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CHECKPOINT SYSTEMS INC 10-K 2010 SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
_______________________________
FORM 10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 27, 2009
Commission
File No. 1-11257
CHECKPOINT
SYSTEMS, INC.
(Exact
name of Registrant as specified in its Articles of Incorporation)
Securities
to be registered pursuant to Section 12(b) of the Act:
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes £ No R
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes £ No R
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes R No
£
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.05 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes £ No
£
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. R
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.:
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes £ No R
As of
June 28, 2009, the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was approximately $589,167,871.
As of
February 12, 2010, there were 39,100,096 shares of the Common Stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s Definitive Proxy Statement for its 2010 Annual Meeting of
Shareholders are incorporated by reference into Part III of this
Form 10-K.
CHECKPOINT
SYSTEMS, INC.
FORM 10-K
Table
of Contents
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, that
involve risks and uncertainties and reflect the Company’s judgment as of the
date of this report. Forward-looking statements often address our expected
future business and financial performance, and often contain words such as
“expect,” “forecast,” “anticipate,” “intend,” “plan,” “believe,” “seek,” or
“will.” By their nature, forward-looking statements address matters that are
subject to risks and uncertainties. Any such forward-looking statements may
involve risk and uncertainties that could cause actual results to differ
materially from any future results encompassed within the forward-looking
statements. Factors that could cause or contribute to such differences include:
changes in our senior management and other matters relating to
the implementation of our succession plan; our ability to integrate recent
acquisitions and to achieve related financial and operational goals; changes in
international business and economic conditions; foreign currency exchange rate
and interest rate fluctuations; lower than anticipated demand by retailers and
other customers for our products; slower commitments of retail customers to
chain-wide installations and/or source tagging adoption or expansion; possible
increases in per unit product manufacturing costs due to less than full
utilization of manufacturing capacity as a result of slowing economic conditions
or other factors; our ability to provide and market innovative and
cost-effective products; the development of new competitive technologies; our
ability to maintain our intellectual property; competitive pricing pressures
causing profit erosion; the availability and pricing of component parts and raw
materials; possible increases in the payment time for receivables as a result of
economic conditions or other market factors; changes in regulations or standards
applicable to our products; the ability to implement cost reduction in field
service, sales, and general and administrative expense, and our manufacturing
and supply chain operations without significantly impacting revenue and profits;
our ability to maintain effective internal control over financial reporting; a
failure to manage our growth effectively; and additional matters discussed more
fully in this report under Item 1A. “Risk Factors Related to Our Business”
and Item 7. “Management’s Discussion and Analysis.” We do not undertake to
update our forward-looking statements, except as required by applicable
securities laws.
Item
1. BUSINESS
Checkpoint
Systems, Inc. is a leading global manufacturer and provider of technology-driven
end-to-end loss prevention, merchandising and labeling solutions to the retail
and apparel industry. We provide solutions to brand, track and secure goods for
retailers, apparel manufacturers and consumer product manufacturers
worldwide.
Retailers
and manufacturers are increasingly focused on identifying and protecting assets
that are moving through the supply chain. On the sales floor, retailers need to
make sure that the right merchandise is in stock to satisfy customers and boost
sales. To address this market opportunity, we have built the necessary
infrastructure to be a single global source for shrink management, merchandise
tracking and visibility, and apparel labeling solutions.
We are a
leading provider of electronic article surveillance (EAS) systems and tags
using radio frequency (RF) and electromagnetic (EM) technology, source
tagging security solutions, secure merchandising solutions using RF and
acoustic-magnetic (AM) technology, branding tags and labels for apparel. In
Europe, we are a leading provider of retail display systems (RDS) and
hand-held labeling systems (HLS). We are also a leading provider and installer
of store monitoring solutions, including fire alarms, intrusion alarms and
digital video recorders for the retail environment in the U.S. Our labeling
systems and services are designed to consolidate tag and label requirements to
improve efficiency, reduce costs, and furnish value-added solutions for
customers across many markets and industries. Applications for tags and labels
include brand identification, automatic identification (auto-ID), retail shrink
management, fabric and woven tags and labels, and pricing and promotional
labels. We have achieved substantial international growth, primarily through
acquisitions, and now operate directly in 30 countries. Products are principally
developed and manufactured in-house and sold through direct distribution and
reseller channels.
COMPANY
HISTORY
Founded
in 1969, we were incorporated in Pennsylvania as a wholly-owned subsidiary of
Logistics Industries Corporation (Logistics). In 1977, Logistics, pursuant to
the terms of its merger into Lydall, Inc., distributed our common stock to
Logistics’ shareholders as a dividend.
Historically,
we have expanded our business both domestically and internationally through
acquisitions, internal growth using wholly-owned subsidiaries, and the
utilization of independent distributors. In 1993 and 1995, we completed two key
acquisitions that gave us direct access into Western Europe. We acquired ID
Systems International BV and ID Systems Europe BV in 1993 and Actron Group
Limited in 1995. These companies engaged in the manufacture, distribution, and
sale of EAS systems throughout Europe.
In
December 1999, we acquired Meto AG, a German multinational corporation and
a leading provider of value-added labeling solutions for article identification
and security. This acquisition doubled our revenues and provided us with an
increased breadth of product offerings and global reach.
In
January 2001, we acquired A.W. Printing Inc., a Houston, Texas-based
printer of tags, labels, and packaging material for the apparel
industry.
In
January 2006, we completed the sale of our barcode systems business to
SATO, a global leader in barcode printing, labeling, and Electronic Product Code
(EPC)/Radio Frequency Identification (RFID) solutions.
In
November 2006, we acquired ADS Worldwide (ADS). Based in Hull, England, ADS
is an established supplier of tags, labels and trim to apparel manufacturers,
retailers and brands around the world. ADS provides us with new technological
and production capabilities and is in line with our strategy to grow our apparel
labeling solutions business to create increased value for our customers and
stockholders.
In
November 2007, we acquired the Alpha S3 business from Alpha Security
Products, Inc. Based in Charlotte, North Carolina, the Alpha S3 business offers
a comprehensive line of security solutions designed to protect high-theft
merchandise in an open-display retail environment. The Alpha S3 product
portfolio combines well with our source tagging program, and is in line with our
strategy to provide retailers a comprehensive line of shrink management
solutions.
In
November 2007, we also acquired SIDEP, an established supplier of EAS
systems operating in France and China, and Shanghai Asialco Electronics Co. Ltd.
(Asialco), a China-based manufacturer of RF-EAS labels. With facilities in
Shanghai, China, Asialco significantly increased our label manufacturing
capacity in Asia. SIDEP and Asialco will help us meet the growing demand in
Asian markets.
In
January 2008, we purchased the business of Security Corporation, Inc., a
privately held company that provides technology and physical security solutions
to the financial services sector.
During
June 2008, we acquired OATSystems, Inc., a recognized leader in RFID-based
application software. The addition of OATSystems, Inc. will build on our
strategy to help retailers and suppliers with our EVOLVETM EAS
platform to more easily migrate to EPC RFID. As our industry moves to a common
EPC standard, we will be able to offer solutions that enable retailers and their
suppliers to gain deeper visibility of assets and merchandise — further reducing
shrink and increasing bottom-line profits while enhancing the on-shelf
availability of merchandise for consumers.
In August
2009, we acquired Brilliant Label Manufacturing Ltd., a China-based manufacturer
of paper, fabric and woven tags and labels. Brilliant Label, through its
facilities in Hong Kong and China, adds significant capacity to Checkpoint’s
world-class apparel labeling business. This acquisition enables us to meet
greater demand for fabric and woven tags and labels and expands our global
manufacturing footprint. Additionally, our labeling business extends the use of
paper, fabric and woven labels beyond branding, variable data and garment care
information by enabling discreet integration of RF-EAS and RFID tags. These
capabilities enable apparel retailers and vendors to brand, track and secure
their products at the point of manufacture using a single
solution. 3
Products
and Offerings
Historically,
we have reported our results of operations into three segments: Shrink
Management Solutions, Intelligent Labels, and Retail Merchandising. During the
first quarter of 2009, resulting from a change in our management structure, we
began reporting our segments into three new segments: Shrink Management
Solutions, Apparel Labeling Solutions, and Retail Merchandising Solutions. The
years ended 2008 and 2007 have been conformed to reflect the segment change.
Shrink Management Solutions now includes results of our EAS labels and library
business. Apparel Labeling Solutions, formerly referred to as Check-Net®,
includes tag and label solutions sold to apparel manufacturers and retailers,
which leverage our graphic and design expertise, strategically located service
bureaus, and our Check-Net®
e-commerce capabilities. Our apparel labeling services coupled with our EAS and
RFID capabilities provide a combination of apparel branding and identification
with loss prevention and supply chain visibility. There were no changes to the
Retail Merchandising Segment. The margins for each of the segments and the
identifiable assets attributable to each reporting segment are set forth in Note
19 “Business Segments and Geographic Information” to the consolidated financial
statements.
Each of
these segments offer an assortment of products and services that in combination
are designed to provide a comprehensive, single source solution to help
retailers, manufacturers, and distributors identify, track, and protect their
assets throughout the entire supply chain. Each segment and its respective
products and services are described below.
SHRINK
MANAGEMENT SOLUTIONS
Our
largest business is providing shrink management and merchandise visibility
solutions to retailers. Our diversified line of security products are designed
to help retailers prevent inventory losses caused by impulse theft, organized
retail theft, and employee theft, reduce selling costs through lower staff
requirements, and boost sales by having the right goods available when customers
are ready to buy. Our products facilitate the open display of merchandise, which
allows retailers to maximize sales opportunities. Offering our own proprietary
RF-EAS and EM-EAS technologies, we believe that we hold a significant share of
worldwide EAS systems installations. EAS systems revenues accounted for 29%,
35%, and 37% of our 2009, 2008, and 2007 total revenues,
respectively.
We offer
a wide variety of EAS-RF and EAS-EM labels that provide security solutions that
can be matched to specific retail requirements. Under our source tagging
program, tags can be attached or embedded in products or packaging at the
point-of-manufacture. All participants in the retail supply chain are concerned
with maximizing efficiency. Reducing time-to-market requires refined production
and logistics systems to ensure just-in-time delivery, as well as shorter
development, design, and production cycles. Services range from full-color
branding labels to tracking labels and, ultimately, fully-integrated labels that
include an EAS or a RFID circuit. This integration is based on the critical
objective of supporting the rapid delivery of goods to market while reducing
losses, whether through misdirection, tracking failure, theft or counterfeiting,
and to reduce labor costs by tagging and labeling products at the source. EAS-RF
and EAS-EM label revenues represented 16%, 12% and 14% of our total revenues for
2009, 2008, and 2007, respectively.
The
installation of store monitoring solutions through our CheckView™ business
includes fire, intrusion and digital video recording systems. For 2009, 2008,
and 2007, the CheckView™ business represented 14%, 17%, and 17% of our revenues,
respectively.
We
acquired our Alpha business on November 1, 2007. Alpha is unique in its focus on
both design and manufacturing of high theft protection products. Alpha products
are designed to offer retailers security, aesthetics, value and ease of use in
an “open display” format. For 2009, 2008, and 2007, the Alpha business
represented 10%, 9%, and 1% of our revenues, respectively.
No other
product group in this segment accounted for as much as 10% of our
revenues.
These
broad and flexible product lines, marketed and serviced by our extensive sales
and service organizations, have helped us emerge as a preferred supplier to
retailers around the world. Shrink Management Solutions represented
approximately 72%, 75%, and 73% of total revenues in 2009, 2008, and 2007,
respectively.
Electronic
Article Surveillance Systems
We have
designed EAS systems to act as a deterrent to prevent merchandise theft in
retail stores. Our diversified product lines are designed to help reduce impulse
theft, organized retail theft, and employee theft and enable retailers to sell
more by openly displaying high-margin and high-cost items.
During
early 2008, we introduced EVOLVE™, our state-of-the-art shrink management
platform. EVOLVE™ is our next-generation suite of RF and RFID-enabled products
providing enhanced system performance with advanced information management and
networking capabilities in a more aesthetically pleasing format. EVOLVE™ is
compatible with our CheckPro data analysis software and our complete line of EAS
labels and tags as well as products of other suppliers. Our business model
relies upon customer commitments for our security product installations to a
large number of their stores over a period of several months (large chain-wide
installations). This new product will allow our existing customers to upgrade
their security offerings and should result in increased installations for the
future. The enhanced capabilities of the EVOLVE™ platform should also attract
interest from new retail customers.
We offer
a wide variety of RF-EAS and EM-EAS solutions to meet the varied requirements of
retail store configurations for multiple market segments worldwide. Our EAS
systems are primarily comprised of sensors and deactivation units, which respond
to or act upon our tags and labels. Our EAS products are designed and built to
comply with applicable Federal Communications Commission (FCC) and European
Community (EC) regulations governing RF, signal strengths, and other
factors.
Electronic
Article Surveillance Consumables
We
produce EAS-RF and EAS-EM labels that work in combination with our EAS systems
to reduce merchandise theft in retail stores. Our diversified product line of
discrete, disposable labels and one-time-use hard tags are designed to enable
retailers to protect a diverse array of easily-pocketed, high shrink
merchandise. While EAS labels can be applied in retail stores and distribution
centers, an increasing percentage of our customers are taking advantage of our
source tagging program. With source tagging, EAS labels and hard tags are
configured to the merchandise and specific security requirements of the customer
and applied at the point of manufacture. Our paper thin EAS labels have
characteristics that are easily integrated with high-speed automated application
systems. We have recently launched a new generation of EAS labels with enhanced
performance EP labels. These labels are smaller yet provide superior detection
capability.
Alpha
We
provide retailers with innovative and technically advanced products engineered
to protect high-theft merchandise. Alpha is unique in its focus on both design
and manufacturing of high theft protection products. Alpha products are designed
to offer retailers security, aesthetics, value and ease of use. Alpha pioneered
the “open display” security philosophy by providing retailers a truly safe means
to bring merchandise from behind locked cabinets and openly display it. The
product line consists of keepers, spider wraps, bottle security, and hard tags.
Alpha recently introduced a new product, Showsafe, which is a line alarm system
for protecting display merchandise. All Alpha products are available in AM, RF,
or EM formats.
CheckView™
— Video, Fire and Intrusion Systems
We
provide complete physical and electronic store monitoring solutions, including
fire alarms, intrusion alarms and digital video recording systems for retail
environments. CheckView’s™ exclusive focus on retail offers centralized project
coordination supported by a large field management structure. Our product and
application teams evaluate and support new technology development and our design
department engineers each project. Our video surveillance
solutions address shoplifting and internal theft as well as customer and
employee safety and security needs. The product line consists of closed circuit
television products and services including fixed and high-speed pan/tilt/zoom
camera systems, programmable switcher controls, time-lapse recording, and remote
video surveillance.
Our fire
and intrusion systems provide life safety and property protection, completing
the line of loss prevention solutions. In addition to the system installations,
we offer a U.S.-based 24-hour central station monitoring service.
In 2008,
we expanded our systems solution offering in the U.S. by entering the financial
services sector, providing branch banks with physical and electronic security
solutions. 4
RFID
Tags and Labels
We
produce RFID tags and labels, leveraging our high volume, low cost RF circuit
production and manufacturing knowledge. In October 2006, we announced our
intention to focus our RFID initiative on our core retail customers business.
During June 2008, we acquired OATSystems, Inc., a recognized leader in
RFID-based application software. The addition of OATSystems, Inc. will build on
our strategy to help retailers and suppliers with our EVOLVETM EAS
platform to more easily migrate to EPC RFID. As our industry moves to a common
EPC standard, we will be able to offer solutions that enable retailers and their
suppliers to gain deeper visibility of assets and merchandise — further reducing
shrink and increasing bottom-line profits while enhancing the on-shelf
availability of merchandise for consumers.
APPAREL
LABELING SOLUTIONS
Apparel
Labeling Solutions (ALS) is our second largest business. We provide apparel
retailers, brand owners, and manufacturers with a single source of their apparel
labeling requirements. ALS is our web-enabled apparel labeling solutions
platform and network of 28 service bureaus located in 22 countries that supplies
customers with customized apparel tags and labels to the location where the
goods are manufactured. Our order entry, logistics, and data management
capabilities facilitates on-demand printing of variable pricing and article
identification data and barcode information onto price and apparel tags. ALS
also offers a product line that integrates our EAS-RF security labels into
customized apparel tags.
Our
service bureau network is one of the most extensive in the industry, and its
ability to offer integrated branding, barcode, and EAS security tags places it
among just a handful of suppliers who possess this capability. Our printing
capacity and service bureau network expanded in August 2009 with the acquisition
of Brilliant Label Manufacturing Ltd. The acquisition of Brilliant also enables
us to meet the greater demand for fabric and woven tags and labels.
ALS
revenues represented 18%, 15%, and 15% of our total revenues for 2009, 2008, and
2007, respectively.
RETAIL
MERCHANDISING SOLUTIONS
Our
retail merchandising solutions business includes hand-held label applicators and
tags, promotional displays, and queuing systems. These traditional products
broaden our reach among retailers. Many of the products in this business segment
represent high-margin items with a high level of recurring sales of associated
consumables such as labels. As a result of the increasing use of scanning
technology in retail, our hand-held labeling systems products are serving a
declining market. Retail merchandising solutions, which is focused on European
and Asian markets, represents approximately 10% of our business, with no product
group in this segment accounting for as much as 10% of our
revenues.
Hand-held
Labeling Systems
Hand-held
labeling systems (HLS) include a complete line of hand-held price marking and
label application solutions, primarily sold to retailers. Sales of labels,
consumables, and service generate a significant source of recurring revenues. As
retail scanning becomes widespread, in-store retail price marking applications
have continued to decline. Our HLS products possess a market leading position in
several European countries.
Retail
Merchandising Systems
Retail
merchandising systems (RMS) include a wide range of products for customers in
certain retail sectors, such as supermarkets and do-it-yourself, where
high-quality signage and in-store price promotion are important. Product
categories include traditional retail promotional systems for in-store
communication and electronic graphics systems, and customer queuing
systems.
BUSINESS
STRATEGY
Our
business strategy focuses on providing end-to-end shrink management and
merchandise visibility solutions and apparel labeling solutions that help
retailers, manufacturers, and distributors identify, track, and protect their
assets. We believe that innovative new products and expanded product offerings
will provide significant opportunities to enhance the value of legacy products
while expanding the product base in existing customer accounts. We intend to
maintain our leadership position in certain key hard goods markets
(supermarkets, drug stores, mass merchandisers, and music/electronics), expand
our market share in the soft goods markets (apparel), and maximize our position
in under-penetrated markets. We also intend to continue to capitalize on our
installed base of large global retailers to promote source tagging. Furthermore,
we plan to leverage our knowledge of RF and identification technologies to
assist retailers and manufacturers in realizing the benefits of
RFID.
To
achieve these objectives, we plan to continually enhance and expand our
technologies and products, and provide superior service to our customers. We are
focused on providing our customers with a wide variety of integrated shrink
management solutions, labeling, and retail merchandising solutions characterized
by superior quality, ease of use, good value, and enhanced merchandising
opportunities for the retailer, manufacturer, and distributor.
We
continue to evaluate our sales productivity, manufacturing and supply chain
efficiency, and our overhead structure and have taken actions where we have
identified specific opportunities to improve profitability.
Principal
Markets and Marketing Strategy
Through
our Shrink Management Solutions business segment, we market EAS systems,
software and other security solutions, and CheckView™ products and services
primarily to worldwide retailers in the hard goods market and soft goods market.
We enjoy significant market share, particularly in the supermarket, drug store,
hypermarket, and mass merchandiser market segments.
Shoplifting
and employee theft are major causes of shrinkage. Data collection systems have
highlighted the shrinkage problem to retailers. As a result, retailers recognize
that the implementation of effective electronic security solutions can
significantly reduce shrinkage and increase profitability.
In
addition to providing retail security solutions, we provide a wide variety of
integrated shrink management and merchandise visibility solutions, labeling
solutions, and retail merchandising solutions to manufacturers and retailers
worldwide. This entails a broadened focus within the entire retail supply chain
by providing branding, tracking, and shrink management solutions to retail
stores, distribution centers, and consumer product and apparel manufacturers
worldwide.
We are
focused on “Helping Retailers Grow Profitability” by providing our customers
with a wide variety of integrated solutions. Our ongoing marketing strategy
includes the following:
5
We market
our products primarily:
We focus
on partnering with retail suppliers worldwide in our source tagging program.
Ongoing strategies to increase acceptance of source tagging are as
follows:
MANUFACTURING,
RAW MATERIALS, AND INVENTORY
Electronic
Article Surveillance
We
manufacture our EAS systems and labels, including Alpha S3 products, in
facilities located in Puerto Rico, Japan, China, the U.S. and the Dominican
Republic. Our manufacturing strategy for EAS products is to rely primarily on
in-house capability for core components and to outsource manufacturing to the
extent economically beneficial. We manage the integration of our in-house
capability and our outsourced manufacturing in a way that provides significant
control over costs, quality, and responsiveness to market demand, which we
believe results in a distinct competitive advantage.
We
involve customers, engineering, manufacturing, and marketing in the design and
development of our products. For RF sensor production, we purchase raw materials
from outside suppliers and assemble electronic components at our facilities in
the Dominican Republic for the majority of our sensor product lines. The
manufacture of some RF sensors sold in Europe and all EM hardware is outsourced.
For our EAS disposable tag production, we purchase raw materials and components
from suppliers and complete the manufacturing process at our facilities in
Puerto Rico, Japan, and China. For our Alpha S3 secured merchandising
production, we purchase raw materials and components from suppliers and complete
the manufacturing process at our facilities in the U.S. as well as using
outsourced manufacturing in China. The principal raw materials and components
used by us in the manufacture of our products are electronic components and
circuit boards for our systems; aluminum foil, resins, paper, and ferric
chloride and hydrochloric acid solutions for our disposable tags; and polymer
resin for our Alpha S3 products. While most of these materials are purchased
from several suppliers, there are alternative sources for all such materials.
The products that are not manufactured by us are sub-contracted to manufacturers
selected for their manufacturing and assembly skills, quality, and
price.
CheckView™
— Video, Fire and Intrusion Systems
We are
primarily an integrator of video, fire and intrusion components manufactured by
others. In the U.S., we use in-house capabilities to assemble products such as
the pan/tilt/zoom dome camera and other products such as the Advanced Public
View (APV) system. The software component of the system is added during
product assembly at our operational facilities.
Apparel
Labeling Solutions and Retail Merchandising Solutions
We
manufacture labels, tags, and hand-held tools. Our main production facilities
are located in Germany, the Netherlands, the U.S., the U.K., China, and
Malaysia. Local production facilities are also situated in Hong Kong, China and
Turkey. Our facilities in the Netherlands, the U.S., and the U.K. manufacture
labels and tags for laser overprinting. With the acquisition of Brilliant in
August 2009, we acquired fabric and woven labels manufacturing facilities in
China. ALS has a network of 28 service bureaus located in 22 countries that
supplies customers with customized apparel tags and labels to the location where
the goods are manufactured. Manufacturing in Germany is focused on HLS labels
and print heads for HLS tools. The Malaysian facility produces standard bodies
for HLS tools for Europe, complete hand-held tools for the rest of the world,
and labels for the local market.
DISTRIBUTION
For our
major product lines, we principally sell our products to end customers using our
direct sales force of more than 500 sales people. To improve our sales
efficiency, we also distribute products through an independent network of
resellers. This distribution channel supports and services smaller customers.
This indirect channel, which has primarily sold EAS solutions, will be broadened
and expanded to include more product lines as we focus on improved sales
productivity.
Electronic
Article Surveillance
We sell
our EAS systems, labels, and Alpha S3 products principally throughout North
America, South America, Europe, and the Asia Pacific region. In North America,
we market our EAS products through our own sales personnel and independent
representatives.
Internationally,
we market our EAS products principally through foreign subsidiaries which sell
directly to the end-user and through independent distributors. Our international
sales operations are currently located in 14 European countries and in
Argentina, Australia, Brazil, Canada, Hong Kong, India, Japan, Malaysia, China,
Mexico, and New Zealand.
CheckView™
— Video, Fire and Intrusion Systems
We market
video systems and services in selected countries throughout the world using our
own sales staff. These products and services are provided to our EAS retail
customers, as well as non-EAS retailers. Fire and intrusion systems are marketed
exclusively in the U.S. through a direct sales force.
Apparel
Labeling Solutions and Retail Merchandising Solutions
Our
customers in the apparel labeling solutions and retail merchandising solutions
businesses are primarily found within the retail sector and retail supply chain.
Major customers include companies within industries such as food retailing, DIY,
department stores, and apparel retailers.
Large
national and international customers are handled centrally by key account sales
specialists supported by appropriate business specialists. Smaller customers are
served by either a general sales force capable of representing all products or,
if the complexity or size of the business demands, a dedicated business
specialist. 6
BACKLOG
Our
backlog of orders was approximately $50.2 million at December 27, 2009
compared to approximately $51.8 million at December 28, 2008. We
anticipate that substantially all of the backlog at the end of 2009 will be
delivered during 2010. In the opinion of management, the amount of backlog is
not indicative of trends in our business. Our security business generally
follows the retail cycle so that revenues are weighted toward the last half of
the calendar year as retailers prepare for the holiday season.
TECHNOLOGY
We
believe that our patented and proprietary technologies are important to our
business and future growth opportunities, and provide us with distinct
competitive advantages. We continually evaluate our domestic and international
patent portfolio, and where the cost of maintaining the patent exceeds its
value, such patent may not be renewed. The majority of our revenues are derived
from products or technologies that are patented or licensed. There can be no
assurance, however, that a competitor could not develop products comparable to
ours. Our competitive position is also supported by our extensive manufacturing
experience and know-how.
PATENTS
& LICENSING
On
October 1, 1995, we acquired certain patents and improvements thereon
related to EAS products and manufacturing processes from Arthur D. Little, Inc.
for which we paid annual royalties. Our payment obligation terminated on
December 31, 2008, and since then we have held a royalty free
license.
We also
license technologies relating to RFID applications, EAS products, certain
sensors, magnetic labels, and fluid tags. These license arrangements have
various expiration dates and royalty terms, which are not considered by us to be
material.
Apparel
Labeling Solutions and Retail Merchandising Solutions
We focus
our in-house development efforts on product areas where we believe we can
achieve and sustain a competitive cost and positioning advantage, and where
delivery service is critical. We also develop and maintain technological
expertise in areas that are believed to be important for new product development
in our principal business areas. We have a base of technology expertise in the
printing, electronics, and software areas and are particularly focused on EAS
and labeling capabilities to support the development of higher value-added
labels.
SEASONALITY
Our
business is subject to seasonal influences, which generally causes us to realize
higher levels of sales and income in the second half of the year. Our business’
seasonality substantially follows the retail cycle of our customers, which
generally has revenues weighted towards the last half of the calendar year in
preparation for the holiday season.
COMPETITION
Electronic
Article Surveillance
Currently,
EAS systems and labels are sold to two principal markets: retail establishments
and libraries. Our principal global competitor in the EAS industry is Tyco
International Ltd. (Tyco), through its ADT Worldwide segment. Tyco is a
diversified global company with interests in security products and
services, fire protection and detection products and services, valves and
controls and other industrial products. Tyco’s 2009 revenues were
approximately $17.2 billion, of which $7.0 billion was attributable to the
ADT Worldwide segment.
Within
the U.S. market, additional competitors include Sentry Technology Corporation
and Ketec, Inc. in EAS systems and consumables, and All-Tag Security in EAS-RF
labels, principally in the retail market. Within our international markets,
mainly Europe, Nedap® is our most significant competitor. The largest
competitors of the Alpha S3 secured merchandising product line include Universal
Surveillance Systems, Protext International Corporation, Se-Kure Controls, Inc,
and Century.
We
believe that our product line offers a more diverse range of products than our
competition with a variety of disposable and reusable tags and labels,
integrated scan/deactivation capabilities, and RF source tagging embedded into
products or packaging. As a result, we compete in marketing our products
primarily on the basis of their versatility, reliability, affordability,
accuracy, and integration into operations. This combination provides many system
solutions and allows for protection against a variety of retail merchandise
theft. Furthermore, we believe that our manufacturing know-how and efficiencies
relating to disposable tags give us a cost advantage over our
competitors.
CheckView™
— Video, Fire and Intrusion Systems
Our
video, fire and intrusion products, which are sold domestically through our
CheckView™ Group, and video products sold internationally through our
international sales subsidiaries, compete primarily with similar products
offered by Tyco, Vector Security, Inc., and Stanley Security Solution. We
compete based on our superior design and project management services and believe
that our offerings provide our retail and non-retail customers with distinctive
system features.
Apparel
Labeling Solutions
We sell
our apparel labeling solutions services, including tags and labels, to the
retail market. Major competitors for our label products are Avery Dennison
Corporation, SML Group, and Fineline Technologies. Several competitive labeling
service companies are also customers as they purchase EAS circuits from us to
integrate into their label offerings.
Retail
Merchandising Solutions
We face
no single competitor across our entire retail merchandising solutions product
range or across all international markets. HL Display AB is our largest
competitor in the retail display systems market, primarily in Europe. In the HLS
segment, we compete with Contact, Garvey Products Inc., Hallo, Avery Dennison
Corporation, and Prix.
OTHER
MATTERS
Research
and Development
We spent
$20.4 million, $22.6 million, and $18.2 million, in research and
development activities during 2009, 2008, and 2007, respectively. The emphasis
of these activities is the continued broadening of the product lines offered by
us, cost reductions of the current product lines, and an expansion of the
markets and applications for our products. We believe that our future growth in
revenues will be dependent, in part, on the products and technologies resulting
from these efforts.
Another
important source of new products and technologies has been the acquisition of
companies and products. The August 2009 acquisition of Brilliant Label
Manufacturing Ltd has strengthened and expanded our core apparel labeling
offering. Brilliant’s woven and printed label manufacturing capabilities move us
closer to becoming a recognized global provider of apparel labeling
solutions.
The 2008
acquisition of OATSystems, Inc. will build on our strategy of helping retailers
and suppliers migrate more easily with our EVOLVE™ Electronic
Article Surveillance platform to EPC RFID. As our industry moves to a
common EPC standard, we will now be able to offer solutions that enable
retailers and their supply chains to gain deeper visibility of their assets and
merchandise - further reducing shrink and increasing the bottom-line profits by
enhancing on-shelf merchandise availability for consumers.
The
November 2007 acquisition of the Alpha S3 business has enhanced our ability
to introduce new products specifically targeted to high-theft merchandise in an
open-display retail environment.
We
continue to assess acquisitions of related businesses or products consistent
with our overall product and marketing strategies. We also continue to develop
and expand our product lines with improvements in disposable tag performance,
disposable tag manufacturing processes, and wide-aisle RF-EAS detection sensors
with integration of remote and wireless internet connectivity and RFID
integration. 7
Employees
As of
December 27, 2009, we had 5,785 employees, including seven executive
officers, 113 employees engaged in research and development activities, and 568
employees engaged in sales and marketing activities. In the United States, 9 of
our employees are represented by a union. In Europe, approximately 282 of our
employees are represented by various unions or work councils.
Financial
Information About Geographic and Business Segments
We
operate both domestically and internationally in the three distinct business
segments described previously. The financial information regarding our
geographic and business segments, which includes net revenues and gross profit
for each of the years in the three-year period ended December 27, 2009, and
long-lived assets as of December 27, 2009 and December 28, 2008, is
provided in Note 19 to the Consolidated Financial Statements.
Available
Information
Our
internet website is at www.checkpointsystems.com. Investors can obtain copies of
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and any amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably
practicable after we have filed such materials with, or furnished them to, the
Securities and Exchange Commission (SEC). We will also furnish a paper copy of
such filings free of charge upon request. Investors can also read and copy any
materials filed by us with the SEC at the SEC’s Public Reference Room which is
located at 100 F Street, NE, Washington, DC 20549. Information about the
operation of the Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330. Our filings can also be accessed at the SEC’s internet website:
www.sec.gov.
We have
adopted a code of business conduct and ethics (the “Code of Ethics”) as required
by the listing standards of the New York Stock Exchange and the rules of the
SEC. This Code of Ethics applies to all of our directors, officers and
employees. We have also adopted corporate governance guidelines (the “Governance
Guidelines”) and a charter for each of our Audit Committee, Compensation
Committee and Governance and Nominating Committee (collectively, the “Committee
Charters”). We have posted the Code of Ethics, the Governance Guidelines and
each of the Committee Charters on our website at www.checkpointsystems.com, and
will post on our website any amendments to, or waivers from, the Code of Ethics
applicable to any of our directors or executive officers. The foregoing
information will also be available in print upon request.
Executive
Officers of the Company
The
following table sets forth certain current information concerning our executive
officers, including their ages, position, and tenure as of the date
hereof:
Mr. van
der Merwe was appointed President and Chief Executive Officer on December 27,
2007. In December 2008, Mr. van der Merwe was appointed our Chairman of the
Board and has been a member of our Board of Directors since October 2007.
He previously served as President and Chief Executive Officer of Paxar
Corporation, a global leader in providing innovative merchandising systems to
retailers and apparel customers. He became Chairman of the Board of Paxar in
January 2007, and served in these capacities until Paxar’s sale to Avery
Dennison in June 2007. Prior to joining Paxar, Mr. van der Merwe held
numerous executive positions with Kimberly-Clark Corporation from 1980 to 1987
and from 1994 to 2005, including the positions of Group President of
Kimberly-Clark’s global consumer tissue business and Group President of Europe,
Middle East and Africa. Earlier in his career, Mr. van der Merwe held managerial
positions in South Africa at Xerox Corporation and Colgate
Palmolive.
Mr. Andrews
was appointed Senior Vice President and Chief Financial Officer on
December 6, 2007. Mr. Andrews was Senior Vice President and Chief
Accounting Officer from August 2005 until December 2007. He previously
served as Controller of INVISTA S.a’r.l., a subsidiary of Koch Industries, where
he oversaw the company’s accounting operations in North and South America,
Europe and Asia. Prior to the acquisition by Koch Industries, Mr. Andrews
was Director of Accounting Operations of INVISTA Inc. From 1998 to 2002,
Mr. Andrews served as Controller for DuPont Pharmaceuticals Company and
then Bristol-Myers Squibb Pharma Company, a subsidiary of Bristol-Myers Squibb,
when that company acquired DuPont Pharmaceuticals in 2001. Prior to being
appointed Controller, he held positions of increasing responsibility at DuPont
Merck Pharmaceutical Company and the DuPont Company. Mr. Andrews is a
Certified Public Accountant.
Mr. Gremillet
was appointed Executive Vice President Global Customer Management in
January 2009. Previously, he was Executive Vice President Geographies since
August 2007. Prior to that Mr. Gremillet was President, Europe and Latin
America from March 2006 to August 2007. Mr. Gremillet was Western
Mediterranean Unit Manager from March 2004 until March 2006 and was an
independent consultant to Checkpoint from February 2003 to March 2004.
Mr. Gremillet was Corporate Director of Engineering and Technology at
Repsol YPF SA, from December 1999 to May 2002 and Senior Vice
President Downstream at YPF SA in 1999. He held a variety of positions,
including Vice President Marketing and Development for Oilfield Services from
July 1995 to June 1997 and Vice President and General Manager for
Latin America from July 1989 to June 1993 during his 22 years
with Schlumberger from 1975 to 1997.
Mr. Levin
was appointed President, Shrink Management and Merchandise Visibility Solutions
in March 2006. He was President of Europe from June 2004 until
March 2006, Executive Vice President, General Manager, Europe from
May 2003 until June 2004, Vice President, General Manager, Europe from
February 2001 until May 2003. Mr. Levin was Regional Director,
Southern Europe from 1997 to 2001 and joined the Company in January 1995 as
Managing Director of Spain.
Mr. Davidson
joined Checkpoint in 2008 as President, Global Apparel Labeling Solutions.
Previously, he spent 16 years with the Braitrim Group, a company providing
products and services to global apparel retailers and garment manufacturers.
While with the Braitrim Group, Mr. Davidson made a significant contribution
to building their $180 million business, including establishing Sales and
Marketing and Manufacturing infrastructures throughout Asia. Following the
acquisition of Braitrim by the Spotless Group in 2002, Mr. Davidson
remained with the larger organization in the capacity of Managing Director,
EMEA, for Spotless Retailer Services. Mr. Davidson’s previous experience
includes Senior Management positions at TCI Marketing Consultancy, K Shoes Group
in the UK, and Unilever.
Mr. Van
Zile has been Senior Vice President, General Counsel and Secretary since joining
the Checkpoint in June 2003. Prior to joining us, Mr. Van Zile served
as Executive Vice President, General Counsel and Secretary of Exide Corporation
from September 2000 until October 2002, and was Vice President and General
Counsel from November 1996 until September 2000. Prior to Exide
Corporation, Mr. Van Zile held positions of increasing legal responsibility
at GM-Hughes Electronics Corporation and Coltec Industries.
Mr. Abadi
was appointed Senior Vice President and Chief Innovation Officer in
October 2008. Mr. Abadi retains responsibility for our procurement and
systems supply chain. He also served as Senior Vice President, Worldwide
Operations from April 2006 until October 2008 and Vice President and
General Manager, Worldwide Research and Development from November 2004
until April 2006. Prior to joining Checkpoint, Mr. Abadi was Senior
Vice President of Global Cross-Industry Practices at Atos Origin from
February 2004 until November 2004. Mr. Abadi held various senior
management positions with Schlumberger for over eighteen years. 8
The risks
described below are among those that could materially and adversely affect our
business, financial condition or results of operations. These risks could cause
actual results to differ materially from historical experience and from results
predicted by any forward-looking statements related to conditions or events that
may occur in the future.
Current
economic conditions could adversely impact our business and results of
operations.
Our
operations and results depend significantly on global market worldwide economic
conditions, which have experienced a recent deterioration. Current economic
factors include diminished liquidity and tighter credit conditions, leading to
decreased credit availability, as well as declines in economic growth and
employment levels. As a result of these market conditions, the cost and
availability of credit has been and may continue to be adversely affected by
illiquid credit markets and wider credit spreads. These conditions may increase
the difficulty for us to accurately forecast and plan future business. Customer
demand could be impacted by decreased spending by businesses and consumers
alike, and competitive pricing pressures could increase. Additionally, the
disruption in the credit markets may also adversely affect the availability of
financing to support our strategy for future growth through acquisitions. We are
unable to predict the length or severity of the current economic conditions. A
continuation or further deterioration of these economic factors may have a
material and adverse effect on our results of operations, financial condition,
and liquidity, and the liquidity and financial condition of our customers,
including our ability to refinance maturing liabilities and access the capital
markets to meet liquidity needs.
We
have significant foreign operations, which are subject to political, economic
and other risks inherent in operating in foreign countries.
We are a
multinational manufacturer and marketer of identification, tracking security,
and merchandising solutions for the retail industry. We have significant
operations outside of the U.S. We currently operate directly in 30 countries,
and our international operations generate approximately 66% of our revenue. We
expect net revenue generated outside of the U.S. to continue to represent a
significant portion of total net revenue. Business operations outside of the
U.S. are subject to political, economic and other risks inherent in operating in
certain countries, such as:
Changes
in the political or economic environments in the countries in which we operate,
as well as the impact of economic conditions on underlying demand for our
products could have a material adverse effect on our financial condition,
results of operations or cash flows.
Volatility
in currency exchange rates and interest rates may adversely affect our financial
condition, results of operations or cash flows.
We are
exposed to a variety of market risks, including the effects of changes in
currency exchange rates and interest rates. See Part 7A. Quantitative and
Qualitative Disclosures About Market Risk.
Our net
revenue derived from sales in non-U.S. markets is approximately 66% of our total
net revenue, and we expect revenue from non-U.S. markets to continue to
represent a significant portion of our net revenue. When the U.S. dollar
strengthens in relation to the currencies of the foreign countries where we sell
our products, our U.S. dollar reported revenue and income will decrease. Changes
in the relative values of currencies occur regularly and, in some instances, may
have a significant effect on our results of operations. Our financial statements
reflect recalculations of items denominated in non-U.S. currencies to U.S.
dollars, which is our functional currency.
We
monitor these exposures as an integral part of our overall risk management
program. In some cases, we enter into contracts to reduce the risks of currency
fluctuations on short-term inter-company receivables and payables, and on
projected future billings in non-functional currencies and use third-party
borrowings in foreign currencies to hedge a portion of our net investments in,
and cash flows derived from, our foreign subsidiaries. Nevertheless, changes in
currency exchange rates and interest rates may have a material adverse effect on
our financial condition, results of operations, or cash flows.
Our
business could be materially adversely affected as a result of lower than
anticipated demand by retailers and other customers for our products,
particularly in the current economic environment.
Our
business is heavily dependent on the retail marketplace. Changes in the economic
environment including the liquidity and financial condition of our customers or
reductions in retailer spending could adversely affect our revenues and results
of operations. In a period of decreased consumer spending, retailers could
respond by reducing their spending on new store openings and loss prevention
budgets. This reduction could directly impact our SMS business, as a reduction
in new store openings will lower demand for SMS EAS systems and consumables and
CheckView™ installations. Additionally, lower loss prevention budgets could
reduce the amount retailers will be willing to spend to upgrade existing store
technology. Label demand could also be impacted due to lower loss prevention
budgets as retailers may reduce the percentage of items covered. In addition,
our label volume increases as more items are sold through the retailer and lower
demand decreases the volume related to the items tagged by the retailer. As
retail sales volumes decline, label demand may also decline. A decrease in the
demand for our products resulting from reduced spending by retailers due to
fewer store openings, reduced loss prevention budgets and slower adoption of our
new technology could have a material adverse effect on our revenues and results
of operations.
Our
business could be materially adversely affected as a result of slower
commitments of retail customers to chain-wide installations and/or source
tagging adoption or expansion.
Our
revenues are dependent on our ability to maintain and increase our system
installation base. The SMS EAS system installation base leads to additional
revenues, which we term as “recurring revenues,” through the sale of maintenance
services and SMS EAS consumables including sensor tags. In addition, we partner
with manufacturers to include our sensor tags into the product during
manufacturing, an approach known as source tagging.
The level
of commitments for chain-wide installations may decline due to decreased
consumer spending that then results in reduced spending on loss prevention by
our retail customers, our failure to develop new technology that entices the
customer to maintain their commitment to our loss prevention products and
services, and competing technologies. A reduction in the commitment for
chain-wide installations may also impact our ability to expand utilization of
our source tagging program. A reduction in commitments to chain-wide
installations and utilization of our source tagging program could have an
adverse effect on our revenues and results of operations. 9
The
markets we serve are highly competitive and we may be unable to compete
effectively if we are unable to provide and market innovative and cost-effective
products at competitive prices.
We face
competition around the world, including competition from other large,
multinational companies and other regional companies. Some of these companies
may have substantially greater financial and other resources than the Company.
We face competition in several aspects of our business. In the SMS EAS systems
and Alpha S3 businesses and SMS EAS consumables business, we compete primarily
on the basis of integrated security solutions and diversified, sophisticated,
and quality product lines targeted at meeting the loss prevention needs of our
retail customers. In our CheckView™ business, we compete primarily on the basis
of efficient installation capability that is in place in North America. In the
ALS business, we compete primarily on the capability to effectively and quickly
deliver retail customer specified tags and labels to manufacturing sites in
multiple countries. It is possible that our competitors will be able to offer
additional products, services, lower prices, or other incentives that we cannot
offer or that will make our products less profitable. It is also possible that
our competitors will offer incentive programs or will market and advertise their
products in a way that will impact customers’ preferences, and we may not be
able to compete effectively.
We may be
unable to anticipate the timing and scale of our competitors’ activities and
initiatives, or we may be unable to successfully counteract them, which could
harm our business. In addition, the cost of responding to our competitors’
activities may affect our financial performance in the relevant period. Our
ability to compete also depends on our ability to attract and retain key talent,
protect patent and trademark rights, and develop innovative and cost-effective
products. A failure to compete effectively could adversely affect our growth and
profitability.
Our
long term success is largely dependent upon our ability to develop new
technologies, and if we are unable to successfully develop those technologies,
our business could be materially adversely affected.
Our
growth depends on continued sales of existing products, as well as the
successful development and introduction of new products, which face the
uncertainty of retail and consumer acceptance and reaction from competitors. In
addition, our ability to create new products and to sustain existing products is
affected by whether we can:
The
failure to develop and launch successful new products could hinder the growth of
our business. Research and development for each of our operating segments is
complex and uncertain and requires innovation and anticipation of market trends.
Also, delay in the development or launch of a new product could compromise our
competitive position, particularly if our competitors announce or introduce new
products and services in advance of us.
An
inability to acquire, protect or maintain our intellectual property and patents
could harm our ability to compete or grow.
We have a
number of patents that will expire in the next several years. Because our
products involve complex technology and chemistry, we rely on protections of our
intellectual property and proprietary information to maintain a competitive
advantage. The expiration of these patents will reduce the barriers to entry
into our existing lines of business and may result in loss of market share and a
decrease in our competitive abilities, thus having a potential adverse effect on
our financial condition, results of operations and cash flows.
Our
business could be materially adversely affected as a result of possible
increases in per unit product manufacturing costs as a result of slowing
economic conditions or other factors.
Our
manufacturing capacity is designed to meet our current and future anticipated
demands. If our product demand decreases as a result of economic conditions and
other factors, it could increase our cost per unit. If an increase in our cost
per unit is passed on to our customers, it may decrease our competitive
position, which may have an adverse effect on our revenues and results of
operations. If an increase in cost per unit is not passed on to our customers,
it may reduce our gross margins, which may have an adverse effect on our results
of operations. Our SMS EAS consumables and ALS manufacturing have various low
price competitors globally. In order for us to maintain and improve our market
position, we need to continuously monitor and seek to improve our manufacturing
effectiveness while maintaining our high quality standard. If we are
unsuccessful in our efforts to improve manufacturing and supply chain
effectiveness, then our cost per unit may increase which could have an adverse
impact on our results of operations.
If
we cannot obtain sufficient quantities of raw materials and component parts
required for our manufacturing activities at competitive prices and quality and
on a timely basis, our financial condition, results of operations or cash flows
may suffer.
We
purchase materials and component parts from third parties for use in our
manufacturing operations. Our ability to grow earnings will be affected by
inflationary and other increases in the cost of component parts and raw
materials, including electronic components, circuit boards, aluminum foil,
resins, paper, and ferric chloride and hydrochloric acid solutions. Inflationary
and other increases in the costs of raw materials, labor, and energy have
occurred in the past and are expected to recur, and our performance depends in
part on our ability to pass these cost increases on to customers in the prices
for our products and to effect improvements in productivity. We may not be able
to fully offset the effects of higher component parts and raw material costs
through price increases, productivity improvements or cost reduction programs.
If we cannot obtain sufficient quantities of these items at competitive prices
and quality and on a timely basis, we may not be able to produce sufficient
quantities of product to satisfy market demand, product shipments may be
delayed, or our material or manufacturing costs may increase. A disruption to
our supply chain could adversely affect our sales and profitability. Any of
these problems could result in the loss of customers and revenue, provide an
opportunity for competing products to gain market acceptance and otherwise
adversely affect our financial condition, results of operations, or cash
flows.
Possible
increases in the payment time for receivables as a result of economic conditions
or other market factors could have a material effect on our results from
operations and anticipated cash from operating activities.
The
majority of our customer base is in the retail marketplace. Although we have a
rigorous process to administer credit granted to customers and believe our
allowance for doubtful accounts is adequate, we have experienced, and in the
future may experience, losses as a result of our inability to collect our
accounts receivable. During the past several years, various retailers have
experienced significant financial difficulties, which in some cases have
resulted in bankruptcies, liquidations and store closings. The financial
difficulties of a customer could result in reduced business with that customer.
We may also assume higher credit risk relating to receivables of a customer
experiencing financial difficulty. If these developments occur, our inability to
shift sales to other customers or to collect on our trade accounts receivable
from a major customer could substantially reduce our income and have a material
adverse effect on our results of operations and cash flows from operating
activities.
We
have entered into a secured credit facility agreement that restricts certain
activities, and failure to comply with this agreement may have an adverse effect
on our financial condition, results of operations and cash flows.
We
maintain a secured credit facility that contains restrictive financial
covenants, including financial covenants that require us to comply with
specified financial ratios. We may have to curtail some of our
operations to comply with these covenants. In addition, our
secured credit facility contains other affirmative and negative covenants that
could restrict our operating and financing activities. These provisions limit
our ability to, among other things, incur future indebtedness, contingent
obligations or liens, guarantee indebtedness, make certain investments and
capital expenditures, sell stock or assets and pay dividends, and consummate
certain mergers or acquisitions. Because of the restrictions on our ability
to create or assume liens, we may find it difficult to secure additional
indebtedness if required. Furthermore, if we fail to comply with the secured
credit facility requirements, we may be in default, and we may not be able to
obtain the necessary amendments to the credit agreement or waivers of an event
of default. Upon an event of default if the credit agreement is not amended
or the event of default is not waived, the lender could declare all amounts
outstanding, together with accrued interest, to be immediately due and payable.
If this happens, we may not be able to make those payments or borrow sufficient
funds from alternative sources to make those payments. Even if we were to obtain
additional financing, that financing may be on unfavorable
terms. 10
Changes
in legislation or governmental regulations, policies or standards applicable to
our products may have a significant impact on our ability to compete in our
target markets.
We
operate in regulated industries. Our U.S. operations are subject to regulation
by federal, state, and local governmental agencies with respect to safety of
operations and equipment, labor and employment matters, and financial
responsibility. Our SMS EAS products are subject to FCC regulation, and our
international operations are regulated by the countries in which they operate,
including regulation of the Conformité Européene (CE) in Europe. Failure to
comply with laws or regulations could result in substantial fines or revocation
of our operating permits or licenses. If laws and regulations change and we fail
to comply, our financial condition, results of operations, or cash flows could
be materially and adversely affected.
Our
ability to implement cost reductions in field services, selling, general and
administrative expenses, and our manufacturing and supply chain operations may
have a significant impact on our business and future revenues and
profits.
We have
taken actions to rationalize our field service, improve our sales productivity,
reduce our general and administrative expenses, and reconfigure our
manufacturing and supply chain operations. Such rationalization actions require
management judgment on the development of cost reduction strategies and
precision on the execution of those strategies. We may not realize, in full or
in part, the anticipated benefits from these initiatives, and other events and
circumstances, such as difficulties, delays, or unexpected costs may occur,
which could result in our not realizing all or any of the anticipated benefits.
We also cannot predict whether we will realize improved operating performance as
a result of any cost reduction strategies. Further, in the event the market
continues to fluctuate, we may not have the appropriate level of resources and
personnel to react to the change. We are also subject to the risk of business
disruption in connection with our restructuring initiatives, which could have a
material adverse effect on our business and future revenues and
profits.
We
continue to evaluate opportunities to restructure our business and rationalize
our operations in an effort to optimize our cost structure and
efficiencies. As a result of these evaluations, we may take similar
rationalization steps in the future. Future actions could result in
restructuring and related charges, including but not limited to workforce
reduction costs and charges relating to consolidation of excess facilities that
could be significant.
Our
ability to integrate the acquisitions of the Alpha S3, SIDEP/Asialco, OATSystems
and Brilliant businesses and to achieve our financial and operational goals for
these businesses could have an impact on future revenues and
profits.
We are in
the process of integrating our OATSystems and Brilliant businesses into our
operations. In 2007, we acquired the Alpha S3 business, and we continue to work
to take advantage of the business opportunity to utilize our existing sales
force to grow revenue. In 2007, we also acquired the SIDEP/Asialco business, and
have been integrating that business to optimize worldwide manufacturing
capabilities and improve the quality and profitability of the acquired product
lines. In June 2008, we acquired OATSystems, which will facilitate
complementary merchandise protection and inventory management applications
solutions that will enable retailers and their supply chains to gain deeper
inventory visibility. In August 2009, we acquired Brilliant, a Hong Kong and
China-based manufacturer of woven and printed labels, which will allow us to
strengthen and expand our core apparel labeling offering and provides us with
additional capacity in a key geographical location. Brilliant’s woven and
printed label manufacturing capabilities will establish us as a full range
global supplier for the apparel labeling solutions business.
Various
risks, uncertainties and costs are associated with the acquisitions. Effective
integration of systems, key business processes, controls, objectives, personnel,
management practices, product lines, markets, customers, supply chain
operations, and production facilities can be difficult to achieve and the
results are uncertain, particularly across our internationally diverse
organization. We may not be able to retain key personnel of an acquired company
and we may not be able to successfully execute integration strategies or achieve
projected performance targets set for the business segment into which an
acquired company is integrated. Our ability to execute the integration plans
could have an impact on future revenues and profits and may adversely affect our
financial condition, results of operations or cash flows. There can be no
assurance that these acquisitions or others will be successful and contribute to
our profitability.
If
we fail to manage our growth effectively, our business could be
harmed.
Our
strategy is to maximize value by achieving growth both organically and through
acquisitions. Our ability to effectively manage and control any future growth
may be limited. To manage any growth, our management must continue to improve
our operational, information and financial systems, procedures and controls and
expand, train, retain and manage our employees. If our systems, procedures and
controls are inadequate to support our operations, any expansion could decrease
or stop, and investors may lose confidence in our operations or financial
results. If we are unable to manage growth effectively, our business and
operating results could be adversely affected, and any failure to develop and
maintain adequate internal controls over financial reporting could cause the
trading price of our shares to decline substantially.
An
impairment in the carrying value of goodwill or other assets could negatively
affect our consolidated results of operations and net worth.
Pursuant
to accounting principles generally accepted in the United States, we are
required to annually assess our goodwill, intangibles and other long-lived
assets to determine if they are impaired. In addition, interim reviews must be
performed whenever events or changes in circumstances indicate that impairment
may have occurred. If the testing performed indicates that impairment has
occurred, we are required to record a non-cash impairment charge for the
difference between the carrying value of the goodwill or other intangible assets
and the implied fair value of the goodwill or other intangible assets in the
period the determination is made. Disruptions to our business, end market
conditions and protracted economic weakness, unexpected significant declines in
operating results of reporting units, divestitures and market capitalization
declines may result in additional charges for goodwill and other asset
impairments. We have significant intangible assets, including goodwill with an
indefinite life, which are susceptible to valuation adjustments as a result of
changes in such factors and conditions. We assess the potential impairment of
goodwill and indefinite lived intangible assets on an annual basis, as well as
when interim events or changes in circumstances indicate that the carrying value
may not be recoverable. We assess definite lived intangible assets when events
or changes in circumstances indicate that the carrying value may not be
recoverable.
Our 2009
annual impairment test indicated no impairment of our goodwill or intangible
assets. Although our analysis regarding the fair values of the
goodwill and indefinite lived intangible assets indicates that they exceed their
respective carrying values, materially different assumptions regarding the
future performance of our businesses or significant declines in our stock price
could result in additional goodwill impairment losses. Specifically, an
unanticipated deterioration in revenues and gross margins generated by our
Retail Merchandising Solutions segment could trigger future impairment in that
segment. We also evaluate other assets on our balance sheet whenever
events or changes in circumstances indicate that their carrying value may not be
recoverable. Materially different assumptions regarding the future performance
of our businesses could result in significant asset impairment
losses.
Our
future results may be affected by various legal and regulatory
proceedings.
We cannot
predict with certainty the outcome of litigation matters, government proceedings
and investigations, and other contingencies and uncertainties that may arise out
of the conduct of our business, including matters relating to intellectual
property, employment, commercial and other matters. Resolution of such matters
can be prolonged and costly, and the ultimate results or judgments are uncertain
due to the inherent uncertainty in litigation and other proceedings. Moreover,
our potential liabilities are subject to change over time due to new
developments, changes in settlement strategy or the impact of evidentiary
requirements, and we may be required to pay fines, damage awards or settlements,
or become subject to fines, damage awards or settlements, that could have a
material adverse effect on our results of operations, financial condition, and
liquidity.
The
failure to effectively maintain and upgrade our information systems could
adversely affect our business.
Our
business depends significantly on effective information systems, and we have
many different information systems for our various businesses. Our information
systems require an ongoing commitment of significant resources to maintain and
enhance existing systems and develop new systems in order to keep pace with
continuing changes in information processing technology, evolving industry and
regulatory standards, and changing customer preferences. In addition, we may
from time to time obtain significant portions of our systems-related or other
services or facilities from independent third parties, which may make our
operations vulnerable to such third parties’ failure to perform adequately. Our
failure to maintain effective and efficient information systems, or our failure
to efficiently and effectively consolidate our information systems to eliminate
redundant or obsolete applications, could have a material adverse effect on our
business, financial condition and results of operations. Additionally, any
disruption or failure of such networks, systems, or other technology may disrupt
our operations, cause customer dissatisfaction, and loss of customer
revenues. 11
Risks
generally associated with a company-wide implementation of an enterprise
resource planning (ERP) system may adversely affect our business and
results of operations or the effectiveness of internal control over financial
reporting.
We are
preparing to implement a company-wide ERP system to handle the business and
financial processes within our operations and corporate functions. ERP
implementations are complex and time-consuming projects that involve substantial
expenditures on system software and implementation activities that can continue
for several years. ERP implementations also require transformation of business
and financial processes in order to reap the benefits of the ERP system. Our
business and results of operations may be adversely affected if we experience
operating problems and/or cost overruns during the ERP implementation process or
if the ERP system and the associated process changes, do not give rise to the
benefits that we expect. Additionally, if we do not effectively
implement the ERP system as planned or if the system does not operate as
intended, it could adversely affect the effectiveness of our internal controls
over financial reporting.
As
a global business, we have a relatively complex tax structure, and there is a
risk that tax authorities will disagree with our tax positions.
Since we
conduct operations worldwide through our foreign subsidiaries, we are subject to
complex transfer pricing regulations in the countries in which we operate.
Transfer pricing regulations generally require that, for tax purposes,
transactions between us and our foreign affiliates be priced on a basis that
would be comparable to an arm’s length transaction and that contemporaneous
documentation be maintained to support the tax allocation. Although uniform
transfer pricing standards are emerging in many of the countries in which we
operate, there is still a relatively high degree of uncertainty and inherent
subjectivity in complying with these rules. To the extent that any foreign tax
authorities disagree with our transfer pricing policies, we could become subject
to significant tax liabilities and penalties.
Our tax
returns are subject to review by taxing authorities in the jurisdictions in
which we operate. Although we believe that we have provided for all tax
exposures, the ultimate outcome of a tax review could differ materially from our
provisions.
We record
a valuation allowance to reduce our deferred tax assets to the amount that it is
more likely than not to be realized. Our assessments about the realizability of
our deferred tax assets are based on estimates of our future taxable income by
tax jurisdiction, the prudence and feasibility of possible tax planning
strategies, and the economic environments in which we do business. Any changes
in these assessments could have a material impact on our results of
operations.
None.
Our
principal corporate offices are located at 101 Wolf Drive, Thorofare, New
Jersey. As of December 27, 2009, we owned or leased approximately
2.7 million square feet of space worldwide which is used primarily for
sales, distribution, manufacturing, and general administration. These facilities
include offices located throughout North and South America, Europe, Asia, and
Australia. Our principal manufacturing facilities are located in China, the
Dominican Republic, Germany, Japan, Malaysia, the Netherlands, Puerto Rico,
India, Hong Kong, Bangladesh, the U.K. and the U.S. We believe our current
manufacturing capacity will support our needs for the foreseeable future.
We are
involved in certain legal and regulatory actions, all of which have arisen in
the ordinary course of business, except for the matters described in the
following paragraphs. Management believes that the ultimate resolution of such
matters is unlikely to have a material adverse effect on our consolidated
results of operations and/or financial condition, except as described
below.
Matter
related to All-Tag Security S.A., et al
We
originally filed suit on May 1, 2001, alleging that the disposable,
deactivatable radio frequency security tag manufactured by All-Tag Security S.A.
and All-Tag Security Americas, Inc.’s (jointly “All-Tag”) and sold by
Sensormatic Electronics Corporation (Sensormatic) infringed on a U.S. Patent
No. 4,876,555 (Patent) owned by us. On April 22, 2004, the United
States District Court for the Eastern District of Pennsylvania granted summary
judgment to defendants All-Tag and Sensormatic on the ground that our Patent was
invalid for incorrect inventorship. We appealed this decision. On June 20,
2005, we won an appeal when the Federal Circuit reversed the grant of summary
judgment and remanded the case to the District Court for further proceedings. On
January 29, 2007 the case went to trial, and on February 13, 2007, a
jury found in favor of the defendants on infringement, the validity of the
Patent and the enforceability of the Patent. On June 20, 2008, the Court
entered judgment in favor of defendants based on the jury’s infringement and
enforceability findings. On February 10, 2009, the Court granted
defendants’ motions for attorneys’ fees under Section 285 of the Patent
Statute. The district court will have to quantify the amount of attorneys’ fees
to be awarded, but it is expected that defendants will request approximately
$5.7 million plus interest. We recognized this amount during the fourth
fiscal quarter ended December 28, 2008 in litigation settlements on the
consolidated statement of operations. We intend to appeal any award of legal
fees.
Other
Settlements
During
2009, we recorded $1.3 million of litigation expense related to the settlement
of a dispute with a consultant for $0.9 million and the acquisition of a patent
related to our Alpha business for $0.4 million. We purchased the patent for $1.7
million related to our Alpha business. A portion of this purchase price was
attributable to use prior to the date of acquisition and as a result we recorded
$0.4 million in litigation expense and $1.3 million in intangibles.
No matter
was submitted during the fourth quarter of 2009 to a vote of stockholders.
Our
common stock is listed on the New York Stock Exchange (NYSE) under the
symbol CKP. The following table sets forth, for the periods indicated, the high
and low sale prices for our common stock as reported on the NYSE Composite
Tape.
Holders
of Record
As of
February 12, 2010, there were 646 holders of record of our common
stock. 12
Dividends
We have
never paid a cash dividend on our common stock (except for a nominal cash
distribution in April 1997 to redeem the rights outstanding under our 1988
Shareholders’ Rights Plan). We do not anticipate paying any cash dividends in
the near future. We have retained, and expect to continue to retain, our
earnings for reinvestment into the business. The declaration and payment of
dividends in the future, and their amounts, will be determined by the Board of
Directors in light of conditions then existing, including our earnings, our
financial condition and business requirements (including working capital needs),
and other factors.
Recent
Sales of Unregistered Securities
There has
been no sale of unregistered securities in fiscal years 2009, 2008 or
2007.
Equity
Compensation Plan Information
The
following table sets forth our shares authorized for issuance under our equity
compensation plan at December 27, 2009:
(1)
Includes stock options and performance based restricted stock
units.
(2)
Inducement options granted to newly elected President and CEO of Checkpoint in
connection with his hire in fiscal year 2007.
STOCK
PERFORMANCE GRAPH
The
following graph compares the cumulative total shareholder return on the Common
Stock of the Company for the period beginning December 26, 2004 and ending
on December 27, 2009, with the cumulative total return on the Center for
Research in Security Prices Index (CRSP Index) for NYSE/AMEX/NASDAQ Stock
market, and the CRSP Index for NASDAQ Electronic Components and Accessories,
assuming the investment of $100 in the Company’s Stock, the CRSP Index for
NYSE/AMEX/NASDAQ Stock market, and the CRSP Index for NASDAQ Electronic
Components and Accessories and the reinvestment of all dividends.
This
Stock Performance Graph shall not be deemed incorporated by reference by any
general statement incorporating by reference this annual report into any filing
under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended, except to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such Acts.
Comparison
of 5 Year Cumulative Total Return
Assumes
Initial Investment of $100
December 2009
 Notes:
13
The
following tables set forth our selected financial data and should be read in
conjunction with Management’s Discussion and Analysis of Financial Condition and
Results of Operations and the Consolidated Financial Statements and Notes
thereto included elsewhere herein.
(dollar
amounts are in thousands except per share amounts)
14
The
following section highlights significant factors impacting the consolidated
operations and financial condition of the Company and its subsidiaries. The
following discussion should be read in conjunction with Item 6. “Selected
Financial Data” and Item 8. “Financial Statements and Supplementary
Data.”
Overview
We are a
multinational manufacturer and marketer of identification, tracking, security
and merchandising solutions 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, electronic
article surveillance (EAS), custom tags and labels (Apparel Labeling Solutions),
store monitoring solutions (CheckView™), hand-held labeling systems (HLS),
retail merchandising systems (RMS), and radio frequency identification
(RFID) systems and software. Applications of these products include
primarily retail security, asset and merchandise visibility, automatic
identification, and pricing and promotional labels and signage. Operating
directly in 30 countries, we have a global network of subsidiaries and
distributors and provide customer service and technical support around the
world.
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.
Historically,
we have reported our results of operations into three segments: Shrink
Management Solutions, Intelligent Labels, and Retail Merchandising. During the
first quarter of 2009, resulting from a change in our management structure, we
began reporting our segments into three new segments: Shrink Management
Solutions, Apparel Labeling Solutions, and Retail Merchandising Solutions.
Fiscal years 2008 and 2007 have been conformed to reflect the segment change.
The margins for each of the segments and the identifiable assets attributable to
each reporting segment are set forth in Note 19 “Business Segments and
Geographic Information” to the consolidated financial statements. Shrink
Management Solutions now includes results of our EAS labels and library
businesses. Apparel Labeling Solutions, formerly referred to as Check-Net®,
includes tag and label solutions sold to apparel manufacturers and retailers,
which leverage our graphic and design expertise, strategically located service
bureaus, and our Check-Net®
e-commerce capabilities. Our apparel labeling services, coupled with our EAS and
RFID capabilities, provide a combination of apparel branding and identification
with loss prevention and supply chain visibility. There were no changes to the
Retail Merchandising Solutions segment.
Our
business has been impacted by the unprecedented credit crisis and on-going
softening of the global economic environment. 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 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 a 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. The total anticipated costs related to the first phase of the
plan are $3.1 million of which $2.8 million were incurred during 2009. The
remaining stages of the plan will not be finalized until 2010, at which time
further details and cost impacts will be disclosed.
In
August 2008, we announced a manufacturing and supply chain restructuring
program designed to accelerate profitable growth in our ALS business and to
support incremental improvements in our EAS systems and labels businesses. We
anticipate this program to result in total restructuring charges of
approximately $3 million to $4 million, or $0.06 to $0.08 per diluted
share. We continue to expect implementation of this program to be complete in
2010 and to result in annualized cost savings of approximately
$6 million.
In July
2009, we entered into an agreement to purchase the business of Brilliant, a
China-based manufacturer of woven and printed labels, and settled the
acquisition in August 2009. The financial statements reflect the
preliminary allocations of the Brilliant purchase price based on estimated fair
values at the date of acquisition. The allocation of the purchase
price remains open for certain information related to deferred income taxes and
is expected to be completed during the first half of 2010. 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 a key
geographical location. Brilliant’s woven and
printed label manufacturing capabilities will establish us as a full range
global supplier for the apparel labeling solutions business.
Future
financial results will be dependent upon our ability to expand the functionality
of our existing product lines, develop or acquire new products for sale through
our global distribution channels, convert new large chain retailers to 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.
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, and our
borrowing capacity should provide us with adequate cash flow and liquidity to
execute our business plan.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles (GAAP) in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosure of contingent
assets and liabilities.
Note 1 of
the notes to the consolidated financial statements describes the significant
accounting policies used in the preparation of the consolidated financial
statements. Certain of these significant accounting policies are considered to
be critical accounting policies. A critical accounting policy is defined as one
that is both material to the presentation of our consolidated financial
statements and requires management to make difficult, subjective or complex
judgments that could have a material effect on our financial condition or
results of operations.
Specifically,
these policies have the following attributes: (1) we are required to make
assumptions about matters that are highly uncertain at the time of the estimate;
and (2) different estimates we could reasonably have used, or changes in
the estimate that are reasonably likely to occur, would have a material effect
on our financial condition or results of operations. Estimates and assumptions
about future events and their effects cannot be determined with certainty. On an
on-going basis, we evaluate our estimates on historical experience and on
various other assumptions believed to be applicable and reasonable under the
circumstances. These estimates may change as new events occur, as additional
information is obtained and as our operating environment changes. These changes
have historically been minor and have been included in the consolidated
financial statements as soon as they became known. Senior management reviews the
development and selection of our accounting policies and estimates with the
Audit Committee. The critical accounting policies have been consistently applied
throughout the accompanying financial statements.
15
We believe the following accounting
policies are critical to the preparation of our consolidated financial
statements:
Revenue Recognition.> We recognize revenue when
revenue is realized or realizable and earned. Revenue is realized or realizable
and earned when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; the
price to the buyer is fixed or determinable; and collectability is reasonably
assured. We enter into contracts to sell our products and services, and, while
the majority of our sales agreements contain standard terms and conditions,
there are agreements that contain multiple elements or non-standard terms and
conditions. As a result, significant contract interpretation is sometimes
required to determine the appropriate accounting, including whether the
deliverables specified in a multiple element arrangement should be treated as
separate units of accounting for revenue recognition purposes, and, if so, how
the price should be allocated among the elements and when to recognize revenue
for each element. Unearned revenue is recorded when payments are received in
advance of performing our service obligations and is recognized over the service
period.
For
arrangements with multiple elements, we determine the fair value of each element
and then allocate the total arrangement consideration among the separate
elements. We recognize revenue when installation is complete or other
post-shipment obligations have been satisfied. Equipment leased to customers
under sales-type leases is accounted for as the equivalent of a sale. The
present value of such lease revenues is recorded as net revenues, and the
related cost of the equipment is charged to cost of revenues. The deferred
finance charges applicable to these leases are recognized over the terms of the
leases. Rental revenue from equipment under operating leases is recognized over
the term of the lease. Installation revenue from SMS EAS equipment is recognized
when the systems are installed. Service revenue is recognized, for service
contracts, on a straight-line basis over the contractual period, and, for
non-contract work, as services are performed. Revenues from software license
agreements are recognized when persuasive evidence of an agreement exists,
delivery of the product has occurred, no significant vendor obligations are
remaining to be fulfilled, the fee is fixed and determinable, and collection is
probable. Revenue from software contracts for both licenses and professional
services that require significant production, modification, customization, or
implementation are recognized together using the percentage of completion method
based upon the ratio of labor incurred to total estimated labor to complete each
contract. In instances where there is a term license combined with services,
revenue is recognized ratably over the term. We record estimated reductions to
revenue for customer incentive offerings, including volume-based incentives and
rebates. We record revenues net of an allowance for estimated return activities.
Return activity was immaterial to revenue and results of operations for all
periods presented.
We
believe the following judgments and estimates have a significant effect on our
consolidated financial statements:
Goodwill
and indefinite-lived intangible assets are subject to tests for impairment at
least annually or whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. We test for impairment on
an annual basis as of fiscal month end October of each fiscal year, relying on a
number of factors including operating results, business plans, and anticipated
future cash flows. Our management uses its judgment in assessing whether
goodwill has become impaired between annual impairment tests. Reporting units
are primarily determined as the geographic areas comprising our business
segments, except in situations when aggregation of the reporting units is
appropriate. 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 shares outstanding on the assessment date by the average market
price of our common stock over a 30-day period before each assessment date. We
use this 30-day duration to consider inherent market fluctuations that may
affect any individual closing price. We believe that our market capitalization
alone does not fully capture the fair value of our business as a whole, or the
substantial value that an acquirer would obtain from its ability to obtain
control of our business. As such, in determining fair value, we add a control
premium to our market capitalization. To estimate the control premium, we
considered our unique competitive advantages that would likely provide synergies
to a market participant.
We have
not made any material changes in the methodology used in the assessment of
whether or not goodwill is impaired during the past three fiscal years.
Determining the fair value of a reporting unit is a matter of judgment and often
involves the use of significant estimates and assumptions. The use of different
assumptions would increase or decrease estimated discounted future cash flows
and could increase or decrease an impairment charge. If the use of these assets
or the projections of future cash flows change in the future, we may be required
to record impairment charges. An erosion of future business results in any of
the business units could create impairment in goodwill or other long-lived
assets and require a significant charge in future periods. Specifically, an
unanticipated deterioration in revenues and gross margins generated by our
Retail Merchandising Solutions segment could trigger future impairment in that
segment. (See Notes 1 and 5 of the Consolidated Financial
Statements.) 16
Changes
in tax laws and rates could also affect recorded deferred tax assets and
liabilities in the future. We are not aware of any such changes that would have
a material effect on our results of operations, cash flows or financial
position.
In
addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations in a multitude of
jurisdictions across our global operations. We record tax liabilities for the
anticipated settlement of tax audit issues in the U.S. and other tax
jurisdictions based on our estimate of whether, and the extent to which,
additional taxes will be due. Our income tax expense includes amounts intended
to satisfy income tax assessments that result from these audit issues.
Determining the income tax expense for these potential assessments and recording
the related assets and liabilities requires management judgments and estimates.
Due to the complexity of some of these uncertainties, the ultimate resolution
may result in a payment that is different from our estimate of tax liabilities.
If payment of these amounts ultimately proves to be greater or less than the
recorded amounts, the change of the liabilities would result in tax expense or
benefit being recognized in that period. We evaluate our uncertain tax positions
and believe that our reserve for uncertain tax positions, including related
interest, is adequate.
Stock Compensation.> We recognize stock-based
compensation expense for all share-based payment awards net of an estimated
forfeiture rate and only recognize compensation cost for those shares expected
to vest. Stock compensation expense is recognized for all share-based payments
on a straight-line basis over the requisite service period of the
award.
Determining
the fair value of share-based payment awards requires the input of highly
subjective assumptions, including the expected life of the share-based payment
awards and stock price volatility. The assumptions used in calculating the fair
value of share-based payment awards represent management’s best estimates, but
these estimates involve inherent uncertainties and the application of management
judgment. As a result, if factors change and we use different assumptions, our
share-based compensation expense could be materially different in the future. In
addition, we are required to estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. If our actual forfeiture
rate is materially different from our estimate, the share-based compensation
expense could be significantly different from what we have recorded in the
current period. A change in the estimated forfeiture rate of 10% would have a
$0.2 million effect on stock compensation expense. As of December 27, 2009,
there was $3.0 million and $2.8 million of unrecognized stock-based compensation
expense related to nonvested stock options and restricted stock units,
respectively. Such costs are expected to be recognized over a weighted-average
period of 1.7 years and 1.6 years, respectively. (See Note 8 to the Consolidated
Condensed Financial Statements for further discussion on share-based
compensation.)
Liquidity
and Capital Resources
Our
liquidity needs have related to, and are expected to continue to relate to,
acquisitions, capital investments, product development costs, potential future
restructuring related to the rationalization of the business, and working
capital requirements. We have met our liquidity needs primarily through cash
generated from operations. Based on an analysis of liquidity utilizing
conservative assumptions for the next twelve months, we believe that cash
provided from operating activities and funding available under our credit
agreements should be adequate to service debt and working capital needs, meet
our capital investment requirements, other potential restructuring requirements,
and product development requirements.
The
recent financial and credit crisis has reduced credit availability and liquidity
for many companies. We believe, however, that the strength of our core business,
cash position, access to credit markets, and our ability to generate positive
cash flow will sustain us through this challenging period. We are working to
reduce our liquidity risk by accelerating efforts to improve working capital
while reducing expenses in areas that will not adversely impact the future
potential of our business. Additionally, we have increased our monitoring of
counterparty risk. We evaluate the creditworthiness of all existing and
potential counterparties for all debt, investment, and derivative transactions
and instruments. Our policy allows us to enter into transactions with nationally
recognized financial institutions with a credit rating of “A” or higher as
reported by one of the credit rating agencies that is a nationally recognized
statistical rating organization by the U.S. Securities and Exchange Commission.
The maximum exposure permitted to any single counterparty is $50.0 million.
Counterparty credit ratings and credit exposure are monitored monthly and
reviewed quarterly by our Treasury Risk Committee.
As of
December 27, 2009, our cash and cash equivalents were $162.1 million
compared to $132.2 million as of December 28, 2008. Cash and cash
equivalents increased in 2009 primarily due to $114.8 million of cash provided
by operating activities, partially offset by $50.3 million of cash used in
financing activities and $38.6 million of cash used in investing activities.
Cash from operating activities improved $37.6 million in 2009 compared to
2008, primarily due to improvements in accounts receivable and inventory
management, and increased earnings. The improvement in accounts receivable in
2009 resulted primarily from a concentrated effort to improve working capital
through enhanced collection efforts. The improvement in inventory was primarily
the result of improved inventory management, which resulted in lower inventory
levels. Cash used in investing activities was $16.1 million less in
2009 compared to 2008. This was due primarily to the amount paid for the
acquisitions of OATSystems, Inc. and Security Corporation, Inc. in 2008, which
was partially offset by the amount paid for Brilliant in 2009, and a decrease in
the acquisitions of property, plant and equipment and intangible assets in
2009. Cash used in financing activities was $45.9 million greater
in 2009 compared to 2008. This was due primarily to a $23 million payment to
retire the senior unsecured multi-currency credit facility, a $23 million
payment to reduce the Secured Credit Facility, and $15.5 million in payments to
reduce the debt acquired in the Brilliant acquisition, coupled with an increase
in borrowings in 2008 that were used to finance our stock repurchase program and
OATSystems, Inc. acquisition. The increase in cash used in financing activities
was partially offset by $13.3 million of new factoring arrangements in Europe
during 2009.
Our
percentage of total debt to total equity as of December 27, 2009, was 21.1%
compared to 28.8% as of December 28, 2008. As of December 27, 2009,
our working capital was $241.8 million compared to $282.8 million as
of December 28, 2008.
We
continue to reinvest in the Company through our investment in technology and
process improvement. During 2009, our investment in research and development
amounted to $20.4 million, as compared to $22.6 million in 2008. These
amounts are reflected in the cash generated from operations, as we expense our
research and development as it is incurred. In 2010, we anticipate spending of
approximately $21 million on research and development to support
achievement of our strategic plan.
We have
various unfunded pension plans outside the U.S. These plans have significant
pension costs and liabilities that are developed from actuarial valuations. For
fiscal 2009, our contribution to these plans was $4.6 million. Our funding
expectation for 2010 is $5.2 million. We believe our current cash position,
cash generated from operations, and the availability of cash under our revolving
line of credit will be adequate to fund these requirements. The Contractual
Obligation table details our anticipated funding requirements related to pension
obligations for the next ten years.
Acquisition
of property, plant, and equipment and intangibles during 2009 totaled $13.8
million compared to $15.2 million during 2008. During 2009, our acquisition of
property, plant, and equipment and intangibles consisted of $12.5 million of
capital expenditures and $1.3 million was related to the purchase of a patent.
We anticipate our capital expenditures, used primarily to upgrade information
technology and improve our production capabilities, to approximate
$32 million in 2010. 17
In July
2009, we entered into an agreement to purchase the business of Brilliant, a
China-based manufacturer of woven and printed labels, and settled the
acquisition on August 14, 2009 for approximately $38.3 million, including
cash acquired of $0.6 million and the assumption of debt of $19.6 million. The
payment to acquire Brilliant is reflected in the acquisition of businesses line
within investing activities on the consolidated statement of cash flows. During
2009, $15.5 million of debt payments were made and consisted of $6.8 million of
the current portion of long-term debt, $5.1 million in factoring payments, $2.8
million of bank overdraft payments, and $0.8 million of term loans. All payments
are included in the cash used in financing activities section of our
consolidated statement of cash flows.
Our
Brilliant business has variable interest rate full-recourse factoring
arrangements of accounts receivable with a maximum limit of $3.2 million (HKD
25.0 million) and totaled $1.4 million (HKD 10.9 million) as of December 27,
2009. The arrangements are secured by trade receivables as well as a fixed cash
deposit of $0.6 million (HKD 5.0 million). The arrangement bears interest of HKD
Prime Rate + 1.00%. On December 27, 2009, the interest rate was 6.00%. The
secured cash deposit is recorded within restricted cash in the accompanying
consolidated balance sheets. The factoring arrangement is included in short-term
borrowings in the accompanying consolidated balance sheets. Factoring payments
are included in the cash used in financing activities section of our
consolidated statement of cash flows.
Our
Brilliant business has term loans that totaled $1.1 million (RMB 7.2 million) on
December 27, 2009. The interest rates range from 4.89% to 5.90%. The term loans
mature at various times through July 2010. The term loans are
collateralized by land and buildings with an aggregate carrying value of
$13.1 million as of December 27, 2009. Term loan payments are included
in the cash used in financing activities section of our consolidated statement
of cash flows.
The
remaining $1.6 million of Brilliant debt is related to capital leases which
mature at various dates through 2014. Capital lease payments are included in the
cash used in financing activities section of our consolidated statement of cash
flows.
In
June 2008, we purchased the business of OATSystems, Inc., a privately held
company, for approximately $37.2 million, net of cash acquired of
$0.9 million, and including the assumption of $3.2 million of
OATSystems, Inc. debt. The transaction was paid in cash. Additionally, we
acquired $1.3 million in liabilities.
In
January 2008, we purchased the business of Security Corporation, Inc., a
privately held company, for $7.9 million plus $1.0 million of
liabilities acquired. The transaction was paid in cash.
On
November 1, 2007, Checkpoint Systems, Inc. and one of its direct
subsidiaries (collectively, the “Company”) and Alpha Security Products, Inc. and
one of its direct subsidiaries (collectively, “the Seller”) entered into an
Asset Purchase Agreement and a Dutch Assets Sale and Transfer Agreement
(collectively, the “Agreements”) under which we purchased all of the assets of
Alpha’s S3 business (the “Acquisition”) for approximately $142 million,
subject to a post-closing working capital adjustment, plus additional
performance-based contingent payments up to a maximum of $8 million plus
interest thereon. The purchase price was funded by $67 million of cash and
$75 million of borrowings under our senior unsecured credit facility.
Subject to the Agreements, contingent payments were earned if the revenue
derived from the S3 business exceeded $70 million during the period from
December 31, 2007, until December 28, 2008. In the event that the
revenue derived from the S3 business exceeded $83 million during such
period, the Seller was entitled to a maximum payment of $8 million. During
the fourth fiscal quarter ended December 28, 2008, revenues for the S3
business exceeded the minimum contingency payment thresholds. An accrual of
$6.8 million was recognized at December 28, 2008 for the contingent
payment, with a corresponding increase to goodwill recorded on the acquisition.
The payment of $6.8 million was made during the first quarter of 2009, and
is reflected in the acquisition of businesses line within investing activities
on the consolidated statement of cash flows.
During
the second quarter of 2009, our outstanding Asialco loans were paid down and a
loan was renewed in April 2009 for a 12 month period. As of December 27,
2009, our outstanding Asialco loan balance is $3.7 million
(RMB25 million) and has a maturity date of April 2010. The loan is included
in short-term borrowings in the accompanying consolidated balance sheets. Upon
maturity of the Asialco loans, we intend to renew the outstanding borrowings for
a period of one year.
In August
2009, $8.5 million (¥800 million) was paid in order to extinguish our existing
Japanese local line of credit. The line of credit was included in short-term
borrowings in the accompanying consolidated balance sheet as of December 28,
2008.
In
September 2009, we entered into a new Japanese local line of credit for $6.5
million (¥600 million). As of December 27, 2009, the Japanese local line of
credit is $6.6 million (¥600 million) and is fully drawn. The line of credit
matures in September 2010 and was included in short-term borrowings in the
accompanying consolidated balance sheet as of December 27, 2009.
In
October 2009, we entered into a $12.0 million (€8.0 million) full-recourse
factoring arrangement. The arrangement is secured by trade receivables.
Borrowings bear interest at rates of EURIBOR plus a margin of 3.00%. At December
27, 2009, the interest rate was 3.70%. As of December 27, 2009, the
factoring arrangement had a balance of $10.7 million (€7.4 million) and was
included in short-term borrowings in the accompanying consolidated balance sheet
since the agreement expires in October 2010.
On
April 30, 2009, we entered into a new $125.0 million three-year senior
secured multi-currency revolving credit agreement (the “Secured Credit
Facility”) with a syndicate of lenders. The Secured Credit Facility replaces the
$150.0 million senior unsecured multi-currency credit facility (the “Senior
Unsecured Credit Facility”) arranged in December 2005. Prior to entering
into the Secured Credit Facility, $23.0 million of the Senior Unsecured Credit
Facility was paid down during the second quarter of 2009. We paid fees of $4.0
million to enter into the Secured Credit Facility, which were capitalized as
deferred debt issuance costs and are amortized over the term of the
agreement.
The
Secured Credit Facility also includes an expansion option that gives us the
right to increase the aggregate revolving commitment by an amount up to
$50 million, for a potential total commitment of $175 million. The
expansion option allows the additional $50 million in increments of $25 million
based upon consolidated earnings before interest, taxes, and depreciation and
amortization (EBITDA) on June 28, 2009 and December 27, 2009, respectively.
Based on our consolidated EBITDA at December 27, 2009, we qualified to request
the $50 million expansion option for a total potential commitment of $175
million. We did not elect to request the $50 million expansion option at
December 27, 2009.
Borrowings
under the Secured Credit Facility bear interest at rates of LIBOR plus an
applicable margin ranging from 2.50% to 3.75% and/or prime plus 1.50% to 2.75%
based on our leverage ratio of consolidated funded debt to EBITDA. Under the
Secured Credit Facility, we pay an unused line fee ranging from 0.30% to 0.75%
per annum on the unused portion of the commitment. Our availability under the
Secured Credit Facility will be reduced by letters of credit of up to
$25 million, of which $1.4 million are outstanding at
December 27, 2009. There are no other restrictions on our ability to draw
down on the available portion of our Secured Credit Facility.
The
Secured Credit Facility contains covenants that include requirements for a
maximum debt to EBITDA ratio of 2.75, a minimum fixed charge coverage ratio of
1.25 as well as other affirmative and negative covenants. As of
December 27, 2009, we were in compliance with all covenants. Based upon our
projections, we do not anticipate any issues with meeting our existing debt
covenants over the next twelve months.
In
December 2009, we entered into new full-recourse factoring arrangements. The
arrangements are secured by trade receivables. We 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 December 27, 2009, the factoring
arrangement had a balance of $2.4 million (€1.7 million), of which $0.5 million
(€0.4 million) was included in short-term borrowings and $1.9 million (€1.3
million) was included in long-term borrowings in the accompanying consolidated
balance sheets since the receivables are collectable through 2016.
We have
never paid a cash dividend (except for a nominal cash distribution in
April 1997 to redeem the rights outstanding under our 1988 Shareholders’
Rights Plan). We do not anticipate paying any cash dividends in the near
future.
As we
continue to implement our strategic plan in a volatile global economic
environment, our focus will remain on operating our business in a manner that
addresses the reality of the current economic marketplace without sacrificing
the capability to effectively execute our strategy when economic conditions and
the retail environment stabilize. Based upon an analysis of liquidity using our
current forecast, management believes that our anticipated cash needs can be
funded from cash and cash equivalents on hand, the availability of cash under
the new $125.0 million Secured Credit Facility and cash generated from
future operations over the next twelve months. 18
Off-Balance
Sheet Arrangements
We do not
utilize material off-balance sheet arrangements apart from operating leases that
have, or are reasonably likely to have, a current or future effect on our
financial condition, changes in financial condition, revenue or expenses,
results of operations, liquidity, capital expenditures or capital resources. We
use operating leases as an alternative to purchasing certain property, plant,
and equipment. Our future rental commitment under all non-cancelable operating
leases was $38.1 million as of December 27, 2009. The scheduled timing of
these rental commitments is detailed in our “Contractual Obligations”
section.
Contractual
Obligations
Our
contractual obligations and commercial commitments at December 27, 2009 are
summarized below:
The table
above excludes our gross liability for uncertain tax positions, including
accrued interest and penalties, which totaled $21.3 million as of
December 27, 2009, since we cannot predict with reasonable reliability the
timing of cash settlements to the respective taxing authorities.
Pension
Plans
We
maintain several defined benefit pension plans, principally in Europe. The
majority of these pension plans are unfunded. Our pension expense for 2009,
2008, and 2007 was $5.7 million, $5.7 million, and $5.5 million,
respectively. Included in pension expense in 2008 and 2007 is a pension
settlement of $37 thousand and $0.5 million, respectively.
We review
our pension assumptions annually. Our assumptions for the year ended
December 27, 2009, were a discount rate of 5.75%, an expected return of
3.75% and an expected rate of increase in future compensation of
2.77%. In developing the discount rate assumption for each country,
we use a yield curve approach. The yield curve is based on the AA rated bonds
underlying the Barclays Capital corporate bond index. As of December 27, 2009,
and December 28, 2008, the weighted average discount rate was 5.77% in 2009 and
5.75%, respectively. We calculate the weighted average duration of
the plans in each country, and then select the discount rate from the
appropriate yield curve which best corresponds to the plans' liability profile.
The expected rate of the return was developed using the historical rate of
returns of the foreign government bonds currently held.
As of
December 31, 2006, we recognized previously unrecognized losses into the
accrued pension liability with an offsetting charge to accumulated other
comprehensive income. The total amount recognized for losses in accumulated
other comprehensive income as of December 31, 2006 was $14.7 million.
As of December 25, 2005, these amounts were unrecognized and amounted to
$14.5 million. The primary component of the unrecognized losses are
actuarial losses, a transition obligation, and prior period service costs. The
change in actuary losses during 2008 was attributable to changes in the discount
rate as the bond yields have increased. Unrecognized losses are amortized over
the average remaining service period of the employees expected to receive the
benefit in accordance with pension accounting rules. The weighted average
remaining service period is approximately 13 years. The impact of
recognizing the actuarial gains on 2009, 2008, and 2007 pension expense are
$0.1 million, $0.1 million, and $0.6 million, respectively. The
total projected amortization for these gains in 2010 is approximately $0.1
million.
Exposure
to Foreign Currency
We
manufacture products in the USA, the Caribbean, Europe, and the Asia Pacific
region for both the local marketplace, and for export to our foreign
subsidiaries. The subsidiaries, in turn, sell these products to customers in
their respective geographic areas of operation, generally in local currencies.
This method of sale and resale gives rise to the risk of gains or losses as a
result of currency exchange rate fluctuations on inter-company receivables and
payables. Additionally, the sourcing of product in one currency and the sales of
product in a different currency can cause gross margin fluctuations due to
changes in currency exchange rates.
We
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 December 27, 2009, we had currency forward
exchange contracts with notional amounts totaling approximately
$15.5 million. The fair values of the forward exchange contracts were
reflected as a $0.1 million asset and $0.2 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 USA, 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.
During
the second quarter of 2007, we entered into a foreign currency option contract,
at a notional amount of €5 million, to mitigate the effect of fluctuating
foreign exchange rates on the reporting of a portion of its expected 2007
foreign currency denominated earnings. Changes in the fair value of this foreign
currency option contract, which is not designated as a hedge, are recorded in
earnings immediately. The premium paid on the option contract was $73,000. The
foreign currency option contract expired on December 28, 2007. The fair
market value on this option at the expiration date was zero. 19
Hedging
Activity
Beginning
in the second quarter of 2008, we entered into various foreign currency
contracts to reduce our exposure to forecasted Euro-denominated inter-company
revenues. These contracts were designated as cash flow hedges. The foreign
currency contracts mature at various dates from January 2010 to
September 2010. 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 December 27, 2009, the fair value of
these cash flow hedges were reflected as a $0.3 million asset and a $0.1 million
liability and are included in other current assets and other current liabilities
in the accompanying consolidated balance sheets. The total notional amount of
these hedges is $18.3 million (€12.6 million) and the unrealized loss
recorded in other comprehensive income was $0.2 million (net of taxes of $4
thousand), of which the full amount is expected to be reclassified to earnings
over the next twelve months. During the year ended December 27, 2009, a $1.7
million benefit related to these foreign currency hedges was recorded to cost of
goods sold as the inventory was sold to external parties. We recognized an $8
thousand loss during the year ended December 27, 2009 for hedge
ineffectiveness.
During
the first quarter of 2008, we entered into an interest rate swap agreement with
a notional amount of $40 million and a maturity date of February 18, 2010.
The purpose of this interest rate swap agreement is to hedge potential changes
to our cash flows due to the variable interest nature of our senior unsecured
credit facility. The interest rate swap was designated as a cash flow hedge.
This cash flow hedging instrument is marked to market and the changes are
recorded in other comprehensive income. Any hedge ineffectiveness is charged to
interest expense. As of December 27, 2009, the fair value of the
interest rate swap agreement was reflected as a $0.2 million liability and
is included in other current liabilities in the accompanying consolidated
balance sheets and the unrealized loss recorded in other comprehensive income
was $0.1 million (net of taxes of $66 thousand). We estimate that the full
amount of the loss in accumulated other comprehensive income will be
reclassified to earnings over the next twelve months. We recognized no hedge
ineffectiveness during the year ended December 27, 2009.
Provision
for Restructuring
Restructuring
expense for the periods ended December 27, 2009, December 28, 2008,
and December 30, 2007 were as follows:
(amounts in
thousands)
Restructuring
accrual activity for the periods ended December 27, 2009, and
December 28, 2008, were as follows:
(amounts in
thousands)
(amounts in
thousands)
SG&A
Restructuring Plan
During
2009, we initiated a 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. The remaining stages of the plan will not be finalized until
2010, at which time further details and cost impacts will be
disclosed.
As of
December 27, 2009, the net charge to earnings of $2.8 million represents the
first stage of the SG&A Restructuring Plan. The total anticipated costs
related to the first phase of the plan are $3.1 million of which $2.8 million
were incurred. The total number of employees affected by the SG&A
Restructuring Plan were 42, of which 7 have been terminated. Termination
benefits are planned to be paid one month to 24 months after termination.
Upon completion, the annual savings related to the first phase of the plan are
anticipated to be approximately $3 million. 20
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
year ended December 27, 2009, there was a net charge to earnings of $1.5 million
recorded in connection with the Manufacturing Restructuring Plan.
The total
number of employees affected by the Manufacturing Restructuring Plan were 179,
of which 76 have been terminated. The anticipated total cost is expected to
approximate $3.0 million to $4.0 million, of which $3.0 million
has been incurred. Termination benefits are planned to be paid one month to
24 months after termination. The remaining anticipated costs are expected
to be incurred through the end of 2010. Upon completion, the annual savings are
anticipated to be approximately $6 million.
2005
Restructuring Plan
In the
second quarter of 2005, we initiated actions focused on reducing our overall
operating expenses. This plan included the implementation of a cost reduction
plan designed to consolidate certain administrative functions in Europe and a
commitment to a plan to restructure a portion of our supply chain manufacturing
to lower cost areas. During the fourth quarter of 2006, we continued to review
the results of the overall initiatives and added an additional reduction focused
on the reorganization of senior management to focus on key markets and
customers. This additional restructuring reduced our management by 25%. As of
December 27, 2009, this restructuring plan is substantially
complete.
For the
year ended December 27, 2009, a net charge of $1.1 million was
recorded in connection with the 2005 Restructuring Plan. The charge was composed
of severance accruals and related costs, partially offset by the release of a
lease termination liability.
The total
number of employees affected by the 2005 Restructuring Plan were 897, of which
all have been terminated. The anticipated total cost is expected to approximate
$31 million, of which $31 million has been incurred and $31 million
paid. Termination benefits are planned to be paid one month to 24 months
after termination. Upon completion, the annual savings are anticipated to be
approximately $36 million.
2003
Restructuring Plan
During
2008, we reversed $0.3 million of previously accrued severance and incurred
$0.1 million of lease termination costs related to the 2003 Restructuring
Plan.
During
2007, we reversed $0.1 million of previously accrued severance related to
the 2003 Restructuring Plan.
Goodwill
Impairments
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 fourth quarter of each fiscal year and whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. In 2009 and 2007, annual assessments did not result in an
impairment charge. Future annual assessments could result in impairment charges,
which would be accounted for as an operating expense.
During
the year ended December 28, 2008, we completed step one of our fiscal 2008
annual analysis and test for impairment of goodwill and it was determined that
certain goodwill related to the Shrink Management Solutions, Apparel Labeling
Solutions and Retail Merchandising Solutions segments were impaired. The second
step of the goodwill impairment test was not completed prior to the issuance of
the fiscal 2008 financial statements. Therefore, we recognized a charge of
$59.6 million as a reasonable estimate of the impairment loss in its fiscal
2008 financial statements. The impairment charge was recorded in goodwill
impairment on the consolidated statement of operations. The impairment charge
was attributed to a combination of a decline in our market capitalization and a
decline in the estimated forecasted discounted cash flows expected by the
Company.
During
the first quarter of fiscal 2009, we completed the second step of its fiscal
2008 annual analysis and test for impairment of goodwill and it was determined
that no further adjustment to the estimated impairment recorded at
December 28, 2008 was needed.
Asset
Impairments
In 2008,
asset impairment expense was $4.5 million, or 0.5% of revenues. There were
no asset impairment charges in 2009 and 2007.
During
our 2008 goodwill and indefinite-lived intangibles annual impairment test, we
determine that indefinite-lived trade mark intangible in our Shrink Management
Solutions segment was impaired. As a result we recorded an impairment charge of
$0.4 million in the fourth quarter of 2008. This charge was recorded in
asset impairments on the consolidated statement of operations.
As a
result of changes in business circumstances related to the customer relationship
intangible recognized in connection with the SIDEP/Asialco acquisition, we
recorded an impairment charge of $2.6 million in the fourth quarter ended
December 28, 2008. The impairment charge was recorded in asset impairments
in the Shrink Management Solutions segment on the consolidated statement of
operations.
In 2008,
we recorded a $1.5 million fixed asset impairment. The charge consisted of
$1.1 million related to the write down of a building in France and
$0.4 million related to the write down of land and a building in Japan.
These impairments were recorded in asset impairments on the consolidated
statement of operations.
Results
of Operations
(All
comparisons are with the previous fiscal year, unless otherwise
stated.)
Net
Revenues
Our unit
volume is driven by product offerings, number of direct sales personnel,
recurring sales and, to some extent, pricing. Our base of installed systems
provides a source of recurring revenues from the sale of disposable tags,
labels, and service revenues.
Our
customers are substantially dependent on retail sales, which are seasonal,
subject to significant fluctuations, and difficult to predict. In addition,
current economic trends have particularly strongly affected our customers, and
consequently our net revenues may be impacted. Such seasonality and fluctuations
impact our sales. Historically, we have experienced lower sales in the first
half of each year.
21
Analysis
of Statement of Operations
The
following table presents for the periods indicated certain items in the
consolidated statement of operations as a percentage of total revenues and the
percentage change in dollar amounts of such items compared to the indicated
prior period:
N/A —
Comparative percentages are not meaningful.
22
Fiscal
2009 compared to Fiscal 2008
Net
Revenues
During
2009, revenues decreased by $144.4 million, or 15.7%, from
$917.1 million to $772.7 million. Foreign currency translation had a
negative impact on revenues of $28.4 million for the full year of
2009.
(dollar amounts
in millions)
Shrink Management
Solutions
Shrink
Management Solutions revenues decreased by $133.7 million, or 19.4%, in
2009 compared to 2008. Foreign currency translation had a negative impact of
approximately $17.9 million. The remaining revenue decrease was due
primarily to declines in EAS systems, CheckView™, and Alpha business of
$89.3 million, $41.2 million, and $5.6 million, respectively. These
declines were partially offset by a $16.7 million increase in our EAS
consumables business and a $3.6 million increase in our RFID
business.
EAS
systems revenues decreased $89.3 million in 2009 as compared to 2008. The
decrease was due primarily to declines in revenues of $52.4 million in
Europe, $22.0 million in the U.S., and $12.9 million in Asia. The
decline in Europe was due primarily to 2008 large chain-wide roll-outs in Spain,
France, Italy and Belgium without comparable roll-outs in 2009 coupled with a
general overall decline in revenues due to the weak economic conditions in
Europe. The decline in Europe was partially offset by an increase in Germany due
primarily to a new large roll-out in 2009. The decline in the U.S. was due
primarily to large installations in 2008 without comparable roll-outs during
2009. The decline in Asia was due primarily to weak economic conditions in Japan
and Hong Kong coupled with large chain-wide installations in Australia and New
Zealand during 2008 without comparable roll-outs in 2009. The decrease in Asia
was partially offset by a large chain-wide roll-out in China. Our EAS systems
business is dependent upon new store openings and the liquidity and financial
condition of our customers which has been impacted by current economic trends.
Our plan is to partially mitigate this issue by selling new solutions to
existing customers and increasing our market share through innovative products
such as Evolve™.
CheckView™
revenues decreased $41.2 million in 2009 as compared to 2008. The CheckView™
business declined primarily due to decreases in the U.S. and Asia of
$35.3 million and $5.9 million, respectively. The U.S. revenues
associated with our 2008 banking acquisitions benefited by $1.0 million due
to a full year of revenues in 2009 with only a partial year in 2008. The decline
in our U.S. retail business was $28.9 million, due primarily to an overall
decline in capital expenditures as a result of the current weak economic
conditions in the U.S. Our banking business, excluding the non-comparable
acquisition, declined $7.4 million due primarily to decreased customer
spending as a result of the current economic condition in the financial services
sector. We anticipate our U.S. CheckView™ business will continue to experience
difficulties in 2010 as constraints on capital spending by our customers and the
slowing of new store openings will likely continue as a result of the current
economic conditions. The decline in Asia was due primarily to large orders in
Japan in 2008 without comparable installations in 2009.
Our Alpha
business declined by $5.6 million during 2009 as compared to 2008. The
decrease was due primarily to declines in revenues of $5.9 million in
Europe and $1.6 million in the U.S., which was partially offset by a $1.7
million increase in Asia. The decrease in Europe was primarily due to a decrease
in volumes due to the current weak economic condition in Europe. The decrease in
the U.S. was primarily due to a decrease in volumes with several large customers
due to the current weak economic conditions in the U.S. The increase in Asia was
primarily due to an increase in Australia due to sales to several new large
customers during 2009.
EAS
consumables revenues increased by $16.7 million in 2009 as compared to 2008. The
increase was due primarily to increases in revenues of $16.5 million in
Europe and $4.2 million in the U.S., which were partially offset by a $3.9
million decrease in Asia. The increases in Europe and the U.S. were due
primarily to the implementation of our new hard tag at source program. The
decline in Asia was due primarily to the anticipated loss of customers
associated with the acquisition of SIDEP/Asialco.
RFID
revenues increased by $3.6 million during 2009 as compared to 2008. The increase
was due primarily to increases in revenues of $3.1 million in Europe and
$0.6 million in the U.S. The increase in revenues in Europe was due to the sale
of detachers associated with our hard tag at source program that are RFID
enabled for future use. The increase was partially offset by decreases in
Germany and France due to large roll-outs that were completed in 2008 with no
such comparable roll-outs during 2009. The increase in the U.S. was primarily
due to $1.4 million in non-comparable OATSystems Inc. revenues during the first
half of 2009, which was partially offset by a decline in OATSystems Inc.
revenues during the second half of 2009 due to a decrease in non-recurring
licensing fees in 2009.
Apparel Labeling
Solutions
Apparel
Labeling Solutions revenues increased by $6.6 million, or 4.8%, in 2009 as
compared to 2008. Foreign currency translation had a negative impact of
approximately $5.1 million. Apparel Labeling Solutions benefited by
$12.7 million due to our newly acquired Brilliant business. The remaining
decrease of $1.0 million was due to a general overall decline resulting from
current economic conditions.
Retail Merchandising
Solutions
Retail
Merchandising Solutions revenues decreased by $17.3 million, or 18.3%, in
2009 as compared to 2008. The negative impact of foreign currency translation
was approximately $5.4 million. The remaining decrease in our RMS business
was due to a decrease in our revenues from RDS of $8.5 million and a
decrease in revenues of HLS of $3.4 million. Our RDS decline is due to a general
reduction of store remodel work in Europe due to the current economic
environment. The decrease in HLS is due to increased competition and pricing
pressures as well as a general shift in market demand away from HLS products as
retail scanning technology continues to grow worldwide. We anticipate RDS and
HLS to continue to face difficult revenue trends in 2010 due to the impact of
current economic conditions on the RDS business and continued shifts in market
demand for HLS products.
Gross
Profit
During
2009, gross profit decreased by $46.8 million, or 12.4%, from
$378.1 million to $331.3 million. The negative impact of foreign currency
translation on gross profit was approximately $10.4 million. Gross profit, as a
percentage of net revenues, increased from 41.2% to 42.9%.
Shrink Management
Solutions
Shrink
Management Solutions gross profit as a percentage of Shrink Management Solutions
revenues increased to 43.7% in 2009, from 41.4% in 2008. The increase in the
gross profit percentage of Shrink Management Solutions was due primarily to
higher margins in EAS consumables, EAS systems, and CheckView™, partially offset
by lower margins in our Alpha business. EAS consumables margins improved due
primarily to lower royalties due to the expiration of our EAS licensing
obligation in December 2008. EAS consumables also improved due to the
favorable product mix. EAS systems margins improved due to product mix resulting
from fewer chain-wide rollouts in 2009, improved manufacturing margins, and
lower royalties due to the expiration of our EAS licensing obligation in
December 2008. CheckView™ margins improved due to better project management
during 2009 and cost control. Alpha margins decreased in 2009 due to
manufacturing variances related to lower volumes in 2009. 23
Apparel Labeling
Solutions
Apparel
Labeling Solutions gross profit as a percentage of Apparel Labeling Solutions
revenues increased to 37.0% in 2009, from 34.7% in 2008. Apparel Labeling
Solutions margins increased due primarily to better utilization of low cost
manufacturing facilities, which resulted in improved product costs and
reductions in freight.
Retail Merchandising
Solutions
The
Retail Merchandising Solutions gross profit as a percentage of Retail
Merchandising Solutions revenues decreased to 47.5% in 2009 from 49.4% in 2008.
The decrease in Retail Merchandising Solutions gross profit percentage was the
result of a decline in volumes and pricing pressures in our HLS and RDS
businesses.
Selling,
General, and Administrative Expenses
Selling,
general, and administrative (SG&A) expenses decreased $34.3 million, or
11.5%, over 2008. Foreign currency translation decreased SG&A expenses by
approximately $8.4 million. The remaining decrease was due primarily to
lower bad debt expense, lower sales and marketing expense, and lower general and
administrative expenses. The decrease was also due to $1.4 million of
deferred compensation expense in 2008 without a comparable charge in 2009. The
decrease in bad debt expense was attributable to an improved focus on working
capital during 2009. The decrease in sales and marketing expense corresponds to
the decrease in revenues over the prior year, coupled with an increased effort
by management to reduce costs. The decrease in general and administrative
expense is due to efforts to reduce costs, coupled with an additional expense
that was incurred during the second quarter of 2008 due to a change in executive
management with no comparable transition costs in 2009. The cost reduction
efforts were due primarily to better control of discretionary spending and the
impact of our temporary global payroll reduction and furlough program. These
reductions were partially offset by an increase of expenses related to our
Brilliant acquisition coupled with $2.8 million of non-comparable OATSystems,
Inc. expenses during the first half of 2009.
Research
and Development Expenses
Research
and development (R&D) expenses were $20.4 million, or 2.6% of revenues,
in 2009 and $22.6 million, or 2.5% of revenues in 2008. Foreign currency
translation decreased R&D costs by approximately $0.2 million.
Non-comparable R&D expenses generated by OATSystems, Inc. operations during
the first half of 2009 were $1.0 million. The remaining decrease was due to
efforts to reduce costs. The cost reduction efforts were due primarily to the
impact of our temporary global payroll reduction and furlough
program.
Restructuring
Expenses
Restructuring
expenses were $5.4 million, or 0.7% of revenues in 2009 compared to
$6.4 million or 0.7% of revenues in 2008. The current and the prior year
expenses are detailed in the “Provision for Restructuring” section.
Goodwill
Impairment
Goodwill
Impairment expense was $59.6 million, or 6.5% of revenues in 2008, without
a comparable charge in 2009. The 2008 expense is detailed in the “Goodwill
Impairment” section following “Liquidity and Capital Resources.”
Asset
Impairment
Asset
Impairment expense was $4.5 million, or 0.5% of revenues in 2008, without a
comparable charge in 2009. The 2008 expense is detailed in the “Asset
Impairment” section following “Liquidity and Capital Resources.”
Litigation
Settlement
Litigation
Settlement expense was $1.3 million in 2009, compared to $6.2 million in
2008. Included in the 2009 litigation expense was $0.9 million of expense
related to the settlement of a dispute with a consultant and $0.4 million
related to the acquisition of a patent related to our Alpha business. We
purchased the patent for $1.7 million related to our Alpha business. A portion
of this purchase price was attributable to use prior to the date of acquisition
and as a result we recorded $0.4 million in litigation expense and $1.3 million
in intangibles.
The 2008
litigation settlement expense is primarily attributed to a $5.7 million
litigation accrual recorded during the fourth quarter of 2008 related to a
patent infringement counter suit in which we were found to be liable for the
other party’s associated legal fees. We plan to appeal the ruling but have
accrued the full amount of the judgment. The remaining $0.5 million of the
litigation expense was due to a contract settlement with a product manufacturer
in the third quarter of 2008. We do not anticipate any additional charges
related to this issue.
Other
Operating Income
Other
operating income was $1.0 million, or 0.1% of revenues in 2008, without a
comparable gain in 2009. Other operating income was recorded in 2008 due to the
sale of our Czech Republic subsidiary, which is now operating as a distributor
of our products.
Interest
Income and Interest Expense
Interest
income for 2009 decreased $0.7 million from the comparable period in 2008.
The decrease in interest income was due to lower cash balances during 2009
compared to 2008.
Interest
expense for 2009 increased $1.6 million from the comparable period in 2008.
The increase in interest expense was due to higher debt levels in 2009 compared
to 2008.
Other
Gain (Loss), net
Other
gain (loss), net was a loss of $0.2 million in 2009 compared to a net loss
of $8.9 million in 2008. The increase of $8.7 million was due primarily to
a foreign exchange loss of $0.4 million in 2009 as compared to a foreign
exchange loss of $9.2 million in 2008. During 2008, the primary drivers of
the foreign currency loss were fluctuations in the value of the U.S. Dollar to
the Euro and the Japanese Yen, as well as the Euro to the British
Pound.
Income
Taxes
The
effective rate of tax at December 27, 2009 was 28.6%. At December 28, 2008, the
effective tax rate was (2.5%). The 2009 tax rate includes a benefit of $0.1
million in tax reserves and a net increase to the valuation allowance of $7.6
million. The main components of the valuation allowance change were a charge of
$1.1 million in connection with our Italy operations and a charge of $4.6
related to operations in Japan. The valuation allowance was also impacted by a
charge of $2.0 million in connection with state net operating losses, of which
$0.3 million was related to activity in 2009. The remainder of the
valuation allowance movement relates to benefits from the current year
utilization of deferred tax assets that a valuation was recorded against in
prior periods. A benefit of $0.1 million was recorded related to tax
audits settled in the current year.
The 2008
tax rate includes a $1.2 million change in tax reserves and a net valuation
allowance benefit of $2.9 million. The main components of the valuation
allowance benefit was a release of $4.7 million relating to net operating
losses in Brazil, a charge of $1.2 million in connection to our United Kingdom
operations, and a charge of $0.8 million in connection to state net
operating losses. A charge of $0.7 million was recorded related to tax
audits settled in the current year. In addition, an income tax benefit was not
recorded in 2008 on $58.5 million of the $59.6 million impairment as
it related to non-deductible goodwill.
Net
Earnings (Loss) Attributable to Checkpoint Systems, Inc.
Net
earnings (loss) attributable to Checkpoint Systems, Inc. were $26.1 million, or
$0.66 per diluted share, for 2009 compared to ($29.8) million, or ($0.76) per
diluted share, for 2008. The weighted average number of shares used in the
diluted earnings per share computation were 39.6 million and
39.4 million for 2009 and 2008, respectively.
24
Fiscal
2008 compared to Fiscal 2007
Net
Revenues
During
2008, revenues increased by $82.9 million, or 9.9%, from
$834.2 million to $917.1 million. Foreign currency translation had a
positive impact on revenues of $33.0 million for the full year of
2008.
(amounts in
millions)
Shrink Management
Solutions
Shrink
Management Solutions revenues increased by $76.2 million, or 12.5%, in 2008
compared to 2007. Foreign currency translation had a positive impact of
approximately $24.1 million. The Alpha, SIDEP and OATSystems acquisitions
increased revenues in 2008 by $82.4 million. Additionally, CheckView™
revenues increased $4.9 million in 2008 compared to 2007. These increases
were partially offset by a decrease of $14.1 million in EAS systems
revenues, $13.2 million in our EAS consumables business, and $6.3 million in our
Library business.
The
CheckView™ business improved primarily due to increases in the U.S. of
$2.6 million coupled with an increase in Asia of $1.5 million. The
U.S. CheckView™ revenue increase was due primarily to an increase of
$11.8 million in our U.S. banking business, partially offset by a decrease
of $9.2 million in our U.S. retail business. The U.S. banking business
benefited $10.7 million due to recent acquisitions, without comparable
revenues in 2007, coupled with $1.1 million of comparable business growth.
The U.S. retail business revenue decline was due to difficult comparables in
2007 due to large 2007 installations coupled with the impact of current economic
conditions on this business resulting in reductions in 2008 orders and
installations. The increase in Asia CheckView™ revenues was due primarily to
expansion of the business model within the region during fiscal 2008. The U.S.
CheckView™ business has a significant portion of its revenue growth dependent
upon new store openings which could continue to be impacted by the current
decline in U.S. economic activity.
EAS
systems revenues, excluding the benefit of foreign currency translation and
acquisitions decreased $14.1 million for 2008 compared to 2007. The
decrease was due to declines in revenues of $15.3 million in Europe and
$1.9 million in Latin America, partially offset by an increase of $3.6
million in revenues in Asia. The decline in Europe was due primarily to general
overall business declines in the UK coupled with large chain-wide installations
in various countries during 2007 without comparable activity in 2008. These
declines in Europe revenues were partially offset by an increase in Belgium due
to a large chain-wide roll-out in 2008 without comparable revenue in 2007. The
decline in Latin America was due primarily to a decline in Mexico attributable
to large chain-wide roll-outs in 2007 without comparable revenues in 2008. The
increase in Asia was due primarily to large chain-wide roll-outs in New Zealand,
Australia, and China without comparables in 2007, partially offset by a decline
in Japan revenue attributable to large chain-wide roll-outs in 2007 without
comparable revenues in 2008. Our EAS systems business is dependent upon new
store openings and the liquidity and financial condition of our customers which
could continue to be impacted by current economic trends. Our plan is to
partially mitigate this issue by selling new solutions to existing customers and
increasing our market share through innovative products such as EvolveTM.
EAS
consumables revenues, excluding the benefit of foreign currency translation
decreased $13.2 million for 2008 compared to 2007. EAS consumables revenues
were impacted by current economic conditions resulting in decreased retail
sector sales resulting in a decreased demand for labels, coupled with
competitive pressures in certain regions. We anticipate that weak economic
conditions could continue to impact our EAS consumables volumes in future
quarters.
Library
revenues, excluding the benefit of foreign currency translation decreased
$6.3 million for 2008 compared to 2007. Library revenues declined due to
the transition period for our 3M distributor agreement compared to direct sales
in the prior year. We expect the library revenues to become comparable in 2009
as the transition to selling to a distributor was initiated at the beginning of
fiscal 2008.
Apparel Labeling
Solutions
Apparel
Labeling Solutions revenues increased by $8.7 million, or 6.9% in 2008
compared to 2007. The positive impact of foreign currency translation was
approximately $3.0 million. The remaining increase of $5.7 million was due
primarily to an increase in revenues in the U.S. and Asia, partially offset by a
decline in our Europe revenues. The U.S. revenue increase was due to increased
sales volume with existing large customers and an increase in orders from new
customers. We anticipate that weak economic conditions could continue to impact
our U.S. revenues but that our growth in orders from new customers could
partially mitigate this impact. The revenue decline in Europe and growth in Asia
is due primarily to a shift in revenues to Asia for certain customers previously
serviced from Europe. Europe also experienced a decline in revenues due to the
effects of current economic conditions of apparel retailers in the
region.
Retail Merchandising
Solutions
Retail
Merchandising Solutions revenues decreased by $2.0 million or 2.0%. The
positive impact of foreign currency translation was approximately
$5.8 million. The decrease in our RMS business was due to a decrease in our
revenues from retail display systems of $5.2 million and a decrease in
revenues of HLS of $2.6 million. Our retail display systems decline is due
to large remodel work in 2007 in Europe and Asia without such comparable
revenues in 2008. The decrease in HLS is due to increased competition and
pricing pressures as well as a general shift in market demand for HLS products
as retail scanning technology continues to grow worldwide. We anticipate RMS and
HLS to continue to face difficult revenue trends in 2009 due to impacts of
current economic conditions on the RMS business and continued shifts in market
demand for HLS products.
Gross
Profit
During
2008, gross profit increased by $32.1 million, or 9.3%, from
$346.0 million to $378.1 million. The benefit of foreign currency
translation on gross profit was approximately $13.7 million. Gross profit, as a
percentage of net revenues, decreased from 41.5% to 41.2%.
Shrink Management
Solutions
Shrink
Management Solutions gross profit as a percentage of Shrink Management Solutions
revenues decreased to 41.4% in 2008, from 41.8% in 2007. The decrease in the
gross profit percentage of Shrink Management Solutions was due primarily to
decreases in EAS consumables margins and Library margins, which was offset by
increases in EAS systems margins and the inclusion of a full year of
revenues of Alpha products at higher margin levels in 2008.
The
decline in EAS consumables margins was due primarily to increased manufacturing
variances in 2008, which were primarily attributable to volume declines and
increased production issues resulting in labor inefficiencies and increased
scrap, coupled with higher energy costs. The Library margins were negatively
impacted by the 3M deal, which shifted our business model from direct sales to
distributor revenues with lower margins. The EAS hardware margin improvement was
due to improved inventory management coupled with better sourcing costs for our
antenna components. 25
Apparel Labeling
Solutions
Apparel
Labeling Solutions gross profit as a percentage of Apparel Labeling Solutions
revenues decreased to 34.7% in 2008, from 34.9% in 2007. This decrease was due
to a general overall decline resulting from current weak economic
conditions.
Retail Merchandising
Solutions
The
Retail Merchandising Solutions gross profit as a percentage of Retail
Merchandising revenues increased to 49.4% in 2008 from 47.9% in 2007. This
increase in Retail Merchandising Solutions gross profit percentage was primarily
due to improved margins in our HLS business resulting from improved
manufacturing efficiencies.
Selling,
General, and Administrative Expenses
Selling,
general, and administrative (SG&A) expenses increased $36.1 million, or
13.8%, over 2007. Foreign currency translation increased SG&A expenses by
approximately $9.5 million. SG&A expenses generated by the recently
acquired Alpha, SIDEP, and OATSystems operations coupled with our banking
acquisitions accounted for $27.8 million of the increase over the prior
year. SG&A expenses were additionally increased due to an increase in bad
debt provisions and $1.4 million of deferred compensation expense related
to prior periods. These increases were partially offset by decreases in
management expense due to internal restructuring efforts and a decrease in
compensation related to a decrease in accrued bonuses and the reversal of
stock-based compensation related to our long-term incentive plan performance
restricted stock units. In light of current economic conditions, we are more
closely monitoring the aging of individual customer receivable balances and
associated credit risk in an effort to mitigate our exposure to bad
debt.
Research
and Development Expenses
Research
and development (R&D) expenses were $22.6 million, or 2.5% of revenues,
in 2008 and $18.2 million, or 2.2% of revenues in 2007. Foreign currency
translation increased R&D costs by approximately $0.3 million. The
increase of $4.4 million is largely attributed to R&D expenses
generated by the recently acquired Alpha, SIDEP, and OATSystems operations of
$3.9 million.
Restructuring
Expenses
Restructuring
expenses were $6.4 million, or 0.7% of revenues in 2008 compared to
$2.7 million or 0.3% of revenues in 2007. The current and the prior year
expenses are detailed in the “Provision for Restructuring” section.
Goodwill
Impairment
Goodwill
Impairment expense was $59.6 million, or 6.5% of revenues in 2008, without
a comparable charge in 2007. The current year expense is detailed in the
“Goodwill Impairment” section following “Liquidity and Capital
Resources.”
Asset
Impairment
Asset
Impairment expense was $4.5 million, or 0.5% of revenues in 2008, without a
comparable charge in 2007. The current year expense is detailed in the “Asset
Impairment” section following “Liquidity and Capital Resources.”
Litigation
Settlement
Litigation
Settlement expense was $6.2 million in 2008, without a comparable charge in
2007. The litigation settlement expense is primarily attributed to a
$5.7 million litigation accrual recorded during the fourth quarter of 2008
related to a patent infringement counter suit in which the Company was found to
be liable for the other party’s associated legal fees. The Company plans to
appeal the ruling but has accrued the full amount of the judgment. The remaining
$0.5 million of the litigation expense was due to a contract settlement
with a product manufacturer in the third quarter of 2008. We do not anticipate
any additional charges related to this issue.
Other
Operating Income
In 2008,
other operating income of $1.0 million was recorded due to the sale of our
Czech Republic subsidiary, which is now operating as a distributor of our
products.
In 2007,
other operating income of $2.6 million was recorded due to the sale of our
Austrian subsidiary. This sale resulted from our plan to move this business to
an indirect sales model.
Interest
Income and Interest Expense
Interest
income for 2008 decreased $2.8 million from the comparable period in 2007.
The decrease in interest income was due to lower cash balances during 2008
compared to 2007.
Interest
expense for 2008 increased $3.4 million from the comparable period in 2007.
The increase in interest expense was due to higher debt levels in 2008 compared
to 2007. Increased borrowings in 2008 were primarily used to finance our stock
repurchase program and the OATSystems, Inc. acquisition.
Other
Gain (Loss), net
Other
gain (loss), net was a loss of $8.9 million for 2008 compared to a net gain
of $0.7 million for 2007. The increase in loss for 2008 was due primarily
to losses on foreign currency. The primary drivers of the increase in foreign
currency loss were fluctuations in the value of the U.S. Dollar to the Euro and
the Japanese Yen, as well as the Euro to the British Pound.
Income
Taxes
The
effective rate of tax at December 28, 2008 was 2.5%. At December 30,
2007, the effective tax rate was 17.2%. The 2008 tax rate includes a
$1.2 million change in tax reserves and a net valuation allowance benefit
of $2.9 million. The main components of the valuation allowance benefit was
a release of $4.7 million relating to net operating losses in Brazil, a
charge of $1.2 million in connection to our United Kingdom operations, and a
charge of $0.8 million in connection to state net operating losses. A
charge of $0.7 million was recorded related to tax audits settled in the
current year. In addition, an income tax benefit was not recorded in 2008 on
$58.5 million of the $59.6 million impairment as it related to
non-deductible goodwill. The 2007 tax rate includes a $1.9 million change
in tax reserves, a net valuation allowance benefit of $3.2 million, a
$1.0 million tax benefit relating to statutory tax rate changes, and a
$0.9 million tax benefit relating to the sale of our Austrian subsidiary.
The two main changes to the valuation allowance in 2007 were a release of
$5.4 million relating to state net operating losses and a charge of
$2.7 million in connection to our United Kingdom operations. The 2007
effective tax rate was positively impacted by a reduction of valuation
allowances and tax reserves of $2.0 million. In addition, the Company
recorded a $1.7 million reduction in foreign tax, primarily associated with
a change in tax law in Germany.
In 2007,
we recorded an adjustment of $2.1 million to reduce deferred income tax
expense, and increase earnings from continuing operations and net earnings. We
have determined that this adjustment related to errors made in prior years
associated with the impact of changes in statutory rates on deferred taxes. Had
these errors been recorded in the proper periods, earnings from continuing
operations and net earnings as reported would increase by $0.2 million in
2006 and increase by $1.9 million for years prior to 2005. We have
determined that these adjustments did not have a material effect on the 2007 and
prior years’ financial statements. Without the reduction to our income tax
provision our 2007 effective rate would have been 20.3% rather than
17.2%. 26
Earnings
from Discontinued Operations, Net of Tax
There
were no earnings from discontinued operations, net of tax, for 2008. Earnings
from discontinued operations, net of tax, were $0.4 million in 2007. The
2007 earnings were primarily due to adjustments related to the sale in 2006 of
our barcode business.
Net
Earnings (Loss) Attributable to Checkpoint Systems, Inc.
Net
earnings (loss) attributable to Checkpoint Systems, Inc. were ($29.8) million,
or ($0.76) per diluted share, for 2008 compared to $58.8 million, or $1.44 per
diluted share, for 2007. The weighted average number of shares used in the
diluted earnings per share computation were 39.4 million and
40.7 million for 2008 and 2007, respectively.
Other
Matters
Recently
Adopted Accounting Standards
In
September 2009, we adopted ASC 105-10-05, which provides for the Financial
Accounting Standards Board (FASB) Accounting Standards Codification™ (the
“Codification”) to become the single official source of authoritative,
nongovernmental GAAP to be applied by nongovernmental entities in the
preparation of financial statements in conformity with GAAP. The Codification
does not change GAAP, but combines all authoritative standards into a
comprehensive, topically organized online database. ASC 105-10-05 explicitly
recognizes rules and interpretative releases of the Securities and Exchange
Commission (SEC) under federal securities laws as authoritative GAAP for SEC
registrants. Subsequent revisions to GAAP will be incorporated into the ASC
through Accounting Standards Updates (ASU). ASC 105-10-05 is
effective for interim and annual periods ending after September 15, 2009, and
was effective for us in the third quarter of 2009. The adoption of ASC 105-10-05
impacted the Company’s financial statement disclosures, as all references to
authoritative accounting literature were updated to and in accordance with the
Codification. Our adoption of ASC 105-10-05 did not have a material impact on
our consolidated results of operations and financial condition.
In
December 2007, the FASB issued an accounting standard codified within ASC
805, “Business Combinations” which changed the accounting for business
acquisitions. Under this standard, business combinations continue to
be required to be accounted for at fair value under the acquisition method of
accounting, but the standard changed the method of applying the acquisition
method in a number of significant aspects. Acquisition costs will generally be
expensed as incurred; noncontrolling interests will be valued at fair value at
the acquisition date; in-process research and development will be recorded at
fair value as an indefinite-lived intangible asset at the acquisition date,
until either abandoned or completed, at which point the useful lives will be
determined; restructuring costs associated with a business combination will
generally be expensed subsequent to the acquisition date; and changes in
deferred tax asset valuation allowances and income tax uncertainties after the
acquisition date generally will affect income tax expense. The standard is
effective on a prospective basis for all business combinations for which the
acquisition date is on or after the beginning of the first annual period
subsequent to December 15, 2008, with the exception of the accounting for
valuation allowances on deferred taxes and acquired tax contingencies. The
standard amends the accounting for income taxes such that adjustments made to
valuation allowances on deferred taxes and acquired tax contingencies associated
with acquisitions that closed prior to the effective date of the standard would
also apply the provisions of the new standard. Disclosure requirements were also
expanded to enable the evaluation of the nature and financial effects of the
business combination. For the Company, the standard is effective for business
combinations occurring after December 28, 2008. Adoption of the standard
did not have a significant impact on our financial position and results of
operations; however, any business combination entered into after the adoption
may significantly impact our financial position and results of operations when
compared to acquisitions accounted for under prior GAAP and result in more
earnings volatility and generally lower earnings due to the expensing of deal
costs and restructuring costs of acquired companies. This standard was applied
to business combinations disclosed in Note 2 that were completed after
2008. Also, since we have significant acquired deferred tax assets
for which full valuation allowances were recorded at the acquisition date, the
standard could significantly affect the results of operations if changes in the
valuation allowances occur subsequent to adoption. As of December 27, 2009,
such deferred tax valuation allowances amounted to
$4.6 million.
In
February 2009, the FASB issued an accounting standard codified within ASC
805, “Business Combinations” which amends the provisions related to the initial
recognition and measurement, subsequent measurement, and disclosure of assets
and liabilities arising from contingencies in a business combination. The
standard applies to all assets acquired and liabilities assumed in a business
combination that arise from contingencies that would be within the scope of ASC
450, “Contingencies”, if not acquired or assumed in a business combination,
except for assets or liabilities arising from contingencies that are subject to
specific guidance in ASC 805. The standard applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
adoption of the standard effective December 29, 2008 did not have an impact
on our financial position and results of operations.
In
December 2007, the FASB issued an accounting standard codified within ASC
810, “Consolidation”. The standard establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. Noncontrolling interest (minority
interest) is required to be recognized as equity in the consolidated financial
statements and separate from the parent’s equity. The standard also establishes
disclosure requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. The
effective date of the standard is for fiscal years beginning after
December 15, 2008. We adopted the standard on December 29, 2008. As of
December 27, 2009, our noncontrolling interest totaled $0.8 million,
which is included in the stockholders’ equity section of our Consolidated
Balance Sheets. The Company has incorporated the required presentation and
disclosure requirements in our consolidated financial statements.
In March
2008, the FASB issued an accounting standard related to disclosures about
derivative instruments and hedging activities, codified within ASC 815,
“Derivatives and Hedging”. Provisions of this standard change the
disclosure requirements for derivative instruments and hedging activities
including enhanced disclosures about (a) how and why derivative instruments
are used, (b) how derivative instruments and related hedged items are
accounted for under ASC 815 and its related interpretations, and (c) how
derivative instruments and related hedged items affect our financial position,
financial performance, and cash flows. This statement was effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. We adopted the standard on December 29, 2008. See
Note 15 for our enhanced disclosures required under this standard.
In
April 2008, the FASB issued an accounting standard codified within ASC 350,
“Intangibles - Goodwill and Other” which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset Under this standard,
entities estimating the useful life of a recognized intangible asset must
consider their historical experience in renewing or extending similar
arrangements or, in the absence of historical experience, must consider
assumptions that market participants would use about renewal or
extension. The intent of the standard is to improve the consistency
between the useful life of a recognized intangible asset and the period of
expected cash flows used to measure the fair value of the asset. Adoption of the
standard was effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. We adopted the standard on December 29, 2008. We do not expect the
standard to have a material impact on our accounting for future acquisitions of
intangible assets.
In
June 2008, the FASB issued an accounting standard codified within ASC 260,
“Earnings Per Share” which provides that unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the
computation of earnings per share pursuant to the two-class method. The standard
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Upon
adoption, an entity is required to retrospectively adjust its earnings per share
data (including any amounts related to interim periods, summaries of earnings
and selected financial data) to conform to the standard’s provisions. We adopted
this pronouncement effective December 29, 2008 and the adoption did not
have an impact on our calculation of earnings per share. 27
In
November 2008, the FASB issued an accounting standard codified within ASC
350, “Intangibles - Goodwill and Other” that applies to defensive assets which
are acquired intangible assets which the acquirer does not intend to actively
use, but intends to hold to prevent its competitors from obtaining access to the
asset. The standard clarifies that defensive intangible assets are separately
identifiable and should be accounted for as a separate unit of accounting in
accordance with guidance provided within ASC 805, “Business Combinations” and
ASC 820, “Fair Value Measurements and Disclosures”. The standard is
effective for intangible assets acquired in fiscal years beginning on or after
December 15, 2008 and will be applied by us to intangible assets acquired
on or after December 29, 2008.
In
December 2008, the FASB issued an accounting standard codified within ASC
810, “Consolidation” and ASC 860, “Transfers and Servicing”. The standard was
effective for the first reporting period ending after December 15, 2008 and
requires additional disclosures concerning transfers of financial assets and an
enterprise’s involvement with variable interest entities (VIE) and qualifying
special purpose entities under certain conditions. Upon adoption in our interim
consolidated financial statements for the quarter ending March 29, 2009,
there were no additional required disclosures.
In
April 2009, the FASB issued an accounting standard codified within ASC 825,
“Financial Instruments” that requires disclosures about the fair value of
financial instruments that are not reflected in the consolidated balance sheets
at fair value whenever summarized financial information for interim reporting
periods is presented. Entities are required to disclose the methods and
significant assumptions used to estimate the fair value of financial instruments
and describe changes in methods and significant assumptions, if any, during the
period. The standard was effective for interim reporting periods ending after
June 15, 2009 and was adopted by the Company in the second quarter of
2009. See Note 15 for our disclosures required under the
standard.
In
April 2009, the FASB issued an accounting standard codified within ASC 820,
“Fair Value Measurements and Disclosures,” which provides guidance on
determining fair value when there is no active market or where the price inputs
being used represent distressed sales. The standard reaffirms the
objective of fair value measurement, which is to reflect how much an asset would
be sold for in an orderly transaction. It also reaffirms the need to use
judgment to determine if a formerly active market has become inactive, as well
as to determine fair values when markets have become inactive. The standard is
effective for interim and annual periods ending after June 15, 2009 and was
adopted by the Company in the second quarter of 2009. The adoption of this
accounting pronouncement did not have a material impact on our consolidated
results of operations and financial condition.
In
May 2009, the FASB issued an accounting standard codified within ASC 855
“Subsequent Events,” which sets forth general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It
requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date, that is, whether that date
represents the date the financial statements were issued or were available to be
issued. The standard is effective for interim or annual periods
ending after June 15, 2009 and was adopted by the Company in the second quarter
of 2009. The adoption of this standard did not have a material impact
on our consolidated results of operations and financial
condition. See Note 1 for the required disclosures.
In August
2009, the FASB issued ASU No. 2009-04, “Accounting for Redeemable Equity
Instruments.” The ASU represents an update to ASC 480-10-S99
“Distinguishing Liabilities from Equity.” This update provides
guidance on what type of instruments should be classified as temporary versus
permanent equity, as well as guidance with respect to
measurement. The adoption of the ASU did not have a material impact
on our consolidated results of operations and financial condition.
In
December 2008, the FASB issued an accounting standard codified within ASC
715, “Compensation – Retirement Benefits” that requires enhanced disclosures
about the plan assets of a Company’s defined benefit pension and other
postretirement plans. The enhanced disclosures are intended to provide users of
financial statements with a greater understanding of: (1) how investment
allocation decisions are made, including the factors that are pertinent to an
understanding of investment policies and strategies; (2) the major
categories of plan assets; (3) the inputs and valuation techniques used to
measure the fair value of plan assets; (4) the effect of fair value
measurements using significant unobservable inputs (Level 3) on changes in plan
assets for the period; and (5) significant concentrations of risk within
plan assets. The disclosures under this standard were effective for us for the
fiscal year ending December 27, 2009. See Note 14 for the
additional disclosures required upon adoption of this standard.
In August
2009, the FASB issued ASU No. 2009-05, “Fair Value Measurements and
Disclosures – Measuring Liabilities at Fair Value.”. The ASU provides additional
guidance for the fair value measurement of liabilities under ASC 820 “Fair Value
Measurements and Disclosures”. The ASU provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using certain techniques. The ASU also clarifies that when estimating the fair
value of a liability, a reporting entity is not required to include a separate
input or adjustment to other inputs relating to the existence of a restriction
that prevents the transfer of a liability. It also clarifies that both a quoted
price in an active market for the identical liability at the measurement date
and the quoted price for the identical liability when traded as an asset in an
active market when no adjustments to the quoted price of the asset are required
are Level 1 fair value measurements. We adopted the ASU in the fourth
fiscal quarter of 2009. The adoption of the ASU did not have a
material impact on our consolidated results of operations and financial
condition.
New Accounting Pronouncements and Other
Standards
In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue
Arrangements, (amendments to ASC Topic 605, Revenue Recognition)” (ASU 2009-13)
and ASU 2009-14, “Certain Arrangements That Include Software Elements,
(amendments to ASC Topic 985, Software)” (ASU 2009-14). ASU 2009-13
requires entities to allocate revenue in an arrangement using estimated selling
prices of the delivered goods and services based on a selling price hierarchy.
The amendments eliminate the residual method of revenue allocation and require
revenue to be allocated using the relative selling price method. ASU
2009-14 removes tangible products from the scope of software revenue guidance
and provides guidance on determining whether software deliverables in an
arrangement that includes a tangible product are covered by the scope of the
software revenue guidance. ASU 2009-13 and ASU 2009-14 should be applied on
a prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. We are currently evaluating the impact of the adoption of these ASUs
on the Company’s consolidated results of operations or financial
condition.
In
December 2009, the FASB issued ASU No. 2009-16, “Accounting for Transfers of
Financial Assets” which amends ASC 860 “Transfers and Servicing” by: eliminating
the concept of a qualifying special-purpose entity (QSPE); clarifying and
amending the derecognition criteria for a transfer to be accounted for as a
sale; amending and clarifying the unit of account eligible for sale accounting;
and requiring that a transferor initially measure at fair value and recognize
all assets obtained (for example beneficial interests) and liabilities incurred
as a result of a transfer of an entire financial asset or group of financial
assets accounted for as a sale. Additionally, on and after the effective date,
existing QSPEs (as defined under previous accounting standards) must be
evaluated for consolidation by reporting entities in accordance with the
applicable consolidation guidance. The standard requires enhanced disclosures
about, among other things, a transferor’s continuing involvement with transfers
of financial assets accounted for as sales, the risks inherent in the
transferred financial assets that have been retained, and the nature and
financial effect of restrictions on the transferor’s assets that continue to be
reported in the statement of financial position. The standard will be
effective as of the beginning of interim and annual reporting periods that begin
after November 15, 2009, which for us would be December 28, 2009, the
first day of our 2010 fiscal year. We do not expect the adoption of
this standard to have a material effect on our consolidated results of
operations and financial condition. Any required enhancements to
disclosures will be included in our financial statements for the first quarter
ended March 29, 2010.
In
December 2009, the FASB issued ASU No. 2009-17, “Improvements to Financial
Reporting by Enterprises Involved with Variable Interest Entities” which amends
ASC 810, “Consolidation” to address the elimination of the concept of a
qualifying special purpose entity. The standard also replaces the
quantitative-based risks and rewards calculation for determining which
enterprise has a controlling financial interest in a variable interest entity
with an approach focused on identifying which enterprise has the power to direct
the activities of a variable interest entity and the obligation to absorb losses
of the entity or the right to receive benefits from the entity. This standard
also requires continuous reassessments of whether an enterprise is the primary
beneficiary of a VIE whereas previous accounting guidance required
reconsideration of whether an enterprise was the primary beneficiary of a VIE
only when specific events had occurred. The standard provides more
timely and useful information about an enterprise’s involvement with a variable
interest entity and will be effective as of the beginning of interim and annual
reporting periods that begin after November 15, 2009, which for us would be
December 28, 2009, the first day of our 2010 fiscal year. We do
not expect the adoption of this standard to have a material effect on our
consolidated results of operations and financial condition. 28
In
January 2010, the FASB issued ASU No. 2010-6, “Improving Disclosures About Fair
Value Measurements,” which provides amendments to ASC 820 “Fair Value
Measurements and Disclosures,” including requiring reporting entities to make
more robust disclosures about (1) the different classes of assets and
liabilities measured at fair value, (2) the valuation techniques and inputs
used, (3) the activity in Level 3 fair value measurements including information
on purchases, sales, issuances, and settlements on a gross basis and (4) the
transfers between Levels 1, 2, and 3. The standard is effective for
annual reporting periods beginning after December 15, 2009, except for Level 3
reconciliation disclosures which are effective for annual periods beginning
after December 15, 2010. We do not expect the adoption of this standard to have
a material impact on our consolidated financial statements.
Market
Risk Factors
Fluctuations
in interest and foreign currency exchange rates affect our financial position
and results of operations. We enter into forward exchange contracts denominated
in foreign currency to reduce the risks of currency fluctuations on short-term
inter-company receivables and payables. We also enter into various foreign
currency contracts to reduce our exposure to forecasted Euro-denominated
inter-company revenues. We have historically not used financial instruments to
minimize our exposure to currency fluctuations on our net investments in and
cash flows derived from our foreign subsidiaries. We have used third party
borrowings in foreign currencies to hedge a portion of our net investments in
and cash flows derived from our foreign subsidiaries. As of December 27,
2009, all third party borrowings were in the functional currency of the
subsidiary borrower. Additionally, we enter, on occasion, into interest rate
swaps to reduce the risk of significant interest rate increases in connection
with our floating rate debt.
We are
subject to foreign currency exchange risk on our foreign currency forward
exchange contracts which represent a $0.1 million asset position and $0.2
million liability position as of December 27, 2009, and a $0.9 liability
position as of December 28, 2008. The sensitivity analysis assumes an
instantaneous 10% change in foreign currency exchange rates from year-end
levels, with all other variables held constant. At December 27, 2009, a 10%
strengthening of the U.S. dollar versus other currencies would result in an
increase of $0.3 million in the net asset position, while a 10% weakening
of the dollar versus all other currencies would result in a decrease of
$0.3 million.
Foreign
exchange forward contracts are used to hedge certain of our firm foreign
currency cash flows. Thus, there is either an asset or cash flow exposure
related to all the financial instruments in the above sensitivity analysis for
which the impact of a movement in exchange rates would be in the opposite
direction and substantially equal to the impact on the instruments in the
analysis. There are presently no significant restrictions on the remittance of
funds generated by our operations outside the U.S. At December 27, 2009,
unremitted earnings of subsidiaries outside the United States were deemed to be
permanently reinvested.
29
Index
to Consolidated Financial Statements
30
Report
of Independent Registered Public Accounting Firm
To The
Board of Directors and Stockholders of
Checkpoint
Systems, Inc.
In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income (loss), equity and
cash flows present fairly, in all material respects, the financial position of
Checkpoint Systems, Inc. and its subsidiaries at December 27, 2009 and December
28, 2008, and the results of their operations and their cash flows for each of
the three years in the period ended December 27, 2009, in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. Also in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 27, 2009, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's
management is responsible for these financial statements and financial statement
schedule, for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in Management's Annual Report on Internal Control over
Financial Reporting appearing under Item 9A. Our responsibility is to
express opinions on these financial statements, on the financial statement
schedule, and on the Company's internal control over financial reporting based
on our integrated audits. We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
As
discussed in Note 1 to the consolidated financial statements, the Company
changed the manner in which it accounts for noncontrolling interests in
2009.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
As
described in Management's Annual Report on Internal Control over Financial
Reporting, management has excluded Brilliant Label Manufacturing Ltd from its
assessment of internal control over financial reporting as of December 27, 2009
because it was acquired by the Company in a purchase business combination during
2009. We have also excluded Brilliant Label Manufacturing Ltd from
our audit of internal control over financial reporting. Brilliant
Label Manufacturing Ltd is a wholly-owned subsidiary whose total assets and
total revenues represent 6.6% and 1.7%, respectively, of the related
consolidated financial statement amounts as of and for the year ended December
27, 2009.
 PricewaterhouseCoopers
LLP
Philadelphia,
Pennsylvania
February
23, 2010
31
CHECKPOINT
SYSTEMS, INC.
CONSOLIDATED
BALANCE SHEETS
(amounts
in thousands)
See notes
to consolidated financial statements.
32
CHECKPOINT
SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
See notes
to consolidated financial statements.
33
CHECKPOINT
SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF EQUITY
(amounts
in thousands)
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