Checkpoint Systems (CKP) 10-Q 2007 Q2 Quarterly report

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

þ    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 1, 2007

OR

o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File No. 1-11257

CHECKPOINT SYSTEMS, INC.

(Exact name of Registrant as specified in its Articles of Incorporation)

Pennsylvania	22-1895850
(State of Incorporation)	(IRS Employer Identification No.)
101 Wolf Drive, PO Box 188, Thorofare, New Jersey	08086
(Address of principal executive offices)	(Zip Code)

856-848-1800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filerþ       Accelerated filero       Non-accelerated filero

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of August 3, 2007, there were 39,679,777 shares of the Company’s Common Stock outstanding.

CHECKPOINT SYSTEMS, INC.
FORM 10-Q

Table of Contents

			Page
PART I. FINANCIAL INFORMATION
	Item 1.	Condensed Consolidated Financial Statements (Unaudited)
		Consolidated Balance Sheets		3
		Consolidated Statements of Operations		4
		Consolidated Statements of Shareholders’ Equity		5
		Consolidated Statements of Comprehensive Income		6
		Consolidated Statements of Cash Flows		7
		Condensed Notes to Consolidated Financial Statements		8–16
	Item 2.	Management Discussion and Analysis of Financial Condition and Results of Operations		17 – 26
	Item 3.	Quantitative and Qualitative Disclosure About Market Risk		26
	Item 4.	Controls and Procedures		26 – 27
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings		27
Item 1A.		Risk Factors		27
Item 4.		Submission of Matters to a Vote of Security Holders		28
Item 6.		Exhibits		29
SIGNATURES				30
INDEX TO EXHIBITS				31
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification pursuant to 18 U.S.C. Section 1350

CHECKPOINT SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(amounts in thousands)

	July 1,			December 31,
	2007			2006*
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	161,342		$	143,394
Restricted cash		2,173			2,121
Accounts receivable, net of allowance of $12,926 and $12,417		160,489			160,463
Inventories		96,971			94,562
Other current assets		42,701			36,199
Deferred income taxes		8,463			10,858
Total Current Assets		472,139			447,597
REVENUE EQUIPMENT ON OPERATING LEASE, net		3,941			4,325
PROPERTY, PLANT, AND EQUIPMENT, net		66,899			67,717
GOODWILL		197,265			187,288
OTHER INTANGIBLES, net		32,835			33,143
DEFERRED INCOME TAXES		32,129			31,416
OTHER ASSETS		8,750			9,705
TOTAL ASSETS	$	813,958		$	781,191
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long term debt	$	1,334		$	6,810
Accounts payable		49,794			49,521
Accrued compensation and related taxes		26,794			27,712
Other accrued expenses		34,019			33,557
Income taxes		11,389			27,811
Unearned revenues		22,448			21,634
Restructuring reserve		4,576			6,786
Accrued pensions — current		3,825			3,730
Other current liabilities		15,653			16,012
Total Current Liabilities		169,832			193,573
LONG-TERM DEBT, LESS CURRENT MATURITIES		14,960			9,724
ACCRUED PENSIONS		84,391			82,602
OTHER LONG-TERM LIABILITIES		18,412			4,125
DEFERRED INCOME TAXES		16,781			16,630
MINORITY INTEREST		878			956
COMMITMENTS AND CONTINGENCIES
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 41,565,357 and 41,315,581		4,156			4,131
Additional capital		352,767			345,206
Retained earnings		165,012			146,658
Common stock in treasury, at cost, 2,035,912 shares		(20,621	)		(20,621	)
Accumulated other comprehensive income		7,390			(1,793	)
TOTAL STOCKHOLDERS’ EQUITY		508,704			473,581
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	813,958		$	781,191

* Derived from the Company’s audited consolidated financial statements at December 31, 2006.

See accompanying notes to the condensed consolidated financial statements.

3

CHECKPOINT SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(amounts in thousands, except per share data)

	Quarter						Six Months
	(13 weeks) Ended						(26 weeks) Ended
	July 1,			June 25,			July 1,			June 25,
	2007			2006			2007			2006
Net revenues	$	195,702		$	163,863		$	366,904		$	303,856
Cost of revenues		112,707			94,217			213,630			177,852
Gross profit		82,995			69,646			153,274			126,004
Selling, general, and administrative expenses		59,947			56,351			119,748			109,222
Research and development		4,060			5,000			8,048			9,368
Restructuring expense		329			609			654			856
Litigation settlement		—			2,251			—			2,251
Operating income		18,659			5,435			24,824			4,307
Interest income		1,210			1,149			2,392			2,274
Interest expense		270			555			601			969
Other gain (loss), net		131			44			(393	)		416
Earnings before income taxes and minority interest		19,730			6,073			26,222			6,028
Income taxes		5,158			1,417			6,745			1,393
Minority interest		(2	)		(18	)		(63	)		(69	)
Earnings from continuing operations		14,574			4,674			19,540			4,704
Earnings (loss) from discontinued operations, net of tax		523			(55	)		523			1,518
Net earnings	$	15,097		$	4,619		$	20,063		$	6,222
Basic earnings per share:
Earnings from continuing operations	$	.37		$	.12		$	.49		$	.12
Earnings from discontinued operations, net of tax		.01			—			.02			.04
Basic earnings per share	$	.38		$	.12		$	.51		$	.16
Diluted earnings per share:
Earnings from continuing operations	$	.36		$	.11		$	.48		$	.11
Earnings from discontinued operations, net of tax		.01			—			.02			.04
Diluted earnings per share	$	.37		$	.11		$	.50		$	.15

See accompanying notes to the condensed consolidated financial statements.

4 

CHECKPOINT SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(amounts in thousands)

															Accumulated
															Other			Total
	Common Stock				Additional		Retained			Treasury Stock					Comprehensive			Stockholders’
	Shares		Amount		Capital		Earnings			Shares		Amount			Income			Equity
Balance, December 31, 2006		41,315	$	4,131	$	345,206	$	146,658			2,036	$	(20,621	)	$	(1,793	)	$	473,581
Net earnings								20,063											20,063
Exercise of stock-based compensation		250		25		3,303													3,328
Tax benefit of stock-based compensation						246													246
Stock-based compensation expense						3,182													3,182
Deferred compensation plan						830													830
Cumulative impact of change in accounting for uncertainties in income taxes (FIN 48 – see note 2)								(1,709	)										(1,709	)
Amortization of pension plan actuarial losses, net of tax																194			194
Foreign currency translation adjustment																8,989			8,989
Balance, July 1, 2007		41,565	$	4,156	$	352,767	$	165,012			2,036	$	(20,621	)	$	7,390		$	508,704

See accompanying notes to the condensed consolidated financial statements.

5

CHECKPOINT SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(amounts in thousands)

	Quarter				Six Months
	(13 weeks) Ended				(26 weeks) Ended
	July 1,		June 25,		July 1,		June 25,
	2007		2006		2007		2006
Net earnings	$	15,097	$	4,619	$	20,063	$	6,222
Amortization of pension plan actuarial losses, net of tax		49		—		194		—
Foreign currency translation adjustment		5,018		9,204		8,989		11,105
Comprehensive income	$	20,164	$	13,823	$	29,246	$	17,327

See accompanying notes to the condensed consolidated financial statements.

6

CHECKPOINT SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)

	July 1,			June 25,
Six Months Ended (26 Weeks)	2007			2006
Cash flows from operating activities:
Net earnings	$	20,063		$	6,222
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization		8,851			9,692
Deferred taxes		(811	)		(833	)
Stock-based compensation		3,182			2,890
Provision for losses on accounts receivable		1,094			1,335
Excess tax benefit on stock compensation		(292	)		(1,275	)
Gain on sale of discontinued operations		(523	)		(1,299	)
(Gain)/loss on disposal of fixed assets		(538	)		4
(Increase) decrease in current assets, net of the effects of acquired companies:
Accounts receivable		3,304			10,499
Inventories		(356	)		(13,058	)
Other current assets		(5,450	)		766
Increase (decrease) in current liabilities, net of the effects of acquired companies:
Accounts payable		(857	)		(18,148	)
Income taxes		(458	)		(1,100	)
Unearned revenues		(26	)		(3,438	)
Restructuring reserve		(2,302	)		(8,752	)
Other current and accrued liabilities		(745	)		(9,761	)
Net cash provided by (used in) operating activities		24,136			(26,256	)
Cash flows from investing activities:
Acquisition of property, plant, and equipment		(5,461	)		(5,420	)
Acquisitions, net of cash acquired		(6,677	)		—
Cash (outflows)/proceeds from the sale of discontinued operations		(1,313	)		32,058
Other investing activities		1,106			54
Net cash (used in) provided by investing activities		(12,345	)		26,692
Cash flows from financing activities:
Proceeds from stock issuances upon exercise		3,328			7,986
Excess tax benefit on stock compensation		292			1,275
Proceeds from short-term debt		2,899			7,711
Payment of short-term debt		(8,808	)		(6,503	)
Increase in overdraft borrowings		591			397
Proceeds from long-term debt		5,967			—
Payment of long-term debt		(386	)		(9,916	)
Net cash provided by financing activities		3,883			950
Effect of foreign currency rate fluctuations on cash and cash equivalents		2,274			1,796
Net increase in cash and cash equivalents		17,948			3,182
Cash and cash equivalents:
Beginning of period		143,394			113,223
End of period	$	161,342		$	116,405

See accompanying notes to condensed consolidated financial statements.

7

CHECKPOINT SYSTEMS, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. BASIS OF ACCOUNTING

The consolidated financial statements include the accounts of Checkpoint Systems, Inc. and its majority-owned subsidiaries (Company). All inter-company transactions are eliminated in consolidation. The consolidated financial statements and related notes are unaudited and do not contain all disclosures required by generally accepted accounting principles in annual financial statements. Refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 for the most recent disclosure of the Company’s accounting policies.

The consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to state fairly our financial position at July 1, 2007 and December 31, 2006 and our results of operations for the thirteen and twenty-six weeks ended July 1, 2007 and June 25, 2006 and cash flows for the twenty-six week periods ended July 1, 2007 and June 25, 2006. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

Certain reclassifications have been made to the 2006 financial statements and related footnotes to conform to the current year presentation.

Restricted Cash

At July 1, 2007, the Company has $2.2 million in restricted cash related to cash received from the divestiture of our barcode businesses and the U.S. hand-held labeling and Turn-O-Matic^® businesses. This cash is restricted until potential working capital adjustments related to the divestiture are resolved. The restrictions will be removed during the third quarter 2007.

Warranty Reserves

We provide product warranties for our various products. These warranties vary in length depending on product and geographical region. We establish our warranty reserves based on historical data of warranty transactions.

The following table sets forth the movement in the warranty reserve:

(amounts in thousands)

	July 1,
	2007
Balance at beginning of fiscal year	$	5,499
Accruals for warranties issued		2,845
Settlement made		(2,600	)
Foreign currency translation adjustment		112
Balance at end of period	$	5,856

New Accounting Pronouncements and Other Standards

We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, on January 1, 2007. As a result of adoption, we recognized a charge of approximately $1.7 million to the January 1, 2007 retained earnings balance. Additionally, we reclassified $13.9 million of the unrecognized tax benefits, and interest and penalties from income taxes to other long-term liabilities on our consolidated balance sheet. As of the adoption date, we had $10.6 million of unrecognized tax benefits, all of which would affect our effective tax rate if recognized. Also as of the adoption date, we had accrued interest expense and penalties related to the unrecognized tax benefits of $3.8 million and $0.3 million respectfully.

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements”. This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The adoption of SFAS 157 is not expected to have a material impact on our financial position, results of operations or cash flows.

In February 2007, FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 is effective for fiscal years after November 15, 2007. We are currently evaluating the impact of adopting FAS 159 on our financial statements.

8 

Note 2. INCOME TAXES

We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, on January 1, 2007. As a result of adoption, we recognized a charge of approximately $1.7 million to the January 1, 2007 retained earnings balance. Additionally, we reclassified $13.9 million of the unrecognized tax benefits, and interest and penalties from income taxes to other long-term liabilities on our consolidated balance sheet. As of the adoption date, we had $10.6 million of unrecognized tax benefits, all of which would affect our effective tax rate if recognized. Also as of the adoption date, we had accrued interest expense and penalties related to the unrecognized tax benefits of $3.8 million and $0.3 million respectively. We recognize interest expense and penalties relating to unrecognized tax benefits as a component of income tax expense.

We conduct business globally and, as a result, Checkpoint Systems, Inc. or one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as France, Germany, Hong Kong, Japan, Netherlands, Puerto Rico, Spain, and the United States. The Company has completed examinations through 2003 for U.S. Federal income taxes and with a few exceptions, income tax in jurisdictions other than the U.S. through 2001.

We are currently under audit in the following jurisdictions: Australia 1997-2003, Netherlands 2003-2004, and the United Kingdom 2001 and 2003. It is likely that the examination phase of the Australian audit will conclude in 2007 and will result in a settlement. It is not possible to quantify an estimated range of the expected settlement of issues at this time.

Note 3. STOCK-BASED COMPENSATION

Stock-based compensation cost recognized in operating results (included in selling, general and administrative expenses) under SFAS No. 123R for the three and six months ended July 1, 2007 was $1.8 million and $3.2 million ($1.2 million and $2.3 million, net of tax) or $.03 per diluted share and $.06 per diluted share. For the three and six months ended June 25, 2006, the total compensation expense was $1.4 million and $2.9 million ($1.0 million and $2.1 million, net of tax) or $.02 per diluted share and $.05 per diluted share. The associated actual tax benefit realized for the tax deduction from option exercises of share-based payment units equaled $0.5 million and $1.4 million for the six months ended July 1, 2007 and June 25, 2006, respectively.

Stock Options

Option activity under the principal option plans as of July 1, 2007 and changes during the six months ended July 1, 2007 were as follows:

						Weighted
						Average
				Weighted-		Remaining		Aggregate
				Average		Contractual		Intrinsic
				Exercise		Term		Value
	Shares			Price		(in years)		(in thousands)
Outstanding at December 31, 2006		3,154,517		$	16.28		6.03	$	15,274
Granted		241,526			23.74
Exercised		(186,965	)		16.00
Forfeited or expired		(158,621	)		25.83
Outstanding at July 1, 2007		3,050,457		$	16.39		6.24	$	29,220
Vested and expected to vest at July 1, 2007		2,938,244		$	16.10		6.14	$	28,905
Exercisable at July 1, 2007		2,493,657		$	14.83		5.65	$	27,421

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 the second quarter of fiscal 2007 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 July 1, 2007. This amount changes based on the fair market value of the Company’s stock. Total intrinsic value of options exercised for the six months ended July 1, 2007 was $0.8 million.

As of July 1, 2007, $3.3 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.1 years.

The fair value of share-based payment units was estimated using the Black-Scholes option pricing model. The table below presents the weighted average expected life in years. The expected life computation is based on historical exercise patterns and post-vesting termination behavior. Volatility is determined using changes in historical stock prices. The interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

9

The following assumptions and weighted average fair values were as follows:

	Six months		Six months
	ended,		ended,
	July 1, 2007		June 25, 2006
Weighted average fair value of grants	$	8.90	$	11.80
Valuation assumptions:
Expected dividend yield		—%		—%
Expected volatility		36.56%		41.64%
Expected life (in years)		4.56		4.54
Risk-free interest rate		4.557%		4.55 – 4.68%

Restricted Stock Units

Nonvested service based restricted stock units as of July 1, 2007 and changes during the six months ended July 1, 2007 were as follows:

						Weighted- Average
	Number of Shares			Weighted-Average		Grant Date Fair
	(in thousands)			Vest Date		Value
Nonvested at December 31, 2006		197,672			1.37	$	26.24
Granted		148,812				$	24.77
Vested		(28,637	)			$	28.89
Forfeited		(6,142	)			$	28.42
Nonvested at July 1, 2007		311,705			1.65	$	25.25
Vested and expected to vest at July 1, 2007		196,742			1.54
Vested at July 1, 2007		70,084			—

As of July 1, 2007, there was $4.6 million unrecognized stock-based compensation expense related to nonvested restricted stock units. That cost is expected to be recognized over a weighted-average period of 2.6 years. The total conversion value of released restricted stock units for the six months ended July 1, 2007 was $0.6 million.

Note 4. INVENTORIES

Inventories consist of the following:

(amounts in thousands)

	July 1,		December 31,
	2007		2006
Raw materials	$	13,654	$	14,420
Work-in-process		5,570		4,467
Finished goods		77,747		75,675
Total	$	96,971	$	94,562

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Note 5. GOODWILL AND OTHER INTANGIBLE ASSETS

We had intangible assets with a net book value of $32.8 million and $33.1 million as of July 1, 2007 and December 31, 2006, respectively.

The following table reflects the components of intangible assets as of July 1, 2007 and December 31, 2006:

(amounts in thousands)

			July 1, 2007				December 31, 2006
	Amortizable				Gross				Gross
	Life		Carrying		Accumulated		Carrying		Accumulated
	(years)		Amount		Amortization		Amount		Amortization
Customer lists		20	$	33,830	$	22,970	$	32,583	$	22,116
Trade name		30		29,341		14,240		28,625		13,587
Patents, license agreements		5 to 14		41,073		34,490		40,060		32,761
Other		3 to 6		930		639		921		582
Total			$	105,174	$	72,339	$	102,189	$	69,046

Estimated amortization expense for each of the five succeeding years is anticipated to be:

(amounts in thousands)

2007	$	3,393
2008	$	3,313
2009	$	2,937
2010	$	2,474
2011	$	2,362

The changes in the carrying amount of goodwill for the six months ended July 1, 2007, are as follows:

(amounts in thousands)

			Labeling		Retail
	Security		Services		Merchandising		Total
Balance as of December 31, 2006	$	110,731	$	6,378	$	70,179	$	187,288
Additions during the year		5,344		161		—		5,505
Translation adjustment and other		2,252		187		2,033		4,472
Balance as of July 1, 2007	$	118,327	$	6,726	$	72,212	$	197,265

In January 2007, the Company purchased the business of Security Systems Technology, Inc., a privately held company, for $0.8 million plus $0.2 million of liabilities acquired. The transaction was paid in cash. The financial statements reflect the preliminary allocations of the purchase price based on estimated fair values at the date of acquisition. This allocation has resulted in acquired goodwill of $0.9 million, which is deductible for tax purposes. The allocation of the purchase price is expected to be completed during the year 2007. The results from the acquisition date through July 1, 2007 are included in the Security segment and were not material to the consolidated financial statements.

In May 2007, the Company purchased the business of SSE Southeast, LLC, for $5.1 million plus $0.8 million of liabilities acquired. The transaction was paid in cash. The financial statements reflect the preliminary allocations of the purchase price based on estimated fair values at the date of acquisition. This allocation has resulted in acquired goodwill of $4.4 million, which is deductible for tax purposes. The allocation of the purchase price is expected to be completed during the year 2007. The results from the acquisition date through July 1, 2007 are included in the Security segment and were not material to the consolidated financial statements.

Pursuant to SFAS 142 “Goodwill and Other Intangible Assets”, we will perform our annual assessment of goodwill by comparing each individual reporting unit’s carrying amount of net assets, including goodwill, to their fair value during the fourth quarter of each fiscal year or earlier if there are indicators of impairment. Future annual assessments could result in impairment charges, which would be accounted for as an operating expense.

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Note 6. LONG-TERM DEBT

Long-term debt at July 1, 2007 and December 31, 2006 consisted of the following:

(amounts in thousands)

	July 1,		December 31,
	2007		2006
Senior unsecured credit facility:
$150 million variable interest rate revolving credit facility maturing in 2010	$	14,446	$	9,067
€2.7 million capital lease maturing in 2007		242		469
Other capital leases with maturities through 2010		1,003		1,186
Total		15,691		10,722
Less current portion		731		998
Total long-term portion	$	14,960	$	9,724

During the first quarter of 2007, the senior unsecured revolving credit facility increased by $6.0 million. The proceeds from these borrowings were used to repay the borrowings under our Japanese short-term line of credit.

At December 31, 2006, the Company had a full recourse factoring arrangement with Mitsubishi UFJ Factoring Co., Ltd., in which the arrangements were secured by trade receivables. As of December 31, 2006, the face amount of receivables sold and not yet collected were $0.8 million. During the first quarter of 2007, the remaining full recourse factoring liability was paid in full.

The senior unsecured credit facility contains certain covenants that include requirements for a maximum ratio of debt to EBITDA, a maximum ratio of interest to EBITDA, and a maximum threshold for capital expenditures. As of July 1, 2007, we were in compliance with all covenants.

12

Note 7. PER SHARE DATA

The following data shows the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock:

(amounts in thousands, except per share data)

	Quarter				Six Months
	(13 weeks) Ended				(26 weeks) Ended
	July 1,		June 25,		July 1,		June 25,
	2007		2006		2007		2006
Earnings available to common stockholders:
Earnings available to common stockholders from continuing operations	$	14,574	$	4,674	$	19,540	$	4,704
Shares:
Weighted average number of common shares outstanding		39,456		39,188		39,394		39,011
Shares issuable under deferred compensation arrangements		308		238		298		218
Basic weighted average number of common shares outstanding		39,764		39,426		39,692		39,229
Common shares assumed upon exercise of stock options and awards		927		1,092		762		1,231
Shares issuable under deferred compensation arrangements		13		21		10		18
Dilutive weighted average number of common shares outstanding		40,704		40,539		40,464		40,478
Basic earnings per share:
Earnings from continuing operations	$	.37	$	.12	$	.49	$	.12
Earnings from discontinued operations, net of tax		.01		—		.02		.04
Basic earnings per share	$	.38	$	.12	$	.51	$	.16
Diluted earnings per share:
Earnings from continuing operations	$	.36	$	.11	$	.48	$	.11
Earnings from discontinued operations, net of tax		.01		—		.02		.04
Diluted earnings per share	$	.37	$	.11	$	.50	$	.15

The long-term incentive plan restricted stock units have been excluded as the vesting criteria has not been met. Anti-dilutive potential common shares are not included in our earnings per share calculation. The number of anti-dilutive common share equivalents were as follows:

	Quarter				Six Months
	(13 weeks) Ended				(26 weeks) Ended
	July 1,		June 25,		July 1,		June 25,
	2007		2006		2007		2006
Weighted average common share equivalents associated with anti-dilutive stock options and restricted stock units excluded from the computation of diluted EPS:		576		643		558		529

13

Note 8. DISCONTINUED OPERATIONS

On January 30, 2006 the Company completed the sale of its global barcode businesses included in our Labeling Services Segment, and the U.S. hand-held labeling and Turn-O-Matic^® businesses included in the Retail Merchandising Segment for cash proceeds of $37 million, plus the assumption of $5 million in liabilities. The Company recorded a pre-tax gain of $2.8 million ($1.4 million, net of tax), included in discontinued operations, net of tax in the consolidated statement of operations. The post closing adjustments have been finalized and an additional gain of $0.5 million, net of tax, was recorded in discontinued operations during the second quarter of 2007.

The Company’s discontinued operations reflect the operating results for the disposal group through the date of disposition. The results for the thirteen and twenty-six weeks ended July 1, 2007 and June 25, 2006 have been reclassified to show the results of operations for the barcode labeling systems and U.S. hand-held labeling and Turn-O-Matic^® businesses as discontinued operations. Below is a summary of these results:

(amounts in thousands)

	Quarter					Six Months
	(13 weeks) Ended					(26 weeks) Ended
	July 1,		June 25,			July 1,		June 25,
	2007		2006			2007		2006
Net revenues	$	—	$	88		$	—	$	7,540
Gross profit		—		(40	)		—		1,643
Selling, general, & administrative expenses		—		48			—		1,351
Operating income		—		(88	)		—		292
Gain on disposal		796		—			796		2,756
Earnings (loss) from discontinued operations before income taxes		796		(88	)		796		3,048
Income taxes		273		(33	)		273		1,530
Earnings (loss) from discontinued operations, net of tax	$	523	$	(55	)	$	523	$	1,518

Note 9. SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments for interest and income taxes for the twenty-six week periods ended July 1, 2007 and June 25, 2006 were as follows:

(amounts in thousands)

	Six Months
	(26 weeks) Ended
	July 1,		June 25,
	2007		2006
Interest	$	529	$	890
Income tax payments	$	4,238	$	6,024

14

Note 10. PROVISION FOR RESTRUCTURING

2005 Restructuring Plan

In the second quarter of 2005, we initiated actions focused on reducing our overall operating expenses. This plan included the implementation of a cost reduction plan designed to consolidate certain administrative functions in Europe and a commitment to a plan to restructure a portion of our supply chain manufacturing to lower cost areas. During the fourth quarter of 2006, we continued to review the results of the overall initiatives and achieved additional reductions focused on the reorganization of senior management to focus on key markets and customers. This additional restructuring reduced our management by 25%.

A net charge of $0.7 million was recorded in the first six months of 2007 in connection with the 2005 Restructuring Plan primarily related to employee severance.

The total number of employees affected by the restructuring were 763, of which 756 have been terminated. The remaining terminations are expected to be completed by the end of fiscal year 2007. The anticipated total cost is expected to approximate $24 million to $26 million, of which $24 million has been incurred and $20 million has been paid. Termination benefits are planned to be paid 1 month to 24 months after termination.

Restructuring accrual activity was as follows:

Fiscal 2007
(amounts are in thousands)

	Accrual at				Charge
	Beginning		Charged to		Reversed to		Cash		Exchange		Accrual at
	of Year		Earnings		Earnings		Payments		Rate Changes		7/1/2007
Severance and other employee-related charges	$	6,786	$	753	$	62	$	2,982	$	81	$	4,576

Note 11. EMPLOYEE BENEFIT PLANS

The components of net periodic benefit cost for the thirteen week and twenty-six week periods ended July 1, 2007 and June 25, 2006 were as follows:

(amounts in thousands)

	Quarter						Six Months
	(13 weeks) Ended						(26 weeks) Ended
	July 1,			June 25,			July 1,			June 25,
	2007			2006			2007			2006
Service cost	$	348		$	337		$	687		$	660
Interest cost		1,008			875			1,987			1,713
Expected return on plan assets		(36	)		(36	)		(70	)		(71	)
Amortization of actuarial loss		117			142			231			278
Amortization of transition obligation		32			29			62			57
Amortization of prior service cost		—			—			1			1
Net periodic pension cost	$	1,469		$	1,347		$	2,898		$	2,638

We expect the cash requirements for funding the pension benefits to be approximately $5.2 million during fiscal 2007, including $3.2 million which was funded during the six months ended July 1, 2007.

15

Note 12. CONTINGENT LIABILITIES AND SETTLEMENTS

We are involved in certain legal and regulatory actions, all of which have arisen in the ordinary course of business. Management believes it is remotely possible that the ultimate resolution of such matters will have a material adverse effect on our consolidated results of operations and/or financial condition.

Note 13. BUSINESS SEGMENTS

(amounts in thousands)

	Quarter				Six Months
	(13 weeks) Ended				(26 weeks) Ended
	July 1,		June 25,		July 1,			June 25,
	2007		2006		2007			2006
Business segment net revenue:
Security	$	135,428	$	115,509	$	252,493		$	215,281
Labeling Services		35,855		28,202		66,163			49,044
Retail Merchandising		24,419		20,152		48,248			39,531
Total revenues		195,702		163,863		366,904			303,856
Business segment gross profit:
Security		59,451		49,554		109,090			89,497
Labeling Services		12,606		10,647		21,564			17,042
Retail Merchandising		10,938		9,445		22,620			19,465
Total gross profit		82,995		69,646		153,274			126,004
Operating expenses		64,336		64,211		128,450			121,697
Interest income (expense), net		940		594		1,791			1,305
Other gain (loss), net		131		44		(393	)		416
Earnings from continuing operations before income taxes and minority interest	$	19,730	$	6,073	$	26,222		$	6,028

16

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Information Relating to Forward-Looking Statements

This report includes forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Except for historical matters, the matters discussed are forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, that reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from historical results or those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Information about potential factors that could affect our business and financial results is included in our Annual Report on Form 10-K for the year ended December 31, 2006, and our other Securities and Exchange Commission filings.

Critical Accounting Policies and Estimates

There has been no change to our critical accounting policies and estimates, contained in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K filed for the year ended December 31, 2006.

Overview

Checkpoint Systems, Inc. is a multinational manufacturer and marketer of integrated system solutions for retail security, labeling, and merchandising. 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 electronic article surveillance (EAS) systems and tags using radio frequency (RF) and electromagnetic (EM) technology, security source tagging, branding tags and labels for apparel, retail display systems (RDS), and hand-held labeling systems (HLS). Our labeling systems and services are designed to consolidate tag and label requirements to improve efficiency, reduce costs, and furnish value-added solutions for customers across many markets and industries. Applications for printed tags and labels include brand identification, automatic identification (auto-ID), retail security, and pricing and promotional labels. We now operate directly in 31 countries. Products are principally developed and manufactured in-house and sold through direct distribution and reseller channels.

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.

Our business plan is to generate sustained revenue growth through selected investments in product development and marketing. We intend to offset the cost of these investments through product cost and operating expense reductions. Revenue growth may also be generated by acquisitions that are targeted to expand our product offerings and customer base.

We are developing new avenues for growth by expanding into new vertical markets, as demonstrated by the Security Systems Group’s (SSG) entry into the financial services sector with technology and physical security solutions. Our library operations are transitioning from a security-based business into Library Patron Services, a new business model focused on interactive patron services, advertising, and community involvement. While these actions are in the early stages, we believe that these business opportunities have the potential to significantly contribute to revenue and profit growth in the future.

We have also modified our organization to better fit our customers’ needs and address our competitive business environment by reorganizing our two primary lines of business from a regional focus to a global one, to more effectively serve our customers who are continually expanding their global presence. To that end, we have established two global business groups: Shrink Management & Merchandising Solutions and iLabels. These two groups will work together to advance our lead in source tagging capabilities, firmly establish Checkpoint as a full shrink management solutions provider, and leverage our RF experience to provide solutions that make sense for our customers today, with a path to RFID-based solutions for the future. We anticipate changing our management reporting to conform to our new business structure during fiscal 2007. This is anticipated to result in a change in our business segments.

Revenue for the second quarter of 2007 was $195.7 million, a 19.4% increase over the comparable periods in 2006. Foreign currency translation had a positive impact on revenue of approximately 4.6%, for the quarter ended July 1, 2007. The remaining increase was due to higher revenues in our CheckNet^® ($8.9 million), CCTV ($8.3 million), and EAS ($6.7 million) businesses. The CheckNet^® revenue benefited $6.0 million from our acquisition of ADS in November 2006.

Future financial results will be dependent upon our ability to expand the functionality of our existing product lines, develop or acquire new products for sale through our global distribution channels, convert new large chain retailers to RF-EAS, and reduce the cost of our products and infrastructure to respond to competitive pricing pressures.

17

Our strong base of recurring revenue (revenues from the sale of consumables into the installed base of security systems, and hand-held labeling tools), repeat customer business, and our borrowing capacity should provide us with adequate cash flow and liquidity to execute our business plan.

Results of Operations

(All comparisons are with the prior year period, unless otherwise stated.)

Net Revenues

Our unit volume is driven by product offerings, number of direct sales personnel, recurring sales and, to some extent, pricing. Our base of installed systems and hand held tools provides a source of recurring revenues from the sale of disposable tags, labels and service revenues.
Our customers are substantially dependent on retail sales, which are seasonal, subject to significant fluctuations, and difficult to predict. Such seasonality and fluctuations impact our sales. Historically, we have experienced lower sales in the first half of each fiscal year than in the second half of the year.

18

Analysis of Statement of Operations

Thirteen Weeks Ended July 1, 2007 Compared to Thirteen Weeks Ended June 25, 2006

The following table presents for the periods indicated certain items in the consolidated statement of operations as a percentage of total revenues and the percentage change in dollar amounts of such items compared to the indicated prior period:

							Percentage
							Change in
							Dollar
	Percentage of Total Revenues						Amount
	July 1,			June 25,
	2007			2006			Fiscal 2007 vs.
Quarter ended	(Fiscal 2007)			(Fiscal 2006)			Fiscal 2006
Net Revenues
Security		69.2	%		70.5	%		17.2	%
Labeling Services		18.3			17.2			27.1
Retail Merchandising		12.5			12.3			21.2
Net revenues		100.0			100.0			19.4
Cost of revenues		57.6			57.5			19.6
Total gross profit		42.4			42.5			19.2
Selling, general, and administrative expenses		30.6			34.4			6.4
Research and development		2.1			3.0			(18.8	)
Restructuring expense		0.2			0.4			(46.0	)
Legal settlement		—			1.4			N/A
Operating income		9.5			3.3			N/A
Interest income		0.6			0.7			5.3
Interest expense		0.1			0.3			(51.4	)
Other gain (loss), net		0.1			—			N/A
Earnings before income taxes and minority interest		10.1			3.7			N/A
Income taxes		2.7			0.9			N/A
Minority interest		—			—			N/A
Earnings from continuing operations		7.4			2.8			N/A
Earnings from discontinued operations, net of tax		0.3			—			N/A
Net earnings		7.7	%		2.8	%		N/A	%

N/A – Comparative percentages are not meaningful.

19

Net Revenues

Revenues for the second quarter 2007 compared to the second quarter 2006 increased by $31.8 million or 19.4% from $163.9 million to $195.7 million. Foreign currency translation had a positive impact on revenues of approximately $7.5 million or 4.6% in the second quarter of 2007 as compared to the second quarter of 2006.

(amounts in millions)

					Dollar		Percentage
					Amount		Change
	July 1,		June 25,		Change		Fiscal 2007
	2007		2006		Fiscal 2007		vs. Fiscal
Quarter ended	(Fiscal 2007)		(Fiscal 2006)		vs. Fiscal 2006		2006
Net Revenues:
Security	$	135.4	$	115.5	$	19.9		17.2	%
Labeling Services		35.9		28.2		7.7		27.1
Retail Merchandising		24.4		20.2		4.2		21.2
Net Revenues	$	195.7	$	163.9	$	31.8		19.4	%

Security revenues increased by $19.9 million or 17.2% in the second quarter 2007 as compared to the second quarter 2006. Foreign currency translation had a positive impact of approximately $4.6 million. The remaining revenue growth was primarily due to increases in EAS revenues in Europe ($4.3 million), Asia Pacific ($1.2 million), and International Americas ($1.2 million). In addition, revenue in the CCTV business increased $8.3 million, primarily in the U.S. The increase in Europe EAS was due to large chain-wide roll-outs in Germany and overall improvements in the region primarily led by France. The increase in Asia was due primarily to new business in China and continued growth in our Hong Kong distribution unit. The U.S. CCTV business improved due to a larger number of installations with existing customers in 2007 compared to 2006.

Labeling services revenues increased by $7.7 million or 27.1%. The positive impact of foreign currency translation was approximately $1.6 million. The remaining revenue growth was primarily due to increases in our CheckNet^® business of $8.9 million partially offset by a decrease in our Intelligent Library Systems business of $2.3 million. CheckNet^® business revenue benefited $6.0 million due from the ADS acquisition and continued the strong growth of its base business in the second quarter of 2007.

Retail merchandising revenues increased by $4.2 million or 21.2%. The positive impact of foreign currency translation was approximately $1.4 million. The remaining revenue growth was due to an increase in our Retail Merchandising Solutions (RMS) business of $1.9 million coupled with an increase of $0.5 million in our European Hand Held Labeling Systems (HLS) business. The RMS increase was due primarily to an increase in sales of our retail display systems in Europe ($1.1 million) and Asia Pacific ($0.9 million). The European HLS business increase was due primarily to improved results in our indirect sales channel.

Gross Profit

Gross profit for the second quarter 2007 was $83.0 million, or 42.4% of net revenues, compared to $69.6 million, or 42.5% of revenues, for the second quarter 2006. Foreign currency translation had a positive impact on gross profit of approximately $3.0 million in the second quarter of 2007.

Security gross profit for the second quarter of 2007 was $59.5 million, or 43.9% of security revenues, compared to $49.6 million, or 42.9% of security revenues, for the second quarter 2006. Security gross profit percentage increased due primarily to revenue increases in our EAS and CCTV businesses covering our fixed field service costs.

Labeling services gross profit as a percentage of labeling revenues decreased to 35.2% in the second quarter 2007 from 37.8% in the second quarter 2006. This decrease in labeling gross profit percentage was due to the lower margins of the recently acquired ADS business with constant margins in our core CheckNet^® business.

Retail merchandising gross profit as a percentage of retail merchandising revenues decreased to 44.8% in the second quarter 2007 from 46.9% in the second quarter of 2006. This decrease was due to increases in revenues in certain countries with lower margins.

Field service and installation costs for the second quarter 2007 and 2006 were 9.9% and 10.2% of net revenues, respectively. This decrease as a percentage of revenue was due to higher revenues, which allowed us to leverage our fixed costs.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses increased $3.6 million, or 6.4%, over the second quarter 2006. Foreign currency translation increased selling, general, and administrative expenses by approximately $2.0 million. SG&A expenses generated by the recently acquired ADS operations accounted for $2.0 million of the increase over the prior year. This was partially offset by a decrease in management expenses

20

resulting from our restructuring initiatives. Selling, general and administrative expenses decreased, as a percentage of revenues, from 34.4% in 2006 to 30.6% in 2007.

Research and Development Expenses

Research and development costs were $4.1 million, or 2.1% of revenues in the second quarter 2007 and $5.0 million, or 3.0% in the second quarter 2006.

Restructuring Expenses

Restructuring expenses were $0.3 million, or 0.2% of revenues in the second quarter 2007 compared to $0.6 million or 0.4% of revenues in the second quarter 2006.

Litigation Settlement

Litigation expense was $2.3 million in the second quarter of 2006. This was a result of the settlement of a class action suit arising from the anti-trust litigation with ID Security Systems Canada, Inc.

Income Taxes

Our effective tax rates were 26.1% and 23.3% for the second quarters of 2007 and 2006, respectively. The 2007 effective tax rate percentage was higher due to increased earnings in higher tax rate countries in 2007 compared to 2006. We are considering changes in our legal entity structure that, if successful, could result in the release of valuation allowances and have a positive impact on our 2007 income tax expense.

Net Earnings

Net earnings were $15.1 million, or $0.37 per diluted share, in the second quarter of 2007 compared to $4.6 million, or $0.11 per diluted share, in the second quarter of 2006. The weighted average number of shares used in the diluted earnings per share computation were 40.7 million and 40.5 million for the second quarters of 2007 and 2006, respectively.

21

Twenty-six Weeks Ended July 1, 2007 Compared to Twenty-six Weeks Ended June 25, 2006

The following table presents for the periods indicated certain items in the consolidated statement of operations as a percentage of total revenues and the percentage change in dollar amounts of such items compared to the indicated prior period:

							Percentage
							Change in Dollar
	Percentage of Total Revenues						Amount
	July 1,			June 25,
	2007			2006			Fiscal 2007 vs.
Twenty-six weeks ended	(Fiscal 2007)			(Fiscal 2006)			Fiscal 2006
Net Revenues
Security		68.8	%		70.9	%		17.3	%
Labeling Services		18.0			16.1			34.9
Retail Merchandising		13.2			13.0			22.0
Net revenues		100.0			100.0			20.7
Cost of revenues		58.2			58.5			20.1
Total gross profit		41.8			41.5			21.6
Selling, general, and administrative expenses		32.6			35.9			9.6
Research and development		2.2			3.1			(14.1	)
Restructuring expense		0.2			0.3			(23.6	)
Legal settlement		—			0.7			N/A
Operating income		6.8			1.5			N/A
Interest income		0.7			0.7			5.2
Interest expense		0.2			0.3			(38.0	)
Other (loss) gain, net		(0.1	)		0.1			N/A
Earnings before income taxes and minority interest		7.2			2.0			N/A
Income taxes		1.8			0.5			N/A
Minority interest		—			—			(8.7	)
Earnings from continuing operations		5.4			1.5			N/A
Earnings from discontinued operations, net of tax		0.1			0.5			N/A
Net earnings		5.5	%		2.0	%		N/A	%

N/A – Comparative percentages are not meaningful.

22

Net Revenues

Revenues for the first six months of 2007 compared to the same period in 2006 increased by $63.0 million or 20.7% from $303.9 million to $366.9 million. Foreign currency translation had a positive impact on revenues of approximately $14.9 million or 4.9% in the first six months of 2007 as compared to the first six months of 2006.

(amounts in millions)

					Dollar		Percentage
					Amount		Change
	July 1,		June 25,		Change		Fiscal 2007
	2007		2006		Fiscal 2007		Vs. Fiscal
Twenty-six weeks ended	(Fiscal 2007)		(Fiscal 2006)		vs. Fiscal 2006		2006
Net Revenues:
Security	$	252.5	$	215.3	$	37.2		17.3	%
Labeling Services		66.2		49.1		17.1		34.9
Retail Merchandising		48.2		39.5		8.7		22.0
Net Revenues	$	366.9	$	303.9	$	63.0		20.7	%

Security revenues increased by $37.2 million or 17.3% in the first six months of 2007 as compared to the first six months of 2006. Foreign currency translation had a positive impact of approximately $8.6 million. The remaining growth in revenue was primarily due to increases in EAS revenues in the U.S. ($3.3 million), Europe ($8.7 million), and Asia Pacific ($2.7 million). In addition, the CCTV business increased $10.9 million, primarily in the U.S. The U.S. EAS business increase was due primarily to new installation with existing customers. The increase in Europe EAS was due to an overall improvement in the region, led primarily by France. The increase in Asia was due primarily to new business in China and India and continued growth in our Hong Kong distribution unit and Japan business. The CCTV business improved due to a larger number of installations with existing customers in 2007 compared to 2006.

Labeling Services revenues increased by $17.1 million or 34.9% over last year’s comparable period. Foreign currency translation had a positive impact of approximately $3.1 million over the first six months of 2007. The remaining revenue growth was primarily due to an increase in our CheckNet^® business of $17.2 million partially offset by a decrease in our Intelligent Library Systems business of $3.1 million. CheckNet^® business revenue benefited $11.2 million due to the ADS acquisition and continued the strong growth of its base business during the first six months of 2007.

Retail merchandising revenues increased by $8.7 million or 22.0%. The positive impact of foreign currency translation was approximately $3.2 million. The remaining increase was due primarily to increases in sales of our retail display systems in Europe of $3.7 million and Asia Pacific of $0.9 million.

Gross Profit

Gross profit in the first six months of 2007 was $153.3 million, or 41.8% of revenues, compared to $126.0 million, or 41.5% of revenues, in the first six months of 2006. Foreign currency translation had a positive impact of approximately $5.7 million. Gross profit in the first six months of 2007 increased by $27.3 million or 21.6%.

Security gross profit in the first six months of 2007 was $109.1 million, or 43.2% of security revenues, compared to $89.5 million, or 41.6% of security revenues, in the first six months of 2006. The increase in security gross profit percentage was due primarily to improved margins in our U.S. EAS business.

Labeling services gross profit as a percentage of labeling revenues decreased to 32.6% in the first six months of 2007 from 34.7% in the first six months in 2006. This decrease in labeling gross profit percentage was primarily due to manufacturing inefficiencies and competitive pricing pressures and the lower margins of our recently acquired ADS business.

The retail merchandising gross profit as a percentage of retail merchandising revenues decreased to 46.9% in the first six months of 2007 from 49.2% in the first six months of 2006. This decrease was due primarily to continued margin decreases in our HLS business as we converted to an indirect sales model.

Field service and installation costs for the first six months of 2007 and 2006 were 10.1% and 10.8% of net revenues, respectively. This decrease as a percentage of revenue was due to higher revenues, which allowed us to leverage our fixed costs.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses increased $10.5 million, or 9.6%, over the first six months of 2006. Foreign currency translation increased selling, general, and administrative expenses by approximately $4.4 million. SG&A expenses generated by the recently acquired

23

ADS operations accounted for $4.0 million of the increase over the prior year. The remaining increase was due primarily to $1.6 million of expense incurred related to the restatement of our financial statements, an increase in operating expenses and commissions resulting from higher revenue. This was partially offset by a decrease in management expense related resulting from our restructuring initiatives. Selling, general and administrative expenses decreased, as a percentage of revenues, from 35.9% in 2006 to 32.6% in 2007.

Research and Development Expenses

Research and development costs were $8.0 million, or 2.2% of revenues in the first six months of 2007 and $9.4 million, or 3.1% in the first six months of 2006.

Restructuring Expenses

Restructuring expenses were $0.7 million, or 0.2% of revenues in the first six months of 2007 compared to $0.9 million or 0.3% of revenues in the first six months of 2006.

Litigation Settlement

Litigation expense was $2.3 million in the first six months of 2006. This was a result of the settlement of a class action suit arising from the anti-trust litigation with ID Security Systems Canada, Inc.

Income Taxes

The effective tax rate for the twenty-six weeks ended July 1, 2007 was 25.7%. For the twenty-six weeks ended June 25, 2006, the effective tax rate was 23.1%. The 2007 effective tax rate percentage was higher due to increased earnings in higher tax rate countries in 2007 compared to 2006. We are considering changes in our legal entity structure that, if successful, could result in the release of valuation allowances and have a positive impact on our 2007 income tax expense.

Net Earnings

Net earnings were $20.1 million, or $0.50 per diluted share, in the first six months 2007 compared to $6.2 million, or $0.15 per diluted share, in the first six months 2006. The weighted average number of shares used in the diluted earnings per share computation were 40.5 million and 40.5 million for the first six months of 2007 and 2006, respectively.

Financial Condition

Liquidity and Capital Resources

Our liquidity needs have related to, and are expected to continue to relate to, capital investments, product development costs, future restructurings associated with the rationalization of the business, acquisitions, and working capital requirements. We believe that cash provided from operating activities and funding available under our current credit agreement should be adequate for the foreseeable future to service debt and meet our anticipated cash requirements.

As of July 1, 2007, our cash and cash equivalents were $161.3 million compared to $143.4 million as of December 31, 2006. Our operating activities during the first half of 2007 provided approximately $24.1 million compared to a use of $26.3 million during the first half of 2006. In 2007, our cash from operating activities was impacted positively compared to the prior year due to improved earnings, a decrease in payments for accounts payable, better inventory management in the current year and reduced payments for restructuring in 2007 compared to 2006.

We continue to reinvest in the Company through spending in technology and process improvement. In the first six months of 2007, our expenditures in research and development amounted to $8.0 million. We estimate our expenditures in research and development during the remainder of 2007 will be approximately $10.0 million.

Our capital expenditures for the first half of 2007 totaled $5.5 million, compared to $5.4 million during the first half of 2006. We anticipate our capital expenditures, used primarily to upgrade technology and improve our production capabilities, to approximate $10.0 million for the remainder 2007.

In January 2007, we purchased the business of Security Systems Technology, Inc., a privately held company, for $0.8 million plus $0.2 million of liabilities acquired. The transaction was paid in cash. The financial statements reflect the preliminary allocations of the purchase price based on estimated fair values at the date of acquisition. This allocation has resulted in acquired goodwill of $0.9 million. The allocation of the purchase price is expected to be completed during the year 2007. The results from the acquisition date through July 1, 2007 are included in the Security segment and were not material to the consolidated financial statements.

In May 2007, we purchased the business of SSE Southeast, LLC, for $5.1 million plus $0.8 million of liabilities acquired. The transaction was paid in cash. The financial statements reflect the preliminary allocations of the purchase price based on estimated fair values at the date of acquisition. This allocation has resulted in acquired goodwill of $4.4 million. The allocation of the purchase price is expected to be completed during the year 2007. The results from the acquisition date through July 1, 2007 are included in the Security segment and were not material to the consolidated financial statements.

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During the first quarter of 2007, the senior unsecured revolving credit facility increased by $6.0 million. The proceeds from these borrowings were used to repay the borrowings under our Japanese short-term line of credit.

At December 31, 2006, the Company had a full-recourse factoring arrangement with Mitsubishi UFJ Factoring Co., Ltd., in which the arrangements were secured by trade receivables. As of December 31, 2006, the face amount of receivables sold and not yet collected were $0.8 million. During the first quarter of 2007, the remaining full recourse factoring liability was paid in full.

As of July 1, 2007, our working capital was $302.3 million compared to $254.0 million as of December 31, 2006. At the end of the second quarter 2007, our percentage of total debt to total stockholders’ equity decreased to 3.2% from 3.5% as of December 31, 2006. As of July 1, 2007, we had available line of credit totaling approximately $134.3 million.

We do not anticipate paying any cash dividends on our common stock in the near future.

Provisions for Restructuring

2005 Restructuring Plan

In the second quarter of 2005, we initiated actions focused on reducing our overall operating expenses. This plan included the implementation of a cost reduction plan designed to consolidate certain administrative functions in Europe and a commitment to a plan to restructure a portion of our supply chain manufacturing to lower cost areas. During the fourth quarter of 2006, we continued to review the results of the overall initiatives and achieved additional reductions focused on the reorganization of senior management to focus on key markets and customers. This additional restructuring reduced our management by 25%.

A net charge of $0.7 million was recorded in the first six months of 2007 in connection with the 2005 Restructuring Plan, primarily related to employee severance.

The total number of employees affected by the restructuring were 763, of which 756 have been terminated. The remaining terminations are expected to be completed by the end of fiscal year 2007. The anticipated total cost is expected to approximate $24 million to $26 million, of which $24 million has been incurred and $20 million has been paid. Termination benefits are planned to be paid one month to 24 months after termination. Upon completion, the annual savings are anticipated to be approximately $22 million to $24 million.
Restructuring accrual activity was as follows:

Fiscal 2007
(amounts are in thousands)

	Accrual at				Charge
	Beginning		Charged to		Reversed to		Cash		Exchange		Accrual at
	of Year		Earnings		Earnings		Payments		Rate Changes		7/1/2007
Severance and other employee-related charges	$	6,786	$	753	$	62	$	2,982	$	81	$	4,576

Exposure to Foreign Currency

We manufacture products in the USA, the Caribbean, Europe, and the Asia Pacific region for both the local marketplace, and for export to our foreign subsidiaries. The subsidiaries, in turn, sell these products to customers in their respective geographic areas of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations on inter-company receivables and payables. Additionally, the sourcing of product in one currency and the sales of product in a different currency can cause gross margin fluctuations due to changes in currency exchange rates.

We have used third party borrowings in foreign currencies to hedge a portion of our net investments in and cash flows derived from our foreign subsidiaries. As we reduce our third party foreign currency borrowings, the effect of foreign currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries increases.

We selectively purchase currency forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. This allows us to shift the effect of positive or negative currency fluctuations to a third party. As of July 1, 2007, we had currency forward exchange contracts totaling approximately $7.8 million. The contracts are in the various local currencies covering primarily our Western European, Canadian, and Australian operations. Historically, we have not purchased currency forward exchange contracts where it is not economically efficient, specifically for our operations in South America and Asia.

During the second quarter of 2007, the Company entered into a foreign currency option contract, at a notional amount of€5 million, to mitigate the effect of fluctuating foreign exchange rates on the reporting of a portion of its expected 2007 foreign currency denominated earnings.

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Changes in the fair value of this foreign currency option contract, which is designated as a non-hedge, are recorded in earnings immediately. The premium paid on the option contract was $73 thousand. The fair market value, as of July 1, 2007, was $20 thousand.

Off-Balance Sheet Arrangements and Contractual Obligations

There have been no material changes to the table presented in our Annual Report on Form 10-K for the year ended December 31, 2006. The table excludes our liability for uncertain tax positions, including accrued interest and penalties, which totaled $4.1 million as of January 1, 2007 and $4.4 million as of July 1, 2007, since we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities.

New Accounting Pronouncements and Other Standards

We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, on January 1, 2007. As a result of adoption, we recognized a charge of approximately $1.7 million to the January 1, 2007 retained earnings balance. Additionally, we reclassified $13.9 million of the unrecognized tax benefits, and interest and penalties from income taxes to other long-term liabilities on our consolidated balance sheet. As of the adoption date, we had $10.6 million of unrecognized tax benefits, all of which would affect our effective tax rate if recognized. Also as of the adoption date, we had accrued interest expense and penalties related to the unrecognized tax benefits of $3.8 million and $0.3 million respectfully.

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements”. This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The adoption of SFAS 157 is not expected to have a material impact on our financial position, results of operations or cash flows.

In February 2007, FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 is effective for fiscal years after November 15, 2007. We are currently evaluating the impact of adopting FAS 159 on our financial statements.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes to the market risks as disclosed in Item 7a. “Quantitative And Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K filed for the year ended December 31, 2006.

Item 4. DISCLOSURE CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Checkpoint Systems, Inc.’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of July 1, 2007, the end of the period covered by this report, our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(c), were not effective as a result of the material weakness discussed below.

As previously reported in the Company’s 2006 Annual Report on Form 10-K, management identified the following material weakness in our internal control over financial reporting as of December 31, 2006:

The Company did not maintain effective controls over the financial reporting and close process. Specifically, the Company’s controls to monitor the financial position and results of operations of subsidiaries, and controls to accurately record non-routine and non-systematic transactions in accordance with accounting principles generally accepted in the United States of America, were not effective. This control deficiency contributed to errors resulting in the restatement of the Company’s consolidated financial statements for 2005 and 2004, each of the interim periods in 2005 and the first three quarters of 2006 affecting revenues and cost of revenues. Additionally, this control deficiency could result in a material misstatement in any account or disclosure that would not be prevented or detected.

To remediate the material weakness described above and to enhance our internal control over financial reporting, management is in the process of supplementing its financial reporting and close procedures to enhance the focus on complex transaction activity determined to present a relatively higher degree of risk. Management is also in the process of implementing formal procedures of detailed reviews of subsidiary financial results, conducted by regional controllers and other qualified personnel. Checkpoint’s internal audit function will expand its substantive testing at the subsidiary level with greater emphasis on such transactions. As part of these efforts, management will expand the training of all key finance personnel in corporate, regional and subsidiary reporting teams in the application of accounting principles generally accepted in the United States of America and the company’s accounting policies and procedures. Management has begun to adopt these measures and expects that the remediation of the material weakness will be completed in 2007.

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Notwithstanding the material weakness, management believes 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

Other than the foregoing changes relating to the ongoing remediation of the material weakness, there have been no changes in the Company’s internal control over financial reporting during the six months ended July 1, 2007 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

We are involved in certain legal and regulatory actions, all of which have arisen in the ordinary course of business. Management believes it is remotely possible that the ultimate resolution of such matters will have a material adverse effect on our consolidated results of operations and/or financial condition.

Item 1A. RISK FACTORS

There have been no material changes from December 31, 2006 to the significant risk factors and uncertainties known to the Company that, if they were to occur, could materially adversely affect the Company’s business, financial condition, operating results and/or cash flow. For a discussion of the Company’s risk factors, refer to Item 1A. “Risk Factors”, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of shareholders was held on May 31, 2007. The following matters were acted upon.

ELECTION OF DIRECTORS

William S. Antle, III, R. Keith Elliott and George W. Off were elected to serve three year terms as Class I directors by the following votes:

			Votes
Nominee	Votes For		Withheld
William S. Antle, III		28,912,084		7,550,886
R. Keith Elliott		31,664,533		4,798,437
George W. Off		29,127,372		7,335,598

Continuing as Class II directors for a term expiring in 2008 are David W. Clark, Jr., Harald Einsmann and Jack W. Partridge. Continuing as Class III directors for a term expiring in 2009 are George W. Babich, Jr., Alan R. Hirsig and Sally Pearson.

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Item 6. EXHIBITS

Exhibit 3.1	Articles of Incorporation, as amended, are hereby incorporated by reference to Item 14(a), Exhibit 3(i) of the Registrant’s 1990 Form 10-K, filed with the SEC on March 14, 1991.
Exhibit 3.2	By-Laws, as Amended and Restated, are hereby incorporated by reference to Item 15(c), Exhibit 3.2 of the Registrant’s 2004 10-K, filed with the SEC on March 11, 2005.
Exhibit 31.1	Rule 13a-14(a) Certification of George W. Off, Chairman of the Board, President and Chief Executive Officer.
Exhibit 31.2	Rule 13a-4(a) Certification of W. Craig Burns, Executive Vice President, Chief Financial Officer and Treasurer.
Exhibit 32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CHECKPOINT SYSTEMS, INC.
/S/ W. Craig Burns	August 9, 2007
W. Craig Burns
Executive Vice President,
Chief Financial Officer and Treasurer
/S/ Raymond Andrews	August 9, 2007
Raymond Andrews
Vice President, Chief Accounting Officer

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INDEX TO EXHIBITS

EXHIBIT	DESCRIPTION
EXHIBIT 31.1	Rule 13a-14(a)/15d-14(a) Certification of George W. Off, Chairman of the Board, President and Chief Executive Officer
EXHIBIT 31.2	Rule 13a-4(a)/15d-14(a) Certification of W. Craig Burns, Executive Vice President, Chief Financial Officer and Treasurer
EXHIBIT 32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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