $0.2 million for a special termination benefit provided to one employee according
to the employee’s termination agreement.
The total number of employees affected by the 2005 Restructuring Plan were 858, of which 853 have
been terminated. The remaining terminations are expected to be completed by the end of fiscal year
2009. The anticipated total cost is expected to approximate $30 million to $31 million, of which
$30 million has been incurred and $27 million has been paid. Termination benefits are planned to be
paid one month to 24 months after termination. Upon completion, the annual savings are anticipated
to be approximately $34 million to $35 million.
33
2003 Restructuring Plan
During 2008, we reversed $0.3 million of previously accrued severance and incurred $0.1 million of
lease termination costs related to the 2003 Restructuring Plan.
During 2007, we reversed $0.1 million of previously accrued severance related to the 2003
Restructuring Plan.
During 2006, we reversed $0.8 million related to the 2003 Restructuring Plan. This was composed of
$0.4 million related to the release of our lease reserve to income as we have obtained a sublease
for the property previously reserved and a $0.4 million severance reversal.
Goodwill Impairments
We have
completed step one of our fiscal 2008 annual analysis and test for impairment of goodwill
and it was determined that certain goodwill related to the Intelligent Labels and Retail
Merchandising segments was impaired. As a result, a $59.6 million estimated impairment charge was
recorded as of December 28, 2008. The impairment charge was recorded in goodwill impairment on the
consolidated statement of operations. This amount may change upon completion of step two of the
impairment test. It is anticipated that the impairment testing will be complete by the first
quarter of fiscal 2009 at which time any required adjustments to the estimate will be recorded.
The impairment charge is attributed to a combination of a decline in market capitalization of the
Company and a decline in the estimated forecasted discounted cash flows expected by us. Fair
values exceeded their respective carrying values by more than 25% in the remaining reporting units
for which no impairment charge was recorded.
The 2007 and 2006 annual assessments did not result in an impairment charge. Significant turmoil
in the financial markets and weakness in macroeconomic conditions globally have recently
contributed to volatility in our stock price, including a significant decline in our stock price
during the third and fourth quarters of 2008 during which our stock price fluctuated from a high of
$23.43 to a low of $9.01. These factors have contributed to the estimated impairment loss recorded
in the fourth quarter ended December 28, 2008. There can be no certainty as to the duration of the
current economic conditions and their potential impact on our stock price performance or future
goodwill impairment (See Notes 1 and 5 of the Consolidated Financial
Statements).
Asset Impairments
Asset impairment expense was $4.5 million, or 0.5% of revenues in 2008, without a comparable charge
in 2007.
During our 2008 goodwill and indefinite-lived intangibles annual impairment test, we
determine that indefinite-lived trade mark intangible in our I-Labels segment was
impaired. As a result we recorded an impairment charge of $0.4 million in the fourth quarter of
2008. This charge was recorded in asset impairments on the consolidated statement of operations.
As a result of changes in business circumstances related to the customer relationship intangible
recognized in connection with the SIDEP/Asialco acquisition, we recorded an impairment charge of
$2.6 million in the fourth quarter ended December 28, 2008. The impairment charge was recorded in
asset impairments in the Intelligent Labels segment on the consolidated statement of operations.
In 2008, we recorded a $1.5 million fixed asset impairment. The charge consisted of $1.1 million
related to the write down of a building in France and $0.4 million related to the write down of
land and a building in Japan. These impairments were recorded in asset impairments on the
consolidated statement of operations.
Results of Operations
(All comparisons are with the previous year, unless otherwise stated.)
Net Revenues
Our unit volume is driven by product offerings, number of direct sales personnel, recurring sales
and, to some extent, pricing. Our base of installed systems provides a source of recurring revenues
from the sale of disposable tags, labels, and service revenues.
Our customers are substantially dependent on retail sales, which are seasonal, subject to
significant fluctuations, and difficult to predict. In addition, current economic trends have
particularly strongly affected our customers, and consequently our net revenues may be impacted.
Such seasonality and fluctuations impact our sales. Historically, we have experienced lower sales
in the first half of each year.
34
Analysis of Statement of Operations
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
|
|
|
|
|
Percentage of Total Revenues
|
|
|
In Dollar Amount
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Fiscal 2008
|
|
|
Fiscal 2007
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
vs.
|
|
|
vs.
|
|
|
Year ended
|
|
(Fiscal 2008)
|
|
|
(Fiscal 2007)
|
|
|
(Fiscal 2006)
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
|
|
61.6
|
%
|
|
|
57.4
|
%
|
|
|
55.8
|
%
|
|
|
18.1
|
%
|
|
|
24.6
|
%
|
|
Intelligent Labels
|
|
|
28.1
|
|
|
|
31.1
|
|
|
|
31.9
|
|
|
|
(0.6
|
)
|
|
|
18.2
|
|
|
Retail Merchandising
|
|
|
10.3
|
|
|
|
11.5
|
|
|
|
12.3
|
|
|
|
(2.0
|
)
|
|
|
14.1
|
|
|
|
|
Net revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
9.9
|
|
|
|
21.3
|
|
|
Cost of revenues
|
|
|
58.8
|
|
|
|
58.5
|
|
|
|
57.6
|
|
|
|
10.4
|
|
|
|
23.3
|
|
|
|
|
Total gross profit
|
|
|
41.2
|
|
|
|
41.5
|
|
|
|
42.4
|
|
|
|
9.3
|
|
|
|
18.6
|
|
|
Selling, general, and administrative expenses
|
|
|
32.4
|
|
|
|
31.3
|
|
|
|
33.0
|
|
|
|
13.8
|
|
|
|
14.9
|
|
|
Research and development
|
|
|
2.5
|
|
|
|
2.2
|
|
|
|
2.8
|
|
|
|
24.4
|
|
|
|
(6.4
|
)
|
|
Restructuring expenses
|
|
|
0.7
|
|
|
|
0.3
|
|
|
|
1.0
|
|
|
|
138.5
|
|
|
|
(61.5
|
)
|
|
Asset impairment
|
|
|
0.5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Goodwill impairment
|
|
|
6.5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Litigation settlement
|
|
|
0.6
|
|
|
|
—
|
|
|
|
0.3
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Other operating income
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
(62.3
|
)
|
|
|
27.0
|
|
|
|
|
Operating (loss) income
|
|
|
(1.9
|
)
|
|
|
8.0
|
|
|
|
5.5
|
|
|
|
(125.7
|
)
|
|
|
75.5
|
|
|
Interest income
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
(51.1
|
)
|
|
|
10.9
|
|
|
Interest expense
|
|
|
0.6
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
(145.8
|
)
|
|
|
8.9
|
|
|
Other (loss) gain, net
|
|
|
(0.9
|
)
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
N/A
|
|
|
|
(42.0
|
)
|
|
|
|
(Loss) earnings from continuing operations
before income taxes and minority interest
|
|
|
(3.1
|
)
|
|
|
8.5
|
|
|
|
6.1
|
|
|
|
(141.4
|
)
|
|
|
68.1
|
|
|
Income taxes
|
|
|
0.1
|
|
|
|
1.5
|
|
|
|
1.0
|
|
|
|
(94.1
|
)
|
|
|
74.2
|
|
|
Minority interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
(Loss) earnings from continuing operations
|
|
|
(3.2
|
)
|
|
|
7.0
|
|
|
|
5.1
|
|
|
|
(151.0
|
)
|
|
|
66.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
0.1
|
|
|
|
N/A
|
|
|
|
(60.2
|
)
|
|
|
|
Net (loss) earnings
|
|
|
(3.2
|
)%
|
|
|
7.0
|
%
|
|
|
5.2
|
%
|
|
|
(150.7
|
)%
|
|
|
63.6
|
%
|
|
|
N/A — Comparative percentages are not meaningful.
35
Fiscal 2008 compared to Fiscal 2007
Net Revenues
During 2008, revenues increased by $82.9 million, or 9.9%, from $834.2 million to $917.1 million.
Foreign currency translation had a positive impact on revenues of $33.0 million for the full year
of 2008.
(dollar amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Amount
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
Fiscal 2008
|
|
|
Fiscal 2008
|
|
|
|
|
2008
|
|
|
2007
|
|
|
vs.
|
|
|
vs.
|
|
|
Year ended
|
|
(Fiscal 2008)
|
|
|
(Fiscal 2007)
|
|
|
Fiscal 2007
|
|
|
Fiscal 2007
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
|
$
|
565.1
|
|
|
$
|
478.5
|
|
|
$
|
86.6
|
|
|
|
18.1
|
%
|
|
Intelligent Labels
|
|
|
257.6
|
|
|
|
259.3
|
|
|
|
(1.7
|
)
|
|
|
(0.6
|
)
|
|
Retail Merchandising
|
|
|
94.4
|
|
|
|
96.4
|
|
|
|
(2.0
|
)
|
|
|
(2.0
|
)
|
|
|
|
Net revenues
|
|
$
|
917.1
|
|
|
$
|
834.2
|
|
|
$
|
82.9
|
|
|
|
9.9
|
%
|
|
|
Shrink Management Solutions
Shrink Management Solutions revenues increased by $86.6 million, or 18.1%, in 2008 compared to
2007. Foreign currency translation had a positive impact of approximately $19.6 million. The Alpha,
SIDEP and OATSystems acquisitions increased revenues in 2008 by $77.8 million. Additionally,
CheckView™ revenues increased $4.9 million in 2008 compared to 2007. These increases were partially
offset by a decrease of $14.1 million in EAS hardware revenues.
The CheckView™ business improved primarily due to increases in the U.S. of $2.6 million coupled
with an increase in Asia of $1.5 million. The U.S. CheckView™ revenue increase was due primarily
to an increase of $11.8 million in our U.S. banking business, partially offset by a decrease of
$9.2 million in our U.S. retail business. The U.S. banking business benefited $10.7 million due to
recent acquisitions, without comparable revenues in 2007, coupled with $1.1 million of comparable
business growth. The U.S. retail business revenue decline was due to difficult comparables in 2007
due to large 2007 installations coupled with the impact of current economic conditions on this
business resulting in reductions in 2008 orders and installations. The increase in Asia CCTV
revenues was due primarily to expansion of the business model within the region during fiscal 2008.
The U.S. CheckView™ 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.
EAS hardware revenues, excluding the benefit of foreign currency translation and acquisitions
decreased $14.1 million for 2008 compared to 2007. The decrease was due to declines in revenues of
$15.3 million in Europe and $1.9 million in Latin America, partially offset by an increase of $3.6
million in revenues in Asia. The decline in Europe was due primarily to general overall business
declines in the UK coupled with large chain-wide installations in various countries during 2007
without comparable activity in 2008. These declines in Europe revenues 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, Australia, and China without comparables in
2007, partially offset by a decline in Japan revenue attributable to large chain-wide roll-outs in
2007 without comparable revenues in 2008. Our EAS hardware business is dependent upon new store
openings and the liquidity and financial condition of our customers 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 increasing our market share through innovative products such as
Evolve
TM
.
Intelligent Labels
Intelligent Labels revenues decreased by $1.7 million, or 0.6% in 2008 compared to 2007. The
positive impact of foreign currency translation was approximately $7.5 million. Also benefiting
revenues were increases of $4.6 million and $5.7 million related to the acquisition of SIDEP and
our Check-Net
®
business, respectively. These increases were offset by decreases in our EAS label
business and our Library business of $13.2 million and $6.3 million, respectively. The increase in
our Check-Net
®
revenues was due primarily to an increase in revenues in the U.S. and Asia,
partially offset by a decline in our Europe revenues. The U.S. Check-Net
®
revenue increase was due
to increased sales volume with existing large customers and an increase in orders from new
customers. We anticipate that weak economic conditions could continue to impact our Check-Net
®
revenues but that our growth in orders from new customers 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. Europe also experienced a decline in revenues
due to the
effects of current economic conditions of apparel retailers in the region. The EAS label revenues
were impacted by current economic conditions resulting in decreased retail sector sales resulting
in a decreased demand for labels, 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 the library revenues to become comparable in
2009 as the transition to selling to a distributor was initiated at the beginning of fiscal 2008.
36
Retail Merchandising
Retail Merchandising revenues decreased by $2.0 million or 2.0%. The positive impact of foreign
currency translation was approximately $5.8 million. The decrease in our RMS business was due to a
decrease in our revenues from retail display systems of $5.2 million and a decrease in revenues of
HLS of $2.6 million. Our retail display systems decline is due to large remodel work in 2007 in
Europe and Asia without such comparable revenues in 2008. The decrease in HLS is due to increased
competition and pricing pressures as well as a general shift in market demand for HLS products as
retail scanning technology continues to grow worldwide. We anticipate RMS and HLS to continue to
face difficult revenue trends in 2009 due to impacts of current economic conditions on the RMS
business and continued shifts in market demand for HLS products.
Gross Profit
During 2008, gross profit increased by $32.1 million, or 9.3%, from $346.0 million to $378.1
million. The benefit of foreign currency translation on gross profit was approximately $13.7
million. Gross profit, as a percentage of net revenues, decreased from 41.5% to 41.2%.
Shrink Management Solutions
Shrink Management Solutions gross profit as a percentage of Shrink Management Solutions revenues
increased to 40.8% in 2008, from 39.8% in 2007. The increase in the gross profit percentage of
Shrink Management Solutions was due primarily to the inclusion of a full year of revenues of Alpha
products at higher margin levels in 2008 coupled with improvements in EAS Hardware margins. The EAS hardware margin improvement was due to improved inventory management
coupled with better sourcing costs for our antenna components.
Intelligent Labels
Intelligent Labels gross profit as a percentage of Intelligent Labels revenues decreased to 39.2%
in 2008, from 42.2% in 2007. This decrease was due primarily to a decrease in EAS label gross
margin percentage and the Library business gross margin percentage for 2008 compared to 2007
coupled with an increase in lower margin Check-Net
®
revenues as a percentage of total Intelligent
Labels revenues.
The decline in EAS label margins was due primarily to increased manufacturing variances in 2008,
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.
Retail Merchandising
The Retail Merchandising gross profit as a percentage of Retail Merchandising revenues increased to
49.4% in 2008 from 47.9% in 2007. This increase in Retail Merchandising gross profit percentage was
primarily due to improved margins in our HLS business resulting from improved manufacturing
efficiencies.
Selling, General, and Administrative Expenses
Selling, general, and administrative (SG&A) expenses increased $36.1 million, or 13.8%, over 2007.
Foreign currency translation increased SG&A expenses by approximately $9.5 million. SG&A expenses
generated by the recently acquired Alpha, SIDEP, and OATSystems operations coupled with our banking
acquisitions accounted for $27.8 million of the increase over the prior year. SG&A expenses were
additionally increased due to an increase in bad debt provisions and $1.4 million of deferred
compensation expense related to prior periods. These increases were partially offset by decreases
in management expense due to internal restructuring efforts and a decrease in compensation related
to a decrease in accrued bonuses and the reversal of stock-based compensation related to our
long-term incentive plan performance restricted stock units. In light of current economic
conditions, 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.
37
Research and Development Expenses
Research and development (R&D) expenses were $22.6 million, or 2.5% of revenues, in 2008 and $18.2
million, or 2.2% of revenues in 2007. Foreign currency translation increased R&D costs by
approximately $0.3 million. The increase of $4.4 million is largely attributed to R&D expenses
generated by the recently acquired Alpha, SIDEP, and OATSystems
operations of $3.9 million.
Restructuring Expenses
Restructuring expenses were $6.4 million, or 0.7% of revenues in 2008 compared to $2.7 million or
0.3% of revenues in 2007. The current and the prior year expenses are detailed in the “Provision
for Restructuring” section.
Goodwill Impairment
Goodwill Impairment expense was $59.6 million, or 6.5% of revenues in 2008, without a comparable
charge in 2007. The current year expense is detailed in the “Goodwill Impairment” section
following “Liquidity and Capital Resources.”
Asset Impairment
Asset Impairment expense was $4.5 million, or 0.5% of revenues in 2008, without a comparable charge
in 2007. The current year expense is detailed in the “Asset Impairment” section following
“Liquidity and Capital Resources.”
Litigation Settlement
Litigation Settlement expense was $6.2 million in 2008, without a comparable charge in 2007. The
litigation settlement expense is primarily attributed to a $5.7 million litigation accrual recorded
during the fourth quarter of 2008 related to a patent infringement counter suit in which the
Company was found to be liable for the other party’s associated legal fees. The Company plans to
appeal the ruling but has accrued the full amount of the judgment. The remaining $0.5 million of
the litigation expense was due to a contract settlement with a product manufacturer in the third
quarter of 2008. We do not anticipate any additional charges related to this issue.
Other Operating Income
In 2008, other operating income of $1.0 million was recorded due to the sale of our Czech Republic
subsidiary, which is now operating as a distributor of our products.
In 2007, other operating income of $2.6 million was recorded due to the sale of our Austrian
subsidiary. This sale resulted from our plan to move this business to an indirect sales model.
Interest Income and Interest Expense
Interest income for 2008 decreased $2.8 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 for 2008 increased $3.4 million from the comparable period in 2007. The increase
in interest expense was due to higher debt levels in 2008 compared to 2007. Increased borrowings
in 2008 were primarily used to finance our stock repurchase program and the OATSystems, Inc.
acquisition.
Other Gain (Loss), net
Other gain (loss), net was a loss of $8.9 million for 2008 compared to a net gain of $0.7 million
for 2007. The increase in loss for 2008 was due primarily to losses on foreign currency. The
primary drivers of the increase in foreign currency loss were fluctuations in the value of the U.S.
Dollar to the Euro and the Japanese Yen, as well as the Euro to the British Pound.
Income Taxes
The effective rate of tax at December 28, 2008 was 2.5%. At December 30, 2007, the effective tax
rate was 17.2%. The 2008 tax rate includes a $1.2 million change in tax reserves and a net
valuation allowance benefit of $2.9 million. The main components of the valuation allowance
benefit was a release of $4.7 million relating to net operating losses in Brazil, a charge of $1.2
million in connection to our United Kingdom operations, and a charge
of $0.8 million in connection
to state net operating losses. A charge of $0.7 million was recorded related to tax audits settled
in the current year. In addition, an income tax benefit was not recorded in 2008
on $58.5 million of the $59.6 million impairment as it
related to non-deductible goodwill. The
2007 tax rate includes a $1.9 million change in tax reserves, a net valuation allowance benefit of
$3.2 million, a $1.0 million tax benefit relating to statutory tax rate changes, and a $0.9 million
tax benefit relating to the sale of our Austrian subsidiary. The two main changes to the valuation
allowance in 2007 were a release of $5.4 million relating to state net operating losses and a charge
of $2.7 million in connection to our United Kingdom operations. The 2007 effective tax rate was
positively impacted by a reduction of valuation allowances and tax reserves of $2.0 million. In
addition, the Company recorded a $1.7 million reduction in foreign tax, primarily associated with a
change in tax law in Germany.
38
In 2007, we recorded an adjustment of $2.1 million to reduce deferred income tax expense, and
increase earnings from continuing operations and net earnings. We have determined that this
adjustment related to errors made in prior years associated with the impact of changes in statutory
rates on deferred taxes. Had these errors been recorded in the proper periods, earnings from
continuing operations and net earnings as reported would increase by $0.2 million in 2006 and
increase by $1.9 million for years prior to 2005. We have determined that these adjustments did not
have a material effect on the current and prior years’ financial statements. Without the reduction
to our income tax provision our 2007 effective rate would have been 20.3% rather than 17.2%.
Earnings from Discontinued Operations, Net of Tax
There were no earnings from discontinued operations, net of tax, for 2008. Earnings from
discontinued operations, net of tax, were $0.4 million in 2007. The 2007 earnings were primarily
due to adjustments related to the sale in 2006 of our barcode business.
Net
(Loss) Earnings
Net
(loss) earnings were ($29.8) million, or ($0.76) per diluted share, for 2008 compared to $58.8
million, or $1.44 per diluted share, for 2007. The weighted average number of shares used in the
diluted earnings per share computation were 39.4 million and 40.7 million for 2008 and 2007,
respectively.
Fiscal 2007 compared to Fiscal 2006
Net Revenues
During 2007, revenues increased by $146.4 million, or 21.3%, from $687.8 million to $834.2 million.
Foreign currency translation had a positive impact on revenues of $39.4 million for the full year
of 2007.
(dollar amounts in millions)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Amount
|
|
|
Percentage
|
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|
|
|
|
|
|
|
|
|
|
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Change
|
|
|
Change
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Fiscal 2007
|
|
|
Fiscal 2007
|
|
|
|
|
2007
|
|
|
2006
|
|
|
vs.
|
|
|
vs.
|
|
|
Year ended
|
|
(Fiscal 2007)
|
|
|
(Fiscal 2006)
|
|
|
Fiscal 2006
|
|
|
Fiscal 2006
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
|
$
|
478.5
|
|
|
$
|
383.9
|
|
|
$
|
94.6
|
|
|
|
24.6
|
%
|
|
Intelligent Labels
|
|
|
259.3
|
|
|
|
219.4
|
|
|
|
39.9
|
|
|
|
18.2
|
|
|
Retail Merchandising
|
|
|
96.4
|
|
|
|
84.5
|
|
|
|
11.9
|
|
|
|
14.1
|
|
|
|
|
Net revenues
|
|
$
|
834.2
|
|
|
$
|
687.8
|
|
|
$
|
146.4
|
|
|
|
21.3
|
%
|
|
|
Shrink Management Solutions
Shrink Management Solutions revenues increased by $94.6 million or 24.6% in 2007 compared to 2006.
The positive impact of foreign currency translation was approximately $19.9 million. The increase
in revenues was primarily due to an increase in EAS Hardware and CheckView™ revenues of $29.4
million and $30.5 million, respectively. Shrink Management Solutions revenues also benefited $11.7
million from the Alpha acquisition. EAS Hardware revenue increased $20.7 million in Europe, $5.9
million in Asia Pacific, and $3.9 million in International Americas. The increase in Europe EAS
Hardware was due to large chain-wide roll-outs, primarily in France and Spain. The increase in
Asia was due primarily to a large chain-wide roll-out in Australia and continued growth in our Hong
Kong distribution unit. The International Americas revenue increased due to large chain-wide
roll-outs, primarily in Mexico. The CCTV business improved due to a larger number of installations
with existing customers in 2007 compared to 2006.
Intelligent Labels
Intelligent Labels revenues increased by $39.9 million, or 18.2%, over last year. The positive
impact of foreign currency translation was approximately $11.4 million. The remaining revenue
growth was primarily due to an increase in our Check-Net
®
business of $30.4 million,
partially offset by a decrease in our Library business of $2.6 million. Check-Net
®
business revenue benefited
$22.9 million due to the ADS acquisition and continued the strong growth of its base business during
fiscal 2007. Library revenues declined due to the transition period for shifting the business
strategy to our new Library Patron Services business model.
39
Retail Merchandising
Retail Merchandising revenues increased by $11.9 million, or 14.1%, in 2007 compared to 2006. The
positive impact of foreign currency translation was approximately $8.0 million. The remaining
increase was due primarily to increases in sales of our retail display systems in Europe of $3.1
million and Asia Pacific of $1.2 million.
Gross Profit
During 2007, gross profit increased by $54.3 million, or 18.6%, from $291.7 million to $346.0
million. The benefit of foreign currency translation on gross profit was approximately $15.4
million. Gross profit, as a percentage of net revenues, decreased from 42.4% to 41.5%.
Shrink Management Solutions
Shrink Management Solutions gross profit increased from 38.9% in 2006 to 39.8% in 2007. The
increase in Shrink Management Solutions gross profit percentage was due primarily to improved
margins in our EAS Hardware business, due to higher volumes which allowed us to leverage fixed
field service costs. For fiscal years 2007 and 2006, field service and installation costs were
16.9% and 18.6% of Shrink Management Solutions revenue, respectively.
Intelligent Labels
Intelligent Labels gross profit decreased from 45.9% in 2006 to 42.2% in 2007. This decrease in
Intelligent Labels gross profit percentage was primarily due to the increased proportion of the
Check-Net
®
business in the segment with lower margins. Additionally,
Check-Net
®
margins decreased from the prior year due to manufacturing inefficiencies and
competitive pricing pressures, which further impacted the Intelligent Labels gross profit.
Retail Merchandising
Retail Merchandising gross profit decreased from 49.2% in 2006 to 47.9% in 2007. This decrease was
due primarily to margin decreases in our retail display business due primarily to pricing
pressures.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased $33.9 million, or 14.9%, from $227.0
million in 2006 to $260.9 million in 2007. Foreign currency translation increased selling, general,
and administrative expenses by approximately $11.5 million. SG&A expenses generated by the recently
acquired ADS operations accounted for $10.3 million of the increase over the prior year and SG&A
expenses generated by the recently acquired Alpha operations accounted for $2.9 million of the
increase over the prior year. In addition, in 2007, $4.4 million of SG&A expenses were recorded
related to the CEO transition. The increase was also due to increased sales and marketing expenses
to support our higher revenue base, which was partially offset by lower management expenses
resulting from our restructuring initiatives.
Research and Development Expenses
Research
and development expenses were $18.2 million, or 2.2%, of revenues in 2007 and $19.4 million,
or 2.8%, in 2006.
Restructuring Expenses
Restructuring expenses were $2.7 million in 2007 compared to $7.0 million in 2006. The current and
the prior year expense are detailed in the “Provisions for Restructuring” section.
Litigation Settlement
Litigation expense was $2.3 million for 2006. This was a result of the settlement of a class action
suit arising from the anti-trust litigation with ID Security Systems Canada, Inc.
40
Other Operating Income
In 2007, other operating income of $2.6 million was recorded due to the sale of our Austrian
subsidiary. This sale resulted from our plan to move this business to an indirect sales model.
In 2006, other operating income was recorded due to the settlement of a sublease with our tenant in
a building under a capital lease and the subsequent cancellation of that lease. The net impact of
the sublease income and impairment of the asset was $2.0 million.
Interest Income and Interest Expense
Interest expense for 2007 increased by $0.2 million compared to 2006, primarily due to increased
borrowings in 2007 related to the Alpha acquisition. Interest income in 2007 increased by $0.5
million compared to 2006, primarily due to higher monthly cash levels during 2007 compared to 2006.
Other Gain (Loss), net
Other gain (loss), net decreased in 2007 by $0.5 million compared to 2006. Other gain (loss), net
was greater in 2006 primarily due to transition services from the sale of our BCS business to SATO.
Income Taxes
The effective rate of tax at December 30, 2007 was 17.2%. At December 31, 2006, the effective tax
rate was 16.6%. The 2007 tax rate includes a $1.9 million change in tax reserves, a net valuation
allowance benefit of $3.2 million, a $1.0 million tax benefit relating to statutory tax rate
changes, and a $0.9 million tax benefit relating to the sale of our Austrian subsidiary. The two
main changes to the valuation allowance was a release of $5.4 million relating to state net
operating losses and a charge of $2.7 million in connection to our United Kingdom operations. The
2006 effective tax rate was positively impacted by a reduction of valuation allowances and tax
reserves of $2.0 million. In addition, the Company recorded a $1.7 million reduction in foreign
tax, primarily associated with a change in tax law in Germany.
In 2007, we recorded an adjustment of $2.1 million to reduce deferred income tax expense, and
increase earnings from continuing operations and net earnings. We have determined that this
adjustment related to errors made in prior years associated with the impact of changes in statutory
rates on deferred taxes. Had these errors been recorded in the proper periods, earnings from
continuing operations and net earnings as reported would increase by $0.2 million in 2006 and
increase by $1.9 million for years prior to 2005. We have determined that these adjustments did not
have a material effect on the current and prior years’ financial statements. Without the reduction
to our income tax provision our 2007 effective rate would have been 20.3% rather than 17.2%.
Earnings from Discontinued Operations, Net of Tax
Earnings from discontinued operations, net of tax, for 2007 decreased to $0.4 million from $0.9
million in 2006. The 2006 earnings were primarily due to the $1.4 million gain on the sale of our
barcode business.
Net Earnings
Net earnings were $58.8 million, or $1.44 per diluted share, in 2007, compared to net earnings of
$35.9 million, or $0.89 per diluted share, in 2006. The weighted average number of shares used in
the diluted earnings per share computation was 40.7 million and 40.2 million for fiscal years 2007
and 2006, respectively.
41
Other Matters
Recently Adopted Accounting Standards
We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes”, on January 1, 2007. As a result of adoption, we
recognized a charge of approximately $1.7 million to the January 1, 2007 retained earnings balance.
Additionally, we reclassified $13.9 million of the unrecognized tax benefits, and interest and
penalties from income taxes to other long-term liabilities on our consolidated balance sheet. As of
the adoption date, we had $10.6 million of unrecognized tax benefits, all of which would affect our
effective tax rate if recognized. Also as of the adoption date, we had accrued interest expense and
penalties related to the unrecognized tax benefits of $3.8 million and $0.3 million, respectively.
We adopted the provisions
of Statement of Financial Accounting Standards (SFAS) No. 157, “Fair
Value Measurements” (SFAS 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. SFAS 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 FASB issued FASB Staff Position No. FAS 157-2 (SFAS 157-2), which deferred
the effective date of SFAS 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. In October 2008, the FASB issued FSP No. FAS 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,”
(FSP FAS 157-3), which clarifies the application of SFAS 157 for financial assets in a market
that is not active. FSP FAS 157-3 was effective upon issuance. The adoption of FAS 157 did not have
a material effect on our financial condition or results of operations. The Company does not expect
the adoption of FAS 157 for non-financial assets and liabilities on December 29, 2008 to have a
material impact on the Company’s consolidated results of operations and financial condition.
Non-financial assets and liabilities for which we have not applied
the provisions of SFAS 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” (SFAS 159) on December 31, 2007. SFAS 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. SFAS 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 SFAS 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 May 2008, the FASB issued SFAS No. 162,
“The Hierarchy of Generally Accepted Accounting
Principles” (SFAS 162). SFAS 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 (GAAP). SFAS 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. SFAS 162 became effective on
November 15, 2008. The adoption of SFAS 162 did not have a material impact on the Company’s
consolidated results of operations and financial condition.
New Accounting Pronouncements and Other Standards
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141R).
SFAS 141R retains the underlying concepts of SFAS 141 in that all business combinations are still
required to be accounted for at fair value under the acquisition
method of accounting, but SFAS 141R
changed the method of applying the acquisition method in a number of significant aspects.
Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued
at fair value at the acquisition date; in-process research and development will be recorded at fair
value as an indefinite-lived intangible asset at the acquisition date, until either abandoned or
completed, at which point the useful lives will be determined; restructuring costs associated with
a business combination will generally be expensed subsequent to the acquisition date; and changes
in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date
generally will affect income tax expense. SFAS 141R is effective on a prospective basis for all
business combinations for which the acquisition date is on or after the beginning of the first
annual period subsequent to December 15, 2008, with the exception of the accounting for valuation
allowances on deferred taxes and acquired tax contingencies. SFAS 141R amends SFAS No. 109,
“Accounting for Income Taxes” (SFAS 109) such that adjustments made to valuation allowances on
deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the
effective date of SFAS 141R would also apply the provisions of SFAS 141R. SFAS 141R also
establishes disclosure requirements to enable the evaluation of the nature and financial effects of
the business combination. For the Company, SFAS
141R will be effective for business combinations occurring after December 28, 2008. Upon adoption,
SFAS 141R will not have a significant impact on our financial position and results of operations;
however, any business combination entered into after the adoption may significantly impact our
financial position and results of operations when compared to acquisitions accounted for under
existing U.S. Generally Accepted Accounting Principles (GAAP) and result in more earnings
volatility and generally lower earnings due to the expensing of deal costs and restructuring costs
of acquired companies. Also, since we have significant acquired deferred tax assets for which full
valuation allowances were recorded at the acquisition date, SFAS 141R could significantly affect
the results of operations if changes in the valuation allowances occur subsequent to adoption. As
of December 28, 2008, such deferred tax valuation allowances amounted to $4.2 million. For
additional discussion on deferred tax valuation allowances, refer to
Note 13 of the Consolidated
Financial Statements in the 2008 Form 10-K.
42
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 parent’s ownership interest, and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. This statement requires the
recognition of a noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. 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. As of December 28, 2008, our minority interest totaled $0.9 million, which was
included in the long-term liabilities section of our Consolidated Balance Sheet. The Company will
incorporate presentation and disclosure requirements as outlined in SFAS 160 in the Company’s
Quarterly Report on Form 10-Q for the period ending March 29, 2009.
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. The Company will adopt this standard in the first fiscal quarter
of 2009 and believes that upon adoption, there will be no material impact on the Company’s
consolidated results of operations and financial condition.
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 do not expect FSP FAS
142-3 to have a material impact on our accounting for future acquisitions of intangible assets.
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 and will be adopted by us in the
first fiscal quarter of 2009. We do not expect that the adoption of FSP EITF 03-6-1 will have a
material impact on our calculation of EPS.
In November 2008, the FASB ratified Staff Position FSP EITF 08-6, “Equity Method Investment
Accounting Considerations,” (EITF 08-6). EITF 08-6 clarifies that the initial carrying value of an
equity method investment should be determined in accordance with SFAS No. 141(R).
Other-than-temporary impairment of an equity method investment should be recognized in accordance
with FSP No. APB 18-1, “Accounting by an Investor for Its Proportionate Share of Accumulated Other
Comprehensive Income of an Investee Accounted for under the Equity Method in Accordance with APB
Opinion No. 18 upon a Loss of Significant Influence.” EITF 08-6 is effective on a prospective basis
in fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal
years, and will be adopted by us in the first quarter of fiscal year 2009. The adoption of EITF
08-6 will not have a material impact on our consolidated results of operations and financial
condition.
In November 2008, the FASB ratified EITF 08-7, “Accounting for Defensive Intangible Assets,” (EITF
08-7). EITF 08-7 applies to defensive assets which are acquired intangible assets which the
acquirer does not intend to actively use, but intends to hold to prevent its competitors from
obtaining access to the asset. EITF 08-7 clarifies that defensive intangible assets are separately
identifiable and
43
should be accounted for as a separate unit of accounting in accordance with SFAS No. 141(R) and
SFAS No. 157, “Fair Value Measurements,” or SFAS No. 157. EITF 08-7 is effective for intangible
assets acquired in fiscal years beginning on or after December 15, 2008 and will be applied by us
to intangible assets acquired on or after December 29, 2008.
In November 2008, the FASB ratified EITF No. 08-8, “Accounting for an Instrument (or an Embedded
Feature) with a Settlement Amount That Is Based on the Stock of an Entity’s Consolidated
Subsidiary,” (EITF 08-8). EITF 08-8 clarifies whether a financial instrument for which the payoff
to the counterparty is based, in whole or in part, on the stock of an entity’s consolidated
subsidiary is indexed to the reporting entity’s own stock and therefore should not be precluded
from qualifying for the first part of the scope exception in paragraph 11 (a) of SFAS No. 133, “
Accounting for Derivative Instruments and Hedging Activities” or from being within the scope of
EITF No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and, Potentially
Settled in, a Company’s Own Stock.” EITF 08-8 is effective for fiscal years beginning on or after
December 15, 2008, and interim periods within those fiscal years, and will be adopted by us in the
first quarter of fiscal year 2009. The adoption of EITF 08-8 will not have a material impact on
our consolidated results of operations and financial condition.
In December 2008, the FASB issued FASB Staff Position (FSP) No.132 (R)-1, “Employers’ Disclosures
about Pensions and Other Postretirement Benefits” (FSP 132R-1). FSP 132R-1 requires enhanced
disclosures about the plan assets of a Company’s defined benefit pension and other postretirement
plans. The enhanced disclosures required by this FSP are intended to provide users of financial
statements with a greater understanding of: (1) how investment allocation decisions are made,
including the factors that are pertinent to an understanding of investment policies and strategies;
(2) the major categories of plan assets; (3) the inputs and valuation techniques used to measure
the fair value of plan assets; (4) the effect of fair value measurements using significant
unobservable inputs (Level 3) on changes in plan assets for the period; and (5) significant
concentrations of risk within plan assets. This FSP is effective for us for the fiscal year ending
December 27, 2009.
In December 2008, the FASB issued FSP FAS No. 140-4 and FIN No. 46R-8, “Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest
Entities.” The FSP, which is effective in the first reporting period ending after December 15,
2008, requires additional disclosures concerning continuing involvement in transfers of financial assets. The FSP also
requires additional disclosures concerning an enterprise’s involvement with variable interest
entities and qualifying special purpose entities under certain conditions, none of which apply to
the Company. This standard involves disclosures only, and did not impact our consolidated results of
operations and financial condition.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Factors
Fluctuations in interest and foreign currency exchange rates affect our financial position and
results of operations. We enter into forward exchange contracts denominated in foreign currency to
reduce the risks of currency fluctuations on short-term inter-company
receivables and payables. We also enter into various foreign currency contracts
to reduce our exposure to forecasted Euro-denominated inter-company revenues. We
have historically not used financial instruments to minimize our exposure to currency fluctuations
on our net investments in and cash flows derived from our foreign subsidiaries. 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 of December 28, 2008, all third party borrowings were in
the functional currency of the subsidiary borrower. Additionally, we enter, on occasion, into interest rate swaps to reduce the risk of
significant interest rate increases in connection with our floating rate debt.
We are subject to foreign currency exchange risk on our foreign currency forward exchange contracts
which represent a $0.9 million liability position as of December 28, 2008, and a zero liability
position as of December 30, 2007. The sensitivity analysis assumes an instantaneous 10% change in
foreign currency exchange rates from year-end levels, with all other variables held constant. At
December 28, 2008, a 10% strengthening of the U.S. dollar versus other currencies would result in
an increase of $1.2 million in the net asset position, while a 10% weakening of the dollar versus
all other currencies would result in a decrease of $1.2 million.
Foreign exchange forward contracts are used to hedge certain of our firm foreign currency cash
flows. Thus, there is either an asset or cash flow exposure related to all the financial
instruments in the above sensitivity analysis for which the impact of a movement in exchange rates
would be in the opposite direction and substantially equal to the impact on the instruments in the
analysis. There are presently no significant restrictions on the remittance of funds generated by
our operations outside the U.S.
44
|
|
|
|
|
Item 8.
|
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
Index to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
47
|
|
|
|
|
|
48
|
|
|
|
|
|
49
|
|
|
|
|
|
50
|
|
|
|
|
|
51
|
|
|
|
|
|
52-83
|
|
|
|
|
|
89
|
|
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of
Checkpoint Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, comprehensive income (loss), stockholders’ equity and cash flows present
fairly, in all material respects, the financial position of Checkpoint Systems, Inc. and its
subsidiaries at December 28, 2008 and December 30, 2007, and the results of their operations and
their cash flows for each of the three years in the period ended December 28, 2008, in conformity
with accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 28, 2008, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible
for these financial statements and financial statement schedule, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in Management’s Annual Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Company’s internal control over
financial reporting based on our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in
which it accounts for uncertain tax positions in 2007.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Annual Report on Internal Control Over Financial Reporting, management
has excluded OATSystems from its assessment of internal control over financial reporting as of
December 28, 2008 because they were acquired by the Company in purchase business combinations
during 2008. We have also excluded OATSystems from our audit of internal control over financial
reporting. OATSystems is a wholly-owned subsidiary whose total assets and total revenues represent
3.9% and 0.3%, respectively, of the related consolidated financial statement amounts as of and for
the year ended December 28, 2008.
Philadelphia, Pennsylvania
February 26, 2009
46
CHECKPOINT
SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
132,222
|
|
|
$
|
118,271
|
|
|
Marketable securities
|
|
|
—
|
|
|
|
29
|
|
|
Accounts receivable, net of allowance of $18,414 and $15,839
|
|
|
196,664
|
|
|
|
221,875
|
|
|
Inventories
|
|
|
102,122
|
|
|
|
109,329
|
|
|
Other current assets
|
|
|
41,224
|
|
|
|
42,914
|
|
|
Deferred income taxes
|
|
|
22,078
|
|
|
|
14,492
|
|
|
|
|
Total Current Assets
|
|
|
494,310
|
|
|
|
506,910
|
|
|
|
|
REVENUE EQUIPMENT ON OPERATING LEASE, net
|
|
|
2,040
|
|
|
|
4,500
|
|
|
PROPERTY, PLANT, AND EQUIPMENT, net
|
|
|
86,735
|
|
|
|
88,096
|
|
|
GOODWILL
|
|
|
235,532
|
|
|
|
274,601
|
|
|
OTHER INTANGIBLES, net
|
|
|
113,755
|
|
|
|
119,294
|
|
|
DEFERRED INCOME TAXES
|
|
|
36,182
|
|
|
|
28,591
|
|
|
OTHER ASSETS
|
|
|
17,162
|
|
|
|
9,052
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
985,716
|
|
|
$
|
1,031,044
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Short-term borrowings and current portion of long-term debt
|
|
$
|
11,582
|
|
|
$
|
3,756
|
|
|
Accounts payable
|
|
|
63,872
|
|
|
|
76,404
|
|
|
Accrued compensation and related taxes
|
|
|
32,056
|
|
|
|
38,821
|
|
|
Other accrued expenses
|
|
|
54,123
|
|
|
|
43,469
|
|
|
Income taxes
|
|
|
8,066
|
|
|
|
4,827
|
|
|
Unearned revenues
|
|
|
11,005
|
|
|
|
13,615
|
|
|
Restructuring reserve
|
|
|
4,522
|
|
|
|
4,224
|
|
|
Accrued pensions — current
|
|
|
4,305
|
|
|
|
4,337
|
|
|
Other current liabilities
|
|
|
22,027
|
|
|
|
20,401
|
|
|
|
|
Total Current Liabilities
|
|
|
211,558
|
|
|
|
209,854
|
|
|
|
|
LONG-TERM DEBT, LESS CURRENT MATURITIES
|
|
|
133,704
|
|
|
|
91,756
|
|
|
ACCRUED PENSIONS
|
|
|
77,623
|
|
|
|
80,549
|
|
|
OTHER LONG-TERM LIABILITIES
|
|
|
47,928
|
|
|
|
46,380
|
|
|
DEFERRED INCOME TAXES
|
|
|
9,665
|
|
|
|
13,200
|
|
|
MINORITY INTEREST
|
|
|
924
|
|
|
|
977
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
Preferred stock, no par value, authorized 500,000 shares, none issued
|
|
|
—
|
|
|
|
—
|
|
|
Common stock, par value $.10 per share, authorized 100,000,000 shares,
issued 42,747,808 and 41,837,525
|
|
|
4,274
|
|
|
|
4,183
|
|
|
Additional capital
|
|
|
381,498
|
|
|
|
360,684
|
|
|
Retained earnings
|
|
|
173,912
|
|
|
|
203,717
|
|
|
Common stock in treasury, at cost, 4,035,912 shares and 2,035,912 shares
|
|
|
(71,520
|
)
|
|
|
(20,621
|
)
|
|
Accumulated other comprehensive income, net of tax
|
|
|
16,150
|
|
|
|
40,365
|
|
|
|
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
504,314
|
|
|
|
588,328
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
985,716
|
|
|
$
|
1,031,044
|
|
|
|
See notes to consolidated financial statements.
47
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollar amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Year ended
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Net revenues
|
|
$
|
917,082
|
|
|
$
|
834,156
|
|
|
$
|
687,775
|
|
|
Cost of revenues
|
|
|
538,983
|
|
|
|
488,184
|
|
|
|
396,084
|
|
|
|
|
Gross profit
|
|
|
378,099
|
|
|
|
345,972
|
|
|
|
291,691
|
|
|
Selling, general, and administrative expenses
|
|
|
296,935
|
|
|
|
260,854
|
|
|
|
226,958
|
|
|
Research and development
|
|
|
22,607
|
|
|
|
18,170
|
|
|
|
19,417
|
|
|
Restructuring expenses
|
|
|
6,442
|
|
|
|
2,701
|
|
|
|
7,007
|
|
|
Asset impairment
|
|
|
4,510
|
|
|
|
—
|
|
|
|
—
|
|
|
Goodwill impairment
|
|
|
59,583
|
|
|
|
—
|
|
|
|
—
|
|
|
Litigation settlement
|
|
|
6,167
|
|
|
|
—
|
|
|
|
2,251
|
|
|
Other operating income
|
|
|
968
|
|
|
|
2,571
|
|
|
|
2,025
|
|
|
|
|
Operating (loss) income
|
|
|
(17,177
|
)
|
|
|
66,818
|
|
|
|
38,083
|
|
|
Interest income
|
|
|
2,660
|
|
|
|
5,443
|
|
|
|
4,906
|
|
|
Interest expense
|
|
|
5,768
|
|
|
|
2,347
|
|
|
|
2,155
|
|
|
Other (loss) gain, net
|
|
|
(8,924
|
)
|
|
|
662
|
|
|
|
1,141
|
|
|
|
|
(Loss) earnings from continuing operations before income taxes and
minority interest
|
|
|
(29,209
|
)
|
|
|
70,576
|
|
|
|
41,975
|
|
|
Income taxes expense
|
|
|
719
|
|
|
|
12,174
|
|
|
|
6,987
|
|
|
Minority interest, net of tax
|
|
|
(123
|
)
|
|
|
(7
|
)
|
|
|
(31
|
)
|
|
|
|
(Loss) earnings from continuing operations
|
|
|
(29,805
|
)
|
|
|
58,409
|
|
|
|
35,019
|
|
|
Earnings from discontinued operations, net of tax of $0, $351, and $1,059
|
|
|
—
|
|
|
|
359
|
|
|
|
903
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(29,805
|
)
|
|
$
|
58,768
|
|
|
$
|
35,922
|
|
|
|
|
Basic (Loss) Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from continuing operations
|
|
$
|
(.76
|
)
|
|
$
|
1.46
|
|
|
$
|
.89
|
|
|
Earnings from discontinued operations, net of tax
|
|
|
—
|
|
|
|
.01
|
|
|
|
.02
|
|
|
|
|
Basic (Loss) Earnings Per Share
|
|
$
|
(.76
|
)
|
|
$
|
1.47
|
|
|
$
|
.91
|
|
|
|
|
Diluted (Loss) Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from continuing operations
|
|
$
|
(.76
|
)
|
|
$
|
1.43
|
|
|
$
|
.87
|
|
|
Earnings from discontinued operations, net of tax
|
|
|
—
|
|
|
|
.01
|
|
|
|
.02
|
|
|
|
|
Diluted (Loss) Earnings Per Share
|
|
$
|
(.76
|
)
|
|
$
|
1.44
|
|
|
$
|
.89
|
|
|
|
See notes to consolidated financial statements.
48
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Total
|
|
|
|
Common Stock
|
|
Additional
|
|
Retained
|
|
Treasury Stock
|
|
Comprehensive
|
|
Stockholders’
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Shares
|
|
Amount
|
|
Income (Loss)
|
|
Equity
|
|
|
|
Balance, December 25, 2005
|
|
|
40,737
|
|
|
$
|
4,073
|
|
|
$
|
326,950
|
|
|
$
|
110,736
|
|
|
|
2,036
|
|
|
$
|
(20,621
|
)
|
|
$
|
(24,718
|
)
|
|
$
|
396,420
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,922
|
|
|
Exercise of stock-based
compensation
|
|
|
578
|
|
|
|
58
|
|
|
|
8,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,691
|
|
|
Tax benefit on stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
1,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,836
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
5,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,710
|
|
|
Deferred compensation plan
|
|
|
|
|
|
|
|
|
|
|
2,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,077
|
|
|
Adoption of SFAS 158, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,743
|
)
|
|
|
(2,743
|
)
|
|
Minimum pension liability
adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(121
|
)
|
|
|
(121
|
)
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,789
|
|
|
|
25,789
|
|
|
|
|
Balance, December 31, 2006
|
|
|
41,315
|
|
|
|
4,131
|
|
|
|
345,206
|
|
|
|
146,658
|
|
|
|
2,036
|
|
|
|
(20,621
|
)
|
|
|
(1,793
|
)
|
|
|
473,581
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,768
|
|
|
Exercise of stock-based
compensation
|
|
|
522
|
|
|
|
52
|
|
|
|
6,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,722
|
|
|
Tax benefit on stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
881
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
6,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,518
|
|
|
Deferred compensation plan
|
|
|
|
|
|
|
|
|
|
|
1,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,409
|
|
|
Cumulative effect of adopting a
change in accounting for
uncertainties in income taxes
(FIN 48)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,709
|
)
|
|
Amortization of pension plan
actuarial losses, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
130
|
|
|
Unrealized gain adjustment on
marketable securities, net of
tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
16
|
|
|
Recognized gain on pension, net
of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,755
|
|
|
|
6,755
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,257
|
|
|
|
35,257
|
|
|
|
|
Balance, December 30, 2007
|
|
|
41,837
|
|
|
|
4,183
|
|
|
|
360,684
|
|
|
|
203,717
|
|
|
|
2,036
|
|
|
|
(20,621
|
)
|
|
|
40,365
|
|
|
|
588,328
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,805
|
)
|
|
Exercise of stock-based
compensation
|
|
|
911
|
|
|
|
91
|
|
|
|
8,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,005
|
|
|
Tax benefit on stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
2,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,121
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
7,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,096
|
|
|
Deferred compensation plan
|
|
|
|
|
|
|
|
|
|
|
2,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,683
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
(50,899
|
)
|
|
|
|
|
|
|
(50,899
|
)
|
|
Amortization of pension plan
actuarial losses, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
|
|
72
|
|
|
Change in realized and
unrealized gains on derivative
hedges, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
880
|
|
|
|
880
|
|
|
Unrealized gain adjustment on
marketable securities, net of
tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
(16
|
)
|
|
Recognized loss on pension, net
of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(169
|
)
|
|
|
(169
|
)
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,982
|
)
|
|
|
(24,982
|
)
|
|
|
|
Balance, December 28, 2008
|
|
|
42,748
|
|
|
$
|
4,274
|
|
|
$
|
381,498
|
|
|
$
|
173,912
|
|
|
|
4,036
|
|
|
$
|
(71,520
|
)
|
|
$
|
16,150
|
|
|
$
|
504,314
|
|
|
|
See notes to consolidated financial statements.
49
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Year ended
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(29,805
|
)
|
|
$
|
58,768
|
|
|
$
|
35,922
|
|
|
Amortization of pension plan actuarial losses, net of tax
|
|
|
72
|
|
|
|
130
|
|
|
|
—
|
|
|
Change in realized and unrealized gains on derivative hedges, net of tax
|
|
|
880
|
|
|
|
—
|
|
|
|
—
|
|
|
Unrealized gain adjustment on marketable securities, net of tax
|
|
|
(16
|
)
|
|
|
16
|
|
|
|
—
|
|
|
Recognized (loss) gain on pension, net of tax
|
|
|
(169
|
)
|
|
|
6,755
|
|
|
|
—
|
|
|
Minimum pension liability adjustment, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
(121
|
)
|
|
Foreign currency translation adjustment
|
|
|
(24,982
|
)
|
|
|
35,257
|
|
|
|
25,789
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(54,020
|
)
|
|
$
|
100,926
|
|
|
$
|
61,590
|
|
|
|
See notes to consolidated financial statements.
50
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Year ended
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
(29,805
|
)
|
|
$
|
58,768
|
|
|
$
|
35,922
|
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
30,788
|
|
|
|
21,059
|
|
|
|
19,504
|
|
|
Deferred taxes
|
|
|
(13,716
|
)
|
|
|
(7,486
|
)
|
|
|
281
|
|
|
Stock-based compensation
|
|
|
7,096
|
|
|
|
6,518
|
|
|
|
5,710
|
|
|
Excess tax benefit on stock compensation
|
|
|
(2,229
|
)
|
|
|
(755
|
)
|
|
|
(1,685
|
)
|
|
Provision for losses on accounts receivable
|
|
|
5,810
|
|
|
|
1,846
|
|
|
|
2,442
|
|
|
Gain on sublease settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,777
|
)
|
|
Gain on sale of discontinued operations
|
|
|
—
|
|
|
|
(359
|
)
|
|
|
(1,299
|
)
|
|
Gain on sale of subsidiaries
|
|
|
(968
|
)
|
|
|
(2,523
|
)
|
|
|
—
|
|
|
Loss (gain) on disposal of fixed assets
|
|
|
276
|
|
|
|
(193
|
)
|
|
|
262
|
|
|
Goodwill impairment
|
|
|
59,583
|
|
|
|
—
|
|
|
|
—
|
|
|
Asset impairment
|
|
|
4,510
|
|
|
|
—
|
|
|
|
—
|
|
|
(Increase) decrease in current assets, net of the effects of acquired companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(215
|
)
|
|
|
(34,186
|
)
|
|
|
(3,977
|
)
|
|
Inventories
|
|
|
5,469
|
|
|
|
2,186
|
|
|
|
(8,299
|
)
|
|
Other current assets
|
|
|
3,920
|
|
|
|
(2,496
|
)
|
|
|
6,207
|
|
|
Increase (decrease) in current liabilities, net of the effects of acquired companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(12,278
|
)
|
|
|
17,958
|
|
|
|
(18,358
|
)
|
|
Income taxes
|
|
|
5,951
|
|
|
|
(9,144
|
)
|
|
|
4,904
|
|
|
Unearned revenues
|
|
|
(3,208
|
)
|
|
|
4,229
|
|
|
|
(3,930
|
)
|
|
Restructuring reserve
|
|
|
546
|
|
|
|
(2,958
|
)
|
|
|
(5,668
|
)
|
|
Other current and accrued liabilities
|
|
|
15,676
|
|
|
|
14,507
|
|
|
|
(7,853
|
)
|
|
|
|
Net cash provided by operating activities
|
|
|
77,206
|
|
|
|
66,971
|
|
|
|
22,386
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property, plant, and equipment
|
|
|
(15,217
|
)
|
|
|
(13,363
|
)
|
|
|
(11,520
|
)
|
|
Net cash (outflow) proceeds from the sale of discontinued operations
|
|
|
—
|
|
|
|
(2,159
|
)
|
|
|
26,904
|
|
|
Acquisitions of businesses, net of cash acquired
|
|
|
(39,629
|
)
|
|
|
(94,522
|
)
|
|
|
(7,353
|
)
|
|
Decrease in restricted cash
|
|
|
—
|
|
|
|
2,121
|
|
|
|
—
|
|
|
Other investing activities
|
|
|
142
|
|
|
|
1,772
|
|
|
|
(68
|
)
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(54,704
|
)
|
|
|
(106,151
|
)
|
|
|
7,963
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock issuances
|
|
|
9,005
|
|
|
|
7,174
|
|
|
|
8,691
|
|
|
Excess tax benefit on stock compensation
|
|
|
2,229
|
|
|
|
755
|
|
|
|
1,685
|
|
|
Proceeds of short-term debt
|
|
|
3,582
|
|
|
|
2,899
|
|
|
|
14,200
|
|
|
Payment of short-term debt
|
|
|
(3,596
|
)
|
|
|
(8,950
|
)
|
|
|
(9,873
|
)
|
|
Net change in factoring and bank overdrafts
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,293
|
)
|
|
Proceeds of long-term debt
|
|
|
105,898
|
|
|
|
6,177
|
|
|
|
—
|
|
|
Payment of long-term debt
|
|
|
(65,813
|
)
|
|
|
(891
|
)
|
|
|
(18,355
|
)
|
|
Payment of
notes payable
|
|
|
(4,866
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Purchase of treasury stock
|
|
|
(50,899
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Net cash
(used in) provided by financing activities
|
|
|
(4,460
|
)
|
|
|
7,164
|
|
|
|
(6,945
|
)
|
|
|
|
Effect of foreign currency rate fluctuations on cash and cash equivalents
|
|
|
(4,091
|
)
|
|
|
6,893
|
|
|
|
6,767
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
13,951
|
|
|
|
(25,123
|
)
|
|
|
30,171
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
118,271
|
|
|
|
143,394
|
|
|
|
113,223
|
|
|
|
|
End of year
|
|
$
|
132,222
|
|
|
$
|
118,271
|
|
|
$
|
143,394
|
|
|
|
See notes to consolidated financial statements.
51
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
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
(Check-Net
®
), hand-held labeling systems (HLS), retail merchandising systems (RMS), and
radio frequency identification (RFID) systems. Applications of these products include retail
security, automatic identification, and pricing and promotional labels and signage. Operating
directly in 30 countries, we have a global network of subsidiaries and distributors, and provide
customer service and technical support around the world.
Out of Period Adjustments
During the fourth quarter of 2008, we identified an error in our financial statements related to
fiscal year 2006. This error related to the accounting for a building impairment in France. We
corrected the error during the fourth quarter of 2008, which had the effect of increasing asset
impairment expense $1.1 million and reducing net income by $0.8 million. This prior period error is
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 for the twelve months
ended December 28, 2008. As a result, we have not restated our previously issued annual financial
statements or previously issued interim financial data.
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 twelve months ended December 28,
2008. As a result, we have not restated our previously issued annual financial statements or
previously issued interim financial data.
In 2007, we recorded an adjustment of $2.1 million to reduce deferred income tax expense, and
increase earnings from continuing operations and net earnings. We have determined that this
adjustment related to errors made in prior years associated with the impact of changes in statutory
rates on deferred taxes. Had these errors been recorded in the proper periods, earnings from
continuing operations and net earnings as reported would increase by $0.2 million in 2006 and
increase by $1.9 million for years prior to 2005. We have determined that these adjustments did not
have a material effect on the current and prior years’ financial statements.
Principles of Consolidation
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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and judgments that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fiscal Year
Our fiscal year is the 52 or 53 week period ending the last Sunday of December. References to 2008,
2007, and 2006, are for the 52 weeks ended December 28, 2008, 52 weeks ended December 30, 2007, and
for the 53 weeks ended December 31, 2006.
52
Reclassifications
Certain reclassifications have been made to the 2007 financials statements and related footnotes to
conform to the current year presentation.
Cash and Cash Equivalents
Cash in excess of operating requirements is invested in short-term, income-producing instruments or
used to pay down debt. Cash equivalents include commercial paper and other securities with original
maturities of 90 days or less at the time of purchase. Book value approximates fair value because
of the short maturity of those instruments.
Accounts Receivable
Accounts receivables are recorded at net realizable values. We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to make required
payments. These allowances are based on specific facts and circumstances surrounding individual
customers as well as our historical experience. Provisions for the losses on receivables are
charged to income to maintain the allowance at a level considered adequate to cover losses.
Receivables are charged off against the reserve when they are deemed uncollectible.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market. A provision is
made to reduce excess or obsolete inventory to its net realizable value.
Revenue Equipment on Operating Lease
The cost of the equipment leased to customers under operating leases is depreciated on a
straight-line basis over the lesser of the length of the contract or estimated useful life of the
asset, which is usually between three and five years.
Property, Plant, and Equipment
Property, plant, and equipment is carried at cost less accumulated depreciation. Maintenance,
repairs, and minor renewals are expensed as incurred. Additions, improvements, and major renewals
are capitalized. Depreciation is provided on a straight-line basis over the estimated useful lives
of the assets. Assets subject to capital leases are depreciated over the lesser of the estimated
useful life of the asset or length of the contract. Buildings, equipment rented to customers, and
leased equipment on capitalized leases use the following estimated useful lives of fifteen to
thirty years, three to five years, and five years, respectively. Machinery and equipment estimated
useful lives range from three to ten years. Leasehold improvement useful lives are the lesser of
the minimum lease term or the useful life of the item. The cost and accumulated depreciation
applicable to assets retired are removed from the accounts and the gain or loss on disposition is
included in income.
We review our property, plant, and equipment for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be recoverable. If it is
determined that an impairment, based on expected future undiscounted cash flows, exists, then the
loss is recognized on the consolidated statements of operations. The amount of the impairment is
the excess of the carrying amount of the impaired asset over its fair value.
Internal-Use Software
Included in fixed assets is the capitalized cost of internal-use software. As required by Statement
of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use,” we capitalize costs incurred during the application development stage of
internal-use software and amortize these costs over their estimated useful lives, which generally
range from three to five years. Costs incurred related to design or maintenance of internal-use
software are expensed as incurred.
Goodwill
Goodwill is carried at cost and is not amortized. We test goodwill for impairment on an annual
basis as of fiscal month end October of each fiscal year, relying on a number of factors including
operating results, business plans and anticipated future cash flows. Company management uses its
judgment in assessing whether goodwill has become impaired between annual impairment tests.
Reporting units are primarily determined as the geographic areas comprising the Company’s business
segments, except in situations when aggregation of the reporting units is appropriate.
Recoverability of goodwill is evaluated using a two-step process. The first step involves a
comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of
the reporting unit
exceeds its fair value, then the second step of the process involves a comparison of the implied
fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the
goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is
recognized in an amount equal to the excess. We perform our annual assessment as of fiscal month
end October each fiscal year.
53
The fair value of our reporting units is dependent upon our estimate of future discounted cash
flows and other factors. Our estimates of future cash flows include assumptions concerning future
operating performance and economic conditions and may differ from actual future cash flows.
Estimated future cash flows are adjusted by an appropriate discount rate derived from our market
capitalization plus a suitable control premium at the date of evaluation. The financial and credit
market volatility directly impacts our fair value measurement through our weighted average cost of
capital that we use to determine our discount rate and through our stock price that we use to
determine our market capitalization. Therefore, changes in the stock price may also affect the
amount of impairment recorded. Market capitalization is determined by multiplying the shares
outstanding on the assessment date by the average market price of our common stock over a 30-day
period before each assessment date. We use this 30-day duration to consider inherent market
fluctuations that may affect any individual closing price. We believe that our market
capitalization alone does not fully capture the fair value of our business as a whole, or the
substantial value that an acquirer would obtain from its ability to obtain control of our business.
As such, in determining fair value, we add a control premium to our market capitalization. To
estimate the control premium, we considered our unique competitive advantages that would likely
provide synergies to a market participant. In addition, we considered external market factors which
we believe contributed to the decline and volatility in our stock price that did not reflect our
underlying fair value. Refer to Note 5.
Other Intangibles
Indefinite-lived intangible assets are carried at cost and are not amortized, but are subject to
tests for impairment at least annually or whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable.
Definite-lived intangibles are amortized on a straight-line basis over their useful lives (or legal
lives if shorter). We review our other intangible assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be recoverable.
If it is determined that an impairment, based on expected future cash flows, exists, then the loss
is recognized on the consolidated statements of operations. The amount of the impairment is the
excess of the carrying amount of the impaired asset over the fair value of the asset. The fair
value represents expected future cash flows from the use of the assets, discounted at the rate used
to evaluate potential investments. Refer to Note 5.
Other Assets
Included in other assets are $11.5 million and $1.1 million of net long-term customer-based
receivables at December 28, 2008 and December 30, 2007, respectively.
Deferred Financing Costs
Financing costs are capitalized and amortized to interest expense over the life of the debt. The
net deferred financing costs at December 28, 2008 and December 30, 2007 were $0.2 million and $0.4
million, respectively. The financing cost amortization expense was $0.2 million, $0.2 million, and
$0.2 million, for 2008, 2007, and 2006, respectively.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition,” which states that revenue is realized or realizable and earned when all of the
following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or
services have been rendered; the price to the buyer is fixed or determinable; and collectability is
reasonably assured. For arrangements with multiple elements, we determine the fair value of each
element and then allocate the total arrangement consideration among the separate elements. We
recognize revenue when installation is complete or other post-shipment obligations have been
satisfied. Equipment leased to customers under sales-type leases is accounted for as the equivalent
of a sale. The present value of such lease revenues is recorded as net revenues, and the related
cost of the equipment is charged to cost of revenues. The deferred finance charges applicable to
these leases are recognized over the terms of the leases. Rental revenue from equipment under
operating leases is recognized over the term of the lease. Installation revenue from EAS equipment
is recognized when the systems are installed. Service revenue is recognized, for service contracts,
on a straight-line basis over the contractual period, and, for non-contract work, as services are
performed. Unearned revenue is recorded when payments are received in advance of performing our
service obligations and is recognized over the service period.
54
Software license fee revenues are recognized in accordance with Statement of Position (“SOP”) 97-2,
“Software Revenue Recognition”, as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue
Recognition with Respect to Certain Transactions.” Revenues from software license agreements are
recognized when persuasive evidence of an agreement exists, delivery of the product has occurred,
no significant vendor obligations are remaining to be fulfilled, the fee is fixed and determinable,
and collection is probable. Revenue from software contracts that require significant production,
modification, customization, or implementation is recognized in accordance with SOP 81-1,
“Accounting For Performance of Construction-Type and Certain Production-Type Contracts”. Revenue
from these arrangements for both licenses and professional services are recognized together using
the percentage of completion method based upon the ratio of labor incurred to total estimated labor
to complete each contract. In instances where there is a term license combined with services,
revenue is recognized ratably over the term.
We record estimated reductions to revenue for customer incentive offerings, including volume-based
incentives and rebates. We record revenues net of an allowance for estimated return activities.
Return activity was immaterial to revenue and results of operations for all periods presented.
Shipping and Handling Fees and Costs
Shipping and handling fees are accounted for in net revenues and shipping and handling costs in
cost of revenues.
Cost of Revenues
The principal elements of cost of revenues are product cost, field service and installation cost,
freight, and product royalties paid to third parties.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
Balance at beginning of year
|
|
$
|
8,108
|
|
|
$
|
5,499
|
|
|
Accruals for warranties issued
|
|
|
6,388
|
|
|
|
7,929
|
|
|
Settlement made
|
|
|
(5,882
|
)
|
|
|
(6,155
|
)
|
|
Acquisitions/(Divestitures)
|
|
|
89
|
|
|
|
309
|
|
|
Foreign currency translation adjustment
|
|
|
(300
|
)
|
|
|
526
|
|
|
|
|
Balance at end of year
|
|
$
|
8,403
|
|
|
$
|
8,108
|
|
|
|
Royalty Expense
Royalty expenses related to security products approximated $3.7 million, $3.7 million, and $3.7
million, in 2008, 2007, and 2006, respectively. These expenses are included as part of cost of
revenues.
Research and Development Costs
Research and development costs are expensed as incurred and consist of development work associated
with the Company’s existing and potential products. The Company’s research and development expenses
relate primarily to payroll costs for engineering personnel, costs associated with various
projects, including testing, developing prototypes and related expenses.
Stock Options
We recognize stock-based compensation expense for all share-based payment awards granted after
December 25, 2005 and granted prior to but not yet vested as of December 25, 2005, in accordance
with Statement of Financial Accounting Standards (SFAS) 123R “Share-Based Payment” (“SFAS 123R”).
Under the fair value recognition provisions of SFAS 123R, we recognize share-based compensation net
of an estimated forfeiture rate and only recognize compensation cost for those shares expected to
vest. For awards granted after the SFAS 123R adoption date we recognize the expense on a
straight-line basis over the requisite service period of the award. For non-vested awards granted
prior to the adoption date, we continue to use the ratable expense allocation method. Prior to SFAS
123R adoption, we accounted for share-based payments under Accounting Principles Board Opinion No.
25, “Accounting for Stock Issued to Employees” (“APB 25”) and accordingly, generally recognized
compensation expense only when we granted options with a discounted exercise price.
55
In light of new accounting guidance under SFAS 123R, the Company reevaluated its assumptions used
in estimating the fair value of employee options granted. As part of its SFAS 123R adoption, the
Company also examined its historical pattern of option exercises in an effort to determine if there
were any discernable activity patterns based on certain employee populations. From this analysis,
the Company identified that there were no discernable populations. The Company used the
Black-Scholes option pricing model to value the options. 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 fair value of share-based payment units was estimated using the Black-Scholes option pricing
model with the following assumptions and weighted average fair values as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended,
|
|
|
Year Ended,
|
|
|
Year Ended,
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Weighted average fair value of grants
|
|
$
|
8.04
|
|
|
$
|
8.88
|
|
|
$
|
11.47
|
|
|
Valuation assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Expected volatility
|
|
|
.3883
|
|
|
|
.3659
|
|
|
|
.4135
|
|
|
Expected life (in years)
|
|
|
4.84
|
|
|
|
4.56
|
|
|
|
4.54
|
|
|
Risk-free interest rate
|
|
|
2.450
|
%
|
|
|
4.264
|
%
|
|
|
4.55 - 5.07
|
%
|
See Note 8 to the Consolidated Condensed Financial Statements for a further discussion on
stock-based compensation.
Income Taxes
Deferred tax liabilities and assets are determined based on the difference between the financial
statement basis and the tax basis of assets and liabilities, using enacted statutory tax rates in
effect at the balance sheet date. Changes in enacted tax rates are reflected in the tax provision
as they occur. A valuation allowance is recorded to reduce deferred tax assets when it is more
likely than not that a tax benefit will not be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period when the change is
enacted.
On January 1, 2007, we adopted FASB Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No.
109 “Accounting for Income Taxes.” FIN 48 provides guidance on recognizing, measuring, presenting
and disclosing in the financial statements uncertain tax positions that a company has taken or
expects to take on a tax return. See Note 13 for further information related to FIN 48.
Taxes
and Value Added Collected from Customers
Sales and value added taxes collected from customers are excluded from revenues. The obligation is included in
other current liabilities until the taxes are remitted to the appropriate taxing authorities.
Foreign Currency Translation and Transactions
Our balance sheet accounts of foreign subsidiaries are translated into U.S. dollars at the rate of
exchange in effect at the balance sheet dates. Revenues, costs, and expenses of our foreign
subsidiaries are translated into U.S. dollars at the year-to-date average rate of exchange. The
resulting translation adjustments are recorded as a separate component of shareholders’ equity.
Gains or losses on certain long-term inter-company transactions are excluded from the net earnings
(loss) and accumulated in the cumulative translation adjustment as a separate component of
consolidated stockholders’ equity. All other foreign currency transaction gains and losses are
included in net earnings (loss).
Accounting for Hedging Activities
We enter into certain foreign exchange forward contracts in order to hedge anticipated rate
fluctuations in Western Europe, Canada, Japan and Australia. Transaction gains or losses resulting
from these contracts are recognized at the end of each reporting period. We use the fair value
method of accounting, recording realized and unrealized gains and losses on these contracts. These
gains and losses are included in other gain (loss), net on our consolidated statements of
operations.
We enter into various foreign currency contracts to reduce our exposure to forecasted
Euro-denominated inter-company revenues. These cash flow hedging instruments are marked to market
and the changes are recorded in other comprehensive income. Amounts
recorded in other comprehensive income are recognized in cost of goods sold as the inventory is
sold to external parties. Any hedge ineffectiveness is charged to other gain (loss), net on our
consolidated statements of operations.
56
We enter, on occasion, into interest rate swaps to reduce the risk of significant interest rate
increases in connection with floating rate debt. This cash flow hedging instrument is marked to
market and the changes are recorded in other comprehensive income. Any hedge ineffectiveness is
charged to interest expense.
See Note 15 for further information.
Recently Adopted Accounting Standards
We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes”, on January 1, 2007. As a result of adoption, we
recognized a charge of approximately $1.7 million to the January 1, 2007 retained earnings balance.
Additionally, we reclassified $13.9 million of the unrecognized tax benefits, and interest and
penalties from income taxes to other long-term liabilities on our consolidated balance sheet. As of
the adoption date, we had $10.6 million of unrecognized tax benefits, all of which would affect our
effective tax rate if recognized. Also as of the adoption date, we had accrued interest expense and
penalties related to the unrecognized tax benefits of $3.8 million and $0.3 million, respectively.
We adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 157, “Fair
Value Measurements” (SFAS 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. SFAS 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 FASB issued FASB Staff Position No. FAS 157-2 (SFAS 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. In October 2008, the FASB issued FSP No. FAS 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,”
(FSP FAS 157-3), which clarifies the application of SFAS No. 157 for financial assets in a market
that is not active. FSP FAS 157-3 was effective upon issuance. The adoption of FAS 157 did not have
a material effect on our financial condition or results of operations The Company does not expect
the adoption of FAS 157 for non-financial assets and liabilities on December 29, 2008 to have a
material impact on the Company’s consolidated results of operations and financial condition.
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” (SFAS 159) on December 31, 2007. SFAS 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. SFAS 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 May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162). SFAS 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. SFAS 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. SFAS 162 became effective on
November 15, 2008. The adoption of SFAS 162 did not have a material impact on the Company’s
consolidated results of operations and financial condition.
57
New Accounting Pronouncements and Other Standards
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141R).
SFAS 141R retains the underlying concepts of SFAS 141 in that all business combinations are still
required to be accounted for at fair value under the acquisition method of accounting but SFAS 141R
changed the method of applying the acquisition method in a number of significant aspects.
Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued
at fair value at the acquisition date; in-process research and development will be recorded at fair
value as an indefinite-lived intangible asset at the acquisition date, until either abandoned or
completed, at which point the useful lives will be determined; restructuring costs associated with
a business combination will generally be expensed subsequent to the acquisition date; and changes
in deferred tax
asset valuation allowances and income tax uncertainties after the acquisition date generally will
affect income tax expense. SFAS 141R is effective on a prospective basis for all business
combinations for which the acquisition date is on or after the beginning of the first annual period
subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on
deferred taxes and acquired tax contingencies. SFAS 141R amends SFAS No. 109, “Accounting for
Income Taxes” (SFAS 109) such that adjustments made to valuation allowances on deferred taxes and
acquired tax contingencies associated with acquisitions that closed prior to the effective date of
SFAS 141R would also apply the provisions of SFAS 141R. 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. Upon adoption, SFAS 141R will not have a significant impact on our
financial position and results of operations; however, any business combination entered into after
the adoption may significantly impact our financial position and results of operations when
compared to acquisitions accounted for under existing U.S. Generally Accepted Accounting Principles
(GAAP) and result in more earnings volatility and generally lower earnings due to the expensing of
deal costs and restructuring costs of acquired companies. Also, since we have significant acquired
deferred tax assets for which full valuation allowances were recorded at the acquisition date, SFAS
141R could significantly affect the results of operations if changes in the valuation allowances
occur subsequent to adoption. As of December 28, 2008, such deferred tax valuation allowances
amounted to $4.2 million. For additional discussion on deferred tax valuation allowances, refer to
Note 13 to the Consolidated Financial Statements in the 2008 Form 10-K.
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 parent’s ownership interest, and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. This statement requires the
recognition of a noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. 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. As of December 28, 2008, our minority interest totaled $0.9 million, which was
included in the long-term liabilities section of our Consolidated Balance Sheet. The Company will
incorporate presentation and disclosure requirements as outlined in SFAS 160 in the Company’s
Quarterly Report on Form 10-Q for the period ending March 29, 2009.
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. The Company will adopt this standard in the first fiscal quarter
of 2009 and believes that upon adoption, there will be no material impact on the Company’s
consolidated results of operations and financial condition.
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 do not expect FSP FAS
142-3 to have a material impact on our accounting for future acquisitions of intangible assets.
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 and will be adopted by us in the
first fiscal quarter of 2009. We do not expect that the adoption of FSP EITF 03-6-1 will have a
material impact on our calculation of EPS.
In November 2008, the FASB ratified Staff Position FSP EITF 08-6, “Equity Method Investment
Accounting Considerations,” (EITF 08-6). EITF 08-6 clarifies that the initial carrying value of an
equity method investment should be determined in accordance with SFAS No. 141(R).
Other-than-temporary impairment of an equity method investment should be recognized in accordance
with FSP No. APB 18-1, “Accounting by an Investor for Its Proportionate Share of Accumulated Other
Comprehensive Income of an Investee Accounted for under the Equity Method in Accordance with APB
Opinion No. 18 upon a Loss of Significant Influence.”
58
EITF 08-6 is effective on a prospective basis in fiscal years beginning on or after December 15,
2008 and interim periods within those fiscal years, and will be adopted by us in the first quarter
of fiscal year 2009. The adoption of EITF 08-6 will not have a material impact on our consolidated
results of operations and financial condition.
In November 2008, the FASB ratified EITF 08-7, “Accounting for Defensive Intangible Assets,” (EITF
08-7). EITF 08-7 applies to defensive assets which are acquired intangible assets which the
acquirer does not intend to actively use, but intends to hold to prevent its competitors from
obtaining access to the asset. EITF 08-7 clarifies that defensive intangible assets are separately
identifiable and should be accounted for as a separate unit of accounting in accordance with SFAS
No. 141(R) and SFAS No. 157, “Fair Value Measurements,” or SFAS No. 157. EITF 08-7 is effective for
intangible assets acquired in fiscal years beginning on or after December 15, 2008 and will be
applied by us to intangible assets acquired on or after December 29, 2008.
In November 2008, the FASB ratified EITF No. 08-8, “Accounting for an Instrument (or an Embedded
Feature) with a Settlement Amount That Is Based on the Stock of an Entity’s Consolidated
Subsidiary,” (EITF 08-8). EITF 08-8 clarifies whether a financial instrument for which the payoff
to the counterparty is based, in whole or in part, on the stock of an entity’s consolidated
subsidiary is indexed to the reporting entity’s own stock and therefore should not be precluded
from qualifying for the first part of the scope exception in paragraph 11 (a) of SFAS No. 133, “
Accounting for Derivative Instruments and Hedging Activities” or from being within the scope of
EITF No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and, Potentially
Settled in, a Company’s Own Stock.” EITF 08-8 is effective for fiscal years beginning on or after
December 15, 2008, and interim periods within those fiscal years, and will be adopted by us in the
first quarter of fiscal year 2009. The adoption of EITF 08-8 will not have a material impact on
our consolidated results of operations and financial condition.
In December 2008, the FASB issued FASB Staff Position (FSP) No.132 (R)-1, “Employers’ Disclosures
about Pensions and Other Postretirement Benefits” (FSP 132R-1). FSP 132R-1 requires enhanced
disclosures about the plan assets of a Company’s defined benefit pension and other postretirement
plans. The enhanced disclosures required by this FSP are intended to provide users of financial
statements with a greater understanding of: (1) how investment allocation decisions are made,
including the factors that are pertinent to an understanding of investment policies and strategies;
(2) the major categories of plan assets; (3) the inputs and valuation techniques used to measure
the fair value of plan assets; (4) the effect of fair value measurements using significant
unobservable inputs (Level 3) on changes in plan assets for the period; and (5) significant
concentrations of risk within plan assets. This FSP is effective for us for the fiscal year ending
December 27, 2009.
In December 2008, the FASB issued FSP FAS No. 140-4 and FIN No. 46R-8, “Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest
Entities.” The FSP, which is effective in the first reporting period ending after December 15,
2008, requires additional disclosures concerning transfers of financial assets. The FSP also
requires additional disclosures concerning an enterprise’s involvement with variable interest
entities and qualifying special purpose entities under certain conditions, none of which apply to
the Company. The Company will include additional required disclosures concerning transfers of
financial assets, as applicable, in its interim consolidated financial statements for the period
ending March 29, 2009.
Note 2. ACQUISITIONS
On November 1, 2007, Checkpoint Systems, Inc. and one of its direct subsidiaries (collectively, the
“Company”) and Alpha Security Products, Inc. and one of its direct subsidiaries (collectively, “the
Seller”) entered into an Asset Purchase Agreement and a Dutch Assets Sale and Transfer Agreement
(collectively, the “Agreements”) under which the Company purchased all of the assets of Alpha’s S3
business (the “Acquisition”) for approximately $142 million, subject to a post-closing working
capital adjustment, plus additional performance-based contingent payments up to a maximum of $8
million plus interest thereon. The purchase price was funded by $67 million of cash and $75 million
of borrowings under our senior unsecured credit facility. Subject to the Agreements, contingent
payments were earned if the revenue derived from the S3 business exceeded $70 million during the
period from December 31, 2007, until December 28, 2008. In the event that the revenue derived from
the S3 business exceeded $83 million during such period, the Seller was entitled to a maximum
payment of $8 million. During the fourth fiscal quarter ended December 28, 2008, revenues for the
S3 business exceeded the minimum contingency payment thresholds. An accrual of $6.8 million is
recognized at December 28, 2008 for the contingent payment, with a corresponding increase to
goodwill recorded on the acquisition.
The S3 business includes the development, manufacture, distribution, and sale of retail store
applied security products requiring removal by store personnel at the cash register.
59
The purchase price allocation as of the date of acquisition was as follows:
|
|
|
|
|
|
|
|
|
November 1,
|
|
|
(dollar amounts in thousands)
|
|
2007
|
|
|
|
|
Cash
|
|
$
|
67,000
|
|
|
Long-term debt
|
|
|
75,000
|
|
|
Contingent payment
|
|
|
6,796
|
|
|
|
|
Purchase price (1)
|
|
|
148,796
|
|
|
|
|
Fair value of net assets acquired:
|
|
|
|
|
|
Accounts receivable
|
|
|
6,986
|
|
|
Inventories
|
|
|
6,882
|
|
|
Other current assets
|
|
|
73
|
|
|
Property, plant, and equipment
|
|
|
9,148
|
|
|
Intangible assets (2)
|
|
|
71,053
|
|
|
Accounts payable
|
|
|
(2,526
|
)
|
|
Accrued compensation and related taxes
|
|
|
(810
|
)
|
|
Other accrued expenses
|
|
|
(799
|
)
|
|
|
|
Fair value of the net assets acquired
|
|
|
90,007
|
|
|
Excess cost over net assets acquired
|
|
|
58,789
|
|
|
Adjustment to the realization of deferred tax assets for Checkpoint
|
|
|
(59
|
)
|
|
Estimated acquisition costs
|
|
|
648
|
|
|
|
|
Goodwill (3)
|
|
$
|
59,378
|
|
|
|
Notes:
|
(1)
|
|
Represents the cash, long-term debt, and contingent payment used to finance the acquisition.
|
|
|
|
(2)
|
|
Intangible assets consist of customer relationships ($33.4 million), trade names ($19.4
million), and developed technologies ($18.3 million). The weighted-average useful lives for
the customer relationships and developed technologies are approximately 10 years. The
intangible assets related to the trade name are deemed to have an indefinite life. The
amortization of definite life intangibles are calculated on a straight-line basis.
|
|
|
|
(3)
|
|
Goodwill of $59.4 million was assigned to the Shrink Management Solutions reporting
segment. Of that total amount, $59.4 million is expected to be deductible for tax purposes
over a 15 year period.
|
The allocation of the purchase price for the Alpha Acquisition, which primarily used a discounted
cash flow approach with respect to identified intangible assets and a combination of the cost and
market approaches with respect to property, plant and equipment, was finalized during fiscal year
2008. The discounted cash flow approach was based upon management’s estimated future cash flows
from the acquired assets and liabilities and utilized a discount rate consistent with the inherent
risk associated with the acquired assets and liabilities. The results of the assets acquired and
liabilities assumed in connection with the Alpha Acquisition have been included in the consolidated
statement of operations since the closing of the transaction on November 1, 2007, as part of the
SMS segment.
60
The following schedule presents 2007 and 2006 supplemental unaudited pro forma information as if
the Alpha Acquisition had occurred on December 26, 2005. The unaudited pro forma information is
presented based on information available, is intended for informational purposes only and is not
necessarily indicative of and does not purport to represent what Checkpoint’s future financial
condition or operating results will be after giving effect to the Alpha Acquisition and does not
reflect actions that may be undertaken by management in integrating these businesses. In addition,
this information does not reflect financial and operating benefits Checkpoint expects to realize as
a result of the acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Year ended
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Net revenues
|
|
$
|
880,790
|
|
|
$
|
739,033
|
|
|
Earnings from continuing operations
|
|
|
58,225
|
|
|
|
34,920
|
|
|
Earnings from discontinued operations, net of tax
|
|
|
359
|
|
|
|
903
|
|
|
|
|
Net earnings
|
|
$
|
58,584
|
|
|
$
|
35,823
|
|
|
|
|
Basic Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
1.46
|
|
|
$
|
.89
|
|
|
Earnings from discontinued operations, net of tax
|
|
|
.01
|
|
|
|
.02
|
|
|
|
|
Basic Earnings Per Share
|
|
$
|
1.47
|
|
|
$
|
.91
|
|
|
|
|
Diluted Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
1.43
|
|
|
$
|
.87
|
|
|
Earnings from discontinued operations, net of tax
|
|
|
.01
|
|
|
|
.02
|
|
|
|
|
Diluted Earnings Per Share
|
|
$
|
1.44
|
|
|
$
|
.89
|
|
|
|
Other Acquisitions in Fiscal 2008
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
$1.3 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 $22.8 million, which is not tax deductible. We also acquired intangibles of $6.1
million consisting of a trade name and proprietary technologies. The trade name is an
indefinite-lived intangible asset while the proprietary technologies are finite-lived intangible
assets that have a useful life of 4 years. The results from the acquisition date through
December
28, 2008 are included in the Shrink Management Solutions segment and were not material to the
consolidated financial statements. The allocation of the purchase price is expected to be completed
during the first half of fiscal year 2009.
In January 2008, the Company purchased the business of Security Corporation, Inc., a privately held
company, for $7.9 million plus $1.0 million of liabilities acquired. The transaction was paid in
cash. The financial statements reflect the final allocation of the purchase price based on
estimated fair values at the date of acquisition. This allocation has resulted in acquired goodwill
of $1.3 million, which is deductible for tax purposes. We also acquired intangibles of $5.2 million
related to customer relationships with a useful life of 10 years. The results from the acquisition
date through December 28, 2008 are included in the Shrink Management Solutions segment and were not
material to the consolidated financial statements.
Pro forma results of operations have not been presented individually or in the aggregate for these
acquisitions, described in “Other Acquisitions in Fiscal 2008”, because the effects of these
acquisitions were not material to our consolidated financial statements.
Other Acquisitions in Fiscal 2007
In November 2007, we purchased SIDEP, a provider of Radio Frequency (RF) Electronic Article
Surveillance (EAS) products. Upon closing, we also acquired the remaining minority interests in a
SIDEP subsidiary, Shanghai Asialco Electronics Co., Ltd. (Asialco), a China based manufacturer of
RF-EAS labels. The total purchase price for these acquisitions was $27.9 million, net of cash
acquired. The purchase agreement was structured with deferred payments to the minority interest
owners of Asialco of $9.3 million. These payments will be paid over a three-year period from the
date of acquisition and were recorded as a liability on the date of acquisition. 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 $14.0 million,
which is non-deductible for tax purposes. Intangible assets included in this acquisition were $10.7
million. The intangible assets were composed of customer lists ($5.2 million), non-compete
agreement ($3.8 million), trademarks ($1.1 million), and technology ($0.6 million). The useful
lives were 8 to 13 years for customer lists, 3 years for the non-compete agreement, indefinite for
trademarks, and 3 years for technology. The allocation of the purchase price was finalized during
fiscal year 2008. The results from the acquisition date through December 30, 2007 are included
in the Shrink Management Solutions segment and Intelligent Labels segment and were not material to
the consolidated financial statements.
During 2008, we recorded working capital adjustments for the SIDEP acquisition which increased goodwill
by $1.8 million. The working capital adjustments were primarily related to income tax adjustments. We also paid
$4.9 million to the minority interest owners of Asialco as part of the deferred payment arrangement established in the
SIDEP purchase agreement.
61
In May 2007, the Company purchased the business of SSE Southeast, LLC, for $5.1 million plus $1.0
million of liabilities acquired. The transaction was paid in cash. The financial statements reflect
the final allocations of the purchase price based on estimated fair values at the date of
acquisition. This allocation has resulted in acquired goodwill of $1.8 million, which is deductible
for tax purposes. We also acquired intangibles of $2.7 million related to customer lists with a
useful life of 9 years. The results from the acquisition date through December 30, 2007 are
included in the Shrink Management Solutions segment and were not material to the consolidated
financial statements. The purchase agreement has a working capital
adjustment, which was settled during
2008.
In January 2007, the Company purchased the business of Security Systems Technology, Inc., a
privately held company, for $0.8 million plus $0.3 million of liabilities acquired. The transaction
was paid in cash. The financial statements reflect the final allocation of the purchase price based
on estimated fair values at the date of acquisition. This allocation has resulted in acquired
goodwill of $0.8 million, which is deductible for tax purposes. We also acquired intangibles of
$0.2 million related to customer lists with a useful life of 9 years. The results from the
acquisition date through December 30, 2007 are included in the Shrink Management Solutions segment
and were not material to the consolidated financial statements.
Pro forma results of operations have not been presented individually or in the aggregate for these
acquisitions, described in “Other Acquisitions in Fiscal 2007”, because the effects of these
acquisitions were not material to our consolidated financial statements.
Other Acquisitions in Fiscal 2006
In November 2006, the Company purchased ADS Worldwide (ADS), a privately held company, for $7.4
million, net of cash acquired. The transaction was paid in cash. The final allocation of the
purchase price resulted in acquired goodwill of $3.4 million, which is non-deductible for tax
purposes. We also acquired intangibles of $2.9 million related to customer lists ($1.9 million) and
software ($1.0 million). The intangibles have useful lives of 6 years and 4 years, respectively.
Note 3. INVENTORIES
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
Raw materials
|
|
$
|
16,287
|
|
|
$
|
16,352
|
|
|
Work-in-process
|
|
|
6,100
|
|
|
|
6,497
|
|
|
Finished goods
|
|
|
79,735
|
|
|
|
86,480
|
|
|
|
|
Total
|
|
$
|
102,122
|
|
|
$
|
109,329
|
|
|
|
62
Note 4. REVENUE EQUIPMENT ON OPERATING LEASE AND PROPERTY, PLANT, AND EQUIPMENT
The major classes are:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
Revenue equipment on operating lease
|
|
|
|
|
|
|
|
|
|
Equipment rented to customers
|
|
$
|
22,795
|
|
|
$
|
31,290
|
|
|
Accumulated depreciation
|
|
|
(20,755
|
)
|
|
|
(26,790
|
)
|
|
|
|
Total revenue equipment on operating lease
|
|
$
|
2,040
|
|
|
$
|
4,500
|
|
|
|
|
Property, plant, and equipment
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
9,809
|
|
|
$
|
8,741
|
|
|
Buildings
|
|
|
56,014
|
|
|
|
59,463
|
|
|
Machinery and equipment
|
|
|
144,717
|
|
|
|
140,982
|
|
|
Leasehold improvements
|
|
|
13,385
|
|
|
|
11,938
|
|
|
Construction in progress
|
|
|
3,429
|
|
|
|
4,672
|
|
|
|
|
|
|
|
227,354
|
|
|
|
225,796
|
|
|
Accumulated depreciation
|
|
|
(140,619
|
)
|
|
|
(137,700
|
)
|
|
|
|
Total property, plant, and equipment
|
|
$
|
86,735
|
|
|
$
|
88,096
|
|
|
|
Property, plant, and equipment under capital lease had gross values of $1.4 million and $1.7
million and accumulated depreciation of $0.9 million and $0.7 million, as of December 28, 2008 and
December 30, 2007, respectively.
As of December 28, 2008, the outstanding Asialco loan balance of $3.6 million (RMB25 million) is
collateralized by land and buildings with an aggregate carrying value of $6.0 million at December
28, 2008. The loans mature at various times through May 2009.
Depreciation expense on our revenue equipment on operating lease and property, plant, and equipment
was $18.1 million, $15.4 million, and $16.2 million, for 2008, 2007, and 2006, respectively.
In 2008, we recorded a $1.5 million fixed asset impairment. The charge consisted of $1.1 million
related to the write down of a building in France and $0.4 million related to the write down of
land and a building in Japan. These impairments were recorded in asset impairments on the
consolidated statement of operations.
In November 2006, we cancelled a capital lease for one of our buildings with an outstanding amount
owed of $10.3 million. This building was sublet to a third party tenant. The Company and the tenant
reached a cancellation settlement which resulted in sublease income of $10.2 million. We recorded a
$8.0 million impairment on this building as a result of the transaction. Additionally, we incurred
a loss on the retirement of the capital lease of $0.2 million and an additional interest expense
charge of $0.2 million. The sublease income, loss on the settlement of the capital lease, and the
impairment were recorded in other operating income on our consolidated statement of operations.
Note 5. GOODWILL AND OTHER INTANGIBLE ASSETS
We had intangible assets with a net book value of $113.8 million, and $119.3 million as of December
28, 2008 and December 30, 2007, respectively.
The following table reflects the components of intangible assets as of December 28, 2008 and
December 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2008
|
|
|
December 30, 2007
|
|
|
|
|
Amortizable
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
|
Life
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
(dollar amounts in thousands)
|
|
(years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists
|
|
|
20
|
|
|
$
|
81,037
|
|
|
$
|
31,184
|
|
|
$
|
80,104
|
|
|
$
|
26,535
|
|
|
Trade name
|
|
|
30
|
|
|
|
30,610
|
|
|
|
16,107
|
|
|
|
31,662
|
|
|
|
15,695
|
|
|
Patents, license agreements
|
|
|
5 to 14
|
|
|
|
60,986
|
|
|
|
40,277
|
|
|
|
62,716
|
|
|
|
38,076
|
|
|
Other
|
|
|
3 to 6
|
|
|
|
9,700
|
|
|
|
3,140
|
|
|
|
5,890
|
|
|
|
1,322
|
|
|
|
|
Total amortized finite-lived intangible assets
|
|
|
|
|
|
|
182,333
|
|
|
|
90,708
|
|
|
|
180,372
|
|
|
|
81,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
|
|
|
|
22,130
|
|
|
|
—
|
|
|
|
20,550
|
|
|
|
—
|
|
|
|
|
Total identifiable intangible assets
|
|
|
|
|
|
$
|
204,463
|
|
|
$
|
90,708
|
|
|
$
|
200,922
|
|
|
$
|
81,628
|
|
|
|
63
We recorded $12.5 million, $5.5 million, and $3.2 million of amortization expense for 2008, 2007,
and 2006, respectively.
During our 2008 annual goodwill and indefinite-lived intangibles annual impairment test, we
determine our indefinite-lived intangible trade mark intangible in
our i-Labels segment was
impaired. As a result we recorded an impairment charge of $0.4 million in the fourth quarter of
2008. This charge was recorded in asset impairments on the consolidated statement of operations.
As a result of changes in business circumstances related to the customer list intangible asset
recognized in connection with the SIDEP/Asialco acquisition, we recorded an impairment charge of
$2.6 million in the fourth quarter ended December 28, 2008. The impairment charge was recorded in
asset impairments in the Intelligent Labels segment on the consolidated statement of operations.
Estimated amortization expense for each of the five succeeding years is anticipated to be:
|
|
|
|
|
|
|
(dollar amounts in thousands)
|
|
|
|
|
|
|
|
2009
|
|
$
|
12,470
|
|
|
2010
|
|
$
|
11,874
|
|
|
2011
|
|
$
|
10,428
|
|
|
2012
|
|
$
|
9,622
|
|
|
2013
|
|
$
|
8,429
|
|
|
|
The changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shrink
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
Intelligent
|
|
|
Retail
|
|
|
|
|
|
(dollar amounts in thousands)
|
|
Solutions
|
|
|
Labels
|
|
|
Merchandising
|
|
|
Total
|
|
|
|
|
Balance as of December 31, 2006
|
|
$
|
69,335
|
|
|
$
|
47,774
|
|
|
$
|
70,179
|
|
|
$
|
187,288
|
|
|
Acquired during the year
|
|
|
63,584
|
|
|
|
6,446
|
|
|
|
—
|
|
|
|
70,030
|
|
|
Purchase accounting adjustments
|
|
|
—
|
|
|
|
(2,687
|
)
|
|
|
—
|
|
|
|
(2,687
|
)
|
|
Translation adjustment and other
|
|
|
7,025
|
|
|
|
4,781
|
|
|
|
8,164
|
|
|
|
19,970
|
|
|
|
|
Balance as of December 30, 2007
|
|
$
|
139,944
|
|
|
$
|
56,314
|
|
|
$
|
78,343
|
|
|
$
|
274,601
|
|
|
Acquired during the year
|
|
|
24,130
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,130
|
|
|
Purchase accounting adjustments
|
|
|
7,697
|
|
|
|
1,429
|
|
|
|
—
|
|
|
|
9,126
|
|
|
Impairment losses
|
|
|
—
|
|
|
|
(51,770
|
)
|
|
|
(7,813
|
)
|
|
|
(59,583
|
)
|
|
Translation adjustment and other
|
|
|
(2,278
|
)
|
|
|
(5,973
|
)
|
|
|
(4,491
|
)
|
|
|
(12,742
|
)
|
|
|
|
Balance as of December 28, 2008
|
|
$
|
169,493
|
|
|
$
|
—
|
|
|
$
|
66,039
|
|
|
$
|
235,532
|
|
|
|
During fiscal 2008, 2007, and 2006 we made multiple acquisitions, which impacted goodwill and
intangible assets. Please refer to Note 2 of these consolidated financial statements for more
information on these acquisitions and their impact.
The Company has completed step one of its fiscal 2008 annual analysis and test for impairment of
goodwill and it was determined that certain goodwill related to the Intelligent Labels and Retail
Merchandising segments was impaired. As a result, a $59.6 million estimated impairment charge was
recorded as of December 28, 2008. The impairment charge was recorded in goodwill impairment on the
consolidated statement of operations. This amount may change upon completion of step two of the
impairment test. It is anticipated that the impairment testing will be complete by the first
quarter of fiscal 2009 at which time an adjustment to the estimate will be recorded. The
impairment charge is attributed to a combination of a decline in our market capitalization of the
Company and a decline in the estimated forecasted discounted cash flows expected by the Company.
Fair values exceeded their respective carrying values by more than 25% in the remaining reporting
units for which no impairment charge was recorded.
The 2007 and 2006 annual assessments did not result in an impairment charge. Significant turmoil
in the financial markets and weakness in macroeconomic conditions globally have recently
contributed to volatility in our stock price, including a significant decline in our stock price
during the third and fourth quarters of 2008 during which our stock price fluctuated from a high of
$23.43 to a low of $9.01. These factors have contributed to the estimated impairment loss recorded
in the fourth quarter ended December 28, 2008. There can be no certainty as to the duration of the
current economic conditions and their potential impact on our stock price performance or future
goodwill impairment.
We have not made any material changes in the methodology used in the assessment of whether or not
goodwill is impaired during the past three fiscal years. Determining the fair value of a reporting
unit is a matter of judgment and often involves the use of significant estimates and assumptions.
The use of different assumptions would increase or decrease estimated discounted future cash flows
and could increase or decrease an impairment charge. If the use of these assets or the projections
of future cash flows change in the future, we may be required to record additional impairment
charges. An erosion of future business results in any of the business units could create impairment
in goodwill or other long-lived assets and require a significant charge in future periods.
64
Note 6. SHORT-TERM BORROWINGS AND CURRENT PORTION OF LONG-TERM DEBT
Short-term borrowings and current portion of long-term debt at December 28, 2008 and at December
30, 2007 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
Lines of credit with interest rates ranging from 1.43% to 1.47% (1)
|
|
$
|
7,707
|
|
|
$
|
—
|
|
|
Asialco loans
|
|
|
3,645
|
|
|
|
3,418
|
|
|
Current portion of long-term debt
|
|
|
230
|
|
|
|
338
|
|
|
|
|
Total short-term borrowings and current portion of long-term debt
|
|
$
|
11,582
|
|
|
$
|
3,756
|
|
|
|
|
(1)
|
|
The weighted average interest rate for 2008 was 1.45%.
|
At December 28, 2008, our $8.8 million (¥800 million) Japanese local line of credit had an
outstanding balance of $7.7 million (¥700 million) and availability of $1.1 million (¥100 million).
The line of credit expires in March 2009.
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 (RMB25 million) of outstanding
debt of Asialco. The loans were paid down in April and May 2008 and were renewed for 12 month
periods under the original terms of the loan agreement. As of December 28, 2008, the outstanding
Asialco loan balance is $3.6 million (RMB25 million) and has an interest rate of 5.31%. The loans
are collateralized by land and buildings with an aggregate carrying value of $6.0 million at
December 28, 2008. The loans mature at various times through May 2009.
Note 7. LONG-TERM DEBT
Long-term debt at December 28, 2008 and December 30, 2007 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
Senior unsecured credit facility:
|
|
|
|
|
|
|
|
|
|
$150 million variable interest rate revolving credit facility maturing in 2010
|
|
$
|
133,596
|
|
|
$
|
91,496
|
|
|
Other capital leases with maturities through 2013
|
|
|
338
|
|
|
|
598
|
|
|
|
|
Total(1)
|
|
|
133,934
|
|
|
|
92,094
|
|
|
Less current portion
|
|
|
230
|
|
|
|
338
|
|
|
|
|
Total long-term portion
|
|
$
|
133,704
|
|
|
$
|
91,756
|
|
|
|
|
(1)
|
|
The weighted average interest rates for 2008 and 2007 were 3.0% and 4.9%, respectively.
|
On March 4, 2005, we entered into a new $150.0 million five-year senior unsecured multi-currency
revolving credit agreement (“Credit Agreement”) with a syndicate of lenders.
Borrowings under the Credit Agreement bear interest rates of LIBOR plus an applicable margin
ranging from 0.75% to 1.75% and/or prime plus 0.00% to 0.50%. The interest rate matrix is based on
our leverage ratio of funded debt to EBITDA, as defined by the Credit Agreement. Under the Credit
Agreement, we pay an unused line fee ranging from 0.18% to 0.30% per annum on the unused portion of
the commitment. In connection with the 2005 refinancing, our aggregate fees and expenses were $0.7
million, which are being amortized over the term of the Credit Agreement. At December 28, 2008, we
had $133.6 million outstanding under this facility. Our available line of credit under this
agreement is $15.2 million. Our availability under this facility was reduced by letters of credit
totaling $1.2 million. There are no restrictions on our ability to draw down on the available
portion of our line of credit.
The senior unsecured credit facility increased by $42.1 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 the Alpha S3 business. As part of the funding for this acquisition,
we borrowed $75.0 million under our unsecured multi-currency revolving credit facility. The
borrowing was composed of $55.0 million under the U.S. portion of our revolver and $20.0 million
(
€
13.9 million) under the German portion of this revolver.
The Credit Agreement contains certain covenants, as defined in the Credit Agreement, 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 December 28, 2008, we were in compliance with all
covenants.
65
The aggregate maturities on all long-term debt (including current portion) are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Total
|
|
|
(dollar amounts in thousands)
|
|
Debt
|
|
|
Leases
|
|
|
Debt
|
|
|
|
|
2009
|
|
$
|
—
|
|
|
$
|
230
|
|
|
$
|
230
|
|
|
2010
|
|
|
133,596
|
|
|
|
68
|
|
|
|
133,664
|
|
|
2011
|
|
|
—
|
|
|
|
24
|
|
|
|
24
|
|
|
2012
|
|
|
—
|
|
|
|
13
|
|
|
|
13
|
|
|
2013
|
|
|
—
|
|
|
|
3
|
|
|
|
3
|
|
|
Thereafter
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Total
|
|
$
|
133,596
|
|
|
$
|
338
|
|
|
$
|
133,934
|
|
|
|
Note 8. STOCK-BASED COMPENSATION
At December 28, 2008, we had stock-based employee compensation plans as described below. For the
years ended December 28, 2008, December 30, 2007, and December 31, 2006, the total compensation
expense (included in selling general, and administrative expense) related to these plans was $7.1
million, $6.5 million, and $5.7 million ($4.9 million, $4.6 million, and $4.2 million, net of tax),
respectively.
On December 27, 2007, there was a change of our President and CEO. As a result of this management
transition and in accordance with the former CEO’s contract, we recorded a one-time charge of $1.4
million ($1.0 million, net of tax) related to stock compensation costs associated with the former
CEO. This charge was recorded in the fourth quarter of 2007.
In 2006, we changed the method in which we issue share-based awards to our key employees. In prior
years, share-based compensation for key employees consisted primarily of stock options. Upon
consideration of several factors, we began in 2006 to award key employees a combination of stock
options and restricted stock units. Therefore, this change resulted in an increase in stock-based
compensation from restricted stock units.
Stock Plans
On April 29, 2004, the shareholders approved the Checkpoint Systems, Inc. 2004 Omnibus Incentive
Compensation Plan (2004 Plan). The initial shares available under the 2004 Plan were approximately
3,500,000, which represent the shares that were available at that time under the 1992 Stock Option
Plan (1992 Plan). All cancellations and forfeitures related to share units outstanding under the
1992 Plan will be added back to the shares available for grant under the 2004 Plan. No further
awards will be issued under the 1992 Plan. The 2004 Plan is designed to provide incentives to
employees, non-employee directors, and independent contractors through the award of stock options,
stock appreciation rights, stock units, phantom shares, dividend equivalent rights and cash awards.
The Compensation Committee (Committee) of our Board of Directors administers the 2004 Plan and
determines the terms and conditions of each award. Stock options issued under the 2004 Plan
primarily vest over a three-year period and expire not more than 10 years from date of grant.
Restricted stock units vest over three to five year periods from date of grant. As of December 28,
2008, there were 1,573,746 shares available for grant under the 2004 plan.
Our 1992 Stock Option Plan (1992 Plan) allowed us to grant either Incentive Stock Options (ISOs) or
Non-Incentive Stock Options (NSOs) to purchase up to 16,000,000 shares of common stock. Only
employees were eligible to receive ISOs and both employees and non-employee directors of the
Company were eligible to receive NSOs. On February 17, 2004, the Plan was amended to allow an
independent consultant to receive NSOs. All ISOs under the 1992 Plan expire not more than ten years
(plus six months in the case of NSOs) from the date of grant. Both ISOs and NSOs require a purchase
price of not less than 100% of the fair market value of the stock at the date of grant. As of
December 28, 2008, there were no shares available for grant under the 1992 Plan.
On December 27, 2007, we adopted a stand alone inducement stock option plan authorizing the
issuance of options to purchase up to 270,000 shares of our common stock, which were granted to the
newly elected President and CEO of the Company in connection with his hire. The non-qualified stock
options provide for three vesting instances: 60% on December 31, 2010; 20% on December 31, 2011;
and 20% on December 31, 2012. The options also have a market condition. The market condition
specifies that any unvested tranche will vest immediately as soon as the Company’s stock price
exceeds 200% of the December 27, 2007, strike price of $22.71. In addition, there were 230,000
shares issued out of our Omnibus Incentive Compensation Plan with similar vesting and market based
criteria as described above.
To determine the fair value of stock options with market conditions we used the Monte Carlo
simulation lattice model using the following assumptions: (i) expected volatility of 37.04%, (ii)
risk-free rate of 4.1%, (iii) expected term of 10 years, and (iv) an expected dividend yield of
zero. The weighted average fair value of the stock options with market conditions was $12.43 per
share.
66
During fiscal 2005, we initiated a Long-Term Incentive Plan (LTIP). Under this plan, restricted
stock units (RSUs) were awarded to eligible executives. The number of shares for these units varies
based on the Company’s operating income and operating margin. These units cliff vest at the end of
fiscal 2007. At December 30, 2007, the Company did not achieve the operating margin required by the
plan and as a result no RSUs were earned under this plan. During 2007, $0.4 million of previously
recognized compensation cost was reversed related to the 2005 LTIP.
During fiscal 2006, we expanded the scope of the LTIP. Under the expanded plan, RSUs were awarded
to eligible key employees. The number of shares for these units varies based on the Company’s cash
flow. These units cliff vest at the end of fiscal 2008. During fiscal 2007, 34,996 units vested at
a grant price of $28.89 per share in accordance with the former CEO’s retirement plan. At December
28, 2008, the Company did not achieve the cash flow targets required by the plan and as a result no
remaining RSUs were earned under this plan. During fiscal 2008, $2.0 million of previously
recognized compensation cost was reversed related to the 2006 LTIP.
The LTIP plan was further expanded during fiscal 2007. Under the 2007 LTIP plan, RSUs were awarded
to eligible key employees. The number of shares for these units varies based on the Company’s
revenue and earnings per share. These units cliff vest at the end of fiscal 2009. As of December
30, 2007, 20,000 units vested at a grant price of $23.91 per share in accordance with the former
CEO’s retirement plan. At December 28, 2008, we reversed $1.7 million of previously recognized
compensation cost since it was determined that the Company will not achieve the revenue and
earnings per share targets set for in the 2007 LTIP plan during fiscal 2009.
On December 4, 2007, RSUs were awarded to certain key employees of the Company’s Alpha Security
Products Division as part of the LTIP plan. The number of shares for these units varies based on
the Company’s Alpha product revenues. These units have the potential to vest 33% per year, over a
three-year period ending at the end of fiscal 2010. The final value of these units will be
determined by the number of shares earned. The value of these units is charged to compensation
expense on a straight-line basis over the vesting period with periodic adjustments to account for
changes in anticipated award amounts and estimated forfeitures rates. The weighted average price
for these RSUs was $21.84 per share. For fiscal year 2008, $0.2 million was charged to compensation
expense. As of December 28, 2008, total unamortized compensation expense for this grant was $0.3
million. As of December 28, 2008, the maximum achievable RSUs outstanding under this plan are
53,200 units. These RSUs reduce the shares available to grant under the 2004 Plan.
Stock Options
Option activity under the principal option plans as of December 28, 2008 and changes during the
year then ended 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
|
|
|
328,481
|
|
|
|
21.82
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(687,504
|
)
|
|
|
12.42
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(166,553
|
)
|
|
|
22.60
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 28, 2008
|
|
|
2,880,326
|
|
|
$
|
18.85
|
|
|
|
6.42
|
|
|
$
|
25,079
|
|
|
|
|
Vested and expected to vest at December 28, 2008
|
|
|
2,691,674
|
|
|
$
|
18.60
|
|
|
|
6.24
|
|
|
$
|
25,079
|
|
|
|
|
Exercisable at December 28, 2008
|
|
|
1,866,847
|
|
|
$
|
16.60
|
|
|
|
5.13
|
|
|
$
|
25,079
|
|
|
|
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the
difference between the Company’s closing stock price on the last trading day of 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 December 28, 2008. This amount
changes based on the fair market value of the Company’s stock. The total intrinsic value of options
exercised for the years ended December 28, 2008,
December 30, 2007, and December 31, 2006, was $8.2
million, $3.1 million, and $5.8 million, respectively.
As of December 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 2.3 years.
67
Prior to the adoption of SFAS 123R, the Company presented the tax benefit of stock option exercises
as operating cash flows. Upon the adoption of SFAS 123R, tax benefits resulting from tax deductions
in excess of the compensation cost recognized for those options are classified as financing cash
flows. Cash received from option exercises and purchases under the ESPP for the year ended December
28, 2008 was $9.0 million. The actual tax benefit realized for the tax deduction from option
exercises of the share-based payment units totaled $3.1 million and $1.7 million for the fiscal
years ended December 28, 2008 and December 30, 2007. In adopting SFAS 123R, we have applied the
“Short-cut” method in calculating the historical windfall tax benefits. All tax short falls will be
applied against this windfall before being charged to earnings.
Restricted Stock Units
In 2006, 2007, and 2008 we issued service-based restricted stock units with vesting periods of
three to five years. These awards are valued using their intrinsic value on the date of grant. The
compensation expense is recognized straight-line over the vesting term.
Nonvested service-based restricted stock units as of December 28, 2008 and changes during the year
ended December 28, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
Average Vest
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Date
|
|
|
Average Grant
|
|
|
|
|
Shares
|
|
|
(in years)
|
|
|
Date Fair Value
|
|
|
|
|
Nonvested at December 30, 2007
|
|
|
376,386
|
|
|
|
1.48
|
|
|
$
|
32.70
|
|
|
Granted
|
|
|
280,074
|
|
|
|
—
|
|
|
|
19.63
|
|
|
Vested
|
|
|
(85,483
|
)
|
|
|
—
|
|
|
|
21.77
|
|
|
Forfeited
|
|
|
(17,992
|
)
|
|
|
—
|
|
|
|
27.40
|
|
|
|
|
Nonvested at December 28, 2008
|
|
|
552,985
|
|
|
|
1.34
|
|
|
$
|
36.45
|
|
|
|
|
Vested and expected to vest at December 28, 2008
|
|
|
456,684
|
|
|
|
1.13
|
|
|
|
|
|
|
|
|
Vested at December 28, 2008
|
|
|
8,400
|
|
|
|
—
|
|
|
|
|
|
|
|
The total fair value of restricted stock awards vested during 2008 was $1.9 million as compared to
$0.8 million during 2007. As of December 28, 2008, there was $4.3 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 9. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments in 2008, 2007, and 2006, included payments for interest of $5.2 million, $2.1
million, and $2.0 million, and income taxes of $17.0 million, $18.7 million, and $13.6 million,
respectively.
Non-cash investing and financing activities are excluded from the consolidated statement of cash
flows. For 2006, non-cash transfer of a sublease receivable of $10.3 million was transferred to
settle our capital lease obligation and excluded from our consolidated cash flow. The net of the
transaction was shown as an adjustment to reconcile net earnings to cash provided by operating
activities. Additionally, we entered into new capital leases in 2006 of $0.4 million which were
excluded from the cash flow as they were non-cash transactions.
Business Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Fair value of tangible assets acquired, less cash acquired
|
|
$
|
12,492
|
|
|
$
|
45,883
|
|
|
$
|
10,755
|
|
|
Goodwill and identified intangible assets
|
|
|
44,246
|
|
|
|
155,239
|
|
|
|
5,733
|
|
|
Liabilities assumed
|
|
|
(17,109
|
)
|
|
|
(31,600
|
)
|
|
|
(9,135
|
)
|
|
Borrowings to fund acquisition
|
|
|
—
|
|
|
|
(75,000
|
)
|
|
|
—
|
|
|
|
|
Cash paid for acquisitions
|
|
$
|
39,629
|
|
|
$
|
94,522
|
|
|
$
|
7,353
|
|
|
|
68
Note 10. STOCKHOLDERS’ EQUITY
In October 2006, our Board of Directors approved a share repurchase program that allowed for the
purchase of up to 2 million shares of the Company’s 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 Company’s
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.
In March 1997, our Board of Directors adopted a new Shareholder’s Rights Plan (1997 Plan). The
Rights under the 1997 Plan attached to the common shares of the Company as of March 24, 1997. The
Rights are designed to ensure all Company shareholders fair and equal treatment in the event of a
proposed takeover of the Company, and to guard against partial tender offers and other abusive
tactics to gain control of the Company without paying all shareholders a fair price.
The Rights are exercisable only as a result of certain actions of an acquiring person. Initially,
upon payment of the exercise price (currently $100.00), each Right will be exercisable for one
share of common stock. Upon the occurrence of certain events each Right will entitle its holder
(other than the acquiring person) to purchase a number of our or an acquiring person’s common
shares having a market value of twice the Right’s exercise price. The Rights expire on March 10,
2017.
The components of accumulated other comprehensive income at December 28, 2008 and at December 30,
2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
Actuarial losses on pension plans, net of tax
|
|
$
|
(2,862
|
)
|
|
$
|
(2,883
|
)
|
|
Unrealized gain adjustment on marketable securities, net of tax
|
|
|
—
|
|
|
|
16
|
|
|
Derivative hedge contracts, net of tax
|
|
|
880
|
|
|
|
—
|
|
|
Foreign currency translation adjustment
|
|
|
18,132
|
|
|
|
43,232
|
|
|
|
|
Total
|
|
$
|
16,150
|
|
|
$
|
40,365
|
|
|
|
Note 11. EARNINGS PER SHARE
For fiscal years 2008, 2007, and 2006, basic earnings per share are based on net earnings divided
by the weighted average number of shares outstanding during the period. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
(Amounts in thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Basic earnings available to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings available to common stockholders from continuing operations
|
|
$
|
(29,805
|
)
|
|
$
|
58,409
|
|
|
$
|
35,019
|
|
|
|
|
Diluted (loss) earnings available to common stockholders from continuing operations
|
|
$
|
(29,805
|
)
|
|
$
|
58,409
|
|
|
$
|
35,019
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
39,071
|
|
|
|
39,550
|
|
|
|
39,136
|
|
|
Shares issuable under deferred compensation agreements
|
|
|
337
|
|
|
|
311
|
|
|
|
240
|
|
|
|
|
Basic weighted average number of common shares Outstanding
|
|
|
39,408
|
|
|
|
39,861
|
|
|
|
39,376
|
|
|
Common shares assumed upon exercise of stock options and awards
|
|
|
—
|
|
|
|
853
|
|
|
|
839
|
|
|
Shares issuable under deferred compensation arrangements
|
|
|
—
|
|
|
|
10
|
|
|
|
18
|
|
|
|
|
Dilutive weighted average number of common shares outstanding
|
|
|
39,408
|
|
|
|
40,724
|
|
|
|
40,233
|
|
|
|
|
Basic (Loss) Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from continuing operations
|
|
$
|
(.76
|
)
|
|
$
|
1.46
|
|
|
$
|
.89
|
|
|
Earnings from discontinued operations, net of tax
|
|
|
—
|
|
|
|
.01
|
|
|
|
.02
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(.76
|
)
|
|
$
|
1.47
|
|
|
$
|
.91
|
|
|
|
|
Diluted (Loss) Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from continuing operations
|
|
$
|
(.76
|
)
|
|
$
|
1.43
|
|
|
$
|
.87
|
|
|
Earnings from discontinued operations, net of tax
|
|
|
—
|
|
|
|
.01
|
|
|
|
.02
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(.76
|
)
|
|
$
|
1.44
|
|
|
$
|
.89
|
|
|
|
Anti-dilutive potential common shares are not included in our earnings per share calculation. The
Long-term Incentive Plan restricted stock units were excluded from our calculation due to the
performance of vesting criteria not being met.
The number of anti-dilutive common share equivalents for the years ended December 28, 2008,
December 30, 2007, and December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
(share amounts in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Weighted average
common share equivalents
associated with
anti-dilutive stock options
and restricted stock units
excluded from the
computation of diluted EPS (1):
|
|
|
2,151
|
|
|
|
524
|
|
|
|
541
|
|
|
|
(1) Adjustments
for stock options and awards of 518 shares and deferred compensation
arrangements of 22 shares were anti-dilutive in fiscal 2008 and
therefore excluded from the earnings per share calculation due to our
net loss for the year.
69
Note 12. DISCONTINUED OPERATIONS
On January 30, 2006, the Company completed the sale of its global barcode businesses included in
our Intelligent Labels segment, and the U.S. hand-held labeling and Turn-O-Matic
®
businesses included in the Shrink Management Solutions 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 ($1.3 million, net of tax), included in discontinued operations, net of tax in the
consolidated statement of operations. During fiscal 2007, the post closing adjustments were
finalized and an additional gain of $0.4 million, net of tax, was recorded in discontinued
operations.
The Company’s discontinued operations reflect the operating results for the disposal group through
the date of disposition. The results for the years ended December 30, 2007 and December 31, 2006
have been reclassified to show the results of operations for the barcode labeling systems and U.S.
hand-held labeling and Turn-O-Matic
®
businesses as discontinued operations. Below is a
summary of these results:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
(dollar amounts in thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
Net revenue
|
|
$
|
—
|
|
|
$
|
7,446
|
|
|
Gross profit
|
|
|
—
|
|
|
|
1,433
|
|
|
Selling,
general, & administrative expenses
|
|
|
—
|
|
|
|
2,239
|
|
|
|
|
Operating (loss)
|
|
|
—
|
|
|
|
(806
|
)
|
|
Gain on disposal
|
|
|
710
|
|
|
|
2,768
|
|
|
|
|
Earnings from discontinued operations before income taxes
|
|
|
710
|
|
|
|
1,962
|
|
|
Income taxes
|
|
|
351
|
|
|
|
1,059
|
|
|
|
|
Earnings from discontinued operations, net of tax
|
|
$
|
359
|
|
|
$
|
903
|
|
|
|
Note 13. INCOME TAXES
The domestic and foreign components of earnings from continuing operations before income taxes and
minority interest are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Domestic
|
|
$
|
(16,448
|
)
|
|
$
|
4,730
|
|
|
$
|
(778
|
)
|
|
Foreign
|
|
|
(12,761
|
)
|
|
|
65,846
|
|
|
|
42,753
|
|
|
|
|
Total
|
|
$
|
(29,209
|
)
|
|
$
|
70,576
|
|
|
$
|
41,975
|
|
|
|
Provision for income taxes — continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Currently payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
36
|
|
|
$
|
(1,240
|
)
|
|
$
|
(760
|
)
|
|
State
|
|
|
12
|
|
|
|
981
|
|
|
|
582
|
|
|
Puerto Rico
|
|
|
243
|
|
|
|
1,058
|
|
|
|
(58
|
)
|
|
Foreign
|
|
|
11,826
|
|
|
|
18,255
|
|
|
|
7,645
|
|
|
|
|
Total currently payable
|
|
|
12,117
|
|
|
|
19,054
|
|
|
|
7,409
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(4,259
|
)
|
|
|
(80
|
)
|
|
|
1,315
|
|
|
State
|
|
|
902
|
|
|
|
(5,493
|
)
|
|
|
—
|
|
|
Puerto Rico
|
|
|
12
|
|
|
|
(9
|
)
|
|
|
(121
|
)
|
|
Foreign
|
|
|
(8,053
|
)
|
|
|
(1,298
|
)
|
|
|
(1,616
|
)
|
|
|
|
Total deferred
|
|
|
(11,398
|
)
|
|
|
(6,880
|
)
|
|
|
(422
|
)
|
|
|
|
Total provision
|
|
$
|
719
|
|
|
$
|
12,174
|
|
|
$
|
6,987
|
|
|
|
70
Deferred tax assets/liabilities at December 28, 2008 and December 30, 2007 consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
Inventory
|
|
$
|
6,650
|
|
|
$
|
7,963
|
|
|
Accounts receivable
|
|
|
2,158
|
|
|
|
3,305
|
|
|
Capitalized research and development costs
|
|
|
3,161
|
|
|
|
—
|
|
|
Net operating loss and foreign tax credit carryforwards
|
|
|
53,635
|
|
|
|
44,743
|
|
|
Restructuring
|
|
|
31
|
|
|
|
350
|
|
|
Deferred revenue
|
|
|
1,345
|
|
|
|
454
|
|
|
Pension
|
|
|
6,555
|
|
|
|
6,401
|
|
|
Warranty
|
|
|
2,171
|
|
|
|
1,529
|
|
|
Deferred compensation
|
|
|
1,712
|
|
|
|
2,194
|
|
|
Stock based compensation
|
|
|
3,885
|
|
|
|
2,647
|
|
|
Valuation allowance
|
|
|
(22,717
|
)
|
|
|
(27,572
|
)
|
|
|
|
Deferred tax assets
|
|
|
58,586
|
|
|
|
42,014
|
|
|
|
|
Depreciation
|
|
|
(28
|
)
|
|
|
(724
|
)
|
|
Intangibles
|
|
|
10,993
|
|
|
|
9,980
|
|
|
Other
|
|
|
(1,095
|
)
|
|
|
2,658
|
|
|
Withholding tax liabilities
|
|
|
945
|
|
|
|
1,031
|
|
|
|
|
Deferred tax liabilities
|
|
|
10,815
|
|
|
|
12,945
|
|
|
|
|
Net deferred
tax assets
|
|
$
|
47,771
|
|
|
$
|
29,069
|
|
|
|
At December 28, 2008, the net deferred tax asset related to net operating loss carryforwards is
$22.6 million, detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration
|
|
Federal
|
|
|
State
|
|
|
International
|
|
|
Total
|
|
|
|
|
2009 — 2015
|
|
$
|
—
|
|
|
$
|
3,172
|
|
|
$
|
1,459
|
|
|
$
|
4,631
|
|
|
2016 — 2022
|
|
|
—
|
|
|
|
2,127
|
|
|
|
35
|
|
|
|
2,162
|
|
|
2023 — 2029
|
|
|
7,160
|
|
|
|
2,125
|
|
|
|
—
|
|
|
|
9,285
|
|
|
Indefinite life
|
|
|
—
|
|
|
|
—
|
|
|
|
27,808
|
|
|
|
27,808
|
|
|
|
|
Deferred tax asset
|
|
|
7,160
|
|
|
|
7,424
|
|
|
|
29,302
|
|
|
|
43,886
|
|
|
Valuation allowance
|
|
|
—
|
|
|
|
(3,240
|
)
|
|
|
(18,018
|
)
|
|
|
(21,258
|
)
|
|
|
|
Net deferred position
|
|
$
|
7,160
|
|
|
$
|
4,184
|
|
|
$
|
11,284
|
|
|
$
|
22,628
|
|
|
|
We have
U.S. and U.K. foreign tax credit carryforwards of $9.7 million. The U.S. credits of $9.4
million have expiration dates ranging from 2012 to 2018. Realization is dependent on generating
sufficient taxable income prior to expiration of the foreign tax credit and loss carryforwards.
Although realization is not assured, management believes it is more likely than not that the net
deferred position will be realized. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
In June 2008, the Company purchased the stock
of OATSystems, Inc. As of December 28, 2008, we have provided a net deferred tax asset of
$8.4 million of which $7.7 million relates to a federal net operating loss carryforward.
The federal net operating loss carryforward is subject to IRC § 382 limitation.
We feel that it is more likely than not the federal net operating loss will be utilized in the
carryforward period. In addition, OATSystems has a deferred tax asset of $1.4 million
related to state net operating loss carryforwards on which a full valuation
allowance has been provided. The purchase accounting for OATSystems will be completed in 2009.
The tax effect of net operating losses includes $4.2 million which was acquired in connection with
the acquisition of ID Systems Group, Actron Group Limited, Meto AG and OATSystems, Inc.
At December 28, 2008, unremitted earnings of subsidiaries outside the United States totaling $78.3
million were deemed to be permanently reinvested. No deferred tax liability has been recognized
with regards to the remittance of such earnings. It is not practical to estimate the income tax
liability that might be incurred if such earnings were remitted to the United States.
In 2007, we recorded an adjustment of $2.1 million to reduce deferred income tax expense, and
increase earnings from continuing operations and net earnings. We have determined that this
adjustment related to errors made in prior years associated with the impact of changes in statutory
rates on deferred taxes. Had these errors been recorded in the proper periods, earnings from
continuing operations and net earnings as reported would increase by $0.2 million in 2006 and
increase by $1.9 million for years prior to 2005. We have determined that these adjustments did not
have a material effect on the current and prior years’ financial statements. Without the reduction
to our income tax provision our 2007 effective rate would have been 20.3% rather than 17.2%.
71
A reconciliation of the tax provision at the statutory U.S. Federal income tax rate with the tax
provision at the effective income tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Tax provision at the statutory Federal income tax rate
|
|
$
|
(10,222
|
)
|
|
$
|
24,702
|
|
|
$
|
14,692
|
|
|
Non-deductible goodwill
|
|
|
20,994
|
|
|
|
—
|
|
|
|
—
|
|
|
Non-deductible permanent items
|
|
|
1,258
|
|
|
|
(165
|
)
|
|
|
260
|
|
|
State and local income taxes, net of Federal benefit
|
|
|
207
|
|
|
|
634
|
|
|
|
186
|
|
|
Benefit from extraterritorial income
|
|
|
—
|
|
|
|
—
|
|
|
|
(70
|
)
|
|
Foreign losses for which no tax benefit recognized
|
|
|
3,122
|
|
|
|
1,348
|
|
|
|
801
|
|
|
Foreign rate differentials
|
|
|
(13,356
|
)
|
|
|
(12,028
|
)
|
|
|
(6,982
|
)
|
|
Tax settlements
|
|
|
730
|
|
|
|
—
|
|
|
|
—
|
|
|
Potential tax contingencies
|
|
|
1,214
|
|
|
|
1,984
|
|
|
|
(1,528
|
)
|
|
Change in valuation allowance
|
|
|
(3,574
|
)
|
|
|
(4,527
|
)
|
|
|
(453
|
)
|
|
Stock based compensation
|
|
|
365
|
|
|
|
384
|
|
|
|
308
|
|
|
Other
|
|
|
(19
|
)
|
|
|
(158
|
)
|
|
|
(227
|
)
|
|
|
|
Tax provision at the effective tax rate
|
|
$
|
719
|
|
|
$
|
12,174
|
|
|
$
|
6,987
|
|
|
|
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
Gross unrecognized tax benefits
|
|
$
|
12,714
|
|
|
$
|
10,197
|
|
|
Increases in tax positions for prior years
|
|
|
—
|
|
|
|
384
|
|
|
Decreases in tax positions for prior years
|
|
|
(966
|
)
|
|
|
—
|
|
|
Increases in tax positions for current year
|
|
|
1,843
|
|
|
|
1,128
|
|
|
Settlements
|
|
|
(965
|
)
|
|
|
—
|
|
|
Acquisition reserves
|
|
|
—
|
|
|
|
1,063
|
|
|
Lapse in statute of limitations
|
|
|
(106
|
)
|
|
|
(58
|
)
|
|
|
|
Gross unrecognized tax benefits
|
|
$
|
12,520
|
|
|
$
|
12,714
|
|
|
|
We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes”, on January 1, 2007. As a result of adoption, we
recognized a charge of $1.7 million to the January 1, 2007, retained earnings opening balance. The
total amount of gross unrecognized tax benefits that, if recognized, would affect the effective tax
rate was $12.5 million at December 28, 2008. We have accrued interest and penalties related to
unrecognized tax benefits in its provision for income taxes. During fiscal year ending December 28,
2008, we accrued $0.8 million for interest and penalties. At December 28, 2008, we had accrued
interest and penalties related to unrecognized tax benefits of $6.1 million.
We file income tax returns in the U.S. and in various states, local and foreign jurisdictions. We
are routinely examined by tax authorities in these jurisdictions. It is possible that these
examinations may be resolved within twelve months. Due to the potential for resolution of Federal,
state and foreign examinations, and the expiration of various statutes of limitation, it is
reasonably possible that the gross unrecognized tax benefits balance may change within the next
twelve months by a range of $2.0 million to $3.6 million.
We are currently under audit in the following jurisdictions: United States
2005 – 2006, France 2005
– 2007, Germany 2002 – 2004, and the United Kingdom 2001
– 2005.
Note 14. EMPLOYEE BENEFIT PLANS
Under our defined contribution savings plans, eligible employees may make basic (up to 6% of an
employee’s earnings) and supplemental contributions. We match in cash 50% of the participant’s
basic contributions. Company contributions vest to participants in increasing percentages over one
to five years of service. Our contributions under the plans approximated $1.2 million, $1.0
million, and $1.0 million, in 2008, 2007, and 2006, respectively.
Generally, all employees in the U.S. may participate in our U.S. Savings Plan. All full-time
employees of the Puerto Rico subsidiary who have completed three months of service may participate
in our Puerto Rico Savings Plan.
During fiscal 2005, we initiated a 423(b) Employee Stock Purchase Plan, which was adopted by the
shareholders at the Annual Shareholder Meeting on April 29, 2004. This plan replaces the
non-qualified Employee Stock Purchase Plan. Under the provisions of the 423(b) plan, eligible
employees may contribute from 1% to 25% of their base compensation to purchase shares of our common
stock at 85 percent of the fair market value on the offering date or the exercise date of the
offering period, whichever is lower. Our expense for this plan in fiscal 2008, 2007 and 2006 was
$0.4 million, $0.2 million, and $0.2 million, respectively. As of December 28, 2008, there were
75,416 shares authorized and available to be issued. During fiscal year 2008, 51,315 shares were
issued under this plan as compared to 52,352 shares in 2007 and 45,680 shares in 2006.
72
We maintain deferred compensation plans for executives and non-employee directors. The executive
deferred compensation plan allows certain executives to defer portions of their salary and bonus
(up to 50% and 100%, respectively) into a deferred stock account. All deferrals in this plan are
matched 25% by the Company. The match vests in thirds at each calendar year end for three years
following the match. For executives over the age of 55 years old, the matching contribution vests
immediately. The settlement of this deferred stock account is required by the plan to be made only
in Company common stock. The deferral shares held in the deferred compensation plan are considered
outstanding for purposes of calculating basic and diluted earnings per share. The unvested match is
considered in the calculation of diluted earnings per share. Our match into the deferred stock
account under the executive plan for fiscal years 2008, 2007, and 2006 were approximately $0.3
million, $0.4 million, and $0.4 million, respectively. The match will be expensed ratably over a
three year vesting period for executives under 55 years old and immediate for those older than 55
years.
The director deferred compensation plan allows non-employee directors to defer their compensation
into a deferred stock account. All deferrals in this plan are matched 25% by the Company. The match
vests immediately. The settlement of this deferred stock account is required by the plan to be made
only in Company common stock. The deferral shares held in the deferred compensation plan are
considered outstanding for purposes of calculating basic and diluted earnings per share. Our match
into the deferred stock account under the director’s plan approximated $0.1 million for fiscal
years 2008, 2007, and 2006.
Pension Plans
We maintain several defined benefit pension plans, principally in Europe. The plans covered
approximately 10% of the total workforce at December 28, 2008. The benefits accrue according to the
length of service, age, and remuneration of the employee.
In September 2006, the Financial Accounting Standards Board issued Statement 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans: an amendment of FASB
Statements No. 87, 88, 106, and 132(R). Statement 158 requires the Company to recognize the funded
status of its defined benefit postretirement plan in the Company’s statement of financial position.
The funded status was previously disclosed in the notes to the Company’s financial statements, but
differed from the amount recognized in the statement of financial position.
The amounts recognized in accumulated other comprehensive income at December 28, 2008, and December
30, 2007, consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
Transition obligation
|
|
$
|
473
|
|
|
$
|
633
|
|
|
Prior service costs
|
|
|
23
|
|
|
|
26
|
|
|
Actuarial losses
|
|
|
5,441
|
|
|
|
5,456
|
|
|
|
|
Total
|
|
|
5,937
|
|
|
|
6,115
|
|
|
Deferred tax
|
|
|
(3,075
|
)
|
|
|
(3,232
|
)
|
|
|
|
Net
|
|
$
|
2,862
|
|
|
$
|
2,883
|
|
|
|
73
The amounts included in accumulated other comprehensive income at December 28, 2008 and expected to
be recognized in net periodic pension cost during the years ended December 27, 2009 are as follows:
|
|
|
|
|
|
|
|
|
December 29,
|
|
|
(dollar amounts in thousands)
|
|
2009
|
|
|
|
|
Transition obligation
|
|
$
|
130
|
|
|
Prior service costs
|
|
|
3
|
|
|
Actuarial gain
|
|
|
(10
|
)
|
|
|
|
Total
|
|
$
|
123
|
|
|
|
The Company does not expect to have any plan assets returned during the year ended December 27,
2009.
The Company expects to make contributions of $4.8 million during the year ended December 27, 2009.
The pension plans included the following net cost components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Service cost
|
|
$
|
1,088
|
|
|
$
|
1,420
|
|
|
$
|
1,350
|
|
|
Interest cost
|
|
|
4,623
|
|
|
|
4,094
|
|
|
|
3,505
|
|
|
Expected return on plan assets
|
|
|
(72
|
)
|
|
|
(144
|
)
|
|
|
(144
|
)
|
|
Amortization of actuarial loss
|
|
|
(44
|
)
|
|
|
477
|
|
|
|
569
|
|
|
Amortization of transition obligation
|
|
|
137
|
|
|
|
128
|
|
|
|
117
|
|
|
Amortization of prior service costs
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
Net periodic pension cost
|
|
|
5,734
|
|
|
|
5,977
|
|
|
|
5,399
|
|
|
Settlement (gain) loss
|
|
|
(37
|
)
|
|
|
(462
|
)
|
|
|
736
|
|
|
Special termination benefit recognized
|
|
|
—
|
|
|
|
—
|
|
|
|
226
|
|
|
Curtailment gain
|
|
|
—
|
|
|
|
—
|
|
|
|
(337
|
)
|
|
|
|
Total pension expense
|
|
$
|
5,697
|
|
|
$
|
5,515
|
|
|
$
|
6,024
|
|
|
|
The table below sets forth the funded status of our plans and amounts recognized in the
accompanying balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
Net benefit obligation at beginning of year
|
|
$
|
86,340
|
|
|
$
|
89,566
|
|
|
Service cost
|
|
|
1,088
|
|
|
|
1,420
|
|
|
Interest cost
|
|
|
4,623
|
|
|
|
4,094
|
|
|
Actuarial (gain)
|
|
|
(60
|
)
|
|
|
(10,082
|
)
|
|
Gross benefits paid
|
|
|
(4,366
|
)
|
|
|
(6,925
|
)
|
|
Plan settlements
|
|
|
(37
|
)
|
|
|
(91
|
)
|
|
Divestment
|
|
|
—
|
|
|
|
(1,165
|
)
|
|
Acquisition
|
|
|
—
|
|
|
|
118
|
|
|
Foreign currency exchange rate changes
|
|
|
(4,110
|
)
|
|
|
9,405
|
|
|
|
|
Net benefit obligation at end of year
|
|
$
|
83,478
|
|
|
$
|
86,340
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
1,454
|
|
|
$
|
3,234
|
|
|
Actual return on assets
|
|
|
(196
|
)
|
|
|
(613
|
)
|
|
Employer contributions
|
|
|
4,734
|
|
|
|
5,534
|
|
|
Gross benefits paid
|
|
|
(4,366
|
)
|
|
|
(6,925
|
)
|
|
Foreign currency exchange rate changes
|
|
|
(76
|
)
|
|
|
224
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
1,550
|
|
|
$
|
1,454
|
|
|
|
|
Reconciliation of funded status
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(81,928
|
)
|
|
$
|
(84,886
|
)
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
Amounts recognized in accrued benefit consist of:
|
|
|
|
|
|
|
|
|
|
Accrued pensions — current
|
|
$
|
4,305
|
|
|
$
|
4,337
|
|
|
Accrued pensions
|
|
|
77,623
|
|
|
|
80,549
|
|
|
|
|
Net amount recognized at end of year
|
|
$
|
81,928
|
|
|
$
|
84,886
|
|
|
|
|
Other comprehensive income attributable to change in additional minimum liability recognition
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Accumulated benefit obligation at end of year
|
|
$
|
79,165
|
|
|
$
|
81,824
|
|
|
|
The following table sets forth additional fiscal year-ended information for pension plans for which
the accumulated benefit is in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
Projected benefit obligation
|
|
$
|
83,478
|
|
|
$
|
86,340
|
|
|
Accumulated benefit obligation
|
|
$
|
79,165
|
|
|
$
|
81,824
|
|
|
Fair value of plan assets
|
|
$
|
1,550
|
|
|
$
|
1,454
|
|
|
|
The weighted average rate assumptions used in determining pension costs and the projected benefit
obligation are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Weighted average assumptions for year-end benefit obligations:
|
|
|
|
|
|
|
|
|
|
Discount
rate (1)
|
|
|
5.75
|
%
|
|
|
5.50
|
%
|
|
Expected rate of increase in future compensation levels
|
|
|
2.77
|
%
|
|
|
2.50
|
%
|
|
Weighted average assumptions for net periodic benefit cost development:
|
|
|
|
|
|
|
|
|
|
Discount
rate (1)
|
|
|
5.50
|
%
|
|
|
4.50
|
%
|
|
Expected rate of return on plan assets
|
|
|
4.25
|
%
|
|
|
3.80
|
%
|
|
Expected rate of increase in future compensation levels
|
|
|
2.52
|
%
|
|
|
2.50
|
%
|
|
Measurement Date:
|
|
December 28, 2008
|
|
December 30, 2007
|
|
|
|
(1)
|
|
Represents the weighted average rate for all pension plans.
|
In developing the discount rate assumption, we considered the estimated plan durations of each of
our plans and selected a rate of a corresponding length of time. The source of the discount rate
was obtained by considering the yield curves available on AA rated corporate bonds in the Eurozone,
specifically the iboxx AA 10+ index. This resulted in a discount rate of 5.75% and 5.50% for 2008
and 2007, respectively.
The majority of our pension plans are unfunded plans. The expected rate of the return was developed
using the historical rate of returns of the foreign government bonds currently held. This resulted
in the selection of the 4.25% long-term rate of return on asset assumption. For funded plans, all
assets are held in foreign government bonds.
The benefits expected to be paid over the next five years and the five aggregated years after:
|
|
|
|
|
|
|
(dollar amounts in thousands)
|
|
|
|
|
|
|
|
2009
|
|
$
|
4,357
|
|
|
2010
|
|
|
4,595
|
|
|
2011
|
|
|
4,825
|
|
|
2012
|
|
|
4,879
|
|
|
2013
|
|
|
5,257
|
|
|
2014 through 2017
|
|
$
|
26,862
|
|
|
|
75
Note 15. FAIR VALUE MEASUREMENT
,
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
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 entity’s 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.
|
Because the Company’s derivatives are not listed on an exchange, the Company values these
instruments using a valuation model with pricing inputs that are observable in the market or that
can be derived principally from or corroborated by observable market data. The Company’s
methodology also incorporates the impact of both the Company’s and the counterparty’s credit
standing.
The following table represents our financial assets and liabilities measured at fair value as of
December 28, 2008 and the basis for that measurement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
Measurement
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
December 28,
|
|
|
Identical Asset
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
Foreign currency forward exchange contracts
|
|
$
|
901
|
|
|
$
|
—
|
|
|
$
|
901
|
|
|
$
|
—
|
|
|
Foreign currency revenue forecast contracts
|
|
|
48
|
|
|
|
—
|
|
|
|
48
|
|
|
|
—
|
|
|
Interest rate swap
|
|
|
916
|
|
|
|
—
|
|
|
|
916
|
|
|
|
—
|
|
|
|
|
Total liabilities
|
|
$
|
1,865
|
|
|
$
|
—
|
|
|
$
|
1,865
|
|
|
$
|
—
|
|
|
|
The following table provides a summary of the activity associated with all of our designated cash
flow hedges (interest rate and foreign currency) reflected in accumulated other comprehensive
income for the years ended December 28, 2008 and December 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
Beginning balance, net of tax
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Changes in fair value gain, net of tax
|
|
|
1,508
|
|
|
|
—
|
|
|
Reclass to earnings, net of tax
|
|
|
(628
|
)
|
|
|
—
|
|
|
|
|
Ending balance, net of tax
|
|
$
|
880
|
|
|
$
|
—
|
|
|
|
76
The following table represents the carrying amounts and fair values of our financial instruments
not measured at fair value on a recurring basis at December 28, 2008 and December 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2008
|
|
|
December 30, 2007
|
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
(dollar amounts in thousands)
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
|
Long-term debt (including current maturities and excluding capital leases) (1)
|
|
$
|
133,596
|
|
|
$
|
133,596
|
|
|
$
|
94,914
|
|
|
$
|
94,914
|
|
|
|
|
(1)
|
|
The carrying amounts are reported on the balance sheet under the indicated captions.
|
Long-term debt is carried at the original offering price, less any payments of principal. Rates
currently available to us for long-term borrowings with similar terms and remaining maturities are
used to estimate the fair value of existing borrowings as the present value of expected cash flows.
The senior unsecured credit facility maturity date is in the year 2010.
The carrying value approximates fair value for cash, restricted cash, accounts receivable, and
accounts payable.
Financial Instruments and Risk Management
We manufacture products in the USA, the Caribbean, Europe, the U.K.,and the Asia Pacific region for both the
local marketplace, and for export to our foreign subsidiaries. The subsidiaries, in turn, sell
these products to customers in their respective geographic areas of operation, generally in local
currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of
currency exchange rate fluctuations on inter-company receivables and payables. Additionally, the
sourcing of product in one currency and the sales of product in a different currency can cause
gross margin fluctuations due to changes in currency exchange rates.
Our major market risk exposures are movements in foreign currency and interest rates. We have
historically not used financial instruments to minimize our exposure to currency fluctuations on
our net investments in and cash flows derived from our foreign subsidiaries. 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. We enter into forward exchange contracts to reduce the
risks of currency fluctuations on short-term inter-company receivables and payables. These
contracts are entered into with major financial institutions, thereby minimizing the risk of credit
loss. Our policy is to manage interest rates through the use of interest rate caps or swaps. We do
not hold or issue derivative financial instruments for speculative or trading purposes. We are
subject to other foreign exchange market risk exposure resulting from anticipated non-financial
instrument foreign currency cash flows which are difficult to reasonably predict, and have
therefore not been included in the table of Fair Values. All listed items described are
non-trading.
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 December 28, 2008, we
had currency forward exchange contracts totaling approximately $9.7 million. The fair value of the
forward exchange contracts was reflected as a $0.9 million liability and is included in other
current liabilities in the accompanying balance sheets. 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.
Beginning in the second quarter of 2008, we entered into various foreign currency contracts to
reduce our exposure to forecasted Euro-denominated inter-company revenues. These contracts were
designated as cash flow hedges. The foreign currency contracts mature at various dates from January
2009 to September 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
December 28, 2008, the fair value of these cash flow hedges were reflected as a $48,000 liability
and are included in other current liabilities in the accompanying consolidated balance sheets. The
total notional amount of these hedges is $15.1 million (
€
10.7 million) and the unrealized gain
recorded in other comprehensive income was $1.5 million (net of
taxes of $29,000). During the year ended December 28, 2008, a
$0.6 million benefit related to these foreign currency hedges was recorded to cost of goods sold as
the inventory was sold to external parties. The Company recognized no gain or loss during the year
ended December 28, 2008 for hedge ineffectiveness. As of December 28, 2008, deferred net gains or losses included in accumulated other comprehensive
income that are expected to be reclassified as earnings during the next twelve months are
approximately $1.5 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 December 28, 2008, the fair value of the interest rate swap agreement
was reflected as a $0.9 million liability
and is included in other long-term liabilities in the accompanying
consolidated balance sheets and the unrealized loss recorded in other
comprehensive income was $0.6 million (net of taxes of $0.3 million). The
Company recognized no gain or loss during the year ended December 28, 2008 for hedge
ineffectiveness.
77
During the second quarter of 2007, the Company entered into a foreign currency option contract, at
a notional amount of
€
5 million, to mitigate the effect of fluctuating foreign exchange rates on
the reporting of a portion of its expected 2007 foreign currency denominated earnings. Changes in
the fair value of this foreign currency option contract, which is not designated as a hedge, are
recorded in earnings immediately. The premium paid on the option contract was $73,000. The foreign
currency option contract expired on December 28, 2007. The fair market value on this option at the
expiration date was zero.
Aggregate
foreign currency transaction gains (losses) in 2008, 2007, and 2006, were $(9.2) million,
$0.3 million, and $(0.4) million, respectively, and are included in other gain, net on the
consolidated statements of operations.
Additionally, there were no deferrals of gains or losses on currency forward exchange contracts at
December 28, 2008.
Note 16. PROVISION FOR RESTRUCTURING
Restructuring expense for the periods ended December 28, 2008, December 30, 2007, and December 31,
2006 were as follows:
(dollar amounts are in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Fiscal 2008
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Manufacturing Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
|
$
|
699
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Consulting fees
|
|
|
838
|
|
|
|
—
|
|
|
|
—
|
|
|
2005 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
|
|
4,563
|
|
|
|
1,215
|
|
|
|
7,915
|
|
|
Acquisition integration costs
|
|
|
519
|
|
|
|
—
|
|
|
|
—
|
|
|
Pension curtailment
|
|
|
—
|
|
|
|
(420
|
)
|
|
|
(339
|
)
|
|
Pension termination benefit expense
|
|
|
—
|
|
|
|
—
|
|
|
|
226
|
|
|
Lease termination costs
|
|
|
—
|
|
|
|
2,051
|
|
|
|
—
|
|
|
2003 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
|
|
(253
|
)
|
|
|
(145
|
)
|
|
|
(409
|
)
|
|
Lease termination costs
|
|
|
76
|
|
|
|
—
|
|
|
|
(386
|
)
|
|
|
|
Total
|
|
$
|
6,442
|
|
|
$
|
2,701
|
|
|
$
|
7,007
|
|
|
|
Restructuring accrual activity for the periods ended December 28, 2008, and December 30, 2007, were
as follows:
(dollar amounts are in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual at
|
|
|
Charged
|
|
|
Reversed
|
|
|
|
|
|
|
Exchange
|
|
|
|
|
|
|
|
Beginning
|
|
|
to
|
|
|
to
|
|
|
Cash
|
|
|
Rate
|
|
|
Accrual at
|
|
|
Fiscal 2008
|
|
of Year
|
|
|
Earnings
|
|
|
Earnings
|
|
|
Payments
|
|
|
Changes
|
|
|
12/28/08
|
|
|
|
|
Manufacturing Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
|
$
|
—
|
|
|
$
|
701
|
|
|
$
|
(2
|
)
|
|
$
|
(37
|
)
|
|
$
|
(10
|
)
|
|
$
|
652
|
|
|
2005 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
|
|
3,015
|
|
|
|
5,362
|
|
|
|
(799
|
)
|
|
|
(4,141
|
)
|
|
|
(135
|
)
|
|
|
3,302
|
|
|
Acquisition restructuring costs
|
|
|
1,209
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(612
|
)
|
|
|
(29
|
)
|
|
|
568
|
|
|
|
|
Total
|
|
$
|
4,224
|
|
|
$
|
6,063
|
|
|
$
|
(801
|
)
|
|
$
|
(4,790
|
)
|
|
$
|
(174
|
)
|
|
$
|
4,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual at
|
|
|
|
|
|
|
Charged
|
|
|
Reversed
|
|
|
|
|
|
|
Exchange
|
|
|
|
|
|
|
|
Beginning
|
|
|
Acquisition
|
|
|
to
|
|
|
to
|
|
|
Cash
|
|
|
Rate
|
|
|
Accrual at
|
|
|
Fiscal 2007
|
|
of Year
|
|
|
Restructuring
|
|
|
Earnings
|
|
|
Earnings
|
|
|
Payments
|
|
|
Changes
|
|
|
12/30/07
|
|
|
|
|
2005 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
|
$
|
6,786
|
|
|
$
|
—
|
|
|
$
|
2,096
|
|
|
$
|
(881
|
)
|
|
$
|
(5,287
|
)
|
|
$
|
301
|
|
|
$
|
3,015
|
|
|
Acquisition restructuring costs (1)
|
|
|
—
|
|
|
|
1,125
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
84
|
|
|
|
1,209
|
|
|
|
|
Total
|
|
$
|
6,786
|
|
|
$
|
1,125
|
|
|
$
|
2,096
|
|
|
$
|
(881
|
)
|
|
$
|
(5,287
|
)
|
|
$
|
385
|
|
|
$
|
4,224
|
|
|
|
|
(1)
|
|
During 2007, restructuring costs of $1.2 million included as a
cost of the SIDEP acquisition ($1.1 million related to employee
severance and $0.1 million related to the cost to abandon
facilities) were accounted for under Emerging Issues Task Force
Issue No. 95-3 “Recognition of Liabilities in Connection with
Purchase Business Combinations.” These costs were recognized as an
assumed liability in the acquisition and were included in the
purchase price allocation at November 9, 2007.
|
78
Manufacturing Restructuring Plan
In August 2008, we announced a manufacturing and supply chain restructuring program designed to
accelerate profitable growth in our Check-Net
®
business and to support incremental improvements in
our EAS hardware and labels businesses.
For the year ended December 28, 2008, a net charge of $1.5 million was recorded in connection with
the Manufacturing Restructuring Plan. The charge was composed of $0.7 million of severance accruals
and $0.8 million of consulting fees.
The total number of employees affected by the Manufacturing Restructuring Plan were 18, of which 3
have been terminated. The remaining terminations are expected to be completed by the end of fiscal
year 2010. The anticipated total cost is expected to approximate $3.0 million to $4.0 million, of
which $1.5 million has been incurred and $0.9 million has been paid. Termination benefits are
planned to be paid one month to 24 months after termination.
2005 Restructuring Plan
In the second quarter of 2005, we initiated actions focused on reducing our overall operating
expenses. This plan included the implementation of a cost reduction plan designed to consolidate
certain administrative functions in Europe and a commitment to a plan to restructure a portion of
our supply chain manufacturing to lower cost areas. During the fourth quarter 2006, we continued to
review the results of the overall initiatives and added an additional reduction focused on the
reorganization of senior management to focus on key markets and customers. This additional
restructuring reduced our management by 25%.
For the year ended December 28, 2008, a net charge of $5.1 million was recorded in connection with
the 2005 Restructuring Plan. The charge was composed of $4.6 million of severance accruals and $0.5
million related to SIDEP acquisition integration costs.
A net charge of $2.8 million was recorded in 2007 in connection with the 2005 Restructuring Plan.
The charge was composed of $1.2 million of severance accruals and $2.0 million of lease termination
and related costs, partially offset by $0.4 million related to settlements on pension liabilities
resulting from employees who left due to the restructuring plan.
A net charge of $7.8 million was recorded in 2006 in connection with the 2005 Restructuring Plan.
Included in the net charge was $7.2 million related to severance and a $0.7 million litigation
settlement accrual related to employees previously terminated according to the restructuring plan
in certain countries. Also included in the net charge was a $0.3 million pension curtailment gain
related to employees previously terminated according to the restructuring plan in certain countries
and an expense of $0.2 million for a special termination benefit provided to one employee according
to the employee’s termination agreement.
The total number of employees affected by the 2005 Restructuring Plan were 858, of which 853 have
been terminated. The remaining terminations are expected to be completed by the end of fiscal year
2009. The anticipated total cost is expected to approximate $30 million to $31 million, of which
$30 million has been incurred and $27 million has been paid. Termination benefits are planned to be
paid one month to 24 months after termination.
2003 Restructuring Plan
During 2008, we reversed $0.3 million of previously accrued severance and incurred $0.1 million of
lease termination costs related to the 2003 Restructuring Plan.
During 2007, we reversed $0.1 million of previously accrued severance related to the 2003
Restructuring Plan.
During 2006, we reversed $0.8 million related to the 2003 Restructuring Plan. This was composed of
$0.4 million related to the release of our lease reserve to income as we have obtained a sublease
for the property previously reserved and a $0.4 million severance reversal.
79
Note 17. COMMITMENTS AND CONTINGENCIES
We lease certain production facilities, offices, distribution centers, and equipment. Rental
expense for all operating leases approximated $15.1 million, $26.7 million, and $14.7 million, in
2008, 2007, and 2006, respectively.
Future minimum payments for operating leases and capital leases having non-cancelable terms in
excess of one year at December 28, 2008 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
|
|
(dollar amounts in thousands)
|
|
Leases
|
|
|
Leases
|
|
|
Total
|
|
|
|
|
2009
|
|
$
|
258
|
|
|
$
|
14,613
|
|
|
$
|
14,871
|
|
|
2010
|
|
|
72
|
|
|
|
10,602
|
|
|
|
10,674
|
|
|
2011
|
|
|
26
|
|
|
|
6,686
|
|
|
|
6,712
|
|
|
2012
|
|
|
13
|
|
|
|
4,944
|
|
|
|
4,957
|
|
|
2013
|
|
|
3
|
|
|
|
2,777
|
|
|
|
2,780
|
|
|
Thereafter
|
|
|
—
|
|
|
|
3,101
|
|
|
|
3,101
|
|
|
|
|
Total minimum lease payments
|
|
|
372
|
|
|
$
|
42,723
|
|
|
$
|
43,095
|
|
|
Less: amounts representing interest
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
$
|
338
|
|
|
|
|
|
|
|
|
|
|
|
Contingencies
We are involved in certain legal and regulatory actions, all of which have arisen in the ordinary
course of business. Management believes that the ultimate resolution of such matters is unlikely to
have a material adverse effect on our consolidated results of operations and/or financial
condition, except as described below.
Matters related to ID Security Systems Canada Inc. versus Checkpoint Systems, Inc.
On June 22, 2006, the Company settled the follow-on purported class action suits that were filed in
connection with the ID Security Systems Canada Inc. litigation. The purported class action
complaints generally alleged a claim of monopolization. The settlement was for $1.45 million in
cash and credits for the purchase of 90 million radio frequency label tags. As a result, we
recorded a pre-tax charge to earnings of $2.3 million in fiscal 2006. As a portion of the
settlement is in the form of vouchers for the future purchases of tags, the settlement is
anticipated to impact revenue and margin over the term of the redemption period for the vouchers.
Matter related to All-Tag Security S.A., et al
The Company originally filed suit on May 1, 2001, alleging that the disposable, deactivatable radio
frequency security tag manufactured by All-Tag Security S.A. and All-Tag Security Americas, Inc.’s
(jointly “All-Tag”) and sold by Sensormatic Electronics Corporation (Sensormatic) infringed on a
U.S. Patent No. 4,876,555 (Patent) owned by the Company. On April 22, 2004, the United States
District Court for the Eastern District of Pennsylvania granted summary judgment to defendants
All-Tag and Sensormatic on the ground that the Company’s Patent was invalid for incorrect
inventorship. The Company appealed this decision. On June 20, 2005, the Company won an appeal when
the Federal Circuit reversed the grant of summary judgment and remanded the case to the District
Court for further proceedings. On January 29, 2007 the case went to trial. On February 13, 2007, a
jury found in favor of the defendants on infringement, the validity of the Patent and the
enforceability of the Patent. On June 20, 2008, the Court entered judgment in favor of defendants
based on the jury’s infringement and enforceability findings. On February 10, 2009 the Court
granted defendants’ motions for attorneys’ fees under Section 285 of the Patent Statute. The
district court will have to quantify the amount of attorneys’ fees to be awarded, but it is
expected that defendants will request approximately $5.7 million plus interest. The Company
recognized this amount during the fourth fiscal quarter ended December 28, 2008 in litigation
settlements on the consolidated statement of operations. The Company intends to appeal any award
of legal fees.
Note 18. CONCENTRATION OF CREDIT RISK
Our foreign subsidiaries, along with many foreign distributors, provide diversified international
sales thus minimizing credit risk to one or a few distributors. Domestically, our sales are well
diversified among numerous retailers in the apparel, drug, home entertainment, mass merchandise,
music, shoe, supermarket, and video markets. We perform ongoing credit evaluations of our
customers’ financial condition and generally require no collateral from our customers.
80
Note 19. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
Historically, we have reported our results of operations into three segments: Security, Labeling
Services, and Retail Merchandising. During the fourth quarter of 2007, we began reporting our
segments into three new segments: Shrink Management Solutions, Intelligent Labels, and Retail
Merchandising. Fiscal 2006 has been conformed to reflect the segment change.
Our reportable business segments are strategic business units that offer distinctive products and
services that are marketed through different channels. We have three reportable business segments:
|
|
i
|
|
Shrink Management Solutions — includes electronic article surveillance (EAS) systems,
closed-circuit television (CCTV) systems, and fire and intrusion systems.
|
|
|
|
|
ii
|
|
Intelligent Labels — includes electronic article surveillance labels,
Check-Net
®
(service bureau), intelligent library systems, and radio frequency
identification (RFID) tags and labels.
|
|
|
iii
|
|
Retail Merchandising — includes hand-held labeling systems (HLS) and retail display
systems (RDS).
|
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies.
The business segment information set forth below is that viewed by the chief operating decision
maker:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Business segment net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
|
$
|
565,067
|
|
|
$
|
478,526
|
|
|
$
|
383,932
|
|
|
Intelligent Labels
|
|
|
257,635
|
|
|
|
259,282
|
|
|
|
219,389
|
|
|
Retail Merchandising
|
|
|
94,380
|
|
|
|
96,348
|
|
|
|
84,454
|
|
|
|
|
Total
|
|
$
|
917,082
|
|
|
$
|
834,156
|
|
|
$
|
687,775
|
|
|
|
|
Business segment gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
|
$
|
230,453
|
|
|
$
|
190,379
|
|
|
$
|
149,505
|
|
|
Intelligent Labels
|
|
|
100,983
|
|
|
|
109,487
|
|
|
|
100,654
|
|
|
Retail Merchandising
|
|
|
46,663
|
|
|
|
46,106
|
|
|
|
41,532
|
|
|
|
|
Total gross profit
|
|
|
378,099
|
|
|
|
345,972
|
|
|
|
291,691
|
|
|
Operating expenses
|
|
|
395,276
|
(1)
|
|
|
279,154
|
(2)
|
|
|
253,608
|
(3)
|
|
Interest (expense) income, net
|
|
|
(3,108
|
)
|
|
|
3,096
|
|
|
|
2,751
|
|
|
Other (loss) gain, net
|
|
|
(8,924
|
)
|
|
|
662
|
|
|
|
1,141
|
|
|
|
|
(Loss) earnings from continuing
operations before income taxes and
minority interest
|
|
$
|
(29,209
|
)
|
|
$
|
70,576
|
|
|
$
|
41,975
|
|
|
|
|
Business segment total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
|
$
|
495,187
|
|
|
$
|
548,071
|
|
|
|
|
|
|
Intelligent Labels
|
|
|
421,239
|
|
|
|
334,865
|
|
|
|
|
|
|
Retail Merchandising
|
|
|
69,290
|
|
|
|
148,108
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
985,716
|
|
|
$
|
1,031,044
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes a $59.6 million goodwill impairment charge, $6.4 million
restructuring charge, a $6.2 million litigation settlement charge, a
$3.0 million intangible asset impairment charge, a $1.5 million fixed
asset impairment charge, and a $1.0 million gain from the sale of our
Czech subsidiary.
|
|
|
|
(2)
|
|
Includes a $2.7 million restructuring charge, a $4.4 million charge
related to our CEO transition, and a $2.6 million gain from the sale
of our Austria subsidiary.
|
|
|
|
(3)
|
|
Includes a $7.0 million restructuring charge, a $2.3 million
litigation settlement charge, and a $2.0 million gain from the
settlement of a capital lease.
|
|
|
(B)
|
|
Geographic Information
|
Operating results are prepared on a “country of domicile” basis, meaning that net revenues and
gross profit are included in the geographic area where the selling entity is located. Assets are
included in the geographic area in which the producing entities are located. A direct sale from the
U.S. to an unaffiliated customer in South America is reported as a sale in the U.S. Inter-area
sales between our locations are made at transfer prices that approximate market price and have been
eliminated from consolidated net
81
revenues. Gross profit for the individual area includes the profitability on a transfer price
basis, generated by sales of our products imported from other geographic areas. International
Americas is defined as all countries in North and South America, excluding the United States
Puerto Rico, and Dominican Republic.
The following table shows net revenues, gross profit, and other financial information by geographic
area for the years 2008, 2007, and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico, &
|
|
|
|
|
|
International
|
|
|
Asia
|
|
|
|
|
|
(dollar amounts in thousands)
|
Dominican Republic
|
|
|
Europe
|
|
Americas
|
|
|
Pacific
|
|
|
Total
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from unaffiliated customers
|
|
$
|
319,929
|
|
|
$
|
438,011
|
|
|
$
|
35,433
|
|
|
$
|
123,709
|
|
|
$
|
917,082
|
|
|
Gross profit
|
|
|
143,795
|
|
|
|
168,013
|
|
|
|
14,529
|
|
|
|
51,762
|
|
|
|
378,099
|
|
|
Long-lived assets
|
|
$
|
196,241
|
|
|
$
|
192,627
|
|
|
$
|
3,286
|
|
|
$
|
45,908
|
|
|
$
|
438,062
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from unaffiliated customers
|
|
$
|
275,212
|
|
|
$
|
412,416
|
|
|
$
|
37,125
|
|
|
$
|
109,403
|
|
|
$
|
834,156
|
|
|
Gross profit
|
|
|
122,630
|
|
|
|
161,457
|
|
|
|
12,462
|
|
|
|
49,423
|
|
|
|
345,972
|
|
|
Long-lived assets
|
|
$
|
158,127
|
|
|
$
|
262,377
|
|
|
$
|
7,021
|
|
|
$
|
58,966
|
|
|
$
|
486,491
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from unaffiliated customers
|
|
$
|
237,108
|
|
|
$
|
340,171
|
|
|
$
|
31,048
|
|
|
$
|
79,448
|
|
|
$
|
687,775
|
|
|
Gross profit
|
|
$
|
102,987
|
|
|
$
|
136,534
|
|
|
$
|
12,269
|
|
|
$
|
39,901
|
|
|
$
|
291,691
|
|
|
|
Note 20. MINORITY INTEREST
On July 1, 1997, Checkpoint Systems Japan Co. Ltd. (Checkpoint Japan), a wholly-owned subsidiary of
the Company, issued newly authorized shares to Mitsubishi Materials Corporation (Mitsubishi) in
exchange for cash.
In February 2006, Checkpoint Japan repurchased 26% of these shares from Mitsubishi in exchange for
$0.2 million in cash. The remaining shares held by Mitsubishi represent 15% of the adjusted
outstanding shares of Checkpoint Japan.
Our consolidated balance sheets include 100% of the assets and liabilities of Checkpoint Japan.
Mitsubishi’s 15% interest in Checkpoint Japan and the earnings there from have been reflected as
minority interest on our consolidated balance sheets and consolidated statements of operations,
respectively.
82
Note 21. QUARTERLY INFORMATION (UNAUDITED)
QUARTERS (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands, except per share data)
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Year
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
209,620
|
|
|
$
|
236,200
|
|
|
$
|
233,995
|
|
|
$
|
237,267
|
|
|
$
|
917,082
|
|
|
Gross profit
|
|
|
86,479
|
|
|
|
97,941
|
|
|
|
97,631
|
|
|
|
96,048
|
|
|
|
378,099
|
|
|
Earnings (loss) from continuing operations
|
|
|
4,798
|
(1)
|
|
|
14,356
|
(2)
|
|
|
12,776
|
(3)
|
|
|
(61,735)
|
(4) (5)
|
|
|
(29,805
|
)
|
|
Net earnings
|
|
|
4,798
|
(1)
|
|
|
14,356
|
(2)
|
|
|
12,776
|
(3)
|
|
|
(61,735)
|
(4) (5)
|
|
|
(29,805
|
)
|
|
Earnings
(loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.12
|
|
|
$
|
.36
|
|
|
$
|
.33
|
|
|
$
|
(1.58
|
)
|
|
$
|
(.76
|
)
|
|
Diluted
|
|
$
|
.12
|
|
|
$
|
.36
|
|
|
$
|
.33
|
|
|
$
|
(1.58
|
)
|
|
$
|
(.76
|
)
|
|
Net
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.12
|
|
|
$
|
.36
|
|
|
$
|
.32
|
|
|
$
|
(1.58
|
)
|
|
$
|
(.76
|
)
|
|
Diluted
|
|
$
|
.12
|
|
|
$
|
.36
|
|
|
$
|
.32
|
|
|
$
|
(1.58
|
)
|
|
$
|
(.76
|
)
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Year
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
171,202
|
|
|
$
|
195,702
|
|
|
$
|
204,589
|
|
|
$
|
262,663
|
|
|
$
|
834,156
|
|
|
Gross profit
|
|
|
70,279
|
|
|
|
82,995
|
|
|
|
85,648
|
|
|
|
107,050
|
|
|
|
345,972
|
|
|
Earnings from continuing operations
|
|
|
4,966
|
(6)
|
|
|
14,574
|
(7)
|
|
|
14,347
|
|
|
|
24,522
|
(8) (9)
|
|
|
58,409
|
|
|
Net earnings
|
|
|
4,966
|
(6)
|
|
|
15,097
|
(7)
|
|
|
14,338
|
|
|
|
24,367
|
(8) (9)
|
|
|
58,768
|
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.13
|
|
|
$
|
.37
|
|
|
$
|
.36
|
|
|
$
|
.61
|
|
|
$
|
1.46
|
|
|
Diluted
|
|
$
|
.12
|
|
|
$
|
.36
|
|
|
$
|
.35
|
|
|
$
|
.60
|
|
|
$
|
1.43
|
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.13
|
|
|
$
|
.38
|
|
|
$
|
.36
|
|
|
$
|
.61
|
|
|
$
|
1.47
|
|
|
Diluted
|
|
$
|
.12
|
|
|
$
|
.37
|
|
|
$
|
.35
|
|
|
$
|
.59
|
|
|
$
|
1.44
|
|
|
|
|
(1)
|
|
Includes a $0.7 million restructuring charge (net of tax) and a $0.8 deferred compensation adjustment (net
of tax) from prior periods (see Note 1 “ Out of Period Adjustments” for additional information).
|
|
|
|
(2)
|
|
Includes a $2.1 million restructuring charge (net of tax) and a $4.8 million valuation allowance adjustment.
|
|
|
|
(3)
|
|
Includes a $0.5 million restructuring charge (net of tax), $0.3 million litigation settlement expense (net
of tax), and a $1.0 million gain from the sale of the Czech Republic subsidiary (net of tax).
|
|
|
|
(4)
|
|
Includes a $58.5 million goodwill impairment charge (net of tax), a $3.5 million litigation settlement
charge (net of tax), a $2.2 million intangible asset impairment charge (net of tax), a $1.6 million
restructuring charge (net of tax), and a $0.8 million fixed asset impairment charge (net of tax).
|
|
|
|
(5)
|
|
Includes a $0.8 million out of period adjustment related to the accounting for a building
impairment in France (see Note 1 “ Out of Period
Adjustments” for additional information).
|
|
|
|
(6)
|
|
Includes a $0.3 million restructuring charge (net of tax).
|
|
|
|
(7)
|
|
Includes a $0.2 million restructuring charge (net of tax).
|
|
|
|
(8)
|
|
Includes a $2.0 million restructuring charge (net of tax), a $2.9 million charge related to our CEO
transition (net of tax), and a $2.5 million gain from the sale of our Austrian subsidiary (net of tax).
|
|
|
|
(9)
|
|
Includes a $2.1 million out of period adjustment related to income taxes (see Note 1 “ Out of Period
Adjustments” for additional information).
|
83
|
|
|
|
|
Item 9.
|
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
There are no changes or disagreements to report under this item.
Item 9A. CONTROLS AND PROCEDURES
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 Company’s disclosure controls and procedures are effective as of
December 28, 2008.
Management’s Annual Report On Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting for the Company. With the participation of our Chief Executive Officer and Chief
Financial Officer, management conducted an evaluation of the effectiveness of our internal control
over financial reporting as of December 28, 2008 based on the
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this evaluation, management concluded that our internal control over financial reporting was
effective as of December 28, 2008.
The scope of management’s assessment of internal control over financial reporting as of December
28, 2008 excluded OATSystems because it was acquired in a purchase business combination in June
2008. OATSystems represented 3.9% of total assets at December 28, 2008, and generated 0.3% of total
revenue during fiscal year 2008.
Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has issued an audit
report on the effectiveness of our internal control over financial reporting, which appears in Item
8 of this report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting that occurred
during the Company’s fourth fiscal quarter of 2008 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
84
PART III
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Item 10.
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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by this Item (except for the information regarding executive officers
called for by Item 401 of Regulation S-K, which is included in Part I hereof in accordance with
General Instruction G (3)) is hereby incorporated by reference to the Registrant’s Definitive Proxy
Statement for its Annual Meeting of Shareholders presently scheduled to be held on June 3, 2009,
which management expects to file with the SEC within 120 days of the end of the Registrant’s fiscal
year.
We have adopted a code of business conduct and ethics (the “Code of Ethics”) as required by the
listing standards of the New York Stock Exchange and the rules of the SEC. This Code of Ethics
applies to all of our directors, officers and employees. We have also adopted corporate governance
guidelines (the “Governance Guidelines”) and a charter for each of our Audit Committee,
Compensation Committee and Governance and Nominating Committee (collectively, the “Committee
Charters”). We have posted the Code of Ethics, the Governance Guidelines and each of the Committee
Charters on our website at www.checkpointsystems.com, and will post on our website any amendments
to, or waivers from, the Code of Ethics applicable to any of its directors or executive officers.
The foregoing information will also be available in print upon request.
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Item 11.
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EXECUTIVE COMPENSATION
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The information required by this Item is hereby incorporated by reference to the Registrant’s
Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on
June 3, 2009, which management expects to file with the SEC within 120 days of the end of the
Registrant’s fiscal year.
Note that the sections of our Definitive Proxy Statement entitled “Compensation and Stock Option
Committee Report on Executive Compensation” pursuant to Regulation S-K Item 402 (a)(9) are not
deemed “soliciting material” or “filed” as part of this report.
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Item 12.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
The information required by this Item is hereby incorporated by reference to the Registrant’s
Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on
June 3, 2009, which management expects to file with the SEC within 120 days of the end of the
Registrant’s fiscal year.
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Item 13.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
The information required by this Item is hereby incorporated by reference to the Registrant’s
Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on
June 3, 2009, which management expects to file with the SEC within 120 days of the end of the
Registrant’s fiscal year.
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Item 14.
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PRINCIPAL ACCOUNTING FEES AND SERVICES
|
The information required by this Item is hereby incorporated by reference to the Registrant’s
Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on
June 3, 2009, which management expects to file with the SEC within 120 days of the end of the
Registrant’s fiscal year.
85
PART IV
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Item 15.
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EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
All other schedules are omitted either because they are not applicable, not required, or because
the required information is included in the financial statements or notes thereto:
|
1.
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|
The following consolidated financial statements of Checkpoint Systems, Inc. were included in Item 8
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Consolidated Balance Sheets as of December 28, 2008 and December 30, 2007
|
47
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Consolidated Statements of Operations for each of the years in the three-year period ended December 28, 2008
|
48
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Consolidated Statements of Stockholders’ Equity for each of the years in the three-year period ended
December 28, 2008
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49
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Consolidated Statements of Comprehensive (Loss) Income for each of the years in the three-year period ended
December 28, 2008
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50
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Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 28, 2008
|
51
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Notes to Consolidated Financial Statements
|
52-83
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2.
|
|
The following consolidated financial statements schedules of Checkpoint Systems, Inc. is included
Financial Statement Schedule, Schedule II — Valuation and Qualifying Accounts
|
89
|
86
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized in Thorofare, New Jersey, on February 26, 2009.
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CHECKPOINT SYSTEMS, INC.
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/s/ Robert P. van der Merwe
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Chairman of the Board of Directors,
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|
President and Chief Executive Officer
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|
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been
signed below by the following persons in the capacities and on the dates indicated.
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SIGNATURE
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TITLE
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DATE
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/s/ Robert P. van der Merwe
|
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Chairman of the Board of Directors, President
and Chief Executive Officer
|
|
February 26, 2009
|
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/s/ Raymond D. Andrews
|
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Senior Vice President and Chief Financial Officer
|
|
February 26, 2009
|
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/s/ William S. Antle, III
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Director
|
|
February 26, 2009
|
|
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/s/ George Babich, Jr.
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Director
|
|
February 26, 2009
|
|
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/s/ Harald Einsmann
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Director
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|
February 26, 2009
|
|
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/s/ R. Keith Elliott
|
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Director
|
|
February 26, 2009
|
|
|
|
|
|
|
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/s/ Alan R. Hirsig
|
|
Director
|
|
February 26, 2009
|
|
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/s/ George W. Off
|
|
Director
|
|
February 26, 2009
|
|
|
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/s/ Jack W. Partridge
|
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Director
|
|
February 26, 2009
|
|
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/s/ Sally Pearson
|
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Director
|
|
February 26, 2009
|
|
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|
|
/s/ Robert N. Wildrick
|
|
Director
|
|
February 26, 2009
|
|
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|
|
87
3. Exhibits
|
|
|
|
|
Exhibit 3.1
|
|
Articles of Incorporation, as amended, are hereby
incorporated by reference to Item 14(a), Exhibit 3(i) of the
Registrant’s 1990 Form 10-K, filed with the SEC on March 14,
1991.
|
|
Exhibit 3.2
|
|
By-Laws, as Amended and Restated, are hereby incorporated by
reference Item 5.03, Exhibit 3.2 of the Registrant’s Current
Report on Form 8-K filed with the SEC on December 28, 2007.
|
|
Exhibit 3.3
|
|
Articles of Amendment to the Articles of Incorporation are
hereby incorporated by reference to Item 5.03, Exhibit 3.1
of the Registrant’s Current Report on Form 8-K filed with
the SEC on December 28, 2007.
|
|
Exhibit 4.1
|
|
Rights Agreement by and between Registrant and American
Stock and Transfer and Trust Company dated as of March 10,
1997, is hereby incorporated by reference to Item 14(a),
Exhibit 4.1 of the Registrant’s 1996 Form 10-K filed with
the SEC on March 17, 1997.
|
|
Exhibit 4.2
|
|
Amendment No. 1 to Rights Agreement dated as of March 2,
2007 is hereby incorporated by reference to Exhibit 4.1 of
the Registrant’s Current Report on Form 8-K filed with the
SEC on March 8, 2007.
|
|
Exhibit 10.1*
|
|
Amended and Restated Stock Option Plan (1992) is hereby
incorporated by reference to Registrant’s Form 10-K for 1997
filed with the SEC on March 23, 1998.
|
|
Exhibit 10.2
|
|
Consulting and Deferred Compensation Agreement with Albert
E. Wolf, are incorporated by reference to Item(a), Exhibit
10(c) of the Registrant’s 1994 Form 10-K.
|
|
Exhibit 10.3
|
|
Credit Agreement dated March 4, 2005, by and among
Registrant, Wachovia Bank N.A., as Administrative Agent, and
the lenders named therein, is incorporated herein by
reference to Exhibit 99.1 of the Registrant’s Form 8-K filed
on March 9, 2005.
|
|
Exhibit 10.4*
|
|
Employment Agreement with Per Harold Levin is incorporated
by reference to Item 6(a), Exhibit 10.4 of the Registrant’s
Form 10-Q filed on May 13, 2004.
|
|
Exhibit 10.5*
|
|
Amendment to Employment Agreement with Per Harold Levin is
incorporated by reference to Item 6(a), Exhibit 10.5 of the
Registrant’s Form 10-Q filed on May 13, 2004.
|
|
Exhibit 10.6*
|
|
Employment Agreement with John R. Van Zile is Incorporated
by reference to Item 6(a), Exhibit 10.7 of the Registrant’s
Form 10-Q filed on May 13, 2004.
|
|
Exhibit 10.7*
|
|
2004 Omnibus Incentive Compensation Plan as Appendix A to
the Company’s Definitive Proxy Statement, filed with the SEC
on March 29, 2004, is incorporated by reference.
|
|
Exhibit 10.8*
|
|
423 Employee Stock Purchase Plan as Appendix A to the
Company’s Definitive Proxy Statement, filed with the SEC on
March 29, 2004, is incorporated by reference.
|
|
Exhibit 10.9*
|
|
Employment Agreement by and between Robert P. van der Merwe
and Checkpoint Systems, Inc. dated December 27, 2007 is
incorporated by reference to Registrant’s Form 10-K for 2007
filed with the SEC on February 28, 2008.
|
|
Exhibit 12
|
|
Ratio of Earnings to Fixed Charges.
|
|
Exhibit 21
|
|
Subsidiaries of Registrant.
|
|
Exhibit 23
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
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
|
|
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.
|
|
*
|
|
Management contract or compensatory plan or arrangement.
|
88
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(dollar amounts in thousands)
Allowance For Doubtful Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Additions
|
|
|
Charged to
|
|
|
Deductions
|
|
|
|
|
|
|
|
Beginning
|
|
|
Through
|
|
|
Costs and
|
|
|
(Write-Offs and
|
|
|
Balance at
|
|
|
Year
|
|
of Year
|
|
|
Acquisition
|
|
|
Expenses
|
|
|
Recoveries, net)
|
|
|
End of Year
|
|
|
|
|
2008
|
|
$
|
15,839
|
|
|
$
|
27
|
|
|
$
|
5,783
|
|
|
$
|
(3,235
|
)
|
|
$
|
18,414
|
|
|
|
|
2007
|
|
$
|
12,417
|
|
|
$
|
2,244
|
|
|
$
|
2,330
|
|
|
$
|
(1,152
|
)
|
|
$
|
15,839
|
|
|
|
|
2006
|
|
$
|
11,823
|
|
|
$
|
—
|
|
|
$
|
2,442
|
|
|
$
|
(1,848
|
)
|
|
$
|
12,417
|
|
|
|
Deferred Tax Valuation Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Release of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
|
|
|
Release of
|
|
|
Allowance on
|
|
|
|
|
|
|
|
Balance at
|
|
|
Additions
|
|
|
Recorded on
|
|
|
Allowance on
|
|
|
Losses
|
|
|
|
|
|
|
|
Beginning
|
|
|
Through
|
|
|
Current Year
|
|
|
Current Year
|
|
|
Expired or
|
|
|
Balance at
|
|
|
Year
|
|
of Year
|
|
|
Acquisition
|
|
|
Losses
|
|
|
Utilization
|
|
|
Revalued
|
|
|
End of Year
|
|
|
|
|
2008
|
|
$
|
27,572
|
|
|
$
|
1,449
|
|
|
$
|
3,122
|
|
|
$
|
(697
|
)
|
|
$
|
(8,729
|
)
|
|
$
|
22,717
|
|
|
|
|
2007
|
|
$
|
34,510
|
|
|
$
|
—
|
|
|
$
|
1,563
|
|
|
$
|
854
|
|
|
$
|
(9,355
|
)
|
|
$
|
27,572
|
|
|
|
|
2006
|
|
$
|
26,477
|
|
|
$
|
—
|
|
|
$
|
801
|
|
|
$
|
(151
|
)
|
|
$
|
7,383
|
|
|
$
|
34,510
|
|
|
|
89
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