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 25, 2011
Commission File No. 1-11257
CHECKPOINT SYSTEMS, INC.
(Exact name of Registrant as specified in its Articles of Incorporation)
| Pennsylvania | | 22-1895850 |
| (State of Incorporation) | | (IRS Employer Identification No.) |
| | | |
| One Commerce Square, 2005 Market Street, Suite 2410, Philadelphia, Pennsylvania | | 19103 |
| (Address of principal executive offices) | | (Zip Code) |
| | | |
| | 856-848-1800 | |
| | (Registrant’s telephone number, including area code) | |
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class to be so registered | | Name of each exchange on which each class is to be registered |
| Common Stock Purchase Rights | | New York Stock Exchange |
| | | |
| | Securities to be registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $.10 Per Share | |
| | (Title of class) | |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes £ 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.
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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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).
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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.:
Large accelerated filer þ | | Accelerated filer o | | Non-accelerated filer o | | Smaller reporting company o |
| (Do not check if a smaller reporting company) |
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 26, 2011, the aggregate market value of the Common Stock held by non-affiliates of the Registrant was approximately $684,008,493.
As of February 24, 2012, there were 40,304,746 shares of the Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Definitive Proxy Statement for its 2012 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.
Explanatory Note
In this Annual Report on Form 10-K, we are revising our historical financial statements for the year ended December 26, 2010 and the year ended December 27, 2009 and consolidated financial data for each of the quarterly periods for the years ended December 25, 2011 and December 26, 2010 (the “Revised Periods”). We are also revising the Selected Financial Data in Item 6 for each of the periods presented. The revision is the result of the Company making corrections for the combined effect of financial statement errors attributable to (i) the intentional misstatement of expenses due to the improper and fraudulent activities of a certain former employee of the Company's Canada sales subsidiary; and (ii) immaterial income tax adjustments recorded in the third quarter of 2010 that should have been recorded in the fourth quarter of 2009. The Company assessed the impact of these errors, including the impact of the previously disclosed out-of-period adjustment on its prior interim and annual financial statements and concluded that these errors were not material, individually or in the aggregate, to any of those financial statements. Although the effect of these errors was not material to any previously issued financial statements, the cumulative effect of correcting the newly identified errors in the current year would have been material for the fiscal year 2011. Consequently, the Company has revised its prior period financial statements. All amounts in this Annual Report on Form 10-K affected by the revision adjustments reflect such amounts as revised. In addition to the revisions described above, the effects of discontinued operations presentation on previously reported amounts have been included in order to reconcile between previously reported amounts and the final amounts as revised in this Annual Report on Form 10-K. For a more detailed explanation of the matters and resulting revisions, please see Part II – “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations – Revision of Previously Issued Consolidated Financial Statements,” “Item 8: Financial Statements and Supplementary Data – Note 1 to the Consolidated Financial Statements, and “Item 8: Financial Statements and Supplementary Data – Note 20 to the Consolidated Financial Statements.”
In addition to the revised consolidated financial information for the Revised Periods, this Annual Report on Form 10-K also contains revised financial discussion and analysis regarding the Revised Periods. This revised disclosure is contained in Part 1 – “Item 1A: Risks Related to Our Internal Control Over Financial Reporting and the Revision of Our Previously Issued Financial Statements,” Part II – “Item 6: Selected Consolidated Financial Data,” and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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, but are not limited, to the following: our ability to integrate the Shore to Shore acquisition and other acquisitions and to achieve our financial and operational goals for our acquisitions; changes in international business conditions; foreign currency exchange rate and interest rate fluctuations; lower than anticipated demand by retailers and other customers for our products; slower commitments of retail customers to chain-wide installations and/or source tagging adoption or expansion; possible increases in per unit product manufacturing costs due to less than full utilization of manufacturing capacity as a result of slowing economic conditions or other factors; our ability to provide and market innovative and cost-effective products; the development of new competitive technologies; our ability to maintain our intellectual property; competitive pricing pressures causing profit erosion; the availability and pricing of component parts and raw materials; possible increases in the payment time for receivables as a result of economic conditions or other market factors; changes in regulations or standards applicable to our products; the ability to successfully implement global cost reductions in operating expenses including, field service, sales, and general and administrative expense, and our manufacturing and supply chain operations without significantly impacting revenue and profits; our ability to maintain effective internal control over financial reporting; and risks generally associated with our company-wide implementation of an enterprise resource planning (ERP) system, 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.” Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We do not undertake to update our forward-looking statements, except as required by applicable securities laws.
Checkpoint Systems, Inc. is a leading global manufacturer and provider of technology-driven end-to-end loss prevention, merchandising and labeling solutions to the retail and apparel industry. We enable retailers and their suppliers to reduce shrink, improve shelf availability, improve shoppers’ experience and leverage real-time data to achieve operational excellence. Our solutions are built upon 40 years of RF technology expertise, diverse shrink management offerings, a broad portfolio of apparel labeling solutions, RFID applications, innovative high-theft solutions and our Check-Net® web-based data management platform. 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. In addition, we manufacture and sell worldwide a complete line of apparel tags and labels. In Europe, we are a leading provider of retail display systems (RDS) and hand-held labeling systems (HLS). In the U.S., we are also a leading provider and installer of physical and electronic security solutions in the form of fire and intrusion alarms, digital video surveillance solutions and 24/7 alarm monitoring for the retail and financial services environments.
Our retail labeling systems and services are designed to consolidate tag and label requirements to improve efficiency, reduce costs, and furnish value-added solutions for customers in many markets and industries. Applications for apparel customers include tickets, tags and labels containing brand identification, variable data, pricing and promotional information, automatic identification (auto-ID), EAS for theft protection, and RFID for item tracking and inventory management. We have achieved substantial international growth, primarily through acquisitions, and now operate directly in 35 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. This acquisition, which gave us new technological and production capabilities, was in line with our strategy to enhance our product offerings and solutions to apparel customers and to create increased value for our 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 on open display in retail environments. The Alpha® S3 product portfolio complements our EAS 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. These businesses are helping us to meet growing regional demand.
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.
In June 2008, we acquired OATSystems, Inc., a recognized leader in RFID-based application software. The addition of OATSystems, Inc. has enhanced our strategy to help retailers and suppliers with our EVOLVE™ EAS platform to more easily migrate to EPC RFID, as our industry moves to a common EPC standard. In addition, as closed-loop apparel retailers and department stores increasingly see the value of using item-level RFID for tracking and managing inventory through the supply chain and in stores, our complete end-to-end solution of RFID hardware and software, tags and labels, service and support, is uniquely available from one fully integrated source. With Checkpoint’s merchandise visibility solutions, retailers and their suppliers gain deeper visibility of assets and merchandise, enabling them to reduce out-of-stock products, reduce working capital requirements, and increase sales.
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 apparel labeling business extends the use of paper, fabric and woven labels beyond carriers of branding, variable data and garment care information to the discreet integration of RF-EAS and RFID. These capabilities enable apparel retailers and vendors to brand, track and secure their products at the point of manufacture using a single solution.
In May 2011, through the acquisition of equity and/or assets, we acquired the Shore to Shore businesses, a retail apparel and footwear product identification business which designs, manufactures and sells tags and labels, brand protection, and EAS solutions/labels. The acquisition is a further step in our strategy to become the recognized number two global provider of apparel labeling solutions.
Products and Offerings
We report results of operations in three segments: Shrink Management Solutions, Apparel Labeling Solutions, and Retail Merchandising Solutions. The revenues and gross profit margins for each of the segments and the identifiable assets attributable to each reporting segment are set forth in Note 18 “Business Segments and Geographic Information” to the Consolidated Financial Statements.
Historically, we have reported RF and EM Hard Tags as part of the SMS EAS Systems product line. During the first quarter of 2010, we began reporting our RF and EM Hard Tags as part of the Alpha® product line. This change results in all hard tags for in-store application being recorded in the same product line as the Alpha® hard tags. Because both product lines are reported within the Shrink Management Solutions segment, the change in classification does not impact segment reporting. Fiscal year 2009 has been conformed to reflect the product line change within the SMS segment. We have adjusted all prior year comparative amounts and explanations within Management’s Discussion and Analysis to reflect this change in classification to be consistent for all periods presented.
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 segment is providing shrink management and merchandise visibility solutions to retailers. Our diversified line of security products is designed to help retailers prevent inventory losses caused by impulse theft, organized retail theft, and employee theft, reduce selling costs through lower staff requirements, enhance shoppers’ experience, improve inventory management 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. We believe that we hold a significant share of worldwide EAS systems installations through the deployment of our own proprietary RF-EAS and EM-EAS technologies. EAS systems revenues accounted for 23%, 22%, and 27% of our 2011, 2010, and 2009 total revenues, respectively.
Our Alpha® solutions are focused exclusively on protecting high-risk merchandise. Alpha® products enable retailers to safely display high-theft merchandise in an open environment, giving consumers easy access and convenient purchasing. For 2011, 2010, and 2009, the Alpha business represented 16%, 17%, and 12% of our revenues, respectively.
We offer a wide variety of EAS-RF and EAS-EM labels which provide security solutions matched to specific retail requirements. Under our source tagging program, labels and tags can be attached or embedded in products or packaging at the point of manufacture. In 2009, we introduced Hard Tag @ Source™ for apparel customers who prefer hard tags for garment security but wish to avoid the expense of in-store tag application. These tags are recycled back into distribution following quality assurance thus reducing waste and saving energy. 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 EAS or RFID circuits. This integration is based on the critical objectives of supporting rapid delivery of goods to market while reducing losses, whether through misdirection, tracking failure, theft or counterfeiting, and of reducing labor costs by tagging and labeling products at the source. EAS consumables revenues represented 14%, 15% and 16% of our total revenues for 2011, 2010, and 2009, respectively.
Our CheckView® business offers retailers physical and electronic security solutions in the form of fire and intrusion alarms, digital video surveillance solutions and 24/7 alarm monitoring. For 2011, 2010, and 2009, the CheckView® business represented 13%, 14%, and 13% of our revenues, respectively. Our CheckView® business in the financial services sector is being marketed to be divested after we conducted an assessment of our business portfolio with the Board of Directors. This assessment led to the determination to divest the U.S. Southeast region-based Banking Security Systems Integration business so that we can focus on the growth of our core businesses. As such, it is not included in our revenues from continuing operations.
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 69%, 70%, and 71% of total revenues in 2011, 2010, and 2009, respectively.
Electronic Article Surveillance Systems
We have designed EAS systems to act as a deterrent to prevent merchandise theft in retail stores. Our offering includes 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. Together, they are intended to reduce impulse theft, organized retail theft, and employee theft. In addition, our products enable retailers to openly display merchandise, including high-margin and high-cost items, giving consumers easier access to a broader range of products and more convenient purchasing.
In 2008, we introduced our technology-rich EVOLVE™ platform of antennas and deactivators, setting a new standard in retail loss prevention and customer tracking. EVOLVE™ represents the next generation, a flexible, upgradable platform delivering superior performance, including significant energy savings, with advanced data analytics and networking capabilities. EVOLVE™ is compatible with our CheckPro™ software suite and our complete line of EAS labels and tags as well as products of other suppliers.
Our business model relies upon customer commitments for security product installations to a large number of their stores over a period of several months (large chain-wide installations). EVOLVE™ allows existing customers to upgrade their security systems. Furthermore, its enhanced data analytics capabilities enable customers to maximize the return on their hardware investment and gain insight into shrink and operational issues through the use of actionable data.
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 are designed to enable retailers to protect a wide 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. In source tagging programs, 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 offer a new generation of enhanced performance (EP) labels that are smaller yet provide superior detection capability. This product line, which is easily attached to limited surfaces, offers protection to small items like cosmetics or CDs. In 2010, we launched EP CLEAR, which offers the same kind of protection without covering packaging and allows for scanning of bar codes through the label. In 2011 we launched our On Demand Print services for the CLEAR labels, which allow our customers to customize their labels with their own unique brand or other information, according to their needs. Also, in 2011, we launched the EP Clear Tamper Tag, which provides the advantages of an EP Clear label with a strong bond that degrades packaging material when removed, deterring theft with the intent to resell the product.
Alpha®
We provide retailers with innovative and technically advanced products engineered to protect high-theft merchandise. Alpha® products are uniquely designed to protect high-risk merchandise, offering retailers the highest levels of theft protection, aesthetically pleasing design, 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, Cable Loks®, hard tags for in-store application, and Showsafe™ displays. Showsafe™ 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, digital video surveillance systems and 24/7 central station monitoring 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. In 2010, CheckView® introduced its revolutionary Interactive Public View monitor (IPV), the first of its kind designed with retail integration in mind and with the ability to connect to smart alert fixtures. This new imaging and display technology enables retailers to better leverage their video surveillance investment.
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 2007 and 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. In 2011, we conducted an assessment of our business portfolio with the Board of Directors. This assessment led to the determination to divest the U.S. Southeast region-based Banking Security Systems Integration business so that we can focus on the growth of our core businesses.
Merchandise Visibility (RFID)
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. builds on our strategy to help retailers and suppliers with our EVOLVE™ EAS platform to more easily migrate to EPC RFID, as our industry moves to a common EPC standard. In addition, as closed-loop apparel retailers and department stores increasingly see the value of using item-level RFID for tracking apparel through the supply chain and for managing inventory. Our complete end-to-end solution of RFID hardware and software, tags and labels, service and support, is uniquely available from one fully integrated source. With Checkpoint’s merchandise visibility offering, retailers and their suppliers 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 2011, we introduced an RFID Overhead EAS solution incorporating Wirama Radar™ as a key component of an integrated solution delivering real-time inventory and related benefits, while serving as an enhanced EAS system, improving operations at the point-of-exit.
APPAREL LABELING SOLUTIONS
Apparel Labeling Solutions (ALS) is our second largest segment. We provide apparel retailers, brand owners, and manufacturers with a single source for all their apparel labeling requirements. ALS also includes our web-based data management service and network of 29 service bureaus strategically located in 20 countries close to where apparel is manufactured. Our data management service offers order entry, logistics, and data management capabilities. It facilitates on-demand printing of variable information onto apparel tags and labels. ALS also offers the integration of EAS-RF and RFID into apparel tags and labels.
Our service bureau network is one of the most extensive in the industry, and its ability to offer fully integrated apparel labeling places it among just a handful of suppliers who possess this capability.
ALS revenues represented 23%, 21%, and 19% of our total revenues for 2011, 2010, and 2009, respectively.
RETAIL MERCHANDISING SOLUTIONS
The Retail Merchandising Solutions segment 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 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 serve a declining market. Retail Merchandising Solutions, which is focused on European and Asian markets, represents approximately 8% of our business, with no product group in this segment accounting for as much as 10% of our revenues.
Hand-held Labeling Systems
Our 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 continue to decline. Our HLS products possess a market-leading position in several European countries.
Retail Display Systems
Our retail display systems (RDS) 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 display, 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 to retailers, manufacturers, and distributors. These solutions help our retail and apparel customers 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 key hard goods markets (supermarkets, drug stores, mass merchandisers, and music and electronics retailers); to expand our market share in soft goods, specifically apparel, and maximize our position in under-penetrated markets. We also intend to continue to capitalize on our installed base with large global retailers to promote source tagging. Furthermore, we plan to leverage our knowledge of RF and identification technologies to assist retailers and manufacturers realize the benefits of RFID.
To achieve these objectives, we expect to continuously enhance and expand our technologies and products, and provide superior service to our customers. We intend to offer customers a wide variety of integrated shrink management solutions, apparel labeling, and retail merchandising solutions characterized by superior quality, ease-of-use, good value, with enhanced merchandising opportunities.
We continue to evaluate our sales, productivity, manufacturing, supply chain efficiency and overhead structure, and we will take action where specific opportunities exist to improve profitability.
Principal Markets and Marketing Strategy
Through our Shrink Management Solutions segment, we market EAS systems, including hardware, consumables and software, and other security solutions, namely Alpha® 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 retail shrinkage. Data collection systems highlight the 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, we offer integrated shrink management and merchandise visibility solutions, apparel 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 committed to helping retailers grow profitability by providing our customers with a wide variety of solutions. Our ongoing marketing strategy includes the following:
| § | communicate the synergies within Checkpoint’s product portfolio to demonstrate the collective value that our holistic, end-to-end product line offers; |
| § | open new retail accounts, and expand existing ones, introducing new products that offer integrated, value-added solutions for labeling, security, and merchandising, thereby increasing account penetration; |
| § | establish business-to-business web-based capabilities to enable retailers and manufacturers to initiate and track their orders through the supply chain on a global basis; |
| § | expand market opportunities to manufacturers and distributors, including source tagging and value-added labeling; |
| § | continue to promote source tagging around the world with extensive integration and automation capabilities using new EAS, RFID, and auto-ID technologies; and |
| § | assist retailers in understanding the benefits and implementation of EPC using RFID technology. |
We market our products primarily:
| § | by providing total loss prevention, merchandise visibility and apparel labeling solutions to our customers; |
| § | by communicating, messaging and highlighting Checkpoint’s unique position as a single source provider of integrated and complete solutions for retailers; |
| § | by helping retailers sell more merchandise by avoiding stock-outs and making merchandise available to consumers; |
| § | by serving as a single point of contact for auto-ID and EAS labeling and ticketing needs; |
| § | through direct sales efforts, comprehensive public relations efforts, online marketing and targeted trade show participation; |
| § | through superior service and support capabilities; and |
| § | by emphasizing source tagging benefits. |
We focus on partnering with retail suppliers worldwide in our source tagging program. Ongoing strategies to increase acceptance of source tagging are as follows:
| § | increase installation of EAS equipment on a chain-wide basis with leading retailers around the world; |
| § | offer integrated tag solutions, including custom tag conversion, that address the multiple but synergistic need for branding, tracking, and loss prevention; |
| § | assist retailers in promoting source tagging with vendors; |
| § | broaden penetration of existing accounts by promoting our in-house printing, global service bureau network, and labeling solution capabilities; |
| § | support manufacturers and suppliers to speed implementation; |
| § | expand RF tag technologies and products to accommodate the needs of the packaging industry; and |
| § | develop compatibility with EPC/RFID technologies. |
MANUFACTURING, RAW MATERIALS, AND INVENTORY
Electronic Article Surveillance
We manufacture our EAS systems and consumables, including Alpha® S3 products, in facilities located in Puerto Rico, Japan, China, the U.S., and Germany. 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 China and 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, Germany, 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 market video systems and installation and monitoring 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
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, Bangladesh, Sri Lanka, and Turkey. Our facilities in the Netherlands and the U.S. 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. The acquisition of Shore to Shore in May 2011 expanded the geographic footprint of our printed label operations. ALS has a network of 29 service bureaus located in 20 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 regions. 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, New Zealand, and Turkey.
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.
BACKLOG
Our backlog of orders was approximately $52.2 million at December 25, 2011, compared to approximately $48.0 million at December 26, 2010. We anticipate that substantially all of the backlog at the end of 2011 will be delivered during 2012. 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 consumables 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 Tyco Security Solutions 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 2011 revenues were approximately $17.4 billion, of which $8.6 billion was attributable to the Tyco Security Solutions 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, Vanguard Protex Global Corporation, Se-Kure Controls, Inc., Invue Security Products, 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 Solutions. 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, including a full complement of tags and labels, to apparel retailers, brand owners and apparel manufacturers. 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 in any international market across our entire retail merchandising solutions product range. HL Display AB and VFK Renzel GMBH are our largest competitors in retail display systems, primarily in Europe. In hand-held labeling solutions, we compete with Contact, Garvey Products Inc., Hallo, Avery Dennison Corporation, and Prix.
OTHER MATTERS
Research and Development
We spent $19.8 million, $20.5 million, and $20.4 million, in research and development activities during 2011, 2010, and 2009, respectively. Our R&D emphasis is on continually broadening our product lines, reducing costs, and expanding the markets and applications for all products. We believe that our future growth is dependent, in part, on the products and technologies resulting from these efforts.
The acquisition of Shore to Shore is a further step in Checkpoint's strategy to become the recognized number two global provider of apparel labeling solutions. Not only does this acquisition put Checkpoint significantly closer to its goal of growing the Apparel Labeling Solutions business significantly, it also extends our global network of print shops and variable data management capabilities to effectively deliver our RFID-based merchandise visibility solutions.
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 Label’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. built on our strategy to help retailers and suppliers migrate more easily to EPC RFID using our EVOLVE™ EAS platform. As our industry moves to a common EPC standard, we are now able to offer solutions that give retailers and their supply chains clearer visibility of their assets and merchandise - further reducing shrink while increasing bottom-line profits by reducing out-of-stocks.
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.
Employees
As of December 25, 2011, we had 6,565 employees, including six executive officers, 119 employees engaged in research and development activities, 540 field service employees, and 656 employees engaged in sales and marketing activities. In the United States, 10 of our employees are represented by a union. In Europe, approximately 378 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 25, 2011, and long-lived assets as of December 25, 2011 and December 26, 2010, is provided in Note 18 of 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 on our website 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, Room 1580, 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:
Name | Age | Tenure with Company | Position with the Company and Date of Election to Position |
| Robert P. van der Merwe | 59 | 4 years | Chairman since December 2008, President and Chief Executive Officer since December 2007 |
| Raymond D. Andrews | 58 | 6 years | Senior Vice President and Chief Financial Officer since December 2007 |
| Per H. Levin | 54 | 17 years | President Merchandise Visibility and Apparel Labeling Solutions since September 2011 |
| John R. Van Zile | 59 | 8 years | Senior Vice President, General Counsel and Secretary since June 2003 |
| Farrokh Abadi | 50 | 7 years | President, Shrink Management Solutions since September 2010 |
| S. James Wrigley | 58 | 2 years | Group President, Global Customer Management since March 2010 |
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 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 and a Chartered Global Management Accountant.
Mr. Levin was appointed President Merchandise Visibility and Apparel Labeling Solutions in September 2011 and was President Merchandise Visibility from September 2010 until September 2011. He was President, Shrink Management and Merchandise Visibility Solutions from March 2006 until September 2010. He was President of Europe from June 2004 until March 2006, Executive Vice President, General Manager, Europe from May 2003 until June 2004, and 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. Van Zile has been Senior Vice President, General Counsel and Secretary since joining 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 President, Shrink Management Solutions in September 2010. He was Senior Vice President and Chief Innovation Officer from October 2008 until September 2010. 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.
Mr. Wrigley joined Checkpoint as Group President, Global Customer Management in March 2010. Prior to joining Checkpoint, Mr. Wrigley was Vice President, EMEA and South Asia, at Avery Dennison Corporation's Retail Information Services business from June 2007 to March 2010. Prior to Avery's acquisition of Paxar Corporation in 2007, Mr. Wrigley was Group President, Global Apparel Solutions from January 2007 until June 2007. Mr. Wrigley was President, Paxar EMEA from 1996 to 2006. Mr. Wrigley served as International Director of the Pepe Group from 1991 until 1996.
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 deterioration in recent years. Future economic factors may continue to be less favorable than in years past and may continue to result in diminished liquidity and tighter credit conditions, leading to decreased credit availability, as well as declines in economic growth and employment levels. 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. 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 the liquidity and financial condition of our customers and on our results of operations, financial condition, liquidity, 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 35 countries, and our international operations generate approximately 67% 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:
| § | the difficulty in enforcing agreements, collecting receivables and protecting assets through foreign legal systems; |
| § | trade protection measures and import or export licensing requirements; |
| § | difficulty in staffing and managing widespread operations and the application of foreign labor regulations; |
| § | compliance with a variety of foreign laws and regulations; |
| § | compliance with the Foreign Corrupt Practices Act and the Office of Foreign Assets Control; |
| § | changes in the general political and economic conditions in the countries where we operate, particularly in emerging markets; |
| § | the threat of nationalization and expropriation; |
| § | increased costs and risks of doing business in a number of foreign jurisdictions; |
| § | changes in enacted tax laws; |
| § | limitations on repatriation of earnings; and |
| § | fluctuations in equity and revenues due to changes in foreign currency exchange rates. |
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.
As we continue to explore the expansion of our global reach, an increasing focus of our business may be in emerging markets, including South America and Southwest Asia. In many of these emerging markets, we may be faced with risks that are more significant than if we were to do business in developed countries, including undeveloped legal systems, unstable governments and economies, and potential governmental actions affecting the flow of goods and currency.
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. Refer to Part 7A. Quantitative and Qualitative Disclosures about Market Risk.
Our net revenue derived from sales in non-U.S. markets is approximately 67% 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 which results in reduced spending on loss prevention by our retail customers, our failure to develop new technology that entices the customer to maintain their commitment to our loss prevention products and services, and competing technologies. A reduction in the commitment for chain-wide installations may also impact our ability to expand utilization of our source tagging program. A reduction in commitments to chain-wide installations and utilization of our source tagging program could have an adverse effect on our revenues and results of operations.
The markets we serve are highly competitive and we may be unable to compete effectively if we are unable to provide and market innovative and cost-effective products at competitive prices.
We face competition around the world, including competition from other large, multinational companies and other regional companies. Some of these companies may have substantially greater financial and other resources than the Company. We face competition in several aspects of our business. In the SMS EAS 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:
| § | develop and fund technological innovations, such as those related to our next generation EAS product solutions, continued investment in evolving RFID technologies, and other innovative security device, software, and systems initiatives; |
| § | receive and maintain necessary patent and trademark protection; and |
| § | successfully anticipate customer needs and preferences. |
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, including patents, could harm our ability to compete or grow.
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. At this time we do not anticipate any significant impact from the expiration of patents over the next two to three years.
There is no assurance that the patents we have obtained will provide adequate protection to ensure any competitive advantages for our products. We also cannot assure investors that those patents will not be successfully challenged, invalidated or circumvented prior to their expiration. In addition, we cannot provide assurance that competitors have not already applied for or obtained, or will not seek to apply for and obtain, patents that will prevent, limit or interfere with our ability to make, use and sell our products either in the U.S. or in international markets.
We cannot assure you that we will not become subject to patent infringement claims. The defense and prosecution of intellectual property lawsuits generally are costly and time-consuming. If other parties violate our proprietary rights, further litigation may be necessary to enforce our patents, to protect trade secrets or know-how we own or to determine the enforceability, scope and validity of the proprietary rights of others. Any litigation will be costly and cause significant diversion of effort by our technical and management personnel.
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 senior secured credit facility agreement and senior secured notes agreement that restrict certain activities, and failure to comply with these agreements may have an adverse effect on our financial condition, results of operations and cash flows.
We maintain a senior secured credit facility and senior secured notes that contain 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 senior secured credit facility and senior secured notes agreements contain 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 requirements of the senior secured credit facility and/or senior secured notes agreements, we may be in default, and we may not be able to obtain the necessary amendments to the respective agreements or waivers of an event of default. Upon an event of default, if the respective agreements are not amended or the event of default is not waived, the lenders 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. The impact of our restructuring initiatives and on-going economic conditions are expected to put pressure on our leverage ratio covenant during 2012. As a proactive measure, we pursued an amendment to temporarily increase the leverage ratio through the end of the third quarter of 2012. This amendment was approved and deemed effective as of February 17, 2012.
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.
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.
Our ability to integrate acquisitions and to achieve our financial and operational goals for these acquired businesses could have an impact on future revenues and profits.
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. Upon full integration of the acquisition, Brilliant’s woven and printed label manufacturing capabilities will establish us as a full range global supplier for the apparel labeling solutions business. In May 2011, we acquired the equity and/or assets of Shore to Shore, Inc., including the Adapt Group and related assets. Together, this acquisition represents a retail apparel and footwear product identification business which designs, manufactures and sells tags and labels, hang tags, price tickets, printed paper tags, pressure sensitive products, woven labels, leather and leather-like labels, heat transfer labels and brand protection and EAS solutions/labels which may or may not contain RFID tags, chips or inlays. The allocation of the purchase price remains open for quantification of acquired income and non-income based tax exposures, certain information related to deferred income taxes, and finalization of the 2010 performance payment amount due.
Various risks, uncertainties and costs are associated with 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.
Any acquisition, strategic relationship, joint venture or investment could disrupt our business and harm our financial condition.
We actively pursue acquisitions, strategic relationships, joint ventures, collaborations and investments that we believe may allow us to complement our growth strategy, increase market share in our current markets or expand into adjacent markets, or broaden our technology and intellectual property. Such transactions may be complex, time consuming and expensive, and may present numerous challenges and risks. Lack of control over the actions of our business partners in any strategic relationship, joint venture or collaboration, could significantly delay the introduction of planned products or otherwise make it difficult or impossible to realize the expected benefits of such relationship.
Divestitures of some of our businesses or product lines may materially adversely affect our financial condition, results of operations or cash flows.
We continually evaluate the performance of all of our businesses and may sell businesses or product lines. Divestitures involve risks, including difficulties in the separation of operations, services, products and personnel, the diversion of management’s attention from other business concerns, the disruption of our business, the potential loss of key employees and the retention of uncertain environmental or other contingent liabilities related to the divested business. In addition, divestitures may result in significant asset impairment charges, including those related to goodwill and other intangible assets, which could have a material adverse effect on our financial condition and results of operations. We cannot assure you that we will be successful in managing these or any other significant risks that we encounter in divesting a business or product line.
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 2011 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 Apparel Labeling Solutions and Retail Merchandising Solutions segments could trigger future impairment in those segments.
We evaluate our businesses and product lines periodically for their strategic fit within our operations. In December of 2011, we began actively marketing our Banking Security Systems Integration business unit included in our Shrink Management Solutions segment. As a result of this divestiture decision, we are accounting for this business as discontinued operations. The classification of this business as discontinued operations was determined to be a triggering event for testing goodwill impairment. As a result of this impairment test, we determined that there was a $3.4 million impairment charge in the goodwill reporting unit of our Shrink Management Solutions segment and a $2.8 million impairment of customer relationship intangible assets. These impairment charges were included in discontinued operations on the Consolidated Statement of Operations.
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.
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 have been implementing 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.
We have identified a material weakness in our internal control over financial reporting that resulted in revisions of our Consolidated Financial Statements included in this Annual Report on Form 10-K. This material weakness could continue to adversely affect our ability to report our results of operations and financial condition accurately and in a timely manner.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management assessed the effectiveness of our internal control over financial reporting as of December 25, 2011, and identified a material weakness related to our controls to prevent or detect management override of controls at certain of our foreign subsidiaries that were not integrated into our shared services environments in the United States and Europe. Specifically, the monitoring controls over certain locations, including internal audits, periodic reviews of segregation of duties and review of the effectiveness of key balance sheet reconciliations were not designed to prevent or detect management override of controls that could circumvent internal control over financial reporting. As a result of this control deficiency, we failed to detect on a timely basis fraudulent misappropriation of company funds, which contributed to the revision of the annual financial statements for 2010 and 2009 and the interim financial information for 2011 and 2010. The impacted accounts were cash, accounts receivable and inventory as well as income taxes and non-income taxes payable and operating expenses. Although the effect of these errors was not material to any previously issued financial statements, the cumulative effect of correcting the newly identified errors in the current year would have been material for the fiscal year 2011. Additionally, this control deficiency could result in misstatements of the aforementioned accounts or other accounts that could result in a material misstatement of the consolidated financial statements that would not be prevented or detected. As a result of this material weakness, our management concluded that our internal control over financial reporting was ineffective as of December 25, 2011. See Part II — “Item 9A: Controls and Procedures.”
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim Consolidated Financial Statements will not be prevented or detected on a timely basis. Our efforts have been and will continue to be time-consuming and expensive. The effectiveness of any controls and procedures is subject to certain limitations, and, as a result, there can be no assurance that our controls and procedures will detect all errors or fraud. A control, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained. We also cannot assure you that other material weaknesses will not arise as a result of our past failure to maintain adequate internal controls and procedures or that circumvention of those controls and procedures will not occur. Additionally, even our improved controls and procedures may not be adequate to prevent or identify errors or irregularities or ensure that our financial statements are prepared in accordance with generally accepted accounting principles.
The investigations by internal management into some of our historical accounting practices and the determination of various accounting adjustments, which resulted in the revision of our previously issued Consolidated Financial Statements, have been time-consuming and expensive, and may continue to have an adverse effect on our financial condition, results of operations and cash flows.
Commencing December 2011, our internal management devoted substantial internal and external resources to the investigation of certain unsubstantiated accounting entries in our Canada operations. Over substantially the same period, we have devoted substantial additional resources to preparing the revised financial statements and information included in this Annual Report on Form 10-K. As a result of these efforts, we have incurred substantial fees and expenses during the fourth quarter of fiscal 2011 and first quarter of fiscal 2012, primarily for additional accounting, tax, legal and related consulting costs. These costs, as well as the substantial management time devoted to address these issues, have adversely affected and may continue to adversely affect our financial condition, results of operations and cash flows.
None.
Our principal corporate offices are located at One Commerce Square, 2005 Market Street, Suite 2410, Philadelphia, Pennsylvania. As of December 25, 2011, we owned or leased approximately 3.0 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 Bangladesh, China, the Dominican Republic, Germany, Guatemala, Hong Kong, India, Japan, Malaysia, the Netherlands, Puerto Rico, Spain, Sri Lanka, Turkey, 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 designating the case as an exceptional case and awarding an unspecified portion of defendants’ attorneys’ fees under 35 U.S.C. § 285. Defendants are seeking 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. On March 6, 2009, we filed objections to the defendants’ bill of attorneys’ fees. On November 2, 2011, the Court finalized the decision to order us to pay the attorneys’ fees and costs of the defendants in the amount of $6.6 million. The additional amount of $0.9 million was recorded in the fourth quarter ended December 25, 2011 in the Consolidated Statement of Operations. On November 15, 2011, we filed objections to and appealed the defendants’ bill of attorneys’ 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.
Not Applicable.
Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol CKP. The following table sets forth, for the periods indicated, the high and low sale prices for our common stock as reported on the NYSE Composite Tape.
| | Market Price Per Share |
| | High | Low |
| Fiscal year ended December 25, 2011 | | |
| First Quarter | $ 23.00 | $ 19.29 |
| Second Quarter | $ 22.69 | $ 15.89 |
| Third Quarter | $ 18.24 | $ 12.41 |
| Fourth Quarter | $ 14.95 | $ 10.58 |
| Fiscal year ended December 26, 2010 | | |
| First Quarter | $ 23.05 | $ 14.98 |
| Second Quarter | $ 23.92 | $ 17.15 |
| Third Quarter | $ 21.50 | $ 16.07 |
| Fourth Quarter | $ 22.42 | $ 16.96 |
Holders of Record
As of February 24, 2012, there were 579 holders of record of our common stock.
Dividends
We have never paid a cash dividend on our common stock (except for a nominal cash distribution in April 1997 to redeem the rights outstanding under our 1988 Shareholders’ Rights Plan). We do not anticipate paying any cash dividends in the near future. We have retained, and expect to continue to retain, our earnings for reinvestment into the business. The declaration and payment of dividends in the future, and their amounts, will be determined by the Board of Directors in light of conditions then existing, including our earnings, our financial condition and business requirements (including working capital needs), and other factors.
Recent Sales of Unregistered Securities
There has been no sale of unregistered securities in fiscal years 2011, 2010, or 2009.
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on the Common Stock of the Company for the period beginning December 31, 2006 and ending on December 25, 2011, 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.
Year | Checkpoint Systems, Inc. | NYSE/AMEX/NASDAQ Stock Market Index | NASDAQ Electronic Components and Accessories Index |
| 2006 | 100.00 | 100.00 | 100.00 |
| 2007 | 128.66 | 105.21 | 116.66 |
| 2008 | 48.72 | 66.58 | 59.54 |
| 2009 | 75.51 | 85.94 | 96.46 |
| 2010 | 101.75 | 101.49 | 112.21 |
| 2011 | 54.16 | 102.44 | 103.29 |
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 2011
Notes:
| A. | Note: Data complete through last fiscal year. |
| B. | Note: Corporate Performance Graph with peer group uses peer group only performance (excludes only company). |
| C. | Note: Peer group indices use beginning of period market capitalization weighting. |
| D. | Note: Data and graph are calculated from CRSP Total Return Index for the NYSE/AMEX/NASDAQ Stock Market (US Companies), Center for Research in Security Prices (CRSP), Graduate School of Business, The University of Chicago. |
We have revised the selected financial data as of and for the years ended December 26, 2010, December 27, 2009, December 28, 2008 and December 30, 2007. The revision is the result of the Company making corrections for the combined effect of financial statement errors attributable to (i) the intentional misstatement of expenses due to the improper and fraudulent activities of a certain former employee of the Company's Canada sales subsidiary; and (ii) income tax adjustments recorded in the third quarter of 2010 that should have been recorded in the fourth quarter of 2009. The Company assessed the impact of these errors and concluded that these errors were not material, individually or in the aggregate, to any of those financial statements. Although the effect of these errors was not material to any previously issued financial statements, the cumulative effect of correcting the newly identified errors in the current year would have been material for the fiscal year 2011. Due to the revisions, the periods ended December 28, 2008 and December 30, 2007 should be considered unaudited for purposes of the presentation below. For more information, refer to Note 1 of the Consolidated Financial Statements. 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.
(amounts in thousands, except per share data)
Year ended | December 25, 2011 | December 26, 2010 | December 27, 2009 | December 28, 2008 | December 30, 2007 |
| | | (As Revised) | (As Revised) | (As Revised) | (As Revised) |
| STATEMENT OF OPERATIONS DATA | | | | | |
| Net revenues | $ 865,343 | $ 821,678 | $ 762,251 | $ 900,215 | $ 829,126 |
| Earnings (loss) from continuing operations before income taxes | $ 428 | $ 37,745 | $ 35,659 | $ (29,062) | $ 71,034 |
| Income taxes expense | $ 59,540 | $ 9,358 | $ 11,083 | $ 793 | $ 12,400 |
| (Loss) earnings from continuing operations | $ (59,112) | $ 28,387 | $ 24,576 | $ (29,855) | $ 58,634 |
| Loss from discontinued operations, net of tax | $ (7,514) | $ (773) | $ (911) | $ (271) | $ (207) |
| Net (loss) earnings attributable to Checkpoint Systems, Inc. | $ (66,569)(1) | $ 27,730(2) | $ 24,112(3) | $ (30,003)(4) | $ 58,434(5) |
| (Loss) earnings attributable to Checkpoint Systems, Inc. per share from continuing operations: | | | | | |
| Basic | $ (1.46) | $ .71 | $ .63 | $ (.75) | $ 1.47 |
| Diluted | $ (1.46) | $ .71 | $ .63 | $ (.75) | $ 1.44 |
| (Loss) earnings attributable to Checkpoint Systems, Inc. per share: | | | | | |
| Basic | $ (1.64) | $ .69 | $ .61 | $ (.76) | $ 1.47 |
| Diluted | $ (1.64) | $ .69 | $ .61 | $ (.76) | $ 1.43 |
| Depreciation and amortization | $ 37,348 | $ 34,477 | $ 32,325 | $ 30,788 | $ 21,059 |
| (1) | Includes a $47.7 million valuation allowance adjustment, a $28.6 million restructuring charge ($25.8 million, net of tax), a $3.4 million intangible impairment ($3.2 million, net of tax), a $3.4 million goodwill impairment ($3.1 million, net of tax), $2.3 million in acquisition costs ($2.3 million, net of tax), a $1.0 million change related to an indefinite tax reversal assertion, and a $0.9 million litigation settlement ($0.9 million, net of tax), and income of $0.2 million related to improper and fraudulent Canadian activities ($0.1 million, net of tax). |
| (2) | Includes an $8.2 million restructuring charge ($6.2 million, net of tax), a valuation allowance adjustment of $4.3 million, a $1.7 million tax charge, a $1.5 million expense related to improper and fraudulent Canadian activities ($1.2 million, net of tax), and a $0.8 million selling, general and administrative charge ($0.8 million, net of tax) related to adjustments to acquisition related liabilities pertaining to the period prior to the acquisition date. |
| (3) | Includes a $5.4 million restructuring charge ($4.0 million, net of tax), a valuation allowance adjustment of $5.3 million, a $1.3 million expense related to improper and fraudulent Canadian activities ($1.1 million, net of tax), and a $1.3 million litigation settlement charge ($0.8 million, net of tax). |
| (4) | Includes a $59.6 million goodwill impairment charge ($58.5 million, net of tax), a $6.4 million restructuring charge ($4.6 million, net of tax), a $6.2 million litigation settlement charge ($3.8 million, net of tax), a $3.0 million intangible asset impairment charge ($2.2 million, net of tax), a $1.5 million fixed asset impairment charge ($1.1 million, net of tax), a $1.0 million gain from the sale of our Czech subsidiary ($1.0 million, net of tax), and a $0.1 million expense related to improper and fraudulent Canadian activities ($0.1 million, net of tax). |
| (5) | Includes a $4.4 million ($2.9 million, net of tax) charge related to the CEO transition, a $2.7 million restructuring charge ($2.0 million, net of tax), a $2.6 million gain from the sale of our Austrian subsidiary ($2.5 million, net of tax), and a $0.4 million expense related to improper and fraudulent Canadian activities ($0.3 million, net of tax). |
(amounts in thousands) | December 25, 2011 | | December 26, 2010 | | December 27, 2009 | | December 28, 2008 | | December 30, 2007 | |
| | | | (As Revised) | | (As Revised) | | (As Revised) | | (As Revised) | |
| AT YEAR END | | | | | | | | | | |
| Working capital | $ 233,116 | | $ 295,138 | | $ 238,733 | | $ 281,788 | | $ 281,185 | |
| Total debt | $ 150,462 | | $ 141,949 | | $ 116,872 | | $ 145,286 | | $ 95,512 | |
| Total equity | $ 529,340 | | $ 581,554 | | $ 555,558 | | $ 510,407 | | $ 594,510 | |
| Total assets | $ 1,044,481 | | $ 1,033,910 | | $ 1,022,290 | | $ 991,881 | | $ 1,037,347 | |
| FOR THE YEAR ENDED | | | | | | | | | | |
| Capital expenditures | $ 22,981 | | $ 23,712 | | $ 13,757 | | $ 15,217 | | $ 13,363 | |
| Cash provided by operating activities | $ 10,385 | | $ 11,727 | | $ 113,045 | | $ 77,061 | | $ 66,971 | |
| Cash (used in) investing activities | $ (98,280) | | $ (23,185) | | $ (38,645) | | $ (54,704) | | $ (106,151) | |
| Cash provided by (used in) financing activities | $ 5,897 | | $ 28,891 | | $ (50,316) | | $ (4,460) | | $ 7,164 | |
| RATIOS | | | | | | | | | | |
Return on net sales(a) | (7.69) | % | 3.37 | % | 3.16 | % | (3.33) | % | 7.05 | % |
Return on average equity(b) | (11.98) | % | 4.88 | % | 4.52 | % | (5.43) | % | 10.87 | % |
Return on average assets(c) | (6.41) | % | 2.70 | % | 2.39 | % | (2.96) | % | 6.40 | % |
Current ratio(d) | 1.90 | | 2.37 | | 1.99 | | 2.33 | | 2.24 | |
Percent of total debt to capital(e) | 22.13 | % | 19.62 | % | 17.38 | % | 22.16 | % | 13.84 | % |
| (a) | “Return on net sales” is calculated by dividing net earnings (loss) after the cumulative effect of change in accounting principle by net sales. |
| (b) | “Return on average equity” is calculated by dividing net earnings (loss) after the cumulative effect of change in accounting principle by average equity. |
| (c) | “Return on average assets” is calculated by dividing net earnings (loss) after the cumulative effect of change in accounting principle by average assets. |
| (d) | “Current ratio” is calculated by dividing current assets by current liabilities. |
| (e) | “Percent of total debt to capital” is calculated by dividing total debt by total debt and equity. |
(amounts in thousands, except employee data) | December 25, 2011 | December 26, 2010 | December 27, 2009 | December 28, 2008 | December 30, 2007 |
| OTHER INFORMATION | | | | | |
| Weighted average number of shares outstanding - diluted | 40,532(1) | 40,445 | 39,552 | 39,408(2) | 40,724 |
| Number of employees | 6,565 | 5,814 | 5,785 | 3,878 | 3,930 |
| Backlog | $ 52,204 | $ 47,974 | $ 50,186 | $ 51,799 | $ 73,462 |
| (1) | Excludes 329 common shares from stock options and awards and 11 common shares from deferred compensation arrangements as they are anti-dilutive due to our net loss for the year. |
| (2) | Excludes 518 common shares from stock options and awards and 22 common shares from deferred compensation arrangements as they are anti-dilutive due to our net loss for the year. |
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 Shrink Management, Apparel Labeling and Retail Merchandising Solutions. Shrink Management Solutions consists of electronic article surveillance (EAS) systems and EAS consumables including Alpha® solutions, store security system installations and monitoring solutions (CheckView®), and radio frequency identification (RFID) systems, software, tags and labels. Apparel Labeling Solutions includes our web-enabled apparel labeling solutions platform and network of service bureaus to manage the printing of variable information on price and promotional tickets, adhesive labels, fabric and woven tags and labels, and apparel branding tags. Retail Merchandising Solutions consists of hand-held labeling systems (HLS) and retail display systems (RDS). Applications of these products include primarily retail security, asset and merchandise visibility, automatic identification, and pricing and promotional labels and signage. Operating directly in 35 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 RF and EM Hard Tags as part of the SMS EAS Systems product line. During the first quarter of 2010, we began reporting our RF and EM Hard Tags as part of the Alpha® product line. This change results in all hard tags for in-store application being recorded in the same product line as the Alpha® hard tags. Because both product lines are reported within the Shrink Management Solutions segment, the change in classification does not impact segment reporting. The year ended 2009 has been conformed to reflect the product line change within the SMS segment. We have adjusted all prior year comparative amounts and explanations within Management’s Discussion and Analysis to reflect this change in classification to be consistent for all periods presented.
Our operations and results depend significantly on global market worldwide economic conditions, which have experienced deterioration in recent years. In response to these market conditions, we continue to focus on providing customers with innovative products that will be valuable in addressing shrink, which is particularly important during a difficult economic environment. We have also implemented initiatives to reduce costs and improve working capital to mitigate the effects of the economy on our business. We believe that these restructuring initiatives coupled with the strength of our core business and our ability to generate positive cash flow will sustain us through this challenging period.
In the third quarter of 2011, the Company approved an expansion of our previous SG&A Restructuring Plan to include manufacturing and other cost reduction initiatives. The expanded global plan including the new Global Restructuring Plan and the SG&A Restructuring Plan will impact over 1,000 existing employees. Total costs of the two plans are expected to approximate $51 million by the end of 2013, with $27 million to $32 million in total anticipated costs for the Global Restructuring Plan and $19 million to $21 million in total anticipated costs for the SG&A Restructuring Plan. Total annual savings of the two plans are expected to approximate $59 million by 2013, with $38 million to $43 million in total anticipated savings for the Global Restructuring Plan and $19 million to $24 million in total anticipated savings for the SG&A Restructuring Plan.
During 2009, we initiated the SG&A Restructuring Plan focused on reducing our overall operating expenses by consolidating certain administrative functions to improve efficiencies. The first phase of this plan was implemented in the fourth quarter of 2009 with the remaining phases of the plan expected to be substantially completed by the end of the first quarter of 2012.
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. The implementation of this program was substantially completed in 2010, with total restructuring charges incurred of approximately $4.2 million. We expect to realize approximately $6 million of annualized cost savings related to this program.
In January 2011, the Company entered into an agreement to acquire the business of Shore to Shore, through the acquisition of equity and/or assets, which together is a retail apparel and footwear product identification business which designs, manufactures and sells tags and labels, brand protection, and EAS solutions/labels. The acquisition settled in May 2011 for a purchase price of approximately $78.7 million. The financial statements reflect the preliminary allocations of the purchase price based on estimated fair values at the date of acquisition. The results from the acquisition and related goodwill are included in the Apparel Labeling Solutions segment. This acquisition will allow us to strengthen and expand our core apparel labeling offering and provides us with additional capacity in key geographical locations.
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. As of the second quarter of 2010, our financial statements reflected the final allocations of the Brilliant Label purchase price based on estimated fair values at the date of acquisition. The results from the acquisition and related goodwill are included in the Apparel Labeling Solutions segment. This acquisition has allowed 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.
Revision of Previously Issued Consolidated Financial Statements
In December of 2011, we identified errors in our financial statements resulting from improper and fraudulent activities of a certain former employee of our Canada sales subsidiary as part of the transition of our Canadian operations into our shared service environment in North America. Subsequent to the discovery of such errors, we retained outside counsel to undertake an investigation and with the assistance of forensic accountants and internal audit. The results of this investigation concluded that in the period from 2005 through the fourth quarter of 2011, the then Controller of our Canadian operations was able to misappropriate cash through various schemes. The defalcation of cash was concealed by overriding internal controls at the subsidiary which had the effect of misstating certain accounts including cash, accounts receivable, and inventories as well as income taxes and non-income taxes payable and operating expenses. Based on this investigation, it was determined that improper and fraudulent activities by a certain employee of the subsidiary affected the financial reporting of the subsidiary and that the improper and fraudulent activities were contained within the Canada sales subsidiary.
The total cumulative gross financial statement impact of the improper and fraudulent activities was approximately $4.7 million and impacted fiscal years 2005 through 2011 of which $1.1 million of this amount was recovered by the Company from the perpetrator during the fourth quarter of 2011, resulting in a net cumulative financial statement impact of $3.6 million. The fiscal year 2011 financial statement impact was $0.2 million income due to the recovery of $1.1 million offset by expense of $0.9 million. During the fiscal years 2010 and prior, a total cumulative impact of $0.5 million expense had been recorded in the financial statements of the Canada sales subsidiary. The cumulative gross adjustments made to the revised financial statements for the fiscal years ended 2005 through 2010 totaled $3.3 million in the aggregate. We recorded additional operating expense adjustments of $0.4 million and $1.8 million in fiscal years 2010 and 2009, respectively and a cumulative adjustment of $1.1 million ($0.8 million, net of tax) for fiscal years 2008 and prior. The financial statement impacts of the improper and fraudulent Canadian activities have been included in other expense (income) in the Consolidated Statements of Operations. We anticipate filing a claim in 2012 with our insurance provider for the unrecovered amount of the loss.
The Company assessed the impact of these errors, including the impact of immaterial income tax adjustments recorded in the third quarter of 2010 related to provision-to-return adjustments resulting from the misapplication of tax law to the foreign tax credit calculation associated with the payment of a dividend from one of our wholly owned subsidiaries to the Company that should have been recorded in the fourth quarter of 2009. We concluded that these errors were not material, individually or in the aggregate, to any of those financial statements. Although the effect of these errors was not material to any previously issued financial statements, the cumulative effect of correcting the newly identified errors in the current year would have been material for the fiscal year 2011. Consequently, the Company has revised its prior period financial statements. All amounts in this Annual Report on Form 10-K affected by the revision adjustments reflect such amounts as revised. In addition to the revisions described above, the effects of discontinued operations presentation on previously reported amounts have been included in order to reconcile between previously reported amounts and the final amounts as revised in this Annual Report on Form 10-K.
Our management assessed the effectiveness of our internal control over financial reporting as of December 25, 2011, and identified a material weakness related to our controls to detect management override of controls at certain of our foreign subsidiaries that were not integrated into our shared services environments in the United States and Europe. Specifically, the monitoring controls over certain locations, including internal audits, periodic reviews of segregation of duties and review of the effectiveness of key balance sheet reconciliations were not designed to prevent or detect management override of controls that could circumvent internal control over financial reporting. As a result of this control deficiency, we failed to detect on a timely basis fraudulent misappropriation of company funds, which contributed to the revision of the annual financial statements for 2010 and 2009 and the interim financial information for 2011 and 2010. This control deficiency could result in misstatements of the aforementioned accounts or other accounts that could result in a material misstatement of the consolidated financial statements that would not be prevented or detected. As a result of this material weakness, our management concluded that our internal control over financial reporting was ineffective as of December 25, 2011. See Part II – “Item 9A: Controls and Procedures.”
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities.
Note 1 of the Notes to the Consolidated Financial Statements describes the significant accounting policies used in the preparation of the Consolidated Financial Statements. Certain of these significant accounting policies are considered to be critical accounting policies. A critical accounting policy is defined as one that is both material to the presentation of our Consolidated Financial Statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition or results of operations.
Specifically, these policies have the following attributes: (1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations. Estimates and assumptions about future events and their effects cannot be determined with certainty. On an on-going basis, we evaluate our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the Consolidated Financial Statements as soon as they became known. Senior management reviews the development and selection of our accounting policies and estimates with the Audit Committee. The critical accounting policies have been consistently applied throughout the accompanying financial statements.
We believe the following accounting policies are critical to the preparation of our Consolidated Financial Statements:
Revenue Recognition. We recognize revenue 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 selling price should be allocated among the elements and when to recognize revenue for each element.
For arrangements with multiple elements, we allocate total arrangement consideration to all deliverables based on their relative selling price using a specific hierarchy and recognize revenue when each element’s revenue recognition criteria are met. The hierarchy is as follows: vendor-specific objective evidence (“VSOE”), third-party evidence of selling price (“TPE”) or best estimate of selling price (“BESP”). VSOE of fair value for each element is established based on the price charged when the same element is sold separately. We recognize revenue when installation is complete or other post-shipment obligations have been satisfied. Unearned revenue is recorded when payments are received in advance of performing our service obligations and is recognized over the service period.
Products leased to customers under sales-type leases are 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 products is charged to cost of revenues. The deferred finance charges applicable to these leases are recognized over the terms of the leases, or when sold. Rental revenue from products under operating leases is recognized over the term of the lease. Installation revenue from SMS EAS products 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 or 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:
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These allowances are based on specific facts and circumstances surrounding individual customers as well as our historical experience. The adequacy of the reserves for doubtful accounts is continually assessed by periodically evaluating each customer’s receivable balance, considering our customers’ financial condition and credit history, and considering current economic conditions. Historically, our reserves have been adequate to cover all losses associated with doubtful accounts. If the financial condition of our customers were to deteriorate, impairing their ability to make payments, additional allowances may be required. If economic or political conditions were to change in the countries where we do business, it could have a significant impact on the results of operations, and our ability to realize the full value of our accounts receivable. Furthermore, we are dependent on customers in the retail markets. Economic difficulties experienced in those markets could have a significant impact on our results of operations and our ability to realize the full value of our accounts receivables. If our historical experiences changed by 10%, it would require an increase or decrease of $0.5 million to our reserve.
Inventory Valuation. We write down our inventory for estimated obsolescence or unmarketable items equal to the difference between the cost of the inventory and the estimated net realizable value based upon assumptions of future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. If our estimates were to change by 10%, it would cause a change in inventory value of $0.9 million.
Valuation of Long-lived Assets. Our long-lived assets include property, plant, and equipment, goodwill, and identified intangible assets. With the exception of goodwill and indefinite-lived intangible assets, long-lived assets are depreciated or amortized over their estimated useful lives, and are reviewed for impairment whenever changes in circumstances indicate the carrying value may not be recoverable. Recoverability is determined based upon our estimates of future undiscounted cash flows. If the carrying value is determined to be not recoverable, an impairment charge would be necessary to reduce the recorded value of the assets to their fair value. The fair value of the long-lived assets other than goodwill is based upon appraisals, quoted market prices of similar assets, or discounted cash flows.
Goodwill and indefinite-lived intangible assets are subject to tests for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We test for impairment on an annual basis as of fiscal month end October of each fiscal year, relying on a number of factors including operating results, business plans, and anticipated future cash flows. Our management uses its judgment in assessing whether goodwill has become impaired between annual impairment tests. Reporting units are primarily determined as the geographic areas comprising our business segments, except in situations when aggregation of the reporting units is appropriate. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds the fair value, then the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
The implied fair value of our reporting units is dependent upon our estimate of future discounted cash flows and other factors. Our estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. Estimated future cash flows are adjusted by an appropriate discount rate derived from our market capitalization plus a suitable control premium at the date of evaluation. The financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital that we use to determine our discount rate, and through our stock price that we use to determine our market capitalization. Therefore, changes in the stock price may also affect the result of the impairment test. Market capitalization is determined by multiplying the number of shares outstanding on the assessment date by the average market price of our common stock over a 30-day period before each assessment date. We use this 30-day duration to consider inherent market fluctuations that may affect any individual closing price. We believe that our market capitalization alone does not fully capture the fair value of our business as a whole, or the substantial value that an acquirer would obtain from its ability to obtain control of our business. The difference between the sum total of the fair value of our reporting units and our market capitalization represents the control premium. As of the date of our goodwill impairment test, management has assessed our control premium to be within a reasonable range.
We have not made any changes to our methodology used in our annual impairment test since the adoption of ASC 350. Determination of the fair value of a reporting unit is a matter of judgment and involves the use of estimates and assumptions, which are based on management’s best estimates at the time.
We use an income approach (discounted cash flow approach) for the determination of fair value of our reporting units. Our projected cash flows incorporate many assumptions, the most significant of which include variables such as future sales, growth rates, operating margin, and the discount rates applied.
Assumptions related to revenue, growth rates and operating margin are based on management’s annual and ongoing forecasting, budgeting and planning processes and represent our best estimate of the future results of operations across the company. These estimates are subject to many assumptions, such as the economic environment across the segments in which we operate, end demand for our products, and competitor actions. The use of different assumptions would increase or decrease estimated discounted future cash flows and could increase or decrease an impairment charge. If the use of these assets or the projections of future cash flows change in the future, we may be required to record impairment charges. An erosion of future business results in any of the business units or significant declines in our stock price could result in an impairment to goodwill or other long-lived assets. These risks are discussed in Item 1A. Risk Factors.
As of the date of our fiscal 2010 impairment test, the total fair values for the reporting units in all of our segments exceeded their total carrying values by more than 66%. Individually, the fair values for each of the reporting units in our segments exceeded their respective carrying values by more than 34%. Based on this goodwill impairment assessment of the reporting units of our segments and our understanding of currently projected trends of the business and the economy, we do not believe that there is a significant risk of impairment for these reporting units for a reasonable period of time.
As of the date of our fiscal 2011 impairment test, the total fair values for the reporting units in all of our segments exceeded their total carrying values by more than 44%. Based on our most recent goodwill impairment assessment of the reporting units of our segments and our understanding of currently projected trends of the business and the economy, we do not believe that there is a significant risk of impairment for these reporting units for a reasonable period of time. 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 Apparel Labeling Solutions and Retail Merchandising Solutions segments could trigger future impairment in those segments.
Our Apparel Labeling Solutions segment is composed of one reporting unit. As of December 25, 2011, the goodwill for this one reporting unit totaled $62.6 million. The fair value of this reporting unit exceeded its respective carrying value as of the date of the most recent impairment test by approximately 18%. In determining the fair value of this reporting unit, our projected cash flows did not contain significant growth assumptions. In addition, the discount rate used in determining the discounted cash flows for this reporting unit was lower than that used for reporting units in other segments due to the lower risk associated with these low growth rates. However, a 16% decline in operating results, or a 300 basis point increase in our discount rate could result in a future decrease in the fair value of this reporting unit which could result in a future impairment.
Our Retail Merchandising Solutions segment is composed of three reporting units. As of December 25, 2011, the goodwill for this one reporting unit totaled $60.2 million. The fair value of this reporting unit exceeded its respective carrying value as of the date of the most recent impairment test by approximately 13%. In determining the fair value of this reporting unit, our projected cash flows did not contain significant growth assumptions. In addition, the discount rate used in determining the discounted cash flows for this reporting unit was lower than that used for reporting units in other segments due to the lower risk associated with these low growth rates. However, a 15% decline in operating results, or a 300 basis point increase in our discount rate could result in a future decrease in the fair value of this reporting unit which could result in a future impairment. All other reporting units within the Retail Merchandising segment exceed their respective carrying value by more than 35%.
The fair values for the reporting units in our remaining segments exceeded their respective carrying values as of the date of the impairment test by more than 20%. Refer to Notes 1 and 5 of the Consolidated Financial Statements.
Income Taxes. In determining income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of recoverability of certain of the deferred tax assets, which arise from temporary differences between tax and financial statement recognition of revenue and expense. We record a valuation allowance to reduce our deferred tax assets to the amount that it is more likely than not to be realized. In assessing the realizability of deferred tax assets, we consider future taxable income by tax jurisdictions and tax planning strategies. If we were to determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the valuation allowance would decrease income in the period such determination was made. Refer to Note 12 of the Consolidated Financial Statements.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. We are not aware of any such changes that would have a material effect on our results of operations, cash flows or financial position.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We record tax liabilities for the anticipated settlement of tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. Our income tax expense includes amounts intended to satisfy income tax assessments that result from these audit issues. 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’ve evaluated our uncertain tax positions and believe that our reserve for uncertain tax positions, including related interest and penalty, is adequate.
Pension Plans. We have various unfunded pension plans outside the U.S. These plans have significant pension costs and liabilities that are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets, mortality rates, and merit and promotion increases. We are required to consider current market conditions, including changes in interest rates, in selecting these assumptions. Changes in the related pension costs or liabilities may occur in the future due to changes in the assumptions. A change in discount rates of 0.25% would have less than a $0.2 million effect on pension expense.
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 $0.1 million effect on stock compensation expense. As of December 25, 2011, there was $1.1 million and $3.4 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 1.5 years and 1.7 years, respectively. Refer to Note 8 of the Consolidated Financial Statements.
Liquidity and Capital Resources
Our liquidity needs have been, and are expected to continue to be driven by 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 on hand from operating activities and funding available under our credit agreements should be adequate to service our debt and working capital needs, meet our capital investment requirements, other potential restructuring requirements, and product development requirements.
In the fourth quarter of 2011, we changed our assertion on unremitted earnings for certain foreign subsidiaries, primarily due to pressure on our leverage ratio for debt covenants. This resulted in the repatriation of foreign earnings in order to reduce worldwide debt to the levels stipulated by our covenants. Also impacting the change in assertion was the projected future cash impact of the 2011 Global Restructuring Plan. As of December 25, 2011, the majority of our unremitted earnings of subsidiaries outside the United States were deemed not to be permanently reinvested.
The ongoing 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 25, 2011, our cash and cash equivalents were $93.5 million compared to $172.5 million as of December 26, 2010. Cash and cash equivalents decreased in 2011 primarily due to $98.3 million of cash used in investing activities, partially offset by $10.4 million of cash provided by operating activities, $5.9 million of cash provided by financing activities, and $3.0 million effect of foreign currency.
Cash provided by operating activities was $1.3 million less during 2011 compared to 2010. In 2011 compared to 2010, our cash from operating activities was impacted negatively by changes in accounts receivable, other current assets and inventories, which was partially offset by changes in other current liabilities, unearned revenues, and the restructuring reserve. In 2011, we sold accounts receivable related to sales-type lease extensions customers to third party financial institutions totaling $38.0 million. Cash proceeds from the initial sale of the accounts receivable are used to fund operations. Other current assets fluctuated due to an increase in current income tax receivable. Inventories increased due to expected customer demand during the first quarter of 2012. Other current liabilities favorably impacted cash flows from operating activities primarily due to the timing of payments during 2011 compared to 2010. The restructuring reserve increased due to the implementation of the first phase of the new Global Restructuring Plan in the third quarter of 2011. Unearned revenues increased due to the increase of future contracted customer orders during 2011.
Cash used in investing activities was $75.1 million greater during 2011 compared to 2010. This was primarily due to the Shore to Shore acquisition.
Cash provided by financing activities was $23.0 million less during 2011 compared to 2010. The decrease in cash provided by financing activities was primarily due to payments on existing borrowing facilities.
Our percentage of total debt to total equity as of December 25, 2011, was 28.4% compared to 24.4% as of December 26, 2010. As of December 25, 2011, our working capital was $233.1 million compared to $295.1 million as of December 26, 2010.
We continue to reinvest in the Company through our investment in technology and process improvement. During 2011, our investment in research and development amounted to $19.8 million, as compared to $20.5 million in 2010. These amounts are reflected in cash used in operations, as we expense our research and development as it is incurred. In 2012, we anticipate spending of approximately $20 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 2011, our contribution to these plans was $4.8 million. Our funding expectation for 2012 is $4.7 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 2011 totaled $23.0 million compared to $23.7 million during 2010. During 2011, our acquisition of property, plant, and equipment and intangibles included $8.3 million of capitalized internal-use software costs related to an ERP system implementation, compared to $10.3 million during 2010. We anticipate our capital expenditures, used primarily to upgrade information technology and improve our production capabilities, to approximate $23 million in 2012.
In January 2011, the Company entered into an agreement to acquire, through the acquisition of equity and/or assets, a retail apparel and footwear product identification business which designs, manufactures and sells tags and labels, brand protection, and EAS solutions/labels. The acquisition settled in May 2011 for a purchase price of approximately $78.7 million, including cash acquired of $1.9 million and the assumption of debt of $4.2 million. As of December 25, 2011, $3.8 million of the assumed debt amount remained outstanding. The debt assumed includes capital leases, accounts receivable factoring arrangements, term loans, an overdraft facility, and other short-term loans. With the exception of the capital leases, the banking facilities are subject to the banks right to call the liabilities at any time, and are therefore included in short-term borrowings in the accompanying Consolidated Balance Sheets. The payment for the acquisition is reflected in the acquisition of businesses line within investing activities on the Consolidated Statement of Cash Flows.
In October 2010, we acquired a software programming and development business based in the Philippines from Napar Contracting and Allied Services, Inc. for $0.5 million. The transaction was paid in cash. Based on the terms of the transaction, 60% of the purchase price was due upon signing the agreement and the remaining 40% was due on January 1, 2011.
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.
On November 1, 2007, Checkpoint Systems, Inc. and one of its direct subsidiaries 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 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.
In September 2010, $7.2 million (¥600 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 Sheets. In November 2010, we entered into a new Japanese local line of credit for $1.8 million (¥150 million). During the fourth quarter of 2011, our Japanese local line of credit of $1.9 million (¥150 million) was paid down.
During fiscal 2010, our outstanding Asialco loans of $3.7 million (RMB 25 million) were paid down.
In December 2011, $4.2 million (HKD 32.5 million) was paid in order to extinguish our existing Hong Kong banking facility and other outstanding Hong Kong debt. In December 2011, we entered into a new five-year Hong Kong banking facility. The maximum availability under the facility is $8.9 million (HKD 69.0 million), and includes an $8.4 million (HKD 65.0 million) term loan and a $0.5 million (HKD 4.0 million) overdraft facility. The term loan bears interest at a rate of HIBOR + 2.75% and the overdraft facility bears interest at a rate of HKD Best Lending Rate + 2.00%. As of December 25, 2011, $8.4 million (HKD 65.0 million) was outstanding on the term loan. The banking facility is subject to the bank’s right to call the liabilities at any time, and is therefore included in short-term borrowings in the accompanying Consolidated Balance Sheets.
In connection with the acquisition of the Shore to Shore businesses, the Company assumed debt of $4.2 million. As of December 25, 2011, $3.8 million related to the assumed debt remained outstanding. The debt assumed includes capital leases, accounts receivable factoring arrangements, term loans, an overdraft facility, and other short-term loans. With the exception of the capital leases, the banking facilities are subject to the banks’ rights to call the liabilities at any time, and are therefore included in short-term borrowings in the accompanying Consolidated Balance Sheets.
In December 2009, we entered into new full-recourse factoring arrangements. The arrangements are secured by trade receivables. The Company received a weighted average of 92.4% of the face amount of receivables that it desired to sell and the bank agreed, at its discretion, to buy. As of December 25, 2011 the factoring arrangements had a balance of $1.3 million (€1.0 million), of which $0.4 million (€0.3 million) was included in the current portion of long-term debt and $0.9 million (€0.7 million) was included in long-term borrowings in the accompanying Consolidated Balance Sheets since the receivables are collectable through 2016.
In October 2009, the Company 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%. As of December 25, 2011, the interest rate was 4.5%. As of December 25, 2011, our short-term full-recourse factoring arrangement equaled $8.8 million (€6.8 million) and is included in short-term borrowings in the accompanying Consolidated Balance Sheets. The full-recourse factoring arrangement was extended in December 2011 for a twelve month period.
On July 1, 1997, Checkpoint Systems Japan Co. Ltd. (Checkpoint Japan), a wholly-owned subsidiary of the Company, issued newly authorized shares to Mitsubishi Materials Corporation (Mitsubishi) in exchange for cash. In February 2006, Checkpoint Japan repurchased 26% of these shares from Mitsubishi in exchange for $0.2 million in cash. In August 2010, Checkpoint Manufacturing Japan Co., LTD. repurchased the remaining 74% of these shares from Mitsubishi in exchange for $0.8 million in cash.
On July 22, 2010, we entered into an Amended and Restated Senior Secured Credit Facility (the “Senior Secured Credit Facility”) with a syndicate of lenders. The Senior Secured Credit Facility provides us with a $125.0 million four-year senior secured multi-currency revolving credit facility.
The Senior Secured Credit Facility amended and restated the terms of our existing $125.0 million senior secured multi-currency revolving credit agreement (“Secured Credit Facility”). The amendments primarily reflect an extension of the terms of the Secured Credit Facility, reductions in the interest rates charged on the outstanding balances, and favorable changes with regard to the collateral provided under the Senior Secured Credit Facility. Prior to entering into the Senior Secured Credit Facility, $102.2 million of the Secured Credit Facility was paid down during the third quarter of 2010.
The Senior Secured Credit Facility provides for a revolving commitment of up to $125.0 million with a term of four years from the effective date of July 22, 2010. We may borrow, prepay and re-borrow under the Senior Secured Credit Facility as long as the sum of the outstanding principal amounts is less than the aggregate facility availability. The Senior Secured Credit Facility also includes an expansion option that will allow us to request an increase in the Senior Secured Credit Facility of up to an aggregate of $50.0 million, for a potential total commitment of $175.0 million. As of December 25, 2011, we did not elect to request the $50.0 million expansion option.
Borrowings under the Senior Secured Credit Facility, other than swingline loans, bear interest at our option of either a spread ranging from 1.25% to 2.50% over the Base Rate (as described below), or a spread ranging from 2.25% to 3.50% over the LIBOR rate, and in each case fluctuating in accordance with changes in our leverage ratio, as defined in the Senior Secured Credit Facility. The “Base Rate” is the highest of (a) our lender’s prime rate, (b) the Federal Funds rate, plus 0.50%, and (c) a daily rate equal to the one-month LIBOR rate, plus 1.0%. Swingline loans bear interest of (i) a spread ranging from 1.25% to 2.50% over the Base Rate with respect to swingline loans denominated in U.S. dollars, or (ii) a spread ranging from 2.25% to 3.50% over the LIBOR rate for one month U.S. dollar deposits, as of 11:00 a.m., London time. We pay an unused line fee ranging from 0.30% to 0.75% per annum based on the unused portion of the commitment under the Senior Secured Credit Facility.
Pursuant to the terms of the Senior Secured Credit Facility, we are subject to various requirements, including covenants requiring the maintenance of a maximum total leverage ratio of 2.75 and a minimum fixed charge coverage ratio of 1.25. The Senior Secured Credit Facility also contains customary representations and warranties, affirmative and negative covenants, notice provisions and events of default, including change of control, cross-defaults to other debt, and judgment defaults. Upon a default under the Senior Secured Credit Facility, including the non-payment of principal or interest, our obligations under the Senior Secured Credit Facility may be accelerated and the assets securing such obligations may be sold. Certain wholly-owned subsidiaries with respect to the Company are guarantors of our obligations under the Senior Secured Credit Facility. The impacts of our restructuring initiatives and on-going economic conditions have the potential to put pressure on our leverage ratio covenant during 2012. As a proactive measure, we pursued an amendment to temporarily increase the leverage ratio through the end of the third quarter of 2012. This amendment was approved and deemed effective as of February 17, 2012. As of December 25, 2011, we were in compliance with all covenants.
In connection with the Senior Secured Credit Facility, the Company incurred $1.7 million in fees and expenses, which are amortized over the term of the Senior Secured Credit Facility to interest expense on the Consolidated Statement of Operations. The remaining unamortized debt issuance costs recognized in connection with the Secured Credit Facility of $2.4 million are amortized over the term of the Senior Secured Credit Facility to interest expense on the Consolidated Statement of Operations.
Also on July 22, 2010, we entered into a Note Purchase and Private Shelf Agreement (the “Senior Secured Notes Agreement”) with a lender, and certain other purchasers party thereto (together with the lender, the “Purchasers”).
Under the Senior Secured Notes Agreement, we issued to the Purchasers its Series A Senior Secured Notes in an aggregate principal amount of $25.0 million (the “Series A Notes”), its Series B Senior Secured Notes in an aggregate principal amount of $25.0 million (the “Series B Notes”), and its Series C Senior Secured Notes in an aggregate principal amount of $25.0 million (the “Series C Notes”); together with the Series A Notes and the Series B Notes, (the “2010 Notes”). The Series A Notes bear interest at a rate of 4.00% per annum and mature on July 22, 2015. The Series B Notes bear interest at a rate of 4.38% per annum and mature on July 22, 2016. The Series C Notes bear interest at a rate of 4.75% per annum and mature on July 22, 2017. The 2010 Notes are not subject to any scheduled prepayments. The entire outstanding principal amount of each of the 2010 Notes shall become due on their respective maturity date.
The Senior Secured Notes Agreement also provides that for a three-year period ending on July 22, 2013, we may issue, and our lender may, in its sole discretion, purchase, additional fixed-rate senior secured notes (the “Shelf Notes”); together with the 2010 Notes, (the “Notes”), up to an aggregate amount of $50.0 million. The aggregate principal amount of the Shelf Notes issued at any time shall be no less than $5.0 million. The Shelf Notes will have a maturity date of no more than 10 years from the respective maturity date and an average life of no more than 7 years after the date of issue. The Shelf Notes will have such other terms, including principal amount, interest rate and repayment schedule, as agreed with our lender at the time of issuance. As of December 25, 2011, we had not issued additional fixed-rate senior secured notes.
We may prepay the Notes in a minimum principal amount of $1.0 million and in $0.1 million increments thereafter, at 100% of the principal amount so prepaid, plus an amount equal to the excess, if any, of the present value of the remaining scheduled payments of principal and interest on the amount repaid, over the principal amount repaid. Either we or our lender may terminate the private shelf facility with respect to undrawn amounts upon 30 days’ written notice, and our lender may terminate the private shelf facility with respect to undrawn amounts upon the occurrence and/or continuation of an event of default or acceleration of any Note.
The Senior Secured Notes Agreement is subject to covenants that are substantially similar to the covenants in the Senior Secured Credit Facility Agreement, including covenants requiring the maintenance of a maximum total leverage ratio of 2.75 and a minimum fixed charge coverage ratio of 1.25. The Senior Secured Notes Agreement also contains representations and warranties, affirmative and negative covenants, notice provisions and events of default, including change of control, cross-defaults to other debt, and judgment defaults that are substantially similar to those contained in the Senior Secured Credit Facility, and those that are customary for similar private placement transactions. Upon a default under the Senior Secured Notes Agreement, including the non-payment of principal or interest, our obligations under the Senior Secured Notes Agreement may be accelerated and the assets securing such obligations may be sold. Certain of our wholly-owned subsidiaries are also guarantors of our obligations under the Notes. The impact of our restructuring initiatives and on-going economic conditions are expected to put pressure on our leverage ratio covenant during 2012. As a proactive measure, we pursued an amendment to temporarily increase the leverage ratio through the end of the third quarter of 2012. This amendment was approved and deemed effective as of February 17, 2012. As of December 25, 2011, we were in compliance with all covenants.
In connection with the Senior Secured Notes, the Company incurred $0.2 million in fees and expenses, which are amortized over the term of the notes to interest expense on the Consolidated Statement of Operations.
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 Senior Secured Credit Facility, Senior Secured Notes, and cash generated from future operations over the next twelve months.
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 $32.3 million as of December 25, 2011. The scheduled timing of these rental commitments is detailed in our “Contractual Obligations” section.
Contractual Obligations
Our contractual obligations and commercial commitments at December 25, 2011 are summarized below:
Contractual Obligation (amounts in thousands) | Total | Due in less than 1 year | Due in 1-3 years | Due in 3-5 years | Due after 5 years |
Long-term debt(1) | $ 145,038 | $ 5,425 | $ 86,843 | $ 52,770 | $ — |
Capital leases(2) | 1,113 | 574 | 465 | 74 | — |
| Operating leases | 32,255 | 14,407 | 13,578 | 2,042 | 2,228 |
Pension obligations(3) | 48,612 | 4,453 | 9,216 | 9,602 | 25,341 |
Inventory purchase commitments(4) | 1,048 | 1,048 | — | — | — |
| Total contractual cash obligations | $ 228,066 | $ 25,907 | $ 110,102 | $ 64,488 | $ 27,569 |
Commercial Commitments (amounts in thousands) | Total | Due in less than 1 year | Due in 1-3 years | Due in 3-5 years | Due after 5 years |
| Standby letters of credit | $ 1,417 | $ 1,417 | $ — | $ — | $ — |
| Surety bonds | 9,506 | 9,494 | 12 | — | — |
| Total commercial commitments | $ 10,923 | $ 10,911 | $ 12 | $ — | $ — |
| (1) | Includes Senior Secured Credit Facility, Senior Secured Notes, long-term full-recourse factoring liabilities, and related interest payments through maturity of $16,457. |
| (2) | Includes interest payments through maturity of $100. |
| (3) | Amounts represent undiscounted projected benefit payments to our unfunded plans over the next 10 years. The expected benefit payments are estimated based on the same assumptions used to measure our accumulated benefit obligation at the end of 2011 and include benefits attributable to estimated future employee service of current employees. |
| (4) | Inventory purchase commitments represent our legally binding agreements to purchase fixed or minimum quantities of goods at determinable prices. |
The table above excludes our gross liability for uncertain tax positions, including accrued interest and penalties, which totaled $17.9 million as of December 25, 2011, 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 2011, 2010, and 2009 was $5.7 million, $5.2 million, and $5.7 million, respectively.
We review our pension assumptions annually. Our assumptions for the year ended December 25, 2011, were a discount rate of 5.27%, an expected return of 5.75% and an expected rate of increase in future compensation of 2.52%. 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 25, 2011, and December 26, 2010, the weighted average discount rate was 4.77% and 5.27%, 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 components of the unrecognized losses are actuarial losses, a transition obligation, and prior period service costs. 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 12 years. The impact of recognizing the actuarial gains on 2011, 2010, and 2009 pension expense are $0.1 million, $0.1 million, and $0.1 million, respectively. The total projected amortization for these gains in 2012 is approximately $0.3 million.
Exposure to Foreign Currency
We manufacture products in the U.S., the Caribbean, Europe, and the Asia Pacific regions for both the local marketplace and for export to our foreign subsidiaries. The foreign subsidiaries, in turn, sell these products to customers in their respective geographic areas of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations on inter-company receivables and payables. Additionally, the sourcing of product in one currency and the sales of product in a different currency can cause gross margin fluctuations due to changes in currency exchange rates.
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 25, 2011, we had currency forward exchange contracts with notional amounts totaling approximately $26.0 million. The fair values of the forward exchange contracts were reflected as a $0.5 million asset and $0.4 million liability and are included in other current assets and other current liabilities in the accompanying Consolidated Balance Sheets. The contracts are in the various local currencies covering primarily our operations in the U.S., the Caribbean, and Western Europe. Historically, we have not purchased currency forward exchange contracts where it is not economically efficient, specifically for our operations in South America and Asia, with the exception of Japan.
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 2012 to November 2012. 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 25, 2011, the fair value of these cash flow hedges was reflected as a $1.1 million asset and is included in other current assets in the accompanying Consolidated Balance Sheets. The total notional amount of these hedges is $20.3 million (€14.6 million) and the unrealized gain recorded in other comprehensive income was $1.7 million (net of taxes of $32 thousand), of which $1.6 million is expected to be reclassified to earnings over the next twelve months. During the year ended December 25, 2011, a $1.8 million expense related to these foreign currency hedges was recorded to cost of goods sold as the inventory was sold to external parties. The Company recognized a $0.1 million loss during the year ended December 25, 2011 for hedge ineffectiveness.
During the first quarter of 2008, we entered into an interest rate swap agreement with a notional amount of $40 million. The purpose of this interest rate swap agreement was 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 was marked to market and the changes are recorded in other comprehensive income. The interest rate swap matured on February 18, 2010.
Provision for Restructuring
In the third quarter of 2011, the Company approved an expansion of our previous SG&A Restructuring Plan to include manufacturing and other cost reduction initiatives. The expanded global plan including the new Global Restructuring Plan and the SG&A Restructuring Plan will impact over 1,000 existing employees. Total costs of the two plans are expected to approximate $51 million by the end of 2013, with $27 million to $32 million in total anticipated costs for the Global Restructuring Plan and $19 million to $21 million in total anticipated costs for the SG&A Restructuring Plan. Total annual savings of the two plans are expected to approximate $59 million by 2013, with $38 million to $43 million in total anticipated savings for the Global Restructuring Plan and $19 million to $24 million in total anticipated savings for the SG&A Restructuring Plan.
Restructuring expense for the periods ended December 25, 2011, December 26, 2010, and December 27, 2009 were as follows:
(amounts in thousands)
| | December 25, 2011 | December 26, 2010 | December 27, 2009 |
| Global Restructuring Plan | | | |
| Severance and other employee-related charges | $ 11,115 | $ — | $ — |
| Asset impairments | 7,761 | — | — |
| Other exit costs | 519 | — | — |
| SG&A Restructuring Plan | | | |
| Severance and other employee-related charges | 7,015 | 6,993 | 2,828 |
| Asset impairments | 72 | — | — |
| Other exit costs | 2,203 | — | — |
| Manufacturing Restructuring Plan | | | |
| Severance and other employee-related charges | (146) | 641 | 1,481 |
| Other exit costs | 101 | 577 | — |
| 2005 Restructuring Plan | | | |
| Severance and other employee-related charges | — | — | 1,149 |
| Other exit costs | — | — | (57) |
| Total | $ 28,640 | $ 8,211 | $ 5,401 |
Restructuring accrual activity for the periods ended December 25, 2011, and December 26, 2010, were as follows:
(amounts in thousands)
| Fiscal 2011 | Accrual at Beginning of Year | Charged to Earnings | Charge Reversed to Earnings | Cash Payments | Exchange Rate Changes | Accrual at December 25, 2011 |
| Global Restructuring Plan | | | | | | |
| Severance and other employee-related charges | $ — | $ 11,382 | $ (267) | $ (1,268) | $ (137) | $ 9,710 |
Other exit costs(1) | — | 519 | — | (519) | — | — |
| SG&A Restructuring Plan | | | | | | |
| Severance and other employee-related charges | 6,660 | 7,147 | (132) | (6,718) | (239) | 6,718 |
Other exit costs(2) | — | 2,214 | (11) | (1,095) | 1 | 1,109 |
| Manufacturing Restructuring Plan | | | | | | |
| Severance and other employee-related charges | 719 | 69 | (215) | (583) | 10 | — |
Other exit costs(3) | 143 | 112 | (11) | (169) | — | 75 |
| Total | $ 7,522 | $ 21,443 | $ (636) | $ (10,352) | $ (365) | $ 17,612 |
(1) | During 2011, there was a net charge to earnings of $0.5 million primarily due to lease termination costs, inventory and equipment moving costs, restructuring agent costs, legal costs, and gains/losses on sale of assets in connection with the restructuring plan. |
(2) | During 2011, there was a net charge to earnings of $2.2 million primarily due to the closing of an operating facility and one-time payment related to a lease modification for an operating facility as well as lease payment accruals after exiting one of our facilities. |
(3) | During 2010, costs were recorded due to the closing of a manufacturing facility. For the year ended 2011, there was a net charge to earnings of $0.1 million due to other exit costs associated with the manufacturing closings. |
(amounts in thousands)
| Fiscal 2010 | Accrual at Beginning of Year | Charged to Earnings | Charge Reversed to Earnings | Cash Payments | Other | Exchange Rate Changes | Accrual at December 26, 2010 |
| SG&A Restructuring Plan | | | | | | | |
| Severance and other employee-related charges | $ 2,810 | $ 7,732 | $ (739) | $ (3,005) | $ — | $ (138) | $ 6,660 |
| Manufacturing Restructuring Plan | | | | | | | |
| Severance and other employee-related charges | 1,481 | 1,203 | (562) | (1,339) | — | (64) | 719 |
Other exit costs(1) | — | 577 | — | (541) | 107 | — | 143 |
| Total | $ 4,291 | $ 9,512 | $ (1,301) | $ (4,885) | $ 107 | $ (202) | $ 7,522 |
| (1) | During 2010, lease termination and other exit costs of $0.6 million were recorded due to the closing of a manufacturing facility, which were partially offset by a deferred rent charge of $0.1 million previously incurred in prior periods for the manufacturing facility. |
Global Restructuring Plan
During September 2011, we initiated the Global Restructuring Plan focused on further reducing our overall operating expenses by including manufacturing and other cost reduction initiatives, such as consolidating certain manufacturing facilities and administrative functions to improve efficiencies. The first phase of this plan was implemented in the third quarter of 2011 with the remaining phases of the plan expected to be substantially complete by the end of 2013.
As of December 25, 2011, the net charge to earnings of $19.4 million represents the current year activity related to the Global Restructuring Plan. The anticipated total costs related to the plan are expected to approximate $27 million to $32 million, of which $19.4 million have been incurred. The total number of employees planned to be affected by the Global Restructuring Plan is 894, of which 97 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 Global Restructuring Plan are anticipated to be approximately $38 million to $43 million.
SG&A Restructuring Plan
During 2009, we initiated the SG&A Restructuring Plan focused on reducing our overall operating expenses by consolidating certain administrative functions to improve efficiencies. The first phase of this plan was implemented in the fourth quarter of 2009 with the remaining phases of the plan expected to be substantially completed by the end of first quarter of 2012.
As of December 25, 2011, the net charge to earnings of $9.3 million represents the current year activity related to the SG&A Restructuring Plan. The total anticipated costs related to the plan are expected to approximate $19 million to $21 million, of which $19.1 million have been incurred. The total number of employees planned to be affected by the SG&A Restructuring Plan is 368, of which 294 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 SG&A Restructuring Plan are anticipated to be approximately $19 million to $24 million.
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 25, 2011, there was a net increase to earnings of $45 thousand recorded in connection with the Manufacturing Restructuring Plan. This net charge was primarily due to other exit costs associated with the closing of manufacturing facilities partially offset by lower than estimated severance accruals.
The total number of employees planned to be affected by the Manufacturing Restructuring Plan is 420, all of which have been terminated. As of December 25, 2011 the implementation of the Manufacturing Restructuring Plan is substantially complete, with total costs incurred of $4.2 million. Termination benefits are planned to be paid one month to 24 months after termination. Annual savings in connection with the Manufacturing Restructuring Plan are anticipated to be approximately $6 million.
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 2011, 2010, and 2009, 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.
As a result of the plan to divest the Banking Security Systems Integration business unit in 2012, we have assessed the related goodwill asset for impairment. In the fourth quarter ended December 25, 2011, we recorded a goodwill impairment charge of $3.4 million. The impairment charge was recorded in discontinued operations, net of tax on the Consolidated Statement of Operations
Intangible Asset Impairments
Intangible asset impairment expense was $0.6 million ($3.4 million including discontinued operations), without a comparable charge in 2010.
During our 2011 goodwill and indefinite-lived intangibles annual impairment test, we determine that an indefinite-lived trade name intangible asset in our SMS segment was impaired. As a result we recorded an impairment charge of $0.6 million in the fourth quarter of 2011. This charge was recorded in asset impairments on the Consolidated Statement of Operations.
As a result of the plan to divest the Banking Security Systems Integration business unit in 2012, we have assessed the related customer relationship intangible assets for impairment. In the fourth quarter ended December 25, 2011, we recorded an intangible impairment charge of $2.8 million. The impairment charge was recorded in discontinued operations, net of tax 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 affected our customers, and consequently our net revenues have been, and may continue to be impacted in the future. Historically, we have experienced lower sales in the first half of each year.
Analysis of Statement of Operations
The following table presents for the periods indicated certain items in the Consolidated Statement of Operations as a percentage of total revenues and the percentage change in dollar amounts of such items compared to the indicated prior period:
| | Percentage of Total Revenues | | Percentage Change in Dollar Amount | |
| Year ended | December 25, 2011 (Fiscal 2011) | | December 26, 2010 (Fiscal 2010) | | December 27, 2009 (Fiscal 2009) | | Fiscal 2011 vs. Fiscal 2010 | | Fiscal 2010 vs. Fiscal 2009 | |
| | | | (As Revised) | | (As Revised) | | | | | |
| Net revenues: | | | | | | | | | | |
| Shrink Management Solutions | 68.6 | % | 70.2 | % | 71.3 | % | 2.9 | % | 6.2 | % |
| Apparel Labeling Solutions | 22.9 | | 21.0 | | 18.6 | | 14.6 | | 21.9 | |
| Retail Merchandising Solutions | 8.5 | | 8.8 | | 10.1 | | 2.3 | | (6.6) | |
| Net revenues | 100.0 | | 100.0 | | 100.0 | | 5.3 | | 7.8 | |
| Cost of revenues | 61.5 | | 58.2 | | 56.9 | | 11.4 | | 10.2 | |
| Total gross profit | 38.5 | | 41.8 | | 43.1 | | (3.2) | | 4.6 | |
| Selling, general, and administrative expenses | 33.9 | | 32.8 | | 33.9 | | 8.9 | | 4.3 | |
| Research and development | 2.3 | | 2.5 | | 2.7 | | (3.4) | | 0.8 | |
| Restructuring expenses | 3.3 | | 1.0 | | 0.7 | | 248.8 | | 52.0 | |
| Intangible asset impairment | 0.1 | | — | | — | | N/A | | N/A | |
| Litigation settlement | 0.1 | | — | | 0.2 | | N/A | | (100.0) | |
| Acquisition costs | 0.2 | | — | | — | | 343.4 | | (8.2) | |
| Other expense (income) | — | | 0.2 | | 0.2 | | (111.6) | | 19.6 | |
| Other operating income | 2.2 | | — | | — | | N/A | | N/A | |
| Operating income | 0.8 | | 5.3 | | 5.4 | | (85.0) | | 5.1 | |
| Interest income | 0.4 | | 0.4 | | 0.3 | | 8.4 | | 58.2 | |
| Interest expense | 0.9 | | 0.8 | | 1.0 | | 21.8 | | (11.9) | |
| Other gain (loss), net | (0.2) | | (0.3) | | — | | (31.9) | | N/A | |
| Earnings from continuing operations before income taxes | 0.1 | | 4.6 | | 4.7 | | (98.9) | | 5.8 | |
| Income taxes expense | 6.9 | | 1.1 | | 1.5 | | N/A | | (15.6) | |
| Net (loss) earnings from continuing operations | (6.8) | | 3.5 | | 3.2 | | (308.2) | | 15.5 | |
| Loss from discontinued operations, net of tax | (0.9) | | (0.1) | | (0.1) | | N/A | | (15.1) | |
| Net (loss) earnings | (7.7) | | 3.4 | | 3.1 | | (341.3) | | 16.7 | |
| Less: loss attributable to non-controlling interests | — | | — | | (0.1) | | (50.9) | | (74.0) | |
| Net (loss) earnings attributable to Checkpoint Systems, Inc. | (7.7) | % | 3.4 | % | 3.2 | % | (340.1) | % | 15.0 | % |
N/A - Comparative percentages are not meaningful.
Fiscal 2011 compared to Fiscal 2010
Net Revenues
During 2011, revenues increased by $43.7 million, or 5.3%, from $821.6 million to $865.3 million. Foreign currency translation had a positive impact on revenues of $24.3 million for the full year of 2011.
(amounts in millions)
| Year ended | December 25, 2011 (Fiscal 2011) | December 26, 2010 (Fiscal 2010) | | Dollar Amount Change Fiscal 2011 vs. Fiscal 2010 | | Percentage Change Fiscal 2011 vs. Fiscal 2010 | |
| | | (As Revised) | | | | | |
| Net Revenues: | | | | | | | |
| Shrink Management Solutions | $ 593.5 | $ 576.7 | | $ 16.8 | | 2.9 | % |
| Apparel Labeling Solutions | 198.1 | 172.9 | | 25.2 | | 14.6 | |
| Retail Merchandising Solutions | 73.7 | 72.0 | | 1.7 | | 2.3 | |
| Net Revenues | $ 865.3 | $ 821.6 | | $ 43.7 | | 5.3 | % |
Shrink Management Solutions
Shrink Management Solutions revenues increased $16.8 million, or 2.9%, in 2011 compared to 2010. Foreign currency translation had a positive impact of approximately $18.2 million. After considering the impact of the foreign currency translation, the increases in EAS systems, were offset by decreases in EAS consumables and CheckView®.
The EAS systems revenue increase was driven by growth in Asia and Europe resulting from the addition of new customers and also due to the extensions of arrangements and new product installations with existing customers. Historically, new store openings are a significant contributor to EAS systems revenues. These have been scaled back by many of our European and North American based customers, who have increased their focus on margin improvement at existing stores.
The EAS consumables revenue decrease was primarily due to Hard Tag @ Source™ revenues, which were below levels of one year ago when we experienced high volumes associated with the initial program roll-out to a major European retailer. A decline in Europe EAS label revenues due to reduced volumes with certain customers was also a factor.
The CheckView® revenue decrease was due to declines in installations and services with existing customers, primarily in the U.S. Our CheckView® business is dependent on new store openings and the capital spending of our customers, all of which have been impacted, and may continue to be impacted in the future by current economic trends.
Apparel Labeling Solutions
Apparel Labeling Solutions revenues increased $25.2 million, or 14.6%, in 2011 compared to 2010. After considering the foreign currency translation positive impact of approximately $2.1 million, the remaining increase of $23.1 million was due to $35.3 million in revenues from the acquisition of Shore to Shore on May 16, 2011, which were offset by a $12.2 million decline in organic revenues, primarily due a decline in sales volumes in Europe.
Retail Merchandising Solutions
Retail Merchandising Solutions revenues increased $1.7 million, or 2.3%, in 2011 compared to 2010. After considering the foreign currency translation positive impact of approximately $4.0 million, the decrease in revenues is primarily related to a decrease in Hand-held Labeling Solutions (HLS). HLS has faced difficult trends due to the impact of continued shifts in market demand for HLS products.
Gross Profit
During 2011, gross profit decreased $10.9 million, or 3.2%, from $343.8 million to $332.9 million. The positive impact of foreign currency translation on gross profit was approximately $7.5 million. Gross profit, as a percentage of net revenues, decreased from 41.8% to 38.5%.
Shrink Management Solutions
Shrink Management Solutions gross profit as a percentage of Shrink Management Solutions revenues decreased to 40.6% in 2011, from 42.8% in 2010. The decrease in the gross profit percentage of Shrink Management Solutions was due primarily to lower margins in CheckView®, Alpha®, EAS consumables, and EAS systems. The decline in CheckView® margins was due to customer product and service mix as well as project timing and increased costs associated with inventory adjustments. The decline in Alpha® margins was due to customer and product mix coupled with rising raw material prices. The decline in EAS consumables margins was due to delays in capturing expected cost efficiencies as we expanded new product and specialty label capacity, coupled with pricing that does not yet reflect the enhanced capabilities of these products that we experienced earlier this year. EAS consumables margins were also impacted by the year over year reduction in higher margin Hard Tag @ Source™. The decline in EAS Systems margins were driven by lower volumes and product mix.
Apparel Labeling Solutions
Apparel Labeling Solutions gross profit as a percentage of Apparel Labeling Solutions revenues decreased to 28.7% in 2011, from 35.7% in 2010. The decline was largely attributable to weaker operational performance at certain Asia facilities, inventory adjustments, and the impact of the Shore to Shore acquisition, which includes a purchase accounting based mark-up of acquired inventory as well as the deferred transfer to the Company of certain Asia based printing operations. The efficiency issues that impacted EAS consumables margins in the Shrink Management Solutions segment also contributed to the Apparel Labeling Solutions margin decline.
Retail Merchandising Solutions
Retail Merchandising Solutions gross profit as a percentage of Retail Merchandising Solutions revenues decreased to 47.3% in 2011, from 48.5% in 2010. The decrease in Retail Merchandising Solutions gross profit percentage was due primarily to lower margins in HLS resulting from unfavorable manufacturing variances related to lower volumes.
Selling, General, and Administrative Expenses
Selling, general, and administrative (SG&A) expenses increased $23.9 million, or 8.9%, in 2011 compared to 2010. Foreign currency translation increased SG&A expenses by approximately $8.0 million. The remaining increase in SG&A expense of $15.9 million was due primarily to the impact of the Shore to Shore acquisition, increases in selling expenses, and temporary increases in consulting, operations and shared services expenses resulting from the 2011 North American and Caribbean implementation of our company wide ERP system. Also contributing to the increase were additions to staff to add capabilities required for future process and cost improvement initiatives, and increased commissions expenses associated with the renewal/extension of sales-type leases in the 2011. Offsetting these increases were the effects of an incentive compensation adjustment, fee reductions from external service providers and decreased marketing activities. We expect the impact of the SG&A and enhanced Global Restructuring program to contribute to meaningful reductions in SG&A expense.
Research and Development Expenses
Research and development (R&D) expenses were $19.8 million, or 2.3% of revenues, in 2011 and $20.5 million, or 2.5% of revenues in 2010.
Restructuring Expenses
Restructuring expenses were $28.6 million, or 3.3% of revenues in 2011 compared to $8.2 million or 1.0% of revenues in 2010. The increase is due to the implementation of the Global Restructuring Plan and continued SG&A Plan activities, which included $7.8 million in restructuring related asset impairment charges for various locations around the world as well as $18.0 million of severance charges and other costs of $2.8 million primarily in connection with the enhanced Global Restructuring Plan and the SG&A Restructuring Plan.
Intangible Asset Impairments
Intangible asset impairment expense was $0.6 million in 2011, without a comparable charge in 2010. The 2011 expense is detailed in the “Intangible Asset Impairments” section following “Liquidity and Capital Resources.”
Litigation Settlement Expense
Litigation settlement expense was $0.9 million or 0.1% of revenues in 2011 without comparable expense in 2010. The litigation settlement expense is primarily attributable to a $0.9 million accrual recorded during the fourth quarter of 2011 related to a patent infringement counter suit in which the Company was found liable for the other party’s associated legal fees. The Company has submitted an appeal of the ruling to the Court but has accrued the full amount of the judgment.
Acquisition Costs
Acquisition costs were $2.3 million in 2011 and $0.5 million in 2010.
Other Expense (Income)
Other expense (income) was $0.2 million of income in 2011 compared to $1.5 million of expense in 2010. These amounts represent the income statement impacts of the improper and fraudulent activities of a certain former employee of the Company’s Canada sales subsidiary.
Other Operating Income
Other operating income was $19.3 million, or 2.2% of revenues in 2011 without comparable income in 2010. The increase was due to the sales of customer related receivables associated with the renewal and extension of sales-type lease arrangements. The customers are based mostly in Europe and relate to our Shrink Management Solutions segment.
Interest Income and Interest Expense
Interest income in 2011 increased $0.3 million from the comparable period in 2010. The increase in interest income was primarily due to higher subsidiary cash balances and increased interest income recognized for sales-type leases during 2011 compared to 2010.
Interest expense for 2011 increased $1.4 million from the comparable period in 2010 due to an increase in debt related to the Shore to Shore acquisition as well as the funding of the temporary cash flow impact of the 2011 ERP implementation in North America and Caribbean operations. Interest expense was also impacted by an increase in interest charged on our revolving credit facility due to an increase in our total leverage ratio.
Other Gain (Loss), net
Other gain (loss), net was a net loss of $1.5 million in 2011 compared to a net loss of $2.2 million in 2010. The change in other net loss was primarily due to a $2.1 million foreign currency loss during 2011 compared to a $2.7 million foreign currency loss during 2010. The primary drivers of the change in foreign currency loss were fluctuations in the value of the U.S. Dollar to the Euro and the Japanese Yen.
Income Taxes
The effective rate of tax at December 25, 2011 was 13,911.2%. At December 26, 2010, the effective tax rate was 24.8%. The 2011 tax rate was primarily impacted by a charge of $47.7 million to establish a valuation allowance on the U.S. Federal net deferred tax assets.
The 2010 tax rate was impacted by a $7.9 million release of tax reserves, partially offset by charges of $5.1 million related to establishing a full valuation allowance against the U.S. State deferred tax assets and provision to return adjustments of $4.0 million and $1.1 million, respectively. The 2010 effective tax rate was also impacted by a $1.7 million adjustment of an acquisition related liability pertaining to the period prior to the acquisition date.
Loss from Discontinued Operations, Net of Tax
Losses from discontinued operations, net of tax, were $7.5 million and $0.8 million in 2011 and 2010, respectively. In December of 2011, we began actively marketing our Banking Security Systems Integration business unit included in our Shrink Management Solutions segment. As a result of this divestiture decision, we are accounting for this business as discontinued operations. The 2011 loss from discontinued operations included an impairment charge of $5.9 million, net of tax.
Net (Loss) Earnings Attributable to Checkpoint Systems, Inc.
Net loss attributable to Checkpoint Systems, Inc. was $66.6 million, or $1.64 per diluted share, for 2011 compared to net earnings attributable to Checkpoint Systems, Inc. of $27.7 million, or $0.69 per diluted share, for 2010. The weighted-average number of shares used in the diluted earnings per share computation was 40.5 million and 40.4 million for 2011 and 2010, respectively.
Fiscal 2010 compared to Fiscal 2009
Net Revenues
During 2010, revenues increased by $59.4 million, or 7.8%, from $762.2 million to $821.6 million. Foreign currency translation had a negative impact on revenues of $4.3 million for the full year of 2010.
(amounts in millions)
| Year ended | December 26, 2010 (Fiscal 2010) | December 27, 2009 (Fiscal 2009) | | Dollar Amount Change Fiscal 2010 vs. Fiscal 2009 | | Percentage Change Fiscal 2010 vs. Fiscal 2009 | |
| | (As Revised) | (As Revised) | | | | | |
| Net Revenues: | | | | | | | |
| Shrink Management Solutions | $ 576.7 | $ 543.2 | | $ 33.5 | | 6.2 | % |
| Apparel Labeling Solutions | 172.9 | 141.9 | | 31.0 | | 21.9 | |
| Retail Merchandising Solutions | 72.0 | 77.1 | | (5.1) | | (6.6) | |
| Net Revenues | $ 821.6 | $ 762.2 | | $ 59.4 | | 7.8 | % |
Shrink Management Solutions
Shrink Management Solutions revenues increased $33.5 million, or 6.2%, in 2010 compared to 2009. Foreign currency translation had a negative impact of approximately $0.8 million. The increase in our SMS business was due to organic growth in our Alpha business, CheckView® business, and EAS consumables business, of $42.5 million, $14.0 million, and $4.9 million, respectively. These increases were partially offset by decreases in our EAS systems business, Merchandise Visibility (RFID) business, and Library business revenues of $20.6 million, $4.8 million, and $1.8 million, respectively.
Our Alpha business revenues increased $42.5 million in 2010 as compared to 2009. The increase was due to increases in revenues in all regions as a result of a general increase in demand for Alpha® products as market conditions for high theft prevention products improved during 2010, and is expected to continue in 2011.
CheckView® revenues increased $14.0 million in 2010 as compared to 2009. The increase was due to improvements in installations and on-going services with existing customers, primarily in the U.S. Although revenues have improved since last year, our CheckView® business is dependent on new store openings and the capital spending of our customers, all of which have been impacted, and may continue to be impacted in the future by current economic trends.
EAS consumables revenues increased $4.9 million in 2010 as compared to 2009. The increase was primarily due to revenues from our hard tag at source program in Europe. This was partially offset by a decrease in revenue in our North American hard tag at source program as it transitioned from high volumes associated with of initial roll-out to lower program maintenance level volumes.
EAS systems revenues decreased $20.6 million in 2010 as compared to 2009. The decrease was primarily due to declines in revenues primarily in Europe. Our EAS systems business is dependent upon new store openings and the liquidity and financial condition of our customers, all of which have 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™ and other faster payback products in our EAS consumables and Alpha businesses.
Merchandise Visibility (RFID) revenues decreased $4.8 million in 2010 as compared to 2009. The decrease was due to decreases in revenues primarily in Europe. This decrease was due to a substantial roll-out with RFID enabled technology in 2009, which did not occur in 2010.
Library revenues decreased $1.8 million in 2010 as compared to the 2009. The decline was due to reduced distributor revenues.
Apparel Labeling Solutions
Apparel Labeling Solutions revenues increased $31.0 million, or 21.9%, in 2010 as compared to 2009. Foreign currency translation had a negative impact of approximately $2.2 million. Included in 2010 were $21.9 million of non-comparable Brilliant Label revenues since our Brilliant Label business was acquired in August 2009. The remaining increase of $11.3 million was primarily due to increases in Europe and Asia as a result of higher demand from our apparel retailer customers and changes in product mix.
Retail Merchandising Solutions
Retail Merchandising Solutions revenues decreased $5.1 million, or 6.6%, in 2010 as compared to 2009. Foreign currency translation had a negative impact of approximately $1.3 million. The remaining decrease of $3.8 million in our Retail Merchandising Solutions business was due to a decrease in our revenues from Retail Display Solutions (RDS) of $3.4 million and a decrease in revenues from Hand-held Labeling Solutions (HLS) of $0.4 million. RDS declined due to a general reduction of store remodel work in Europe. We anticipate RDS and HLS to continue to face difficult revenue trends in 2011 due to the impact of pricing pressures on the RDS business and continued shifts in market demand for HLS products.
Gross Profit
During 2010, gross profit increased $15.0 million, or 4.6%, from $328.8 million to $343.8 million. The negative impact of foreign currency translation on gross profit was approximately $1.1 million. Gross profit, as a percentage of net revenues, decreased from 43.1% to 41.8%.
Shrink Management Solutions
Shrink Management Solutions gross profit as a percentage of Shrink Management Solutions revenue decreased to 42.8% in 2010, from 44.1% in 2009. The decrease in the gross profit percentage of Shrink Management Solutions was primarily due to margin decreases in our CheckView®, EAS Consumables, EAS Systems, and Alpha businesses. Our CheckView® business margins decreased due to increased field service costs and declines in installation and monitoring margins. The decline in EAS Consumables margin was due to higher product costs, changes in product mix and pricing pressures in certain markets. EAS Systems margins decreased primarily due to an increase in field service costs as a percentage of revenues in 2010. The increase in field service costs in 2010 was due primarily to reduced salary expense in 2009 related to our temporary global payroll reduction and furlough program and decreased EAS Systems revenues to absorb field service costs. Alpha® margins declined slightly due to an unfavorable product mix and an increase in warranty reserve that was offset by favorable manufacturing variances related to the higher volumes in 2010.
Apparel Labeling Solutions
Apparel Labeling Solutions gross profit as a percentage of Apparel Labeling Solutions revenues decreased to 35.7% in 2010 from 37.0% in 2009. Apparel Labeling Solutions margins decreased primarily due to changes in our product mix and due to non-comparable lower margins in our Brilliant Label business resulting from its acquisition in August 2009.
Retail Merchandising Solutions
The Retail Merchandising Solutions gross profit as a percentage of Retail Merchandising Solutions revenues increased to 48.5% in 2010 from 47.5% in 2009. This increase in Retail Merchandising Solutions gross profit percentage was primarily due to improved margins in our HLS business resulting from improved manufacturing efficiencies. The increase in HLS margin was partially offset by a decrease in RDS. The decrease in RDS was due primarily to increased product and freight costs in 2010.
Selling, General, and Administrative Expenses
Selling, general, and administrative (SG&A) expenses increased $11.0 million, or 4.3%, in 2010 compared to 2009. Foreign currency translation decreased SG&A expenses by approximately $2.2 million. Included in SG&A expense was $5.4 million of non-comparable expense incurred during 2010 related to our Brilliant acquisition in August 2009. The increase in SG&A expense was also due to the adjustment of an acquisition related liability of $0.8 million pertaining to the period prior to the acquisition date. The remaining increase in SG&A expense of $7.0 million was primarily due to increased sales and marketing expense related to the increase in revenues over the prior year and increased expenditures used to upgrade information technology and improve our production capabilities. The increase in SG&A expense was also due to the impact of our temporary global payroll reduction and furlough program, which reduced costs during 2009. These reductions in SG&A were partially offset by an adjustment to reduce performance incentive accruals in 2010, without a comparable reduction in 2009.
Research and Development Expenses
Research and development (R&D) expenses were $20.5 million, or 2.5% of revenues, in 2010 and $20.4 million, or 2.7% of revenues in 2009.
Restructuring Expenses
Restructuring expenses were $8.2 million, or 1.0% of revenues in 2010 compared to $5.4 million or 0.7% of revenues in 2009. The increase in 2010 is due to increased severance and other employee-related charges incurred in connection with the SG&A Restructuring Plan, which was first implemented in the fourth quarter of 2009.
Litigation Settlement
Litigation settlement expense was $1.3 million in 2009, with no comparable charge in 2010. Included in litigation expense in 2009 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.
Acquisition Costs
Acquisition costs were $0.5 million in 2010 and $0.6 million in 2009.
Other Expense (Income)
Other expense (income) was $1.5 million expense in 2010 compared to $1.3 million expense in 2009. These amounts represent the income statement impacts of the improper and fraudulent activities of a certain former employee of the Company’s Canada sales subsidiary.
Interest Income and Interest Expense
Interest income in 2010 increased $1.1 million from the comparable period in 2009. The increase in interest income was due to higher cash balances and increased interest income recognized for sales-type leases during 2010 compared to 2009.
Interest expense for 2010 decreased $0.9 million from the comparable period in 2009. The decrease in interest expense was primarily due to reduced interest rates related to the expiration of an interest rate swap during the first quarter of 2010.
Other Gain (Loss), net
Other gain (loss), net was a net loss of $2.2 million in 2010 compared to a net loss of $0.2 million in 2009. The increase of $2.0 million was primarily due 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.
Income Taxes
The effective rate of tax at December 26, 2010 was 24.8%. At December 27, 2009, the effective tax rate was 31.1%. The 2010 tax rate was impacted by a $7.9 million release of tax reserves, partially offset by charges of $5.1 million related to establishing a full valuation allowance against the U.S. State deferred tax assets and provision to return adjustments of $4.0 million and $1.1 million, respectively. The 2010 effective tax rate was also impacted by a $1.7 million adjustment of an acquisition related liability pertaining to the period prior to the acquisition date.
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 million 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.
Loss from Discontinued Operations, Net of Tax
Losses from discontinued operations, net of tax, were $0.7 million and $0.9 million in 2010 and 2009, respectively. In December of 2011, we began actively marketing our Banking Security Systems Integration business unit included in our Shrink Management Solutions segment. As a result of this divestiture decision, we are accounting for this business as discontinued operations.
Net Earnings Attributable to Checkpoint Systems, Inc.
Net earnings attributable to Checkpoint Systems, Inc. were $27.7 million, or $0.69 per diluted share, for 2010 compared to $24.1 million, or $0.61 per diluted share, for 2009. The weighted-average number of shares used in the diluted earnings per share computation was 40.4 million and 39.6 million for 2010 and 2009, respectively.
Other Matters
Recently Adopted Accounting 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 are effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, which for us was December 27, 2010, the first day of our 2011 fiscal year. The adoption of these standards did not have a material impact on our Consolidated Results of Operations and Financial Condition.
In April 2010, FASB issued ASU 2010-13 "Compensation-Stock Compensation (Topic 718) Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades" (ASU 2010-13). Topic 718 is amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The amendments in this standard are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010, which for us was December 27, 2010, the first day of our 2011 fiscal year. The guidance should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings for all outstanding awards as of the beginning of the fiscal year in which the amendments are initially applied. The adoption of the standard did not have a material impact on our Consolidated Results of Operations and Financial Condition.
In December 2010, FASB issued ASU 2010-28 “Intangibles - Goodwill and Other (Topic 350)” (ASU 2010-28). Topic 350 is amended to clarify the requirement to test for impairment of goodwill. Topic 350 has required that goodwill be tested for impairment if the carrying amount of a reporting unit exceeds its fair value. Under ASU 2010-28, when the carrying amount of a reporting unit is zero or negative an entity must assume that it is more likely than not that a goodwill impairment exists, perform an additional test to determine whether goodwill has been impaired and calculate the amount of that impairment. The modifications to ASC Topic 350 resulting from the issuance of ASU 2010-28 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2010, which for us was December 27, 2010, the first day of our 2011 fiscal year. The adoption of the standard did not have a material impact on our Consolidated Results of Operations and Financial Condition.
In December 2010, the FASB issued ASU 2010-29 “Business Combinations (Topic 805) - Disclosure of Supplementary Pro Forma Information for Business Combinations” (ASU 2010-29). This standard update clarifies that, when presenting comparative financial statements, SEC registrants should disclose revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for material (either on an individual or aggregate basis) business combinations entered into in fiscal years beginning on or after December 15, 2010, which for us was December 27, 2010, the first day of our 2011 fiscal year. The adoption of the standard did not have a material impact on our Consolidated Financial Statements.
In January 2011, the FASB issued ASU 2011-01 “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20” (ASU 2011-01). This standard update defers the effective date of new disclosure requirements for troubled debt restructurings prescribed by ASU 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses." ASU 2011-01 is effective upon issuance. The adoption of the standard did not have a material impact on our Consolidated Results of Operations and Financial Condition.
In April 2011, the FASB issued ASU 2011-02 “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” (ASU 2011-02). The amendments to Topic 310 (Receivables) clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulties and when a loan modification or restructuring is considered a troubled debt restructuring. In determining whether a loan modification represents a troubled debt restructuring, an entity should consider whether the debtor is experiencing financial difficulty and the lender has granted a concession to the borrower. ASU 2011-02 is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of the standard did not have a material impact on our Consolidated Results of Operations and Financial Condition.
New Accounting Pronouncements and Other Standards
In April 2011, the FASB issued ASU 2011-03 “Reconsideration of Effective Control for Repurchase Agreements” (ASU 2011-03). The amendments to Topic 860 (Transfers and Servicing) affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments do not affect other transfers of financial assets. The amendments remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. ASU 2011-03 is effective for the first interim or annual periods beginning on or after December 15, 2011, and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. We do not expect the adoption of the standard to have a material impact on our Consolidated Results of Operations and Financial Condition.
In May 2011, the FASB issued ASU 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). The amendments to Topic 820 (Fair Value Measurement) establish common requirements for measuring fair value and related disclosures in accordance with accounting principles generally accepted in the United Sates and international financial reporting standards. This amendment did not require additional fair value measurements. ASU 2011-04 is effective for the first interim and annual periods beginning after December 15, 2011, and should be applied prospectively. We do not expect the adoption of the standard to have a material effect on our Consolidated Results of Operations and Financial Condition.
In June 2011, the FASB issued ASU 2011-05 “Presentation of Comprehensive Income” (ASU 2011-05). The amendments to Topic 220 (Comprehensive Income) eliminate the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders' equity, require consecutive presentation of the statement of net income and other comprehensive income and require reclassification adjustments from other comprehensive income to net income to be shown on the financial statements. In December 2011, the FASB issued ASU 2011-12, "Comprehensive Income -- Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in ASU 2011-05," to defer the effective date of the provision requiring entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. However, the remaining requirements of ASU 2011-05 are effective for the first interim and annual periods beginning after December 15, 2011. We do not expect the adoption of the standard to have a material effect on our Consolidated Results of Operations and Financial Condition.
In September 2011, the FASB issued ASU 2011-08, "Intangibles – Goodwill and Other," (ASU 2011-08), which amends current guidance to allow a company to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The amendment also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We do not expect the adoption of the standard to have a material effect on our Consolidated Results of Operations and Financial Condition.
In September 2011, the FASB issued ASU 2011-09, "Compensation – Retirement Benefits – Multiemployer Plans (Subtopic 715-80)," (ASU 2011-09). ASU 2011-09 requires that employers provide additional separate disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans. The additional quantitative and qualitative disclosures will provide users with more detailed information about an employer's involvement in multiemployer pension plans. ASU 2011-09 is effective for fiscal years ending after December 15, 2011. The adoption of this standard will not have a material effect on our Consolidated Results of Operations and Financial Condition.
In December 2011, the FASB issued ASU 2011-11, "Balance Sheet – Disclosures about Offsetting Assets and Liabilities (Topic 210-20)," (ASU 2011-11). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 is effective for fiscal years beginning on or after January 1, 2013, with retrospective application for all comparable periods presented. The adoption of this standard will not have a material effect on our Consolidated Results of Operations and Financial Condition.
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 25, 2011, 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 $0.5 million asset position and $0.4 million liability position as of December 25, 2011, and a $27 thousand asset position and $20 thousand liability position as of December 26, 2010. 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 25, 2011, a 10% strengthening of the U.S. dollar versus other currencies would result in an increase of $0.9 million in the net asset position, while a 10% weakening of the dollar versus all other currencies would result in a decrease of $0.9 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. Certain of our foreign subsidiaries have restrictions on the remittance of funds generated by our operations outside the U.S. At December 25, 2011, the majority of our unremitted earnings of subsidiaries outside the United States were deemed not to be permanently reinvested.
Index to Consolidated Financial Statements
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 (loss) income, equity and cash flows present fairly, in all material respects, the financial position of Checkpoint Systems, Inc. and its subsidiaries at December 25, 2011 and December 26, 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 25, 2011 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 did not maintain, in all material respects, effective internal control over financial reporting as of December 25, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), because a material weakness in internal control over financial reporting related to ineffective controls to prevent or detect management override of controls at certain foreign subsidiaries existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2011 consolidated financial statements and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. 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 referred to above. 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.
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 the Shore to Shore business from its assessment of internal control over financial reporting as of December 25, 2011 because it was acquired by the Company in a purchase business combination in May 2011. We have also excluded the Shore to Shore business from our audit of internal control over financial reporting. The Shore to Shore business is a wholly-owned subsidiary whose total assets and total revenues represent 9.8% or $102.9 million and 4.1% or $35.3 million, respectively, of the related consolidated financial statement amounts as of and for the year ended December 25, 2011.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 1, 2012
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
| | December 25, 2011 | December 26, 2010 |
| | | (As Revised) |
| ASSETS | | |
| CURRENT ASSETS: | | |
| Cash and cash equivalents | $ 93,481 | $ 172,473 |
| Restricted cash | 291 | 140 |
| Accounts receivable, net of allowance of $12,627 and $10,927 | 208,889 | 178,076 |
| Inventories | 130,987 | 106,694 |
| Other current assets | 44,548 | 32,542 |
| Deferred income taxes | 7,720 | 20,622 |
| Assets of discontinued operations held for sale | 6,320 | — |
| Total Current Assets | 492,236 | 510,547 |
| REVENUE EQUIPMENT ON OPERATING LEASE, net | 1,920 | 2,340 |
| PROPERTY, PLANT, AND EQUIPMENT, net | 132,161 | 121,258 |
| GOODWILL | 286,103 | 231,325 |
| OTHER INTANGIBLES, net | 84,557 | 90,823 |
| DEFERRED INCOME TAXES | 27,241 | 53,425 |
| OTHER ASSETS | 20,263 | 24,192 |
| TOTAL ASSETS | $ 1,044,481 | $ 1,033,910 |
| | | |
| LIABILITIES AND EQUITY | | |
| CURRENT LIABILITIES: | | |
| Short-term borrowings and current portion of long-term debt | $ 21,778 | $ 22,225 |
| Accounts payable | 68,886 | 63,585 |
| Accrued compensation and related taxes | 27,620 | 29,308 |
| Other accrued expenses | 58,242 | 47,646 |
| Income taxes | 4,080 | 5,160 |
| Unearned revenues | 22,142 | 12,196 |
| Restructuring reserve | 17,612 | 7,522 |
| Accrued pensions — current | 4,453 | 4,358 |
| Other current liabilities | 32,867 | 23,409 |
| Liabilities of discontinued operations held for sale | 1,440 | — |
| Total Current Liabilities | 259,120 | 215,409 |
| LONG-TERM DEBT, LESS CURRENT MATURITIES | 128,684 | 119,724 |
| ACCRUED PENSIONS | 78,815 | 75,396 |
| OTHER LONG-TERM LIABILITIES | 29,894 | 30,502 |
| DEFERRED INCOME TAXES | 18,628 | 11,325 |
| COMMITMENTS AND CONTINGENCIES | | |
| CHECKPOINT SYSTEMS, INC. STOCKHOLDERS’ EQUITY: | | |
| Preferred stock, no par value, 500,000 shares authorized, none issued | — | — |
Common stock, par value $.10 per share, 100,000,000 shares authorized, issued 44,241,105 and 43,843,095 shares | 4,424 | 4,384 |
| Additional capital | 418,211 | 407,383 |
| Retained earnings | 164,268 | 230,837 |
| Common stock in treasury, at cost, 4,035,912 and 4,035,912 shares | (71,520) | (71,520) |
| Accumulated other comprehensive income, net of tax | 12,741 | 10,470 |
| TOTAL CHECKPOINT SYSTEMS, INC. STOCKHOLDERS’ EQUITY | 528,124 | 581,554 |
| NON-CONTROLLING INTERESTS | 1,216 | — |
| TOTAL EQUITY | 529,340 | 581,554 |
| TOTAL LIABILITIES AND EQUITY | $ 1,044,481 | $ 1,033,910 |
See Notes to the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
| Year ended | December 25, 2011 | December 26, 2010 | December 27, 2009 |
| | | (As Revised) | (As Revised) |
| Net revenues | $ 865,343 | $ 821,678 | $ 762,251 |
| Cost of revenues | 532,493 | 477,904 | 433,478 |
| Gross profit | 332,850 | 343,774 | 328,773 |
| Selling, general, and administrative expenses | 293,491 | 269,625 | 258,609 |
| Research and development | 19,813 | 20,507 | 20,354 |
| Restructuring expenses | 28,640 | 8,211 | 5,401 |
| Intangible asset impairment | 592 | — | — |
| Litigation settlement | 943 | — | 1,300 |
| Acquisition costs | 2,319 | 523 | 570 |
| Other expense (income) | (179) | 1,537 | 1,285 |
| Other operating income | 19,262 | — | — |
| Operating income | 6,493 | 43,371 | 41,254 |
| Interest income | 3,381 | 3,118 | 1,971 |
| Interest expense | 7,923 | 6,507 | 7,386 |
| Other gain (loss), net | (1,523) | (2,237) | (180) |
| Earnings from continuing operations before income taxes | 428 | 37,745 | 35,659 |
| Income taxes expense | 59,540 | 9,358 | 11,083 |
| Net (loss) earnings from continuing operations | (59,112) | 28,387 | 24,576 |
| Loss from discontinued operations, net of tax benefit of $345, $396, and $556 | (7,514) | (773) | (911) |
| Net (loss) earnings | (66,626) | 27,614 | 23,665 |
| Less: loss attributable to non-controlling interests | (57) | (116) | (447) |
| Net (loss) earnings attributable to Checkpoint Systems, Inc. | $ (66,569) | $ 27,730 | $ 24,112 |
| | | | |
| Basic (loss) earnings attributable to Checkpoint Systems, Inc. per share: | | | |
| (Loss) earnings from continuing operations | $ (1.46) | $ 0.71 | $ 0.63 |
| Loss from discontinued operations, net of tax | $ (0.18) | $ (0.02) | $ (0.02) |
| Basic (loss) earnings attributable to Checkpoint Systems, Inc. per share | $ (1.64) | $ 0.69 | $ 0.61 |
| Diluted (loss) earnings attributable to Checkpoint Systems, Inc. per share: | | | |
| (Loss) earnings from continuing operations | $ (1.46) | $ 0.71 | $ 0.63 |
| Loss from discontinued operations, net of tax | $ (0.18) | $ (0.02) | $ (0.02) |
| Diluted (loss) earnings attributable to Checkpoint Systems, Inc. per share | $ (1.64) | $ 0.69 | $ 0.61 |
See Notes to the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF EQUITY
(amounts in thousands)
| | Checkpoint Systems, Inc. Stockholders | | |
| | Common Stock | Additional | Retained | Treasury Stock | Accumulated Other Comprehensive | Non-controlling | Total |
| | Shares | Amount | Capital | Earnings | Shares | Amount | Income | Interests | Equity |
| Balance, December 28, 2008 (As Revised) | 42,748 | $ 4,274 | $ 381,498 | $ 178,995 | 4,036 | $ (71,520) | $ 16,236 | $ 924 | $ 510,407 |
| Net earnings (loss) (As Revised) | | | | 24,112 | | | | (447) | 23,665 |
| Exercise of stock-based compensation and awards released | 330 | 33 | 812 | | | | | | 845 |
| Tax shortfall on stock-based compensation | | | (481) | | | | | | (481) |
| Stock-based compensation expense | | | 7,135 | | | | | | 7,135 |
| Deferred compensation plan | | | 1,415 | | | | | | 1,415 |
| Amortization of pension plan actuarial losses, net of tax | | | | | | | 84 | | 84 |
| Change in realized and unrealized gains on derivative hedges, net of tax | | | | | | | (1,182) | | (1,182) |
| Recognized gain on pension, net of tax | | | | | | | 1,934 | | 1,934 |
| Foreign currency translation adjustment (As Revised) | | | | | | | 11,379 | 357 | 11,736 |
| Balance, December 27, 2009 (As Revised) | 43,078 | $ 4,307 | $ 390,379 | $ 203,107 | 4,036 | $ (71,520) | $ 28,451 | $ 834 | $ 555,558 |
| Net earnings (loss) (As Revised) | | | | 27,730 | | | | (116) | 27,614 |
| Exercise of stock-based compensation and awards released | 765 | 77 | 5,945 | | | | | | 6,022 |
| Tax benefit on stock-based compensation | | | 133 | | | | | | 133 |
| Stock-based compensation expense | | | 8,751 | | | | | | 8,751 |
| Deferred compensation plan | | | 2,112 | | | | | | 2,112 |
| Repurchase of non-controlling interests | | | 63 | | | | | (755) | (692) |
| Amortization of pension plan actuarial losses, net of tax | | | | | | | 103 | | 103 |
| Change in realized and unrealized gains on derivative hedges, net of tax | | | | | | | 679 | | 679 |
| Recognized loss on pension, net of tax | | | | | | | (3,405) | | (3,405) |
| Foreign currency translation adjustment (As Revised) | | | | | | | (15,358) | 37 | (15,321) |
| Balance, December 26, 2010 (As Revised) | 43,843 | $ 4,384 | $ 407,383 | $ 230,837 | 4,036 | $ (71,520) | $ 10,470 | — | $ 581,554 |
| Net loss | | | | (66,569) | | | | (57) | (66,626) |
| Exercise of stock-based compensation and awards released | 398 | 40 | 2,170 | | | | | | 2,210 |
| Tax benefit on stock-based compensation | | | 77 | | | | | | 77 |
| Stock-based compensation expense | | | 7,408 | | | | | | 7,408 |
| Deferred compensation plan | | | 1,173 | | | | | | 1,173 |
| Non-controlling interest of acquired entities | | | | | | | | 1,271 | 1,271 |
| Amortization of pension plan actuarial losses, net of tax | | | | | | | 137 | | 137 |
| Change in realized and unrealized gains on derivative hedges, net of tax | | | | | | | 1,165 | | 1,165 |
| Recognized loss on pension, net of tax | | | | | | | (2,571) | | (2,571) |
| Foreign currency translation adjustment | | | | | | | 3,540 | 2 | 3,542 |
| Balance, December 25, 2011 | 44,241 | $ 4,424 | $ 418,211 | $ 164,268 | 4,036 | $ (71,520) | $ 12,741 | $ 1,216 | $ 529,340 |
See Notes to the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(amounts in thousands)
| Year ended | December 25, 2011 | December 26, 2010 | December 27, 2009 |
| | | (As Revised) | (As Revised) |
| Net (loss) earnings | $ (66,626) | $ 27,614 | $ 23,665 |
| Amortization of pension plan actuarial losses, net of tax | 137 | 103 | 84 |
| Change in realized and unrealized gains (losses) on derivative hedges, net of tax | 1,165 | 679 | (1,182) |
| Recognized (loss) gain on pension, net of tax | (2,571) | (3,405) | 1,934 |
| Foreign currency translation adjustment | 3,542 | (15,321) | 11,736 |
| Comprehensive (loss) income | $ (64,353) | $ 9,670 | $ 36,237 |
| Less: comprehensive loss attributable to non-controlling interests | (55) | (834) | (90) |
| Comprehensive (loss) income attributable to Checkpoint Systems, Inc. | $ (64,298) | $ 10,504 | $ 36,327 |
See Notes to the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
| Year ended | December 25, 2011 | December 26, 2010 | December 27, 2009 |
| | | (As Revised) | (As Revised) |
| Cash flows from operating activities: | | | |
| Net (loss) earnings | $ (66,626) | $ 27,614 | $ 23,665 |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | | |
| Depreciation and amortization | 37,348 | 34,477 | 32,325 |
| Deferred taxes | 47,612 | (2,859) | (6,911) |
| Stock-based compensation | 7,408 | 8,751 | 7,135 |
| Excess tax benefit on stock compensation | (634) | (1,662) | (12) |
| Provision for losses on accounts receivable | 3,765 | 123 | (117) |
| Intangible impairment | 3,373 | — | — |
| Goodwill impairment | 3,411 | — | — |
| Loss on disposal of fixed assets | 106 | 133 | 314 |
| Restructuring-related asset impairment | 7,843 | — | — |
| (Increase) decrease in current assets, net of the effects of acquired companies: | | | |
| Accounts receivable | (25,567) | (8,753) | 27,464 |
| Inventories | (23,821) | (20,535) | 17,033 |
| Other current assets | (14,065) | 162 | 8,993 |
| Increase (decrease) in current liabilities, net of the effects of acquired companies: | | | |
| Accounts payable | 1,064 | 2,705 | (6,348) |
| Income taxes | (506) | (5,653) | 3,483 |
| Unearned revenues | 10,780 | (9,750) | 11,654 |
| Restructuring reserve | 10,544 | 3,044 | 459 |
| Other current and accrued liabilities | 8,350 | (16,070) | (6,092) |
| Net cash provided by operating activities | 10,385 | 11,727 | 113,045 |
| | | | |
| Cash flows from investing activities: | | | |
| Acquisition of property, plant, and equipment and intangibles | (22,981) | (23,712) | (13,757) |
| Acquisitions of businesses, net of cash acquired | (75,937) | (300) | (25,535) |
| Change in restricted cash | 15 | 504 | 516 |
| Other investing activities | 623 | 323 | 131 |
| Net cash used in investing activities | (98,280) | (23,185) | (38,645) |
| | | | |
| Cash flows from financing activities: | | | |
| Proceeds from stock issuances | 2,210 | 6,022 | 845 |
| Excess tax benefit on stock compensation | 634 | 1,662 | 12 |
| Proceeds from short-term debt | 8,565 | 7,621 | 11,215 |
| Payment of short-term debt | (7,895) | (12,344) | (12,941) |
| Proceeds from long-term debt | 74,117 | 141,747 | 93,793 |
| Payment of long-term debt | (67,370) | (114,458) | (144,650) |
| Net change in factoring and bank overdrafts | (4,364) | 1,413 | 5,380 |
| Debt issuance costs | — | (1,991) | (3,970) |
| Repurchase of non-controlling interests | — | (781) | — |
| Net cash provided by (used in) financing activities | 5,897 | 28,891 | (50,316) |
| Effect of foreign currency rate fluctuations on cash and cash equivalents | 3,006 | (4,970) | 3,830 |
| Net increase in cash and cash equivalents | (78,992) | 12,463 | 27,914 |
| Cash and cash equivalents: | | | |
| Beginning of year | 172,473 | 160,010 | 132,096 |
| End of year | $ 93,481 | $ 172,473 | $ 160,010 |
See Notes to the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. FINANCIAL STATEMENT REVISION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revision of Previously Issued Consolidated Financial Statements
Checkpoint Systems, Inc. (the "Company") is revising herein its historical financial statements as of December 26, 2010 and for the years ended December 26, 2010 and December 27, 2009. The revision is the result of the Company making corrections for the combined effect of financial statement errors attributable to (i) the intentional misstatement of expenses due to the improper and fraudulent activities of a certain former employee of the Company's Canada sales subsidiary; and (ii) immaterial income tax adjustments recorded in the third quarter of 2010 that should have been recorded in the fourth quarter of 2009. The Company assessed the impact of these errors on its prior interim and annual financial statements and concluded that these errors were not material, individually or in the aggregate, to any of those financial statements. Although the effect of these errors was not material to any previously issued financial statements, the cumulative effect of correcting the newly identified errors in the current year would have been material for the fiscal year 2011. Consequently, the Company has revised its prior period financial statements. All amounts in this Annual Report on Form 10-K affected by the revision adjustments reflect such amounts as revised.
Description of Revision Adjustments
Set forth below is a description of the revision adjustments reflected in the revision of previously issued financial statements.
Overstatement of expenses due to the improper and fraudulent activities of a certain former employee of the Company’s Canada sales subsidiary - In December of 2011, we identified errors in our financial statements resulting from improper and fraudulent activities of a certain former employee of our Canada sales subsidiary as part of the transition of our Canadian operations into our shared service environment in North America. Subsequent to the discovery of such errors, we retained outside counsel to undertake an investigation and with the assistance of forensic accountants and internal audit. The results of this investigation concluded that in the period from 2005 through the fourth quarter of 2011, the then Controller of our Canadian operations was able to misappropriate cash through various schemes. The defalcation of cash was concealed by overriding internal controls at the subsidiary which had the effect of misstating certain accounts including cash, accounts receivable, and inventories as well as income taxes and non-income taxes payable and operating expenses. Based on this investigation, it was determined that improper and fraudulent activities by a certain employee of the subsidiary affected the financial reporting of the subsidiary and that the improper and fraudulent activities were contained within the Canada sales subsidiary.
The total cumulative gross financial statement impact of the improper and fraudulent activities was approximately $4.7 million and impacted fiscal years 2005 through 2011 of which $1.1 million of this amount was recovered by the Company from the perpetrator during the fourth quarter of 2011, resulting in a net cumulative financial statement impact of $3.6 million. The fiscal year 2011 financial statement impact was $0.2 million income due to the recovery of $1.1 million offset by expense of $0.9 million. During the fiscal years 2010 and prior, a total cumulative impact of $0.5 million expense had been recorded in the financial statements of the Canada sales subsidiary. The cumulative gross adjustments made to the revised financial statements for the fiscal years ended 2005 through 2010 totaled $3.3 million in the aggregate. We recorded additional operating expense adjustments of $0.4 million and $1.8 million in fiscal years 2010 and 2009, respectively and a cumulative adjustment of $1.1 million ($0.8 million, net of tax) for fiscal years 2008 and prior. The financial statement impacts of the improper and fraudulent Canadian activities have been included in other expense (income) in the Consolidated Statements of Operations. We anticipate filing a claim in 2012 with our insurance provider for the unrecovered amount of the loss.
The improper and fraudulent activities by a certain former employee of the subsidiary included (i) the misappropriation of cash including cash payments to improper vendors; (ii) the intentional overstatement of cash balances; (iii) the intentional understatement of accounts receivable and inventory reserve accounts; (iv) the intentional understatement of income taxes and non-income taxes payable; and (v) recording arbitrary balance sheet adjustments to increase cash and liabilities.
Income tax adjustments recorded in the third quarter of 2010 related to provision-to-return adjustments resulting from the misapplication of tax law to the foreign tax credit calculation associated with the payment of a dividend from one of our wholly owned subsidiaries to the Company – To record the adjustment in the appropriate period, income tax expense was reduced by $0.7 million in fiscal year 2010 and was increased by $0.7 million in fiscal year 2009.
In addition to the revisions described above, the effects of discontinued operations presentation on previously reported amounts have been included in order to reconcile between previously reported amounts and the final amounts as revised in this Annual Report on Form 10-K.
The following table summarized the effects of the adjustments on basic earnings per share, diluted earnings per share, operating income, income taxes, earnings from continuing operations before income taxes, and net earnings attributable to Checkpoint Systems, Inc. for the years ended December 26, 2010 and December 27, 2009, respectively, and on retained earnings as of December 29, 2008 (the first day of fiscal 2009).
| | December 26, 2010 | | December 27, 2009 |
| Earnings (loss) attributable to Checkpoint Systems, Inc. per share | Basic EPS | Diluted EPS | | Basic EPS | Diluted EPS |
| As Previously Reported | $ 0.69 | $ 0.68 | | $ 0.67 | $ 0.66 |
| Revision Adjustments: | | | | | |
| Canada Adjustments | (0.02) | (0.01) | | (0.04) | (0.03) |
| Income Tax Adjustments | 0.02 | 0.02 | | (0.02) | (0.02) |
| As Revised for Revision Adjustments | $ 0.69 | $ 0.69 | | $ 0.61 | $ 0.61 |
| Discontinued Operations Adjustments | — | — | | — | — |
| As Revised in this Annual Report on Form 10-K | $ 0.69 | $ 0.69 | | $ 0.61 | $ 0.61 |
| | Retained Earnings | | Net Earnings Attributable to Checkpoint Systems, Inc. | | Earnings from Continuing Operations Before Income Taxes | | Income Taxes |
| (amounts in thousands) | Dec. 29, 2008 | | Dec. 26, 2010 | Dec. 27, 2009 | | Dec. 26, 2010 | Dec. 27, 2009 | | Dec. 26, 2010 | Dec. 27, 2009 |
| As Previously Reported | $ 179,809 | | $ 27,371 | $ 26,142 | | $ 37,022 | $ 35,985 | | $ 9,767 | $ 10,290 |
| Revision Adjustments: | | | | | | | | | | |
| Canada Adjustments | (814) | | (346) | (1,325) | | (446) | (1,793) | | (100) | (468) |
| Income Tax Adjustments | — | | 705 | (705) | | — | — | | (705) | 705 |
| As Revised for Revision Adjustments | $ 178,995 | | $ 27,730 | $ 24,112 | | $ 36,576 | $ 34,192 | | $ 8,962 | $ 10,527 |
| Discontinued Operations Adjustments | — | | — | — | | 1,169 | 1,467 | | 396 | 556 |
| As Revised in this Annual Report on Form 10-K | $ 178,995 | | $ 27,730 | $ 24,112 | | $ 37,745 | $ 35,659 | | $ 9,358 | $ 11,083 |
| | Operating Income |
| (amounts in thousands) | Dec. 26, 2010 | Dec. 27, 2009 |
| As Previously Reported | $ 42,648 | $ 41,580 |
| Revision Adjustments: | | |
| Canada Adjustments | (446) | (1,793) |
| Income Tax Adjustments | — | — |
| As Revised for Revision Adjustments | $ 42,202 | $ 39,787 |
| Discontinued Operations Adjustments | 1,169 | 1,467 |
| As Revised in this Annual Report on Form 10-K | $ 43,371 | $ 41,254 |
Comparison of revised financial statements to financial statements as originally reported
The following tables compare our previously reported Consolidated Statements of Operations, Stockholders’ Equity, Comprehensive Income (Loss), and Cash Flows for the fiscal years ended December 26, 2010 and December 27, 2009 and the previously reported Consolidated Balance Sheet as of December 26, 2010 to the corresponding financial statements for those years as Revised.
CONSOLIDATED BALANCE SHEETS
| (amounts in thousands) | December 26, 2010 |
| | As Previously Reported | As Revised in this Annual Report on Form 10-K |
| ASSETS | | |
| CURRENT ASSETS: | | |
| Cash and cash equivalents | $ 173,802 | $ 172,473 |
| Restricted cash | 140 | 140 |
| Accounts receivable, net of allowance of $10,472 and $10,927 | 178,636 | 178,076 |
| Inventories | 106,974 | 106,694 |
| Other current assets | 32,655 | 32,542 |
| Deferred income taxes | 20,622 | 20,622 |
| Total Current Assets | 512,829 | 510,547 |
| REVENUE EQUIPMENT ON OPERATING LEASE, net | 2,340 | 2,340 |
| PROPERTY, PLANT, AND EQUIPMENT, net | 121,258 | 121,258 |
| GOODWILL | 231,325 | 231,325 |
| OTHER INTANGIBLES, net | 90,823 | 90,823 |
| DEFERRED INCOME TAXES | 52,506 | 53,425 |
| OTHER ASSETS | 24,192 | 24,192 |
| TOTAL ASSETS | $ 1,035,273 | $ 1,033,910 |
| | | |
| LIABILITIES AND EQUITY | | |
| CURRENT LIABILITIES: | | |
| Short-term borrowings and current portion of long-term debt | $ 22,225 | $ 22,225 |
| Accounts payable | 63,366 | 63,585 |
| Accrued compensation and related taxes | 29,308 | 29,308 |
| Other accrued expenses | 47,646 | 47,646 |
| Income taxes | 4,395 | 5,160 |
| Unearned revenues | 12,196 | 12,196 |
| Restructuring reserve | 7,522 | 7,522 |
| Accrued pensions — current | 4,358 | 4,358 |
| Other current liabilities | 23,019 | 23,409 |
| Total Current Liabilities | 214,035 | 215,409 |
| LONG-TERM DEBT, LESS CURRENT MATURITIES | 119,724 | 119,724 |
| ACCRUED PENSIONS | 75,396 | 75,396 |
| OTHER LONG-TERM LIABILITIES | 30,502 | 30,502 |
| DEFERRED INCOME TAXES | 11,325 | 11,325 |
| COMMITMENTS AND CONTINGENCIES | | |
| CHECKPOINT SYSTEMS, INC. STOCKHOLDERS’ EQUITY: | | |
| Preferred stock, no par value, 500,000 shares authorized, none issued | — | — |
Common stock, par value $.10 per share, 100,000,000 shares authorized, issued 43,843,095 and 43,843,095 shares | 4,384 | 4,384 |
| Additional capital | 407,383 | 407,383 |
| Retained earnings | 233,322 | 230,837 |
| Common stock in treasury, at cost, 4,035,912 and 4,035,912 shares | (71,520) | (71,520) |
| Accumulated other comprehensive income, net of tax | 10,722 | 10,470 |
| TOTAL CHECKPOINT SYSTEMS, INC. STOCKHOLDERS’ EQUITY | 584,291 | 581,554 |
| NONCONTROLLING INTERESTS | — | — |
| TOTAL EQUITY | 584,291 | 581,554 |
| TOTAL LIABILITIES AND EQUITY | $ 1,035,273 | $ 1,033,910 |
There is no required discontinued operations impact on the presentation of the As Revised in this Annual Report on Form 10-K amounts.
CONSOLIDATED STATEMENTS OF OPERATIONS
| (amounts in thousands, except per share data) | December 26, 2010 |
| Year ended | As Previously Reported | As Revised for Revision Adjustments | As Revised in this Annual Report on Form 10-K |
| Net revenues | $ 834,498 | $ 834,498 | $ 821,678 |
| Cost of revenues | 487,850 | 487,850 | 477,904 |
| Gross profit | 346,648 | 346,648 | 343,774 |
| Selling, general, and administrative expenses | 275,282 | 274,191 | 269,625 |
| Research and development | 20,507 | 20,507 | 20,507 |
| Restructuring expenses | 8,211 | 8,211 | 8,211 |
| Acquisition costs | — | — | 523 |
| Other expense | — | 1,537 | 1,537 |
| Operating income | 42,648 | 42,202 | 43,371 |
| Interest income | 3,118 | 3,118 | 3,118 |
| Interest expense | 6,507 | 6,507 | 6,507 |
| Other gain (loss), net | (2,237) | (2,237) | (2,237) |
| Earnings from continuing operations before income taxes | 37,022 | 36,576 | 37,745 |
| Income taxes expense | 9,767 | 8,962 | 9,358 |
| Net earnings from continuing operations | 27,255 | 27,614 | 28,387 |
| Loss from discontinued operations, net of tax benefit of $0, $0, and $396 | — | — | (773) |
| Net earnings | 27,255 | 27,614 | 27,614 |
| Less: loss attributable to non-controlling interests | (116) | (116) | (116) |
| Net earnings attributable to Checkpoint Systems, Inc. | $ 27,371 | $ 27,730 | $ 27,730 |
| | | | |
| Basic earnings attributable to Checkpoint Systems, Inc. per share: | | | |
| Earnings from continuing operations | $ 0.69 | $ 0.69 | $ 0.71 |
| Loss from discontinued operations, net of tax | $ — | $ — | $ (0.02) |
| Basic earnings attributable to Checkpoint Systems, Inc. per share | $ 0.69 | $ 0.69 | $ 0.69 |
| Diluted earnings attributable to Checkpoint Systems, Inc. per share: | | | |
| Earnings from continuing operations | $ 0.68 | $ 0.69 | $ 0.71 |
| Loss from discontinued operations, net of tax | $ — | $ — | $ (0.02) |
| Diluted earnings attributable to Checkpoint Systems, Inc. per share | $ 0.68 | $ 0.69 | $ 0.69 |
The As Revised in this Annual Report on Form 10-K amounts include a reclassification of selling, general, and administrative expenses to acquisition costs in order to conform to current period presentation. These amounts also include the effects of discontinued operations presentation on previously reported amounts. Refer to Note 19 to the Consolidated Financial Statements for discontinued operations presentation adjustments to previously reported amounts.
CONSOLIDATED STATEMENTS OF OPERATIONS
| (amounts in thousands, except per share data) | December 27, 2009 |
| Year ended | As Previously Reported | As Revised for Revision Adjustments | As Revised in this Annual Report on Form 10-K |
| Net revenues | $ 772,718 | $ 772,718 | $ 762,251 |
| Cost of revenues | 441,434 | 441,434 | 433,478 |
| Gross profit | 331,284 | 331,284 | 328,773 |
| Selling, general, and administrative expenses | 262,649 | 263,157 | 258,609 |
| Research and development | 20,354 | 20,354 | 20,354 |
| Restructuring expenses | 5,401 | 5,401 | 5,401 |
| Litigation settlement | 1,300 | 1,300 | 1,300 |
| Acquisition costs | — | — | 570 |
| Other expense | — | 1,285 | 1,285 |
| Operating income | 41,580 | 39,787 | 41,254 |
| Interest income | 1,971 | 1,971 | 1,971 |
| Interest expense | 7,386 | 7,386 | 7,386 |
| Other gain (loss), net | (180) | (180) | (180) |
| Earnings from continuing operations before income taxes | 35,985 | 34,192 | 35,659 |
| Income taxes expense | 10,290 | 10,527 | 11,083 |
| Net earnings from continuing operations | 25,695 | 23,665 | 24,576 |
| Loss from discontinued operations, net of tax benefit of $0, $0, and $556 | — | — | (911) |
| Net earnings | 25,695 | 23,665 | 23,665 |
| Less: loss attributable to non-controlling interests | (447) | (447) | (447) |
| Net earnings attributable to Checkpoint Systems, Inc. | $ 26,142 | $ 24,112 | $ 24,112 |
| | | | |
| Basic earnings attributable to Checkpoint Systems, Inc. per share: | | | |
| Earnings from continuing operations | $ 0.67 | $ 0.61 | $ 0.63 |
| Loss from discontinued operations, net of tax | $ — | $ — | $ (0.02) |
| Basic earnings attributable to Checkpoint Systems, Inc. per share | $ 0.67 | $ 0.61 | $ 0.61 |
| Diluted earnings attributable to Checkpoint Systems, Inc. per share: | | | |
| Earnings from continuing operations | $ 0.66 | $ 0.61 | $ 0.63 |
| Loss from discontinued operations, net of tax | $ — | $ — | $ (0.02) |
| Diluted earnings attributable to Checkpoint Systems, Inc. per share | $ 0.66 | $ 0.61 | $ 0.61 |
The As Revised in this Annual Report on Form 10-K amounts include a reclassification of selling, general, and administrative expenses to acquisition costs in order to conform to current period presentation. These amounts also include the effects of discontinued operations presentation on previously reported amounts. Refer to Note 19 to the Consolidated Financial Statements for discontinued operations presentation adjustments to previously reported amounts.
CONSOLIDATED STATEMENTS OF EQUITY
| (amounts in thousands) | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Equity |
| | As Previously Reported | As Revised in this Annual Report on Form 10-K | | As Previously Reported | As Revised in this Annual Report on Form 10-K | | As Previously Reported | As Revised in this Annual Report on Form 10-K |
| Balance, December 28, 2008 | $ 179,809 | $ 178,995 | | $ 16,150 | $ 16,236 | | $ 511,135 | $ 510,407 |
| Net earnings (loss) | 26,142 | 24,112 | | | | | 25,695 | 23,665 |
| Exercise of stock-based compensation and awards released | | | | | | | 845 | 845 |
| Tax shortfall on stock-based compensation | | | | | | | (481) | (481) |
| Stock-based compensation expense | | | | | | | 7,135 | 7,135 |
| Deferred compensation plan | | | | | | | 1,415 | 1,415 |
| Amortization of pension plan actuarial losses, net of tax | | | | 84 | 84 | | 84 | 84 |
| Change in realized and unrealized gains on derivative hedges, net of tax | | | | (1,182) | (1,182) | | (1,182) | (1,182) |
| Recognized gain on pension, net of tax | | | | 1,934 | 1,934 | | 1,934 | 1,934 |
| Foreign currency translation adjustment | | | | 11,617 | 11,379 | | 11,974 | 11,736 |
| Balance, December 27, 2009 | $ 205,951 | $ 203,107 | | $ 28,603 | $ 28,451 | | $ 558,554 | $ 555,558 |
| Net earnings (loss) | 27,371 | 27,730 | | | | | 27,255 | 27,614 |
| Exercise of stock-based compensation and awards released | | | | | | | 6,022 | 6,022 |
| Tax benefit on stock-based compensation | | | | | | | 133 | 133 |
| Stock-based compensation expense | | | | | | | 8,751 | 8,751 |
| Deferred compensation plan | | | | | | | 2,112 | 2,112 |
| Repurchase of non-controlling interests | | | | | | | (692) | (692) |
| Amortization of pension plan actuarial losses, net of tax | | | | 103 | 103 | | 103 | 103 |
| Change in realized and unrealized gains on derivative hedges, net of tax | | | | 679 | 679 | | 679 | 679 |
| Recognized loss on pension, net of tax | | | | (3,405) | (3,405) | | (3,405) | (3,405) |
| Foreign currency translation adjustment | | | | (15,258) | (15,358) | | (15,221) | (15,321) |
| Balance, December 26, 2010 | $ 233,322 | $ 230,837 | | $ 10,722 | $ 10,470 | | $ 584,291 | $ 581,554 |
There is no required discontinued operations impact on the presentation of the As Revised in this Annual Report on Form 10-K amounts.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| (amounts in thousands) | December 26, 2010 | | December 27, 2009 |
| Year ended | As Previously Reported | As Revised in this Annual Report on Form 10-K | | As Previously Reported | As Revised in this Annual Report on Form 10-K |
| Net earnings | $ 27,255 | $ 27,614 | | $ 25,695 | $ 23,665 |
| Amortization of pension plan actuarial losses, net of tax | 103 | 103 | | 84 | 84 |
| Change in realized and unrealized gains (losses) on derivative hedges, net of tax | 679 | 679 | | (1,182) | (1,182) |
| Recognized (loss) gain on pension, net of tax | (3,405) | (3,405) | | 1,934 | 1,934 |
| Foreign currency translation adjustment | (15,221) | (15,321) | | 11,974 | 11,736 |
| Comprehensive income | $ 9,411 | $ 9,670 | | $ 38,505 | $ 36,237 |
| Less: comprehensive loss attributable to non-controlling interests | (834) | (834) | | (90) | (90) |
| Comprehensive income attributable to Checkpoint Systems, Inc. | $ 10,245 | $ 10,504 | | $ 38,595 | $ 36,327 |
There is no required discontinued operations impact on the presentation of the As Revised in this Annual Report on Form 10-K amounts.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| (amounts in thousands) | December 26, 2010 | | December 27, 2009 |
| Year ended | As Previously Reported | As Revised in this Annual Report on Form 10-K | | As Previously Reported | As Revised in this Annual Report on Form 10-K |
| Cash flows from operating activities: | | | | | |
| Net earnings | $ 27,255 | $ 27,614 | | $ 25,695 | $ 23,665 |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 34,477 | 34,477 | | 32,325 | 32,325 |
| Deferred taxes | (2,227) | (2,859) | | (7,109) | (6,911) |
| Stock-based compensation | 8,751 | 8,751 | | 7,135 | 7,135 |
| Excess tax benefit on stock compensation | (1,662) | (1,662) | | (12) | (12) |
| Provision for losses on accounts receivable | 123 | 123 | | (117) | (117) |
| Loss on disposal of fixed assets | 133 | 133 | | 314 | 314 |
| (Increase) decrease in current assets, net of the effects of acquired companies: | | | | | |
| Accounts receivable | (9,467) | (8,753) | | 27,308 | 27,464 |
| Inventories | (20,707) | (20,535) | | 17,078 | 17,033 |
| Other current assets | 51 | 162 | | 8,993 | 8,993 |
| Increase (decrease) in current liabilities, net of the effects of acquired companies: | | | | | |
| Accounts payable | 2,491 | 2,705 | | (6,348) | (6,348) |
| Income taxes | (5,253) | (5,653) | | 3,584 | 3,483 |
| Unearned revenues | (9,750) | (9,750) | | 11,654 | 11,654 |
| Restructuring reserve | 3,044 | 3,044 | | 459 | 459 |
| Other current and accrued liabilities | (16,355) | (16,070) | | (6,133) | (6,092) |
| Net cash provided by operating activities | 10,904 | 11,727 | | 114,826 | 113,045 |
| | | | | | |
| Cash flows from investing activities: | | | | | |
| Acquisition of property, plant, and equipment and intangibles | (23,712) | (23,712) | | (13,757) | (13,757) |
| Acquisitions of businesses, net of cash acquired | (300) | (300) | | (25,535) | (25,535) |
| Change in restricted cash | 504 | 504 | | 516 | 516 |
| Other investing activities | 323 | 323 | | 131 | 131 |
| Net cash used in investing activities | (23,185) | (23,185) | | (38,645) | (38,645) |
| | | | | | |
| Cash flows from financing activities: | | | | | |
| Proceeds from stock issuances | 6,022 | 6,022 | | 845 | 845 |
| Excess tax benefit on stock compensation | 1,662 | 1,662 | | 12 | 12 |
| Proceeds from short-term debt | 7,621 | 7,621 | | 11,215 | 11,215 |
| Payment of short-term debt | (12,344) | (12,344) | | (12,941) | (12,941) |
| Proceeds from long-term debt | 141,747 | 141,747 | | 93,793 | 93,793 |
| Payment of long-term debt | (114,458) | (114,458) | | (144,650) | (144,650) |
| Net change in factoring and bank overdrafts | 1,413 | 1,413 | | 5,380 | 5,380 |
| Debt issuance costs | (1,991) | (1,991) | | (3,970) | (3,970) |
| Repurchase of non-controlling interests | (781) | (781) | | — | — |
| Net cash provided by (used in) financing activities | 28,891 | 28,891 | | (50,316) | (50,316) |
| Effect of foreign currency rate fluctuations on cash and cash equivalents | (4,905) | (4,970) | | 4,010 | 3,830 |
| Net increase in cash and cash equivalents | 11,705 | 12,463 | | 29,875 | 27,914 |
| Cash and cash equivalents: | | | | | |
| Beginning of year | 162,097 | 160,010 | | 132,222 | 132,096 |
| End of year | $ 173,802 | $ 172,473 | | $ 162,097 | $ 160,010 |
There is no required discontinued operations impact on the presentation of the As Revised in this Annual Report on Form 10-K amounts.
Nature of Operations
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 35 countries, we have a global network of subsidiaries and distributors, and provide customer service and technical support around the world.
During the second quarter of 2010, we identified an error in the accounting for a deferred tax liability related to a 2005 transaction. Specifically, we concluded that an existing deferred tax liability in the amount of $5.9 million should have been recognized as income in 2005 rather than remain as a liability on our Consolidated Balance Sheet at that time. We have assessed the materiality of this item on prior periods in accordance with the SEC's Staff Accounting Bulletin ("SAB") No. 99 and concluded that the error was not material to any such periods. We also concluded that the impact of correcting the error in the quarter ended June 27, 2010 would have been misleading to the users of the financial statements and therefore, have not recorded an adjustment in the current year. In this regard, in accordance with SAB 108, we have revised our Consolidated Balance Sheet as of December 27, 2009 to increase retained earnings and reduce long term deferred tax liabilities in the amount of $5.9 million. This revision results in no other change to our Consolidated Financial Statements presented in this report. We will make corresponding revisions to retained earnings and long term deferred tax liabilities in prior periods the next time those financial statements are filed.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Checkpoint Systems, Inc. and its majority-owned subsidiaries (Company). All inter-company transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fiscal Year
Our fiscal year is the 52 or 53 week period ending the last Sunday of December. References to 2011, 2010, and 2009, are for the 52 weeks ended December 25, 2011, December 26, 2010, and December 27, 2009, respectively.
Reclassifications
Certain reclassifications and retrospective adjustments have been made to prior period information to conform to current period presentation. These reclassifications and retrospective adjustments result from our adoption of an accounting standard codified within Financial Accounting Standards Board (“FASB”) Accounting Standards Codification™ (“ASC”) 810, “Consolidation,” related to non-controlling interests, and our change in segment reporting to conform to our current management structure, respectively.
Discontinued Operations
We evaluate our businesses and product lines periodically for their strategic fit within our operations. In December 2011, we began actively marketing our Banking Security Systems Integration business unit. In connection with the decision to sell this business, for all periods presented, the operating results associated with this business have been reclassified into earnings from discontinued operations, net of tax in the Consolidated Statements of Operations, and the assets and liabilities associated with this business have been adjusted to fair value, less costs to sell, and reclassified into assets of discontinued operations, net of tax and liabilities of discontinued operations, net of tax, as appropriate, in the Consolidated Balance Sheets. Refer to Note 19 of the Consolidated Financial Statements.
Non-controlling Interests
On May 16, 2011, Checkpoint Holland Holding B.V., a wholly-owned subsidiary of the Company, acquired 51% of the outstanding voting shares of Shore to Shore PVT Ltd. (Sri Lanka) in exchange for $1.7 million in cash. The fair value of the non-controlling interest was estimated by applying a market approach. Key assumptions include control premiums associated with guideline transactions of entities deemed to be similar to Shore to Shore PVT Ltd. (Sri Lanka), and adjustments because of the lack of control that market participants would consider when measuring the fair value of the non-controlling interest.
On July 1, 1997, Checkpoint Systems Japan Co. Ltd. (Checkpoint Japan), a wholly-owned subsidiary of the Company, issued newly authorized shares to Mitsubishi Materials Corporation (Mitsubishi) in exchange for cash. In February 2006, Checkpoint Japan repurchased 26% of these shares from Mitsubishi in exchange for $0.2 million in cash. In August 2010, Checkpoint Manufacturing Japan Co., LTD. repurchased the remaining 74% of these shares from Mitsubishi in exchange for $0.8 million in cash. No changes in the ownership interests of Checkpoint Japan occurred during the year ended December 27, 2009.
We have classified non-controlling interests as equity on our Consolidated Balance Sheets as of December 25, 2011 and December 26, 2010 and presented net income attributable to non-controlling interests separately on our Consolidated Statements of Operations for the years ended December 25, 2011, December 26, 2010, and December 27, 2009.
Subsequent Events
We perform a review of subsequent events in connection with the preparation of our financial statements. The accounting for and disclosure of events that occur after the balance sheet date, but before our financial statements are issued or available to be issued are reflected where appropriate or required in our financial statements. Refer to Note 7 “Long-Term Debt” for discussion of the amendments to certain debt agreements dated February 17, 2012.
Cash and Cash Equivalents
Cash in excess of operating requirements is invested in short-term, income-producing instruments or used to pay down debt. Cash equivalents include commercial paper and other securities with original maturities of 90 days or less at the time of purchase. Book value approximates fair value because of the short maturity of those instruments.
Restricted Cash
We classify restricted cash as cash that cannot be made readily available for use. Restrictions may include legally restricted deposits held as compensating balances against short-term borrowing arrangements, contracts entered into with others, or company statements of intention with regard to particular deposits. As of December 25, 2011, the unused portion of a grant from the Chinese government of $0.3 million (RMB 1.8 million) was recorded within restricted cash in the accompanying Consolidated Balance Sheets.
Accounts Receivable
Accounts receivables are recorded at net realizable values. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These allowances are based on specific facts and circumstances surrounding individual customers as well as our historical experience. Provisions for the losses on receivables are charged to income to maintain the allowance at a level considered adequate to cover losses. Receivables are charged off against the reserve when they are deemed uncollectible. From time to time, we sell customer related receivables to third party financial institutions and evaluate these transactions to determine if they meet the criteria for sale treatment in accordance with ASC 860 "Accounting for Transfers and Servicing of Financial Assets." If it is determined that the criteria for sale treatment is met, the receivables are removed from the Consolidated Balance Sheet and earnings are reported on the Consolidated Statement of Operations. If it is determined that the criteria for sale treatment is not met, the receivables remain on the Consolidated Balance Sheet and the transaction is treated as a secured financing.
During 2011, cash proceeds from the sale of accounts receivable related to sales-type lease extensions with customers to third party financial institutions totaled $38.0 million. Proceeds from the initial sale of the accounts receivables are used to fund operations. We have presented the earnings recognized on the sales of the receivables separately under the line item captioned other operating income on our Consolidated Statements of Operations for the year ended December 25, 2011.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market. A provision is made to reduce excess or obsolete inventory to its net realizable value.
Revenue Equipment on Operating Lease
The cost of the equipment leased to customers under operating leases is depreciated on a straight-line basis over the lesser of the length of the contract or estimated useful life of the asset, which is usually between three and five years.
Property, Plant, and Equipment
Property, plant, and equipment is carried at cost less accumulated depreciation. Maintenance, repairs, and minor renewals are expensed as incurred. Additions, improvements, and major renewals are capitalized. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets. Assets subject to capital leases are depreciated over the lesser of the estimated useful life of the asset or length of the contract. Buildings, equipment rented to customers, and leased equipment on capitalized leases use the following estimated useful lives of fifteen to thirty years, three to five years, and five years, respectively. Machinery and equipment estimated useful lives range from three to ten years. Leasehold improvement useful lives are the lesser of the minimum lease term or the useful life of the item. The cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is included in income.
We review our property, plant, and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If it is determined that an impairment, based on expected future undiscounted cash flows, exists, then the loss is recognized on the Consolidated Statements of Operations. The amount of the impairment is the excess of the carrying amount of the impaired asset over its fair value.
Internal-Use Software
Included in fixed assets is the capitalized cost of internal-use software. We capitalize costs incurred during the application development stage of internal-use software and amortize these costs over their estimated useful lives, which generally range from three to five years. Costs incurred related to design or maintenance of internal-use software is expensed as incurred.
During 2009, we announced that we were in the initial stages of implementing a company-wide ERP system to handle the business and finance processes within our operations and corporate functions. The total amount of internal-use software costs capitalized since the beginning of the ERP implementation as of December 25, 2011 and December 26, 2010 were $21.4 million and $13.1 million, respectively. As of December 25, 2011, $15.4 million was recorded in machinery and equipment related to portions of the ERP system that were placed in service. The remaining costs of $6.0 million and $12.7 million as of December 25, 2011 and December 26, 2010, respectively, are capitalized as construction-in-progress until such time as the these portions of the ERP system have been placed in service.
Goodwill
Goodwill is carried at cost and is not amortized. We test goodwill for impairment on an annual basis as of fiscal month end October of each fiscal year, relying on a number of factors including operating results, business plans and anticipated future cash flows. Company management uses its judgment in assessing whether goodwill has become impaired between annual impairment tests. Reporting units are primarily determined as the geographic areas comprising the Company’s business segments, except in situations when aggregation of the reporting units is appropriate. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, then the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
The fair value of our reporting units is dependent upon our estimate of future discounted cash flows and other factors. Our estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. Estimated future cash flows are adjusted by an appropriate discount rate derived from our market capitalization plus a suitable control premium at the date of evaluation. The financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital that we use to determine our discount rate and through our stock price that we use to determine our market capitalization. Therefore, changes in the stock price may also affect the amount of impairment recorded. Market capitalization is determined by multiplying the shares outstanding on the assessment date by the average market price of our common stock over a 30-day period before each assessment date. We use this 30-day duration to consider inherent market fluctuations that may affect any individual closing price. We believe that our market capitalization alone does not fully capture the fair value of our business as a whole, or the substantial value that an acquirer would obtain from its ability to obtain control of our business. As such, in determining fair value, we add a control premium to our market capitalization. To estimate the control premium, we considered our unique competitive advantages that would likely provide synergies to a market participant. In addition, we considered external market factors which we believe contributed to the decline and volatility in our stock price that did not reflect our underlying fair value. Refer to Note 5 of the Consolidated Financial Statements.
Other Intangibles
Indefinite-lived intangible assets are carried at cost and are not amortized, but are subject to tests for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
Definite-lived intangibles are amortized on a straight-line basis over their useful lives (or legal lives if shorter). We review our other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
If it is determined that an impairment, based on expected future cash flows, exists, then the loss is recognized on the Consolidated Statements of Operations. The amount of the impairment is the excess of the carrying amount of the impaired asset over the fair value of the asset. The fair value represents expected future cash flows from the use of the assets, discounted at the rate used to evaluate potential investments. Refer to Note 5 of the Consolidated Financial Statements.
Other Assets
Included in other assets are $11.2 million and $15.6 million of net long-term customer-based receivables at December 25, 2011 and December 26, 2010, respectively.
Deferred Financing Costs
Financing costs are capitalized and amortized to interest expense over the life of the debt. The net deferred financing costs at December 25, 2011 and December 26, 2010 were $2.8 million and $3.9 million, respectively. The financing cost amortization expense was $1.1 million, $1.2 million, and $1.0 million, for 2011, 2010, and 2009, respectively.
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 selling price should be allocated among the elements and when to recognize revenue for each element.
For arrangements with multiple elements, we allocate total arrangement consideration to all deliverables based on their relative selling price using a specific hierarchy and recognize revenue when each element’s revenue recognition criteria are met. The hierarchy is as follows: vendor-specific objective evidence (“VSOE”), third-party evidence of selling price (“TPE”) or best estimate of selling price (“BESP”). VSOE of fair value for each element is established based on the price charged when the same element is sold separately. We recognize revenue when installation is complete or other post-shipment obligations have been satisfied. Unearned revenue is recorded when payments are received in advance of performing our service obligations and is recognized over the service period.
Products leased to customers under sales-type leases are 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 products 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 products under operating leases is recognized over the term of the lease. Installation revenue from SMS EAS products 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 or 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. The accrual for these incentives and rebates, which are included in the Other Accrued Expenses section of our Consolidated Balance Sheet, was $11.7 million and $12.4 million as of December 25, 2011 and December 26, 2010, respectively. We record revenues net of an allowance for estimated return activities. Return activity was immaterial to revenue and results of operations for all periods presented.
Shipping and Handling Fees and Costs
Shipping and handling fees are accounted for in net revenues and shipping and handling costs in cost of revenues.
Cost of Revenues
The principal elements of cost of revenues are product cost, field service and installation cost, freight, and product royalties paid to third parties.
Warranty Reserves
We provide product warranties for our various products. These warranties vary in length depending on product and geographical region. We establish our warranty reserves based on historical data of warranty transactions.
The following table sets forth the movement in the warranty reserve which is located in the Other Accrued Expenses section of our Consolidated Balance Sheet:
| (amounts in thousands) | December 25, 2011 | December 26, 2010 |
| Balance at beginning of year | $ 6,170 | $ 6,116 |
| Accruals for warranties issued | 5,882 | 5,940 |
| Settlements made | (6,194) | (5,735) |
| Foreign currency translation adjustment | (1) | (151) |
| Balance at end of period | $ 5,857 | $ 6,170 |
Royalty Expense
Royalty expenses related to security products approximated $0.2 million, $0.1 million, and $0.2 million, in 2011, 2010, and 2009, respectively. These expenses are included as part of cost of revenues.
Research and Development Costs
Research and development costs are expensed as incurred and consist of development work associated with the Company’s existing and potential products and processes. The Company’s research and development expenses relate primarily to payroll costs for engineering personnel, costs associated with various projects, including testing, developing prototypes and related expenses.
Stock Options
We recognize stock-based compensation expense for all share-based payments 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.
We use the Black-Scholes option pricing model to value all stock options. The table below presents the weighted average expected life in years. The expected life computation is based on historical exercise patterns and post-vesting termination behavior. Volatility is determined using changes in historical stock prices. The interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.
The fair value of share-based payment units was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values as follows:
| | Year Ended, December 25, 2011 | | Year Ended, December 26, 2010 | | Year Ended, December 27, 2009 | |
| Weighted-average fair value of grants | $ 9.74 | | $ 7.51 | | $ 3.59 | |
| Valuation assumptions: | | | | | | |
| Expected dividend yield | 0.00 | % | 0.00 | % | 0.00 | % |
| Expected volatility | .4991 | | .4829 | | .4474 | |
| Expected life (in years) | 4.98 | | 4.93 | | 4.86 | |
| Risk-free interest rate | 2.138 | % | 1.845 | % | 1.700 | % |
Refer to Note 8 of the Consolidated Financial Statements.
Income Taxes
Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and the tax basis of assets and liabilities, using enacted statutory tax rates in effect at the balance sheet date. Changes in enacted tax rates are reflected in the tax provision as they occur. A valuation allowance is recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted.
We utilize a two-step approach to recognizing and measuring uncertain tax positions (tax contingencies). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We include interest and penalties related to our tax contingencies in income tax expense.
Taxes and Value Added Collected from Customers
Sales and value added taxes collected from customers are excluded from revenues. The obligation is included in other current liabilities until the taxes are remitted to the appropriate taxing authorities.
Foreign Currency Translation and Transactions
Our balance sheet accounts of foreign subsidiaries are translated into U.S. dollars at the rate of exchange in effect at the balance sheet dates. Revenues, costs, and expenses of our foreign subsidiaries are translated into U.S. dollars at the year-to-date average rate of exchange. The resulting translation adjustments are recorded as a separate component of shareholders’ equity. Gains or losses on certain long-term inter-company transactions are excluded from the net earnings (loss) and accumulated in the cumulative translation adjustment as a separate component of Consolidated Stockholders’ Equity. All other foreign currency transaction gains and losses are included in net earnings (loss) on our Consolidated Statement of Operations
Accounting for Hedging Activities
We enter into certain foreign exchange forward contracts in order to hedge anticipated rate fluctuations in Western Europe, Canada, Japan and Australia. Transaction gains or losses resulting from these contracts are recognized at the end of each reporting period. We use the fair value method of accounting, recording realized and unrealized gains and losses on these contracts. These gains and losses are included in other gain (loss), net on our Consolidated Statements of Operations.
We enter into various foreign currency contracts to reduce our exposure to forecasted Euro-denominated inter-company revenues. These cash flow hedging instruments are marked to market and the changes are recorded in other comprehensive income. Amounts recorded in other comprehensive income are recognized in cost of goods sold as the inventory is sold to external parties. Any hedge ineffectiveness is charged to other gain (loss), net on our Consolidated Statements of Operations.
We enter, on occasion, into interest rate swaps to reduce the risk of significant interest rate increases in connection with floating rate debt. This cash flow hedging instrument is marked to market and the changes are recorded in other comprehensive income. Any hedge ineffectiveness is charged to interest expense. Refer to Note 14 of the Consolidated Financial Statements.
Recently Adopted Accounting 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 are effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, which for us was December 27, 2010, the first day of our 2011 fiscal year. The adoption of these standards did not have a material impact on our Consolidated Results of Operations and Financial Condition.
In April 2010, FASB issued ASU 2010-13 "Compensation-Stock Compensation (Topic 718) Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades" (ASU 2010-13). Topic 718 is amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The amendments in this standard are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010, which for us was December 27, 2010, the first day of our 2011 fiscal year. The guidance should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings for all outstanding awards as of the beginning of the fiscal year in which the amendments are initially applied. The adoption of the standard did not have a material impact on our Consolidated Results of Operations and Financial Condition.
In December 2010, FASB issued ASU 2010-28 “Intangibles - Goodwill and Other (Topic 350)” (ASU 2010-28). Topic 350 is amended to clarify the requirement to test for impairment of goodwill. Topic 350 has required that goodwill be tested for impairment if the carrying amount of a reporting unit exceeds its fair value. Under ASU 2010-28, when the carrying amount of a reporting unit is zero or negative an entity must assume that it is more likely than not that a goodwill impairment exists, perform an additional test to determine whether goodwill has been impaired and calculate the amount of that impairment. The modifications to ASC Topic 350 resulting from the issuance of ASU 2010-28 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2010, which for us was December 27, 2010, the first day of our 2011 fiscal year. The adoption of the standard did not have a material impact on our Consolidated Results of Operations and Financial Condition.
In December 2010, the FASB issued ASU 2010-29 “Business Combinations (Topic 805) - Disclosure of Supplementary Pro Forma Information for Business Combinations” (ASU 2010-29). This standard update clarifies that, when presenting comparative financial statements, SEC registrants should disclose revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for material (either on an individual or aggregate basis) business combinations entered into in fiscal years beginning on or after December 15, 2010, which for us was December 27, 2010, the first day of our 2011 fiscal year. The adoption of the standard did not have a material impact on our Consolidated Financial Statements.
In January 2011, the FASB issued ASU 2011-01 “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20” (ASU 2011-01). This standard update defers the effective date of new disclosure requirements for troubled debt restructurings prescribed by ASU 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses." ASU 2011-01 is effective upon issuance. The adoption of the standard did not have a material impact on our Consolidated Results of Operations and Financial Condition.
In April 2011, the FASB issued ASU 2011-02 “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” (ASU 2011-02). The amendments to Topic 310 (Receivables) clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulties and when a loan modification or restructuring is considered a troubled debt restructuring. In determining whether a loan modification represents a troubled debt restructuring, an entity should consider whether the debtor is experiencing financial difficulty and the lender has granted a concession to the borrower. ASU 2011-02 is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of the standard did not have a material impact on our Consolidated Results of Operations and Financial Condition.
New Accounting Pronouncements and Other Standards
In April 2011, the FASB issued ASU 2011-03 “Reconsideration of Effective Control for Repurchase Agreements” (ASU 2011-03). The amendments to Topic 860 (Transfers and Servicing) affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments do not affect other transfers of financial assets. The amendments remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. ASU 2011-03 is effective for the first interim or annual periods beginning on or after December 15, 2011, and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. We do not expect the adoption of the standard to have a material impact on our Consolidated Results of Operations and Financial Condition.
In May 2011, the FASB issued ASU 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). The amendments to Topic 820 (Fair Value Measurement) establish common requirements for measuring fair value and related disclosures in accordance with accounting principles generally accepted in the United Sates and international financial reporting standards. This amendment did not require additional fair value measurements. ASU 2011-04 is effective for the first interim and annual periods beginning after December 15, 2011, and should be applied prospectively. We do not expect the adoption of the standard to have a material effect on our Consolidated Results of Operations and Financial Condition.
In June 2011, the FASB issued ASU 2011-05 “Presentation of Comprehensive Income” (ASU 2011-05). The amendments to Topic 220 (Comprehensive Income) eliminate the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders' equity, require consecutive presentation of the statement of net income and other comprehensive income and require reclassification adjustments from other comprehensive income to net income to be shown on the financial statements. In December 2011, the FASB issued ASU 2011-12, "Comprehensive Income -- Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in ASU 2011-05," to defer the effective date of the provision requiring entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. However, the remaining requirements of ASU 2011-05 are effective for the first interim and annual periods beginning after December 15, 2011. We do not expect the adoption of the standard to have a material effect on our Consolidated Results of Operations and Financial Condition.
In September 2011, the FASB issued ASU 2011-08, "Intangibles – Goodwill and Other," (ASU 2011-08), which amends current guidance to allow a company to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The amendment also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We do not expect the adoption of the standard to have a material effect on our Consolidated Results of Operations and Financial Condition.
In September 2011, the FASB issued ASU 2011-09, "Compensation – Retirement Benefits – Multiemployer Plans (Subtopic 715-80)," (ASU 2011-09). ASU 2011-09 requires that employers provide additional separate disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans. The additional quantitative and qualitative disclosures will provide users with more detailed information about an employer's involvement in multiemployer pension plans. ASU 2011-09 is effective for fiscal years ending after December 15, 2011. The adoption of this standard will not have a material effect on our Consolidated Results of Operations and Financial Condition.
In December 2011, the FASB issued ASU 2011-11, "Balance Sheet – Disclosures about Offsetting Assets and Liabilities (Topic 210-20)," (ASU 2011-11). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 is effective for fiscal years beginning on or after January 1, 2013, with retrospective application for all comparable periods presented. The adoption of this standard will not have a material effect on our Consolidated Results of Operations and Financial Condition.
Note 2. ACQUISITIONS
Acquisitions in Fiscal 2011
On January 28, 2011, Checkpoint Systems, Inc. and certain of its direct subsidiaries (collectively, the “Company”) entered into a Master Purchase Agreement. The Master Purchase Agreement outlines the general terms and conditions pursuant to which the Company agreed to acquire, through the acquisition of equity and/or assets, a retail apparel and footwear product identification business which designs, manufactures and sells tags and labels, brand protection, and EAS solutions/labels (collectively, the “Shore to Shore businesses”). The acquisition was settled on May 16, 2011 for approximately $78.7 million, net of cash acquired of $1.9 million and the assumption of debt of $4.2 million. The purchase price was funded by $66.7 million of cash from operations and $9.2 million of borrowings under our Senior Secured Credit Facility, and includes the acquisition of the following:
| · | 100% of the voting equity interests of J&F International, Inc. (U.S.), Shore to Shore Far East (Hong Kong), Shore to Shore MIS (India), Shore to Shore Lacar SA (Guatemala), Adapt Identification (HK) Ltd., and W Print Europe Ltd. (UK); |
| · | Assets of Shore to Shore, Inc. (U.S.), Shanghai WH Printing Co. Ltd., Wing Hung (Dongguan) Printing Co., Ltd., and Wing Hung Printing Co., Ltd. (U.S.); |
| · | 51% of the voting equity interests of Shore to Shore PVT Ltd. (Sri Lanka); |
| · | 50% of the voting equity interests of the Cybsa Adapt SA de CV (El Salvador) joint venture. In accordance with ASC 323 “Investments—Equity Method and Joint Ventures”, we have applied the Equity Method in recording this joint venture. |
The purchase price includes a payment to escrow of $17.5 million related to the 2010 performance of the acquired business. This amount is subject to adjustment pending final determination of the 2010 performance and could result in an additional purchase price payment of up to $6.3 million. After final determination of the 2010 performance including final payment amount due, an adjustment will be recorded to the purchase price and goodwill. Acquisition costs incurred in connection with the transaction are recognized within acquisition costs in the Consolidated Statement of Operations and approximate $2.3 million for the year ended December 25, 2011.
As the Company acquired 51% of the outstanding voting shares of Shore to Shore PVT Ltd. (Sri Lanka) in exchange for $1.7 million in cash, we have classified the non-controlling interests as equity on our Consolidated Balance Sheet as of December 25, 2011, and presented net income attributable to non-controlling interests separately on our Consolidated Statement of Operations for the year ended December 25, 2011. The fair value of the non-controlling interest was estimated by applying a market approach. Key assumptions include control premiums associated with guideline transactions of entities deemed to be similar to Shore to Shore PVT Ltd. (Sri Lanka), and adjustments because of the lack of control that market participants would consider when measuring the fair value of the non-controlling interest.
At December 25, 2011, the financial statements reflected the preliminary allocation of the purchase price based on estimated fair values at the date of acquisition, including $17.1 million in Property, Plant, and Equipment, $7.1 million in Accounts Receivable, and $2.2 million in Inventories. This preliminary allocation resulted in acquired goodwill of $58.0 million and intangible assets of $10.5 million. The intangible assets were composed of a non-compete agreement ($0.3 million), customer lists ($9.8 million), and trade names ($0.4 million). The useful lives were 5 years for the non-compete agreement, 10 years for the customer lists, and 7.5 months for the trade names. The Company continues to evaluate certain assets and liabilities related to this business combination. Additional information, which existed as of the acquisition date but was at that time unknown to the Company, may become known during the remainder of the measurement period. Changes to amounts recorded as assets or liabilities may result in a corresponding adjustment to goodwill. Also, the allocation of the purchase price remains open for quantification of acquired income and non-income based tax exposures, certain information related to deferred income taxes, and finalization of the 2010 performance payment amount due. The measurement period is expected to be completed by May of 2012. The tax deductible portion of the acquired goodwill will also be determined during the measurement period. The results from the acquisition date through December 25, 2011 are included in the Apparel Labeling Solutions segment and were not material to the Consolidated Financial Statements (revenues of $35.3 million and a net loss of $9 thousand).
Pro forma results of operations have not been presented individually or in the aggregate for this acquisition because the effects of the acquisition were not material to our Consolidated Financial Statements.
Acquisitions in Fiscal 2010
In October, 2010 the Company entered into a Services and Purchase Agreement with Napar Contracting and Allied Services, Inc. (“Napar”) a Philippines based job contracting & outsourcing company with expertise in web development, software development, software quality assurance and such other similar services for $0.5 million. The transaction was paid in cash. Based on the terms of the transaction, 60% of the purchase price was due upon signing the agreement and the remaining 40% was paid on January 1, 2011.
At December 26, 2010, the financial statements reflect the final allocation of the Napar purchase price. This allocation resulted in acquired goodwill of $467 thousand, which is not tax deductible. Equipment included in this acquisition totaled $33 thousand, and is included in property, plant, & equipment, net in the accompanying Consolidated Balance Sheets. The results from the acquisition date through December 26, 2010 are included in the Apparel Labeling Solutions segment and were not material to the Consolidated Financial Statements.
Pro forma results of operations have not been presented individually or in the aggregate for this acquisition because the effects of the acquisition were not material to our Consolidated Financial Statements.
Acquisitions in Fiscal 2009
In July 2009, the Company 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 transaction was paid in cash and the purchase price includes the acquisition of 100% of Brilliant’s voting equity interests. Acquisition costs incurred in connection with the transaction are recognized within selling, general and administrative expenses in the Consolidated Statement of Operations and approximate $0.3 million, and $0.6 million for the years ended December 26, 2010, and December 27, 2009, respectively.
At December 27, 2009, the financial statements reflected the preliminary allocation of the Brilliant purchase price based on estimated fair values at the date of acquisition. The allocation of the purchase price remained open for certain information related to deferred income taxes. This allocation resulted in acquired goodwill of $4.3 million, which is not tax deductible. Intangible assets included in this acquisition were $1.4 million. The intangible assets were composed of a non-compete agreement ($0.9 million), customer lists ($0.4 million), and trade names ($0.1 million). The useful lives were 5 years for the non-compete agreement, 10 years for the customer lists, and 3 years for the trade names. The results from the acquisition date through December 27, 2009 are included in the Apparel Labeling Solutions segment and were not material to the Consolidated Financial Statements.
During the second quarter of 2010 we finalized our purchase accounting related to income taxes for the Brilliant acquisition and as a result we recorded a decrease to goodwill of $1.1 million. As of the second quarter of 2010, the financial statements reflect the final allocations of the purchase price based on the estimated fair values at the date of acquisition.
Pro forma results of operations have not been presented individually or in the aggregate for this acquisition because the effects of the acquisition were not material to our Consolidated Financial Statements.
Note 3. INVENTORIES
Inventories consist of the following:
| (amounts in thousands) | December 25, 2011 | December 26, 2010 |
| | | (As Revised) |
| Raw materials | $ 28,128 | $ 21,976 |
| Work-in-process | 10,481 | 5,416 |
| Finished goods | 92,378 | 79,302 |
| Total | $ 130,987 | $ 106,694 |
Note 4. REVENUE EQUIPMENT ON OPERATING LEASE AND PROPERTY, PLANT, AND EQUIPMENT
The major classes are:
| (amounts in thousands) | December 25, 2011 | December 26, 2010 |
| Revenue equipment on operating lease | | |
| Equipment rented to customers | $ 3,732 | $ 7,389 |
| Accumulated depreciation | (1,812) | (5,049) |
| Total revenue equipment on operating lease | $ 1,920 | $ 2,340 |
| | | |
| Property, plant, and equipment | | |
| Land | $ 9,862 | $ 10,416 |
| Buildings | 74,402 | 69,145 |
| Machinery and equipment | 204,215 | 168,253 |
| Leasehold improvements | 15,003 | 17,754 |
| Construction in progress | 10,282 | 15,222 |
| | 313,764 | 280,790 |
| Accumulated depreciation | (181,603) | (159,532) |
| Total property, plant, and equipment | $ 132,161 | $ 121,258 |
Property, plant, and equipment under capital lease had gross values of $2.2 million and $2.1 million and accumulated depreciation of $1.5 million and $1.5 million, as of December 25, 2011 and December 26, 2010, respectively.
Included in property, plant, and equipment as of December 25, 2011, is the impact of asset impairment adjustments of $7.8 million related to our restructuring activities.
Depreciation expense on our revenue equipment on operating lease and property, plant, and equipment was $24.5 million, $21.2 million, and $18.8 million, for 2011, 2010, and 2009, respectively.
Note 5. GOODWILL AND OTHER INTANGIBLE ASSETS
We had intangible assets with a net book value of $84.6 million, and $90.8 million as of December 25, 2011 and December 26, 2010, respectively.
The following table reflects the components of intangible assets as of December 25, 2011 and December 26, 2010:
| | | December 25, 2011 | | December 26, 2010 |
| (amounts in thousands) | Amortizable Life (years) | Gross Amount | Gross Accumulated Amortization | | Gross Amount | Gross Accumulated Amortization |
| Finite-lived intangible assets: | | | | | | |
| Customer lists | 6 to 20 | $ 81,348 | $ 43,945 | | $ 79,696 | $ 41,226 |
| Trade name | 1 to 30 | 30,007 | 18,237 | | 29,148 | 16,634 |
| Patents, license agreements | 3 to 14 | 60,249 | 47,704 | | 60,410 | 45,048 |
| Other | 2 to 6 | 7,160 | 5,830 | | 10,701 | 8,320 |
| Total amortized finite-lived intangible assets | | 178,764 | 115,716 | | 179,955 | 111,228 |
| | | | | | | |
| Indefinite-lived intangible assets: | | | | | | |
| Trade name | | 21,509 | — | | 22,096 | — |
| Total identifiable intangible assets | | $ 200,273 | $ 115,716 | | $ 202,051 | $ 111,228 |
We recorded $10.8 million, $11.2 million, and $11.6 million of amortization expense for 2011, 2010, and 2009, respectively.
In December 2011, as a result of our annual impairment test of our indefinite-lived trade names, we recorded a $0.6 million impairment charge to the SIDEP trade name. The impairment charge was recorded in asset impairments in the Shrink Management Solutions segment on the Consolidated Statement of Operations.
Estimated amortization expense for each of the five succeeding years is anticipated to be:
(amounts in thousands)
| 2012 | $ 10,031 |
| 2013 | $ 8,873 |
| 2014 | $ 8,361 |
| 2015 | $ 8,187 |
| 2016 | $ 7,729 |
The changes in the carrying amount of goodwill are as follows:
| (amounts in thousands) | Shrink Management Solutions | Apparel Labeling Solutions | Retail Merchandising Solutions | Total |
| Balance as of December 27, 2009 | $ 171,878 | $ 4,300 | $ 67,884 | $ 244,062 |
| Acquired during the year | — | 467 | — | 467 |
| Purchase accounting adjustment | — | (1,077) | — | (1,077) |
| Translation adjustments | (6,554) | 225 | (5,798) | (12,127) |
| Balance as of December 26, 2010 | $ 165,324 | $ 3,915 | $ 62,086 | $ 231,325 |
| Acquired during the year | — | 58,008 | — | 58,008 |
| Discontinued operations | (3,782) | — | — | (3,782) |
| Translation adjustments | 269 | 661 | (378) | 552 |
| Balance as of December 25, 2011 | $ 161,811 | $ 62,584 | $ 61,708 | $ 286,103 |
The following table reflects the components of goodwill as of December 25, 2011 and December 26, 2010:
| | December 25, 2011 | | December 26, 2010 |
| (amounts in thousands) | Gross Amount | Accumulated Impairment Losses | Goodwill, Net | | Gross Amount | Accumulated Impairment Losses | Goodwill, net |
| Shrink Management Solutions | $ 213,836 | $ 52,025 | $ 161,811 | | $ 219,771 | $ 54,447 | $ 165,324 |
| Apparel Labeling Solutions | 81,662 | 19,078 | 62,584 | | 23,102 | 19,187 | 3,915 |
| Retail Merchandising Solutions | 130,640 | 68,932 | 61,708 | | 130,486 | 68,400 | 62,086 |
| Total goodwill | $ 426,138 | $ 140,035 | $ 286,103 | | $ 373,359 | $ 142,034 | $ 231,325 |
During fiscal 2011, 2010 and 2009 we made multiple acquisitions which impacted goodwill and intangible assets. Refer to Note 2 of the Consolidated Financial Statements for more information on these acquisitions, including any impact of purchase accounting adjustments.
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 2011, 2010, and 2009, annual assessments did not result in an impairment charge.
Determining the fair value of a reporting unit is a matter of judgment and often involves the use of significant estimates and assumptions. The use of different assumptions would increase or decrease estimated discounted future cash flows and could increase or decrease an impairment charge. If the use of these assets or the projections of future cash flows change in the future, we may be required to record additional impairment charges. An erosion of future business results in any of the business units could create impairment in goodwill or other long-lived assets and require a significant charge in future periods.
In December, 2011, we classified our Banking Security Systems Integration business unit as held for sale. At December 25, 2011, the Banking Security Systems Integration business unit had recorded goodwill of $3.8 million related to a series of three acquisitions completed during 2007 and 2008. As a result of the conclusion to report the business as held for sale, we tested the goodwill of the disposal group and determined that there was a $3.4 million impairment charge. We also recorded an impairment of definite-lived customer relationships of $2.8 million as a result of our decision to sell the Banking Security Systems Integration business unit. The impairment charges were recorded in discontinued operations on the Consolidated Statement of Operations.
Note 6. SHORT-TERM BORROWINGS AND CURRENT PORTION OF LONG-TERM DEBT
Short-term borrowings and current portion of long-term debt at December 25, 2011 and at December 26, 2010 consisted of the following:
| (amounts in thousands) | December 25, 2011 | December 26, 2010 |
| Line of credit | $ — | $ 1,808 |
| Overdraft | 405 | — |
| Full-recourse factoring liabilities | 8,809 | 13,065 |
| Term loans | 9,125 | 4,950 |
| Revolving loan facility | — | 386 |
| Other short-term borrowings | 2,529 | — |
| Current portion of long-term debt | 910 | 2,016 |
| Total short-term borrowings and current portion of long-term debt | $ 21,778 | $ 22,225 |
In December 2011, $4.2 million (HKD 32.5 million) was paid in order to extinguish our existing Hong Kong banking facility and other outstanding Hong Kong debt. In December 2011, we entered into a new five-year Hong Kong banking facility. The maximum availability under the facility is $8.9 million (HKD 69.0 million), and includes an $8.4 million (HKD 65.0 million) term loan and a $0.5 million (HKD 4.0 million) overdraft facility. The term loan bears interest at a rate of HIBOR + 2.75% and the overdraft facility bears interest at a rate of HKD Best Lending Rate + 2.00%. As of December 25, 2011, $8.4 million (HKD 65.0 million) was outstanding on the term loan. The banking facility is subject to the bank’s right to call the liabilities at any time, and is therefore included in short-term borrowings in the accompanying Consolidated Balance Sheets.
In connection with the acquisition of the Shore to Shore businesses, the Company assumed debt of $4.2 million. As of December 25, 2011, $3.8 million related to the assumed debt remained outstanding. The debt assumed includes capital leases, accounts receivable factoring arrangements, term loans, an overdraft facility, and other short-term loans. With the exception of the capital leases, the banking facilities are subject to the banks’ rights to call the liabilities at any time, and are therefore included in short-term borrowings in the accompanying Consolidated Balance Sheets.
In September 2010, $7.2 million (¥600 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 Sheets. In November 2010, we entered into a new Japanese local line of credit for $1.8 million (¥150 million). During the fourth quarter of 2011, our Japanese local line of credit of $1.9 million (¥150 million) was paid down.
During the first quarter of 2010, our outstanding Asialco loans of $3.7 million (RMB 25 million) were paid down.
In October 2009, the Company 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%. As of December 25, 2011, the interest rate was 4.5%. As of December 25, 2011, our short-term full-recourse factoring arrangement equaled $8.8 million (€6.8 million) and is included in short-term borrowings in the accompanying Consolidated Balance Sheets. The full-recourse factoring arrangement was extended in December 2011 for a twelve month period.
Note 7. LONG-TERM DEBT
Long-term debt at December 25, 2011 and December 26, 2010 consisted of the following:
(amounts in thousands) | December 25, 2011 | December 26, 2010 |
| Senior Secured Credit Facility: | | |
| $125 million variable interest rate revolving credit facility maturing in 2014 | $ 52,248 | $ 42,687 |
| Senior Secured Notes: | | |
| $25 million 4.00% fixed interest rate Series A senior secured notes maturing in 2015 | 25,000 | 25,000 |
| $25 million 4.38% fixed interest rate Series B senior secured notes maturing in 2016 | 25,000 | 25,000 |
| $25 million 4.75% fixed interest rate Series C senior secured notes maturing in 2017 | 25,000 | 25,000 |
| Full-recourse factoring liabilities | 1,333 | 1,740 |
| Other capital leases with maturities through 2016 | 1,013 | 2,313 |
Total(1) | 129,594 | 121,740 |
| Less current portion | 910 | 2,016 |
| Total long-term portion | $ 128,684 | $ 119,724 |
| (1) | The weighted average interest rates for 2011 and 2010 were 4.0% and 3.9%, respectively. |
Revolving Credit Facility
On July 22, 2010, we entered into an Amended and Restated Senior Secured Credit Facility (the “Senior Secured Credit Facility”) with a syndicate of lenders. The Senior Secured Credit Facility provides us with a $125.0 million four-year senior secured multi-currency revolving credit facility.
The Senior Secured Credit Facility amended and restated the terms of our existing $125.0 million senior secured multi-currency revolving credit agreement (“Secured Credit Facility”). The amendments primarily reflect an extension of the terms of the Secured Credit Facility, reductions in the interest rates charged on the outstanding balances, and favorable changes with regard to the collateral provided under the Senior Secured Credit Facility. Prior to entering into the Senior Secured Credit Facility, $102.2 million of the Secured Credit Facility was paid down during the third quarter of 2010.
The Senior Secured Credit Facility provides for a revolving commitment of up to $125.0 million with a term of four years from the effective date of July 22, 2010. We may borrow, prepay and re-borrow under the Senior Secured Credit Facility as long as the sum of the outstanding principal amounts is less than the aggregate facility availability. The Senior Secured Credit Facility also includes an expansion option that will allow us to request an increase in the Senior Secured Credit Facility of up to an aggregate of $50.0 million, for a potential total commitment of $175.0 million. As of December 25, 2011, we did not elect to request the $50.0 million expansion option.
The Senior Secured Credit Facility contains a $25.0 million sublimit for the issuance of letters of credit of which $1.4 million, issued under the Secured Credit Facility, are outstanding as of December 25, 2011. The Senior Secured Credit Facility also contains a $15.0 million sublimit for swingline loans.
Borrowings under the Senior Secured Credit Facility, other than swingline loans, bear interest at our option of either a spread ranging from 1.25% to 2.50% over the Base Rate (as described below), or a spread ranging from 2.25% to 3.50% over the LIBOR rate, and in each case fluctuating in accordance with changes in our leverage ratio, as defined in the Senior Secured Credit Facility. The “Base Rate” is the highest of (a) our lender’s prime rate, (b) the Federal Funds rate, plus 0.50%, and (c) a daily rate equal to the one-month LIBOR rate, plus 1.0%. Swingline loans bear interest of (i) a spread ranging from 1.25% to 2.50% over the Base Rate with respect to swingline loans denominated in U.S. dollars, or (ii) a spread ranging from 2.25% to 3.50% over the LIBOR rate for one month U.S. dollar deposits, as of 11:00 a.m., London time. We pay an unused line fee ranging from 0.30% to 0.75% per annum based on the unused portion of the commitment under the Senior Secured Credit Facility.
All obligations of domestic borrowers under the Senior Secured Credit Facility are irrevocably and unconditionally guaranteed on a joint and several basis by our domestic subsidiaries. The obligations of foreign borrowers under the Senior Secured Credit Facility are irrevocably and unconditionally guaranteed on a joint and several basis by certain of our foreign subsidiaries as well as the domestic guarantors. Collateral under the Senior Secured Credit Facility includes a 100% stock pledge of domestic subsidiaries and a 65% stock pledge of all first-tier foreign subsidiaries, excluding our Japanese sales subsidiary.
Pursuant to the terms of the Senior Secured Credit Facility, we are subject to various requirements, including covenants requiring the maintenance of a maximum total leverage ratio of 2.75 and a minimum fixed charge coverage ratio of 1.25. The Senior Secured Credit Facility also contains customary representations and warranties, affirmative and negative covenants, notice provisions and events of default, including change of control, cross-defaults to other debt, and judgment defaults. Upon a default under the Senior Secured Credit Facility, including the non-payment of principal or interest, our obligations under the Senior Secured Credit Facility may be accelerated and the assets securing such obligations may be sold. Certain wholly-owned subsidiaries with respect to the Company are guarantors of our obligations under the Senior Secured Credit Facility. The impact of our restructuring initiatives and on-going economic conditions are expected to put pressure on our leverage ratio covenant during 2012. As a proactive measure, we pursued an amendment to temporarily increase the leverage ratio. This amendment was approved and deemed effective as of February 17, 2012. As of December 25, 2011, we were in compliance with all covenants.
In connection with the Senior Secured Credit Facility, the Company incurred $1.7 million in fees and expenses, which are amortized over the term of the Senior Secured Credit Facility to interest expense on the Consolidated Statement of Operations. The remaining unamortized debt issuance costs recognized in connection with the Secured Credit Facility of $2.4 million are amortized over the term of the Senior Secured Credit Facility to interest expense on the Consolidated Statement of Operations.
Senior Secured Notes
Also on July 22, 2010, we entered into a Note Purchase and Private Shelf Agreement (the “Senior Secured Notes Agreement”) with a lender, and certain other purchasers party thereto (together with the lender, the “Purchasers”).
Under the Senior Secured Notes Agreement, we issued to the Purchasers its Series A Senior Secured Notes in an aggregate principal amount of $25.0 million (the “Series A Notes”), its Series B Senior Secured Notes in an aggregate principal amount of $25.0 million (the “Series B Notes”), and its Series C Senior Secured Notes in an aggregate principal amount of $25.0 million (the “Series C Notes”); together with the Series A Notes and the Series B Notes, (the “2010 Notes”). The Series A Notes bear interest at a rate of 4.00% per annum and mature on July 22, 2015. The Series B Notes bear interest at a rate of 4.38% per annum and mature on July 22, 2016. The Series C Notes bear interest at a rate of 4.75% per annum and mature on July 22, 2017. The 2010 Notes are not subject to any scheduled prepayments. The entire outstanding principal amount of each of the 2010 Notes shall become due on their respective maturity date.
The Senior Secured Notes Agreement also provides that for a three-year period ending on July 22, 2013, we may issue, and our lender may, in its sole discretion, purchase, additional fixed-rate senior secured notes (the “Shelf Notes”); together with the 2010 Notes, (the “Notes”), up to an aggregate amount of $50.0 million. The aggregate principal amount of the Shelf Notes issued at any time shall be no less than $5.0 million. The Shelf Notes will have a maturity date of no more than 10 years from the respective maturity date and an average life of no more than 7 years after the date of issue. The Shelf Notes will have such other terms, including principal amount, interest rate and repayment schedule, as agreed with our lender at the time of issuance. As of December 25, 2011, we did not issue additional fixed-rate senior secured notes.
We may prepay the Notes in a minimum principal amount of $1.0 million and in $0.1 million increments thereafter, at 100% of the principal amount so prepaid, plus an amount equal to the excess, if any, of the present value of the remaining scheduled payments of principal and interest on the amount repaid, over the principal amount repaid. Either we or our lender may terminate the private shelf facility with respect to undrawn amounts upon 30 days’ written notice, and our lender may terminate the private shelf facility with respect to undrawn amounts upon the occurrence and/or continuation of an event of default or acceleration of any Note.
All obligations under the Senior Secured Notes are irrevocably and unconditionally guaranteed on a joint and several basis by our domestic subsidiaries. Collateral under the Senior Secured Notes includes a 100% stock pledge of domestic subsidiaries and a 65% stock pledge of all first-tier foreign subsidiaries, excluding our Japanese sales subsidiary.
The Senior Secured Notes Agreement is subject to covenants that are substantially similar to the covenants in the Senior Secured Credit Facility Agreement, including covenants requiring the maintenance of a maximum total leverage ratio of 2.75 and a minimum fixed charge coverage ratio of 1.25. The Senior Secured Notes Agreement also contains representations and warranties, affirmative and negative covenants, notice provisions and events of default, including change of control, cross-defaults to other debt, and judgment defaults that are substantially similar to those contained in the Senior Secured Credit Facility, and those that are customary for similar private placement transactions. Upon a default under the Senior Secured Notes Agreement, including the non-payment of principal or interest, our obligations under the Senior Secured Notes Agreement may be accelerated and the assets securing such obligations may be sold. Certain of our wholly-owned subsidiaries are also guarantors of our obligations under the Notes. The impact of our restructuring initiatives and on-going economic conditions are expected to put pressure on our leverage ratio covenant during 2012. As a proactive measure, we pursued an amendment to temporarily increase the leverage ratio through the end of the third quarter of 2012. This amendment was approved and deemed effective as of February 17, 2012. As of December 25, 2011, we were in compliance with all covenants.
In connection with the Senior Secured Notes, the Company incurred $0.2 million in fees and expenses, which are amortized over the term of the Notes to interest expense on the Consolidated Statement of Operations.
Full-recourse Factoring Arrangements
In December 2009, we entered into new full-recourse factoring arrangements. The arrangements are secured by trade receivables. The Company received a weighted average of 92.4% of the face amount of receivables that it desired to sell and the bank agreed, at its discretion, to buy. As of December 25, 2011 the factoring arrangements had a balance of $1.3 million (€1.0 million), of which $0.4 million (€0.3 million) was included in the current portion of long-term debt and $0.9 million (€0.7 million) was included in long-term borrowings in the accompanying Consolidated Balance Sheets since the receivables are collectable through 2016.
The aggregate maturities on all long-term debt (including current portion) are:
| (amounts in thousands) | Debt | Capital Leases | Total Debt |
| 2012 | $ 385 | $ 525 | $ 910 |
| 2013 | 365 | 294 | 659 |
| 2014 | 77,564 | 128 | 77,692 |
| 2015 | 25,212 | 55 | 25,267 |
| 2016 | 25,055 | 11 | 25,066 |
| Thereafter | — | — | — |
| Total | $ 128,581 | $ 1,013 | $ 129,594 |
Note 8. STOCK-BASED COMPENSATION
At December 25, 2011, we had stock-based employee compensation plans as described below. For the years ended December 25, 2011, December 26, 2010, and December 27, 2009, the total compensation expense (included in selling, general, and administrative expense) related to these plans was $7.5 million, $8.8 million, and $7.1 million ($7.3 million, $6.4 million, and $5.0 million, net of tax), respectively.
Stock Plans
On April 29, 2004, the shareholders approved the Checkpoint Systems, Inc. 2004 Omnibus Incentive Compensation Plan (2004 Plan). The initial shares available under the 2004 Plan were approximately 3,500,000, which represent the shares that were available at that time under the 1992 Stock Option Plan (1992 Plan). All cancellations and forfeitures related to share units outstanding under the 1992 Plan will be added back to the shares available for grant under the 2004 Plan. No further awards will be issued under the 1992 Plan. The 2004 Plan is designed to provide incentives to employees, non-employee directors, and independent contractors through the award of stock options, stock appreciation rights, stock units, phantom shares, dividend equivalent rights and cash awards. The Compensation Committee (Committee) of our Board of Directors administers the 2004 Plan and determines the terms and conditions of each award. Stock options issued under the 2004 Plan primarily vest over a three-year period and expire not more than 10 years from date of grant. Restricted stock units vest over three to five year periods from date of grant. On June 3, 2009, at the 2009 Annual Meeting of Shareholders of Checkpoint Systems, Inc., the shareholders of the Company approved the Checkpoint Systems, Inc. Amended and Restated 2004 Omnibus Incentive Compensation Plan, Effective Date: February 17, 2009 (the “Omnibus Incentive Plan”), which was amended and restated to extend the term of the Omnibus Incentive Plan by an additional five years and to re-approve the performance goals set forth under the Omnibus Incentive Plan. The 2004 Plan was further amended on June 2, 2010, at the 2010 Annual Meeting of Shareholders of Checkpoint Systems, Inc., when our shareholders approved the Checkpoint Systems, Inc. Amended and Restated 2004 Omnibus Incentive Compensation Plan (the “Plan”), which was amended and restated to:
| · | increase the number of shares of the Company’s common stock reserved for issuance under the Plan by 3,250,000 shares to an aggregate of 6,687,956 shares; |
| · | revise the “repricing” provision such that the new provision will provide that, except in respect of certain corporate transactions, the terms of outstanding awards may not be amended to (i) reduce the exercise price of outstanding stock options or stock appreciation rights (“SARs”), or (ii) cancel, exchange, substitute, buy out or surrender outstanding options or SARs in exchange for cash, other awards, stock options or SARs with an exercise price that is less than the exercise price of the original stock options or SARs (as applicable) without shareholder approval; |
| · | impose a limitation on certain shares of the Company’s common stock from again being made available for issuance under the Plan such that the following shares of the Company’s common stock may not again be made available for issuance: (i) shares of common stock not issued or delivered as a result of the net settlement of an outstanding SAR or stock option, (ii) shares of common stock used to pay the exercise price or withholding taxes related to an outstanding award, or (iii) shares of common stock repurchased on the open market with the proceeds of the stock option exercise price; |
| · | establish a minimum exercise price with respect to stock options or SARs to be granted under the Plan such that no stock option or SAR may be granted under the Plan with a per share exercise price that is less than 100% of the fair market value of one share of the Company’s common stock on the date of grant; and |
| · | establish a limitation against the payment of any cash dividend or dividend equivalent right (“DER”) with respect to awards that vest based upon the attainment of one or more performance measures such that no awards granted under the Plan based upon the attainment of one or more performance measures will be entitled to receive payment of any cash dividends or DERs with respect to such awards unless and until such awards vest. |
As of December 25, 2011, there were 3,689,612 shares available for grant under the 2004 Plan.
Our 1992 Stock Option Plan (1992 Plan) allowed us to grant either Incentive Stock Options (ISOs) or Non-Incentive Stock Options (NSOs) to purchase up to 16,000,000 shares of common stock. Only employees were eligible to receive ISOs and both employees and non-employee directors of the Company were eligible to receive NSOs. On February 17, 2004, the Plan was amended to allow an independent consultant to receive NSOs. All ISOs under the 1992 Plan expire not more than ten years (plus six months in the case of NSOs) from the date of grant. Both ISOs and NSOs require a purchase price of not less than 100% of the fair market value of the stock at the date of grant. As of December 25, 2011, there were no shares available for grant under the 1992 Plan.
On December 27, 2007, we adopted a stand alone inducement stock option plan authorizing the issuance of options to purchase up to 270,000 shares of our common stock, which were granted to the newly elected President and CEO of the Company in connection with his hire. The non-qualified stock options provide for three vesting instances: 60% on December 31, 2010; 20% on December 31, 2011; and 20% on December 31, 2012. The options also have a market condition. The market condition specifies that any unvested tranche will vest immediately as soon as the Company’s stock price exceeds 200% of the December 27, 2007, strike price of $22.71. In addition, there were 230,000 shares issued out of our Omnibus Incentive Compensation Plan with similar vesting and market based criteria as described above.
To determine the fair value of stock options with market conditions we used the Monte Carlo simulation lattice model using the following assumptions: (i) expected volatility of 37.04%, (ii) risk-free rate of 4.1%, (iii) expected term of 10 years, and (iv) an expected dividend yield of zero. The weighted average fair value of the stock options with market conditions was $12.43 per share.
During fiscal 2005, we initiated a Long-Term Incentive Plan (LTIP). Under this plan, restricted stock units (RSUs) were awarded to eligible executives. During fiscal 2006, we expanded the scope of the LTIP. Under the expanded plan, RSUs were awarded to eligible key employees.
On April 4, 2007, RSUs were awarded to eligible key employees of the Company as part of the LTIP 2007 plan. The number of shares for these units varies based on the Company’s revenue and earnings per share. These units cliff vest at the end of fiscal 2009. As of December 30, 2007, 20,000 units vested at a grant price of $23.91 per share in accordance with the former CEO’s retirement plan. At December 28, 2008, we reversed $1.7 million of previously recognized compensation cost since it was determined that the Company would not achieve the revenue and earnings per share targets set for in the 2007 LTIP plan during fiscal 2009. At December 27, 2009, the Company did not achieve the targets required by the plan and as a result no remaining RSUs were earned under this plan.
On December 4, 2007, RSUs were awarded to certain key employees of the Company’s Alpha Security Products Division as part of the LTIP plan. The number of shares for these units varies based on the Company’s Alpha® product revenues. These units had the potential to vest 33% per year, over a three-year period ending at the end of fiscal 2010. The weighted average price for these RSUs was $21.84 per share. At December 26, 2010, we reversed $0.6 million of previously recognized compensation cost since it was determined that the Company did not achieve the revenue targets set forth in the plan. Accordingly, no remaining RSUs were earned under this plan.
On February 17, 2009, RSUs were awarded to certain key employees of the Company as part of the LTIP 2009 plan. The number of shares for these units varies based on the Company achieving specific relative performance goals versus a pool of peer companies during the January 2009 to December 2011 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The weighted average price for these RSUs was $8.12 per share. At December 25, 2011, we reversed $0.5 million of previously recognized compensation cost since it was determined that the Company would not achieve the specific relative performance goals set forth in the plan. Accordingly, no RSUs were earned under this plan.
On February 12, 2010, RSUs were awarded to certain key employees of the Company as part of the LTIP 2010 plan. The number of shares for these units varies based on the Company achieving specific relative performance goals versus a pool of peer companies during the January 2010 to December 2012 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The weighted average price for these RSUs was $15.83 per share. Additional RSUs related to the LTIP 2010 plan were awarded on February 22, 2010, and March 11, 2010, with a weighted average price of $17.06 and $21.76 per share, respectively. For fiscal year 2011, $0.3 million was charged to compensation expense. As of December 25, 2011, total unamortized compensation expense for this grant was $0.6 million. As of December 25, 2011, the maximum achievable RSUs outstanding under this plan are 156,600 units. These RSUs reduce the shares available to grant under the 2004 Plan.
On February 17, 2011, RSUs were awarded to certain key employees of the Company as part of the LTIP 2011 plan. The number of shares for these units varies based on the Company achieving specific relative performance goals versus the Russell 2000 index during the January 2011 to December 2013 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The weighted average price for these RSUs was $22.54 per share. For fiscal year 2011, $0.4 million was charged to compensation expense. As of December 25, 2011, total unamortized compensation expense for this grant was $1.4 million. As of December 25, 2011, the maximum achievable RSUs outstanding under this plan are 154,764 units. These RSUs reduce the shares available to grant under the 2004 Plan.
Stock Options
Option activity under the principal option plans as of December 25, 2011 and changes during the year then ended were as follows:
| | Number of Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) |
| Outstanding at December 26, 2010 | 2,745,796 | $ 19.11 | 5.32 | $ 8,731 |
| Granted | 96,444 | 21.59 | | |
| Exercised | (128,218) | 12.37 | | |
| Forfeited or expired | (113,217) | 19.00 | | |
| Outstanding at December 25, 2011 | 2,600,805 | $ 19.54 | 4.39 | $ 512 |
| Vested and expected to vest at December 25, 2011 | 2,577,921 | $ 19.54 | 4.36 | $ 509 |
| Exercisable at December 25, 2011 | 2,150,695 | $ 19.56 | 3.79 | $ 359 |
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of fiscal 2011 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 25, 2011. This amount changes based on the fair market value of the Company’s stock. The total intrinsic value of options exercised for the years ended December 25, 2011, December 26, 2010, and December 27, 2009, was $1.1 million, $4.3 million, and $19 thousand, respectively.
As of December 25, 2011, $1.1 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 1.5 years.
Tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are classified as financing cash flows. Cash received from option exercises and purchases under the ESPP for the year ended December 25 2011 was $2.2 million. The actual tax benefit realized for the tax deduction from option exercises of the share-based payment units totaled $1.3 million and $1.3 million for the fiscal years ended December 25, 2011 and December 26, 2010. We have applied the “Short-cut” method in calculating the historical windfall tax benefits. All tax short falls will be applied against this windfall before being charged to earnings.
Restricted Stock Units
We issue service-based restricted stock units with vesting periods of three to five years. These awards are valued using their intrinsic value on the date of grant. The compensation expense is recognized straight-line over the vesting term.
Nonvested service-based restricted stock units as of December 25, 2011 and changes during the year ended December 25, 2011 were as follows:
| | Number of Shares | Weighted- Average Vest Date (in years) | Weighted- Average Grant Date Fair Value |
| Nonvested at December 26, 2010 | 630,244 | 0.81 | $ 20.48 |
| Granted | 248,892 | | $ 20.83 |
| Vested | (209,972) | | $ 18.92 |
| Forfeited | (51,492) | | $ 18.83 |
| Nonvested at December 25, 2011 | 617,672 | 0.79 | $ 21.29 |
| Vested and expected to vest at December 25, 2011 | 580,281 | 0.73 | |
| Vested at December 25, 2011 | 62,590 | — | |
The total fair value of restricted stock awards vested during 2011 was $4.0 million as compared to $3.3 million during 2010. As of December 25, 2011, there was $3.4 million unrecognized stock-based compensation expense related to nonvested restricted stock units. That cost is expected to be recognized over a weighted-average period of 1.7 years.
Other Compensation Arrangements
During fiscal 2010, we initiated a plan in which time-vested cash unit awards were granted to eligible employees. The time-vested cash unit awards under this plan vest one-third each year over three years from the date of grant. The total amount accrued related to the plan equaled $0.5 million at December 25, 2011, of which $0.6 million and $0.2 million was expensed for the years ended December 25, 2011 and December 26, 2010, respectively. The associated liability is included in Accrued Compensation and Related Taxes in the accompanying Consolidated Balance Sheets.
Note 9. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments in 2011, 2010, and 2009, includes payments for interest of $6.7 million, $3.6 million, and $6.3 million, respectively and also includes income taxes of $17.9 million, $22.4 million, and $8.7 million, respectively.
In January 2011, the Company entered into an agreement to acquire the business of Shore to Shore, through the acquisition of equity and/or assets, which together is a retail apparel and footwear product identification business which designs, manufactures and sells tags and labels, brand protection, and EAS solutions/labels. The acquisition was settled on May 16, 2011 for approximately $78.7 million, net of cash acquired of $1.9 million and the assumption of debt of $4.2 million. The purchase price was funded by $66.7 million of cash from operations and $9.2 million of borrowings under our Senior Secured Credit Facility. The acquisition payment, net of cash acquired, is reflected in the acquisition of businesses line within investing activities on the Consolidated Statement of Cash Flows.
Non-cash investing and financing activities are excluded from the Consolidated Statement of Cash Flows. During the third quarter of 2009 we transferred $5.6 million (HKD 43.0 million) of acquired Brilliant properties and relieved the associated liability to the former Brilliant owner. This transaction was a non-cash transaction and is excluded from our Consolidated Statement of Cash Flows as of December 27, 2009.
Excluded from the Consolidated Statement of Cash Flows for the years ended December 25, 2011, December 26, 2010, and December 27, 2009 are $0.1 million $0.4 million, and $2.8 million, respectively, of new capital lease obligations and related capitalized assets.
Business Acquisitions
| (amounts in thousands) | December 25, 2011 | December 26, 2010 | December 27, 2009 |
| Fair value of tangible assets acquired, less cash acquired | $ 28,535 | $ 33 | $ 52,275 |
| Goodwill and identified intangible assets | 68,458 | 467 | 5,929 |
| Liabilities assumed | (20,270) | — | (32,669) |
| Payment obligation | (786) | (200) | — |
| Cash paid for acquisitions | $ 75,937 | $ 300 | $ 25,535 |
Note 10. STOCKHOLDERS’ EQUITY
The components of accumulated other comprehensive income at December 25, 2011 and at December 26, 2010 are as follows:
| (amounts in thousands) | December 25, 2011 | December 26, 2010 |
| | | (As Revised) |
| Actuarial losses on pension plans, net of tax | $ (6,580) | $ (4,146) |
| Derivative hedge contracts, net of tax | 1,542 | 377 |
| Foreign currency translation adjustment | 17,779 | 14,239 |
| Total | $ 12,741 | $ 10,470 |
Note 11. EARNINGS PER SHARE
For fiscal years 2011, 2010, and 2009, basic earnings per share are based on net earnings divided by the weighted average number of shares outstanding during the period. The following data shows the amounts used in computing earnings per share and the effect on net earnings from continuing operations and the weighted average number of shares of dilutive potential common stock:
| (amounts in thousands, except per share data) | December 25, 2011 | December 26, 2010 | December 27, 2009 |
| | | (As Revised) | (As Revised) |
| Basic (loss) earnings from continuing operations attributable to Checkpoint Systems, Inc. available to common stockholders | $ (59,055) | $ 28,503 | $ 25,023 |
| | | | |
| Diluted (loss) earnings from continuing operations attributable to Checkpoint Systems, Inc. available to common stockholders | $ (59,055) | $ 28,503 | $ 25,023 |
| | | | |
| Shares: | | | |
| Weighted average number of common shares outstanding | 40,070 | 39,483 | 38,909 |
| Shares issuable under deferred compensation agreements | 462 | 452 | 396 |
| Basic weighted average number of common shares outstanding | 40,532 | 39,935 | 39,305 |
| Common shares assumed upon exercise of stock options and awards | — | 505 | 234 |
| Shares issuable under deferred compensation arrangements | — | 5 | 13 |
| Dilutive weighted average number of common shares outstanding | 40,532 | 40,445 | 39,552 |
| | | | |
| Basic (loss) earnings attributable to Checkpoint Systems, Inc. per share | | | |
| (Loss) earnings from continuing operations | $ (1.46) | $ .71 | $ .63 |
| Loss from discontinued operations, net of tax | (.18) | (.02) | (.02) |
| Basic (loss) earnings attributable to Checkpoint Systems, Inc. per share | $ (1.64) | $ .69 | $ .61 |
| | | | |
| Diluted (loss) earnings attributable to Checkpoint Systems, Inc. per share | | | |
| (Loss) earnings from continuing operations | $ (1.46) | $ .71 | $ .63 |
| Loss from discontinued operations, net of tax | (.18) | (.02) | (.02) |
| Diluted (loss) earnings attributable to Checkpoint Systems, Inc. per share | $ (1.64) | $ .69 | $ .61 |
Anti-dilutive potential common shares are not included in our earnings per share calculation. The Long-term Incentive Plan restricted stock units were excluded from our calculation due to the performance of vesting criteria not being met.
The number of anti-dilutive common share equivalents for the years ended December 25, 2011, December 26, 2010, and December 27, 2009 were as follows:
| (amounts in thousands) | December 25, 2011 | December 26, 2010 | December 27, 2009 |
Weighted average common share equivalents associated with anti-dilutive stock options and restricted stock units excluded from the computation of diluted EPS(1) | 2,380 | 1,516 | 2,507 |
| (1) | Adjustments for stock options and awards of 329 shares and deferred compensation arrangements of 11 shares were anti-dilutive in fiscal 2011 and therefore excluded from the earnings per share calculation due to our net loss for the year. |
Note 12. INCOME TAXES
The domestic and foreign components of earnings from continuing operations before income taxes are:
| (amounts in thousands) | December 25, 2011 | December 26, 2010 | December 27, 2009 |
| | | (As Revised) | (As Revised) |
| Domestic | $ (35,107) | $ (21,015) | $ (19,005) |
| Foreign | 35,535 | 58,760 | 54,664 |
| Total | $ 428 | $ 37,745 | $ 35,659 |
Provision for income taxes:
| (amounts in thousands) | December 25, 2011 | December 26, 2010 | December 27, 2009 |
| | | (As Revised) | (As Revised) |
| Currently payable | | | |
| Federal | $ 365 | $ 234 | $ (2,565) |
| State | 99 | 42 | (41) |
| Puerto Rico | 23 | (3,950) | 45 |
| Foreign | 11,441 | 15,891 | 20,555 |
| Total currently payable | 11,928 | 12,217 | 17,994 |
| | | | |
| Deferred | | | |
| Federal | 49,395 | (5,127) | (9,833) |
| State | 526 | 4,320 | 1,002 |
| Puerto Rico | (377) | (707) | 540 |
| Foreign | (1,932) | (1,345) | 1,380 |
| Total deferred | 47,612 | (2,859) | (6,911) |
| Total provision | $ 59,540 | $ 9,358 | $ 11,083 |
Adjustments have been made to prior year figures in the table above to be more presentable with the current year.
Deferred tax assets/liabilities at December 25, 2011 and December 26, 2010 consist of:
| (amounts in thousands) | December 25, 2011 | December 26, 2010 |
| | | (As Revised) |
| Inventory | $ 4,930 | $ 4,817 |
| Accounts receivable | 2,513 | 1,296 |
| Capitalized research and development costs | 18,476 | 13,582 |
| Net operating loss and foreign tax credit carryforwards | 62,685 | 58,728 |
| Restructuring | 2,537 | 1,633 |
| Deferred revenue | (1,316) | (105) |
| Pension | 7,890 | 6,724 |
| Warranty | 1,507 | 1,469 |
| Deferred compensation | 4,980 | 2,306 |
| Stock based compensation | 8,148 | 6,740 |
| Depreciation | 1,052 | 2,501 |
| Other | 12,349 | 11,927 |
| Valuation allowance | (102,148) | (37,808) |
| Deferred tax assets | 23,603 | 73,810 |
| Intangibles | 9,542 | 10,447 |
| Withholding tax liabilities | 2,365 | 945 |
| Deferred tax liabilities | 11,907 | 11,392 |
| Net deferred tax assets | $ 11,696 | $ 62,418 |
At December 25, 2011, we had $35.4 million of net operating loss carryforwards (tax effected) in certain non-U.S. jurisdictions. Of these, $27.1 million have no expiration, and the remaining $8.3 million will expire in future years through 2031. In the U.S., there were approximately $6.6 million of federal and $6.8 million of state net operating loss carryforwards, which will expire in future years through 2031. Of the $6.6 million of federal net operating loss carryforwards, $6.3 million is subject to IRC § 382 limitations. In 2011, in connection with the acquisition of the Shore to Shore business, we acquired J&F International, a U.S. company, with $7.3 million of net operating loss carryforwards, of which $7.3 million are subject to IRC § 382 limitations. We concluded, based on results of operations in the U.S., the acquired § 382 limited net operating loss carryforwards are likely to expire unutilized, therefore, no gross asset has been recognized. In the U.S., a $1.1 million and $3.5 million (gross) windfall benefit on stock compensation occurred in 2011 and 2010, respectively. We have not recorded these amounts to additional capital or increased its related net operating loss carryforward due to the fact that the windfall benefits have not reduced income taxes payable. We have adopted a “with and without” approach with regards to utilization of windfall benefits. At December 25, 2011, we had U.S. foreign tax credit carryforwards of $12.7 million with expiration dates ranging from 2014 to 2021.
In accordance with ASC 740, “Accounting for Income Taxes”, we evaluate our deferred income taxes quarterly to determine if valuation allowances are required or should be adjusted. ASC 740 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on all available evidence, both positive and negative, using a “more likely than not” standard. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with loss carryforwards not expiring and tax planning alternatives. We operate and derive income across multiple jurisdictions. As the geographic footprint of the business changes, we may encounter losses in jurisdictions that have been historically profitable, and as a result might require additional valuation allowances to be recorded against certain deferred tax asset balances. At December 25, 2011 and December 26, 2010, we had net deferred tax assets of $11.7 million and $62.4 million, respectively.
During 2010 negative evidence arose in the form of cumulative losses in the U.S. and Germany, with net deferred tax assets of $41.7 million and $9.6 million, respectively. In 2010, and the first six months of 2011, we considered all available evidence and was able to conclude on a more likely than not basis that the effects of our commitment to specific tax planning actions provided a sufficient amount of positive evidence to support the continued benefit of the jurisdictions’ deferred tax assets. We are committed to implementing tax planning actions, when deemed appropriate, in jurisdictions that experience losses in order to realize deferred tax assets prior to their expiration.
During the quarter ending September 25, 2011, a valuation allowance in the amount of $48 million was established related to all components of the domestic net deferred tax assets based on the determination after the above considerations that it was more likely than not that the deferred tax assets would not be fully realized. The amount of valuation allowance recorded is greater than the net domestic deferred tax asset after consideration of deferred tax liabilities associated with non-amortizable assets such as goodwill and indefinite lived intangibles. This charge was primarily a result of the trend of significant domestic losses experienced in recent years, as well as the reduction of our global earnings experienced during the first nine months of 2011. We have not recorded a valuation allowance on the net German deferred tax asset and continue to rely on a tax planning action that has been executed in the fourth quarter of 2011. The German tax planning action does not significantly rely on our global earnings to utilize German deferred tax assets.
In May 2011, we acquired a retail apparel and footwear product identification business which designs, manufactures and sells tags and labels, brand protection, and EAS solutions/labels (collectively, the “Shore to Shore businesses”) through the acquisition of equity and/or assets. As of December 25, 2011, we have established a preliminary opening net deferred tax liability of $3.0. In addition, we have established $3.1 million of income tax liabilities related to uncertain tax positions in pre-acquisition tax years. The income tax adjustments related to purchase accounting for the Shore to Shore businesses is expected to be finalized in 2012.
In July 2009, we purchased the stock of Brilliant Label Manufacturing Ltd., a China-based manufacturer of paper, fabric and woven tags and labels. As of December 27, 2009, we had established a preliminary opening net deferred tax liability of $3.7 million. In addition, we had established $2.6 million of income tax related to uncertain tax positions for Brilliant in pre-acquisition tax years. During the second quarter of 2010 we finalized our purchase accounting related to income taxes for the Brilliant acquisition and as a result, we recorded a decrease to our deferred tax liability and an increase to our accrual for uncertain tax positions (tax contingencies) of $1.3 million and $0.2 million, respectively. As of the second quarter of 2010, the financial statements reflected the final allocations of the purchase price based on the estimated fair values at the date of acquisition.
Undistributed earnings of certain foreign subsidiaries for which taxes have not been provided approximate $2.6 million as of December 25, 2011. Such undistributed earnings are considered to be indefinitely reinvested in foreign operations. A liability could arise if our intention to permanently reinvest such earnings were to change and amounts are distributed by such subsidiaries or if such subsidiaries are ultimately disposed. It is not practicable to estimate the additional income taxes related to permanently reinvested earnings or the basis differences related to investments in subsidiaries.
In the fourth quarter of 2011, we changed our assertion on unremitted earnings for certain foreign subsidiaries, primarily due to pressure on our leverage ratio for debt covenants. This resulted in the repatriation of foreign earnings in order to reduce worldwide debt to the levels stipulated by our covenants. Also impacting the change in assertion was the projected future cash impact of the 2011 Global Restructuring Plan.
As of December 25, 2011, we provided a deferred tax liability of approximately $2.4 million for withholding taxes associated with future repatriation of earnings for certain subsidiaries. We have not provided deferred tax liabilities for temporary differences related to basis differences in investments in subsidiaries, as such earnings are expected to be permanently reinvested, the investments are essentially permanent in duration, or we have concluded that no additional tax liability will arise as a result of the distribution of such earnings.
A reconciliation of the tax provision at the statutory U.S. Federal income tax rate with the tax provision at the effective income tax rate follows:
| (amounts in thousands) | December 25, 2011 | December 26, 2010 | December 27, 2009 |
| | | (As Revised) | (As Revised) |
| Tax provision at the statutory federal income tax rate | $ 150 | $ 13,211 | $ 12,481 |
| Unremitted earnings | 1,430 | — | — |
| Non-deductible permanent items | 1,790 | 1,543 | 1,297 |
| State and local income taxes, net of federal benefit | 625 | 4,363 | 961 |
| Losses for which no tax benefit recognized | 11,929 | 1,408 | 2,077 |
| Foreign rate differentials | (3,660) | (7,905) | (8,445) |
| Tax settlements | — | (47) | (20) |
| Potential tax contingencies | (1,086) | (3,488) | (72) |
| Change in valuation allowance | 47,684 | — | 3,515 |
| Stock based compensation | 366 | 441 | 349 |
| Other | 312 | (168) | (1,060) |
| Tax provision at the effective tax rate | $ 59,540 | $ 9,358 | $ 11,083 |
Adjustments have been made to prior year figures in the table above to be more presentable with the current year.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| ( amounts in thousands) | December 25, 2011 | December 26, 2010 | December 27, 2009 |
| | | (As Revised) | (As Revised) |
| Gross unrecognized tax benefits at beginning of year | $ 12,846 | $ 14,884 | $ 12,520 |
| Increases in tax positions for prior years | 997 | 1,161 | 2,502 |
| Decreases in tax positions for prior years | (44) | — | (1,684) |
| Increases in tax positions for current year | 808 | 1,229 | 1,442 |
| Settlements | (443) | (928) | — |
| Acquisition reserves | 2,029 | 240 | 2,631 |
| Lapse in statute of limitations | (2,954) | (3,740) | (2,527) |
| Gross unrecognized tax benefits at end of year | $ 13,239 | $ 12,846 | $ 14,884 |
The total amount of gross unrecognized tax benefits that, if recognized, would affect the effective tax rate was $13.2 million and $12.8 million at December 25, 2011 and December 26, 2010, respectively. Penalties and tax-related interest expense are reported as a component of income tax expense. During fiscal years ended December 25, 2011, December 26, 2010 and December 27, 2009, we recognized interest and penalties of $1.0 million, ($2.8) million, and $0.4 million, respectively in the statement of operations. At December 25, 2011 and December 26, 2010, we have accrued interest and penalties related to unrecognized tax benefits of $4.6 million and $3.6 million, respectively.
We file income tax returns in the U.S. and in various states, local and foreign jurisdictions. We are routinely examined by tax authorities in these jurisdictions. It is possible that these examinations may be resolved within the next twelve months. Due to the potential for resolution of Federal, state and foreign examinations, and the expiration of various statutes of limitation, it is reasonably possible that the gross unrecognized tax benefits balance may change within the next twelve months by a range of $8.3 million to $2.6 million.
We are currently under audit in the following major jurisdictions: United States 2007 – 2008, Germany 2002 – 2009, Finland 2008 – 2009, Sweden 2007 – 2009, and France 2008 – 2010.
Note 13. EMPLOYEE BENEFIT PLANS
Under our defined contribution savings plans, eligible employees may make basic (up to 6% of an employee’s earnings) and supplemental contributions. We match in cash 50% of the participant’s basic contributions. Company contributions vest to participants in increasing percentages over one to five years of service. Our contributions under the plans approximated $1.5 million, $1.3 million, and $1.1 million, in 2011, 2010, and 2009, respectively.
Generally, all employees in the U.S. may participate in our U.S. Savings Plan. All full-time employees of the Puerto Rico subsidiary who have completed three months of service may participate in our Puerto Rico Savings Plan.
During fiscal 2005, we initiated a 423(b) Employee Stock Purchase Plan (ESPP), which was adopted by the shareholders at the Annual Shareholder Meeting on April 29, 2004. This plan replaces the non-qualified Employee Stock Purchase Plan. Under the provisions of the 423(b) plan, eligible employees may contribute from 1% to 25% of their base compensation to purchase shares of our common stock at 85 percent of the fair market value on the offering date or the exercise date of the offering period, whichever is lower.
On June 3, 2009, at the 2009 Annual Meeting of Shareholders of Checkpoint, our shareholders amended the ESPP in order to increase the number of shares of the Company’s common stock reserved for issuance under the ESPP by 400,000 shares to an aggregate of 650,000 shares. Our expense for this plan in fiscal 2011, 2010 and 2009 was $0.6 million, $0.6 million, and $0.6 million, respectively. As of December 25, 2011, there were 139,475 shares authorized and available to be issued. During fiscal year 2011, 100,475 shares were issued under this plan as compared to 102,769 shares in 2010 and 132,165 shares in 2009.
We maintain deferred compensation plans for executives and non-employee directors. The executive deferred compensation plan allows certain executives to defer portions of their salary and bonus (up to 50% and 100%, respectively) into a deferred stock account. All deferrals in this plan are matched 25% by the Company. The match vests in thirds at each calendar year end for three years following the match. For executives over the age of 55 years old, the matching contribution vests immediately. The settlement of this deferred stock account is required by the plan to be made only in Company common stock. The deferral shares held in the deferred compensation plan are considered outstanding for purposes of calculating basic and diluted earnings per share. The unvested match is considered in the calculation of diluted earnings per share. Our match into the deferred stock account under the executive plan for fiscal years 2011, 2010, and 2009 were approximately $0.2 million, $0.4 million, and $0.3 million, respectively. The match will be expensed ratably over a three year vesting period for executives under 55 years old and immediate for those older than 55 years.
The director deferred compensation plan allows non-employee directors to defer their compensation into a deferred stock account. All deferrals in this plan are matched 25% by the Company. The match vests immediately. The settlement of this deferred stock account is required by the plan to be made only in Company common stock. The deferral shares held in the deferred compensation plan are considered outstanding for purposes of calculating basic and diluted earnings per share. Our match into the deferred stock account under the director’s plan approximated $40 thousand, $46 thousand, and $0.1 million for fiscal years 2011, 2010, and 2009, respectively.
Pension Plans
We maintain several defined benefit pension plans, principally in Europe. The plans covered approximately 5% of the total workforce at December 25, 2011. The benefits accrue according to the length of service, age, and remuneration of the employee. We recognize the funded status of our defined benefit postretirement plans in the Company’s statement of financial position.
The amounts recognized in accumulated other comprehensive income at December 25, 2011, and December 26, 2010 consist of:
| (amounts in thousands) | December 25, 2011 | December 26, 2010 |
| Transition obligation | $ 58 | $ 198 |
| Prior service costs | 12 | 16 |
| Actuarial losses | 10,638 | 7,358 |
| Total | 10,708 | 7,572 |
| Deferred tax | (4,311) | (3,426) |
| Net | $ 6,397 | $ 4,146 |
The amounts included in accumulated other comprehensive income at December 25, 2011 and expected to be recognized in net periodic pension cost during the year ended December 30, 2012 is as follows:
| (amounts in thousands) | December 30, 2012 |
| Transition obligation | $ 57 |
| Prior service costs | 2 |
| Actuarial loss | 228 |
| Total | $ 287 |
The Company expects to make contributions of $4.7 million during the year ended December 30, 2012.
The pension plans included the following net cost components:
| (amounts in thousands) | December 25, 2011 | December 26, 2010 | December 27, 2009 |
| Service cost | $ 972 | $ 855 | $ 1,020 |
| Interest cost | 4,418 | 4,331 | 4,643 |
| Expected return on plan assets | 155 | (60) | (67) |
| Amortization of actuarial loss (gain) | 50 | (24) | (10) |
| Amortization of transition obligation | 129 | 124 | 130 |
| Amortization of prior service costs | 2 | 2 | 3 |
| Net periodic pension cost | 5,726 | 5,228 | 5,719 |
| Settlement loss | 46 | — | — |
| Curtailment gain | (104) | — | — |
| Total pension expense | $ 5,668 | $ 5,228 | $ 5,719 |
The table below sets forth the funded status of our plans and amounts recognized in the accompanying Consolidated Balance Sheets.
| (amounts in thousands) | December 25, 2011 | December 26, 2010 |
| Change in benefit obligation | | |
| Net benefit obligation at beginning of year | $ 81,226 | $ 83,634 |
| Service cost | 972 | 855 |
| Interest cost | 4,418 | 4,331 |
| Actuarial loss | 4,439 | 4,344 |
| Gross benefits paid | (4,537) | (4,487) |
| Plan curtailments | (618) | — |
| Plan settlements | (470) | — |
| Foreign currency exchange rate changes | (756) | (7,451) |
| Net benefit obligation at end of year | $ 84,674 | $ 81,226 |
| | | |
| Change in plan assets | | |
| Fair value of plan assets at beginning of year | $ 1,472 | $ 1,400 |
| Actual return on assets | 145 | (432) |
| Employer contributions | 4,801 | 5,117 |
| Gross benefits paid | (4,537) | (4,487) |
| Plan settlements | (470) | — |
| Foreign currency exchange rate changes | (5) | (126) |
| Fair value of plan assets at end of year | $ 1,406 | $ 1,472 |
| | | |
| Reconciliation of funded status | | |
| Funded status at end of year | $ (83,268) | $ (79,754) |
| (amounts in thousands) | December 25, 2011 | December 26, 2010 |
| Amounts recognized in accrued benefit consist of: | | |
| Accrued pensions — current | $ 4,453 | $ 4,358 |
| Accrued pensions | 78,815 | 75,396 |
| Net amount recognized at end of year | $ 83,268 | $ 79,754 |
| Other comprehensive income attributable to change in additional minimum liability recognition | $ — | $ — |
| Accumulated benefit obligation at end of year | $ 80,744 | $ 77,361 |
The following table sets forth additional fiscal year-ended information for pension plans for which the accumulated benefit is in excess of plan assets:
| (amounts in thousands) | December 25, 2011 | December 26, 2010 |
| Projected benefit obligation | $ 84,674 | $ 81,226 |
| Accumulated benefit obligation | $ 80,744 | $ 77,361 |
| Fair value of plan assets | $ 1,406 | $ 1,472 |
The weighted average rate assumptions used in determining pension costs and the projected benefit obligation are as follows:
| | December 25, 2011 | | December 26, 2010 | |
| Weighted average assumptions for year-end benefit obligations: | | | | |
Discount rate(1) | 4.77 | % | 5.27 | % |
| Expected rate of increase in future compensation levels | 2.52 | % | 2.52 | % |
| Weighted average assumptions for net periodic benefit cost development: | | | | |
Discount rate(1) | 5.27 | % | 5.77 | % |
| Expected rate of return on plan assets | 5.75 | % | 4.00 | % |
| Expected rate of increase in future compensation levels | 2.52 | % | 2.52 | % |
| Measurement Date: | December 31, 2011 | | December 31, 2010 | |
| (1) | Represents the weighted average rate for all pension plans. |
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. The weighted average discount rate was 4.77% in 2011 and 5.27% in 2010. We calculate the weighted average duration of the plans in each country, then select the discount rate from the appropriate yield curve which best corresponds to the plans' liability profile.
The majority of our pension plans are unfunded plans. The expected rate of the return was developed using the historical rate of returns of the foreign government bonds currently held. This resulted in the selection of the 5.75% long-term rate of return on asset assumption. For funded plans, all assets are held in foreign government bonds.
The benefits expected to be paid over the next five years and the five aggregated years after:
(amounts in thousands)
| 2012 | $ 4,453 |
| 2013 | $ 4,563 |
| 2014 | $ 4,653 |
| 2015 | $ 4,825 |
| 2016 | $ 4,777 |
| 2017 through 2021 | $ 25,341 |
The following table provides a summary of the fair value of the Company's pension plan assets at December 25, 2011 utilizing the fair value hierarchy discussed in Note 14:
| (amounts in thousands) | Total Fair Value Measurement December 25, 2011 | Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| Global insurance assets | $ 1,406 | $ — | $ — | $ 1,406 |
All investments consist of fixed-income global insurance. The investment objective of fixed-income funds is to maximize investment return while preserving investment principal.
Additional information pertaining to the changes in the fair value of the pension plan assets classified as Level 3 for the year ended December 25, 2011 is presented below:
| (amounts in thousands) | Balance as of December 26, 2010 | Actual Return on Plan Assets, Relating to Assets Still Held at the Reporting Date | Actual Return on Plan Assets, Relating to Assets Sold During the Period | Purchases, Sales and Settlements | Transfer into / (out of) Level 3 | Change due to Exchange Rate Changes | Balance as of December 25, 2011 |
| | | | | | | | |
| Asset Category | | | | | | | |
| Global insurance assets | $ 1,472 | $ 627 | $ (153) | $ (381) | $ (154) | $ (5) | $ 1,406 |
| Total Level 3 Assets | $ 1,472 | $ 627 | $ (153) | $ (381) | $ (154) | $ (5) | $ 1,406 |
Note 14. FAIR VALUE MEASUREMENT, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Fair Value Measurement
We utilize the market approach to measure fair value for our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Our financial assets and liabilities are measured using a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
| | Level 1 | Inputs are quoted prices in active markets for identical assets or liabilities. |
| | | |
| | Level 2 | Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. |
| | | |
| | Level 3 | Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. |
Because the Company’s derivatives are not listed on an exchange, the Company values these instruments using a valuation model with pricing inputs that are observable in the market or that can be derived principally from or corroborated by observable market data. The Company’s methodology also incorporates the impact of both the Company’s and the counterparty’s credit standing.
The following table represents our assets and liabilities measured at fair value on a recurring basis as of December 25, 2011 and December 26, 2010 and the basis for that measurement:
| (amounts in thousands) | Total Fair Value Measurement December 25, 2011 | Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| Foreign currency forward exchange contracts | $ 463 | $ — | $ 463 | $ — |
| Foreign currency revenue forecast contracts | 1,120 | — | 1,120 | — |
| Total assets | $ 1,583 | $ — | $ 1,583 | $ — |
| | | | | |
| Foreign currency forward exchange contracts | $ 415 | $ — | $ 415 | $ — |
| Foreign currency revenue forecast contracts | — | — | — | — |
| Total liabilities | $ 415 | $ — | $ 415 | $ — |
| (amounts in thousands) | Total Fair Value Measurement December 26, 2010 | Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| Foreign currency forward exchange contracts | $ 27 | $ — | $ 27 | $ — |
| Foreign currency revenue forecast contracts | 938 | — | 938 | — |
| Total assets | $ 965 | $ — | $ 965 | $ — |
| | | | | |
| Foreign currency forward exchange contracts | $ 20 | $ — | $ 20 | $ — |
| Foreign currency revenue forecast contracts | 278 | — | 278 | — |
| Total liabilities | $ 298 | $ — | $ 298 | $ — |
The following table provides a summary of the activity associated with all of our designated cash flow hedges (foreign currency) reflected in accumulated other comprehensive income for the years ended December 25, 2011 and December 26, 2010:
| (amounts in thousands) | December 25, 2011 | December 26, 2010 |
| Beginning balance, net of tax | $ 377 | $ (302) |
| Changes in fair value gain, net of tax | (643) | 1,841 |
| Reclass to earnings, net of tax | 1,808 | (1,162) |
| Ending balance, net of tax | $ 1,542 | $ 377 |
We believe that the fair values of our current assets and current liabilities (cash, restricted cash, accounts receivable, accounts payable, and other current liabilities) approximate their reported carrying amounts. The carrying values and the estimated fair values of non-current financial assets and liabilities that qualify as financial instruments and are not measured at fair value on a recurring basis at December 25, 2011 and December 26, 2010 are summarized in the following table:
| | December 25, 2011 | | December 26, 2010 |
| (amounts in thousands) | Carrying Amount | Estimated Fair Value | | Carrying Amount | Estimated Fair Value |
Long-term debt (including current maturities and excluding capital leases and factoring)(1) | | | | | |
| Senior secured credit facility | $ 52,248 | $ 52,248 | | $ 42,687 | $ 42,687 |
| Senior secured notes | $ 75,000 | $ 75,686 | | $ 75,000 | $ 75,787 |
| (1) | The carrying amounts are reported on the balance sheet under the indicated captions. |
Long-term debt is carried at the original offering price, less any payments of principal. Rates currently available to us for long-term borrowings with similar terms and remaining maturities are used to estimate the fair value of existing borrowings as the present value of expected cash flows. The Senior Secured Credit Facility’s maturity date is in the year 2014 and the Senior Secured Notes mature in the years 2015 through 2017.
Financial Instruments and Risk Management
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 foreign subsidiaries, in turn, sell these products to customers in their respective geographic areas of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations on inter-company receivables and payables. Additionally, the sourcing of product in one currency and the sales of product in a different currency can cause gross margin fluctuations due to changes in currency exchange rates.
Our major market risk exposures are movements in foreign currency and interest rates. We have historically not used financial instruments to minimize our exposure to currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries. We have used third-party borrowings in foreign currencies to hedge a portion of our net investments in and cash flows derived from our foreign subsidiaries. A reduction in our third party foreign currency borrowings will result in an increase of foreign currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries.
We enter into forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts are entered into with major financial institutions, thereby minimizing the risk of credit loss. We will consider using interest rate derivatives to manage interest rate risks when there is a disproportionate ratio of floating and fixed-rate debt. We do not hold or issue derivative financial instruments for speculative or trading purposes. We are subject to other foreign exchange market risk exposure resulting from anticipated non-financial instrument foreign currency cash flows which are difficult to reasonably predict, and have therefore not been included in the table of fair values. All listed items described are non-trading.
The following table presents the fair values of derivative instruments included within the Consolidated Balance Sheets as of December 25, 2011 and December 26, 2010:
| | December 25, 2011 | | December 26, 2010 |
| | Asset Derivatives | Liability Derivatives | | Asset Derivatives | Liability Derivatives |
| (amounts in thousands) | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value |
| | | | | | | | | | |
| Derivatives designated as hedging instruments | | | | | | | | | |
| Foreign currency revenue forecast contracts | Other current assets | $ 1,120 | Other current liabilities | $ — | | Other current assets | $ 938 | Other current liabilities | $ 278 |
| Total derivatives designated as hedging instruments | | 1,120 | | — | | | 938 | | 278 |
| | | | | | | | | | |
| Derivatives not designated as hedging instruments | | | | | | | | | |
| Foreign currency forward exchange contracts | Other current assets | 463 | Other current liabilities | 415 | | Other current assets | 27 | Other current liabilities | 20 |
| Total derivatives not designated as hedging instruments | | 463 | | 415 | | | 27 | | 20 |
| Total derivatives | | $ 1,583 | | $ 415 | | | $ 965 | | $ 298 |
The following tables present the amounts affecting the Consolidated Statement of Operations for the years ended December 25, 2011, December 26, 2010, and December 27, 2009:
| | December 25, 2011 |
(amounts in thousands) | Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives | Location of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income | Amount of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income | Amount of Forward Points Recognized in Other Gain (Loss), net |
| | | | | |
| Derivatives designated as cash flow hedges | | | | |
| Foreign currency revenue forecast contracts | $ (658) | Cost of sales | $ (1,792) | $ (296) |
| Interest rate swap contracts | — | Interest expense | — | — |
| Total designated cash flow hedges | $ (658) | | $ (1,792) | $ (296) |
| | December 26, 2010 |
(amounts in thousands) | Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives | Location of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income | Amount of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income | Amount of Forward Points Recognized in Other Gain (Loss), net |
| | | | | |
| Derivatives designated as cash flow hedges | | | | |
| Foreign currency revenue forecast contracts | $ 1,940 | Cost of sales | $ 1,194 | $ (124) |
| Interest rate swap contracts | 171 | Interest expense | (159) | — |
| Total designated cash flow hedges | $ 2,111 | | $ 1,035 | $ (124) |
| | December 27, 2009 |
(amounts in thousands) | Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives | Location of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income | Amount of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income | Amount of Forward Points Recognized in Other Gain (Loss), net |
| | | | | |
| Derivatives designated as cash flow hedges | | | | |
| Foreign currency revenue forecast contracts | $ (21) | Cost of sales | $ 1,693 | $ (77) |
| Interest rate swap contracts | 744 | Interest expense | (1,073) | — |
| Total designated cash flow hedges | $ 723 | | $ 620 | $ (77) |
| | December 25, 2011 | | December 26, 2010 | | December 27, 2009 |
| (amounts in thousands) | Amount of Gain (Loss) Recognized in Income on Derivatives | Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income on Derivatives | Location of Gain(Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income on Derivatives | Location of Gain(Loss) Recognized in Income on Derivatives |
| Derivatives not designated as hedging instruments | | | | | | | | |
| Foreign exchange forwards and options | $ (155) | Other gain (loss), net | | $ 77 | Other gain (loss), net | | $ (257) | Other gain (loss), net |
We selectively purchase currency forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. This allows us to shift the effect of positive or negative currency fluctuations to a third party. Transaction gains or losses resulting from these contracts are recognized at the end of each reporting period. We use the fair value method of accounting, recording realized and unrealized gains and losses on these contracts. These gains and losses are included in other gain (loss), net on our Consolidated Statements of Operations. As of December 25, 2011, we had currency forward exchange contracts with notional amounts totaling approximately $26.0 million. The fair values of the forward exchange contracts were reflected as a $0.5 million asset and $0.4 million liability and are included in other current assets and other current liabilities in the accompanying Consolidated Balance Sheets. The contracts are in the various local currencies covering primarily our operations in the U.S., the Caribbean, and Western Europe. Historically, we have not purchased currency forward exchange contracts where it is not economically efficient, specifically for our operations in South America and Asia, with the exception of Japan.
Beginning in the second quarter of 2008, we entered into various foreign currency contracts to reduce our exposure to forecasted Euro-denominated inter-company revenues. These contracts were designated as cash flow hedges. The foreign currency contracts mature at various dates from January 2012 to November 2012. 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 25, 2011, the fair value of these cash flow hedges was reflected as a $1.1 million asset and is included in other current assets in the accompanying Consolidated Balance Sheets. The total notional amount of these hedges is $20.3 million (€14.6 million) and the unrealized gain recorded in other comprehensive income was $1.7 million (net of taxes of $32 thousand), of which $1.6 million is expected to be reclassified to earnings over the next twelve months. During the year ended December 25, 2011, a $1.8 million expense related to these foreign currency hedges was recorded to cost of goods sold as the inventory was sold to external parties. The Company recognized a $0.1 million loss during the year ended December 25, 2011 for hedge ineffectiveness.
During the first quarter of 2008, we entered into an interest rate swap agreement with a notional amount of $40 million. The purpose of this interest rate swap agreement was 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 was marked to market and the changes are recorded in other comprehensive income. The interest rate swap matured on February 18, 2010.
Aggregate foreign currency transaction losses in 2011, 2010, and 2009, were $2.1 million, $2.7 million, and $0.4 million, respectively, and are included in other (loss) gain, net on the Consolidated Statements of Operations.
Additionally, there were no deferrals of gains or losses on currency forward exchange contracts at December 25, 2011.
Note 15. PROVISION FOR RESTRUCTURING
In the third quarter of 2011, the Company approved an expansion of our previous SG&A Restructuring Plan to include manufacturing and other cost reduction initiatives. The expanded global plan including the new Global Restructuring Plan and the SG&A Restructuring Plan will impact over 1,000 existing employees. Total costs of the two plans are expected to approximate $51 million by the end of 2013, with $27 million to $32 million in total anticipated costs for the Global Restructuring Plan and $19 million to $21 million in total anticipated costs for the SG&A Restructuring Plan.
Restructuring expense for the periods ended December 25, 2011, December 26, 2010, and December 27, 2009 were as follows:
(amounts in thousands)
| | December 25, 2011 | December 26, 2010 | December 27, 2009 |
| Global Restructuring Plan | | | |
| Severance and other employee-related charges | $ 11,115 | $ — | $ — |
| Asset impairments | 7,761 | — | — |
| Other exit costs | 519 | — | — |
| SG&A Restructuring Plan | | | |
| Severance and other employee-related charges | 7,015 | 6,993 | 2,828 |
| Asset impairments | 72 | — | — |
| Other exit costs | 2,203 | — | — |
| Manufacturing Restructuring Plan | | | |
| Severance and other employee-related charges | (146) | 641 | 1,481 |
| Other exit costs | 101 | 577 | — |
| 2005 Restructuring Plan | | | |
| Severance and other employee-related charges | — | — | 1,149 |
| Other exit costs | — | — | (57) |
| Total | $ 28,640 | $ 8,211 | $ 5,401 |
Restructuring accrual activity for the periods ended December 25, 2011, and December 26, 2010, were as follows:
(amounts in thousands)
| Fiscal 2011 | Accrual at Beginning of Year | Charged to Earnings | Charge Reversed to Earnings | Cash Payments | Exchange Rate Changes | Accrual at December 25, 2011 |
| Global Restructuring Plan | | | | | | |
| Severance and other employee-related charges | $ — | $ 11,382 | $ (267) | $ (1,268) | $ (137) | $ 9,710 |
Other exit costs(1) | — | 519 | — | (519) | — | — |
| SG&A Restructuring Plan | | | | | | |
| Severance and other employee-related charges | 6,660 | 7,147 | (132) | (6,718) | (239) | 6,718 |
Other exit costs(2) | — | 2,214 | (11) | (1,095) | 1 | 1,109 |
| Manufacturing Restructuring Plan | | | | | | |
| Severance and other employee-related charges | 719 | 69 | (215) | (583) | 10 | — |
Other exit costs(3) | 143 | 112 | (11) | (169) | — | 75 |
| Total | $ 7,522 | $ 21,443 | $ (636) | $ (10,352) | $ (365) | $ 17,612 |
(1) | During 2011, there was a net charge to earnings of $0.5 million primarily due to lease termination costs, inventory and equipment moving costs, restructuring agent costs, legal costs, and gains/losses on sale of assets in connection with the restructuring plan. |
(2) | During 2011, there was a net charge to earnings of $2.2 million primarily due to the closing of an operating facility and one-time payment related to a lease modification for an operating facility as well as lease payment accruals after exiting one of our facilities. |
(3) | During 2010, costs were recorded due to the closing of a manufacturing facility. For the year ended 2011, there was a net charge to earnings of $0.1 million due to other exit costs associated with the manufacturing closings. |
(amounts in thousands)
| Fiscal 2010 | Accrual at Beginning of Year | Charged to Earnings | Charge Reversed to Earnings | Cash Payments | Other | Exchange Rate Changes | Accrual at December 26, 2010 |
| SG&A Restructuring Plan | | | | | | | |
| Severance and other employee-related charges | $ 2,810 | $ 7,732 | $ (739) | $ (3,005) | $ — | $ (138) | $ 6,660 |
| Manufacturing Restructuring Plan | | | | | | | |
| Severance and other employee-related charges | 1,481 | 1,203 | (562) | (1,339) | — | (64) | 719 |
Other exit costs(1) | — | 577 | — | (541) | 107 | — | 143 |
| Total | $ 4,291 | $ 9,512 | $ (1,301) | $ (4,885) | $ 107 | $ (202) | $ 7,522 |
| (1) | During 2010, lease termination and other exit costs of $0.6 million were recorded due to the closing of a manufacturing facility, which were partially offset by a deferred rent charge of $0.1 million previously incurred in prior periods for the manufacturing facility. |
Global Restructuring Plan
During September 2011, we initiated the Global Restructuring Plan focused on further reducing our overall operating expenses by including manufacturing and other cost reduction initiatives, such as consolidating certain manufacturing facilities and administrative functions to improve efficiencies. The first phase of this plan was implemented in the third quarter of 2011 with the remaining phases of the plan expected to be substantially complete by the end of 2013.
As of December 25, 2011, the net charge to earnings of $19.4 million represents the current year activity related to the Global Restructuring Plan. The anticipated total costs related to the plan are expected to approximate $27 million to $32 million, of which $19.4 million have been incurred. The total number of employees planned to be affected by the Global Restructuring Plan is 894, of which 97 have been terminated. Termination benefits are planned to be paid one month to 24 months after termination.
SG&A Restructuring Plan
During 2009, we initiated the SG&A Restructuring Plan focused on reducing our overall operating expenses by consolidating certain administrative functions to improve efficiencies. The first phase of this plan was implemented in the fourth quarter of 2009 with the remaining phases of the plan substantially completed by the end of the first quarter of 2012.
As of December 25, 2011, the net charge to earnings of $9.3 million represents the current year activity related to the SG&A Restructuring Plan. The total anticipated costs related to the plan are expected to approximate $19 million to $21 million, of which $19.1 million have been incurred. The total number of employees planned to be affected by the SG&A Restructuring Plan is 368, of which 294 have been terminated. Termination benefits are planned to be paid one month to 24 months after termination.
Manufacturing Restructuring Plan
In August 2008, we announced a manufacturing and supply chain restructuring program designed to accelerate profitable growth in our Apparel Labeling Solutions (ALS) business, formerly Check-Net®, and to support incremental improvements in our EAS systems and labels businesses. For the year ended December 25, 2011, there was a net increase to earnings of $45 thousand recorded in connection with the Manufacturing Restructuring Plan. This net charge was primarily due to other exit costs associated with the closing of manufacturing facilities partially offset by lower than estimated severance accruals.
The total number of employees planned to be affected by the Manufacturing Restructuring Plan is 420, all of which have been terminated. As of December 25, 2011 the implementation of the Manufacturing Restructuring Plan is substantially complete, with total costs incurred of $4.2 million. Termination benefits are planned to be paid one month to 24 months after termination.
Note 16. COMMITMENTS AND CONTINGENCIES
We lease certain production facilities, offices, distribution centers, and equipment. Rental expense for all operating leases approximated $17.3 million, $16.9 million, and $18.4 million, in 2011, 2010, and 2009, respectively.
Future minimum payments for operating leases and capital leases having non-cancelable terms in excess of one year at December 25, 2011 are:
| (amounts in thousands) | Capital Leases | Operating Leases | Total |
| 2012 | $ 574 | $ 14,407 | $ 14,981 |
| 2013 | 328 | 8,612 | 8,940 |
| 2014 | 137 | 4,966 | 5,103 |
| 2015 | 62 | 1,393 | 1,455 |
| 2016 | 12 | 649 | 661 |
| Thereafter | — | 2,228 | 2,228 |
| Total minimum lease payments | $ 1,113 | $ 32,255 | $ 33,368 |
| Less: amounts representing interest | 100 | | |
| Present value of minimum lease payments | $ 1,013 | | |
Contingencies
We are involved in certain legal and regulatory actions, all of which have arisen in the ordinary course of business. Management believes that the ultimate resolution of such matters is unlikely to have a material adverse effect on our Consolidated Results of Operations and/or Financial Condition, except as described below.
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 designating the case as an exceptional case and awarding an unspecified portion of defendants’ attorneys’ fees under 35 U.S.C. § 285. Defendants are seeking 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. On March 6, 2009, we filed objections to the defendants’ bill of attorneys’ fees. On November 2, 2011, the Court finalized the decision to order the Company to pay the attorneys’ fees and costs of the defendants in the amount of $6.6 million. The additional amount of $0.9 million was recorded in the fourth quarter ended December 25, 2011 in the Consolidated Statement of Operations. On November 15, 2011, we filed objections to and appealed the defendants’ bill of attorneys’ 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.
Note 17. CONCENTRATION OF CREDIT RISK
Our foreign subsidiaries, along with many foreign distributors, provide diversified international sales thus minimizing credit risk to one or a few distributors. Our sales are well diversified among numerous retailers in the apparel, drug, home entertainment, mass merchandise, music, shoe, supermarket, and video markets. We perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral from our customers.
Note 18. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
Historically, we have reported RF and EM Hard Tags as part of the SMS EAS Systems product line. During the first quarter of 2010, we began reporting our RF and EM Hard Tags as part of the Alpha® product line. This change results in all hard tags for in-store application being recorded in the same product line as the Alpha® hard tags. Because both product lines are reported within the Shrink Management Solutions segment, the change in classification does not impact segment reporting. The year ended 2009 has been conformed to reflect the product line change within the SMS segment.
Our reportable business segments are strategic business units that offer distinctive products and services that are marketed through different channels. We have three reportable business segments:
| | | |
| i. | | Shrink Management Solutions — includes electronic article surveillance (EAS) systems, EAS consumables, Alpha®, CheckView®, and radio frequency identification (RFID) tags and labels. |
| | | |
| ii. | | Apparel Labeling Solutions — includes our web-enabled apparel labeling solutions platform and network of service bureaus to manage the printing of variable information on price and promotional tickets, adhesive labels, fabric and woven tags and labels, and apparel branding tags. |
| | | |
| iii. | | Retail Merchandising Solutions — includes hand-held labeling systems (HLS) and retail display systems (RDS). |
The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
The business segment information set forth below is that viewed by the chief operating decision maker:
| (amounts in thousands) | December 25, 2011 | December 26, 2010 | December 27, 2009 |
| | | (As Revised) | (As Revised) |
| Business segment net revenue: | | | |
| Shrink Management Solutions | $ 593,519 | $ 576,749 | $ 543,233 |
| Apparel Labeling Solutions | 198,158 | 172,937 | 141,910 |
| Retail Merchandising Solutions | 73,666 | 71,992 | 77,108 |
| Total | $ 865,343 | $ 821,678 | $ 762,251 |
| | | | |
| Business segment gross profit: | | | |
| Shrink Management Solutions | $ 241,167 | $ 247,040 | $ 239,585 |
| Apparel Labeling Solutions | 56,860 | 61,805 | 52,543 |
| Retail Merchandising Solutions | 34,823 | 34,929 | 36,645 |
| Total gross profit | 332,850 | 343,774 | 328,773 |
| Operating expenses | 326,357(1) | 300,403(2) | 287,519(3) |
| Interest (expense) income, net | (4,542) | (3,389) | (5,415) |
| Other gain (loss), net | (1,523) | (2,237) | (180) |
| Earnings from continuing operations before income taxes | $ 428 | $ 37,745 | $ 35,659 |
| Business segment total assets: | | | |
| Shrink Management Solutions | $ 652,895 | $ 706,300 | |
| Apparel Labeling Solutions | 284,301 | 191,092 | |
| Retail Merchandising Solutions | 107,285 | 136,518 | |
| Total | $ 1,044,481 | $ 1,033,910 | |
| (1) | Includes a $28.6 million restructuring charge, $2.3 million in acquisition costs, a $0.9 million litigation settlement, a $0.6 million intangible asset impairment, and income of $0.2 million related to improper and fraudulent Canadian activities. |
| (2) | Includes an $8.2 million restructuring charge, a $0.8 million selling, general and administrative charge related to an adjustment to an acquisition related liability pertaining to the period prior to the acquisition date, and a $1.5 million charge related to improper and fraudulent Canadian activities. |
| (3) | Includes a $5.4 million restructuring charge, a $1.3 million charge related to improper and fraudulent Canadian activities, and a $1.3 million litigation settlement charge. |
| (B) | Geographic Information |
Operating results are prepared on a “country of domicile” basis, meaning that net revenues are included in the geographic area where the selling entity is located. Assets are included in the geographic area in which the producing entities are located. A direct sale from the U.S. to an unaffiliated customer in South America is reported as a sale in the U.S. Inter-area sales between our locations are made at transfer prices that approximate market price and have been eliminated from consolidated net revenues. International Americas is defined as all countries in North and South America, excluding the United States, Puerto Rico, and Dominican Republic.
The following table shows net revenues, and other financial information by geographic area for the years 2011, 2010, and 2009:
| (amounts in thousands) | United States, Puerto Rico, & Dominican Republic | | Europe | | International Americas | | Asia Pacific | | Total |
| 2011 | | | | | | | | | |
| Net revenues from unaffiliated customers | $ 283,674 | (1) | $ 346,834 | | $ 45,307 | | $ 189,528 | | $ 865,343 |
| Long-lived assets | $ 37,179 | (2) | $ 16,698 | | $ 3,557 | | $ 76,647 | (3) | $ 134,081 |
| | | | | | | | | | |
| 2010 | | | | | | | | | |
| Net revenues from unaffiliated customers | $ 275,462 | (4) | $ 352,347 | | $ 41,868 | | $ 152,001 | | $ 821,678 |
| Long-lived assets | $ 41,274 | (5) | $ 17,815 | | $ 2,280 | | $ 62,229 | (6) | $ 123,598 |
| | | | | | | | | | |
| 2009 | | | | | | | | | |
| Net revenues from unaffiliated customers | $ 254,306 | (7) | $ 362,639 | (8) | $ 30,289 | | $ 115,017 | | $ 762,251 |
| (1) | Includes net revenue from the United States of $283.7 million. |
| (2) | Includes long-lived assets from the United States of $29.9 million. |
| (3) | Includes long-lived assets from China and Japan of $40.3 million and $15.0 million, respectively. |
| (4) | Includes net revenue from the United States of $275.5 million. |
| (5) | Includes long-lived assets from the United States and Puerto Rico of $23.7 million and $15.2 million, respectively. |
| (6) | Includes long-lived assets from China, Hong Kong, and Japan of $28.8 million, $15.9 million and $15.4 million, respectively. |
| (7) | Includes net revenue from the United States of $254.3 million. |
| (8) | Includes net revenue from Germany of $84.2 million. |
Note 19. DISCONTINUED OPERATIONS
We evaluate our businesses and product lines periodically for their strategic fit within our operations. In December of 2011, we began actively marketing our Banking Security Systems Integration business unit included in our Shrink Management Solutions segment. As a result of this divestiture decision, we are accounting for this business as discontinued operations. The classification of this business as discontinued operations was determined to be a triggering event for testing goodwill impairment. As a result of this impairment test, we determined that there was a $3.4 million impairment charge in the goodwill reporting unit of our Shrink Management Solutions segment and a $2.8 million impairment of customer relationship intangible assets. These impairment charges were included in discontinued operations on the Consolidated Statement of Operations.
The Company’s discontinued operations reflect the operating results for the disposal group. The results for the years ended December 25, 2011, December 26, 2010 and December 27, 2009 have been reclassified to show the results of operations for the Banking Security Systems Integration business unit as discontinued operations, net of tax, on the Consolidated Statement of Operations. Below is a summary of these results:
| (amounts in thousands) | December 25, 2011 | December 26, 2010 | December 27, 2009 |
| Net revenue | $ 13,565 | $ 12,820 | $ 10,467 |
| Gross profit | 2,541 | 2,874 | 2,511 |
| Selling, general, & administrative expense | 4,095 | 4,043 | 3,978 |
| Restructuring expenses | 113 | — | — |
| Intangible asset impairment | 2,781 | — | — |
| Goodwill impairment | 3,411 | — | — |
| Operating loss | (7,859) | (1,169) | (1,467) |
| Loss from discontinued operations before income taxes | (7,859) | (1,169) | (1,467) |
| Loss from discontinued operations, net of tax | $ (7,514) | $ (773) | $ (911) |
The assets and liabilities associated with this business have been adjusted to fair value, less costs to sell, and reclassified into assets of discontinued operations held for sale and liabilities of discontinued operations held for sale, as appropriate, on the Consolidated Balance Sheet. As of December 25, 2011 the classification was as follows:
| (amounts in thousands) | December 25, 2011 |
| Accounts receivable, net | $ 1,519 |
| Inventories | 1,087 |
| Property, plant, and equipment , net | 11 |
| Goodwill | 370 |
| Other intangibles, net | 1,754 |
| Other assets | 1,579 |
| Assets of discontinued operations held for sale | $ 6,320 |
| | |
| Accounts payable | $ 551 |
| Accrued compensation and related taxes | 40 |
| Other accrued expenses | 599 |
| Unearned revenues | 169 |
| Restructuring reserve | 78 |
| Other liabilities | 3 |
| Liabilities of discontinued operations held for sale | $ 1,440 |
Net cash flows of our discontinued operations from each of the categories of operating, investing and financing activities were not significant.
Note 20. QUARTERLY INFORMATION (UNAUDITED)
As described in Note 1 to the Consolidated Financial Statements, the Company has revised previously issued financial statements. The following quarterly financial data reflect the revisions for the quarters ended September 25, 2011, June 26, 2011, March 27, 2011, September 26, 2010, June 27, 2010, and March 28, 2010. The revision is considered a correction of immaterial errors.
The following tables summarize the effects of the adjustments on operating income and net income for the quarters ended September 25, 2011, June 26, 2011, March 27, 2011, September 26, 2010, June 27, 2010, and March 28, 2010.
| | Operating (Loss) Income |
| (amounts in thousands) | Sep. 25, 2011 | Jun. 26, 2011 | Mar. 27, 2011 | Sep. 26, 2010 | Jun. 27, 2010 | Mar. 28, 2010 |
| As Previously Reported | $ (8,603) | $ 12,610 | $ (10,581) | $ 13,062 | $ 14,116 | $ 5,621 |
| Revision Adjustments: | | | | | | |
| Canada Adjustments | 797 | 430 | 823 | 719 | (391) | (630) |
| Income Tax Adjustments | — | — | — | — | — | — |
| As Revised for Revision Adjustments | $ (7,806) | $ 13,040 | $ (9,758) | $ 13,781 | $ 13,725 | $ 4,991 |
| Discontinued Operations Adjustments | 636 | 511 | 727 | 420 | 345 | 294 |
| As Revised in this Annual Report on Form 10-K | $ (7,170) | $ 13,551 | $ (9,031) | $ 14,201 | $ 14,070 | $ 5,285 |
| | Net (Loss) Earnings Attributable to Checkpoint Systems, Inc. |
| (amounts in thousands) | Sep. 25, 2011 | Jun. 26, 2011 | Mar. 27, 2011 | Sep. 26, 2010 | Jun. 27, 2010 | Mar. 28, 2010 |
| As Previously Reported | $ (49,259) | $ 9,520 | $ (9,311) | $ 7,081 | $ 9,040 | $ 3,506 |
| Revision Adjustments: | | | | | | |
| Canada Adjustments | 597 | 322 | 616 | 557 | (303) | (488) |
| Income Tax Adjustments | — | — | — | 705 | — | — |
| As Revised for Revision Adjustments | $ (48,662) | $ 9,842 | $ (8,695) | $ 8,343 | $ 8,737 | $ 3,018 |
| Discontinued Operations Adjustments | — | — | — | — | — | — |
| As Revised in this Annual Report on Form 10-K | $ (48,662) | $ 9,842 | $ (8,695) | $ 8,343 | $ 8,737 | $ 3,018 |
| | QUARTERS (unaudited) | | | | |
| (amounts in thousands, except per share data) | First | | Second | | Third | | | | |
| | As Previously Reported | | As Previously Reported | | As Previously Reported | | | | |
| 2011 | | | | | | | | | |
| Net revenues | $ 184,673 | | $ 219,931 | | $ 218,126 | | | | |
| Gross profit | 70,374 | | 85,492 | | 81,620 | | | | |
| Net (loss) earnings attributable to Checkpoint Systems, Inc. | (9,311) | | 9,520 | | (49,259) | | | | |
| Net (loss) earnings attributable to Checkpoint Systems, Inc. per share: | | | | | | | | | |
| Basic | $ (.23) | | $ .23 | | $ (1.21) | | | | |
| Diluted | $ (.23) | | $ .23 | | $ (1.21) | | | | |
| | | | | | | | | | |
| | QUARTERS (unaudited) | | |
| | First | | Second | | Third | | Fourth | | Year |
| | As Previously Reported | | As Previously Reported | | As Previously Reported | | As Previously Reported | | As Previously Reported |
| 2010 | | | | | | | | | |
| Net revenues | $ 187,456 | | $ 208,176 | | $ 203,324 | | $ 235,542 | | $ 834,498 |
| Gross profit | 80,551 | | 90,764 | | 81,879 | | 93,454 | | 346,648 |
| Net earnings attributable to Checkpoint Systems, Inc. | 3,506 | | 9,040 | | 7,081 | | 7,744 | | 27,371 |
| Net earnings attributable to Checkpoint Systems, Inc. per share: | | | | | | | | | |
| Basic | $ .09 | | $ .23 | | $ .18 | | $ .19 | | $ .69 |
| Diluted | $ .09 | | $ .22 | | $ .17 | | $ .19 | | $ .68 |
| | QUARTERS (unaudited) | | | | |
| (amounts in thousands, except per share data) | First | | Second | | Third | | | | |
| | As Revised for Revision Adjustments | | As Revised for Revision Adjustments | | As Revised for Revision Adjustments | | | | |
| 2011 | | | | | | | | | |
| Net revenues | $ 184,673 | | $ 219,931 | | $ 218,126 | | | | |
| Gross profit | 70,374 | | 85,492 | | 81,620 | | | | |
| Net (loss) earnings attributable to Checkpoint Systems, Inc. | (8,695) | (1) | 9,842 | (2) | (48,662) | (3) | | | |
| Net (loss) earnings attributable to Checkpoint Systems, Inc. per share: | | | | | | | | | |
| Basic | $ (.22) | | $ .24 | | $ (1.20) | | | | |
| Diluted | $ (.22) | | $ .24 | | $ (1.20) | | | | |
| | | | | | | | | | |
| | QUARTERS (unaudited) | | |
| | First | | Second | | Third | | Fourth | | Year |
| | As Revised for Revision Adjustments | | As Revised for Revision Adjustments | | As Revised for Revision Adjustments | | As Revised for Revision Adjustments | | As Revised for Revision Adjustments |
| 2010 | | | | | | | | | |
| Net revenues | $ 187,456 | | $ 208,176 | | $ 203,324 | | $ 235,542 | | $ 834,498 |
| Gross profit | 80,551 | | 90,764 | | 81,879 | | 93,454 | | 346,648 |
| Net earnings attributable to Checkpoint Systems, Inc. | 3,018 | (6) | 8,737 | (7) | 8,343 | (8) | 7,632 | (9) | 27,730 |
| Net earnings attributable to Checkpoint Systems, Inc. per share: | | | | | | | | | |
| Basic | $ .08 | | $ .22 | | $ .21 | | $ .19 | | $ .69 |
| Diluted | $ .08 | | $ .22 | | $ .21 | | $ .19 | | $ .69 |
| | QUARTERS (unaudited) | | |
| (amounts in thousands, except per share data) | First | | Second | | Third | | Fourth | | Year |
| | As Revised in this Annual Report on Form 10-K | | As Revised in this Annual Report on Form 10-K | | As Revised in this Annual Report on Form 10-K | | | | |
| 2011 | | | | | | | | | |
| Net revenues | $ 181,886 | | $ 216,810 | | $ 215,049 | | $ 251,598 | | $ 865,343 |
| Gross profit | 70,085 | | 84,984 | | 81,088 | | 96,693 | | 332,850 |
| Net (loss) earnings from continuing operations attributable to Checkpoint Systems, Inc. | (8,222) | (1) | 10,174 | (2) | (47,593) | (3) | (13,414) | (4) | (59,055) |
| Net (loss) earnings attributable to Checkpoint Systems, Inc. | (8,695) | (1) | 9,842 | (2) | (48,662) | (3) | (19,054) | (5) | (66,569) |
| Net (loss) earnings from continuing operations attributable to Checkpoint Systems, Inc. per share: | | | | | | | | | |
| Basic | $ (.21) | | $ .25 | | $ (1.17) | | $ (.33) | | $ (1.46) |
| Diluted | $ (.21) | | $ .25 | | $ (1.17) | | $ (.33) | | $ (1.46) |
| Net (loss) earnings attributable to Checkpoint Systems, Inc. per share: | | | | | | | | | |
| Basic | $ (.22) | | $ .24 | | $ (1.20) | | $ (.47) | | $ (1.64) |
| Diluted | $ (.22) | | $ .24 | | $ (1.20) | | $ (.47) | | $ (1.64) |
| | | | | | | | | | |
| | QUARTERS (unaudited) | | |
| | First | | Second | | Third | | Fourth | | Year |
| | As Revised in this Annual Report on Form 10-K | | As Revised in this Annual Report on Form 10-K | | As Revised in this Annual Report on Form 10-K | | As Revised in this Annual Report on Form 10-K | | As Revised in this Annual Report on Form 10-K |
| 2010 | | | | | | | | | |
| Net revenues | $ 184,309 | | $ 204,977 | | $ 200,408 | | $ 231,984 | | $ 821,678 |
| Gross profit | 79,789 | | 90,139 | | 81,244 | | 92,602 | | 343,774 |
| Net earnings from continuing operations attributable to Checkpoint Systems, Inc. | 3,203 | (6) | 8,954 | (7) | 8,639 | (8) | 7,707 | (9) | 28,503 |
| Net earnings attributable to Checkpoint Systems, Inc. | 3,018 | (6) | 8,737 | (7) | 8,343 | (8) | 7,632 | (9) | 27,730 |
| Net earnings from continuing operations attributable to Checkpoint Systems, Inc. per share: | | | | | | | | | |
| Basic | $ .08 | | $ .22 | | $ .22 | | $ .19 | | $ .71 |
| Diluted | $ .08 | | $ .22 | | $ .22 | | $ .19 | | $ .71 |
| Net earnings attributable to Checkpoint Systems, Inc. per share: | | | | | | | | | |
| Basic | $ .08 | | $ .22 | | $ .21 | | $ .19 | | $ .69 |
| Diluted | $ .08 | | $ .22 | | $ .21 | | $ .19 | | $ .69 |
| (1) | Includes a $1.1 million restructuring charge (net of tax) and a $0.2 million expense related to improper and fraudulent Canadian activities (net of tax). |
| (2) | Includes $2.0 million in acquisition costs (net of tax), a $1.1 million restructuring charge (net of tax), and a $38 thousand expense related to improper and fraudulent Canadian activities (net of tax). |
| (3) | Includes a $48.0 million valuation allowance adjustment, a $16.6 million restructuring charge (net of tax), a $0.2 million expense related to improper and fraudulent Canadian activities (net of tax), and $2 thousand in acquisition costs (net of tax). |
| (4) | Includes a $7.0 million restructuring charge (net of tax), a $1.0 million change in indefinite reversal assertion, a $0.9 million litigation settlement (net of tax), a $0.6 million income related to improper and fraudulent Canadian activities (net of tax), a $0.4 million intangible impairment (net of tax), a $0.3 million reduction in valuation allowance, and a $0.1 million in acquisition costs (net of tax). |
| (5) | Includes a $7.0 million restructuring charge (net of tax), a $3.2 million intangible impairment (net of tax), a $3.1 million goodwill impairment (net of tax), $1.0 million change in indefinite reversal assertion, a $0.9 million litigation settlement (net of tax), a $0.6 million income related to improper and fraudulent Canadian activities (net of tax), a $0.3 million reduction in valuation allowance, and $0.1 million in acquisition costs (net of tax). |
| (6) | Includes a $0.5 million restructuring charge (net of tax) and a $0.4 million expense related to improper and fraudulent Canadian activities (net of tax). |
| (7) | Includes a $0.9 million restructuring charge (net of tax) and a $0.4 million expense related to improper and fraudulent Canadian activities (net of tax). |
| (8) | Includes a $4.3 million valuation allowance adjustment, a $0.6 million restructuring charge (net of tax), and a $0.2 million expense related to improper and fraudulent Canadian activities (net of tax). |
| (9) | Includes a $4.2 million restructuring charge (net of tax). Also includes a $1.7 million tax charge, a $0.8 million selling, general and administrative charge (net of tax) related to adjustments to acquisition related liabilities pertaining to the period prior to the acquisition date, and a $0.2 million expense related to improper and fraudulent Canadian activities (net of tax). |
There are no changes or disagreements to report under this item.
Evaluation of Disclosure Controls and Procedures
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation (as required by Rule 13a-15(b) under the Exchange Act) of the effectiveness of our disclosure controls and procedures as of December 25, 2011. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of December 25, 2011 as a result of the material weakness described below.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, the risk.
Management assessed the effectiveness of our internal control over financial reporting as of December 25, 2011, using the framework set forth in the report of the Treadway Commission’s Committee of Sponsoring Organizations (COSO), “Internal Control — Integrated Framework.” In connection with this assessment, management identified the material weakness described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
We did not maintain effective controls to prevent or detect management override of controls at certain foreign subsidiaries that were not integrated into our shared services environments in the United States and Europe. Specifically, the monitoring controls over certain locations, including internal audits, periodic reviews of segregation of duties and review of the effectiveness of key balance sheet reconciliations were not designed to prevent or detect management override of controls that could circumvent internal control over financial reporting.
As a result of this control deficiency, we failed to detect on a timely basis fraudulent misappropriation of company funds, which contributed to the revision of the annual financial statements for 2010 and 2009 and the interim financial information for 2011 and 2010. The impacted accounts were cash, accounts receivable and inventory as well as income taxes and non-income taxes payable and operating expenses.
Additionally, this control deficiency could result in misstatements of the aforementioned accounts or other accounts that could result in a material misstatement of the consolidated financial statements that would not be prevented or detected. Accordingly, our management has determined that this control deficiency constitutes a material weakness.
As a result of this material weakness, management has concluded that our internal control over financial reporting was not effective 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 as of December 25, 2011.
The scope of management’s assessment of internal control over financial reporting as of December 25, 2011 excluded the Shore to Shore business, which we acquired in a purchase business combination in May 2011. The Shore to Shore business' total assets and total revenues represent 9.8% or $102.9 million and 4.1% or $35.3 million, respectively, of the related consolidated financial statement amounts as of and for the year ended December 25, 2011.
The effectiveness of the Company's internal control over financial reporting as of December 25, 2011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears under “Item 8. Financial Statements and Supplementary Data.”
Plan for Remediation of the Material Weakness
The fraudulent misappropriation of funds was identified during the process of consolidating our Canadian accounting function into our North American shared service center in November 2011. During 2010 and through the third quarter of 2011, the Company consolidated other foreign subsidiary accounting functions to our shared service center environment which we believe provides significantly improved control over accounting and finance operations and limits the risk of management override of controls. Although this action has improved controls over certain foreign subsidiaries, additional actions are required to remediate the material weakness described above and to enhance our internal control over financial reporting.
Management intends to increase the frequency and scope of our program of detailed reviews of financial transactions and reconciliations at all of our subsidiaries based on a formal, rotational review program to be conducted by qualified individuals including internal audit personnel. Management has begun to adopt these measures and expects that the remediation of the material weakness will be completed in 2012.
Based on additional analysis and other post-closing procedures designed to ensure that the company’s consolidated financial statements will be presented in accordance with generally accepted accounting principles, management believes, notwithstanding the material weakness, that the financial statements included in this report fairly present in all material respects our financial position, results of operations and cash flows for the periods presented.
Changes in Internal Control over Financial Reporting
Management has implemented changes as described above in the Company’s internal control over financial reporting during the quarter ended December 25, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
The information required by this Item (except for the information regarding executive officers called for by Item 401 of Regulation S-K, which is included in Part I hereof in accordance with General Instruction G (3)) is hereby incorporated by reference to the Registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on May 31, 2012, which management expects to file with the SEC within 120 days of the end of the Registrant’s fiscal year.
We have posted the Code of Ethics, the Governance Guidelines and each of the Committee Charters on our website at www.checkpointsystems.com, and will post on our website any amendments to, or waivers from, the Code of Ethics applicable to any of its directors or executive officers. The foregoing information will also be available in print upon request.
The information required by this Item is hereby incorporated by reference to the Registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on May 31, 2012, which management expects to file with the SEC within 120 days of the end of the Registrant’s fiscal year.
Note that the section of our Definitive Proxy Statement entitled “Compensation Committee Report” pursuant to Regulation S-K Item 407 (e)(5) is not deemed “soliciting material” or “filed” as part of this report.
The information required by this Item is hereby incorporated by reference to the Registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on May 31, 2012, which management expects to file with the SEC within 120 days of the end of the Registrant’s fiscal year.
The information required by this Item is hereby incorporated by reference to the Registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on May 31, 2012, which management expects to file with the SEC within 120 days of the end of the Registrant’s fiscal year.
The information required by this Item is hereby incorporated by reference to the Registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on May 31, 2012, which management expects to file with the SEC within 120 days of the end of the Registrant’s fiscal year.
All other schedules are omitted either because they are not applicable, not required, or because the required information is included in the financial statements or notes thereto:
| 1. | The following Consolidated Financial Statements of Checkpoint Systems, Inc. were included in Item 8 | |
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| 2. | The following Consolidated Financial Statements schedules of Checkpoint Systems, Inc. are included | |
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in Philadelphia, Pennsylvania, on March 2, 2012.
| CHECKPOINT SYSTEMS, INC. |
| |
| /s/ Robert P. van der Merwe |
| Chairman of the Board of Directors, |
| President and Chief Executive Officer |
| |
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
| SIGNATURE | TITLE | DATE |
| /s/ Robert P. van der Merwe | Chairman of the Board of Directors, President and Chief Executive Officer | March 2, 2012 |
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| /s/ Raymond D. Andrews | Senior Vice President and Chief Financial Officer | March 2, 2012 |
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| /s/ William S. Antle, III | Director | March 2, 2012 |
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| /s/ George Babich, Jr. | Director | March 2, 2012 |
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| /s/ Harald Einsmann | Director | March 2, 2012 |
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| /s/ R. Keith Elliott | Director | March 2, 2012 |
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| /s/ Julie S. England | Director | March 2, 2012 |
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| /s/ Jack W. Partridge | Director | March 2, 2012 |
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| /s/ Sally Pearson | Director | March 2, 2012 |
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| /s/ Robert N. Wildrick | Director | March 2, 2012 |
| Exhibit 3.1 | Articles of Incorporation, as amended, are hereby incorporated by reference to Item 14(a), Exhibit 3(i) of the Registrant’s 1990 Form 10-K, filed with the SEC on March 14, 1991. |
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| Exhibit 3.2 | By-Laws, as Amended and Restated, are hereby incorporated by reference Item 5.03, Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on August 4, 2010. |
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| Exhibit 3.3 | Articles of Amendment to the Articles of Incorporation are hereby incorporated by reference to Item 5.03, Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 28, 2007. |
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| Exhibit 4.1 | Note Purchase and Private Shelf Agreement, dated as of July 22, 2010, between the Company and Prudential Investment Management, Inc., and Other Purchasers party thereto is hereby incorporated by reference to Item 1.01(b), Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on July 23, 2010. |
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Exhibit 10.1(1) | Amended and Restated Stock Option Plan (1992) is hereby incorporated by reference to Registrant’s Form 10-K for 1997 filed with the SEC on March 23, 1998. |
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| Exhibit 10.2 | Consulting and Deferred Compensation Agreement with Albert E. Wolf, are incorporated by reference to Item(a), Exhibit 10(c) of the Registrant’s 1994 Form 10-K. |
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| Exhibit 10.3 | Amended and Restated Credit Agreement, dated as of July 22, 2010, among the Company, Checkpoint Manufacturing Japan Co., Ltd., and CP International Systems C.V., as foreign borrowers, certain other domestic and foreign subsidiaries of the Company, as domestic guarantors and foreign guarantors, the various lenders party thereto from time to time, Wells Fargo Bank, National Association, as Administrative Agent, Citizens Bank of Pennsylvania as Syndication Agent, and Wells Fargo Securities, LLC and Citizens Bank of Pennsylvania, as Joint Lead Arrangers and Joint Bookrunners is hereby incorporated by reference to Item 1.01(a), Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on July 23, 2010. |
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Exhibit 10.4(1) | Employment Agreement with Per Harold Levin is incorporated by reference to Item 6(a), Exhibit 10.4 of the Registrant’s Form 10-Q filed on May 13, 2004. |
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Exhibit 10.5(1) | Amendment to Employment Agreement with Per Harold Levin is incorporated by reference to Item 6(a), Exhibit 10.5 of the Registrant’s Form 10-Q filed on May 13, 2004. |
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Exhibit 10.6(1) | Employment Agreement with John R. Van Zile is Incorporated by reference to Item 6(a), Exhibit 10.7 of the Registrant’s Form 10-Q filed on May 13, 2004. |
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Exhibit 10.7(1) | Employment Agreement by and between Robert P. van der Merwe and Checkpoint Systems, Inc. dated December 27, 2007 is incorporated by reference to Registrant’s Form 10-K for 2007 filed with the SEC on February 28, 2008. |
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Exhibit 10.8(1) | First Amendment to Employment Agreement by and between Robert P. van der Merwe and Checkpoint Systems, Inc. dated March 17, 2010 is incorporated by reference to Registrant’s Form 8-K, filed with the SEC on March 22, 2010. |
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Exhibit 10.9(1) | Employment Agreement by and between S. James Wrigley and Checkpoint Systems, Inc. dated March 11, 2011 is incorporated by reference to Registrant’s Form 10-Q, filed with the SEC on May 4, 2010. |
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Exhibit 10.10(1) | Amended and Restated Checkpoint Systems, Inc. 423 Employee Stock Purchase Plan, is hereby incorporated by reference from Appendix A to Checkpoint System, Inc.’s definitive proxy statement for the 2009 Annual Meeting of Shareholders filed with the Securities and Exchange Commission on April 27, 2009 and as Exhibit 10.1 to the Registrant’s Form 8-K, filed with the SEC on June 8, 2009. |
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Exhibit 10.11(1) | Checkpoint Systems, Inc. Amended and Restated 2004 Omnibus Incentive Compensation Plan is hereby incorporated by reference from Appendix A to Checkpoint Systems, Inc.’s definitive proxy statement for the 2010 Annual Meeting of Shareholders filed with the Securities and Exchange Commission on April 26, 2010 and as Exhibit 10.1 to the Registrant’s Form 8-K, filed with the SEC on June 8, 2010. |
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| Exhibit 10.12 | First Amendment to Credit Agreement dated February 17, 2012, among the Company, Checkpoint Manufacturing Japan Co., Ltd., and CP International Systems C.V., as foreign borrowers, certain other domestic and foreign subsidiaries of the Company, as domestic guarantors and foreign guarantors, the various lenders party thereto from time to time, Wells Fargo Bank, National Association, as Administrative Agent, Citizens Bank of Pennsylvania, as Syndication Agent, and Wells Fargo Securities, LLC and Citizens Bank of Pennsylvania, as Joint Lead Arrangers and Joint Bookrunners is hereby incorporated by reference to Item 1.01, Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on February 23, 2012. |
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| Exhibit 10.13 | First Amendment to Note Purchase and Private Shelf with Prudential Investment Management, Inc. (“Prudential”) and certain Prudential affiliates, dated as of February 17, 2012 is hereby incorporated by reference to Item 1.01, Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on February 23, 2012. |
| Exhibit 12 | Ratio of Earnings to Fixed Charges. |
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| Exhibit 21 | Subsidiaries of Registrant. |
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| Exhibit 23 | Consent of Independent Registered Public Accounting Firm. |
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| Exhibit 31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. |
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| Exhibit 31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. |
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| Exhibit 32 | Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002. |
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| Exhibit 101.INS | XBRL Instance Document.(2) |
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| Exhibit 101.SCH | XBRL Taxonomy Extension Schema Document.(2) |
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| Exhibit 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document.(2) |
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| Exhibit 101.LAB | XBRL Taxonomy Extension Label Linkbase Document.(2) |
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| Exhibit 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document.(2) |
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| Exhibit 101.DEF | XBRL Taxonomy Extension Definition Document.(2) |
| (1) | Management contract or compensatory plan or arrangement. |
| (2) | Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as may be expressly set forth by specific reference in such filings. |
Allowance for Doubtful Accounts
(amounts in thousands)
| Year | Balance at Beginning of Year | Additions Through Acquisition | Charged to Costs and Expenses | Deductions (Write-Offs and Recoveries, net) | Balance at End of Year |
| 2011 | $ 10,927 | $ 435 | $ 3,272 | $ (2,007) | $ 12,627 |
| 2010 (As Revised) | $ 14,826 | $ — | $ 98 | $ (3,997) | $ 10,927 |
| 2009 (As Revised) | $ 18,528 | $ 370 | $ (541) | $ (3,531) | $ 14,826 |
Schedule II - Deferred Tax Valuation Allowance
(amounts in thousands)
| Year | Balance at Beginning of Year | Additions Through Acquisition | Allowance Recorded on Current Year Losses | Change in Valuation Allowance | Release of Allowance on Losses Expired or Revalued | Balance at End of Year |
| 2011 | $ 37,808 | $ 193 | $ 16,119 | $ 47,684 | $ 344 | $ 102,148 |
| 2010 | $ 32,739 | $ — | $ 5,315 | $ — | $ (246) | $ 37,808 |
| 2009 | $ 22,717 | $ — | $ 4,104 | $ 3,514 | $ 2,404 | $ 32,739 |
