CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
(13 weeks) Ended
|
|
|
September 25, 2011
|
|
(amounts in thousands, except per share data)
|
As Previously
Reported
|
|
|
As Revised
for Revision
Adjustments
|
|
|
As Revised in
this Quarterly
Report on
Form 10-Q
|
|
|
Net revenues
|
$
|
218,126
|
|
|
$
|
218,126
|
|
|
$
|
215,049
|
|
|
Cost of revenues
|
136,506
|
|
|
136,506
|
|
|
133,961
|
|
|
Gross profit
|
81,620
|
|
|
81,620
|
|
|
81,088
|
|
|
Selling, general, and administrative expenses
|
69,943
|
|
|
68,857
|
|
|
67,802
|
|
|
Research and development
|
5,476
|
|
|
5,476
|
|
|
5,476
|
|
|
Restructuring expenses
|
17,392
|
|
|
17,392
|
|
|
17,279
|
|
|
Acquisition costs
|
2
|
|
|
2
|
|
|
2
|
|
|
Other expense
|
—
|
|
|
289
|
|
|
289
|
|
|
Other operating income
|
2,590
|
|
|
2,590
|
|
|
2,590
|
|
|
Operating loss
|
(8,603
|
)
|
|
(7,806
|
)
|
|
(7,170
|
)
|
|
Interest income
|
984
|
|
|
984
|
|
|
984
|
|
|
Interest expense
|
2,221
|
|
|
2,221
|
|
|
2,221
|
|
|
Other gain (loss), net
|
(783
|
)
|
|
(783
|
)
|
|
(783
|
)
|
|
Loss from continuing operations before income taxes
|
(10,623
|
)
|
|
(9,826
|
)
|
|
(9,190
|
)
|
|
Income taxes
|
38,588
|
|
|
38,788
|
|
|
38,355
|
|
|
Net loss from continuing operations
|
(49,211
|
)
|
|
(48,614
|
)
|
|
(47,545
|
)
|
|
Loss from discontinued operations, net of tax expense of $0, $0, and $433
|
—
|
|
|
—
|
|
|
(1,069
|
)
|
|
Net loss
|
(49,211
|
)
|
|
(48,614
|
)
|
|
(48,614
|
)
|
|
Less: gain attributable to non-controlling interests
|
48
|
|
|
48
|
|
|
48
|
|
|
Net loss attributable to Checkpoint Systems, Inc.
|
$
|
(49,259
|
)
|
|
$
|
(48,662
|
)
|
|
$
|
(48,662
|
)
|
|
Basic loss attributable to Checkpoint Systems, Inc. per share:
|
|
|
|
|
|
|
Loss from continuing operations
|
$
|
(1.21
|
)
|
|
$
|
(1.20
|
)
|
|
$
|
(1.17
|
)
|
|
Loss from discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
(0.03
|
)
|
|
Basic loss attributable to Checkpoint Systems, Inc. per share
|
$
|
(1.21
|
)
|
|
$
|
(1.20
|
)
|
|
$
|
(1.20
|
)
|
|
Diluted loss attributable to Checkpoint Systems, Inc. per share:
|
|
|
|
|
|
|
Loss from continuing operations
|
$
|
(1.21
|
)
|
|
$
|
(1.20
|
)
|
|
$
|
(1.17
|
)
|
|
Loss from discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
(0.03
|
)
|
|
Diluted loss attributable to Checkpoint Systems, Inc. per share
|
$
|
(1.21
|
)
|
|
$
|
(1.20
|
)
|
|
$
|
(1.20
|
)
|
The As Revised in this Quarterly Report on Form 10-Q amounts include the effects of discontinued operations presentation on previously reported amounts. Refer to Note 14 to the Consolidated Financial Statements for discontinued operations presentation adjustments to previously reported amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
(39 weeks) Ended
|
|
|
September 25, 2011
|
|
(amounts in thousands, except per share data)
|
As Previously
Reported
|
|
|
As Revised
for Revision
Adjustments
|
|
|
As Revised in
this Quarterly
Report on
Form 10-Q
|
|
|
Net revenues
|
$
|
622,730
|
|
|
$
|
622,730
|
|
|
$
|
613,745
|
|
|
Cost of revenues
|
385,244
|
|
|
385,244
|
|
|
377,588
|
|
|
Gross profit
|
237,486
|
|
|
237,486
|
|
|
236,157
|
|
|
Selling, general, and administrative expenses
|
225,021
|
|
|
222,384
|
|
|
219,294
|
|
|
Research and development
|
15,612
|
|
|
15,612
|
|
|
15,612
|
|
|
Restructuring expenses
|
20,484
|
|
|
20,484
|
|
|
20,371
|
|
|
Acquisition costs
|
2,205
|
|
|
2,205
|
|
|
2,205
|
|
|
Other expense
|
—
|
|
|
587
|
|
|
587
|
|
|
Other operating income
|
19,262
|
|
|
19,262
|
|
|
19,262
|
|
|
Operating loss
|
(6,574
|
)
|
|
(4,524
|
)
|
|
(2,650
|
)
|
|
Interest income
|
2,677
|
|
|
2,677
|
|
|
2,677
|
|
|
Interest expense
|
5,781
|
|
|
5,781
|
|
|
5,781
|
|
|
Other gain (loss), net
|
(1,049
|
)
|
|
(1,049
|
)
|
|
(1,049
|
)
|
|
Loss from continuing operations before income taxes
|
(10,727
|
)
|
|
(8,677
|
)
|
|
(6,803
|
)
|
|
Income taxes expense
|
38,273
|
|
|
38,788
|
|
|
38,788
|
|
|
Net loss from continuing operations
|
(49,000
|
)
|
|
(47,465
|
)
|
|
(45,591
|
)
|
|
Loss from discontinued operations, net of tax expense of $0, $0, and $0
|
—
|
|
|
—
|
|
|
(1,874
|
)
|
|
Net loss
|
(49,000
|
)
|
|
(47,465
|
)
|
|
(47,465
|
)
|
|
Less: gain attributable to non-controlling interests
|
50
|
|
|
50
|
|
|
50
|
|
|
Net loss attributable to Checkpoint Systems, Inc.
|
$
|
(49,050
|
)
|
|
$
|
(47,515
|
)
|
|
$
|
(47,515
|
)
|
|
Basic loss attributable to Checkpoint Systems, Inc. per share:
|
|
|
|
|
|
|
Loss from continuing operations
|
$
|
(1.21
|
)
|
|
$
|
(1.17
|
)
|
|
$
|
(1.13
|
)
|
|
Loss from discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
(0.04
|
)
|
|
Basic loss attributable to Checkpoint Systems, Inc. per share
|
$
|
(1.21
|
)
|
|
$
|
(1.17
|
)
|
|
$
|
(1.17
|
)
|
|
Diluted loss attributable to Checkpoint Systems, Inc. per share:
|
|
|
|
|
|
|
Loss from continuing operations
|
$
|
(1.21
|
)
|
|
$
|
(1.17
|
)
|
|
$
|
(1.13
|
)
|
|
Loss from discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
(0.04
|
)
|
|
Diluted loss attributable to Checkpoint Systems, Inc. per share
|
$
|
(1.21
|
)
|
|
$
|
(1.17
|
)
|
|
$
|
(1.17
|
)
|
The As Revised in this Quarterly Report on Form 10-Q amounts include the effects of discontinued operations presentation on previously reported amounts. Refer to Note 14 to the Consolidated Financial Statements for discontinued operations presentation adjustments to previously reported amounts.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
Nine Months
|
|
|
(13 weeks) Ended
|
|
(39 weeks) Ended
|
|
|
September 25, 2011
|
|
September 25, 2011
|
|
(amounts in thousands)
|
As
Previously
Reported
|
|
|
As Revised in
this Quarterly
Report on
Form 10-Q
|
|
|
As
Previously
Reported
|
|
|
As Revised in
this Quarterly
Report on
Form 10-Q
|
|
|
Net loss
|
$
|
(49,211
|
)
|
|
$
|
(48,614
|
)
|
|
$
|
(49,000
|
)
|
|
$
|
(47,465
|
)
|
|
Amortization of pension plan actuarial losses, net of tax
|
253
|
|
|
253
|
|
|
9
|
|
|
9
|
|
|
Change in realized and unrealized gains on derivative hedges, net of tax
|
1,814
|
|
|
1,814
|
|
|
52
|
|
|
52
|
|
|
Foreign currency translation adjustment
|
(12,464
|
)
|
|
(12,423
|
)
|
|
9,621
|
|
|
9,594
|
|
|
Comprehensive loss
|
(59,608
|
)
|
|
(58,970
|
)
|
|
(39,318
|
)
|
|
(37,810
|
)
|
|
Less: comprehensive income attributable to non-controlling interests
|
48
|
|
|
48
|
|
|
50
|
|
|
50
|
|
|
Comprehensive loss attributable to Checkpoint Systems, Inc.
|
$
|
(59,656
|
)
|
|
$
|
(59,018
|
)
|
|
$
|
(39,368
|
)
|
|
$
|
(37,860
|
)
|
There is no discontinued operations impact on the presentation of the As Revised in this Quarterly Report on Form 10-Q amounts.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
September 25, 2011
|
|
Nine months (39 weeks) ended
|
As
Previously
Reported
|
|
|
As Revised in
this Quarterly
Report on
Form 10-Q
|
|
|
Cash flows from operating activities:
|
|
|
|
|
Net loss
|
$
|
(49,000
|
)
|
|
$
|
(47,465
|
)
|
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
27,367
|
|
|
27,367
|
|
|
Deferred taxes
|
47,530
|
|
|
48,045
|
|
|
Stock-based compensation
|
6,208
|
|
|
6,208
|
|
|
Provision for losses on accounts receivable
|
2,237
|
|
|
2,237
|
|
|
Excess tax benefit on stock compensation
|
(598
|
)
|
|
(598
|
)
|
|
Gain on disposal of fixed assets
|
(19
|
)
|
|
(19
|
)
|
|
Restructuring-related asset impairment
|
7,479
|
|
|
7,479
|
|
|
Increase in current assets, net of the effects of acquired companies:
|
|
|
|
|
|
Accounts receivable
|
(1,850
|
)
|
|
(2,035
|
)
|
|
Inventories
|
(35,199
|
)
|
|
(35,329
|
)
|
|
Other current assets
|
(29,458
|
)
|
|
(29,507
|
)
|
|
Increase (decrease) in current liabilities, net of the effects of acquired companies:
|
|
|
|
|
|
Accounts payable
|
4,405
|
|
|
4,242
|
|
|
Income taxes
|
(2,850
|
)
|
|
(2,869
|
)
|
|
Unearned revenues
|
11,798
|
|
|
11,798
|
|
|
Restructuring reserve
|
7,526
|
|
|
7,526
|
|
|
Other current and accrued liabilities
|
7,150
|
|
|
7,855
|
|
|
Net cash provided by operating activities
|
2,726
|
|
|
4,935
|
|
|
Cash flows from investing activities:
|
|
|
|
|
Acquisition of property, plant, and equipment and intangibles
|
(14,424
|
)
|
|
(14,424
|
)
|
|
Acquisition of businesses, net of cash acquired
|
(75,937
|
)
|
|
(75,937
|
)
|
|
Change in restricted cash
|
(82
|
)
|
|
(82
|
)
|
|
Other investing activities
|
408
|
|
|
408
|
|
|
Net cash used in investing activities
|
(90,035
|
)
|
|
(90,035
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
Proceeds from stock issuances
|
2,336
|
|
|
2,336
|
|
|
Excess tax benefit on stock compensation
|
598
|
|
|
598
|
|
|
Proceeds from short-term debt
|
16
|
|
|
16
|
|
|
Payment of short-term debt
|
(1,612
|
)
|
|
(1,612
|
)
|
|
Net change in factoring and bank overdrafts
|
(2,391
|
)
|
|
(2,391
|
)
|
|
Proceeds from long-term debt
|
63,750
|
|
|
63,750
|
|
|
Payment of long-term debt
|
(47,701
|
)
|
|
(47,701
|
)
|
|
Net cash provided by financing activities
|
14,996
|
|
|
14,996
|
|
|
Effect of foreign currency rate fluctuations on cash and cash equivalents
|
4,116
|
|
|
4,031
|
|
|
Net decrease in cash and cash equivalents
|
(68,197
|
)
|
|
(66,073
|
)
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
Beginning of period
|
173,802
|
|
|
172,473
|
|
|
End of period
|
$
|
105,605
|
|
|
$
|
106,400
|
|
The Consolidated Financial Statements include the accounts of Checkpoint Systems, Inc. and its majority-owned subsidiaries (collectively, the “Company”). All inter-company transactions are eliminated in consolidation. The Consolidated Financial Statements and related notes are unaudited and do not contain all disclosures required by generally accepted accounting principles in annual financial statements. Refer to our Annual Report on Form 10-K for the fiscal year ended
December 25, 2011
for the most recent disclosure of the Company’s accounting policies.
The Consolidated Financial Statements include all adjustments, consisting only of normal recurring adjustments, necessary to state fairly our financial position at
September 23, 2012
and
December 25, 2011
and our results of operations for the
thirteen and thirty-nine
weeks ended
September 23, 2012
and
September 25, 2011
and changes in cash flows for the
thirty-nine weeks
ended
September 23, 2012
and
September 25, 2011
. The results of operations for the interim period should not be considered indicative of results to be expected for the full year.
Restricted Cash
We classify restricted cash as cash that cannot be made readily available for use. Restrictions may include legally restricted deposits held as compensating balances against short-term borrowing arrangements, contracts entered into with others, or company statements of intention with regard to particular deposits. During the third quarter ended September 23, 2012, we completed a project for which we had received a grant from the Chinese government that was recorded within restricted cash in the accompanying Consolidated Balance Sheet.
Accounts Receivable
At
September 25, 2011
, proceeds from the sale of accounts receivable related to a sales-type lease extension with a customer to a third party financial institution totaled
$30.9 million
. Proceeds from the initial sale of the accounts receivable are used to fund operations. This transaction meets the criteria for sale treatment in accordance with ASC 860 "Accounting for Transfers and Servicing of Financial Assets". We have presented the earnings recognized on the sale of the receivables separately under the line item captioned other operating income on our Consolidated Statements of Operations for the
three and nine
months ended
September 25, 2011
. There is no comparable amount for the
three and nine
months ended
September 23, 2012
.
Internal-Use Software
Included in fixed assets is the capitalized cost of internal-use software. 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 is expensed as incurred.
During 2009, we announced that we are in the initial stages of implementing a company-wide ERP system to handle the business and finance processes within our operations and corporate functions. The total amount of internal-use software costs capitalized since the beginning of the ERP implementation as of
September 23, 2012
and
December 25, 2011
were
$22.3 million
and
$21.4 million
, respectively. As of
September 23, 2012
,
$18.1 million
was recorded in machinery and equipment related to supporting software packages that were placed in service. The remaining costs of
$4.2 million
and
$6.0 million
as of
September 23, 2012
and
December 25, 2011
, respectively, are capitalized as construction-in-progress until such time as the ERP system has been placed in service.
Assets Held For Sale
As a result of our restructuring plans, certain long-lived assets of our manufacturing facilities met held for sale criteria during the second quarter ended June 24, 2012 and
$3.7 million
of property, plant, and equipment, net was reclassified into other current assets on the Consolidated Balance Sheet. In the third quarter ended September 23, 2012, these long-lived assets of our manufacturing facilities were sold, resulting in a gain on sale of
$0.8 million
that was recognized in other exit costs within restructuring expenses on the Consolidated Statement of Operations.
Non-controlling Interests
On
May 16, 2011
, Checkpoint Holland Holding B.V., a wholly-owned subsidiary of the Company, acquired
51%
of the outstanding voting shares of Shore to Shore PVT Ltd. (Sri Lanka) in exchange for
$1.7 million
in cash. The fair value of the non-controlling interest was estimated by applying a market approach. Key assumptions include control premiums associated with guideline transactions of entities deemed to be similar to Shore to Shore PVT Ltd. (Sri Lanka), and adjustments because of the lack of control that market participants would consider when measuring the fair value of the non-controlling interest.
We have classified non-controlling interests as equity on our Consolidated Balance Sheets as of
September 23, 2012
and
December 25, 2011
and presented net income attributable to non-controlling interests separately on our Consolidated Statements of Operations for the
three and nine
months ended
September 23, 2012
and
September 25, 2011
.
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 which is located in the Other Accrued Expenses section of our Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
|
Nine months ended
|
September 23,
2012
|
|
|
Balance at beginning of year
|
$
|
5,857
|
|
|
Accruals for warranties issued, net
|
4,176
|
|
|
Settlements made
|
(4,182
|
)
|
|
Foreign currency translation adjustment
|
31
|
|
|
Balance at end of period
|
$
|
5,882
|
|
Recently Adopted Accounting Standards
In April 2011, the FASB issued ASU 2011-03 “Reconsideration of Effective Control for Repurchase Agreements” (ASU 2011-03). The amendments to Topic 860 (Transfers and Servicing) affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments do not affect other transfers of financial assets. The amendments remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. ASU 2011-03 is effective for the first interim or annual periods beginning on or after December 15, 2011, which for us was December 26, 2011, the first day of our 2012 fiscal year. This amendment should be applied prospectively to transactions or modifications of existing transactions that occur on or after December 26, 2011. The adoption of the standard has not had a material impact on our Consolidated Results of Operations and Financial Condition.
In May 2011, the FASB issued ASU 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). The amendments to Topic 820 (Fair Value Measurement) establish common requirements for measuring fair value and related disclosures in accordance with accounting principles generally accepted in the United States and international financial reporting standards. This amendment did not require additional fair value measurements. ASU 2011-04 is effective for the first interim and annual periods beginning after December 15, 2011, which for us was December 26, 2011, the first day of our 2012 fiscal year. This amendment should be applied prospectively. The adoption of the standard has not had a material effect on our Consolidated Results of Operations and Financial Condition.
In June 2011, the FASB issued ASU 2011-05 “Presentation of Comprehensive Income” (ASU 2011-05). The amendments to Topic 220 (Comprehensive Income) eliminate the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders' equity, require consecutive presentation of the statement of net income and other comprehensive income and require reclassification adjustments from other comprehensive income to net income to be shown on the financial statements. In December 2011, the FASB issued ASU 2011-12, "Comprehensive Income -- Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in ASU 2011-05," to defer the effective date of the provision requiring entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. However, the remaining requirements of ASU 2011-05 are effective for the first interim and annual periods beginning after December 15, 2011, which for us was December 26, 2011, the first day of our 2012 fiscal year. Any required changes in presentation requirements and disclosures have been included in our Consolidated Financial Statements beginning with the first quarter ended March 25, 2012. The adoption of the standard has not had a material effect on our Consolidated Results of Operations and Financial Condition.
In September 2011, the FASB issued ASU 2011-08, "Intangibles – Goodwill and Other," (ASU 2011-08), which amends current guidance to allow a company to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The amendment also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, which for us was December 26, 2011, the first day of our 2012 fiscal year. The adoption of the standard has not had a material effect on our Consolidated Results of Operations and Financial Condition.
In September 2011, the FASB issued ASU 2011-09, "Compensation – Retirement Benefits – Multiemployer Plans (Subtopic 715-80)," (ASU 2011-09). ASU 2011-09 requires that employers provide additional separate disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans. The additional quantitative and qualitative disclosures will provide users with more detailed information about an employer's involvement in multiemployer pension plans. ASU 2011-09 is effective for fiscal years ending after December 15, 2011. The adoption of this standard has not had a material effect on our Consolidated Results of Operations and Financial Condition.
New Accounting Pronouncements and Other Standards
In December 2011, the FASB issued ASU 2011-11, "Balance Sheet – Disclosures about Offsetting Assets and Liabilities (Topic 210-20)," (ASU 2011-11). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 is effective for fiscal years beginning on or after January 1, 2013, with retrospective application for all comparable periods presented. The adoption of this standard is not expected to have a material effect on our Consolidated Results of Operations and Financial Condition.
In July 2012, the FASB issued ASU 2012-02, "Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment," (ASU 2012-02). ASU 2012-02 amends the guidance in ASC 350-302 on testing indefinite-lived intangible assets, other than goodwill, for impairment by allowing an entity to perform a qualitative impairment assessment before proceeding to the two-step impairment test. If the entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not (i.e., a likelihood of more than 50 percent) impaired, the entity would not need to calculate the fair value of the asset. In addition, the ASU does not amend the requirement to test these assets for impairment between annual tests if there is a change in events or circumstances; however, it does revise the examples of events and circumstances that an entity should consider in interim periods. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption being permitted. The adoption of this standard is not expected to have a material effect on our Consolidated Results of Operations and Financial Condition.
In October 2012, the FASB issued ASU 2012-04, "Technical Corrections and Improvements," (ASU 2012-04). ASU 2012-04 amends current guidance by clarifying the FASB Accountings Standards Codification (Codification), correcting unintended application of guidance, or making minor improvements to the Codification. These amendments are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Additionally, the amendments included in ASU 2012-04 intend to make the Codification easier to understand and the fair value measurement guidance easier to apply by eliminating inconsistencies and providing needed clarifications. The amendments in ASU 2012-04 that will not have transition guidance will be effective upon issuance. For public entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012. The adoption of this standard is not expected to have a material effect on our Consolidated Results of Operations and Financial Condition.
Note 2. INVENTORIES
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
September 23,
2012
|
|
|
December 25,
2011
|
|
|
Raw materials
|
$
|
19,200
|
|
|
$
|
28,128
|
|
|
Work-in-process
|
6,900
|
|
|
10,481
|
|
|
Finished goods
|
83,951
|
|
|
92,378
|
|
|
Total
|
$
|
110,051
|
|
|
$
|
130,987
|
|
Note 3. GOODWILL AND OTHER INTANGIBLE ASSETS
We had intangible assets with a net book value of
$77.0 million
and
$84.6 million
as of
September 23, 2012
and
December 25, 2011
, respectively.
The following table reflects the components of intangible assets as of
September 23, 2012
and
December 25, 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 23, 2012
|
|
December 25, 2011
|
|
(amounts in thousands)
|
Amortizable
Life
(years)
|
|
Gross
Amount
|
|
|
Gross
Accumulated
Amortization
|
|
|
Gross
Amount
|
|
|
Gross
Accumulated
Amortization
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Customer lists
|
6 to 20
|
|
$
|
81,320
|
|
|
$
|
48,311
|
|
|
$
|
81,348
|
|
|
$
|
43,945
|
|
|
Trade name
|
1 to 30
|
|
29,945
|
|
|
18,693
|
|
|
30,007
|
|
|
18,237
|
|
|
Patents, license agreements
|
3 to 14
|
|
60,133
|
|
|
49,424
|
|
|
60,249
|
|
|
47,704
|
|
|
Other
|
2 to 6
|
|
7,203
|
|
|
6,728
|
|
|
7,160
|
|
|
5,830
|
|
|
Total amortized finite-lived intangible assets
|
|
|
178,601
|
|
|
123,156
|
|
|
178,764
|
|
|
115,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
21,509
|
|
|
—
|
|
|
21,509
|
|
|
—
|
|
|
Total identifiable intangible assets
|
|
|
$
|
200,110
|
|
|
$
|
123,156
|
|
|
$
|
200,273
|
|
|
$
|
115,716
|
|
Amortization expense for the
three and nine
months ended
September 23, 2012
was
$2.4 million
and
$7.6 million
, respectively.
Amortization expense for the
three and nine
months ended
September 25, 2011
was
$3.0 million
and
$8.6 million
, respectively.
Estimated amortization expense for each of the five succeeding years is anticipated to be:
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
|
2012
|
$
|
10,466
|
|
|
2013
|
$
|
8,759
|
|
|
2014
|
$
|
8,271
|
|
|
2015
|
$
|
8,115
|
|
|
2016
|
$
|
7,852
|
|
The changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
Shrink
Management
Solutions
|
|
|
Apparel
Labeling
Solutions
|
|
|
Retail
Merchandising
Solutions
|
|
|
Total
|
|
|
Balance as of December 26, 2010
|
$
|
165,324
|
|
|
$
|
3,915
|
|
|
$
|
62,086
|
|
|
$
|
231,325
|
|
|
Acquired during the year
|
—
|
|
|
58,008
|
|
|
—
|
|
|
58,008
|
|
|
Discontinued operations
|
(3,782
|
)
|
|
—
|
|
|
—
|
|
|
(3,782
|
)
|
|
Translation adjustments
|
269
|
|
|
661
|
|
|
(378
|
)
|
|
552
|
|
|
Balance as of December 25, 2011
|
$
|
161,811
|
|
|
$
|
62,584
|
|
|
$
|
61,708
|
|
|
$
|
286,103
|
|
|
Purchase accounting adjustment
|
—
|
|
|
1,624
|
|
|
—
|
|
|
1,624
|
|
|
Impairment losses
|
—
|
|
|
(64,437
|
)
|
|
—
|
|
|
(64,437
|
)
|
|
Translation adjustments
|
(322
|
)
|
|
229
|
|
|
(239
|
)
|
|
(332
|
)
|
|
Balance as of September 23, 2012
|
$
|
161,489
|
|
|
$
|
—
|
|
|
$
|
61,469
|
|
|
$
|
222,958
|
|
The following table reflects the components of goodwill as of
September 23, 2012
and
December 25, 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 23, 2012
|
|
December 25, 2011
|
|
(amounts in thousands)
|
Gross
Amount
|
|
|
Accumulated
Impairment
Losses
|
|
|
Goodwill,
Net
|
|
|
Gross
Amount
|
|
|
Accumulated
Impairment
Losses
|
|
|
Goodwill,
Net
|
|
|
Shrink Management Solutions
|
$
|
211,047
|
|
|
$
|
49,558
|
|
|
$
|
161,489
|
|
|
$
|
213,836
|
|
|
$
|
52,025
|
|
|
$
|
161,811
|
|
|
Apparel Labeling Solutions
|
83,542
|
|
|
83,542
|
|
|
—
|
|
|
81,662
|
|
|
19,078
|
|
|
62,584
|
|
|
Retail Merchandising Solutions
|
131,618
|
|
|
70,149
|
|
|
61,469
|
|
|
130,640
|
|
|
68,932
|
|
|
61,708
|
|
|
Total goodwill
|
$
|
426,207
|
|
|
$
|
203,249
|
|
|
$
|
222,958
|
|
|
$
|
426,138
|
|
|
$
|
140,035
|
|
|
$
|
286,103
|
|
On January 28, 2011, Checkpoint Systems, Inc. and certain of its direct subsidiaries (collectively, the “Company”) entered into a Master Purchase Agreement. The Master Purchase Agreement outlines the general terms and conditions pursuant to which the Company agreed to acquire, through the acquisition of equity and/or assets, a retail apparel and footwear product identification business which designs, manufactures and sells tags and labels, brand protection, and EAS solutions/labels (collectively, the “Shore to Shore businesses” or "Shore to Shore"). The acquisition was settled on
May 16, 2011
for approximately
$78.7 million
, net of cash acquired of
$1.9 million
and the assumption of debt of
$4.2 million
. The purchase price was funded by
$66.7 million
of cash from operations and
$9.2 million
of borrowings under our Senior Secured Credit Facility, and includes the acquisition of the following:
|
|
|
|
•
|
100% of the voting equity interests of J&F International, Inc. (U.S.), Shore to Shore Far East (Hong Kong), Shore to Shore MIS (India), Shore to Shore Lacar SA (Guatemala), Adapt Identification (HK) Ltd., and W Print Europe Ltd. (UK);
|
|
|
|
|
•
|
Assets of Shore to Shore, Inc. (U.S.), Shanghai WH Printing Co. Ltd., Wing Hung (Dongguan) Printing Co., Ltd., and Wing Hung Printing Co., Ltd. (U.S.);
|
|
|
|
|
•
|
51% of the voting equity interests of Shore to Shore PVT Ltd. (Sri Lanka);
|
|
|
|
|
•
|
50% of the voting equity interests of the Cybsa Adapt SA de CV (El Salvador) joint venture. In accordance with ASC 323 “Investments—Equity Method and Joint Ventures,” we have applied the Equity Method in recording this joint venture.
|
During the second quarter of 2012, we finalized the purchase accounting of the acquisition of the Shore to Shore businesses. At June 24, 2012, the financial statements reflected the final allocation of the purchase price based on estimated fair values at the date of acquisition, including
$17.1 million
in Property, Plant, and Equipment,
$7.1 million
in Accounts Receivable, and
$2.2 million
in Inventories. This final allocation resulted in acquired goodwill of
$59.7 million
, of which
$9.8 million
is tax deductible, and intangible assets of
$10.5 million
. The intangible assets were composed of a non-compete agreement (
$0.3 million
), customer lists (
$9.8 million
), and trade names (
$0.4 million
). The useful lives were
5
years for the non-compete agreement,
10
years for the customer lists, and 7.5 months for the trade names.
The purchase price included a payment to escrow of
$17.5 million
related to the 2010 performance of the acquired business. This amount is subject to adjustment pending final determination of the 2010 performance and could result in an additional purchase price payment of up to
$6.3 million
. We are currently involved in an arbitration process in order to require the seller to provide audited financial information related to the 2010 performance. When this information is received, the final adjustment to the purchase price will be recognized through earnings.
Acquisition costs incurred in connection with the transaction are recognized within acquisition costs in the Consolidated Statement of Operations and approximate
$17 thousand
and
$0.1 million
for the
three and nine
months ended
September 23, 2012
and
$2 thousand
and
$2.2 million
for the
three and nine
months ended
September 25, 2011
, respectively.
As the Company acquired
51%
of the outstanding voting shares of Shore to Shore PVT Ltd. (Sri Lanka) in exchange for
$1.7 million
in cash, we have classified the non-controlling interests as equity on our Consolidated Balance Sheet as of
September 23, 2012
and
December 25, 2011
, and presented net income attributable to non-controlling interests separately on our Consolidated Statement of Operations for the
three and nine
months ended
September 23, 2012
and
September 25, 2011
. The fair value of the non-controlling interest was estimated by applying a market approach. Key assumptions include control premiums associated with guideline transactions of entities deemed to be similar to Shore to Shore PVT Ltd. (Sri Lanka), and adjustments because of the lack of control that market participants would consider when measuring the fair value of the non-controlling interest.
We perform an assessment of goodwill by comparing each individual reporting unit’s carrying amount of net assets, including goodwill, to their fair value at least annually during the October month-end close and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our 2011 annual impairment test indicated no impairment of our goodwill assets.
During the second quarter of 2012, we experienced deterioration in revenues, gross margins and operating results in each of our segments as compared to the forecasted amounts in the most recent annual impairment test. Due to the declines in operating results in our segments, a change in management, and a revised strategic focus, we determined that impairment triggering events had occurred and that an assessment of goodwill was warranted. This resulted in the Company's assessment that the carrying value of the Apparel Labeling Solutions reporting unit exceeded its fair value. The basis of the fair value was determined by projecting future cash flows using assumptions concerning future operating performance and economic conditions that may differ from actual 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 the 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. As a result of our interim impairment test, a
$64.4 million
non-cash impairment charge was recorded as of June 24, 2012 in our Apparel Labeling Solutions segment. The goodwill impairment expense was due to the decline in estimated future Apparel Labeling Solutions cash flow impacted by our plan to refocus the business, coupled with recent declines in revenue and profitability. The impairment charge of the entire goodwill balance in our Apparel Labeling Solutions segment was recorded in goodwill impairment on the Consolidated Statement of Operations.
Our Shrink Management Solutions (SMS) segment is composed of
four
reporting units. The fair value of
two
of the
four
reporting units, Europe SMS and Asia Pacific SMS, exceeded their respective carrying values as of the date of the interim impairment test by approximately
10%
and
8%
, respectively. As of the date of our interim impairment test, the goodwill for these
two
reporting units totaled
$72.0 million
for Europe SMS and
$12.0 million
for Asia Pacific SMS. In determining the fair value of these reporting units, our projected cash flows did not contain significant growth assumptions. A
10%
decline in operating results, or a
1.10%
increase in our discount rates could result in future decreases in the fair values of these reporting units which could result in future impairments. The other reporting units within the SMS segment exceeded their respective carrying values by a significant margin.
Our Retail Merchandising Solutions (RMS) segment is composed of
two
reporting units. The fair value of
one
of the
two
reporting units, Europe RMS, exceeded its carrying value as of the date of the interim impairment test by approximately
11%
. As of the date of our interim impairment test, the goodwill for the Europe RMS reporting unit totaled
$59.3 million
. In determining the fair value of this reporting unit, our projected cash flows did not contain significant growth assumptions. A
11%
decline in operating results, or a
1.60%
increase in our discount rate could result in a future decrease in the fair value of this reporting unit which could result in a future impairment. The other reporting unit within the Retail Merchandising segment exceeded its carrying value by a significant margin.
There were no additional impairment indicators in the third quarter of 2012. While we currently believe that our projected results will not result in future impairment, a continued deterioration in results could trigger a future impairment in these reporting units.
As a result of interim impairment indicators in the second quarter of 2012, we performed a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the long-lived assets in our Apparel Labeling Solutions reporting unit to their carrying amounts. The undiscounted cash flow analysis resulted in
no
impairment charge in the quarter ended June 24, 2012. There were no additional impairment indicators in the third quarter of 2012. While we currently believe that our projected results will not result in future impairment, a continued deterioration in results could trigger a future impairment.
Note 4. DEBT
Short-term Borrowings and Current Portion of Long-term Debt
Short-term borrowings and current portion of long-term debt at
September 23, 2012
and at
December 25, 2011
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
September 23,
2012
|
|
|
December 25,
2011
|
|
|
Overdraft
|
$
|
309
|
|
|
$
|
405
|
|
|
Full-recourse factoring liabilities
|
—
|
|
|
8,809
|
|
|
Term loans
|
2,436
|
|
|
9,125
|
|
|
Other short-term borrowings
|
1,078
|
|
|
2,529
|
|
|
Current portion of long-term debt
|
537
|
|
|
910
|
|
|
Total short-term borrowings and current portion of long-term debt
|
$
|
4,360
|
|
|
$
|
21,778
|
|
In September 2012,
$7.4 million
(
€5.7 million
) was paid in order to extinguish our existing short-term full-recourse factoring agreement in Germany. The arrangement was included in short-term borrowings in the accompanying Consolidated Balance Sheets.
In June 2012,
$8.0 million
(HKD
61.8 million
) was paid in order to extinguish our existing Hong Kong term loan. The term loan was included in short-term borrowings in the accompanying Consolidated Balance Sheets.
In June 2012,
$0.7 million
(INR
37.2 million
) was paid in order to extinguish an overdraft facility and other short-term loans assumed in connection with the acquisition of the Shore to Shore businesses. The loans were included in short-term borrowings in the accompanying Consolidated Balance Sheets.
In February 2012, the Company entered into a
$3.2 million
Sri Lanka banking facility, which includes a
$2.7 million
term loan, and a combined
$0.5 million
sublimit for an overdraft/import line. As of
September 23, 2012
,
$2.4 million
and
$0.4 million
were outstanding on the term loan and overdraft/import line, respectively.
Long-Term Debt
Long-term debt as of
September 23, 2012
and
December 25, 2011
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
September 23,
2012
|
|
|
December 25,
2011
|
|
|
Senior secured credit facility:
|
|
|
|
|
$69 million variable interest rate revolving credit facility maturing in 2014
|
$
|
44,206
|
|
|
$
|
52,248
|
|
|
Senior Secured Notes:
|
|
|
|
|
$22 million 4.00% fixed interest rate Series A senior secured notes maturing in 2015
|
22,038
|
|
|
25,000
|
|
|
$22 million 4.38% fixed interest rate Series B senior secured notes maturing in 2016
|
22,038
|
|
|
25,000
|
|
|
$22 million 4.75% fixed interest rate Series C senior secured notes maturing in 2017
|
22,038
|
|
|
25,000
|
|
|
Full-recourse factoring liabilities
|
998
|
|
|
1,333
|
|
|
Other capital leases with maturities through 2016
|
554
|
|
|
1,013
|
|
|
Total
|
111,872
|
|
|
129,594
|
|
|
Less current portion
|
537
|
|
|
910
|
|
|
Total long-term portion
|
$
|
111,335
|
|
|
$
|
128,684
|
|
Senior Secured Credit Facility
On February 17, 2012, we received an amendment to our Senior Secured Credit Facility which increased the required leverage ratio covenant of adjusted EBITDA to total debt from
2.75
to
3.00
,
3.35
and
3.25
for the periods ended March 25, June 24 and September 23, 2012. In addition, the amendment prohibits the Company from consummating any acquisitions from February 17, 2012 through the fiscal quarter ending September 23, 2012. Had we not received the amendment, we would have been in violation of the leverage ratio covenant as of March 25, 2012.
On July 31, 2012, we received an additional amendment to our Senior Secured Credit Facility ("July 2012 Amendment"), which contained several modifications. The July 2012 Amendment reduced the total commitment of the Senior Secured Credit Facility from
$125.0 million
to
$75.0 million
. The July 2012 Amendment reduced the sublimit for the issuance of letters of credit from
$25.0 million
to
$5.0 million
. The July 2012 Amendment reduced the sublimit for swingline loans from
$25.0 million
to
$5.0 million
. The July 2012 Amendment increased the required leverage ratio covenant of adjusted EBITDA to total debt to
5.25
,
6.50
,
5.50
,
3.50
, and
2.75
for the periods ended June 24, 2012, September 23, 2012, December 30, 2012, March 31, 2013, and June 30, 2013 and thereafter. Cash restructuring of up to
$25.0 million
is excluded from the calculation of EBITDA beginning in the fiscal quarter ending June 24, 2012. The July 2012 Amendment waives the fixed charge covenant from June 24, 2012 through September 23, 2012 (the "Waiver Period"), decreases it to
1.00
for the period ended December 30, 2012, and returns to
1.25
for periods thereafter. In addition, the July 2012 Amendment permits divestitures, acquisitions and transfers of assets to non-credit parties, under certain conditions. The July 2012 Amendment also contains a provision whereby if our cash balance exceeds
$65 million
as of weekly measurement dates, we must prepay any additional borrowings made subsequent to the July 2012 Amendments. This provision is effective until we are in compliance with our original covenant requirements for two consecutive quarters. There were no required prepayments in the third quarter of 2012.
Absent the waiver and additional July 2012 Amendment, we would have been in violation of the June 24, 2012 leverage ratio and fixed charge coverage covenants. We are in compliance with the leverage ratio covenant as of
September 23, 2012
. The fixed charge covenant was waived for the quarter ended
September 23, 2012
. Absent the waiver, we would have been in violation of the fixed charge covenant as of
September 23, 2012
. Although we cannot provide full assurance, we project to be in compliance with all of our covenants for all periods subsequent to the fiscal quarter ended September 23, 2012.
During the Waiver Period, the interest rate spread on the Senior Secured Credit Facility increases to a maximum of
4.25%
over the Base Rate or
5.25%
over the LIBOR rate. The “Base Rate” is the highest of (a) our lender’s prime rate, (b) the Federal Funds rate, plus
0.50%
, and (c)
a daily rate equal to the one-month LIBOR rate, plus 1.00%
. The unused line fee will increase to a maximum of
1.00%
per annum. The maximum is based in accordance with changes in our leverage ratio.
During the quarter ended September 23, 2012, the Company incurred
$1.4 million
in fees and expenses in connection with the July 2012 Amendment to the Senior Secured Credit Facility, which were capitalized and will be amortized over the term of the Senior Secured Credit Facility to interest expense on the Consolidated Statement of Operations. In connection with the reduction in borrowing capacity of the Senior Secured Credit Facility, the Company recognized
$0.8 million
of unamortized debt issuance costs. The cost was recognized in interest expense on the Consolidated Statement of Operations in the third quarter of 2012.
On
September 21, 2012
, the Company repaid
$6.1 million
on the Senior Secured Credit Facility. Pursuant to the terms of the July 2012 Amendment, the repayment permanently reduced the outstanding borrowing capacity from
$75.0 million
to
$68.9 million
. In connection with the reduction in borrowing capacity of the Senior Secured Credit Facility, the Company recognized
$0.2 million
of unamortized debt issuance costs. The cost was recognized in interest expense on the Consolidated Statement of Operations in the third quarter of 2012.
The Senior Secured Credit Facility includes an expansion option that will allow us, subject to certain conditions, to request an increase in the Senior Secured Credit Facility of up to an aggregate of
$50.0 million
, for a potential total commitment of
$118.9 million
. As of
September 23, 2012
, we were not eligible to elect to request the $50.0 million expansion option due to financial covenant restrictions.
As of
September 23, 2012
,
$1.4 million
issued in letters of credit were outstanding under the Senior Secured Credit Facility.
All obligations of domestic borrowers under the Senior Secured Credit Facility are irrevocably and unconditionally guaranteed on a joint and several basis by our domestic subsidiaries. The obligations of foreign borrowers under the Senior Secured Credit Facility are irrevocably and unconditionally guaranteed on a joint and several basis by certain of our foreign subsidiaries as well as the domestic guarantors. Collateral under the Senior Secured Credit Facility includes a
100%
stock pledge of domestic subsidiaries and a
65%
stock pledge of all first-tier foreign subsidiaries, excluding our Japanese sales subsidiary. As a condition of the July 2012 Amendment, all domestic assets are also pledged as collateral. The approximate net book value of the collateral as of
September 23, 2012
was
$142 million
.
Pursuant to the original terms of the Senior Secured Credit Facility, we are subject to various requirements, including covenants requiring the maintenance of a maximum total leverage ratio of
2.75
and a minimum fixed charge coverage ratio of
1.25
. The Senior Secured Credit Facility also contains customary representations and warranties, affirmative and negative covenants, notice provisions and events of default, including change of control, cross-defaults to other debt, and judgment defaults. Upon a default under the Senior Secured Credit Facility, including the non-payment of principal or interest, our obligations under the Senior Secured Credit Facility may be accelerated and the assets securing such obligations may be sold. Certain of our wholly-owned subsidiaries with respect to the Company are guarantors of our obligations under the Senior Secured Credit Facility.
Senior Secured Notes
On February 17, 2012, we received an amendment to our Senior Secured Notes which increased the required leverage ratio covenant of adjusted EBITDA to total debt from
2.75
to
3.00
,
3.35
and
3.25
for the periods ended March 25, June 24 and September 23, 2012. In addition, the amendment prohibits the Company from consummating any acquisitions from February 17, 2012 through the fiscal quarter ending September 23, 2012. Had we not received the amendment, we would have been in violation of the leverage ratio covenant as of March 25, 2012.
On July 31, 2012, we received an additional amendment to our Senior Secured Notes ("July 2012 Amendment"), which contained several modifications. The July 2012 Amendment increased the required leverage ratio covenant of adjusted EBITDA to total debt to
5.25
,
6.50
,
5.50
,
3.50
, and
2.75
for the periods ended June 24, 2012, September 23, 2012, December 30, 2012, March 31, 2013, and June 30, 2013 and thereafter. Cash restructuring of up to
$25.0 million
is excluded from the calculation of EBITDA beginning in the fiscal quarter ending June 24, 2012. The July 2012 Amendment waives the fixed charge covenant from June 24, 2012 through September 23, 2012 (the "Waiver Period"), decreases it to
1.00
for the period ended December 30, 2012, and returns to
1.25
for periods thereafter. In addition, the July 2012 Amendment permits divestitures, acquisitions and transfers of assets to non-credit parties, under certain conditions.
Absent the waiver and additional July 2012 Amendment, we would have been in violation of the June 24, 2012 leverage ratio and fixed charge coverage covenants. We are in compliance with the amended leverage ratio covenant as of
September 23, 2012
. The fixed charge covenant was waived for the quarter ended
September 23, 2012
. Absent the waiver, we would have been in violation of the fixed charge covenant as of
September 23, 2012
. Although we cannot provide full assurance, we project to be in compliance with all of our covenants for all periods subsequent to the fiscal quarter ended September 23, 2012.
During the Waiver Period, and until such time the financial covenants return to the original covenants for two consecutive quarters, the coupon rate on the Senior Secured Notes will increase to
5.75%
,
6.13%
, and
6.50%
for the Series A Senior Secured Notes, Series B Senior Secured Notes, and Series C Senior Secured Notes, respectively.
During the quarter ended
September 23, 2012
, the Company incurred
$1.4 million
in fees and expenses in connection with the July 2012 Amendment to the Senior Secured Notes, of which
$0.7 million
were recognized in selling, general, and administrative expenses on the Consolidated Statement of Operations in the third quarter of fiscal 2012 and
$0.7 million
, which were capitalized and will be amortized over the term of the Senior Secured Notes to interest expense on the Consolidated Statement of Operations.
On
September 21, 2012
, the Company repaid
$8.9 million
in principal as well as a make-whole premium of
$1.1 million
related to the Senior Secured Notes. In connection with the repayment on the Senior Secured Notes, the Company recognized
$0.1 million
of unamortized debt issuance costs. The unamortized debt issuance costs and make whole premium fees were recognized in interest expense on the Consolidated Statement of Operations in the third quarter of fiscal 2012.
The Senior Secured Notes Agreement provides that for a three-year period ending on July 22, 2013, we may issue, and our lender may, in its sole discretion, purchase, additional fixed-rate senior secured notes and together with the Senior Secured Notes, up to an aggregate amount of
$50.0 million
. As of
September 23, 2012
, we were not eligible to elect to request the $50.0 million expansion option due to financial covenant restrictions.
All obligations under the Senior Secured Notes are irrevocably and unconditionally guaranteed on a joint and several basis by our domestic subsidiaries. Collateral under the Senior Secured Notes includes a
100%
stock pledge of domestic subsidiaries and a
65%
stock pledge of all first-tier foreign subsidiaries, excluding our Japanese sales subsidiary. As a condition of the July 2012 Amendment, all domestic assets are also pledged as collateral. The approximate net book value of the collateral as of
September 23, 2012
was
$142 million
.
The original Senior Secured Notes Agreement is subject to covenants that are substantially similar to the covenants in the Senior Secured Credit Facility Agreement, including covenants requiring the maintenance of a maximum total leverage ratio of
2.75
and a minimum fixed charge coverage ratio of
1.25
. The Senior Secured Notes Agreement also contains representations and warranties, affirmative and negative covenants, notice provisions and events of default, including change of control, cross-defaults to other debt, and judgment defaults that are substantially similar to those contained in the Senior Secured Credit Facility, and those that are customary for similar private placement transactions. Upon a default under the Senior Secured Notes Agreement, including the non-payment of principal or interest, our obligations under the Senior Secured Notes Agreement may be accelerated and the assets securing such obligations may be sold. Additionally, the Senior Secured Notes have a make-whole provision that requires the discounted value of the remaining payments on the Senior Secured Notes expected through the end term of each of the Senior Secured Notes to be paid in full upon early termination, acceleration, or prepayment. Certain of our wholly-owned subsidiaries are also guarantors of our obligations under the Senior Secured Notes.
Full-recourse Factoring Arrangements
In December 2009, we entered into new full-recourse factoring arrangements in Europe. The arrangements are secured by trade receivables. The Company received a weighted average of
92.4%
of the face amount of receivables that it desired to sell and the bank agreed, at its discretion, to buy. As of
September 23, 2012
the factoring arrangements had a balance of
$1.0 million
(
€0.8 million
), of which
$0.3 million
(
€0.3 million
) was included in the current portion of long-term debt and
$0.7 million
(
€0.5 million
) was included in long-term borrowings in the accompanying Consolidated Balance Sheets since the receivables are collectible through 2016.
Note 5. STOCK-BASED COMPENSATION
Stock-based compensation cost recognized in operating results (included in selling, general, and administrative expenses) for the
three and nine
months ended
September 23, 2012
was
$1.0 million
and
$3.7 million
(
$1.0 million
and
$3.6 million
, net of tax), respectively. For the
three and nine
months ended
September 25, 2011
, the total compensation expense was
$1.4 million
and
$6.2 million
(
$1.1 million
and
$4.6 million
, net of tax), respectively. The associated actual tax benefit realized for the tax deduction from option exercises of share-based payment units and awards released equaled
$0.8 million
and
$1.1 million
for the
nine
months ended
September 23, 2012
and
September 25, 2011
, respectively.
Stock Options
Option activity under the principal option plans as of
September 23, 2012
and changes during the
nine
months ended
September 23, 2012
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
|
Outstanding at December 25, 2011
|
2,600,805
|
|
|
$
|
19.54
|
|
|
4.39
|
|
|
$
|
512
|
|
|
Granted
|
801,880
|
|
|
9.70
|
|
|
|
|
|
|
|
|
Exercised
|
(38,084
|
)
|
|
8.83
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
(254,527
|
)
|
|
16.60
|
|
|
|
|
|
|
|
|
Outstanding at September 23, 2012
|
3,110,074
|
|
|
$
|
17.37
|
|
|
4.79
|
|
|
$
|
342
|
|
|
Vested and expected to vest at September 23, 2012
|
3,110,074
|
|
|
$
|
17.37
|
|
|
4.79
|
|
|
$
|
342
|
|
|
Exercisable at September 23, 2012
|
2,361,581
|
|
|
$
|
19.58
|
|
|
3.29
|
|
|
$
|
49
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the
third
quarter of
fiscal 2012
and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on
September 23, 2012
. This amount changes based on the fair market value of the Company’s stock. The total intrinsic value of options exercised for the
nine
months ended
September 23, 2012
and
September 25, 2011
was
$0.1 million
and
$1.1 million
, respectively.
As of
September 23, 2012
,
$2.4 million
of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of
2.2
years.
The fair value of share-based payment units was estimated using the Black-Scholes option pricing model. The table below presents the weighted-average expected life in years. The expected life computation is based on historical exercise patterns and post-vesting termination behavior. Volatility is determined using changes in historical stock prices. The interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions and weighted-average fair values were as follows:
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
September 23,
2012
|
|
|
September 25,
2011
|
|
|
Weighted-average fair value of grants
|
4.38
|
|
|
9.88
|
|
|
Valuation assumptions:
|
|
|
|
|
|
|
Expected dividend yield
|
0.00
|
%
|
|
0.00
|
%
|
|
Expected volatility
|
52.08
|
%
|
|
49.85
|
%
|
|
Expected life (in years)
|
5.06
|
|
|
4.96
|
|
|
Risk-free interest rate
|
0.750
|
%
|
|
2.178
|
%
|
Restricted Stock Units
Nonvested service based restricted stock units as of
September 23, 2012
and changes during the
nine
months ended
September 23, 2012
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Vest Date
(in years)
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
|
Nonvested at December 25, 2011
|
617,672
|
|
|
0.79
|
|
|
$
|
21.29
|
|
|
Granted
|
210,795
|
|
|
|
|
|
$
|
10.72
|
|
|
Vested
|
(186,254
|
)
|
|
|
|
|
$
|
11.38
|
|
|
Forfeited
|
(68,046
|
)
|
|
|
|
|
$
|
17.34
|
|
|
Nonvested at September 23, 2012
|
574,167
|
|
|
1.04
|
|
|
$
|
21.09
|
|
|
Vested and expected to vest at September 23, 2012
|
574,167
|
|
|
1.04
|
|
|
|
|
|
Vested at September 23, 2012
|
61,250
|
|
|
—
|
|
|
|
|
The total fair value of restricted stock awards vested during the first
nine
months of
2012
was
$2.1 million
as compared to
$3.3 million
in the first
nine
months of
2011
. As of
September 23, 2012
, there was
$2.6 million
of unrecognized stock-based compensation expense related to nonvested restricted stock units. That cost is expected to be recognized over a weighted-average period of
1.6
years.
Other Compensation Arrangements
On March 15, 2010, we initiated a plan in which time-vested cash unit awards were granted to eligible employees. The time-vested cash unit awards under this plan vest evenly over two or three years from the date of grant. The total amount accrued related to the plan equaled
$0.7 million
at
September 23, 2012
, of which
$0.3 million
and
$0.8 million
was expensed for the
three and nine
months ended
September 23, 2012
. The total amount accrued related to the plan equaled
$0.4 million
at
September 25, 2011
, of which
$0.2 million
and
$0.4 million
was expensed for the
three and nine
months ended
September 25, 2011
. The associated liability is included in Accrued Compensation and Related Taxes in the accompanying Consolidated Balance Sheets.
Note 6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes for the
nine
months ended
September 23, 2012
and
September 25, 2011
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
|
|
|
Nine months ended
|
September 23,
2012
|
|
|
September 25,
2011
|
|
|
Interest
|
$
|
8,194
|
|
|
$
|
5,660
|
|
|
Income tax payments
|
$
|
8,229
|
|
|
$
|
9,309
|
|
In January 2011, the Company entered into an agreement to acquire the Shore to Shore businesses, through the acquisition of equity and/or assets, which together is a retail apparel and footwear product identification business which designs, manufactures and sells tags and labels, brand protection, and EAS solutions/labels. The acquisition was settled on May 16, 2011 for approximately
$78.7 million
, net of cash acquired of
$1.9 million
and the assumption of debt of
$4.2 million
. The purchase price was funded by
$66.7 million
of cash from operations (with
$27.8 million
paid in the third quarter of 2011) and
$9.2 million
of borrowings under our Senior Secured Credit Facility. The acquisition payment, net of cash acquired, is reflected in the acquisition of businesses line within investing activities on the Consolidated Statement of Cash Flows.
At
September 23, 2012
and
September 25, 2011
, the Company accrued
$0.6 million
and
$3.0 million
of capital expenditures, respectively. These amounts were excluded from the Consolidated Statements of Cash Flows at
September 23, 2012
and
September 25, 2011
since they represent non-cash investing activities. Accrued capital expenditures at
September 23, 2012
and
September 25, 2011
are included in accounts payable and other accrued expenses on the Consolidated Balance Sheets.
Note 7. EARNINGS PER SHARE
The following data shows the amounts used in computing earnings per share and the effect on net earnings from continuing operations attributable to Checkpoint Systems, Inc. and the weighted-average number of shares of dilutive potential common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
Nine Months
|
|
|
(13 weeks) Ended
|
|
(39 weeks) Ended
|
|
(amounts in thousands, except per share data)
|
September 23,
2012
|
|
|
September 25,
2011
|
|
|
September 23,
2012
|
|
|
September 25,
2011
|
|
|
|
|
|
(As Revised)
|
|
|
|
|
(As Revised)
|
|
|
Basic loss from continuing operations attributable to Checkpoint Systems, Inc. available to common stockholders
|
$
|
(4,167
|
)
|
|
$
|
(47,593
|
)
|
|
$
|
(107,689
|
)
|
|
$
|
(45,641
|
)
|
|
Diluted loss from continuing operations attributable to Checkpoint Systems, Inc. available to common stockholders
|
$
|
(4,167
|
)
|
|
$
|
(47,593
|
)
|
|
$
|
(107,689
|
)
|
|
$
|
(45,641
|
)
|
|
|
|
|
|
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
40,521
|
|
|
40,134
|
|
|
40,415
|
|
|
40,038
|
|
|
Shares issuable under deferred compensation agreements
|
546
|
|
|
471
|
|
|
531
|
|
|
455
|
|
|
Basic weighted-average number of common shares outstanding
|
41,067
|
|
|
40,605
|
|
|
40,946
|
|
|
40,493
|
|
|
Common shares assumed upon exercise of stock options and awards
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Shares issuable under deferred compensation arrangements
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Dilutive weighted-average number of common shares outstanding
|
41,067
|
|
|
40,605
|
|
|
40,946
|
|
|
40,493
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss attributable to Checkpoint Systems, Inc. per share:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
$
|
(0.10
|
)
|
|
$
|
(1.17
|
)
|
|
$
|
(2.63
|
)
|
|
$
|
(1.13
|
)
|
|
Loss from discontinued operations, net of tax
|
(0.03
|
)
|
|
(0.03
|
)
|
|
(0.07
|
)
|
|
(0.04
|
)
|
|
Basic loss attributable to Checkpoint Systems, Inc. per share
|
$
|
(0.13
|
)
|
|
$
|
(1.20
|
)
|
|
$
|
(2.70
|
)
|
|
$
|
(1.17
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted loss attributable to Checkpoint Systems, Inc. per share:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
$
|
(0.10
|
)
|
|
$
|
(1.17
|
)
|
|
$
|
(2.63
|
)
|
|
$
|
(1.13
|
)
|
|
Loss from discontinued operations, net of tax
|
(0.03
|
)
|
|
(0.03
|
)
|
|
(0.07
|
)
|
|
(0.04
|
)
|
|
Diluted loss attributable to Checkpoint Systems, Inc. per share
|
$
|
(0.13
|
)
|
|
$
|
(1.20
|
)
|
|
$
|
(2.70
|
)
|
|
$
|
(1.17
|
)
|
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
three and nine
month periods ended
September 23, 2012
and
September 25, 2011
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
Nine Months
|
|
|
(13 weeks) Ended
|
|
(39 weeks) Ended
|
|
(amounts in thousands)
|
September 23,
2012
|
|
|
September 25,
2011
|
|
|
September 23,
2012
|
|
|
September 25,
2011
|
|
|
Weighted-average common share equivalents associated with anti-dilutive stock options and restricted stock units excluded from the computation of diluted EPS
(1)
|
3,296
|
|
|
2,601
|
|
|
3,068
|
|
|
2,250
|
|
|
|
|
|
(1)
|
Adjustments for stock options and awards of
15
shares and
64
shares, respectively were anti-dilutive in the
three
and
nine
months ended
2012
. Adjustments for stock options and awards of
227
shares and
384
shares, respectively, and deferred compensation arrangements of
6
shares and
5
shares, respectively, were anti-dilutive in the
three
and
nine
months ended
2011
. These shares were therefore excluded from the earnings per share calculation due to our net loss for the periods.
|
Note 8. INCOME TAXES
The effective tax rate for the
thirty-nine weeks
ended
September 23, 2012
was
0.7%
as compared to negative
570.2%
for the
thirty-nine weeks
ended
September 25, 2011
. The increase in the effective tax rate for the
thirty-nine weeks
ended
September 23, 2012
was due to the impairment charges and the valuation allowance position in the United States, discussed further below.
For the thirty-nine weeks ended
September 23, 2012
, included in the loss from earnings from continuing operations before income taxes were charges for impairments of goodwill and property, plant and equipment of
$64.4 million
and
$6.2 million
, respectively. Due to the unusual and infrequent nature of these charges, the
$1.2 million
tax benefit related to the asset impairments has been recorded discretely.
In accordance with ASC 740, “Accounting for Income Taxes”, we evaluate our deferred income taxes quarterly to determine if valuation allowances are required or should be adjusted. ASC 740 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on all available evidence, both positive and negative, using a “more likely than not” standard. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, the Company's experience with loss carryforwards not expiring and tax planning alternatives. The Company operates and derives income across multiple jurisdictions. As the geographic footprint of the business changes, we may encounter losses in jurisdictions that have been historically profitable, and as a result might require additional valuation allowances to be recorded against certain deferred tax asset balances. At
September 23, 2012
and
December 25, 2011
, we had net deferred tax assets of
$11.3 million
and
$11.7 million
respectively.
During the quarter ending
September 25, 2011
a valuation allowance in the amount of
$48.0 million
was established related to all components of the domestic net deferred tax assets based on the determination after the above considerations that it was more likely than not that the deferred tax assets would not be fully realized. This charge was primarily a result of the trend of significant domestic losses experienced by the Company in recent years.
The Company has historically determined its interim tax provision using an estimated annual effective tax rate methodology. In calculating the tax provision for the three and six months ended June 24, 2012 and the
three and nine
months ended
September 23, 2012
, we have accounted for the U.S. operations by applying the discrete method. The Company determined that if the U.S. were included in the estimated annual effective tax rate, small changes in estimated pretax earnings would result in significant fluctuations in the tax rate. Therefore, the historical method would not provide a reliable estimate for the reporting periods ended June 24, 2012 and
September 23, 2012
.
Included in the Company's
$45.6 million
of other current assets is a current income tax receivable of
$9.3 million
. This amount represents estimated tax payments on account net of refunds received in the amount of
$8.5 million
and a tax benefit recorded on the Company's year to date pretax loss of
$0.8 million
. Included in the
$28.7 million
of other current liabilities is the Company's current deferred tax liability of
$4.6 million
.
The total amount of gross unrecognized tax benefits that, if recognized, would affect the effective tax rate was
$11.0 million
and
$13.2 million
at
September 23, 2012
and
December 25, 2011
, respectively. Penalties and tax-related interest expense are reported as a component of income tax expense. During the
nine
months ended
September 23, 2012
we recognized a release of
interest and penalties expense of
$0.7 million
compared to an interest and penalties expense of
$0.2 million
during the
nine
months ended
September 25, 2011
, in the Statement of Operations. At
September 23, 2012
and
December 25, 2011
, the Company had accrued interest and penalties related to unrecognized tax benefits of
$3.8 million
and
$4.6 million
, respectively.
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 decrease within the next twelve months by a range of
$2.3 million
to
$3.7 million
.
We are currently under audit in the following major jurisdictions: Germany
2006
–
2009
, Finland
2008
–
2009
, and India
2008
–
2012
.
Note 9. PENSION BENEFITS
The components of net periodic benefit cost for the
three and nine
months ended
September 23, 2012
and
September 25, 2011
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
Nine Months
|
|
|
(13 weeks) Ended
|
|
(39 weeks) Ended
|
|
(amounts in thousands)
|
September 23,
2012
|
|
|
September 25,
2011
|
|
|
September 23,
2012
|
|
|
September 25,
2011
|
|
|
Service cost
|
$
|
207
|
|
|
$
|
247
|
|
|
$
|
637
|
|
|
$
|
736
|
|
|
Interest cost
|
940
|
|
|
1,125
|
|
|
2,898
|
|
|
3,346
|
|
|
Expected return on plan assets
|
10
|
|
|
39
|
|
|
31
|
|
|
117
|
|
|
Amortization of actuarial loss
|
54
|
|
|
12
|
|
|
166
|
|
|
37
|
|
|
Amortization of transition obligation
|
13
|
|
|
33
|
|
|
42
|
|
|
98
|
|
|
Amortization of prior service costs
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
|
Net periodic pension cost
|
$
|
1,225
|
|
|
$
|
1,457
|
|
|
$
|
3,776
|
|
|
$
|
4,336
|
|
We expect the cash requirements for funding the pension benefits to be approximately
$4.7 million
during
fiscal 2012
, including
$3.7 million
which was funded during the
nine
months ended
September 23, 2012
.
Note 10. FAIR VALUE MEASUREMENT, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Fair Value Measurement
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.
The fair value hierarchy 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 tables represent our assets and liabilities measured at fair value on a recurring basis as of
September 23, 2012
and
December 25, 2011
and the basis for that measurement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
Total Fair Value Measurement September 23, 2012
|
|
|
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Foreign currency forward exchange contracts
|
$
|
36
|
|
|
$
|
—
|
|
|
$
|
36
|
|
|
$
|
—
|
|
|
Foreign currency revenue forecast contracts
|
170
|
|
|
—
|
|
|
170
|
|
|
—
|
|
|
Total assets
|
$
|
206
|
|
|
$
|
—
|
|
|
$
|
206
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
$
|
339
|
|
|
$
|
—
|
|
|
$
|
339
|
|
|
$
|
—
|
|
|
Foreign currency revenue forecast contracts
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total liabilities
|
$
|
339
|
|
|
$
|
—
|
|
|
$
|
339
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
amounts in thousands)
|
Total Fair Value Measurement December 25, 2011
|
|
|
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Foreign currency forward exchange contracts
|
$
|
463
|
|
|
$
|
—
|
|
|
$
|
463
|
|
|
$
|
—
|
|
|
Foreign currency revenue forecast contracts
|
1,120
|
|
|
—
|
|
|
1,120
|
|
|
—
|
|
|
Total assets
|
$
|
1,583
|
|
|
$
|
—
|
|
|
$
|
1,583
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
$
|
415
|
|
|
$
|
—
|
|
|
$
|
415
|
|
|
$
|
—
|
|
|
Foreign currency revenue forecast contracts
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total liabilities
|
$
|
415
|
|
|
$
|
—
|
|
|
$
|
415
|
|
|
$
|
—
|
|
The following table provides a summary of the activity associated with all of our designated cash flow hedges (foreign currency) reflected in accumulated other comprehensive income for the
nine
months ended
September 23, 2012
:
|
|
|
|
|
|
|
|
(amounts in thousands)
|
September 23,
2012
|
|
|
Beginning balance, net of tax
|
$
|
1,542
|
|
|
Changes in fair value gain, net of tax
|
499
|
|
|
Reclassification to earnings, net of tax
|
(1,300
|
)
|
|
Ending balance, net of tax
|
$
|
741
|
|
We believe that the fair values of our current assets and current liabilities (cash, restricted cash, accounts receivable, accounts payable, and other current liabilities) approximate their reported carrying amounts. The carrying values and the estimated fair values of non-current financial assets and liabilities that qualify as financial instruments and are not measured at fair value on a recurring basis at
September 23, 2012
and
December 25, 2011
are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 23, 2012
|
|
December 25, 2011
|
|
(amounts in thousands)
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Long-term debt (including current maturities and excluding capital leases and factoring)
(1)
|
|
|
|
|
|
|
|
|
Senior secured credit facility
|
$
|
44,206
|
|
|
$
|
44,206
|
|
|
$
|
52,248
|
|
|
$
|
52,248
|
|
|
Senior secured notes
|
$
|
66,114
|
|
|
$
|
66,012
|
|
|
$
|
75,000
|
|
|
$
|
75,686
|
|
|
|
|
|
(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 related fair value measurement has generally been classified as Level 2.
Financial Instruments and Risk Management
We manufacture products in the U.S., Europe, and the Asia Pacific region for both the local marketplace and for export to our foreign subsidiaries. The foreign 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. A reduction in our third party foreign currency borrowings will result in an increase of foreign currency fluctuations on 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. We will consider using interest rate derivatives to manage interest rate risks when there is a disproportionate ratio of floating and fixed-rate debt. 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.
The following table presents the fair values of derivative instruments included within the Consolidated Balance Sheets as of
September 23, 2012
and
December 25, 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 23, 2012
|
|
December 25, 2011
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
(amounts in thousands)
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency revenue forecast contracts
|
Other current
assets
|
|
$
|
170
|
|
|
Other current
liabilities
|
|
$
|
—
|
|
|
Other current
assets
|
|
$
|
1,120
|
|
|
Other current
liabilities
|
|
$
|
—
|
|
|
Total derivatives designated as hedging instruments
|
|
|
170
|
|
|
|
|
—
|
|
|
|
|
1,120
|
|
|
|
|
—
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
Other current
assets
|
|
36
|
|
|
Other current
liabilities
|
|
339
|
|
|
Other current
assets
|
|
463
|
|
|
Other current
liabilities
|
|
415
|
|
|
Total derivatives not designated as hedging instruments
|
|
|
36
|
|
|
|
|
339
|
|
|
|
|
463
|
|
|
|
|
415
|
|
|
Total derivatives
|
|
|
$
|
206
|
|
|
|
|
$
|
339
|
|
|
|
|
$
|
1,583
|
|
|
|
|
$
|
415
|
|
The following tables present the amounts affecting the Consolidated Statement of Operations for the
three
months ended
September 23, 2012
and
September 25, 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 23, 2012
|
|
September 25, 2011
|
|
(amounts in thousands)
|
Amount of
Gain (Loss)
Recognized
in Other
Comprehensive
Income on
Derivatives
|
|
Location of
Gain (Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income into
Income
|
Amount of
Gain (Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income into
Income
|
|
Amount of
Forward
Points
Recognized
in
Other Gain
(Loss), net
|
|
|
Amount of
Gain (Loss)
Recognized
in Other
Comprehensive
Income on
Derivatives
|
|
Location of
Gain (Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income into
Income
|
Amount of
Gain (Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income into
Income
|
|
Amount of
Forward
Points
Recognized
in
Other Gain
(Loss), net
|
|
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency revenue forecast contracts
|
$
|
(298
|
)
|
Cost of sales
|
$
|
543
|
|
$
|
11
|
|
|
$
|
1,390
|
|
Cost of sales
|
$
|
(720
|
)
|
$
|
(188
|
)
|
|
Total designated cash flow hedges
|
$
|
(298
|
)
|
|
$
|
543
|
|
$
|
11
|
|
|
$
|
1,390
|
|
|
$
|
(720
|
)
|
$
|
(188
|
)
|
The following tables present the amounts affecting the Consolidated Statement of Operations for the
nine
months ended
September 23, 2012
and
September 25, 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 23, 2012
|
|
September 25, 2011
|
|
(amounts in thousands)
|
Amount of
Gain (Loss)
Recognized
in Other
Comprehensive
Income on
Derivatives
|
|
Location of
Gain (Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income into
Income
|
Amount of
Gain (Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income into
Income
|
|
Amount of
Forward
Points
Recognized
in
Other Gain
(Loss), net
|
|
|
Amount of
Gain (Loss)
Recognized
in Other
Comprehensive
Income on
Derivatives
|
|
Location of
Gain (Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income into
Income
|
Amount of
Gain (Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income into
Income
|
|
Amount of
Forward
Points
Recognized
in
Other Gain
(Loss), net
|
|
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Foreign currency revenue forecast contracts
|
$
|
524
|
|
Cost of sales
|
$
|
1,322
|
|
$
|
89
|
|
|
$
|
(1,334
|
)
|
Cost of sales
|
$
|
(1,214
|
)
|
$
|
(293
|
)
|
|
Total designated cash flow hedges
|
$
|
524
|
|
|
$
|
1,322
|
|
$
|
89
|
|
|
$
|
(1,334
|
)
|
|
$
|
(1,214
|
)
|
$
|
(293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
Nine Months
|
|
|
(13 weeks) Ended
|
|
(39 weeks) Ended
|
|
|
September 23, 2012
|
September 25, 2011
|
|
September 23, 2012
|
September 25, 2011
|
|
(amounts in thousands)
|
Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
|
|
Location of
Gain (Loss)
Recognized in
Income on
Derivatives
|
Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
|
|
Location of
Gain (Loss)
Recognized in
Income on
Derivatives
|
|
Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
|
|
Location of
Gain (Loss)
Recognized in
Income on
Derivatives
|
Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
|
|
Location of
Gain (Loss)
Recognized in
Income on
Derivatives
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forwards and options
|
$
|
(81
|
)
|
Other gain
(loss), net
|
$
|
185
|
|
Other gain
(loss), net
|
|
$
|
193
|
|
Other gain
(loss), net
|
$
|
(216
|
)
|
Other gain
(loss), net
|
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. 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. As of
September 23, 2012
, we had currency forward exchange contracts with notional amounts totaling approximately
$13.7 million
. The fair values of the forward exchange contracts were reflected as a
$36 thousand
asset and a
$0.3 million
liability and are included in other current assets and other current liabilities in the accompanying balance sheets. The contracts are in the various local currencies covering primarily our operations in the U.S., the Caribbean, and Western Europe. Historically, we have not purchased currency forward exchange contracts where it is not economically efficient, specifically for our operations in South America and Asia, with the exception of Japan.
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 October 2012 to March 2013. The purpose of these cash flow hedges is to eliminate the currency risk associated with Euro-denominated forecasted inter-company revenues due to changes in exchange rates. 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. As of
September 23, 2012
, the fair value of these cash flow hedges were reflected as a
$0.2 million
asset and is included in other current assets in the accompanying Consolidated Balance Sheets. The total notional amount of these hedges is
$7.2 million
(
€5.4 million
) and the unrealized gain recorded in other comprehensive income was
$0.9 million
(net of taxes of
$40 thousand
), of which
$0.9 million
(net of taxes of
$40 thousand
) is expected to be reclassified to earnings over the next twelve months. During the
three and nine
months ended
September 23, 2012
, a
$0.5 million
and
$1.3 million
benefit related to these foreign currency hedges was recorded to cost of goods sold as the inventory was sold to external parties, respectively. The Company recognized
zero
and
$40 thousand
of hedge ineffectiveness during the three and
nine
months ended
September 23, 2012
.
Note 11. PROVISION FOR RESTRUCTURING
During the second quarter of 2012, in conjunction with our strategic shift, we launched a new profit improvement initiative, Project LEAN, which is designed to restructure the Company to support a more focused product range while positioning Checkpoint to return to profitable growth. Project LEAN will be reported as part of the Global Restructuring Plan. This plan focuses on consolidating certain manufacturing facilities and administrative functions to improve efficiency.
The expanded Global Restructuring Plan including Project LEAN and the SG&A Restructuring Plan will impact over
2,400
existing employees. Total costs of the Global Restructuring Plan including Project LEAN and the SG&A Restructuring Plan are expected to approximate
$70 million
to
$75 million
by the end of 2013, with
$52 million
to
$55 million
in total anticipated costs for the Global Restructuring Plan and approximately
$19 million
of costs incurred for the SG&A Restructuring Plan, which is substantially complete.
Restructuring expense for the
three and nine
months ended
September 23, 2012
and
September 25, 2011
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
Nine Months
|
|
|
(13 weeks) Ended
|
|
(39 weeks) Ended
|
|
(amounts in thousands)
|
September 23,
2012
|
|
|
September 25,
2011
|
|
|
September 23,
2012
|
|
|
September 25,
2011
|
|
|
Global Restructuring Plan (including LEAN)
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
2,442
|
|
|
5,972
|
|
|
16,661
|
|
|
5,972
|
|
|
Asset impairments
|
859
|
|
|
7,479
|
|
|
6,156
|
|
|
7,479
|
|
|
Other exit costs
|
1,174
|
|
|
—
|
|
|
3,680
|
|
|
—
|
|
|
SG&A Restructuring Plan
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
(288
|
)
|
|
3,661
|
|
|
608
|
|
|
6,120
|
|
|
Other exit costs
|
—
|
|
|
216
|
|
|
66
|
|
|
826
|
|
|
Manufacturing Restructuring Plan
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
—
|
|
|
(49
|
)
|
|
—
|
|
|
(90
|
)
|
|
Other exit costs
|
(75
|
)
|
|
—
|
|
|
(75
|
)
|
|
64
|
|
|
Total
|
$
|
4,112
|
|
|
$
|
17,279
|
|
|
$
|
27,096
|
|
|
$
|
20,371
|
|
Restructuring accrual activity for the
nine
months ended
September 23, 2012
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
Accrual at
Beginning of
Year
|
|
|
Charged to
Earnings
|
|
|
Charge
Reversed to
Earnings
|
|
|
Cash
Payments
|
|
|
Exchange
Rate Changes
|
|
|
Accrual at September 23, 2012
|
|
|
Global Restructuring Plan (including LEAN)
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
9,710
|
|
|
18,106
|
|
|
(1,445
|
)
|
|
(13,969
|
)
|
|
89
|
|
|
12,491
|
|
|
Other exit costs
(1)
|
—
|
|
|
3,680
|
|
|
—
|
|
|
(3,151
|
)
|
|
—
|
|
|
529
|
|
|
SG&A Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
6,718
|
|
|
805
|
|
|
(197
|
)
|
|
(4,860
|
)
|
|
(13
|
)
|
|
2,453
|
|
|
Other exit costs
(2)
|
1,109
|
|
|
66
|
|
|
—
|
|
|
(859
|
)
|
|
(9
|
)
|
|
307
|
|
|
Manufacturing Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Other exit costs
|
75
|
|
|
—
|
|
|
(75
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
17,612
|
|
|
$
|
22,657
|
|
|
$
|
(1,717
|
)
|
|
$
|
(22,839
|
)
|
|
$
|
67
|
|
|
$
|
15,780
|
|
|
|
|
|
(1)
|
During the first
nine
months of 2012, there was a net charge to earnings of
$3.7 million
primarily due to lease termination costs, inventory and equipment moving costs, restructuring agent costs, legal costs, and gains/losses on sale of assets in connection with the restructuring plan.
|
|
|
|
|
(2)
|
During the first
nine
months of 2012, there was a net charge to earnings of
$0.1 million
primarily due to lease termination costs, and inventory and equipment moving costs, in connection with the restructuring plan.
|
Global Restructuring Plan (including LEAN)
During September 2011, we initiated the Global Restructuring Plan focused on further reducing our overall operating expenses by including manufacturing and other cost reduction initiatives, such as consolidating certain manufacturing facilities and administrative functions to improve efficiencies. This plan was further expanded in the first quarter of 2012 and again during the second quarter of 2012 to include Project LEAN. The first phase of this plan was implemented in the third quarter of 2011 with the remaining phases of the plan expected to be substantially complete by the end of 2013.
For the
nine
months ended
September 23, 2012
, the net charge to earnings of
$26.5 million
represents the current year activity related to the Global Restructuring Plan including Project LEAN. The anticipated total costs related to the plan are expected to approximate
$52 million
to
$55 million
, of which
$45.9 million
have been incurred. The total number of employees planned to be affected by the Global Restructuring Plan including Project LEAN is
2,296
, of which
1,263
have been terminated. Termination benefits are planned to be paid
one
month to
24
months after termination.
SG&A Restructuring Plan
During 2009, we initiated the SG&A Restructuring Plan focused on reducing our overall operating expenses by consolidating certain administrative functions to improve efficiencies. The first phase of this plan was implemented in the fourth quarter of 2009 with the remaining phases of the plan substantially completed by the end of the first quarter of 2012.
For the
nine
months ended
September 23, 2012
, the net charge to earnings of
$0.7 million
represents the current year activity related to the SG&A Restructuring Plan. The implementation of the SG&A Restructuring Plan is substantially complete, with total costs incurred of approximately
$19 million
. The total number of employees planned to be affected by the SG&A Restructuring Plan is
369
, of which
363
have been terminated. Termination benefits are planned to be paid
one
month to
24
months after termination.
Manufacturing Restructuring Plan
In August 2008, we announced a manufacturing and supply chain restructuring program designed to accelerate profitable growth in our Apparel Labeling Solutions (ALS) business, formerly Check-Net
®
, and to support incremental improvements in our EAS systems and labels businesses. For the
nine
months ended
September 23, 2012
, there was a
$0.1 million
charge reversed to earnings recorded in connection with the Manufacturing Restructuring Plan.
The total number of employees planned to be affected by the Manufacturing Restructuring Plan is
420
,
all of which have been terminated
. As of
September 23, 2012
the implementation of the Manufacturing Restructuring Plan is substantially complete, with total costs incurred of
$4.1 million
.
Note 12. CONTINGENT LIABILITIES AND SETTLEMENTS
We are involved in certain legal 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 disclosed in our Annual Report on Form 10-K for the year ended
December 25, 2011
for which there have been no material changes.
Note 13. BUSINESS SEGMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
Nine Months
|
|
|
|
(13 weeks) Ended
|
|
(39 weeks) Ended
|
|
|
(amounts in thousands)
|
September 23,
2012
|
|
|
September 25,
2011
|
|
|
September 23,
2012
|
|
|
September 25,
2011
|
|
|
|
|
|
|
(As Revised)
|
|
|
|
|
(As Revised)
|
|
|
|
Business segment net revenue:
|
|
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
$
|
133,859
|
|
|
$
|
147,719
|
|
|
$
|
374,033
|
|
|
$
|
415,620
|
|
|
|
Apparel Labeling Solutions
|
41,759
|
|
|
49,488
|
|
|
133,907
|
|
|
144,705
|
|
|
|
Retail Merchandising Solutions
|
12,545
|
|
|
17,842
|
|
|
40,916
|
|
|
53,420
|
|
|
|
Total revenues
|
$
|
188,163
|
|
|
$
|
215,049
|
|
|
$
|
548,856
|
|
|
$
|
613,745
|
|
|
|
Business segment gross profit:
|
|
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
$
|
56,026
|
|
|
$
|
57,978
|
|
|
$
|
151,525
|
|
|
$
|
166,434
|
|
|
|
Apparel Labeling Solutions
|
10,101
|
|
|
14,733
|
|
|
31,626
|
|
|
44,213
|
|
|
|
Retail Merchandising Solutions
|
5,887
|
|
|
8,377
|
|
|
18,079
|
|
|
25,510
|
|
|
|
Total gross profit
|
72,014
|
|
|
81,088
|
|
|
201,230
|
|
|
236,157
|
|
|
|
Operating expenses
|
68,520
|
|
(1)
|
88,258
|
|
(2)
|
302,862
|
|
(3)
|
238,807
|
|
(4)
|
|
Interest (expense) income, net
|
(4,272
|
)
|
|
(1,237
|
)
|
|
(7,251
|
)
|
|
(3,104
|
)
|
|
|
Other gain (loss), net
|
325
|
|
|
(783
|
)
|
|
29
|
|
|
(1,049
|
)
|
|
|
Loss from continuing operations before income taxes
|
$
|
(453
|
)
|
|
$
|
(9,190
|
)
|
|
$
|
(108,854
|
)
|
|
$
|
(6,803
|
)
|
|
|
|
|
|
(1)
|
Includes a
$4.1 million
restructuring charge and a
$17 thousand
acquisition charge.
|
|
|
|
|
(2)
|
Includes a
$17.3 million
restructuring charge, a
$0.3 million
charge related to improper and fraudulent Canadian activities and a
$2 thousand
acquisition charge.
|
|
|
|
|
(3)
|
Includes a
$64.4 million
goodwill impairment charge, a
$27.1 million
restructuring charge, a
$2.9 million
charge related to our CEO transition, a
$0.7 million
charge for forensic and legal fees associated with the improper and fraudulent Canadian activities, and a
$0.1 million
acquisition charge.
|
|
|
|
|
(4)
|
Includes a
$20.4 million
restructuring charge, a
$2.2 million
acquisition charge, and a
$0.6 million
charge related to improper and fraudulent Canadian activities.
|
Note 14. DISCONTINUED OPERATIONS
We evaluate our businesses and product lines periodically for their strategic fit within our operations. Beginning in December of 2011, we began to actively market our Banking Security Systems Integration business unit included in our Shrink Management Solutions segment. As a result of this divestiture decision, we are accounting for this business as discontinued operations. The classification of this business as discontinued operations was determined to be a triggering event for testing impairment. As a result of this impairment test, we determined that there was a
$3.4 million
impairment charge in the goodwill reporting unit of our Shrink Management Solutions segment and a
$2.8 million
impairment of customer relationship intangible assets. These impairment charges were included in discontinued operations on the Consolidated Statement of Operations during the fourth quarter ended December 25, 2011.
During the second quarter of 2012, we performed an impairment test based on updated fair value information regarding the Banking Security Systems Integration business unit. As a result of this impairment test, we determined that there was a
$0.4 million
impairment charge in the goodwill reporting unit of our Shrink Management Solutions segment and a
$0.7 million
impairment of customer relationship intangible assets. During the third quarter of 2012, we performed an impairment test based on final negotiations of the selling price for the Banking Security Systems Integration business unit. As a result of this impairment test, we determined that there was a
$0.8 million
additional impairment of customer relationship intangible assets. These impairment charges were included in discontinued operations on the Consolidated Statement of Operations during the second and third quarters ended June 24, 2012 and September 23, 2012, respectively.
On October 1, 2012, we completed the sale of this business. For further information, refer to Note 15, "Subsequent Events".
The Company’s discontinued operations reflect the operating results for the disposal group. The results for the
three and nine
months ended
September 23, 2012
and
September 25, 2011
have been reclassified to show the results of operations for the Banking Security Systems Integration business unit as discontinued operations, net of tax, on the Consolidated Statement of Operations. Below is a summary of these results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
Nine Months
|
|
|
(13 weeks) Ended
|
|
(39 weeks) Ended
|
|
(amounts in thousands)
|
September 23,
2012
|
|
|
September 25,
2011
|
|
|
September 23,
2012
|
|
|
September 25,
2011
|
|
|
Net revenue
|
$
|
2,808
|
|
|
$
|
3,077
|
|
|
$
|
10,504
|
|
|
$
|
8,985
|
|
|
Gross profit
|
355
|
|
|
532
|
|
|
1,431
|
|
|
1,329
|
|
|
Selling, general, and administrative expenses
|
752
|
|
|
1,055
|
|
|
2,416
|
|
|
3,090
|
|
|
Restructuring expenses
|
—
|
|
|
113
|
|
|
—
|
|
|
113
|
|
|
Intangible impairment
|
770
|
|
|
—
|
|
|
1,442
|
|
|
—
|
|
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
370
|
|
|
—
|
|
|
Operating loss
|
(1,167
|
)
|
|
(636
|
)
|
|
(2,797
|
)
|
|
(1,874
|
)
|
|
Loss from discontinued operations before income taxes
|
(1,167
|
)
|
|
(636
|
)
|
|
(2,797
|
)
|
|
(1,874
|
)
|
|
Loss from discontinued operations, net of tax
(1)
|
$
|
(1,167
|
)
|
|
$
|
(1,069
|
)
|
|
$
|
(2,797
|
)
|
|
$
|
(1,874
|
)
|
|
|
|
|
(1)
|
As this business is located in the U.S. and a full valuation allowance is recorded in the U.S., there is no tax impact on the loss from discontinued operations for the
three and nine
months ended
September 23, 2012
, and the nine months ended September 25, 2011.
|
The assets and liabilities associated with this business have been adjusted to fair value, less costs to sell, and reclassified into assets of discontinued operations held for sale and liabilities of discontinued operations held for sale, as appropriate, on the Consolidated Balance Sheet. As of
September 23, 2012
and
December 25, 2011
the classification was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
September 23,
2012
|
|
|
December 25,
2011
|
|
|
Accounts receivable, net
|
$
|
1,525
|
|
|
$
|
1,519
|
|
|
Inventories
|
1,045
|
|
|
1,087
|
|
|
Property, plant, and equipment, net
|
18
|
|
|
11
|
|
|
Goodwill
|
—
|
|
|
370
|
|
|
Other intangibles, net
|
312
|
|
|
1,754
|
|
|
Other assets
|
936
|
|
|
1,579
|
|
|
Assets of discontinued operations held for sale
|
$
|
3,836
|
|
|
$
|
6,320
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
372
|
|
|
$
|
551
|
|
|
Accrued compensation and related taxes
|
—
|
|
|
40
|
|
|
Other accrued expenses
|
284
|
|
|
599
|
|
|
Unearned revenues
|
421
|
|
|
169
|
|
|
Restructuring reserve
|
—
|
|
|
78
|
|
|
Other liabilities
|
1
|
|
|
3
|
|
|
Liabilities of discontinued operations held for sale
|
$
|
1,078
|
|
|
$
|
1,440
|
|
Net cash flows of our discontinued operations from each of the categories of operating, investing and financing activities were not significant.
Note 15. SUBSEQUENT EVENTS
On October 1, 2012, the Company completed the sale of the Banking Security Systems Integration business unit for
$3.5 million
subject to closing adjustments related to a non-compete agreement and third-party consents plus a working capital adjustment for which the final calculation is yet to be determined. The working capital adjustment is determined based on the difference between
$2.5 million
and the final calculation of the working capital of the Banking Security Systems Integration business unit as of October 1, 2012. On October 1, 2012, the Company received cash proceeds of
$1.5 million
and a promissory note of
$1.6 million
from the purchaser. The note receivable is due in consecutive monthly installments beginning on November 1, 2012, with the last scheduled payment due on October 1, 2017. The promissory note bears interest at the
30 day LIBOR
rate plus
5.5%
. The selling price is also subject to a contingent consideration payment up to a maximum amount of
$0.9 million
. The contingent payment is based on the purchaser's revenues for the first year of its ownership of the Banking Security Systems Integration business unit. If these revenues exceed
$10 million
, the Company is entitled to a contingent payment amount of
10%
of the revenues above
$10 million
, subject to certain adjustments, not to exceed a total contingent consideration payment of
$0.9 million
. The gain or loss on sale of the Banking Security Systems Integration business unit will be recorded through discontinued operations on the Consolidated Statement of Operations during the fourth quarter ended December 30, 2012.
We filed a claim during the second quarter of 2012 with our insurance provider for the unrecovered amount of our loss related to the improper and fraudulent Canadian activities that impacted our fiscal years 2005 through 2011. The total cumulative gross financial statement impact of the improper and fraudulent activities was approximately
$5.2 million
of which
$1.1 million
was recovered by the Company from the perpetrator during the fourth quarter of 2011, resulting in a net cumulative financial statement impact of
$4.1 million
. We incurred expenses related to the improper and fraudulent activities of
$0.7 million
during 2012. On October 10, 2012, the Company received compensation of
$4.7 million
for the financial impact of the fraudulent Canadian activities from our insurance provider. The income from the settlement will be recorded in the fourth quarter of 2012 in other expense in the Consolidated Statement of Operations.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information Relating to Forward-Looking Statements
This report includes forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this quarterly report on Form 10-Q which express that we "believe," "anticipate," "expect" or "plan to" as well as other statements which are not historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the safe harbors created under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. These forward-looking statements reflect our current views with respect to future events and financial performance, and are subject to certain risks and uncertainties which could cause actual results to differ materially from historical results or those anticipated. Such risks, uncertainties and assumptions include, but are not limited, to the following: the impact upon operations of legal compliance matters or internal controls review, impro
vement and remediation, including the detection of wrongdoing, improper activities, or circumvention of internal controls; our ability to integrate acqui
sitions and to achieve our financial and operational goals for our acquisitions; changes in international business 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 successfully implement global cost reductions in operating expenses including 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, including the ability to remediate the material weakness discovered during the year ended December 25, 2011; and risks generally associated with our company-wide implementation of an enterprise resource planning (ERP) system. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Additional information about potential factors that could affect our business and financial results is included in our Annual Report on Form 10-K for the year ended December 25, 2011, and our other Securities and Exchange Commission filings.
Overview
We are a multinational manufacturer and marketer of identification, tracking, security and merchandising solutions primarily 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 Shrink Management Solutions, Apparel Labeling Solutions and Retail Merchandising Solutions. Shrink Management Solutions consists of electronic article surveillance (EAS) systems and EAS consumables including Alpha solutions, store monitoring solutions (CheckView
®
), and radio frequency identification (RFID) systems, software, tags and labels. Apparel Labeling Solutions includes our web-enabled apparel labeling solutions platform and network of service bureaus to manage the printing of variable information on price and promotional tickets, adhesive labels, fabric and woven tags and labels, and apparel branding tags. Retail Merchandising Solutions consists of hand-held labeling systems (HLS) and retail display systems (RDS). 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.
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.
As a result of a comprehensive and strategic operational review during the second quarter of 2012, we have redefined our strategic focus. We will transform our operations from a product protection business to a provider of inventory management solutions that will enable retailers to enhance profitability by managing product loss due to shrinkage, improving working capital, and increasing sales. This new strategy will continue to focus on being the recognized global leader in shrink management and merchandise visibility solutions to the retail and apparel industries and streamline and direct our Apparel Labeling business to leverage our strategic advantage in variable data management in support of RFID merchandise visibility solutions. Additionally, as part of our strategic repositioning, we will consider the divestiture of certain product lines and businesses that are not strategically important to our redefined strategy.
Our Apparel Labeling business, which was assembled over the past few years through numerous acquisitions to support our penetration into the apparel industry and to support the growth of our RFID strategy, needs a more narrow focus. We will achieve this by right-sizing the Apparel Labeling footprint in order to profitably provide on-time, high quality products to our apparel customers so that retailers can effectively merchandise their products. Simultaneously, we will reduce our Apparel Labeling product offering to only those that are also necessary to support our RFID strategy.
Our operations and results depend significantly on global market worldwide economic conditions, which have experienced deterioration in recent years. In response to these market conditions, we 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 have also implemented initiatives to reduce costs and improve working capital to mitigate the effects of the economy on our business. We believe that these restructuring initiatives coupled with the strength of our core business and our ability to generate positive cash flow will sustain us through this challenging period.
During 2009, we initiated the SG&A Restructuring Plan focused on reducing our overall operating expenses by consolidating certain administrative functions to improve efficiencies. The first phase of this plan was implemented in the fourth quarter of 2009 with the remaining phases of the plan substantially completed by the end of the first quarter of 2012. In the third quarter of 2011, the Company approved the Global Restructuring Plan, an expansion of our previous SG&A Restructuring Plan to include manufacturing and other cost reduction initiatives.
During the second quarter of 2012, in conjunction with our strategic shift, we launched a new profit improvement initiative, Project LEAN, which is designed to restructure the Company to support a more focused product range while positioning Checkpoint to return to profitable growth. Project LEAN will be reported as part of the Global Restructuring Plan.
The expanded Global Restructuring Plan including Project LEAN and the SG&A Restructuring Plan will impact over
2,400
existing employees. Total costs of the two plans are expected to approximate
$70 million
to
$75 million
by the end of 2013, with
$52 million
to
$55 million
in total anticipated costs for the Global Restructuring Plan including Project LEAN and approximately
$19 million
of costs incurred for the SG&A Restructuring Plan, which is substantially complete. Total annual savings of the two plans are expected to approximate
$100 million
to
$105 million
by end of 2013, with
$81 million
to
$85 million
in total anticipated savings for the Global Restructuring Plan including Project LEAN and
$19 million
to
$20 million
in total anticipated savings for the SG&A Restructuring Plan. Through our Global Restructuring Plan including Project LEAN, we plan to stabilize sales, actively manage margins, dramatically reduce operating expenses, more effectively manage working capital and improve global cash management control.
On February 17, 2012, we received amendments to our Senior Secured Credit Facility and Senior Secured Notes ("Debt Agreements") which increased the required leverage ratio covenant of adjusted EBITDA to total debt from
2.75
to
3.00
,
3.35
and
3.25
for the periods ended March 25th, June 24th and September 23, 2012. In addition, the amendments prohibit the Company from consummating any acquisitions from February 17, 2012 through the fiscal quarter ending September 23, 2012. Had we not received these amendments, we would have been in violation of the leverage ratio covenant as of March 25, 2012.
On July 31, 2012, we received additional amendments to our Debt Agreements ("July 2012 Amendments"), which contained several modifications. The July 2012 Amendments reduced the total commitment of the Senior Secured Credit Facility from
$125.0 million
to
$75.0 million
. The July 2012 Amendments reduced the sublimit for the issuance of letters of credit of the Senior Secured Credit Facility from
$25.0 million
to
$5.0 million
. The July 2012 Amendments reduced the sublimit for swingline loans of the Senior Secured Credit Facility from
$25.0 million
to
$5.0 million
. The July 2012 Amendments increased the required leverage ratio covenant of adjusted EBITDA to total debt to
5.25
,
6.50
,
5.50
,
3.50
, and
2.75
for the periods ended June 24, 2012, September 23, 2012, December 30, 2012, March 31, 2013, and June 30, 2013 and thereafter. Cash restructuring of up to
$25.0 million
is excluded from the calculation of EBITDA beginning in the fiscal quarter ending June 24, 2012. The July 2012 Amendments waive the fixed charge covenant from June 24, 2012 through September 23, 2012 (the "Waiver Period"), decreases it to
1.00
for the period ended December 30, 2012, and returns to 1.25 for periods thereafter. In addition, the July 2012 Amendments permit divestitures, acquisitions and transfers of assets to non-credit parties, under certain conditions.
The July 2012 Amendments also contain a provision whereby if our cash balance exceeds $65 million as of weekly measurement dates, we must prepay any additional borrowings made subsequent to the July 2012 Amendments. This provision is effective until we are in compliance with our original covenant requirements for two consecutive quarters. There were no required prepayments in the third quarter of 2012.
Absent the waiver and additional July 2012 Amendments, we would have been in violation of the June 24, 2012 leverage ratio and fixed charge coverage covenants. We are in compliance with the amended leverage ratio covenant as of September 23, 2012. The fixed charge covenant was waived for the quarter ended
September 23, 2012
. Absent the waiver, we would have been in violation of the fixed charge covenant as of
September 23, 2012
. Although we cannot provide full assurance, we project to be in compliance with all of our covenants for all periods subsequent to the fiscal quarter ended September 23, 2012.
During the Waiver Period, the interest rate spread on the Senior Secured Credit Facility increases to a maximum of 4.25% over the Base Rate or 5.25% over the LIBOR rate. The “Base Rate” is the highest of (a) our lender's prime rate, (b) the Federal Funds rate, plus 0.50%, and (c) a daily rate equal to the one-month LIBOR rate, plus 1.0%. The unused line fee will increase to a maximum of 1.00% per annum. The maximum is based in accordance with changes in our leverage ratio.
During the Waiver Period, and until such time the financial covenants return to the original covenants for two consecutive quarters, the coupon rate on the Senior Secured Notes will increase to 5.75%, 6.13%, and 6.50% for the Series A Senior Secured Notes, Series B Senior Secured Notes, and Series C Senior Secured Notes, respectively.
In January 2011, the Company entered into an agreement to acquire the business of Shore to Shore, through the acquisition of equity and/or assets, which together is a retail apparel and footwear product identification business which designs, manufactures and sells tags and labels, brand protection, and EAS solutions/labels. The acquisition settled in May 2011 for a purchase price of approximately
$78.7 million
. During the second quarter of 2012, we finalized the purchase accounting for the acquisition and the financial statements reflect the final allocations of the purchase price based on estimated fair values at the date of acquisition. The results from the acquisition and related goodwill are included in the Apparel Labeling Solutions segment. This acquisition will allow us to strengthen and expand our core apparel labeling offering and provides us with additional capacity in key geographical locations.
Future financial results will be dependent upon our ability to successfully implement our redefined strategic focus, 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 our solutions for shrink management, merchandise visibility and apparel labeling, and reduce the cost of our products and infrastructure to respond to competitive pricing pressures.
We believe that our base of recurring revenue (revenues from the sale of consumables into the installed base of security systems, apparel tags and labels, and hand-held labeling tools and services from monitoring and maintenance), repeat customer business, the anticipated effect of our restructuring activities, and our borrowing capacity should provide us with adequate cash flow and liquidity to execute our business plan.
Revision of Previously Issued Consolidated Financial Statements
As previously disclosed in our Annual Report on Form 10-K for the year ended December 25, 2011, in December of 2011, we identified errors in our financial statements resulting from improper and fraudulent activities of a certain former employee of our Canada sales subsidiary as part of the transition of our Canadian operations into our shared service environment in North America. The total cumulative gross financial statement impact of the improper and fraudulent activities was approximately
$5.2 million
and impacted fiscal years 2005 through 2011 of which
$1.1 million
was recovered by the Company from the perpetrator during the fourth quarter of 2011, resulting in a net cumulative financial statement impact of
$4.1 million
. We incurred additional expenses related to the improper and fraudulent activities of $0.7 million during 2012. The financial statement impacts of the improper and fraudulent Canadian activities have been included in other expense in the Consolidated Statements of Operations. We filed a claim in the second quarter of 2012 with our insurance provider for the unrecovered amount of the loss. On October 10, 2012, the Company received compensation of $4.7 million for the financial impact of the fraudulent Canadian activities from our insurance provider. The income from the settlement will be recorded in the fourth quarter of 2012 in other expense in the Consolidated Statement of Operations. For further information, refer to Note 15, "Subsequent Events".
All amounts in this Quarterly Report on Form 10-Q affected by the revision adjustments reflect such amounts as revised. In addition to the revisions described above, the effects of discontinued operations presentation on previously reported amounts have been included in order to reconcile between previously reported amounts and the final amounts as revised in this Quarterly Report on Form 10-Q.
Our management assessed the effectiveness of our internal control over financial reporting as of December 25, 2011, and identified a material weakness related to our controls to detect management override of controls at certain of our foreign subsidiaries that were not integrated into our shared services environments in the United States and Europe. Specifically, the monitoring controls over certain locations, including internal audits, periodic reviews of segregation of duties and review of the effectiveness of key balance sheet reconciliations were not designed to prevent or detect management override of controls that could circumvent internal control over financial reporting. As a result of this material weakness, our management concluded that our internal control over financial reporting was ineffective as of September 23, 2012. The remediation of the material weakness has progressed as expected and is anticipated to be completed in 2012. See Part I-Item 4: Controls and Procedures.
Critical Accounting Policies and Estimates
We have presented our Critical Accounting Policies and Estimates in Part II - Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 25, 2011. Except as outlined below, there have been no material changes to our Critical Accounting Policies and Estimates set forth in our Annual Report on Form 10-K for the fiscal year ended December 25, 2011.
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 of 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. 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 result of the impairment test. Market capitalization is determined by multiplying the number of 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. The difference between the sum total of the fair value of our reporting units and our market capitalization represents the control premium. As of the date of our goodwill impairment test, management has assessed our control premium to be within a reasonable range.
We have not made any changes to our methodology used in our annual impairment test since the adoption of ASC 350. Determination of the fair value of a reporting unit is a matter of judgment and involves the use of estimates and assumptions, which are based on management's best estimates at the time.
We use an income approach (discounted cash flow approach) for the determination of fair value of our reporting units. Our projected cash flows incorporate many assumptions, the most significant of which include variables such as future sales, growth rates, operating margin, and the discount rates applied.
Assumptions related to revenue, growth rates and operating margin are based on management's annual and ongoing forecasting, budgeting and planning processes and represent our best estimate of the future results of operations across the company. These estimates are subject to many assumptions, such as the economic environment across the segments in which we operate, end demand for our products, and competitor actions. 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 or significant declines in our stock price could result in an impairment to goodwill or other long-lived assets. These risks are discussed in Part 1- Item 1A - "Risk Factors", contained in our Annual Report on Form 10-K for the year ended December 25, 2011.
During the second quarter of 2012, we experienced deterioration in revenues, gross margins and operating results in each of our segments as compared to the forecasted amounts in the most recent annual impairment test. Due to the declines in operating results in our segments, a change in management, and a revised strategic focus, we determined that impairment triggering events had occurred and that an interim assessment of goodwill was warranted. This resulted in the Company's assessment that the carrying value of the Apparel Labeling Solutions reporting unit exceeded its fair value. The basis of the fair value was determined by projecting future cash flows using assumptions concerning future operating performance and economic conditions that may differ from actual 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 the 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. As a result of our interim impairment test, a
$64.4 million
non-cash goodwill impairment charge was recorded as of June 24, 2012 in our Apparel Labeling Solutions segment. The goodwill impairment expense was due to the decline in estimated future Apparel Labeling Solutions cash flow impacted by our plan to refocus the business coupled with recent declines in revenue and profitability. The impairment charge of the entire goodwill balance in our Apparel Labeling Solutions segment was recorded in goodwill impairment on the Consolidated Statement of Operations.
Our Shrink Management Solutions (SMS) segment is composed of
four
reporting units. The fair value of
two
of the
four
reporting units, Europe SMS and Asia Pacific SMS, exceeded their respective carrying values as of the date of the interim impairment test by approximately
10%
and
8%
, respectively. As of the date of our interim impairment test, the goodwill for these
two
reporting units totaled
$72.0 million
for Europe SMS and
$12.0 million
for Asia Pacific SMS. In determining the fair value of these reporting units, our projected cash flows did not contain significant growth assumptions. A
10%
decline in operating results, or a
1.10%
increase in our discount rates could result in future decreases in the fair values of these reporting units which could result in future impairments. The other reporting units within the SMS segment exceeded their respective carrying values by a significant margin.
Our Retail Merchandising Solutions (RMS) segment is composed of
two
reporting units. The fair value of
one
of the
two
reporting units, Europe RMS, exceeded its carrying value as of the date of the interim impairment test by approximately
11%
. As of the date of our interim impairment test, the goodwill for the Europe RMS reporting unit totaled
$59.3 million
. In determining the fair value of this reporting unit, our projected cash flows did not contain significant growth assumptions. A
11%
decline in operating results, or a
1.60%
increase in our discount rate could result in a future decrease in the fair value of this reporting unit which could result in a future impairment. The other reporting unit within the Retail Merchandising segment exceeded its carrying value by a significant margin.
There were no additional impairment indicators in the third quarter of 2012. While we currently believe that our projected results will not result in future impairment, a continued deterioration in results could trigger a future impairment in these reporting units.
As a result of interim impairment indicators in the second quarter of 2012, we performed a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the long-lived assets in our Apparel Labeling Solutions reporting unit to their carrying amounts. The undiscounted cash flow analysis resulted in
no
impairment charge in the quarter ended June 24, 2012. There were no additional impairment indicators in the third quarter of 2012. While we currently believe that our projected results will not result in future impairment, a continued deterioration in results could trigger a future impairment.
Results of Operations
All comparisons are with the prior year period, unless otherwise stated.
Net Revenues
Our unit volume is driven by product offerings, number of direct sales personnel, recurring sales and, to some extent, pricing. Our base of installed systems provides a source of recurring revenues from the sale of disposable tags, labels, and service revenues.
Our customers are substantially dependent on retail sales, which are seasonal, subject to significant fluctuations, and difficult to predict. In addition, current economic trends have particularly affected our customers, and consequently our net revenues have been, and may continue to be impacted in the future. Historically, we have experienced lower sales in the first half of each year.