SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2008
Commission File No. 1-11257
CHECKPOINT SYSTEMS, INC.
(Exact name of Registrant as specified in its Articles of Incorporation)
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| Pennsylvania | | 22-1895850 |
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| (State of Incorporation) | | (IRS Employer Identification No.) |
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101 Wolf Drive, PO Box 188,
Thorofare, New Jersey | |
08086 |
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| (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:
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| Title of each class | | Name of each exchange on which |
| to be so registered | | 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.
Yeso Noþ
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.
Yeso Noþ
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 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.þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filerþ | | Accelerated filero | | Non-accelerated filero | | Smaller reporting companyo |
| | | | | (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).
Yeso Noþ
As of June 29, 2008, the aggregate market value of the Common Stock held by non-affiliates of the Registrant was approximately $102,604,894.
As of February 19, 2009, there were 38,811,078 shares of the Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for its 2009 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.
CHECKPOINT SYSTEMS, INC.
FORM 10-K
Table of Contents
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PART I
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties and reflect the Company’s judgment as of the date of this report. Forward-looking statements often address our expected future business and financial performance, and often contain words such as “expect,” “forecast,” “anticipate,” “intend,” “plan,” “believe,” “seek,” or “will.” By their nature, forward-looking statements address matters that are subject to risks and uncertainties. Any such forward-looking statements may involve risk and uncertainties that could cause actual results to differ materially from any future results encompassed within the forward-looking statements. Factors that could cause or contribute to such differences include: changes in our senior management and other matters relating to implementation of our succession plan; our ability to integrate recent acquisitions and to achieve related financial and operational goals; changes in international business and economic conditions; foreign currency exchange rate and interest rate fluctuations; lower than anticipated demand by retailers and other customers for our products; slower commitments of retail customers to chain-wide installations and/or source tagging adoption or expansion; possible increases in per unit product manufacturing costs due to less than full utilization of manufacturing capacity as a result of slowing economic conditions or other factors; our ability to provide and market innovative and cost-effective products; the development of new competitive technologies; our ability to maintain our intellectual property; competitive pricing pressures causing profit erosion; the availability and pricing of component parts and raw materials; possible increases in the payment time for receivables as a result of economic conditions or other market factors; changes in regulations or standards applicable to our products; the ability to implement cost reduction in field service, sales, and general and administrative expense, and our manufacturing and supply chain operations without significantly impacting revenue and profits; our ability to maintain effective internal control over financial reporting; a failure to manage our growth effectively; and additional matters discussed more fully in this report under Item 1A. “Risk Factors Related to Our Business” and Item 7. “Management’s Discussion and Analysis.” We do not undertake to update our forward-looking statements, except as required by applicable securities laws.
Checkpoint Systems, Inc. is a leading global manufacturer and provider of technology-driven end-to-end loss prevention, merchandising and labeling solutions to the retail and apparel industry. We provide solutions to brand, track, and secure goods for retailers, apparel manufacturers and consumer product manufacturers worldwide.
Retailers and manufacturers are increasingly focused on identifying and protecting assets that are moving through the supply chain. On the sales floor, retailers need to make sure that the right merchandise is in stock to satisfy customers and boost sales. To address this market opportunity, we have built the necessary infrastructure to be a single global source for shrink management, and merchandise tracking and visibility and apparel labeling solutions.
We are a leading provider of electronic article surveillance (EAS) systems and tags using radio frequency (RF) and electromagnetic (EM) technology, source tagging security solutions, secure merchandising solutions using RF and acoustic-magnetic (AM) technology, branding tags and labels for apparel. In Europe, we are a leading provider of retail display systems (RDS) and hand-held labeling systems (HLS). We are also a leading provider and installer of store monitoring solutions, including fire alarms, intrusion alarms and digital video recorders for the retail environment in the U.S. Our labeling systems and services are designed to consolidate tag and label requirements to improve efficiency, reduce costs, and furnish value-added solutions for customers across many markets and industries. Applications for printed tags and labels include brand identification, automatic identification (auto-ID), retail shrink management, and pricing and promotional labels. We have achieved substantial international growth, primarily through acquisitions, and now operate directly in 30 countries. Products are principally developed and manufactured in-house and sold through direct distribution and reseller channels.
COMPANY HISTORY
Founded in 1969, we were incorporated in Pennsylvania as a wholly-owned subsidiary of Logistics Industries Corporation (Logistics). In 1977, Logistics, pursuant to the terms of its merger into Lydall, Inc., distributed our common stock to Logistics’ shareholders as a dividend.
Historically, we expanded our business both domestically and internationally through acquisitions, internal growth using wholly-owned subsidiaries, and the utilization of independent distributors. In 1993 and 1995, we completed two key acquisitions which gave us direct access into Western Europe. We acquired ID Systems International BV and ID Systems Europe BV in 1993 and Actron Group Limited in 1995. These companies engaged in the manufacture, distribution, and sale of EAS systems throughout Europe.
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In December 1999, we acquired Meto AG, a German multinational corporation and a leading provider of value-added labeling solutions for article identification and security. The acquisition doubled our revenues and provided us with an increased breadth of product offerings and global reach.
In January 2001, we acquired A.W. Printing Inc., a Houston, Texas-based printer of tags, labels, and packaging material for the apparel industry.
In January 2006, we completed the sale of our barcode systems business to SATO, a global leader in barcode printing, labeling, and Electronic Product Code (EPC)/Radio Frequency Identification (RFID) solutions.
In November 2006, we acquired ADS Worldwide (ADS). Based in Hull, England, ADS is an established supplier of tags, labels and trim to apparel manufacturers, retailers and brands around the world. ADS provides us with new technological and production capabilities and is in line with our strategy to grow our Check-Net® apparel labeling business to create increased value for our customers and stockholders.
In November 2007, we acquired the Alpha S3 business from Alpha Security Products, Inc. Based in Charlotte, North Carolina, the Alpha S3 business offers a comprehensive line of security solutions designed to protect high-theft merchandise in an open-display retail environment. The Alpha S3 product portfolio combines well with our source tagging program, and is in line with our strategy to provide retailers a comprehensive line of shrink management solutions.
In November 2007, we also acquired SIDEP, an established supplier of EAS systems operating in France and China, and Shanghai Asialco Electronics Co. Ltd. (Asialco), a China-based manufacturer of RF-EAS labels. With facilities in Shanghai, China, Asialco significantly increases our label manufacturing capacity in Asia. SIDEP and Asialco will help us meet the growing demand in Asian markets.
In January 2008, the Company purchased the business of Security Corporation, Inc., a privately held company that provides technology and physical security solutions to the financial services sector.
During June 2008, we acquired OATSystems, Inc., a recognized leader in RFID-based application software. The addition of OATSystems, Inc. will build on our strategy to help retailers and suppliers with our EvolveTM EAS platform to more easily migrate to EPC RFID. As our industry moves to a common EPC standard, we will be able to offer solutions that enable retailers and their suppliers to gain deeper visibility of assets and merchandise — further reducing shrink and increasing bottom-line profits while enhancing the on-shelf availability of merchandise for consumers.
Products and Offerings
We report results of operations in three segments: Shrink Management Solutions, Intelligent Labels, and Retail Merchandising. The margins for each of the segments and the identifiable assets attributable to each reporting segment are set forth in Note 19 “Business Segments and Geographic Information” to the consolidated financial statements.
Each of these segments offer an assortment of products and services that in combination are designed to provide a comprehensive, single source solution to help retailers, manufacturers, and distributors identify, track, and protect their assets throughout the entire supply chain. Each segment and their respective products and services are described below.
SHRINK MANAGEMENT SOLUTIONS
Our largest business is providing shrink management and merchandise visibility solutions to retailers. Our diversified line of security products is designed to help retailers prevent inventory losses caused by theft (both by customers and employees), reduce selling costs through lower staff requirements and boost sales by having the right goods available when customers are ready to buy. Our products facilitate the open display of consumer goods, which allows retailers to maximize sales opportunities through impulse buying. Offering our own proprietary RF-EAS and EM-EAS technologies, we believe that we hold a significant share of worldwide EAS systems installations. EAS systems revenues accounted for 35%, 38%, and 39% of our 2008, 2007, and 2006 total revenues, respectively. The installation of store monitoring solutions including fire, intrusion and CCTV/digital recording systems (CheckView™) also fall within the shrink management solutions segment. For 2008, 2007, and 2006, the CheckView™ business represented 17%, 18%, and 17% of our revenues, respectively. No other product group in this segment accounted for as much as 10% of our revenues.
These broad and flexible product lines, marketed and serviced by our extensive sales and service organizations, have helped us emerge as a preferred supplier to premier retailers around the world. Shrink Management Solutions represented approximately 62% of total revenues in 2008.
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Electronic Article Surveillance
We have designed EAS systems to act as a deterrent to control the problem of merchandise theft in retail stores. Our diversified product lines are designed to help reduce both customer and employee theft, reduce inventory shrinkage, and enable retailers to capitalize on consumer impulse buying by openly displaying high-margin and high-cost items.
During early 2008, we introduced EvolveTM, our new state-of-the-art shrink management platform. Evolve™ is our next-generation suite of RF and RFID enabled products that provide enhanced system performance and networking capability information in a more aesthetically pleasing format. Our business model relies upon customer commitments for our security product installations to a large number of their stores over a period of several months (large chain-wide installations). This new product will allow our existing customers to upgrade their security offerings and should result in increased installations for the future. The enhanced capabilities of the Evolve™ platform should also attract interest from new retail customers. As is typical with market introductions of new products in this industry, we expect the Evolve TM roll-out to positively impact our revenues over an 18-month period starting with existing customers.
We offer a wide variety of RF-EAS and EM-EAS solutions to meet the varied requirements of retail store configurations for multiple market segments worldwide. Our EAS systems are primarily comprised of sensors and deactivation units, which respond to or act upon our tags and labels. We also market an extensive line of reusable security tags that protect apparel items as well as entertainment products. The November 2007 acquisition of the Alpha S3 business expanded our product offering of shrink management solutions to retailers by providing a line of products specifically designed to protect high-theft merchandise in an open-display retail environment. Our EAS products are designed and built to comply with applicable Federal Communications Commission (FCC) and European Community (EC) regulations governing RF, signal strengths, and other factors.
CheckView™ — CCTV, Fire and Intrusion Systems
We provide complete store monitoring solutions, including fire alarms, intrusion alarms and digital video recording systems for retail environments. Our video surveillance solutions address shoplifting and internal theft as well as customer and employee safety and security needs. The product line consists of closed circuit television products and services including fixed and high-speed pan/tilt/zoom camera systems, programmable switcher controls, time-lapse recording, and remote video surveillance.
Our fire and intrusion systems provide life safety and property protection, completing the line of loss prevention solutions. In addition to the system installations, we offer a U.S.-based 24-hour Central Station Monitoring Service.
In 2008, we expanded our systems solution offering in the U.S. by entering the financial services sector, providing branch banks with physical and electronic security solutions.
INTELLIGENT LABELS
Intelligent labels is our second largest business, generating approximately 28% of our revenues in 2008. We offer a wide variety of EAS-RF and EAS-EM labels that provide security solutions that can be matched to specific retail requirements. Under our source tagging program, tags can be embedded in products or packaging at the point-of-manufacture. All participants in the retail supply chain are concerned with maximizing efficiency. Reducing time-to-market requires refined production and logistics systems to ensure just-in-time delivery, as well as shorter development, design, and production cycles. Services range from full-color branding labels to tracking labels and, ultimately, fully-integrated labels that include an EAS or a RFID circuit. This integration is based on the critical objective of supporting the rapid delivery of goods to market while reducing losses, whether through misdirection, tracking failure, theft or counterfeiting, and to reduce labor costs by tagging and labeling products at the source. We support these objectives with our high-quality tag and label production, a global service bureau network of e-commerce-enabled print capabilities (Check-Net®), and EAS and RFID technologies. The market is beginning to move toward more sophisticated tag solutions that incorporate RFID components and that will automate many aspects of supply chain tracking and facilitate many new merchandising enhancements for suppliers and consumers. EAS-RF and EAS-EM label revenues represented 12%, 14% and 16% of our total revenues for 2008, 2007, and 2006, respectively. Check-Net® revenues represented 15%, 15%, and 13% of our total revenues for 2008, 2007, and 2006, respectively. No other product in this segment represented more than 10% of revenues.
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Electronic Article Surveillance Labels
We produce EAS-RF and EAS-EM labels that work in combination with our EAS systems to control the problem of merchandise theft in retail stores. Our diversified product line of discrete, disposable labels and one-time-use hard tags are designed to enable retailers to protect a diverse array of easily-pocketed, high shrink merchandise. While EAS labels can be applied in retail stores and distribution centers, an increasing percentage of our customers are taking advantage of our source tagging program. With source tagging, EAS labels and one-time-use hard tags are configured to the merchandise and specific security requirements of the customer and applied at the point of manufacture. Our paper thin EAS labels have characteristics that are easily integrated with high-speed automated application systems. In November, 2007 we expanded our EAS-RF label manufacturing capacity with the acquisition of Asialco. Asialco, which is based in Shanghai, China, provides additional capacity to support the growing Asia market.
Check-Net®
Check-Net® is Checkpoint’s web-enabled apparel labeling solutions platform and network of 25 service bureaus located in 23 countries that supplies customers with customized retail apparel tags and labels, typically to the location where the retail goods are manufactured. Checkpoint’s order entry and data management capabilities provide for on-demand printing of variable pricing and article identification data and barcode information onto price and apparel branding tags. We also offer a product line that integrates our EAS-RF security labels into customized retail apparel tags.
Checkpoint’s web-enabled capabilities provide on-time, on-demand printing of custom labels with variable data. Our Check-Net® service bureau network is one of the most extensive in the industry, and its ability to offer integrated branding, barcode, and EAS security tags places it among just a handful of suppliers of this caliber in the world. Our printing capacity and service bureau network expanded in November 2006 with the acquisition of ADS.
In addition to our own label integration and service bureau capabilities, we have strategic working relationships with other label integrators.
Intelligent Library Systems
We have established a product line of sophisticated RFID-based intelligent library solutions that offer strong features and benefits compared to competitive offerings. In October 2007, we announced a global strategic sales and marketing alliance with 3M Library Systems, who will become the exclusive worldwide reseller and service provider for our line of library security and productivity products.
RFID Tags and Labels
The company produces RFID tags and labels, leveraging its high volume, low cost RF circuit production and manufacturing knowledge. In October 2006, we announced our intention to focus our RFID initiative on our core retail customers and our library business.
RETAIL MERCHANDISING
Our retail merchandising business includes hand-held label applicators and tags, promotional displays, and queuing systems. These traditional products broaden our reach among retailers. Many of the products in this business segment represent high-margin items with a high level of recurring sales of associated consumables such as labels. As a result of the increasing use of scanning technology in retail, our HLS products are serving a declining market. Retail merchandising, which is focused on European and Asian markets, represents approximately 10% of our business, with no product group in this segment accounting for as much as 10% of our revenues.
Hand-held Labeling Systems
Hand-held labeling systems include a complete line of hand-held price marking and label application solutions, primarily sold to retailers. Sales of labels, consumables, and service generate a significant source of recurring revenues. As retail scanning becomes widespread, in-store retail price marking applications have continued to decline. Our HLS products possess a market leading position in several European countries. These systems are no longer sold in the U.S. as a result of the divesture to SATO in January 2006.
Retail Display Systems
Retail display systems include a wide range of products for customers in certain retail sectors, such as supermarkets and do-it-yourself (DIY), where high-quality signage and in-store price promotion are important. Product categories include traditional retail promotional systems for in-store communication and electronic graphics systems, and customer queuing systems.
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BUSINESS STRATEGY
Our business strategy focuses on providing end-to-end shrink management and merchandise visibility solutions and apparel labeling solutions that help retailers, manufacturers, and distributors identify, track, and protect their assets. We believe that innovative new products and expanded product offerings will provide significant opportunities to enhance the value of legacy products while expanding the product base in existing customer accounts. We intend to maintain our leadership position in certain key hard goods markets (supermarkets, drug stores, mass merchandisers, and music/electronics), expand our market share in the soft goods markets (apparel), and maximize our position in under-penetrated markets. We also intend to continue to capitalize on our installed base of large global retailers to promote source tagging. Furthermore, we plan to leverage our knowledge of RF and identification technologies to assist retailers and manufacturers in realizing the benefits of RFID.
To achieve these objectives, we plan to work to continually enhance and expand our technologies and products, and provide superior service to our customers. We are focused on providing our customers with a wide variety of integrated shrink management solutions, labeling, and retail merchandising solutions characterized by superior quality, ease of use, good value, and enhanced merchandising opportunities for the retailer, manufacturer, and distributor.
We continue to evaluate our sales productivity, manufacturing and supply chain efficiency, and our overhead structure and have taken actions where we have identified specific opportunities to improve profitability.
Principal Markets and Marketing Strategy
Through our Shrink Management Solutions business segment, we market EAS systems, software and other security solutions, and CheckView™ products and services primarily to worldwide retailers in the hard goods market and soft goods market. We enjoy significant market share, particularly in the supermarket, drug store, hypermarket, and mass merchandiser market segments.
Shoplifting and employee theft are major causes of shrinkage. Data collection systems have highlighted the shrinkage problem to retailers. As a result, retailers recognize that the implementation of effective electronic security solutions can significantly reduce shrinkage and increase profitability.
In addition to providing retail security solutions, we provide a wide variety of integrated shrink management and merchandise visibility solutions, labeling solutions, and retail merchandising solutions to manufacturers and retailers worldwide. This entails a broadened focus within the entire retail supply chain by providing branding, tracking, and shrink management solutions to retail stores, distribution centers, and consumer product and apparel manufacturers worldwide.
We are focused on providing our customers with a wide variety of integrated solutions to help them “Sell More and Lose Less.” Our ongoing marketing strategy includes the following:
| | • | | open new, and expand existing retail accounts with new products that will increase penetration through integrated value-added solutions for labeling, security, and merchandising; |
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| | • | | establish business-to-business web-based capabilities to enable retailers and manufacturers to initiate and track their orders through the supply chain on a global basis; |
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| | • | | expand market opportunities to manufacturers and distributors, including source tagging and value-added labeling; |
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| | • | | continue to promote source tagging around the world with extensive integration and automation capabilities using new EAS, RFID, and auto-ID technologies; and |
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| | • | | assist retailers in understanding the benefits and implementation of the new EPC using RFID technology. |
We market our products primarily:
| | • | | by providing total loss prevention solutions to the retailer; |
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| | • | | by helping retailers sell more merchandise by avoiding stock-outs and making merchandise available to consumers; |
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| | • | | by serving as a single point of contact for auto-ID and EAS labeling and ticketing needs; |
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| | • | | through direct sales efforts and targeted trade show participation; |
| | • | | through superior service and support capabilities; and |
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| | • | | by emphasizing source tagging benefits. |
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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; |
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| | • | | offer integrated tag solutions, including custom tag conversion that addresses the needs of branding, tracking, and loss prevention; |
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| | • | | assist retailers in promoting source tagging with vendors; |
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| | • | | broaden penetration of existing accounts by promoting our in-house printing, global service bureau network (Check-Net®), and labeling solution capabilities; |
| | • | | support manufacturers and suppliers to speed implementation; |
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| | • | | expand RF tag technologies and products to accommodate the needs of the packaging industry; and |
| | • | | develop compatibility with EPC/RFID technologies. |
MANUFACTURING, RAW MATERIALS, AND INVENTORY
Electronic Article Surveillance
We manufacture our EAS systems and labels, including Alpha S3 products, in facilities located in Puerto Rico, Japan, China, the U.S. and the Dominican Republic. Our manufacturing strategy for EAS products is to rely primarily on in-house capability for core components and to outsource manufacturing to the extent economically beneficial. We manage the integration of our in-house capability and our outsourced manufacturing in a way that provides significant control over costs, quality, and responsiveness to market demand, which we believe results in a distinct competitive advantage.
We involve customers, engineering, manufacturing, and marketing in the design and development of our products. For RF sensor production, we purchase raw materials from outside suppliers and assemble electronic components at our facilities in the Dominican Republic for the majority of our sensor product lines. The manufacture of some RF sensors sold in Europe and all EM hardware is outsourced. For our EAS disposable tag production, we purchase raw materials and components from suppliers and complete the manufacturing process at our facilities in Puerto Rico, Japan, and China. We sold approximately 4 billion disposable tags in 2008 and have the capacity to produce approximately 6 billion disposable tags per year. For our Alpha S3 secured merchandising production, we purchase raw materials and components from suppliers and complete the manufacturing process at our facilities in the U.S. as well as using outsourced manufacturing in China. The principal raw materials and components used by us in the manufacture of our products are electronic components and circuit boards for our systems; aluminum foil, resins, paper, and ferric chloride and hydrochloric acid solutions for our disposable tags; and polymer resin for our Alpha S3 products. While most of these materials are purchased from several suppliers, there are alternative sources for all such materials. The products that are not manufactured by us are sub-contracted to manufacturers selected for their manufacturing and assembly skills, quality, and price.
CheckView™ — CCTV, Fire and Intrusion Systems
We are primarily an integrator of CCTV, fire and intrusion components manufactured by others. In the U.S., we use in-house capabilities to assemble products such as the pan/tilt/zoom dome camera and other products such as the Advanced Public View (APV) CCTV system. The software component of the system is added during product assembly at our operational facilities.
Check-Net® and Retail Merchandising
We manufacture labels, tags, and hand-held tools. Our main production facilities are located in Germany, the Netherlands, the U.S., the U.K., and Malaysia. Local production facilities are also situated in Hong Kong, China and Turkey. Manufacturing in Germany is focused on HLS labels and print heads for HLS tools. Our facilities in the Netherlands, the U.S., and the U.K. manufacture labels and tags for laser overprinting. The Malaysian facility produces standard bodies for HLS tools for Europe, complete hand-held tools for the rest of the world, and labels for the local market. With the acquisition of ADS in November 2006, we acquired label manufacturing facilities in the U.K., Hong Kong, China, and Turkey.
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DISTRIBUTION
For our major product lines, we principally sell our products to end customers using our direct sales force of more than 500 sales people. To improve our sales efficiency, we also distribute products through an independent network of resellers. This distribution channel supports and services smaller customers. This indirect channel, which has primarily sold EAS solutions, will be broadened and expanded to include more product lines as we focus on improved sales productivity.
Electronic Article Surveillance
We sell our EAS systems, labels, and Alpha S3 products principally throughout North America, South America, Europe, and the Asia Pacific region. In North America, we market our EAS products through our own sales personnel and independent representatives.
Internationally, we market our EAS products principally through foreign subsidiaries which sell directly to the end-user and through independent distributors. Our international sales operations are currently located in 14 European countries and in Argentina, Australia, Brazil, Canada, Puerto Rico, Hong Kong, India, Japan, Malaysia, China, Mexico, and New Zealand.
Foreign distributors sell our products to both the retail and library markets. Pursuant to written distribution agreements, we generally appoint an independent distributor as an exclusive distributor for a specified term and for a specified territory. In October 2007, we announced a global strategic sales and marketing alliance with 3M Library Systems, who will become the exclusive worldwide reseller and service provider for our line of library security and productivity products.
CheckView™ — CCTV, Fire and Intrusion Systems
We market CCTV systems and services in selected countries throughout the world using our own sales staff. These products and services are provided to our EAS retail customers, as well as non-EAS retailers. Fire and intrusion systems are marketed exclusively in the U.S. through a direct sales force.
Check-Net® and Retail Merchandising
We have customers worldwide in the Check-Net® and retail merchandising businesses. These customers are primarily found within the retail sector and retail supply chain. Major customers include companies within industries such as food retailing, DIY, department stores, and apparel retailers.
Large national and international customers are handled centrally by key account sales specialists supported by appropriate business specialists. Smaller customers are served by either a general sales force capable of representing all products or, if the complexity or size of the business demands, a dedicated business specialist.
BACKLOG
Our backlog of orders was approximately $51.8 million at December 28, 2008 compared to approximately $73.5 million at December 30, 2007. We anticipate that substantially all of the backlog at the end of 2008 will be delivered during 2009. In the opinion of management, the amount of backlog is not indicative of trends in our business. Our security business generally follows the retail cycle so that revenues are weighted toward the last half of the calendar year as retailers prepare for the holiday season.
TECHNOLOGY
We believe that our patented and proprietary technologies are important to our business and future growth opportunities, and provide us with distinct competitive advantages. We continually evaluate our domestic and international patent portfolio, and where the cost of maintaining the patent exceeds its value, such patent may not be renewed. The majority of our revenues are derived from products or technologies which are patented or licensed. There can be no assurance, however, that a competitor could not develop products comparable to ours. Our competitive position is also supported by our extensive manufacturing experience and know-how.
PATENTS & LICENSING
On October 1, 1995, we acquired certain patents and improvements thereon related to EAS products and manufacturing processes from Arthur D. Little, Inc. for which we pay annual royalties. Our payment obligation terminated on December 31, 2008, and since then we have held a royalty free license.
We also license technologies relating to RFID applications, EAS products, certain sensors, magnetic labels, and fluid tags. These license arrangements have various expiration dates and royalty terms, but are not considered by us to be material.
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Check-Net® and Retail Merchandising
We focus our in-house development efforts on product areas where we believe we can achieve and sustain a competitive cost and positioning advantage, and where delivery service is critical. We also develop and maintain technological expertise in areas that are believed to be important for new product development in our principal business areas. We have a base of technology expertise in the printing, electronics, and software areas and are particularly focused on EAS and labeling capabilities to support the development of higher value-added labels.
SEASONALITY
Our business is subject to seasonal influences, which generally causes us to realize higher levels of sales and income in the second half of the year. Our business’ seasonality substantially follows the retail cycle of our customers, which generally has revenues weighted towards the last half of the calendar year in preparation for the holiday season.
COMPETITION
Electronic Article Surveillance
Currently, EAS systems and labels are sold to two principal markets: retail establishments and libraries. Our principal global competitor in the EAS industry is Tyco International Ltd. (Tyco), through its ADT security division. Tyco is a diversified manufacturing and service company with interests in electronics, fire and security, healthcare, plastics and adhesives, and engineered products and services. Tyco’s 2008 revenues were approximately $20.2 billion.
Within the U.S. market, additional competitors include Sentry Technology Corporation and Ketec, Inc. in EAS systems and labels, and All-Tag Security in EAS-RF labels, principally in the retail market. Within our international markets, mainly Europe, NEDAP Retail Support and Tyco are our most significant competitors. The largest competitors of the Alpha S3 secured merchandising product line include Clear-vu and Amaray.
We believe that our product line offers a more diverse range of products than our competition with a variety of disposable and reusable tags and labels, integrated scan/deactivation capabilities, and RF source tagging embedded into products or packaging. As a result, we compete in marketing our products primarily on the basis of their versatility, reliability, affordability, accuracy, and integration into operations. This combination provides many system solutions and allows for protection against a variety of retail merchandise theft. Furthermore, we believe that our manufacturing know-how and efficiencies relating to disposable tags give us a cost advantage over our competitors.
CheckView™ — CCTV, Fire and Intrusion Systems
Our CCTV, fire and intrusion products, which are sold domestically through our Checkpoint Security Systems Group, and CCTV products sold internationally through our international sales subsidiaries, compete primarily with similar products offered by Pelco and Tyco. We compete based on our superior service and believe that our offerings provide our retail and non-retail customers with distinctive system features.
Check-Net®
We sell our Check-Net® services, including tags and labels, to the retail market. Major competitors for our label products are Avery Dennison Corporation and SML Group. Several competitive labeling service companies are also customers as they purchase EAS circuits from us to integrate into their label offerings.
Retail Merchandising
We face no single competitor across our entire retail merchandising product range or across all international markets. HL Display AB is our largest competitor in the retail display systems market, primarily in Europe. In the HLS segment, we compete with Contact, Garvey Products Inc., Hallo, Avery Dennison Corporation, and Prix.
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OTHER MATTERS
Research and Development
We spent approximately $22.6 million, $18.2 million, and $19.4 million, in research and development activities during 2008, 2007, and 2006, respectively. The emphasis of these activities is the continued broadening of the product lines offered by us, cost reductions of the current product lines, and an expansion of the markets and applications for our products. We believe that our future growth in revenues will be dependent, in part, on the products and technologies resulting from these efforts.
Another important source of new products and technologies has been the acquisition of companies and products. The November 2007 acquisition of the Alpha S3 business has enhanced our ability to introduce new products specifically targeted to high-theft merchandise in an open-display retail environment. We continue to assess acquisitions of related businesses or products consistent with our overall product and marketing strategies.
The 2008 acquisition of OATSystems, Inc. will build on our strategy of helping retailers and suppliers migrate more easily with our Evolve™ Electronic Article Surveillance platform to EPC RFID. As our industry moves to a common EPC standard, we will now be able to offer solutions that enable retailers and their supply chains to gain deeper visibility of their assets and merchandise - further reducing shrink and increasing the bottom-line profits by enhancing on-shelf merchandise availability for consumers.
We continue to develop and expand our product lines with improvements in disposable tag performance, disposable tag manufacturing processes, and wide-aisle RF-EAS detection sensors with integration of remote and wireless internet connectivity and RFID integration.
Employees
As of December 28, 2008, we had 3,878 employees, including seven executive officers, 134 employees engaged in research and development activities, and 577 employees engaged in sales and marketing activities. In the United States, 11 of our employees are represented by a union. In Europe, approximately 302 of our employees are represented by various unions or work councils.
Financial Information About Geographic and Business Segments
We operate both domestically and internationally in the three distinct business segments described previously. The financial information regarding our geographic and business segments, which includes net revenues and gross profit for each of the years in the three-year period ended December 28, 2008, and long-lived assets as of December 28, 2008, December 30, 2007, and December 31, 2006, is provided in Note 19 to the Consolidated Financial Statements.
Available Information
Our internet website is at www.checkpointsystems.com. Investors can obtain copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after we have filed such materials with, or furnished them to, the Securities and Exchange Commission (SEC). We will also furnish a paper copy of such filings free of charge upon request. Investors can also read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room which is located at 100 F Street, NE, Washington, DC 20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our filings can also be accessed at the SEC’s internet website: www.sec.gov.
We have posted the Code of Ethics, the Governance Guidelines, and each of the Committee Charters on our website at www.checkpointsystems.com, and will post on our website any amendments to, or waivers from, the Code of Ethics applicable to any of our directors or executive officers. The foregoing information will also be available in print upon request.
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Executive Officers of the Company
The following table sets forth certain current information concerning the executive officers of the Company, including their ages, position, and tenure as of the date hereof:
| | | | | | | | | |
| | | | | | | Tenure | | |
| | | | | | | with | | Position with the Company and |
| Name | | Age | | Company | | Date of Election to Position on |
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| Robert P. van der Merwe | | | 56 | | | 2 years | | Chairman since December 2008, President and Chief Executive Officer since December 2007 |
| Raymond D. Andrews | | | 55 | | | 3 years | | Senior Vice President and Chief Financial Officer since December 2007 |
| Per H. Levin | | | 51 | | | 14 years | | President, Shrink Management and Merchandise Visibility Solutions since March 2006 |
| Bernard Gremillet | | | 56 | | | 5 years | | Executive Vice President, Global Customer Management since August
2007 |
| John R. Van Zile | | | 56 | | | 5 years | | Senior Vice President, General Counsel and Secretary since June 2003 |
| Farrokh K. Abadi | | | 47 | | | 5 years | | Senior Vice President, and Chief Innovation Officer since April 2008 |
| Steven Davidson | | | 51 | | | 1 year | | President, Global Apparel Labeling Solutions since October 2008 |
Mr. van der Merwe was appointed President and Chief Executive Officer of the Company on December 27, 2007. In December 2008, Mr. van der Merwe was appointed the Company’s Chairman of the Board and has been a member of the Board of Directors since October 2007. He previously served as President and Chief Executive Officer of Paxar Corporation, a global leader in providing innovative merchandising systems to retailers and apparel customers. He became Chairman of the Board of Paxar in January 2007, and served in these capacities until Paxar’s sale to Avery Dennison in June 2007. Prior to joining Paxar, Mr. van der Merwe held numerous executive positions with Kimberly-Clark Corporation from 1980 to 1987 and from 1994 to 2005, including the positions of Group President of Kimberly-Clark’s global consumer tissue business and Group President of Europe, Middle East and Africa. Earlier in his career, Mr. van der Merwe held managerial positions in South Africa at Xerox Corporation and Colgate Palmolive.
Mr. Andrews was appointed Senior Vice President and Chief Financial Officer on December 6, 2007. Mr. Andrews was Senior Vice President and Chief Accounting Officer of the Company from August 2005 until December 2007. He previously served as Controller of INVISTA S.a’r.l., a subsidiary of Koch Industries, where he oversaw the company’s accounting operations in North and South America, Europe and Asia. Prior to the acquisition by Koch Industries, Mr. Andrews was Director of Accounting Operations of INVISTA Inc. From 1998 to 2002, Mr. Andrews served as Controller for DuPont Pharmaceuticals Company and then Bristol-Myers Squibb Pharma Company, a subsidiary of Bristol-Myers Squibb, when that company acquired DuPont Pharmaceuticals in 2001. Prior to being appointed Controller, he held positions of increasing responsibility at DuPont Merck Pharmaceutical Company and the DuPont Company. Mr. Andrews is a Certified Public Accountant.
Mr. Levin was appointed President, Shrink Management and Merchandise Visibility Solutions in March 2006. He was President of Europe from June 2004 until March 2006, Executive Vice President, General Manager, Europe from May 2003 until June 2004, Vice President, General Manager, Europe from February 2001 until May 2003. Mr. Levin was Regional Director, Southern Europe from 1997 to 2001 and joined the Company in January 1995 as Managing Director of Spain.
Mr. Gremillet was appointed Executive Vice President Global Customer Management in January 2009. Previously, he was Executive Vice President Geographies since August 2007. Prior to that Mr. Gremillet was President, Europe and Latin America from March 2006 to August 2007. Mr. Gremillet was Western Mediterranean Unit Manager from March 2004 until March 2006 and was an independent consultant to Checkpoint from February 2003 to March 2004. Mr. Gremillet was Corporate Director of Engineering and Technology at Repsol YPF SA, from December 1999 to May 2002 and Senior Vice President Downstream at YPF SA in 1999. He held a variety of positions, including Vice President Marketing and Development for Oilfield Services from July 1995 to June 1997 and Vice President and General Manager for Latin America from July 1989 to June 1993 during his 22 years with Schlumberger from 1975 to 1997.
Mr. Van Zile has been Senior Vice President, General Counsel and Secretary since joining the Company in June 2003. Prior to joining the Company, Mr. Van Zile served as Executive Vice President, General Counsel and Secretary of Exide Corporation from September 2000 until October 2002, and was Vice President and General Counsel from November 1996 until September 2000. Prior to Exide Corporation, Mr. Van Zile held positions of increasing legal responsibility at GM-Hughes Electronics Corporation and Coltec Industries.
Mr. Abadi was appointed Senior Vice President and Chief Innovation Officer in October 2008. Mr. Abadi retains responsibility for the Company’s procurement and systems supply chain. He also served as Senior Vice President, Worldwide Operations from April 2006 until October 2008 and Vice President and General Manager, Worldwide Research and Development from November 2004 until April 2006. Prior to joining Checkpoint, Mr. Abadi was Senior Vice President of Global Cross-Industry Practices at Atos Origin from February 2004 until November 2004. Mr. Abadi held various senior management positions with Schlumberger for over eighteen years.
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Mr. Davidson joined Checkpoint in 2008 as President, Global Apparel Labeling Solutions. Previously, he spent 16 years with the Braitrim Group, a company providing products and services to global apparel retailers and garment manufacturers. While with the Braitrim Group, Mr. Davidson made a significant contribution to building their $180 million business, including establishing Sales and Marketing and Manufacturing infrastructures throughout Asia. Following the acquisition of Braitrim by the Spotless Group in 2002, Mr. Davidson remained with the larger organization in the capacity of Managing Director, EMEA, for Spotless Retailer Services. Mr. Davidson’s previous experience includes Senior Management positions at TCI Marketing Consultancy, K Shoes Group in the UK, and Unilever.
Item 1A. RISK FACTORS
The risks described below are among those that could materially and adversely affect the Company’s business, financial condition or results of operations. These risks could cause actual results to differ materially from historical experience and from results predicted by any forward-looking statements related to conditions or events that may occur in the future.
Current economic conditions could adversely impact our business and results of operations.
Our operations and results depend significantly on global market worldwide economic conditions, which have experienced a recent deterioration. Current economic factors include diminished liquidity and tighter credit conditions, leading to decreased credit availability, as well as declines in economic growth and employment levels. As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. These conditions may increase the difficulty for us to accurately forecast and plan future business. Customer demand could be impacted by decreased spending by businesses and consumers alike, and competitive pricing pressures could increase. Additionally, the disruption in the credit markets may also adversely affect the availability of financing to support our strategy for future growth through acquisitions. We are unable to predict the length or severity of the current economic conditions. A continuation or further deterioration of these economic factors may have a material and adverse effect on our results of operations, financial condition, and liquidity, and the liquidity and financial condition of our customers, including our ability to refinance maturing liabilities and access the capital markets to meet liquidity needs.
We have significant foreign operations, which are subject to political, economic and other risks inherent in operating in foreign countries.
We are a multinational manufacturer and marketer of identification, tracking security, and merchandising solutions for the retail industry. We have significant operations outside of the U.S. We currently operate directly in 30 countries, and our international operations generate approximately 65% of our revenue. We expect net revenue generated outside of the U.S. to continue to represent a significant portion of total net revenue. Business operations outside of the U.S. are subject to political, economic and other risks inherent in operating in certain countries, such as:
| | • | | the difficulty in enforcing agreements, collecting receivables and protecting assets through foreign legal systems; |
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| | • | | trade protection measures and import or export licensing requirements; |
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| | • | | difficulty in staffing and managing widespread operations and the application of foreign labor regulations; |
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| | • | | compliance with a variety of foreign laws and regulations; |
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| | • | | changes in the general political and economic conditions in the countries where we operate, particularly in emerging markets; |
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| | • | | the threat of nationalization and expropriation; |
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| | • | | increased costs and risks of doing business in a number of foreign jurisdictions; |
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| | • | | changes in enacted tax laws; |
| | • | | limitations on repatriation of earnings; and |
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| | • | | 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.
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Volatility in currency exchange rates and interest rates may adversely affect our financial condition, results of operations or cash flows.
We are exposed to a variety of market risks, including the effects of changes in currency exchange rates and interest rates. See Part 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our net revenue derived from sales in non-U.S. markets is approximately 65% of our total net revenue, and we expect revenue from non-U.S. markets to continue to represent a significant portion of our net revenue. When the U.S. dollar strengthens in relation to the currencies of the foreign countries where we sell our products, our U.S. dollar reported revenue and income will decrease. Changes in the relative values of currencies occur regularly and, in some instances, may have a significant effect on our results of operations. Our financial statements reflect recalculations of items denominated in non-U.S. currencies to U.S. dollars, our functional currency.
We monitor these exposures as an integral part of our overall risk management program. In some cases, we enter into contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables, and on projected future billings in non-functional currencies and use third-party borrowings in foreign currencies to hedge a portion of our net investments in, and cash flows derived from, our foreign subsidiaries. Nevertheless, changes in currency exchange rates and interest rates may have a material adverse effect on our financial condition, results of operations, or cash flows.
Our business could be materially adversely affected as a result of lower than anticipated demand by retailers and other customers for our products, particularly in the current economic environment.
Our business is heavily dependent on the retail marketplace. Changes in the economic environment including the liquidity and financial condition of our customers or reductions in retailer spending could adversely affect our revenues and results of operations. If a decreased consumer spending trend develops, retailers could respond by reducing their spending on new store openings and loss prevention budgets. This reduction could directly impact our SMS business, as a reduction in new store openings will lower demand for EAS security and CCTV installations. Additionally, lower loss prevention budgets could reduce the amount retailers will be willing to spend to upgrade existing store technology. Label demand could also be impacted due to lower loss prevention budgets as retailers may reduce the percentage of items covered. Additionally, our label volume increases as more items are sold through the retailer and lower demand decreases the volume related to the items tagged by the retailer. As retail sales volumes decline, label demand may also decline. A decrease in the demand for our products resulting from reduced spending by retailers due to fewer store openings, reduced loss prevention budgets and slower adoption of our new technology could have a material adverse effect on our revenues and results of operations.
Our business could be materially adversely affected as a result of slower commitments of retail customers to chain-wide installations and/or source tagging adoption or expansion.
Our revenues are dependent on our ability to maintain and increase our system installation base. The SMS system installation base leads to additional revenues, which we term as “recurring revenues,” through the sale of sensor tags and maintenance services. In addition, we partner with manufacturers to include our sensor tags into the product during manufacturing, an approach known as source tagging.
The level of commitments for chain-wide installations may decline due to decreased consumer spending that results in reduced spending on loss prevention by our retail customers, our failure to develop new technology that entices the customer to maintain their commitment to our loss prevention products and services, and competing technologies. A reduction in the commitment for chain-wide installations may also impact our ability to expand utilization of our source tagging program. A reduction in commitments to chain-wide installations and utilization of our source tagging program could have an adverse effect on our revenues and results of operations.
The markets we serve are highly competitive and we may be unable to compete effectively if we are unable to provide and market innovative and cost-effective products at competitive prices.
We face competition around the world, including competition from other large, multinational companies and other regional companies. Some of these companies may have substantially greater financial and other resources than the Company. We face competition in several aspects of our business. In the SMS EAS and Alpha S3 businesses and Intelligent Labels EAS business, we compete primarily on the basis of integrated security solutions and diversified, sophisticated, and quality product lines targeted at meeting the loss prevention needs of our retail customers. In our CheckView™ business, we compete primarily on the basis of efficient installation capability that is in place in North America. In the Check-Net® Service Bureau business, we compete primarily on the capability to effectively and quickly deliver retail customer specified labels to manufacturing sites in multiple countries. It is possible that our competitors will be able to offer additional products, services, lower prices, or other incentives that we cannot offer or that will make our products less profitable. It is also possible that our competitors will offer incentive programs or will market and advertise their products in a way that will impact customers’ preferences, and we may not be able to compete effectively.
We may be unable to anticipate the timing and scale of our competitors’ activities and initiatives, or we may be unable to successfully counteract them, which could harm our business. In addition, the cost of responding to our competitors’ activities may affect our financial performance in the relevant period. Our ability to compete also depends on our ability to attract and retain key talent, protect patent and trademark rights, and develop innovative and cost-effective products. A failure to compete effectively could adversely affect our growth and profitability.
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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; |
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| | • | | 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 and patents could harm our ability to compete or grow.
We have a number of patents that will expire in the next several years. Because our products involve complex technology and chemistry, we rely on protections of our intellectual property and proprietary information to maintain a competitive advantage. The expiration of these patents will reduce the barriers to entry into our existing lines of business and may result in loss of market share and a decrease in our competitive abilities, thus having a potential adverse effect on our financial condition, results of operations and cash flows.
Our business could be materially adversely affected as a result of possible increases in per unit product manufacturing costs as a result of slowing economic conditions or other factors.
Our manufacturing capacity is designed to meet our current and future anticipated demands. If our product demand decreases as a result of economic conditions and other factors, it could increase our cost per unit. If an increase in our cost per unit is passed on to our customers, it may decrease our competitive position, which may have an adverse effect on our revenues and results of operations. If an increase per unit is not passed on to our customers, it may reduce our gross margins, which may have an adverse effect on our results of operations. Our EAS and service bureau label manufacturing has various low price competitors globally. In order for us to maintain and improve our market position, we need to continuously monitor and seek to improve our manufacturing effectiveness while maintaining our high quality standard. If we are unsuccessful in our efforts to improve manufacturing and supply chain effectiveness, then our cost per unit may increase which could have an adverse impact on our results of operations.
If we cannot obtain sufficient quantities of raw materials and component parts required for our manufacturing activities at competitive prices and quality and on a timely basis, our financial condition, results of operations or cash flows may suffer.
We purchase materials and component parts from third parties for use in our manufacturing operations. Our ability to grow earnings will be affected by inflationary and other increases in the cost of component parts and raw materials, including electronic components, circuit boards, aluminum foil, resins, paper, and ferric chloride and hydrochloric acid solutions. Inflationary and other increases in the costs of raw materials, labor, and energy have occurred in the past and are expected to recur, and our performance depends in part on our ability to pass these cost increases on to customers in the prices for our products and to effect improvements in productivity. We may not be able to fully offset the effects of higher component parts and raw material costs through price increases, productivity improvements or cost reduction programs. If we cannot obtain sufficient quantities of these items at competitive prices and quality and on a timely basis, we may not be able to produce sufficient quantities of product to satisfy market demand, product shipments may be delayed, or our material or manufacturing costs may increase. A disruption to our supply chain could adversely affect our sales and profitability. Any of these problems could result in the loss of customers and revenue, provide an opportunity for competing products to gain market acceptance and otherwise adversely affect our financial condition, results of operations, or cash flows.
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Possible increases in the payment time for receivables as a result of economic conditions or other market factors could have a material effect on our results from operations and anticipated cash from operating activities.
The majority of our customer base is in the retail marketplace. Although we have a rigorous process to administer credit granted to customers and believe our allowance for doubtful accounts is adequate, we have experienced, and in the future may experience, losses as a result of our inability to collect our accounts receivable. During the past several years, various retailers have experienced significant financial difficulties, which in some cases have resulted in bankruptcies, liquidations and store closings. The financial difficulties of a customer could result in reduced business with that customer. We may also assume higher credit risk relating to receivables of a customer experiencing financial difficulty. If these developments occur, our inability to shift sales to other customers or to collect on our trade accounts receivable from a major customer could substantially reduce our income and have a material adverse effect on our results of operations and cash flows from operating activities.
Changes in legislation or governmental regulations, policies or standards applicable to our products may have a significant impact on our ability to compete in our target markets.
We operate in regulated industries. Our U.S. operations are subject to regulation by federal, state, and local governmental agencies with respect to safety of operations and equipment, labor and employment matters, and financial responsibility. Our EAS products are subject to FCC regulation, and our international operations are regulated by the countries in which they operate, including regulation of the Conformité Européene (CE) in Europe. Failure to comply with laws or regulations could result in substantial fines or revocation of our operating permits or licenses. If laws and regulations change and we fail to comply, our financial condition, results of operations, or cash flows could be materially and adversely affected.
Our ability to implement cost reductions in field services, selling, general and administrative expenses, and our manufacturing and supply chain operations may have a significant impact on our business and future revenues and profits.
We are in the process of taking actions to rationalize our field service, improve our sales productivity, reduce our general and administrative expenses, and reconfigure our manufacturing and supply chain operations. Such rationalization actions require management judgment on the development of cost reduction strategies and precision on the execution of those strategies. We may not realize, in full or in part, the anticipated benefits from these initiatives, and other events and circumstances, such as difficulties, delays, or unexpected costs may occur, which could result in our not realizing all or any of the anticipated benefits. We also cannot predict whether we will realize improved operating performance as a result of any cost reduction strategies. Further, in the event the market continues to fluctuate, we may not have the appropriate level of resources and personnel to react to the change. We are also subject to the risk of business disruption in connection with our restructuring initiatives, which could have a material adverse effect on our business and future revenues and profits.
Our ability to integrate the acquisitions of the Alpha S3, SIDEP/Asialco, and OATSystems businesses and to achieve our financial and operational goals for these businesses could have an impact on future revenues and profits.
We are in the process of integrating our Alpha S3, SIDEP/Asialco, and OATSystems businesses into our operations. In 2007, we acquired the Alpha S3 business, and we are working to take advantage of the business to utilize our existing sales force to grow revenue. In 2007, we also acquired the SIDEP/Asialco business, and we are attempting to integrate that business to optimize worldwide manufacturing capabilities and improve the quality and profitability of the acquired product lines. In June 2008, we acquired OATSystems, which will facilitate complementary merchandise protection and inventory management applications solutions that will enable retailers and their supply chains to gain deeper inventory visibility.
Various risks, uncertainties and costs are associated with the acquisitions. Effective integration of systems, key business processes, controls, objectives, personnel, management practices, product lines, markets, customers, supply chain operations, and production facilities can be difficult to achieve and the results are uncertain, particularly across our internationally diverse organization. We may not be able to retain key personnel of an acquired company and we may not be able to successfully execute integration strategies or achieve projected performance targets set for the business segment into which an acquired company is integrated. Our ability to execute the integration plans could have an impact on future revenues and profits and may adversely affect our financial condition, results of operations or cash flows. There can be no assurance that these acquisitions or others will be successful and contribute to our profitability.
16
If we fail to manage our growth effectively, our business could be harmed.
Our strategy is to maximize value by achieving growth both organically and through acquisitions. Our ability to effectively manage and control any future growth may be limited. To manage any growth, our management must continue to improve our operational, information and financial systems, procedures and controls and expand, train, retain and manage our employees. If our systems, procedures and controls are inadequate to support our operations, any expansion could decrease or stop, and investors may lose confidence in our operations or financial results. If we are unable to manage growth effectively, our business and operating results could be adversely affected, and any failure to develop and maintain adequate internal controls over financial reporting could cause the trading price of our shares to decline substantially.
An impairment in the carrying value of goodwill or other assets could negatively affect our consolidated results of operations and net worth.
Pursuant to accounting principles generally accepted in the United States, we are required to annually assess our goodwill, intangibles and other long-lived assets to determine if they are impaired. In addition, interim reviews must be performed whenever events or changes in circumstances indicate that impairment may have occurred. If the testing performed indicates that impairment has occurred, the Company is required to record a non-cash impairment charge for the difference between the carrying value of the goodwill or other intangible assets and the implied fair value of the goodwill or other intangible assets in the period the determination is made. Disruptions to our business, end market conditions and protracted economic weakness, unexpected significant declines in operating results of reporting units, divestitures and market capitalization declines may result in additional charges for goodwill and other asset impairments. We have significant intangible assets, including goodwill with an indefinite life, which are susceptible to valuation adjustments as a result of changes in such factors and conditions. We assess the potential impairment of goodwill on an annual basis, as well as when interim events or changes in circumstances indicate that the carrying value may not be recoverable. We assess definite lived intangible assets when events or changes in circumstances indicate that the carrying value may not be recoverable.
Our annual goodwill impairment test resulted in an estimated goodwill impairment charge of $59.6 million in the quarter ended December 28, 2008, primarily related to the Intelligent Labels and Retail Merchandising segments. Although our analysis regarding the fair value of the remaining goodwill indicates that it exceeds its carrying value, materially different assumptions regarding the future performance of our businesses or significant declines in our stock price could result in additional goodwill impairment losses. We expect to finalize the goodwill impairment analysis in the first quarter of 2009 and any adjustment to the estimated impairment will be recorded in that period. We also evaluate other assets on our balance sheet whenever events or changes in circumstances indicate that their carrying value may not be recoverable. As a result of changes in circumstances related to the customer relationship intangible related to the Asialco acquisition, we recorded an impairment charge of $2.6 million in the quarter ended December 28, 2008. Although our analysis regarding the fair value of the remaining assets indicates that it exceeds their carrying value, materially different assumptions regarding the future performance of our businesses could result in significant asset impairment losses.
The Company’s future results may be affected by various legal and regulatory proceedings.
We cannot predict with certainty the outcome of litigation matters, government proceedings and other contingencies and uncertainties that may arise out of the conduct of our business, including matters relating to intellectual property, employment, commercial and other matters. Resolution of such matters can be prolonged and costly, and the ultimate results or judgments are uncertain due to the inherent uncertainty in litigation and other proceedings. Moreover, our potential liabilities are subject to change over time due to new developments, changes in settlement strategy or the impact of evidentiary requirements, and we may be required to pay damage awards or settlements, or become subject to damage awards or settlements, that could have a material adverse effect on our results of operations, financial condition, and liquidity.
The failure to effectively maintain and upgrade our information systems could adversely affect our business.
Our business depends significantly on effective information systems, and we have many different information systems for our various businesses. Our information systems require an ongoing commitment of significant resources to maintain and enhance existing systems and develop new systems in order to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards, and changing customer preferences. In addition, we may from time to time obtain significant portions of our systems-related or other services or facilities from independent third parties, which may make our operations vulnerable to such third parties’ failure to perform adequately. Our failure to maintain effective and efficient information systems, or our failure to efficiently and effectively consolidate our information systems to eliminate redundant or obsolete applications, could have a material adverse effect on our business, financial condition and results of operations. Additionally, any disruption or failure of such networks, systems, or other technology may disrupt our operations, cause customer dissatisfaction, and loss of customer revenues.
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As a global business, we have a relatively complex tax structure, and there is a risk that tax authorities will disagree with our tax positions.
Since we conduct operations worldwide through our foreign subsidiaries, we are subject to complex transfer pricing regulations in the countries in which we operate. Transfer pricing regulations generally require that, for tax purposes, transactions between us and our foreign affiliates be priced on a basis that would be comparable to an arm’s length transaction and that contemporaneous documentation be maintained to support the tax allocation. Although uniform transfer pricing standards are emerging in many of the countries in which we operate, there is still a relatively high degree of uncertainty and inherent subjectivity in complying with these rules. To the extent that any foreign tax authorities disagree with our transfer pricing policies, we could become subject to significant tax liabilities and penalties.
Our tax returns are subject to review by taxing authorities in the jurisdictions in which we operate. Although we believe that we have provided for all tax exposures, the ultimate outcome of a tax review could differ materially from our provisions.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Our principal corporate offices are located at 101 Wolf Drive, Thorofare, New Jersey. As of December 28, 2008, we owned or leased approximately 2.2 million square feet of space worldwide which is used primarily for sales, distribution, manufacturing, and general administration. These facilities include offices located throughout North and South America, Europe, Asia, and Australia. Our principal manufacturing facilities are located in China, the Dominican Republic, Germany, Japan, Malaysia, the Netherlands, Puerto Rico, India, Hong Kong, Bangladesh, the U.K. and the U.S. We believe our current manufacturing capacity will support our needs for the foreseeable future.
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| Item 3. | | LEGAL PROCEEDINGS |
We are involved in certain legal and regulatory actions, all of which have arisen in the ordinary course of business, except for the matters described in the following paragraphs. Management believes that the ultimate resolution of such matters is unlikely to have a material adverse effect on our consolidated results of operations and/or financial condition, except as described below.
Matters related to ID Security Systems Canada Inc. versus Checkpoint Systems, Inc.
On June 22, 2006, we settled the follow-on purported class action suits that were filed in connection with the ID Security Systems Canada Inc. litigation. The purported class action complaints generally alleged a claim of monopolization. The settlement was for $1.45 million in cash and credits for the purchase of 90 million radio frequency label tags. As a result, we recorded a pre-tax charge to earnings of $2.3 million in fiscal 2006.
As a portion of the settlement is in the form of vouchers for the future purchases of tags, the settlement is anticipated to impact revenue and margin over the term of the redemption period for the vouchers.
Matter related to All-Tag Security S.A., et al
The Company originally filed suit on May 1, 2001, alleging that the disposable, deactivatable radio frequency security tag manufactured by All-Tag Security S.A. and All-Tag Security Americas, Inc.’s (jointly “All-Tag”) and sold by Sensormatic Electronics Corporation (Sensormatic) infringed on a U.S. Patent No. 4,876,555 (Patent) owned by the Company. On April 22, 2004, the United States District Court for the Eastern District of Pennsylvania granted summary judgment to defendants All-Tag and Sensormatic on the ground that the Company’s Patent was invalid for incorrect inventorship. The Company appealed this decision. On June 20, 2005, the Company won an appeal when the Federal Circuit reversed the grant of summary judgment and remanded the case to the District Court for further proceedings. On January 29, 2007 the case went to trial. On February 13, 2007, a jury found in favor of the defendants on infringement, the validity of the Patent and the enforceability of the Patent. On June 20, 2008, the Court entered judgment in favor of defendants based on the jury’s infringement and enforceability findings. On February 10, 2009 the Court granted defendants’ motions for attorneys’ fees under Section 285 of the Patent Statute. The district court will have to quantify the amount of attorneys’ fees to be awarded, but it is expected that defendants will request approximately $5.7 million plus interest. The Company recognized this amount during the fourth fiscal quarter ended December 28, 2008 in litigation settlements on the consolidated statement of operations. The Company intends to appeal any award of legal fees.
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| Item 4. | | SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS |
No matter was submitted during the fourth quarter of 2008 to a vote of stockholders.
PART II
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| Item 5. | | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol CKP. The following table sets forth, for the periods indicated, the high and low sale prices for our common stock as reported on the NYSE Composite Tape.
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| | | High | | | Low | |
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Fiscal year ended December 28, 2008 | | | | | | | | |
| First Quarter | | $ | 28.38 | | | $ | 21.49 | |
| Second Quarter | | $ | 28.10 | | | $ | 20.80 | |
| Third Quarter | | $ | 23.43 | | | $ | 17.32 | |
| Fourth Quarter | | $ | 18.99 | | | $ | 9.01 | |
Fiscal year ended December 30, 2007 | | | | | | | | |
| First Quarter | | $ | 23.74 | | | $ | 18.19 | |
| Second Quarter | | $ | 28.00 | | | $ | 21.70 | |
| Third Quarter | | $ | 29.91 | | | $ | 22.47 | |
| Fourth Quarter | | $ | 30.50 | | | $ | 21.24 | |
Holders of Record
As of February 19, 2009, there were 663 holders of record of our common stock.
Dividends
We have never paid a cash dividend on our common stock (except for a nominal cash distribution in April 1997 to redeem the rights outstanding under our 1988 Shareholders’ Rights Plan). We do not anticipate paying any cash dividends in the near future. We have retained, and expect to continue to retain, our earnings for reinvestment into the business. The declaration and payment of dividends in the future, and their amounts, will be determined by the Board of Directors in light of conditions then existing, including our earnings, our financial condition and business requirements (including working capital needs), and other factors.
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Issuer Purchases of Equity Securities
The following table presents information related to the repurchases of common stock we made during the twelve months ended December 28, 2008:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Maximum Number of | |
| | | | | | | | | | | Total Number of | | | Shares that May Yet | |
| | | Total Number of | | | Average Price | | | Shares Purchased | | | Be Purchased Under | |
| Period | | Shares Purchased | | | Paid per Share | | | Under the Plan (A) | | | the Program | |
| |
| December 31, 2007 — January 27, 2008 | | | — | | | $ | — | | | | — | | | | 2,000,000 | |
| January 28, 2008 — February 24, 2008 | | | — | | | | — | | | | — | | | | 2,000,000 | |
| February 25, 2008 — March 30, 2008 | | | 673,067 | | | | 25.63 | | | | 673,067 | | | | 1,326,933 | |
| March 31, 2008 — April 27, 2008 | | | — | | | | — | | | | — | | | | 1,326,933 | |
| April 28, 2008 — May 25, 2008 | | | 863,218 | | | | 25.11 | | | | 1,536,285 | | | | 463,715 | |
| May 26, 2008 — June 29, 2008 | | | 463,715 | | | | 25.68 | | | | 2,000,000 | | | | — | |
| June 30, 2008 — July 27, 2008 | | | — | | | | — | | | | — | | | | — | |
| July 28, 2008 — August 24, 2008 | | | — | | | | — | | | | — | | | | — | |
| August 25, 2008 — September 28, 2008 | | | — | | | | — | | | | — | | | | — | |
| September 29, 2008 — October 26, 2008 | | | — | | | | — | | | | — | | | | — | |
| October 27, 2008 — November 23, 2008 | | | — | | | | — | | | | — | | | | — | |
| November 24, 2008 — December 28, 2008 | | | — | | | | — | | | | — | | | | — | |
| Total | | | 2,000,000 | | | $ | 25.42 | | | | 2,000,000 | | | | — | |
| |
(A) In October 2006, our Board of Directors approved a share repurchase program that allowed for the purchase of up to 2 million shares of the Company’s common stock. During the first six months of 2008, the Company repurchased 2 million shares of its common stock at an average cost of $25.42, spending a total of $50.9 million. This completed the repurchase of shares under the Company’s repurchase authorization that was put in place during the fourth quarter of 2006. Common stock obtained by the Company through the repurchase program has been added to our treasury stock holdings.
Recent Sales of Unregistered Securities
There has been no sale of unregistered securities in fiscal 2008, 2007 or 2006.
Equity Compensation Plan Information
The following table sets forth our shares authorized for issuance under our equity compensation plan at December 28, 2008:
| | | | | | | | | | | | | |
| | | | | | | Equity | | | | |
| | | Equity | | | compensation | | | | |
| | | compensation | | | plans not | | | | |
| | | plans approved | | | approved by | | | | |
| | | by shareholders | | | shareholders | | | Total | |
| |
| Number of securities to be issued upon exercise of outstanding options | | | 2,610,326 | (1) | | | 270,000 | (2) | | | 2,880,326 | |
| Weighted average exercise price of outstanding options | | $ | 18.45 | | | $ | 22.71 | | | $ | 18.85 | |
| Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected above) | | | 1,573,746 | | | | — | | | | 1,573,746 | |
| |
| (1) | | Includes stock options and performance based restricted stock units. |
| |
| (2) | | Inducement options granted to newly elected President and CEO of Checkpoint in connection with his hire in fiscal 2007. |
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STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on the Common Stock of the Company for the period beginning December 28, 2003 and ending on December 28, 2008, with the cumulative total return on the Center for Research in Security Prices Index (CRSP Index) for NYSE/AMEX/NASDAQ Stock market, and the CRSP Index for NASDAQ Electronic Components and Accessories, assuming the investment of $100 in the Company’s Stock, the CRSP Index for NYSE/AMEX/NASDAQ Stock market, and the CRSP Index for NASDAQ Electronic Components and Accessories and the reinvestment of all dividends.
| | | | | | | | | | | | | |
| | | | | | | | | | | NASDAQ | |
| | | | | | | | | | | Electronic | |
| | | Checkpoint | | | NYSE/AMEX/NASDAQ Stock | | | Components And | |
| Year | | Systems, Inc. | | | Market Index | | | Accessories Index | |
| |
| 2003 | | | 100.00 | | | | 100.00 | | | | 100.00 | |
| 2004 | | | 95.45 | | | | 112.29 | | | | 79.11 | |
| 2005 | | | 130.34 | | | | 119.19 | | | | 82.75 | |
| 2006 | | | 106.82 | | | | 138.24 | | | | 78.74 | |
| 2007 | | | 137.40 | | | | 145.43 | | | | 91.43 | |
| 2008 | | | 52.03 | | | | 87.10 | | | | 46.66 | |
This Stock Performance Graph shall not be deemed incorporated by reference by any general statement incorporating by reference this annual report into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2008
Notes:
| A. | | Note: Data complete through last fiscal year. |
| |
| B. | | Note: Corporate Performance Graph with peer group uses peer group only performance (excludes only company). |
| |
| C. | | Note: Peer group indices use beginning of period market capitalization weighting. |
| |
| D. | | Note: Data and graph are calculated from CRSP Total Return Index for the NYSE/AMEX/NASDAQ Stock Market (U.S. Companies), Center for Research in Security Prices (CRSP), Graduate School of Business, The University of Chicago. |
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| | |
| Item 6. | | SELECTED FINANCIAL DATA |
The following tables set forth our selected financial data and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto included elsewhere herein.
(dollar amounts are in thousands except per share amounts)
| | | | | | | | | | | | | | | | | | | | | |
| | | Dec. 28, | | | Dec. 30, | | | Dec. 31, | | | Dec. 25, | | | Dec. 26, | |
| Year ended | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| |
STATEMENT OF OPERATIONS DATA | | | | | | | | | | | | | | | | | | | | |
| Net revenues | | $ | 917,082 | | | $ | 834,156 | | | $ | 687,775 | | | $ | 717,992 | | | $ | 670,453 | |
| (Loss) earnings from continuing operations before income taxes | | $ | (29,209 | ) | | $ | 70,576 | | | $ | 41,975 | | | $ | 40,127 | | | $ | 21,031 | |
| Income taxes | | $ | 719 | | | $ | 12,174 | | | $ | 6,987 | | | $ | 11,661 | | | $ | 2,064 | |
| (Loss) earnings from continuing operations | | $ | (29,805 | ) | | $ | 58,409 | | | $ | 35,019 | | | $ | 28,413 | | | $ | 18,823 | |
| Discontinued operations, net of tax | | $ | — | | | $ | 359 | | | $ | 903 | | | $ | 8,108 | | | $ | (37,448 | ) |
| Net (loss) earnings | | $ | (29,805 | ) (1) | | $ | 58,768 | (2) | | $ | 35,922 | (3) | | $ | 36,521 | (4) | | $ | (18,625 | ) (5) |
| (Loss) earnings per share from continuing operations: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (.76 | ) | | $ | 1.46 | | | $ | .89 | | | $ | .75 | | | $ | .51 | |
| Diluted | | $ | (.76 | ) | | $ | 1.43 | | | $ | .87 | | | $ | .72 | | | $ | .50 | |
| (Loss) earnings per share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (.76 | ) | | $ | 1.47 | | | $ | .91 | | | $ | .96 | | | $ | (.51 | ) |
| Diluted | | $ | (.76 | ) | | $ | 1.44 | | | $ | .89 | | | $ | .93 | | | $ | (.50 | ) |
| Depreciation and amortization | | $ | 30,788 | | | $ | 21,059 | | | $ | 19,504 | | | $ | 22,539 | | | $ | 26,316 | |
| |
| (1) | | Includes a $59.6 million goodwill impairment charge ($58.5 million, net of tax), a $6.4 million restructuring charge ($4.6 million, net of tax), a $6.2 million litigation settlement charge ($3.8 million, net of tax), a $3.0 million intangible asset impairment charge ($2.2 million, net of tax), a $1.5 million fixed asset impairment charge ($1.1 million, net of tax), and a $1.0 million gain from the sale of our Czech subsidiary ($1.0 million, net of tax). |
| |
| (2) | | Includes a $2.7 million ($2.0 million, net of tax) restructuring charge, a $4.4 million ($2.9 million, net of tax) charge related to the CEO transition, and a $2.6 million ($2.5 million, net of tax) gain from the sale of our Austrian subsidiary. |
| |
| (3) | | Includes a $7.0 million ($4.8 million, net of tax) restructuring charge, a $2.3 million ($1.5 million, net of tax) litigation settlement charge, and a $1.8 million ($1.1 million, net of tax) gain from the settlement of a capital lease. Also included in discontinued operations is a $2.8 million ($1.4 million, net of tax) gain on the divestment of our barcode business. |
| |
| (4) | | Includes a $12.6 million ($8.5 million, net of tax) restructuring charge, a $1.4 million ($1.4 million, net of tax) asset impairment charge, $2.0 million of additional tax expense related to our tax restructuring and dividend repatriation under the American Jobs Creation Act, and a $0.7 million ($0.7 million, net of tax) goodwill impairment charge. |
| |
| (5) | | Includes a $34.7 million ($34.7 million, net of tax) goodwill impairment, a $20.0 million ($13.0 million, net of tax) litigation settlement, $16.7 million ($10.3 million, net of tax) asset impairment, and a $3.0 million ($2.0 million, net of tax) restructuring charge reversal. |
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| | | | | | | | | | | | | | | | | | | | | |
| | | Dec. 28, | | | Dec. 30, | | | Dec. 31, | | | Dec. 25, | | | Dec. 26, | |
| (dollar amounts are in thousands) | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| |
AT YEAR END | | | | | | | | | | | | | | | | | | | | |
| Working capital | | $ | 282,752 | | | $ | 297,056 | | | $ | 254,024 | | | $ | 208,255 | | | $ | 168,382 | |
| Total debt | | $ | 145,286 | | | $ | 95,512 | | | $ | 16,534 | | | $ | 39,745 | | | $ | 73,998 | |
| Stockholders’ equity | | $ | 504,314 | | | $ | 588,328 | | | $ | 473,581 | | | $ | 396,420 | | | $ | 379,645 | |
| Total assets | | $ | 985,716 | | | $ | 1,031,044 | | | $ | 781,191 | | | $ | 739,245 | | | $ | 769,685 | |
FOR THE YEAR ENDED | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | $ | 15,217 | | | $ | 13,363 | | | $ | 11,520 | | | $ | 10,846 | | | $ | 11,342 | |
| Cash provided by operating activities | | $ | 77,206 | | | $ | 66,971 | | | $ | 22,386 | | | $ | 44,618 | | | $ | 23,280 | |
| Cash (used in) provided by investing activities | | $ | (54,704 | ) | | $ | (106,151 | ) | | $ | 7,963 | | | $ | (8,521 | ) | | $ | (10,338 | ) |
| Cash (used in) provided by financing activities | | $ | (4,460 | ) | | $ | 7,164 | | | $ | (6,945 | ) | | $ | (18,283 | ) | | $ | (24,503 | ) |
RATIOS | | | | | | | | | | | | | | | | | | | | |
| Return on net sales(a) | | | (3.25 | )% | | | 7.05 | % | | | 5.22 | % | | | 5.09 | % | | | (2.78 | )% |
| Return on average equity(b) | | | (5.46 | )% | | | 11.07 | % | | | 8.26 | % | | | 9.41 | % | | | (5.30 | )% |
| Return on average assets(c) | | | (2.96 | )% | | | 6.49 | % | | | 4.73 | % | | | 4.84 | % | | | (2.41 | )% |
| Current ratio(d) | | | 2.34 | | | | 2.42 | | | | 2.31 | | | | 1.99 | | | | 1.72 | |
| Percent of total debt to capital(e) | | | 22.37 | % | | | 13.97 | % | | | 3.37 | % | | | 9.11 | % | | | 16.31 | % |
| |
| (a) | | “Return on net sales” is calculated by dividing net earnings (loss) after the cumulative effect of change in accounting principle by net sales. |
| |
| (b) | | “Return on average equity” is calculated by dividing net earnings (loss) after the cumulative effect of change in accounting principle by average equity. |
| |
| (c) | | “Return on average assets” is calculated by dividing net earnings (loss) after the cumulative effect of change in accounting principle by average assets. |
| |
| (d) | | “Current ratio” is calculated by dividing current assets by current liabilities. |
| |
| (e) | | “Percent of total debt to capital” is calculated by dividing total debt by total debt and equity. |
| | | | | | | | | | | | | | | | | | | | | |
| | | Dec. 28, | | | Dec. 30, | | | Dec. 31, | | | Dec. 25, | | | Dec. 26, | |
| (amounts are in thousands, except employee data) | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| |
Other Information | | | | | | | | | | | | | | | | | | | | |
| Weighted average number of shares outstanding — diluted | | | 39,408 | (1) | | | 40,724 | | | | 40,233 | | | | 39,075 | | | | 37,604 | (2) |
| Number of employees | | | 3,878 | | | | 3,930 | | | | 3,213 | | | | 3,955 | | | | 4,260 | |
| Backlog | | $ | 51,799 | | | $ | 73,462 | | | $ | 54,899 | | | $ | 52,234 | | | $ | 63,026 | |
| |
| (1) | | Excludes 518 common shares from stock options and awards and 22 common shares from deferred compensation arrangements as they are anti-dilutive due to our net loss for the year. |
| |
| (2) | | Excludes 2,187 common shares from the assumed conversion of the subordinated debentures as it is anti-dilutive. |
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following section highlights significant factors impacting the consolidated operations and financial condition of the Company and its subsidiaries. The following discussion should be read in conjunction with Item 6. “Selected Financial Data” and Item 8. “Financial Statements and Supplementary Data.”
Overview
We are a multinational manufacturer and marketer of identification, tracking, security and merchandising solutions for the retail industry. We provide technology-driven integrated supply chain solutions to brand, track, and secure goods for retailers and consumer product manufacturers worldwide. We are a leading provider of, and earn revenues primarily from the sale of, electronic article surveillance (EAS), store monitoring solutions (CheckView™), custom tags and labels (Check-Net®), hand-held labeling systems (HLS), retail merchandising systems (RMS), and radio frequency identification (RFID) systems and software. Applications of these products include primarily retail security, asset and merchandise visibility, automatic identification, and pricing and promotional labels and signage. Operating directly in 30 countries, we have a global network of subsidiaries and distributors, and provide customer service and technical support around the world.
Historically, we have reported our results of operations into three segments: Security, Labeling Services, and Retail Merchandising. During the fourth quarter of 2007, resulting from previously announced changes in our management structure we began reporting our segments into three new segments: Shrink Management Solutions, Intelligent Labels, and Retail Merchandising. Fiscal 2006 has been conformed to reflect the segment change. The margins for each of the segments and the identifiable assets attributable to each reporting segment are set forth in Note 19 “Business Segments and Geographic Information” to the consolidated financial statements.
Our results are heavily dependent upon sales to the retail market. Our customers are dependent upon retail sales, which are susceptible to economic cycles and seasonal fluctuations. Furthermore, as approximately two-thirds of our revenues and operations are located outside the U.S., fluctuations in foreign currency exchange rates have a significant impact on reported results.
We believe that some markets we serve are slowing as a result of the unprecedented credit crisis and on-going softening of the global economic environment. In response to anticipated market conditions, we will continue to focus on providing customers with innovative products that will be valuable in addressing shrink, which is particularly important during a difficult economic environment. We are also moving forward with initiatives to reduce costs and improve working capital to mitigate the effects of the economy on our business. We believe that the strength of our core business and our ability to generate positive cash flow will sustain Checkpoint through this challenging period.
Our business plan is to generate sustained revenue growth through selected investments in product development and marketing. We intend to offset the cost of these investments through product cost and operating expense reductions. Revenue growth may also be generated by acquisitions that are targeted to expand our product offerings and customer base.
During early 2008, we introduced Evolve™, our new state-of-the-art shrink management platform. Evolve™ is our next-generation suite of RF and RFID enabled products that provide enhanced system performance and networking capability information in a more aesthetically pleasing format. Our business model relies upon customer commitments for our security product installations to a large number of their stores over a period of several months (large chain-wide installations). This new product will allow our existing customers to upgrade their security offerings and should result in increased installations for the future. The enhanced capabilities of the Evolve™ platform should also attract interest from new retail customers. As is typical with market introductions of new products in this industry, we expect the Evolve TM roll-out to positively impact our revenues over an 18-month period starting with existing customers.
During June 2008, we acquired OATSystems, Inc., a recognized leader in RFID-based application software. The addition of OATSystems, Inc. will build on our strategy of helping retailers and suppliers migrate more easily with our Evolve™ Electronic Article Surveillance platform to EPC RFID. As our industry moves to a common EPC standard, we will now be able to offer solutions that enable retailers and their supply chains to gain deeper visibility of their assets and merchandise - further reducing shrink and increasing the bottom-line profits by enhancing on-shelf merchandise availability for consumers. OATSystems, Inc. employs 49 people.
Our acquisitions of Alpha S3 and SIDEP in 2007 have expanded our product portfolio. We anticipate that these acquisitions will help us improve our product offering and, coupled with our external global distribution chain, provide a platform for continued growth. In addition to improving our offering of shrink management solutions, the Alpha S3 acquisition adds products for use with acoustic-magnetic (AM) technology, providing the potential to expand our penetration in retail customers that are not using our RF EAS solutions.
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In August 2008, we announced a manufacturing and supply chain restructuring program designed to accelerate profitable growth in our Check-Net® business and to support incremental improvements in its EAS hardware and labels businesses. We anticipate this program to result in total restructuring charges of approximately $3 million to $4 million, or $0.06 to $0.08 per diluted share, of which $1.5 million, or $0.03 per diluted share, has been incurred in 2008. We continue to expect implementation of this program to be complete in 2010 and to result in annualized cost savings of approximately $6 million.
Future financial results will be dependent upon our ability to expand the functionality of our existing product lines, develop or acquire new products for sale through our global distribution channels, convert new large chain retailers to RF-EAS, and reduce the cost of our products and infrastructure to respond to competitive pricing pressures.
Our strong base of recurring revenue (revenues from the sale of consumables into the installed base of security systems and hand-held labeling tools and services from monitoring and maintenance), repeat customer business, and our borrowing capacity should provide us with adequate cash flow and liquidity to execute our business plan.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities.
Note 1 of the notes to the consolidated financial statements describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies. A critical accounting policy is defined as one that is both material to the presentation of our consolidated financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition or results of operations.
Specifically, these policies have the following attributes: (1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations. Estimates and assumptions about future events and their effects cannot be determined with certainty. On an on-going basis, we evaluate our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. Senior management reviews the development and selection of our accounting policies and estimates with the Audit Committee. The critical accounting policies have been consistently applied throughout the accompanying financial statements.
We believe the following accounting policies are critical to the preparation of our consolidated financial statements:
Revenue Recognition.We recognize revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which states that revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price to the buyer is fixed or determinable; and collectability is reasonably assured. We enter into contracts to sell our products and services, and, while the majority of our sales agreements contain standard terms and conditions, there are agreements that contain multiple elements or non-standard terms and conditions. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and, if so, how the price should be allocated among the elements and when to recognize revenue for each element. Unearned revenue is recorded when payments are received in advance of performing our service obligations and is recognized over the service period.
For arrangements with multiple elements, we determine the fair value of each element and then allocate the total arrangement consideration among the separate elements. We recognize revenue when installation is complete or other post-shipment obligations have been satisfied. Equipment leased to customers under sales-type leases is accounted for as the equivalent of a sale. The present value of such lease revenues is recorded as net revenues, and the related cost of the equipment is charged to cost of revenues. The deferred finance charges applicable to these leases are recognized over the terms of the leases. Rental revenue from equipment under operating leases is recognized over the term of the lease. Installation revenue from EAS equipment is recognized when the systems are installed. Service revenue is recognized, for service contracts, on a straight-line basis over the contractual period, and, for non-contract work, as services are performed. Software license fee revenues are recognized in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition”, as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions.” Revenues from software license agreements are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant vendor obligations are remaining to be fulfilled, the fee is fixed and determinable, and collection is probable. Revenue from software contracts that require significant production, modification, customization, or implementation is recognized in accordance with SOP 81-1, “Accounting For Performance of
25
Construction-Type and Certain Production-Type Contracts”. Revenue from these arrangements for both licenses and professional services are recognized together using the percentage of completion method based upon the ratio of labor incurred to total estimated labor to complete each contract. In instances where there is a term license combined with services, revenue is recognized ratably over the term. We record estimated reductions to revenue for customer incentive offerings, including volume-based incentives and rebates. We record revenues net of an allowance for estimated return activities. Return activity was immaterial to revenue and results of operations for all periods presented.
We believe the following judgments and estimates have a significant effect on our consolidated financial statements:
Allowance for Doubtful Accounts.We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These allowances are based on specific facts and circumstances surrounding individual customers as well as our historical experience. The adequacy of the reserves for doubtful accounts is continually assessed by periodically evaluating each customer’s receivable balance, considering our customers’ financial condition and credit history, and considering current economic conditions. Historically, our reserves have been adequate to cover all losses associated with doubtful accounts. If the financial condition of our customers were to deteriorate, impairing their ability to make payments, additional allowances may be required. If economic or political conditions were to change in the countries where we do business, it could have a significant impact on the results of operations, and our ability to realize the full value of our accounts receivable. Furthermore, we are dependent on customers in the retail markets. Economic difficulties experienced in those markets could have a significant impact on our results of operations and our ability to realize the full value of our accounts receivables. If our historical experiences changed by 10%, it would require an increase or decrease of $0.4 million to our reserve.
Inventory Valuation.We write down our inventory for estimated obsolescence or unmarketable items equal to the difference between the cost of the inventory and the estimated net realizable value based upon assumptions of future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. If our estimates were to change by 10%, it would cause a change in inventory value of $0.7 million.
Valuation of Long-lived Assets.Our long-lived assets include property, plant, and equipment, goodwill, and identified intangible assets. With the exception of goodwill and indefinite-lived intangible assets, long-lived assets are depreciated or amortized over their estimated useful lives, and are reviewed for impairment whenever changes in circumstances indicate the carrying value may not be recoverable. Recoverability is determined based upon our estimates of future undiscounted cash flows. If the carrying value is determined to be not recoverable an impairment charge would be necessary to reduce the recorded value of the assets to their fair value. The fair value of the long-lived assets other than goodwill is based upon appraisals, quoted market prices of similar assets, or discounted cash flows.
Goodwill and indefinite-lived intangible assets are subject to tests for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We test for impairment on an annual basis as of fiscal month end October of each fiscal year, relying on a number of factors including operating results, business plans, and anticipated future cash flows. Our management uses its judgment in assessing whether goodwill has become impaired between annual impairment tests. Reporting units are primarily determined as the geographic areas comprising our business segments, except in situations when aggregation of the reporting units is appropriate pursuant to FAS 142. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds the fair value, then the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
The implied fair value of our reporting units is dependent upon our estimate of future discounted cash flows and other factors. Our estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. Estimated future cash flows are adjusted by an appropriate discount rate derived from our market capitalization plus a suitable control premium at the date of evaluation. The financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital that we use to determine our discount rate and through our stock price that we use to determine our market capitalization. Therefore, changes in the stock price may also affect the amount of impairment recorded. Market capitalization is determined by multiplying the shares outstanding on the assessment date by the average market price of our common stock over a 30-day period before each assessment date. We use this 30-day duration to consider inherent market fluctuations that may affect any individual closing price. We believe that our market capitalization alone does not fully capture the fair value of our business as a whole, or the substantial value that an acquirer would obtain from its ability to obtain control of our business. As such, in determining fair value, we add a control premium to our market capitalization. To estimate the control premium, we considered our unique competitive advantages that would likely provide synergies to a market participant. In addition, we considered external market factors which we believe contributed to the decline and volatility in our stock price that did not reflect our underlying fair value.
We have not made any material changes in the methodology used in the assessment of whether or not goodwill is impaired during the past three fiscal years. Determining the fair value of a reporting unit is a matter of judgment and often involves the use of significant
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estimates and assumptions. The use of different assumptions would increase or decrease estimated discounted future cash flows and could increase or decrease an impairment charge. If the use of these assets or the projections of future cash flows change in the future, we may be required to record impairment charges. An erosion of future business results in any of the business units could create impairment in goodwill or other long-lived assets and require a significant charge in future periods. (See Notes 1 and 5 of the Consolidated Financial Statements.)
Income Taxes.In determining income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of recoverability of certain of the deferred tax assets, which arise from temporary differences between tax and financial statement recognition of revenue and expense. We record a valuation allowance to reduce our deferred tax assets to the amount that it is more likely than not to be realized. In assessing the realizability of deferred tax assets, we consider future taxable income by tax jurisdictions and tax planning strategies. If we were to determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the valuation allowance would decrease income in the period such determination was made. (See Note 13 of the Consolidated Financial Statements.)
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. We are not aware of any such changes that would have a material effect on our results of operations, cash flows or financial position.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We record tax liabilities for the anticipated settlement of tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. Our income tax expense includes amounts intended to satisfy income tax assessments that result from these audit issues in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). Determining the income tax expense for these potential assessments and recording the related assets and liabilities requires management judgments and estimates. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from our estimate of tax liabilities. If payment of these amounts ultimately proves to be greater or less than the recorded amounts, the change of the liabilities would result in tax expense or benefit being recognized in that period. We evaluate our uncertain tax positions in accordance with FIN 48. We believe that our reserve for uncertain tax positions, including related interest, is adequate.
Pension Plans.We have various unfunded pension plans outside the U.S. These plans have significant pension costs and liabilities that are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets, mortality rates, and merit and promotion increases. We are required to consider current market conditions, including changes in interest rates, in selecting these assumptions. Changes in the related pension costs or liabilities may occur in the future due to changes in the assumptions. A change in discount rates of 0.25% would have less than a $0.1 million effect on pension expense.
Stock Compensation.We recognize stock-based compensation expense for all share-based payment awards granted after December 25, 2005 and granted prior to but not yet vested as of December 25, 2005, in accordance with Statement of Financial Accounting Standards (SFAS) 123R “Share-Based Payment” (SFAS 123R). Under the fair value recognition provisions of SFAS 123R, we recognize share-based compensation, net of an estimated forfeiture rate, and only recognize compensation cost for those shares expected to vest. For awards granted after the SFAS 123R adoption date we recognize the expense on a straight-line basis over the requisite service period of the award. For non-vested awards granted prior to the adoption date, we continue to use the ratable expense allocation method. Prior to SFAS 123R adoption, we accounted for share-based payments under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and accordingly, recognized compensation expense only when we granted options with a discounted exercise price.
Determining the fair value of share-based payment awards requires the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the share-based compensation expense could be significantly different from what we have recorded in the current period. A change in the estimated forfeiture rate of 10% would have a $0.2 million effect on stock compensation expense. As of December 28, 2008, there was $5.2 million and $4.3 million of unrecognized stock-based compensation expense related to nonvested stock options and restricted stock units, respectively. Such costs are expected to be recognized over a weighted-average period of 2.3 years. (See Note 8 to the Consolidated Condensed Financial Statements for further discussion on share-based compensation.)
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Liquidity and Capital Resources
Our liquidity needs have related to, and are expected to continue to relate to, acquisitions, capital investments, product development costs, potential future restructuring related to the rationalization of the business, and working capital requirements. We have met our liquidity needs over the last four years primarily through cash generated from operations. Based on an analysis of liquidity utilizing conservative assumptions for 2009, we believe that cash provided from operating activities and funding available under our current credit agreements should be adequate to service debt and working capital needs, meet our capital investment requirements, other potential restructuring requirements, and product development requirements.
The recent financial and credit crisis has reduced credit availability and liquidity for many companies. We believe, however, that the strength of our core business, cash position, access to credit markets, and our ability to generate positive cash flow will sustain us through this challenging period. We are working to reduce our liquidity risk by accelerating efforts to improve working capital while reducing expenses in areas that will not adversely impact the future potential of our business. Additionally, we have increased our monitoring of counterparty risk. We evaluate the creditworthiness of all existing and potential counterparties for all debt, investment, and derivative transactions and instruments. Our policy allows us to enter into transactions with nationally recognized financial institutions with an S&P rating of “A” or higher. The maximum exposure permitted to any single counterparty is $50.0 million. Counterparty credit ratings and credit exposure are monitored monthly and reviewed quarterly by our Treasury Risk Committee.
As of December 28, 2008, our cash and cash equivalents were $132.2 million compared to $118.3 million as of December 30, 2007. Cash and cash equivalents increased in 2008 primarily due to $77.2 million in cash from operating activities, partially offset by $54.7 million of cash used in investing activities. Cash from operating activities improved $10.2 million in 2008 compared to 2007 due primarily to improvements in accounts receivables and a decrease in inventory offset by a negative cash impact related to lower accounts payable and lower earnings. The improvement in accounts receivable in 2008 resulted primarily from large chain-wide installation revenue billed at the end of 2007 and collected in 2008 coupled with a concentrated effort to improve working capital through enhanced collection efforts and increased monitoring of inventory levels. The decline in inventory and accounts payable were the result of lower revenue and backlog at the end of 2008 compared to 2007. Cash used in investing activities was $51.4 million less in 2008 compared to 2007. This was due primarily to the amount paid in the acquisition of Alpha and SIDEP in 2007 compared to the OATSystems acquisition in 2008. Our percentage of total debt to stockholders’ equity in 2008 increased to 28.8% from 16.2% as a result of the impact of the fourth quarter loss on equity and an increase in debt to fund acquisitions and repurchase of stock. As of December 28, 2008, our working capital was $282.8 million compared to $297.1 million as of December 30, 2007.
During the first half of 2008, we executed our previously approved stock repurchase program in which we are authorized to purchase up to two million shares of the Company’s common stock. In total, we repurchased two million shares of our common stock at an average cost of $25.42, spending a total of $50.9 million. Prior to 2008, no shares were repurchased under this plan. As of December 28, 2008, no shares remain available for purchase under the current program. Common stock obtained by the Company through the repurchase program has been added to our treasury stock holdings.
We continue to reinvest in the Company through our investment in our technology and process improvement. In 2008, our investment in research and development amounted to $22.6 million, as compared to $18.2 million in 2007. These amounts are reflected in the cash generated from operations, as we expense our research and development as it is incurred. In 2009, we anticipate spending of approximately $24 million on research and development to support achievement of our strategic plan.
Our capital expenditures during fiscal 2008 totaled $15.2 million, compared to $13.4 million during fiscal 2007. We anticipate capital expenditures to be used primarily to upgrade technology and improve our production capabilities to approximately $18 million in 2009.
We have various unfunded pension plans outside the U.S. These plans have significant pension costs and liabilities that are developed from actuarial valuations. For fiscal 2008, our contribution to these plans was $4.7 million. Our funding expectation for 2009 is $4.8 million. We believe our current cash position, cash generated from operations, and the availability of cash under our revolving line of credit will be adequate to fund these requirements. The contractual obligation table details our anticipated funding requirements related to pension obligations for the next ten years.
In June 2008, the Company purchased the business of OATSystems, Inc., a privately held company, for approximately $37.2 million, net of cash acquired of $0.9 million, and including the assumption of $3.2 million of OATSystems, Inc. debt. The transaction was paid in cash. Additionally, we acquired $1.3 million in liabilities.
In January 2008, the Company purchased the business of Security Corporation, Inc., a privately held company, for $7.9 million plus $1.0 million of liabilities acquired. The transaction was paid in cash.
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On November 1, 2007, Checkpoint Systems, Inc. and one of its direct subsidiaries (collectively, the “Company”) and Alpha Security Products, Inc. and one of its direct subsidiaries (collectively, “the Seller”) entered into an Asset Purchase Agreement and a Dutch Assets Sale and Transfer Agreement (collectively, the “Agreements”) under which the Company purchased all of the assets of Alpha’s S3 business (the “Acquisition”) for approximately $142 million, subject to a post-closing working capital adjustment, plus additional performance-based contingent payments up to a maximum of $8 million plus interest thereon. The purchase price was funded by $67 million of cash and $75 million of borrowings under our senior unsecured credit facility. Subject to the Agreements, contingent payments were earned if the revenue derived from the S3 business exceeded $70 million during the period from December 31, 2007, until December 28, 2008. In the event that the revenue derived from the S3 business exceeded $83 million during such period, the Seller was entitled to a maximum payment of $8 million. During the fourth fiscal quarter ended December 28, 2008, revenues for the S3 business exceeded the minimum contingency payment thresholds. An accrual of $6.8 million is recognized at December 28, 2008 for the contingent payment, with a corresponding increase to goodwill recorded on the acquisition. Payment of the $6.8 million is required to occur before February 28, 2009.
In November 2007, we purchased SIDEP, a provider of RF-EAS products. Upon closing, we also acquired the remaining minority interests in a SIDEP subsidiary, Shanghai Asialco Electronics Co., Ltd. (Asialco), a China-based manufacturer of RF-EAS labels. The total purchase price for these acquisitions was $27.9 million, net of cash acquired. The purchase agreement was structured with deferred payments to the minority interest owners of Asialco of $9.3 million. These payments will be paid over a three-year period from the date of acquisition and were recorded as a liability on the date of acquisition. As part of the acquisition, we acquired $3.4 million (RMB25 million) of outstanding debt of Asialco. The loans were paid down in April and May 2008 and were renewed for 12 month periods under the original terms of the loan agreement. As of December 28, 2008, the outstanding Asialco loan balance is $3.6 million (RMB25 million) and has an interest rate of 5.31%. The loans are collateralized by land and buildings with an aggregate carrying value of $6.0 million at December 28, 2008. The loans mature at various times through May 2009.
On September 14, 2007, the Company received cash of $2.2 million from the release of the escrow account related to the Bar-code divestiture. Prior to the release, the escrow account value was recorded as restricted cash on our consolidated balance sheet.
In May 2007, the Company purchased the business of SSE Southeast, LLC, for $5.1 million plus $1.0 million of liabilities acquired. The transaction was paid in cash.
In January 2007, the Company purchased the business of Security Systems Technology, Inc., a privately held company, for $0.8 million plus $0.3 million of liabilities acquired. The transaction was paid in cash.
At December 31, 2006, the ¥1.0 billion ($8.4 million) short-term revolving loan facility had an outstanding balance of ¥600 million ($5.0 million) and availability of ¥400 million ($3.4 million). During the first quarter of 2007, we repaid the loan facility with proceeds from our unsecured revolving credit facility and cash from operations.
At December 28, 2008, our $8.8 million (¥800 million) Japanese local line of credit had an outstanding balance of $7.7 million (¥700 million) and availability of $1.1 million (¥100 million). The line of credit expires in March 2009. We expect to renew the line of credit upon its maturity.
On March 4, 2005, we entered into a new $150.0 million five-year senior unsecured multi-currency revolving credit agreement (“Credit Agreement”) with a syndicate of lenders. The Credit Agreement replaced the $375.0 million senior collateralized multi-currency credit facility arranged in December 1999. Borrowings under the Credit Agreement bear interest rates of LIBOR plus an applicable margin ranging from 0.75% to 1.75% and/or prime plus 0.00% to 0.50%. The interest rate matrix is based on our leverage ratio of funded debt to EBITDA, as defined by the Credit Agreement. Under the Credit Agreement, we pay an unused line fee ranging from 0.18% to 0.30% per annum on the unused portion of the commitment. At December 28, 2008, we had $133.6 million outstanding under this facility. Our available line of credit under this agreement is $15.2 million. Our availability under this facility was reduced by letters of credit totaling $1.2 million. There are no restrictions on our ability to draw down on the available portion of our line of credit.
The senior unsecured credit facility increased by $42.1 million since December 30, 2007. The increase in borrowings was primarily used to finance our stock repurchase program and the OATSystems, Inc. acquisition.
We are currently in the process of negotiating a renewal of our Credit Agreement. We anticipate this renewal to be completed during the first half of 2009.
The Credit Agreement contains certain covenants that include requirements for a maximum ratio of debt to EBITDA, a maximum ratio of interest to EBITDA, and a maximum threshold for capital expenditures. At December 28, 2008, we were in compliance with all of our debt covenants. Based upon our projections, we currently do not anticipate any issues with meeting our existing debt covenants during fiscal 2009.
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We have never paid a cash dividend (except for a nominal cash distribution in April 1997 to redeem the rights outstanding under our 1988 Shareholders’ Rights Plan). We do not anticipate paying any cash dividends in the near future.
As we continue to implement our strategic plan in a volatile global economic environment, our focus will remain on operating our business in a manner that addresses the reality of the current economic marketplace without sacrificing the capability to effectively execute our strategy when economic conditions and the retail environment stabilize. Based upon an analysis of liquidity using our current forecast, management believes that our anticipated cash needs can be funded from cash and cash equivalents on hand, the availability of cash under the $150.0 million revolving credit facility, and cash generated from future operations for the 2009 fiscal year.
Off-Balance Sheet Arrangements
We do not utilize material off-balance sheet arrangements apart from operating leases that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. We use operating leases as an alternative to purchasing certain property, plant, and equipment. Our future rental commitment under all non-cancelable operating leases was $42.7 million as of December 28, 2008. The scheduled timing of these rental commitments is detailed in our “Contractual Obligations” section.
Contractual Obligations
Our contractual obligations and commercial commitments at December 28, 2008 are summarized below:
| | | | | | | | | | | | | | | | | | | | | |
| Contractual Obligation | | | | | | Due in less | | | Due in | | | Due in | | | Due after | |
| (dollar amounts in thousands) | | Total | | | than 1 year | | | 1-3 years | | | 3-5 years | | | 5 years | |
| |
| Long-term debt (1) | | $ | 138,400 | | | $ | 4,098 | | | $ | 134,302 | | | $ | — | | | $ | — | |
| Capital leases (2) | | | 372 | | | | 258 | | | | 98 | | | | 16 | | | | — | |
| Operating leases | | | 42,723 | | | | 14,613 | | | | 17,288 | | | | 7,721 | | | | 3,101 | |
| Pension obligations (3) | | | 50,793 | | | | 4,375 | | | | 9,420 | | | | 10,136 | | | | 26,862 | |
| Acquisition obligation (4) | | | 14,216 | | | | 9,476 | | | | 4,740 | | | | — | | | | — | |
| Inventory purchase commitments (5) | | | 10,241 | | | | 6,421 | | | | 3,799 | | | | 21 | | | | — | |
| |
| Total contractual cash obligations | | $ | 256,745 | | | $ | 39,241 | | | $ | 169,647 | | | $ | 17,894 | | | $ | 29,963 | |
| |
| |
| Commercial Commitments | | | | | | Due in less | | | Due in | | | Due in | | | Due after | |
| (dollar amounts in thousands) | | Total | | | than 1 year | | | 1-3 years | | | 3-5 years | | | 5 years | |
| |
| Standby letters of credit | | $ | 1,181 | | | $ | 1,181 | | | $ | — | | | $ | — | | | $ | — | |
| Surety bonds | | | 2,387 | | | | 2,285 | | | | 102 | | | | — | | | | — | |
| |
| Total commercial commitments | | $ | 3,568 | | | $ | 3,466 | | | $ | 102 | | | $ | — | | | $ | — | |
| |
| (1) | | Includes interest payments through maturity of $4,804. |
| |
| (2) | | Includes interest payments through maturity of $34. |
| |
| (3) | | Amounts represent undiscounted projected benefit payments to our unfunded plans over the next 10 years. The expected benefit payments are estimated based on the same assumptions used to measure our accumulated benefit obligation at the end of 2008 and include benefits attributable to estimated future employee service of current employees. |
| |
| (4) | | The acquisition obligation represents $5.4 million of deferred payments to the minority shareholders of Shanghai Asialco Electronics Co., Ltd., a subsidiary of SIDEP coupled with a $2.0 million deferred payment on a non-compete contract related to the acquisition. Additionally, the acquisition obligation includes the $6.8 million contingent liability related to our acquisition of the Alpha S3 business. |
| |
| (5) | | Inventory purchase commitments represent the Company’s legally binding agreements to purchase fixed or minimum quantities of goods at determinable prices. |
The table above excludes our gross liability for uncertain tax positions, including accrued interest and penalties, which totaled $18.5 million as of December 28, 2008, since we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities.
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Pension Plans
We maintain several defined benefit pension plans, principally in Europe. The majority of these pension plans are unfunded. Our pension expense for 2008 was $5.7 million. Included in pension expense in 2008 is a pension settlement of $37,000. Our pension expense for 2007 was $5.5 million. Included in pension expense in 2007 is a pension settlement of $0.5 million.
We review our pension assumptions annually. Our assumptions for the year ended December 28, 2008, were a discount rate of 5.75%, an expected return of 3.75% and an expected rate of increase in future compensation of 2.77%. In developing the discount rate assumption, we considered the estimated plan durations of each of our plans and selected a rate of a corresponding length of time. The source of the discount rate was obtained by comparing the yields available on AA rated corporate bonds in the Eurozone, specifically the iboxx AA 10+ index. This resulted in a discount rate of 5.75% for 2008 and 5.50% for 2007. The expected rate of the return was developed using the historical rate of returns of the foreign government bonds currently held. This resulted in the selection of a long-term rate of return on plan assets of 3.75% for 2008 and 4.25% for 2007.
As of December 31, 2006, we have adopted the recognition provisions of SFAS 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statement No. 87, 88, 106 and 132(R)” and as a result, we recognized the previously unrecognized losses into the accrued pension liability with an offsetting charge to accumulated other comprehensive income. The total amount recognized for losses in accumulated other comprehensive income as of December 31, 2006 was $14.7 million. As of December 25, 2005, these amounts were unrecognized and amounted to $14.5 million. The primary component of the unrecognized losses are actuarial losses, a transition obligation, and prior period service costs. The change in actuary losses during 2008 was attributable to changes in the discount rate as the bond yields have increased. Unrecognized losses are amortized over the average remaining service period of the employees expected to receive the benefit in accordance with pension accounting rules. The weighted average remaining service period is approximately 13 years. The impact of recognizing the actuarial gains on 2008, 2007, and 2006 pension expense are $0.1 million, $0.6 million, and $0.7 million, respectively. The total projected amortization for these gains in 2009 is approximately $0.1 million.
Exposure to Foreign Currency
We manufacture products in the U.S., the Caribbean, the U.K., Europe, and the Asia Pacific regions for both the local marketplace, and for export to our foreign subsidiaries. These subsidiaries, in turn, sell these products to customers in their respective geographic areas of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations on the inter-company receivables and payables. Additionally, the sourcing of products in one currency and the sales of products in a different currency can cause gross margin fluctuations due to changes in currency exchange rates.
We selectively purchase currency forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. This allows us to shift the effect of positive or negative currency fluctuations to a third party. As of December 28, 2008, we had currency forward exchange contracts with a notional amount totaling approximately $9.7 million. The contracts are in various local currencies primarily covering our Western European, Canadian, Japan, and Australian operations. Historically, we have not purchased currency forward exchange contracts where it is not economically efficient, specifically for our operations in South America and Asia.
During the second quarter of 2007, the Company entered into a foreign currency option contract, at a notional amount of€5 million, to mitigate the effect of fluctuating foreign exchange rates on the reporting of a portion of its expected 2007 foreign currency denominated earnings. Changes in the fair value of this foreign currency option contract, which was not designated as a hedge, are recorded in earnings immediately. The premium paid on the option contract was $73,000. The foreign currency option contract expired on December 28, 2007. The fair market value on this option at the expiration date was zero.
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Hedging Activity
During 2008, we entered into various foreign currency contracts to reduce our exposure to forecasted 2008 and 2009 Euro-denominated inter-company revenues. These contracts were designated as cash flow hedges. The foreign currency contracts mature at various dates from January 2009 to September 2009. The purpose of these cash flow hedges is to eliminate the currency risk associated with Euro-denominated forecasted revenues due to changes in exchange rates. As of December 28, 2008, the fair value of these cash flow hedges were reflected as a $48,000 liability and are included in other current liabilities in the accompanying consolidated balance sheets. The total notional amount of these hedges is $15.1 million (€10.7 million) and the unrealized gain recorded in other comprehensive income was $1.5 million. During the year ended December 28, 2008, a $0.6 million benefit related to these foreign currency hedges was recorded to cost of goods sold as the inventory was sold to external parties. As of December 28, 2008, deferred net gains or losses on derivative instruments included in accumulated other comprehensive income that are expected to be reclassified as earnings during the next twelve months is approximately $1.5 million. During the year ended December 28, 2008, a $0.6 million benefit related to these foreign currency hedges was recorded to cost of goods sold as the inventory was sold to external parties. We recognized no gain or loss during the year ended December 28, 2008 for hedge ineffectiveness.
During the first quarter of 2008, we entered into an interest rate swap agreement with a notional amount of $40 million and a maturity date of February 18, 2010. The purpose of this interest rate swap agreement is to hedge potential changes to our cash flows due to the variable interest nature of our senior unsecured credit facility. This interest rate swap was designated as a cash flow hedge under SFAS 133. As of December 28, 2008, the fair value of the interest rate swap agreement was reflected as a $0.9 million liability and is included in other long-term liabilities in the accompanying consolidated balance sheets. We recognized no gain or loss during the year ended December 28, 2008 for hedge ineffectiveness.
Provision for Restructuring
Restructuring expense for the periods ended December 28, 2008, December 30, 2007, and December 31, 2006 were as follows:
(dollar amounts are in thousands)
| | | | | | | | | | | | | |
| | | December 28, | | | December 30, | | | December 31, | |
| Fiscal 2008 | | 2008 | | | 2007 | | | 2006 | |
| |
Manufacturing Restructuring Plan | | | | | | | | | | | | |
| Severance and other employee-related charges | | $ | 699 | | | $ | — | | | $ | — | |
| Consulting fees | | | 838 | | | | — | | | | — | |
2005 Restructuring Plan | | | | | | | | | | | | |
| Severance and other employee-related charges | | | 4,563 | | | | 1,215 | | | | 7,915 | |
| Acquisition integration costs | | | 519 | | | | — | | | | — | |
| Pension curtailment | | | — | | | | (420 | ) | | | (339 | ) |
| Pension termination benefit expense | | | — | | | | — | | | | 226 | |
| Lease termination costs | | | — | | | | 2,051 | | | | — | |
2003 Restructuring Plan | | | | | | | | | | | | |
| Severance and other employee-related charges | | | (253 | ) | | | (145 | ) | | | (409 | ) |
| Lease termination costs | | | 76 | | | | — | | | | (386 | ) |
| |
| Total | | $ | 6,442 | | | $ | 2,701 | | | $ | 7,007 | |
| |
Restructuring accrual activity for the periods ended December 28, 2008, and December 30, 2007, were as follows:
(dollar amounts are in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Charge | | | | | | | | | | | |
| | | Accrual at | | | Charged | | | Reversed | | | | | | | Exchange | | | | |
| | | Beginning | | | to | | | to | | | Cash | | | Rate | | | Accrual at | |
| Fiscal 2008 | | of Year | | | Earnings | | | Earnings | | | Payments | | | Changes | | | 12/28/08 | |
| |
Manufacturing Restructuring Plan | | | | | | | | | | | | | | | | | | | | | | | | |
| Severance and other employee-related charges | | $ | — | | | $ | 701 | | | $ | (2 | ) | | $ | (37 | ) | | $ | (10) | | | $ | 652 | |
2005 Restructuring Plan | | | | | | | | | | | | | | | | | | | | | | | | |
| Severance and other employee-related charges | | | 3,015 | | | | 5,362 | | | | (799 | ) | | | (4,141 | ) | | | (135 | ) | | | 3,302 | |
| Acquisition restructuring costs | | | 1,209 | | | | — | | | | — | | | | (612 | ) | | | (29 | ) | | | 568 | |
| |
| Total | | $ | 4,224 | | | $ | 6,063 | | | $ | (801 | ) | | $ | (4,790 | ) | | $ | (174 | ) | | $ | 4,522 | |
| |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Charge | | | | | | | | | | | |
| | | Accrual at | | | | | | | Charged | | | Reversed | | | | | | | Exchange | | | | |
| | | Beginning | | | Acquisition | | | to | | | to | | | Cash | | | Rate | | | Accrual at | |
| Fiscal 2007 | | of Year | | | Restructuring | | | Earnings | | | Earnings | | | Payments | | | Changes | | | 12/30/07 | |
| |
2005 Restructuring Plan | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Severance and other employee-related charges | | $ | 6,786 | | | $ | — | | | $ | 2,096 | | | $ | (881 | ) | | $ | (5,287 | ) | | $ | 301 | | | $ | 3,015 | |
| Acquisition restructuring costs (1) | | | — | | | | 1,125 | | | | — | | | | — | | | | — | | | | 84 | | | | 1,209 | |
| |
| Total | | $ | 6,786 | | | $ | 1,125 | | | $ | 2,096 | | | $ | (881 | ) | | $ | (5,287 | ) | | $ | 385 | | | $ | 4,224 | |
| |
| (1) | | During 2007, restructuring costs of $1.2 million included as a cost of the SIDEP acquisition ($1.1 million related to employee severance and $0.1 million related to the cost to abandon facilities) were accounted for under Emerging Issues Task Force Issue No. 95-3 “Recognition of Liabilities in Connection with Purchase Business Combinations.” These costs were recognized as an assumed liability in the acquisition and were included in the purchase price allocation at November 9, 2007. |
Manufacturing Restructuring Plan
In August 2008, we announced a manufacturing and supply chain restructuring program designed to accelerate profitable growth in our Check-Net® business and to support incremental improvements in our EAS hardware and labels businesses.
For the year ended December 28, 2008, a net charge of $1.5 million was recorded in connection with the Manufacturing Restructuring Plan. The charge was composed of $0.7 million of severance accruals and $0.8 million of consulting fees.
The total number of employees affected by the Manufacturing Restructuring Plan were 18, of which 3 have been terminated. The remaining terminations are expected to be completed by the end of fiscal year 2010. The anticipated total cost is expected to approximate $3.0 million to $4.0 million, of which $1.5 million has been incurred and $0.9 million has been paid. Termination benefits are planned to be paid one month to 24 months after termination. Upon completion, the annual savings are anticipated to be approximately $6 million.
2005 Restructuring Plan
In the second quarter of 2005, we initiated actions focused on reducing our overall operating expenses. This plan included the implementation of a cost reduction plan designed to consolidate certain administrative functions in Europe and a commitment to a plan to restructure a portion of our supply chain manufacturing to lower cost areas. During fourth quarter 2006, we continued to review the results of the overall initiatives and added an additional reduction focused on the reorganization of senior management to focus on key markets and customers. This additional restructuring reduced our management by 25%.
For the year ended December 28, 2008, a net charge of $5.1 million was recorded in connection with the 2005 Restructuring Plan. The charge was composed of $4.6 million of severance accruals and $0.5 million related to SIDEP acquisition integration costs.
A net charge of $2.8 million was recorded in 2007 in connection with the 2005 Restructuring Plan. The charge was composed of $1.2 million of severance accruals and $2.0 million of lease termination and related costs, partially offset by $0.4 million related to settlements on pension liabilities resulting from employees who left due to the restructuring plan.
A net charge of $7.8 million was recorded in 2006 in connection with the 2005 Restructuring Plan. Included in the net charge was $7.2 million related to severance and a $0.7 million litigation settlement accrual related to employees previously terminated according to the restructuring plan in certain countries. Also included in the net charge was a $0.3 million pension curtailment gain related to employees previously terminated according to the restructuring plan in certain countries and an expense of $0.2 million for a special termination benefit provided to one employee according to the employee’s termination agreement.
The total number of employees affected by the 2005 Restructuring Plan were 858, of which 853 have been terminated. The remaining terminations are expected to be completed by the end of fiscal year 2009. The anticipated total cost is expected to approximate $30 million to $31 million, of which $30 million has been incurred and $27 million has been paid. Termination benefits are planned to be paid one month to 24 months after termination. Upon completion, the annual savings are anticipated to be approximately $34 million to $35 million.
33
2003 Restructuring Plan
During 2008, we reversed $0.3 million of previously accrued severance and incurred $0.1 million of lease termination costs related to the 2003 Restructuring Plan.
During 2007, we reversed $0.1 million of previously accrued severance related to the 2003 Restructuring Plan.
During 2006, we reversed $0.8 million related to the 2003 Restructuring Plan. This was composed of $0.4 million related to the release of our lease reserve to income as we have obtained a sublease for the property previously reserved and a $0.4 million severance reversal.
Goodwill Impairments
We have completed step one of our fiscal 2008 annual analysis and test for impairment of goodwill and it was determined that certain goodwill related to the Intelligent Labels and Retail Merchandising segments was impaired. As a result, a $59.6 million estimated impairment charge was recorded as of December 28, 2008. The impairment charge was recorded in goodwill impairment on the consolidated statement of operations. This amount may change upon completion of step two of the impairment test. It is anticipated that the impairment testing will be complete by the first quarter of fiscal 2009 at which time any required adjustments to the estimate will be recorded. The impairment charge is attributed to a combination of a decline in market capitalization of the Company and a decline in the estimated forecasted discounted cash flows expected by us. Fair values exceeded their respective carrying values by more than 25% in the remaining reporting units for which no impairment charge was recorded.
The 2007 and 2006 annual assessments did not result in an impairment charge. Significant turmoil in the financial markets and weakness in macroeconomic conditions globally have recently contributed to volatility in our stock price, including a significant decline in our stock price during the third and fourth quarters of 2008 during which our stock price fluctuated from a high of $23.43 to a low of $9.01. These factors have contributed to the estimated impairment loss recorded in the fourth quarter ended December 28, 2008. There can be no certainty as to the duration of the current economic conditions and their potential impact on our stock price performance or future goodwill impairment (See Notes 1 and 5 of the Consolidated Financial Statements).
Asset Impairments
Asset impairment expense was $4.5 million, or 0.5% of revenues in 2008, without a comparable charge in 2007.
During our 2008 goodwill and indefinite-lived intangibles annual impairment test, we determine that indefinite-lived trade mark intangible in our I-Labels segment was impaired. As a result we recorded an impairment charge of $0.4 million in the fourth quarter of 2008. This charge was recorded in asset impairments on the consolidated statement of operations.
As a result of changes in business circumstances related to the customer relationship intangible recognized in connection with the SIDEP/Asialco acquisition, we recorded an impairment charge of $2.6 million in the fourth quarter ended December 28, 2008. The impairment charge was recorded in asset impairments in the Intelligent Labels segment on the consolidated statement of operations.
In 2008, we recorded a $1.5 million fixed asset impairment. The charge consisted of $1.1 million related to the write down of a building in France and $0.4 million related to the write down of land and a building in Japan. These impairments were recorded in asset impairments on the consolidated statement of operations.
Results of Operations
(All comparisons are with the previous year, unless otherwise stated.)
Net Revenues
Our unit volume is driven by product offerings, number of direct sales personnel, recurring sales and, to some extent, pricing. Our base of installed systems provides a source of recurring revenues from the sale of disposable tags, labels, and service revenues.
Our customers are substantially dependent on retail sales, which are seasonal, subject to significant fluctuations, and difficult to predict. In addition, current economic trends have particularly strongly affected our customers, and consequently our net revenues may be impacted. Such seasonality and fluctuations impact our sales. Historically, we have experienced lower sales in the first half of each year.
34
Analysis of Statement of Operations
The following table presents for the periods indicated certain items in the consolidated statement of operations as a percentage of total revenues and the percentage change in dollar amounts of such items compared to the indicated prior period:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Percentage Change | |
| | | Percentage of Total Revenues | | | In Dollar Amount | |
| | | December 28, | | | December 30, | | | December 31, | | | Fiscal 2008 | | | Fiscal 2007 | |
| | | 2008 | | | 2007 | | | 2006 | | | vs. | | | vs. | |
| Year ended | | (Fiscal 2008) | | | (Fiscal 2007) | | | (Fiscal 2006) | | | Fiscal 2007 | | | Fiscal 2006 | |
| |
| Net revenues | | | | | | | | | | | | | | | | | | | | |
| Shrink Management Solutions | | | 61.6 | % | | | 57.4 | % | | | 55.8 | % | | | 18.1 | % | | | 24.6 | % |
| Intelligent Labels | | | 28.1 | | | | 31.1 | | | | 31.9 | | | | (0.6 | ) | | | 18.2 | |
| Retail Merchandising | | | 10.3 | | | | 11.5 | | | | 12.3 | | | | (2.0 | ) | | | 14.1 | |
| |
| Net revenues | | | 100.0 | | | | 100.0 | | | | 100.0 | | | | 9.9 | | | | 21.3 | |
| Cost of revenues | | | 58.8 | | | | 58.5 | | | | 57.6 | | | | 10.4 | | | | 23.3 | |
| |
| Total gross profit | | | 41.2 | | | | 41.5 | | | | 42.4 | | | | 9.3 | | | | 18.6 | |
| Selling, general, and administrative expenses | | | 32.4 | | | | 31.3 | | | | 33.0 | | | | 13.8 | | | | 14.9 | |
| Research and development | | | 2.5 | | | | 2.2 | | | | 2.8 | | | | 24.4 | | | | (6.4 | ) |
| Restructuring expenses | | | 0.7 | | | | 0.3 | | | | 1.0 | | | | 138.5 | | | | (61.5 | ) |
| Asset impairment | | | 0.5 | | | | — | | | | — | | | | N/A | | | | N/A | |
| Goodwill impairment | | | 6.5 | | | | — | | | | — | | | | N/A | | | | N/A | |
| Litigation settlement | | | 0.6 | | | | — | | | | 0.3 | | | | N/A | | | | N/A | |
| Other operating income | | | 0.1 | | | | 0.3 | | | | 0.2 | | | | (62.3 | ) | | | 27.0 | |
| |
| Operating (loss) income | | | (1.9 | ) | | | 8.0 | | | | 5.5 | | | | (125.7 | ) | | | 75.5 | |
| Interest income | | | 0.3 | | | | 0.7 | | | | 0.7 | | | | (51.1 | ) | | | 10.9 | |
| Interest expense | | | 0.6 | | | | 0.3 | | | | 0.3 | | | | (145.8 | ) | | | 8.9 | |
| Other (loss) gain, net | | | (0.9 | ) | | | 0.1 | | | | 0.2 | | | | N/A | | | | (42.0 | ) |
| |
| (Loss) earnings from continuing operations before income taxes and minority interest | | | (3.1 | ) | | | 8.5 | | | | 6.1 | | | | (141.4 | ) | | | 68.1 | |
| Income taxes | | | 0.1 | | | | 1.5 | | | | 1.0 | | | | (94.1 | ) | | | 74.2 | |
| Minority interest | | | — | | | | — | | | | — | | | | N/A | | | | N/A | |
| |
| (Loss) earnings from continuing operations | | | (3.2 | ) | | | 7.0 | | | | 5.1 | | | | (151.0 | ) | | | 66.8 | |
| | | | | | | | | | | | | | | | | | | | | |
| Earnings from discontinued operations, net of tax | | | — | | | | — | | | | 0.1 | | | | N/A | | | | (60.2 | ) |
| |
| Net (loss) earnings | | | (3.2 | )% | | | 7.0 | % | | | 5.2 | % | | | (150.7 | )% | | | 63.6 | % |
| |
N/A — Comparative percentages are not meaningful.
35
Fiscal 2008 compared to Fiscal 2007
Net Revenues
During 2008, revenues increased by $82.9 million, or 9.9%, from $834.2 million to $917.1 million. Foreign currency translation had a positive impact on revenues of $33.0 million for the full year of 2008.
(dollar amounts in millions)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Dollar Amount | | | Percentage | |
| | | | | | | | | | | Change | | | Change | |
| | | December 28, | | | December 30, | | | Fiscal 2008 | | | Fiscal 2008 | |
| | | 2008 | | | 2007 | | | vs. | | | vs. | |
| Year ended | | (Fiscal 2008) | | | (Fiscal 2007) | | | Fiscal 2007 | | | Fiscal 2007 | |
| |
| Net revenues: | | | | | | | | | | | | | | | | |
| Shrink Management Solutions | | $ | 565.1 | | | $ | 478.5 | | | $ | 86.6 | | | | 18.1 | % |
| Intelligent Labels | | | 257.6 | | | | 259.3 | | | | (1.7 | ) | | | (0.6 | ) |
| Retail Merchandising | | | 94.4 | | | | 96.4 | | | | (2.0 | ) | | | (2.0 | ) |
| |
| Net revenues | | $ | 917.1 | | | $ | 834.2 | | | $ | 82.9 | | | | 9.9 | % |
| |
Shrink Management Solutions
Shrink Management Solutions revenues increased by $86.6 million, or 18.1%, in 2008 compared to 2007. Foreign currency translation had a positive impact of approximately $19.6 million. The Alpha, SIDEP and OATSystems acquisitions increased revenues in 2008 by $77.8 million. Additionally, CheckView™ revenues increased $4.9 million in 2008 compared to 2007. These increases were partially offset by a decrease of $14.1 million in EAS hardware revenues.
The CheckView™ business improved primarily due to increases in the U.S. of $2.6 million coupled with an increase in Asia of $1.5 million. The U.S. CheckView™ revenue increase was due primarily to an increase of $11.8 million in our U.S. banking business, partially offset by a decrease of $9.2 million in our U.S. retail business. The U.S. banking business benefited $10.7 million due to recent acquisitions, without comparable revenues in 2007, coupled with $1.1 million of comparable business growth. The U.S. retail business revenue decline was due to difficult comparables in 2007 due to large 2007 installations coupled with the impact of current economic conditions on this business resulting in reductions in 2008 orders and installations. The increase in Asia CCTV revenues was due primarily to expansion of the business model within the region during fiscal 2008. The U.S. CheckView™ business has a significant portion of its revenue growth dependent upon new store openings which could continue to be impacted by the current decline in U.S. economic activity.
EAS hardware revenues, excluding the benefit of foreign currency translation and acquisitions decreased $14.1 million for 2008 compared to 2007. The decrease was due to declines in revenues of $15.3 million in Europe and $1.9 million in Latin America, partially offset by an increase of $3.6 million in revenues in Asia. The decline in Europe was due primarily to general overall business declines in the UK coupled with large chain-wide installations in various countries during 2007 without comparable activity in 2008. These declines in Europe revenues were partially offset by an increase in Belgium due to a large chain-wide roll-out in 2008 without comparable revenue in 2007. The decline in Latin America was due primarily to a decline in Mexico attributable to large chain-wide roll-outs in 2007 without comparable revenues in 2008. The increase in Asia was due primarily to large chain-wide roll-outs in New Zealand, Australia, and China without comparables in 2007, partially offset by a decline in Japan revenue attributable to large chain-wide roll-outs in 2007 without comparable revenues in 2008. Our EAS hardware business is dependent upon new store openings and the liquidity and financial condition of our customers which could continue to be impacted by current economic trends. Our plan is to partially mitigate this issue by selling new solutions to existing customers and increasing our market share through innovative products such as Evolve TM .
Intelligent Labels
Intelligent Labels revenues decreased by $1.7 million, or 0.6% in 2008 compared to 2007. The positive impact of foreign currency translation was approximately $7.5 million. Also benefiting revenues were increases of $4.6 million and $5.7 million related to the acquisition of SIDEP and our Check-Net® business, respectively. These increases were offset by decreases in our EAS label business and our Library business of $13.2 million and $6.3 million, respectively. The increase in our Check-Net® revenues was due primarily to an increase in revenues in the U.S. and Asia, partially offset by a decline in our Europe revenues. The U.S. Check-Net® revenue increase was due to increased sales volume with existing large customers and an increase in orders from new customers. We anticipate that weak economic conditions could continue to impact our Check-Net® revenues but that our growth in orders from new customers could partially mitigate this impact. The revenue decline in Europe and growth in Asia is due primarily to a shift in revenues to Asia for certain customers previously serviced from Europe. Europe also experienced a decline in revenues due to the effects of current economic conditions of apparel retailers in the region. The EAS label revenues were impacted by current economic conditions resulting in decreased retail sector sales resulting in a decreased demand for labels, coupled with competitive pressures in certain regions. We anticipate that weak economic conditions could continue to impact our EAS label volumes in future quarters. Library revenues declined due to the transition period for our 3M distributor agreement compared to direct sales in the prior year. We expect the library revenues to become comparable in 2009 as the transition to selling to a distributor was initiated at the beginning of fiscal 2008.
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Retail Merchandising
Retail Merchandising revenues decreased by $2.0 million or 2.0%. The positive impact of foreign currency translation was approximately $5.8 million. The decrease in our RMS business was due to a decrease in our revenues from retail display systems of $5.2 million and a decrease in revenues of HLS of $2.6 million. Our retail display systems decline is due to large remodel work in 2007 in Europe and Asia without such comparable revenues in 2008. The decrease in HLS is due to increased competition and pricing pressures as well as a general shift in market demand for HLS products as retail scanning technology continues to grow worldwide. We anticipate RMS and HLS to continue to face difficult revenue trends in 2009 due to impacts of current economic conditions on the RMS business and continued shifts in market demand for HLS products.
Gross Profit
During 2008, gross profit increased by $32.1 million, or 9.3%, from $346.0 million to $378.1 million. The benefit of foreign currency translation on gross profit was approximately $13.7 million. Gross profit, as a percentage of net revenues, decreased from 41.5% to 41.2%.
Shrink Management Solutions
Shrink Management Solutions gross profit as a percentage of Shrink Management Solutions revenues increased to 40.8% in 2008, from 39.8% in 2007. The increase in the gross profit percentage of Shrink Management Solutions was due primarily to the inclusion of a full year of revenues of Alpha products at higher margin levels in 2008 coupled with improvements in EAS Hardware margins. The EAS hardware margin improvement was due to improved inventory management coupled with better sourcing costs for our antenna components.
Intelligent Labels
Intelligent Labels gross profit as a percentage of Intelligent Labels revenues decreased to 39.2% in 2008, from 42.2% in 2007. This decrease was due primarily to a decrease in EAS label gross margin percentage and the Library business gross margin percentage for 2008 compared to 2007 coupled with an increase in lower margin Check-Net® revenues as a percentage of total Intelligent Labels revenues.
The decline in EAS label margins was due primarily to increased manufacturing variances in 2008, which were primarily attributable to volume declines and increased production issues resulting in labor inefficiencies and increased scrap, coupled with higher energy costs. The Library margins were negatively impacted by the 3M deal, which shifted our business model from direct sales to distributor revenues with lower margins.
Retail Merchandising
The Retail Merchandising gross profit as a percentage of Retail Merchandising revenues increased to 49.4% in 2008 from 47.9% in 2007. This increase in Retail Merchandising gross profit percentage was primarily due to improved margins in our HLS business resulting from improved manufacturing efficiencies.
Selling, General, and Administrative Expenses
Selling, general, and administrative (SG&A) expenses increased $36.1 million, or 13.8%, over 2007. Foreign currency translation increased SG&A expenses by approximately $9.5 million. SG&A expenses generated by the recently acquired Alpha, SIDEP, and OATSystems operations coupled with our banking acquisitions accounted for $27.8 million of the increase over the prior year. SG&A expenses were additionally increased due to an increase in bad debt provisions and $1.4 million of deferred compensation expense related to prior periods. These increases were partially offset by decreases in management expense due to internal restructuring efforts and a decrease in compensation related to a decrease in accrued bonuses and the reversal of stock-based compensation related to our long-term incentive plan performance restricted stock units. In light of current economic conditions, we are more closely monitoring the aging of individual customer receivable balances and associated credit risk in an effort to mitigate our exposure to bad debt.
37
Research and Development Expenses
Research and development (R&D) expenses were $22.6 million, or 2.5% of revenues, in 2008 and $18.2 million, or 2.2% of revenues in 2007. Foreign currency translation increased R&D costs by approximately $0.3 million. The increase of $4.4 million is largely attributed to R&D expenses generated by the recently acquired Alpha, SIDEP, and OATSystems operations of $3.9 million.
Restructuring Expenses
Restructuring expenses were $6.4 million, or 0.7% of revenues in 2008 compared to $2.7 million or 0.3% of revenues in 2007. The current and the prior year expenses are detailed in the “Provision for Restructuring” section.
Goodwill Impairment
Goodwill Impairment expense was $59.6 million, or 6.5% of revenues in 2008, without a comparable charge in 2007. The current year expense is detailed in the “Goodwill Impairment” section following “Liquidity and Capital Resources.”
Asset Impairment
Asset Impairment expense was $4.5 million, or 0.5% of revenues in 2008, without a comparable charge in 2007. The current year expense is detailed in the “Asset Impairment” section following “Liquidity and Capital Resources.”
Litigation Settlement
Litigation Settlement expense was $6.2 million in 2008, without a comparable charge in 2007. The litigation settlement expense is primarily attributed to a $5.7 million litigation accrual recorded during the fourth quarter of 2008 related to a patent infringement counter suit in which the Company was found to be liable for the other party’s associated legal fees. The Company plans to appeal the ruling but has accrued the full amount of the judgment. The remaining $0.5 million of the litigation expense was due to a contract settlement with a product manufacturer in the third quarter of 2008. We do not anticipate any additional charges related to this issue.
Other Operating Income
In 2008, other operating income of $1.0 million was recorded due to the sale of our Czech Republic subsidiary, which is now operating as a distributor of our products.
In 2007, other operating income of $2.6 million was recorded due to the sale of our Austrian subsidiary. This sale resulted from our plan to move this business to an indirect sales model.
Interest Income and Interest Expense
Interest income for 2008 decreased $2.8 million from the comparable period in 2007. The decrease in interest income was due to lower cash balances during 2008 compared to 2007.
Interest expense for 2008 increased $3.4 million from the comparable period in 2007. The increase in interest expense was due to higher debt levels in 2008 compared to 2007. Increased borrowings in 2008 were primarily used to finance our stock repurchase program and the OATSystems, Inc. acquisition.
Other Gain (Loss), net
Other gain (loss), net was a loss of $8.9 million for 2008 compared to a net gain of $0.7 million for 2007. The increase in loss for 2008 was due primarily to losses on foreign currency. The primary drivers of the increase in foreign currency loss were fluctuations in the value of the U.S. Dollar to the Euro and the Japanese Yen, as well as the Euro to the British Pound.
Income Taxes
The effective rate of tax at December 28, 2008 was 2.5%. At December 30, 2007, the effective tax rate was 17.2%. The 2008 tax rate includes a $1.2 million change in tax reserves and a net valuation allowance benefit of $2.9 million. The main components of the valuation allowance benefit was a release of $4.7 million relating to net operating losses in Brazil, a charge of $1.2 million in connection to our United Kingdom operations, and a charge of $0.8 million in connection to state net operating losses. A charge of $0.7 million was recorded related to tax audits settled in the current year. In addition, an income tax benefit was not recorded in 2008 on $58.5 million of the $59.6 million impairment as it related to non-deductible goodwill. The 2007 tax rate includes a $1.9 million change in tax reserves, a net valuation allowance benefit of $3.2 million, a $1.0 million tax benefit relating to statutory tax rate changes, and a $0.9 million tax benefit relating to the sale of our Austrian subsidiary. The two main changes to the valuation allowance in 2007 were a release of $5.4 million relating to state net operating losses and a charge of $2.7 million in connection to our United Kingdom operations. The 2007 effective tax rate was positively impacted by a reduction of valuation allowances and tax reserves of $2.0 million. In addition, the Company recorded a $1.7 million reduction in foreign tax, primarily associated with a change in tax law in Germany.
38
In 2007, we recorded an adjustment of $2.1 million to reduce deferred income tax expense, and increase earnings from continuing operations and net earnings. We have determined that this adjustment related to errors made in prior years associated with the impact of changes in statutory rates on deferred taxes. Had these errors been recorded in the proper periods, earnings from continuing operations and net earnings as reported would increase by $0.2 million in 2006 and increase by $1.9 million for years prior to 2005. We have determined that these adjustments did not have a material effect on the current and prior years’ financial statements. Without the reduction to our income tax provision our 2007 effective rate would have been 20.3% rather than 17.2%.
Earnings from Discontinued Operations, Net of Tax
There were no earnings from discontinued operations, net of tax, for 2008. Earnings from discontinued operations, net of tax, were $0.4 million in 2007. The 2007 earnings were primarily due to adjustments related to the sale in 2006 of our barcode business.
Net (Loss) Earnings
Net (loss) earnings were ($29.8) million, or ($0.76) per diluted share, for 2008 compared to $58.8 million, or $1.44 per diluted share, for 2007. The weighted average number of shares used in the diluted earnings per share computation were 39.4 million and 40.7 million for 2008 and 2007, respectively.
Fiscal 2007 compared to Fiscal 2006
Net Revenues
During 2007, revenues increased by $146.4 million, or 21.3%, from $687.8 million to $834.2 million. Foreign currency translation had a positive impact on revenues of $39.4 million for the full year of 2007.
(dollar amounts in millions)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Dollar Amount | | | Percentage | |
| | | | | | | | | | | Change | | | Change | |
| | | December 30, | | | December 31, | | | Fiscal 2007 | | | Fiscal 2007 | |
| | | 2007 | | | 2006 | | | vs. | | | vs. | |
| Year ended | | (Fiscal 2007) | | | (Fiscal 2006) | | | Fiscal 2006 | | | Fiscal 2006 | |
| |
| Net revenues: | | | | | | | | | | | | | | | | |
| Shrink Management Solutions | | $ | 478.5 | | | $ | 383.9 | | | $ | 94.6 | | | | 24.6 | % |
| Intelligent Labels | | | 259.3 | | | | 219.4 | | | | 39.9 | | | | 18.2 | |
| Retail Merchandising | | | 96.4 | | | | 84.5 | | | | 11.9 | | | | 14.1 | |
| |
| Net revenues | | $ | 834.2 | | | $ | 687.8 | | | $ | 146.4 | | | | 21.3 | % |
| |
Shrink Management Solutions
Shrink Management Solutions revenues increased by $94.6 million or 24.6% in 2007 compared to 2006. The positive impact of foreign currency translation was approximately $19.9 million. The increase in revenues was primarily due to an increase in EAS Hardware and CheckView™ revenues of $29.4 million and $30.5 million, respectively. Shrink Management Solutions revenues also benefited $11.7 million from the Alpha acquisition. EAS Hardware revenue increased $20.7 million in Europe, $5.9 million in Asia Pacific, and $3.9 million in International Americas. The increase in Europe EAS Hardware was due to large chain-wide roll-outs, primarily in France and Spain. The increase in Asia was due primarily to a large chain-wide roll-out in Australia and continued growth in our Hong Kong distribution unit. The International Americas revenue increased due to large chain-wide roll-outs, primarily in Mexico. The CCTV business improved due to a larger number of installations with existing customers in 2007 compared to 2006.
Intelligent Labels
Intelligent Labels revenues increased by $39.9 million, or 18.2%, over last year. The positive impact of foreign currency translation was approximately $11.4 million. The remaining revenue growth was primarily due to an increase in our Check-Net® business of $30.4 million, partially offset by a decrease in our Library business of $2.6 million. Check-Net® business revenue benefited $22.9 million due to the ADS acquisition and continued the strong growth of its base business during fiscal 2007. Library revenues declined due to the transition period for shifting the business strategy to our new Library Patron Services business model.
39
Retail Merchandising
Retail Merchandising revenues increased by $11.9 million, or 14.1%, in 2007 compared to 2006. The positive impact of foreign currency translation was approximately $8.0 million. The remaining increase was due primarily to increases in sales of our retail display systems in Europe of $3.1 million and Asia Pacific of $1.2 million.
Gross Profit
During 2007, gross profit increased by $54.3 million, or 18.6%, from $291.7 million to $346.0 million. The benefit of foreign currency translation on gross profit was approximately $15.4 million. Gross profit, as a percentage of net revenues, decreased from 42.4% to 41.5%.
Shrink Management Solutions
Shrink Management Solutions gross profit increased from 38.9% in 2006 to 39.8% in 2007. The increase in Shrink Management Solutions gross profit percentage was due primarily to improved margins in our EAS Hardware business, due to higher volumes which allowed us to leverage fixed field service costs. For fiscal years 2007 and 2006, field service and installation costs were 16.9% and 18.6% of Shrink Management Solutions revenue, respectively.
Intelligent Labels
Intelligent Labels gross profit decreased from 45.9% in 2006 to 42.2% in 2007. This decrease in Intelligent Labels gross profit percentage was primarily due to the increased proportion of the Check-Net® business in the segment with lower margins. Additionally, Check-Net® margins decreased from the prior year due to manufacturing inefficiencies and competitive pricing pressures, which further impacted the Intelligent Labels gross profit.
Retail Merchandising
Retail Merchandising gross profit decreased from 49.2% in 2006 to 47.9% in 2007. This decrease was due primarily to margin decreases in our retail display business due primarily to pricing pressures.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased $33.9 million, or 14.9%, from $227.0 million in 2006 to $260.9 million in 2007. Foreign currency translation increased selling, general, and administrative expenses by approximately $11.5 million. SG&A expenses generated by the recently acquired ADS operations accounted for $10.3 million of the increase over the prior year and SG&A expenses generated by the recently acquired Alpha operations accounted for $2.9 million of the increase over the prior year. In addition, in 2007, $4.4 million of SG&A expenses were recorded related to the CEO transition. The increase was also due to increased sales and marketing expenses to support our higher revenue base, which was partially offset by lower management expenses resulting from our restructuring initiatives.
Research and Development Expenses
Research and development expenses were $18.2 million, or 2.2%, of revenues in 2007 and $19.4 million, or 2.8%, in 2006.
Restructuring Expenses
Restructuring expenses were $2.7 million in 2007 compared to $7.0 million in 2006. The current and the prior year expense are detailed in the “Provisions for Restructuring” section.
Litigation Settlement
Litigation expense was $2.3 million for 2006. This was a result of the settlement of a class action suit arising from the anti-trust litigation with ID Security Systems Canada, Inc.
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Other Operating Income
In 2007, other operating income of $2.6 million was recorded due to the sale of our Austrian subsidiary. This sale resulted from our plan to move this business to an indirect sales model.
In 2006, other operating income was recorded due to the settlement of a sublease with our tenant in a building under a capital lease and the subsequent cancellation of that lease. The net impact of the sublease income and impairment of the asset was $2.0 million.
Interest Income and Interest Expense
Interest expense for 2007 increased by $0.2 million compared to 2006, primarily due to increased borrowings in 2007 related to the Alpha acquisition. Interest income in 2007 increased by $0.5 million compared to 2006, primarily due to higher monthly cash levels during 2007 compared to 2006.
Other Gain (Loss), net
Other gain (loss), net decreased in 2007 by $0.5 million compared to 2006. Other gain (loss), net was greater in 2006 primarily due to transition services from the sale of our BCS business to SATO.
Income Taxes
The effective rate of tax at December 30, 2007 was 17.2%. At December 31, 2006, the effective tax rate was 16.6%. The 2007 tax rate includes a $1.9 million change in tax reserves, a net valuation allowance benefit of $3.2 million, a $1.0 million tax benefit relating to statutory tax rate changes, and a $0.9 million tax benefit relating to the sale of our Austrian subsidiary. The two main changes to the valuation allowance was a release of $5.4 million relating to state net operating losses and a charge of $2.7 million in connection to our United Kingdom operations. The 2006 effective tax rate was positively impacted by a reduction of valuation allowances and tax reserves of $2.0 million. In addition, the Company recorded a $1.7 million reduction in foreign tax, primarily associated with a change in tax law in Germany.
In 2007, we recorded an adjustment of $2.1 million to reduce deferred income tax expense, and increase earnings from continuing operations and net earnings. We have determined that this adjustment related to errors made in prior years associated with the impact of changes in statutory rates on deferred taxes. Had these errors been recorded in the proper periods, earnings from continuing operations and net earnings as reported would increase by $0.2 million in 2006 and increase by $1.9 million for years prior to 2005. We have determined that these adjustments did not have a material effect on the current and prior years’ financial statements. Without the reduction to our income tax provision our 2007 effective rate would have been 20.3% rather than 17.2%.
Earnings from Discontinued Operations, Net of Tax
Earnings from discontinued operations, net of tax, for 2007 decreased to $0.4 million from $0.9 million in 2006. The 2006 earnings were primarily due to the $1.4 million gain on the sale of our barcode business.
Net Earnings
Net earnings were $58.8 million, or $1.44 per diluted share, in 2007, compared to net earnings of $35.9 million, or $0.89 per diluted share, in 2006. The weighted average number of shares used in the diluted earnings per share computation was 40.7 million and 40.2 million for fiscal years 2007 and 2006, respectively.
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Other Matters
Recently Adopted Accounting Standards
We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, on January 1, 2007. As a result of adoption, we recognized a charge of approximately $1.7 million to the January 1, 2007 retained earnings balance. Additionally, we reclassified $13.9 million of the unrecognized tax benefits, and interest and penalties from income taxes to other long-term liabilities on our consolidated balance sheet. As of the adoption date, we had $10.6 million of unrecognized tax benefits, all of which would affect our effective tax rate if recognized. Also as of the adoption date, we had accrued interest expense and penalties related to the unrecognized tax benefits of $3.8 million and $0.3 million, respectively.
We adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS 157) on December 31, 2007. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2 (SFAS 157-2), which deferred the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) until January 1, 2009. Accordingly, our adoption of this standard in 2008 was limited to financial assets and liabilities, which primarily affects the valuation of our derivative contracts. In October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” (FSP FAS 157-3), which clarifies the application of SFAS 157 for financial assets in a market that is not active. FSP FAS 157-3 was effective upon issuance. The adoption of FAS 157 did not have a material effect on our financial condition or results of operations. The Company does not expect the adoption of FAS 157 for non-financial assets and liabilities on December 29, 2008 to have a material impact on the Company’s consolidated results of operations and financial condition. Non-financial assets and liabilities for which we have not applied the provisions of SFAS 157 include those measured at fair value in impairment testing and those initially measured at fair value in a business combination.
We adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (SFAS 159) on December 31, 2007. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with few exceptions. SFAS 159 also establishes presentation and disclosure requirements to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. The adoption of SFAS 159 did not have an effect on our financial condition or results of operations as we did not elect this fair value option, nor is it expected to have a material impact on future periods as the election of this option for our financial instruments is expected to be limited.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with Generally Accepted Accounting Principles (GAAP). SFAS 162 directs the hierarchy to the entity, rather than the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with generally accepted accounting principles. SFAS 162 became effective on November 15, 2008. The adoption of SFAS 162 did not have a material impact on the Company’s consolidated results of operations and financial condition.
New Accounting Pronouncements and Other Standards
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141R). SFAS 141R retains the underlying concepts of SFAS 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but SFAS 141R changed the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date, until either abandoned or completed, at which point the useful lives will be determined; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS 141R is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS 141R amends SFAS No. 109, “Accounting for Income Taxes” (SFAS 109) such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS 141R would also apply the provisions of SFAS 141R. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. For the Company, SFAS 141R will be effective for business combinations occurring after December 28, 2008. Upon adoption, SFAS 141R will not have a significant impact on our financial position and results of operations; however, any business combination entered into after the adoption may significantly impact our financial position and results of operations when compared to acquisitions accounted for under existing U.S. Generally Accepted Accounting Principles (GAAP) and result in more earnings volatility and generally lower earnings due to the expensing of deal costs and restructuring costs of acquired companies. Also, since we have significant acquired deferred tax assets for which full valuation allowances were recorded at the acquisition date, SFAS 141R could significantly affect the results of operations if changes in the valuation allowances occur subsequent to adoption. As of December 28, 2008, such deferred tax valuation allowances amounted to $4.2 million. For additional discussion on deferred tax valuation allowances, refer to Note 13 of the Consolidated Financial Statements in the 2008 Form 10-K.
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In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51” (SFAS 160). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. As of December 28, 2008, our minority interest totaled $0.9 million, which was included in the long-term liabilities section of our Consolidated Balance Sheet. The Company will incorporate presentation and disclosure requirements as outlined in SFAS 160 in the Company’s Quarterly Report on Form 10-Q for the period ending March 29, 2009.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS 161). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. We will be required to provide enhanced disclosures about (a) how and why derivative instruments are used, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Certain Hedging Activities” (SFAS 133), and its related interpretations, and (c) how derivative instruments and related hedged items affect our financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will adopt this standard in the first fiscal quarter of 2009 and believes that upon adoption, there will be no material impact on the Company’s consolidated results of operations and financial condition.
In April 2008, the FASB issued Staff Position FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets” (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. The intent of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under other accounting principles generally accepted in the United States of America. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. We do not expect FSP FAS 142-3 to have a material impact on our accounting for future acquisitions of intangible assets.
In June 2008, the FASB issued Staff Position FSP EITF No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-6-1). FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform to the provisions in FSP EITF 03-6-1. Early application of FSP EITF 03-6-1 is prohibited and will be adopted by us in the first fiscal quarter of 2009. We do not expect that the adoption of FSP EITF 03-6-1 will have a material impact on our calculation of EPS.
In November 2008, the FASB ratified Staff Position FSP EITF 08-6, “Equity Method Investment Accounting Considerations,” (EITF 08-6). EITF 08-6 clarifies that the initial carrying value of an equity method investment should be determined in accordance with SFAS No. 141(R). Other-than-temporary impairment of an equity method investment should be recognized in accordance with FSP No. APB 18-1, “Accounting by an Investor for Its Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for under the Equity Method in Accordance with APB Opinion No. 18 upon a Loss of Significant Influence.” EITF 08-6 is effective on a prospective basis in fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years, and will be adopted by us in the first quarter of fiscal year 2009. The adoption of EITF 08-6 will not have a material impact on our consolidated results of operations and financial condition.
In November 2008, the FASB ratified EITF 08-7, “Accounting for Defensive Intangible Assets,” (EITF 08-7). EITF 08-7 applies to defensive assets which are acquired intangible assets which the acquirer does not intend to actively use, but intends to hold to prevent its competitors from obtaining access to the asset. EITF 08-7 clarifies that defensive intangible assets are separately identifiable and
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should be accounted for as a separate unit of accounting in accordance with SFAS No. 141(R) and SFAS No. 157, “Fair Value Measurements,” or SFAS No. 157. EITF 08-7 is effective for intangible assets acquired in fiscal years beginning on or after December 15, 2008 and will be applied by us to intangible assets acquired on or after December 29, 2008.
In November 2008, the FASB ratified EITF No. 08-8, “Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That Is Based on the Stock of an Entity’s Consolidated Subsidiary,” (EITF 08-8). EITF 08-8 clarifies whether a financial instrument for which the payoff to the counterparty is based, in whole or in part, on the stock of an entity’s consolidated subsidiary is indexed to the reporting entity’s own stock and therefore should not be precluded from qualifying for the first part of the scope exception in paragraph 11 (a) of SFAS No. 133, “ Accounting for Derivative Instruments and Hedging Activities” or from being within the scope of EITF No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and, Potentially Settled in, a Company’s Own Stock.” EITF 08-8 is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years, and will be adopted by us in the first quarter of fiscal year 2009. The adoption of EITF 08-8 will not have a material impact on our consolidated results of operations and financial condition.
In December 2008, the FASB issued FASB Staff Position (FSP) No.132 (R)-1, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (FSP 132R-1). FSP 132R-1 requires enhanced disclosures about the plan assets of a Company’s defined benefit pension and other postretirement plans. The enhanced disclosures required by this FSP are intended to provide users of financial statements with a greater understanding of: (1) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (2) the major categories of plan assets; (3) the inputs and valuation techniques used to measure the fair value of plan assets; (4) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and (5) significant concentrations of risk within plan assets. This FSP is effective for us for the fiscal year ending December 27, 2009.
In December 2008, the FASB issued FSP FAS No. 140-4 and FIN No. 46R-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” The FSP, which is effective in the first reporting period ending after December 15, 2008, requires additional disclosures concerning continuing involvement in transfers of financial assets. The FSP also requires additional disclosures concerning an enterprise’s involvement with variable interest entities and qualifying special purpose entities under certain conditions, none of which apply to the Company. This standard involves disclosures only, and did not impact our consolidated results of operations and financial condition.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Factors
Fluctuations in interest and foreign currency exchange rates affect our financial position and results of operations. We enter into forward exchange contracts denominated in foreign currency to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. We also enter into various foreign currency contracts to reduce our exposure to forecasted Euro-denominated inter-company revenues. We have historically not used financial instruments to minimize our exposure to currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries. We have used third party borrowings in foreign currencies to hedge a portion of our net investments in and cash flows derived from our foreign subsidiaries. As of December 28, 2008, all third party borrowings were in the functional currency of the subsidiary borrower. Additionally, we enter, on occasion, into interest rate swaps to reduce the risk of significant interest rate increases in connection with our floating rate debt.
We are subject to foreign currency exchange risk on our foreign currency forward exchange contracts which represent a $0.9 million liability position as of December 28, 2008, and a zero liability position as of December 30, 2007. The sensitivity analysis assumes an instantaneous 10% change in foreign currency exchange rates from year-end levels, with all other variables held constant. At December 28, 2008, a 10% strengthening of the U.S. dollar versus other currencies would result in an increase of $1.2 million in the net asset position, while a 10% weakening of the dollar versus all other currencies would result in a decrease of $1.2 million.
Foreign exchange forward contracts are used to hedge certain of our firm foreign currency cash flows. Thus, there is either an asset or cash flow exposure related to all the financial instruments in the above sensitivity analysis for which the impact of a movement in exchange rates would be in the opposite direction and substantially equal to the impact on the instruments in the analysis. There are presently no significant restrictions on the remittance of funds generated by our operations outside the U.S.
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| | |
| Item 8. | | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Index to Consolidated Financial Statements
| | | | | |
| | | 46 | |
| | | 47 | |
| | | 48 | |
| | | 49 | |
| | | 50 | |
| | | 51 | |
| | | 52-83 | |
| | | 89 | |
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of
Checkpoint Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Checkpoint Systems, Inc. and its subsidiaries at December 28, 2008 and December 30, 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 2008, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 28, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in 2007.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Annual Report on Internal Control Over Financial Reporting, management has excluded OATSystems from its assessment of internal control over financial reporting as of December 28, 2008 because they were acquired by the Company in purchase business combinations during 2008. We have also excluded OATSystems from our audit of internal control over financial reporting. OATSystems is a wholly-owned subsidiary whose total assets and total revenues represent 3.9% and 0.3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 28, 2008.
Philadelphia, Pennsylvania
February 26, 2009
46
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands)
| | | | | | | | | |
| | | December 28, | | | December 30, | |
| | | 2008 | | | 2007 | |
| |
ASSETS | | | | | | | | |
| CURRENT ASSETS: | | | | | | | | |
| Cash and cash equivalents | | $ | 132,222 | | | $ | 118,271 | |
| Marketable securities | | | — | | | | 29 | |
| Accounts receivable, net of allowance of $18,414 and $15,839 | | | 196,664 | | | | 221,875 | |
| Inventories | | | 102,122 | | | | 109,329 | |
| Other current assets | | | 41,224 | | | | 42,914 | |
| Deferred income taxes | | | 22,078 | | | | 14,492 | |
| |
| Total Current Assets | | | 494,310 | | | | 506,910 | |
| |
| REVENUE EQUIPMENT ON OPERATING LEASE, net | | | 2,040 | | | | 4,500 | |
| PROPERTY, PLANT, AND EQUIPMENT, net | | | 86,735 | | | | 88,096 | |
| GOODWILL | | | 235,532 | | | | 274,601 | |
| OTHER INTANGIBLES, net | | | 113,755 | | | | 119,294 | |
| DEFERRED INCOME TAXES | | | 36,182 | | | | 28,591 | |
| OTHER ASSETS | | | 17,162 | | | | 9,052 | |
| |
| TOTAL ASSETS | | $ | 985,716 | | | $ | 1,031,044 | |
| |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | |
| Short-term borrowings and current portion of long-term debt | | $ | 11,582 | | | $ | 3,756 | |
| Accounts payable | | | 63,872 | | | | 76,404 | |
| Accrued compensation and related taxes | | | 32,056 | | | | 38,821 | |
| Other accrued expenses | | | 54,123 | | | | 43,469 | |
| Income taxes | | | 8,066 | | | | 4,827 | |
| Unearned revenues | | | 11,005 | | | | 13,615 | |
| Restructuring reserve | | | 4,522 | | | | 4,224 | |
| Accrued pensions — current | | | 4,305 | | | | 4,337 | |
| Other current liabilities | | | 22,027 | | | | 20,401 | |
| |
| Total Current Liabilities | | | 211,558 | | | | 209,854 | |
| |
| LONG-TERM DEBT, LESS CURRENT MATURITIES | | | 133,704 | | | | 91,756 | |
| ACCRUED PENSIONS | | | 77,623 | | | | 80,549 | |
| OTHER LONG-TERM LIABILITIES | | | 47,928 | | | | 46,380 | |
| DEFERRED INCOME TAXES | | | 9,665 | | | | 13,200 | |
| MINORITY INTEREST | | | 924 | | | | 977 | |
| COMMITMENTS AND CONTINGENCIES | | | | | | | | |
| STOCKHOLDERS’ EQUITY: | | | | | | | | |
| Preferred stock, no par value, authorized 500,000 shares, none issued | | | — | | | | — | |
| Common stock, par value $.10 per share, authorized 100,000,000 shares, issued 42,747,808 and 41,837,525 | | | 4,274 | | | | 4,183 | |
| Additional capital | | | 381,498 | | | | 360,684 | |
| Retained earnings | | | 173,912 | | | | 203,717 | |
| Common stock in treasury, at cost, 4,035,912 shares and 2,035,912 shares | | | (71,520 | ) | | | (20,621 | ) |
| Accumulated other comprehensive income, net of tax | | | 16,150 | | | | 40,365 | |
| |
| TOTAL STOCKHOLDERS’ EQUITY | | | 504,314 | | | | 588,328 | |
| |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 985,716 | | | $ | 1,031,044 | |
| |
See notes to consolidated financial statements.
47
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollar amounts in thousands, except per share data)
| | | | | | | | | | | | | |
| | | December 28, | | | December 30, | | | December 31, | |
| Year ended | | 2008 | | | 2007 | | | 2006 | |
| |
| Net revenues | | $ | 917,082 | | | $ | 834,156 | | | $ | 687,775 | |
| Cost of revenues | | | 538,983 | | | | 488,184 | | | | 396,084 | |
| |
| Gross profit | | | 378,099 | | | | 345,972 | | | | 291,691 | |
| Selling, general, and administrative expenses | | | 296,935 | | | | 260,854 | | | | 226,958 | |
| Research and development | | | 22,607 | | | | 18,170 | | | | 19,417 | |
| Restructuring expenses | | | 6,442 | | | | 2,701 | | | | 7,007 | |
| Asset impairment | | | 4,510 | | | | — | | | | — | |
| Goodwill impairment | | | 59,583 | | | | — | | | | — | |
| Litigation settlement | | | 6,167 | | | | — | | | | 2,251 | |
| Other operating income | | | 968 | | | | 2,571 | | | | 2,025 | |
| |
| Operating (loss) income | | | (17,177 | ) | | | 66,818 | | | | 38,083 | |
| Interest income | | | 2,660 | | | | 5,443 | | | | 4,906 | |
| Interest expense | | | 5,768 | | | | 2,347 | | | | 2,155 | |
| Other (loss) gain, net | | | (8,924 | ) | | | 662 | | | | 1,141 | |
| |
| (Loss) earnings from continuing operations before income taxes and minority interest | | | (29,209 | ) | | | 70,576 | | | | 41,975 | |
| Income taxes expense | | | 719 | | | | 12,174 | | | | 6,987 | |
| Minority interest, net of tax | | | (123 | ) | | | (7 | ) | | | (31 | ) |
| |
| (Loss) earnings from continuing operations | | | (29,805 | ) | | | 58,409 | | | | 35,019 | |
| Earnings from discontinued operations, net of tax of $0, $351, and $1,059 | | | — | | | | 359 | | | | 903 | |
| |
| Net (loss) earnings | | $ | (29,805 | ) | | $ | 58,768 | | | $ | 35,922 | |
| |
Basic (Loss) Earnings Per Share: | | | | | | | | | | | | |
| (Loss) earnings from continuing operations | | $ | (.76 | ) | | $ | 1.46 | | | $ | .89 | |
| Earnings from discontinued operations, net of tax | | | — | | | | .01 | | | | .02 | |
| |
Basic (Loss) Earnings Per Share | | $ | (.76 | ) | | $ | 1.47 | | | $ | .91 | |
| |
Diluted (Loss) Earnings Per Share: | | | | | | | | | | | | |
| (Loss) earnings from continuing operations | | $ | (.76 | ) | | $ | 1.43 | | | $ | .87 | |
| Earnings from discontinued operations, net of tax | | | — | | | | .01 | | | | .02 | |
| |
Diluted (Loss) Earnings Per Share | | $ | (.76 | ) | | $ | 1.44 | | | $ | .89 | |
| |
See notes to consolidated financial statements.
48
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(dollar amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Other | | Total |
| | | Common Stock | | Additional | | Retained | | Treasury Stock | | Comprehensive | | Stockholders’ |
| | | Shares | | Amount | | Capital | | Earnings | | Shares | | Amount | | Income (Loss) | | Equity |
| |
| Balance, December 25, 2005 | | | 40,737 | | | $ | 4,073 | | | $ | 326,950 | | | $ | 110,736 | | | | 2,036 | | | $ | (20,621 | ) | | $ | (24,718 | ) | | $ | 396,420 | |
| Net earnings | | | | | | | | | | | | | | | 35,922 | | | | | | | | | | | | | | | | 35,922 | |
| Exercise of stock-based compensation | | | 578 | | | | 58 | | | | 8,633 | | | | | | | | | | | | | | | | | | | | 8,691 | |
| Tax benefit on stock-based compensation | | | | | | | | | | | 1,836 | | | | | | | | | | | | | | | | | | | | 1,836 | |
| Stock-based compensation expense | | | | | | | | | | | 5,710 | | | | | | | | | | | | | | | | | | | | 5,710 | |
| Deferred compensation plan | | | | | | | | | | | 2,077 | | | | | | | | | | | | | | | | | | | | 2,077 | |
| Adoption of SFAS 158, net of tax | | | | | | | | | | | | | | | | | | | | | | | | | | | (2,743 | ) | | | (2,743 | ) |
| Minimum pension liability adjustment, net of tax | | | | | | | | | | | | | | | | | | | | | | | | | | | (121 | ) | | | (121 | ) |
| Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | 25,789 | | | | 25,789 | |
| |
| Balance, December 31, 2006 | | | 41,315 | | | | 4,131 | | | | 345,206 | | | | 146,658 | | | | 2,036 | | | | (20,621 | ) | | | (1,793 | ) | | | 473,581 | |
| Net earnings | | | | | | | | | | | | | | | 58,768 | | | | | | | | | | | | | | | | 58,768 | |
| Exercise of stock-based compensation | | | 522 | | | | 52 | | | | 6,670 | | | | | | | | | | | | | | | | | | | | 6,722 | |
| Tax benefit on stock-based compensation | | | | | | | | | | | 881 | | | | | | | | | | | | | | | | | | | | 881 | |
| Stock-based compensation expense | | | | | | | | | | | 6,518 | | | | | | | | | | | | | | | | | | | | 6,518 | |
| Deferred compensation plan | | | | | | | | | | | 1,409 | | | | | | | | | | | | | | | | | | | | 1,409 | |
| Cumulative effect of adopting a change in accounting for uncertainties in income taxes (FIN 48) | | | | | | | | | | | | | | | (1,709 | ) | | | | | | | | | | | | | | | (1,709 | ) |
| Amortization of pension plan actuarial losses, net of tax | | | | | | | | | | | | | | | | | | | | | | | | | | | 130 | | | | 130 | |
| Unrealized gain adjustment on marketable securities, net of tax | | | | | | | | | | | | | | | | | | | | | | | | | | | 16 | | | | 16 | |
| Recognized gain on pension, net of tax | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,755 | | | | 6,755 | |
| Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | 35,257 | | | | 35,257 | |
| |
| Balance, December 30, 2007 | | | 41,837 | | | | 4,183 | | | | 360,684 | | | | 203,717 | | | | 2,036 | | | | (20,621 | ) | | | 40,365 | | | | 588,328 | |
| Net loss | | | | | | | | | | | | | | | (29,805 | ) | | | | | | | | | | | | | | | (29,805 | ) |
| Exercise of stock-based compensation | | | 911 | | | | 91 | | | | 8,914 | | | | | | | | | | | | | | | | | | | | 9,005 | |
| Tax benefit on stock-based compensation | | | | | | | | | | | 2,121 | | | | | | | | | | | | | | | | | | | | 2,121 | |
| Stock-based compensation expense | | | | | | | | | | | 7,096 | | | | | | | | | | | | | | | | | | | | 7,096 | |
| Deferred compensation plan | | | | | | | | | | | 2,683 | | | | | | | | | | | | | | | | | | | | 2,683 | |
| Repurchase of common stock | | | | | | | | | | | | | | | | | | | 2,000 | | | | (50,899 | ) | | | | | | | (50,899 | ) |
| Amortization of pension plan actuarial losses, net of tax | | | | | | | | | | | | | | | | | | | | | | | | | | | 72 | | | | 72 | |
| Change in realized and unrealized gains on derivative hedges, net of tax | | | | | | | | | | | | | | | | | | | | | | | | | | | 880 | | | | 880 | |
| Unrealized gain adjustment on marketable securities, net of tax | | | | | | | | | | | | | | | | | | | | | | | | | | | (16 | ) | | | (16 | ) |
| Recognized loss on pension, net of tax | | | | | | | | | | | | | | | | | | | | | | | | | | | (169 | ) | | | (169 | ) |
| Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | (24,982 | ) | | | (24,982 | ) |
| |
| Balance, December 28, 2008 | | | 42,748 | | | $ | 4,274 | | | $ | 381,498 | | | $ | 173,912 | | | | 4,036 | | | $ | (71,520 | ) | | $ | 16,150 | | | $ | 504,314 | |
| |
See notes to consolidated financial statements.
49
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(dollar amounts in thousands)
| | | | | | | | | | | | | |
| | | December 28, | | | December 30, | | | December 31, | |
| Year ended | | 2008 | | | 2007 | | | 2006 | |
| |
| Net (loss) earnings | | $ | (29,805 | ) | | $ | 58,768 | | | $ | 35,922 | |
| Amortization of pension plan actuarial losses, net of tax | | | 72 | | | | 130 | | | | — | |
| Change in realized and unrealized gains on derivative hedges, net of tax | | | 880 | | | | — | | | | — | |
| Unrealized gain adjustment on marketable securities, net of tax | | | (16 | ) | | | 16 | | | | — | |
| Recognized (loss) gain on pension, net of tax | | | (169 | ) | | | 6,755 | | | | — | |
| Minimum pension liability adjustment, net of tax | | | — | | | | — | | | | (121 | ) |
| Foreign currency translation adjustment | | | (24,982 | ) | | | 35,257 | | | | 25,789 | |
| |
| Comprehensive (loss) income | | $ | (54,020 | ) | | $ | 100,926 | | | $ | 61,590 | |
| |
See notes to consolidated financial statements.
50
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands)
| | | | | | | | | | | | | |
| | | December 28, | | | December 30, | | | December 31, | |
| Year ended | | 2008 | | | 2007 | | | 2006 | |
| |
Cash flows from operating activities: | | | | | | | | | | | | |
| Net earnings | | $ | (29,805 | ) | | $ | 58,768 | | �� | $ | 35,922 | |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 30,788 | | | | 21,059 | | | | 19,504 | |
| Deferred taxes | | | (13,716 | ) | | | (7,486 | ) | | | 281 | |
| Stock-based compensation | | | 7,096 | | | | 6,518 | | | | 5,710 | |
| Excess tax benefit on stock compensation | | | (2,229 | ) | | | (755 | ) | | | (1,685 | ) |
| Provision for losses on accounts receivable | | | 5,810 | | | | 1,846 | | | | 2,442 | |
| Gain on sublease settlement | | | — | | | | — | | | | (1,777 | ) |
| Gain on sale of discontinued operations | | | — | | | | (359 | ) | | | (1,299 | ) |
| Gain on sale of subsidiaries | | | (968 | ) | | | (2,523 | ) | | | — | |
| Loss (gain) on disposal of fixed assets | | | 276 | | | | (193 | ) | | | 262 | |
| Goodwill impairment | | | 59,583 | | | | — | | | | — | |
| Asset impairment | | | 4,510 | | | | — | | | | — | |
| (Increase) decrease in current assets, net of the effects of acquired companies: | | | | | | | | | | | | |
| Accounts receivable | | | (215 | ) | | | (34,186 | ) | | | (3,977 | ) |
| Inventories | | | 5,469 | | | | 2,186 | | | | (8,299 | ) |
| Other current assets | | | 3,920 | | | | (2,496 | ) | | | 6,207 | |
| Increase (decrease) in current liabilities, net of the effects of acquired companies: | | | | | | | | | | | | |
| Accounts payable | | | (12,278 | ) | | | 17,958 | | | | (18,358 | ) |
| Income taxes | | | 5,951 | | | | (9,144 | ) | | | 4,904 | |
| Unearned revenues | | | (3,208 | ) | | | 4,229 | | | | (3,930 | ) |
| Restructuring reserve | | | 546 | | | | (2,958 | ) | | | (5,668 | ) |
| Other current and accrued liabilities | | | 15,676 | | | | 14,507 | | | | (7,853 | ) |
| |
| Net cash provided by operating activities | | | 77,206 | | | | 66,971 | | | | 22,386 | |
| |
Cash flows from investing activities: | | | | | | | | | | | | |
| Acquisition of property, plant, and equipment | | | (15,217 | ) | | | (13,363 | ) | | | (11,520 | ) |
| Net cash (outflow) proceeds from the sale of discontinued operations | | | — | | | | (2,159 | ) | | | 26,904 | |
| Acquisitions of businesses, net of cash acquired | | | (39,629 | ) | | | (94,522 | ) | | | (7,353 | ) |
| Decrease in restricted cash | | | — | | | | 2,121 | | | | — | |
| Other investing activities | | | 142 | | | | 1,772 | | | | (68 | ) |
| |
| Net cash (used in) provided by investing activities | | | (54,704 | ) | | | (106,151 | ) | | | 7,963 | |
| |
Cash flows from financing activities: | | | | | | | | | | | | |
| Proceeds from stock issuances | | | 9,005 | | | | 7,174 | | | | 8,691 | |
| Excess tax benefit on stock compensation | | | 2,229 | | | | 755 | | | | 1,685 | |
| Proceeds of short-term debt | | | 3,582 | | | | 2,899 | | | | 14,200 | |
| Payment of short-term debt | | | (3,596 | ) | | | (8,950 | ) | | | (9,873 | ) |
| Net change in factoring and bank overdrafts | | | — | | | | — | | | | (3,293 | ) |
| Proceeds of long-term debt | | | 105,898 | | | | 6,177 | | | | — | |
| Payment of long-term debt | | | (65,813 | ) | | | (891 | ) | | | (18,355 | ) |
| Payment of notes payable | | | (4,866 | ) | | | — | | | | — | |
| Purchase of treasury stock | | | (50,899 | ) | | | — | | | | — | |
| |
| Net cash (used in) provided by financing activities | | | (4,460 | ) | | | 7,164 | | | | (6,945 | ) |
| |
| Effect of foreign currency rate fluctuations on cash and cash equivalents | | | (4,091 | ) | | | 6,893 | | | | 6,767 | |
| |
| Net increase (decrease) in cash and cash equivalents | | | 13,951 | | | | (25,123 | ) | | | 30,171 | |
| Cash and cash equivalents: | | | | | | | | | | | | |
| Beginning of year | | | 118,271 | | | | 143,394 | | | | 113,223 | |
| |
| End of year | | $ | 132,222 | | | $ | 118,271 | | | $ | 143,394 | |
| |
See notes to consolidated financial statements.
51
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
We are a multinational manufacturer and marketer of identification, tracking, security and merchandising solutions for the retail industry. We provide technology-driven integrated supply chain solutions to brand, track, and secure goods for retailers and consumer product manufacturers worldwide. We are a leading provider of and earn revenues primarily from the sale of electronic article surveillance (EAS), closed-circuit television (CCTV), custom tags and labels (Check-Net®), hand-held labeling systems (HLS), retail merchandising systems (RMS), and radio frequency identification (RFID) systems. Applications of these products include retail security, automatic identification, and pricing and promotional labels and signage. Operating directly in 30 countries, we have a global network of subsidiaries and distributors, and provide customer service and technical support around the world.
Out of Period Adjustments
During the fourth quarter of 2008, we identified an error in our financial statements related to fiscal year 2006. This error related to the accounting for a building impairment in France. We corrected the error during the fourth quarter of 2008, which had the effect of increasing asset impairment expense $1.1 million and reducing net income by $0.8 million. This prior period error is not material to the financial results for previously issued annual financial statements or previously issued interim financial data prior to fiscal 2008 as well as for the twelve months ended December 28, 2008. As a result, we have not restated our previously issued annual financial statements or previously issued interim financial data.
During the first quarter of 2008, we identified errors in our financial statements for the fiscal years ended 1999 through fiscal year 2007. These errors primarily related to the accounting for a deferred compensation arrangement. We incorrectly accounted for a deferred payment arrangement to a former executive of the Company, these deferred payments should have been appropriately accounted for in prior periods. We corrected these errors during the first quarter of 2008, which had the effect of increasing selling, general and administrative expenses by $1.4 million and reducing net income by $0.8 million. These prior period errors individually and in the aggregate are not material to the financial results for previously issued annual financial statements or previously issued interim financial data prior to fiscal 2008 as well as the twelve months ended December 28, 2008. As a result, we have not restated our previously issued annual financial statements or previously issued interim financial data.
In 2007, we recorded an adjustment of $2.1 million to reduce deferred income tax expense, and increase earnings from continuing operations and net earnings. We have determined that this adjustment related to errors made in prior years associated with the impact of changes in statutory rates on deferred taxes. Had these errors been recorded in the proper periods, earnings from continuing operations and net earnings as reported would increase by $0.2 million in 2006 and increase by $1.9 million for years prior to 2005. We have determined that these adjustments did not have a material effect on the current and prior years’ financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Checkpoint Systems, Inc. and its majority-owned subsidiaries (Company). All inter-company transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fiscal Year
Our fiscal year is the 52 or 53 week period ending the last Sunday of December. References to 2008, 2007, and 2006, are for the 52 weeks ended December 28, 2008, 52 weeks ended December 30, 2007, and for the 53 weeks ended December 31, 2006.
52
Reclassifications
Certain reclassifications have been made to the 2007 financials statements and related footnotes to conform to the current year presentation.
Cash and Cash Equivalents
Cash in excess of operating requirements is invested in short-term, income-producing instruments or used to pay down debt. Cash equivalents include commercial paper and other securities with original maturities of 90 days or less at the time of purchase. Book value approximates fair value because of the short maturity of those instruments.
Accounts Receivable
Accounts receivables are recorded at net realizable values. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These allowances are based on specific facts and circumstances surrounding individual customers as well as our historical experience. Provisions for the losses on receivables are charged to income to maintain the allowance at a level considered adequate to cover losses. Receivables are charged off against the reserve when they are deemed uncollectible.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market. A provision is made to reduce excess or obsolete inventory to its net realizable value.
Revenue Equipment on Operating Lease
The cost of the equipment leased to customers under operating leases is depreciated on a straight-line basis over the lesser of the length of the contract or estimated useful life of the asset, which is usually between three and five years.
Property, Plant, and Equipment
Property, plant, and equipment is carried at cost less accumulated depreciation. Maintenance, repairs, and minor renewals are expensed as incurred. Additions, improvements, and major renewals are capitalized. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets. Assets subject to capital leases are depreciated over the lesser of the estimated useful life of the asset or length of the contract. Buildings, equipment rented to customers, and leased equipment on capitalized leases use the following estimated useful lives of fifteen to thirty years, three to five years, and five years, respectively. Machinery and equipment estimated useful lives range from three to ten years. Leasehold improvement useful lives are the lesser of the minimum lease term or the useful life of the item. The cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is included in income.
We review our property, plant, and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If it is determined that an impairment, based on expected future undiscounted cash flows, exists, then the loss is recognized on the consolidated statements of operations. The amount of the impairment is the excess of the carrying amount of the impaired asset over its fair value.
Internal-Use Software
Included in fixed assets is the capitalized cost of internal-use software. As required by Statement of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” we capitalize costs incurred during the application development stage of internal-use software and amortize these costs over their estimated useful lives, which generally range from three to five years. Costs incurred related to design or maintenance of internal-use software are expensed as incurred.
Goodwill
Goodwill is carried at cost and is not amortized. We test goodwill for impairment on an annual basis as of fiscal month end October of each fiscal year, relying on a number of factors including operating results, business plans and anticipated future cash flows. Company management uses its judgment in assessing whether goodwill has become impaired between annual impairment tests. Reporting units are primarily determined as the geographic areas comprising the Company’s business segments, except in situations when aggregation of the reporting units is appropriate. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, then the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. We perform our annual assessment as of fiscal month end October each fiscal year.
53
The fair value of our reporting units is dependent upon our estimate of future discounted cash flows and other factors. Our estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. Estimated future cash flows are adjusted by an appropriate discount rate derived from our market capitalization plus a suitable control premium at the date of evaluation. The financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital that we use to determine our discount rate and through our stock price that we use to determine our market capitalization. Therefore, changes in the stock price may also affect the amount of impairment recorded. Market capitalization is determined by multiplying the shares outstanding on the assessment date by the average market price of our common stock over a 30-day period before each assessment date. We use this 30-day duration to consider inherent market fluctuations that may affect any individual closing price. We believe that our market capitalization alone does not fully capture the fair value of our business as a whole, or the substantial value that an acquirer would obtain from its ability to obtain control of our business. As such, in determining fair value, we add a control premium to our market capitalization. To estimate the control premium, we considered our unique competitive advantages that would likely provide synergies to a market participant. In addition, we considered external market factors which we believe contributed to the decline and volatility in our stock price that did not reflect our underlying fair value. Refer to Note 5.
Other Intangibles
Indefinite-lived intangible assets are carried at cost and are not amortized, but are subject to tests for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
Definite-lived intangibles are amortized on a straight-line basis over their useful lives (or legal lives if shorter). We review our other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
If it is determined that an impairment, based on expected future cash flows, exists, then the loss is recognized on the consolidated statements of operations. The amount of the impairment is the excess of the carrying amount of the impaired asset over the fair value of the asset. The fair value represents expected future cash flows from the use of the assets, discounted at the rate used to evaluate potential investments. Refer to Note 5.
Other Assets
Included in other assets are $11.5 million and $1.1 million of net long-term customer-based receivables at December 28, 2008 and December 30, 2007, respectively.
Deferred Financing Costs
Financing costs are capitalized and amortized to interest expense over the life of the debt. The net deferred financing costs at December 28, 2008 and December 30, 2007 were $0.2 million and $0.4 million, respectively. The financing cost amortization expense was $0.2 million, $0.2 million, and $0.2 million, for 2008, 2007, and 2006, respectively.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which states that revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price to the buyer is fixed or determinable; and collectability is reasonably assured. For arrangements with multiple elements, we determine the fair value of each element and then allocate the total arrangement consideration among the separate elements. We recognize revenue when installation is complete or other post-shipment obligations have been satisfied. Equipment leased to customers under sales-type leases is accounted for as the equivalent of a sale. The present value of such lease revenues is recorded as net revenues, and the related cost of the equipment is charged to cost of revenues. The deferred finance charges applicable to these leases are recognized over the terms of the leases. Rental revenue from equipment under operating leases is recognized over the term of the lease. Installation revenue from EAS equipment is recognized when the systems are installed. Service revenue is recognized, for service contracts, on a straight-line basis over the contractual period, and, for non-contract work, as services are performed. Unearned revenue is recorded when payments are received in advance of performing our service obligations and is recognized over the service period.
54
Software license fee revenues are recognized in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition”, as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions.” Revenues from software license agreements are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant vendor obligations are remaining to be fulfilled, the fee is fixed and determinable, and collection is probable. Revenue from software contracts that require significant production, modification, customization, or implementation is recognized in accordance with SOP 81-1, “Accounting For Performance of Construction-Type and Certain Production-Type Contracts”. Revenue from these arrangements for both licenses and professional services are recognized together using the percentage of completion method based upon the ratio of labor incurred to total estimated labor to complete each contract. In instances where there is a term license combined with services, revenue is recognized ratably over the term.
We record estimated reductions to revenue for customer incentive offerings, including volume-based incentives and rebates. We record revenues net of an allowance for estimated return activities. Return activity was immaterial to revenue and results of operations for all periods presented.
Shipping and Handling Fees and Costs
Shipping and handling fees are accounted for in net revenues and shipping and handling costs in cost of revenues.
Cost of Revenues
The principal elements of cost of revenues are product cost, field service and installation cost, freight, and product royalties paid to third parties.
Warranty Reserves
We provide product warranties for our various products. These warranties vary in length depending on product and geographical region. We establish our warranty reserves based on historical data of warranty transactions. The following table sets forth the movement in the warranty reserve:
| | | | | | | | | |
| | | December 28, | | | December 30, | |
| (dollar amounts in thousands) | | 2008 | | | 2007 | |
| |
| Balance at beginning of year | | $ | 8,108 | | | $ | 5,499 | |
| Accruals for warranties issued | | | 6,388 | | | | 7,929 | |
| Settlement made | | | (5,882 | ) | | | (6,155 | ) |
| Acquisitions/(Divestitures) | | | 89 | | | | 309 | |
| Foreign currency translation adjustment | | | (300 | ) | | | 526 | |
| |
| Balance at end of year | | $ | 8,403 | | | $ | 8,108 | |
| |
Royalty Expense
Royalty expenses related to security products approximated $3.7 million, $3.7 million, and $3.7 million, in 2008, 2007, and 2006, respectively. These expenses are included as part of cost of revenues.
Research and Development Costs
Research and development costs are expensed as incurred and consist of development work associated with the Company’s existing and potential products. The Company’s research and development expenses relate primarily to payroll costs for engineering personnel, costs associated with various projects, including testing, developing prototypes and related expenses.
Stock Options
We recognize stock-based compensation expense for all share-based payment awards granted after December 25, 2005 and granted prior to but not yet vested as of December 25, 2005, in accordance with Statement of Financial Accounting Standards (SFAS) 123R “Share-Based Payment” (“SFAS 123R”). Under the fair value recognition provisions of SFAS 123R, we recognize share-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest. For awards granted after the SFAS 123R adoption date we recognize the expense on a straight-line basis over the requisite service period of the award. For non-vested awards granted prior to the adoption date, we continue to use the ratable expense allocation method. Prior to SFAS 123R adoption, we accounted for share-based payments under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and accordingly, generally recognized compensation expense only when we granted options with a discounted exercise price.
55
In light of new accounting guidance under SFAS 123R, the Company reevaluated its assumptions used in estimating the fair value of employee options granted. As part of its SFAS 123R adoption, the Company also examined its historical pattern of option exercises in an effort to determine if there were any discernable activity patterns based on certain employee populations. From this analysis, the Company identified that there were no discernable populations. The Company used the Black-Scholes option pricing model to value the options. The table below presents the weighted average expected life in years. The expected life computation is based on historical exercise patterns and post-vesting termination behavior. Volatility is determined using changes in historical stock prices. The interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.
The fair value of share-based payment units was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values as follows:
| | | | | | | | | | | | | |
| | | Year Ended, | | | Year Ended, | | | Year Ended, | |
| | | December 28, | | | December 30, | | | December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| |
| Weighted average fair value of grants | | $ | 8.04 | | | $ | 8.88 | | | $ | 11.47 | |
| Valuation assumptions: | | | | | | | | | | | | |
| Expected dividend yield | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % |
| Expected volatility | | | .3883 | | | | .3659 | | | | .4135 | |
| Expected life (in years) | | | 4.84 | | | | 4.56 | | | | 4.54 | |
| Risk-free interest rate | | | 2.450 | % | | | 4.264 | % | | | 4.55 - 5.07 | % |
See Note 8 to the Consolidated Condensed Financial Statements for a further discussion on stock-based compensation.
Income Taxes
Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and the tax basis of assets and liabilities, using enacted statutory tax rates in effect at the balance sheet date. Changes in enacted tax rates are reflected in the tax provision as they occur. A valuation allowance is recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted.
On January 1, 2007, we adopted FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109 “Accounting for Income Taxes.” FIN 48 provides guidance on recognizing, measuring, presenting and disclosing in the financial statements uncertain tax positions that a company has taken or expects to take on a tax return. See Note 13 for further information related to FIN 48.
Taxes and Value Added Collected from Customers
Sales and value added taxes collected from customers are excluded from revenues. The obligation is included in other current liabilities until the taxes are remitted to the appropriate taxing authorities.
Foreign Currency Translation and Transactions
Our balance sheet accounts of foreign subsidiaries are translated into U.S. dollars at the rate of exchange in effect at the balance sheet dates. Revenues, costs, and expenses of our foreign subsidiaries are translated into U.S. dollars at the year-to-date average rate of exchange. The resulting translation adjustments are recorded as a separate component of shareholders’ equity. Gains or losses on certain long-term inter-company transactions are excluded from the net earnings (loss) and accumulated in the cumulative translation adjustment as a separate component of consolidated stockholders’ equity. All other foreign currency transaction gains and losses are included in net earnings (loss).
Accounting for Hedging Activities
We enter into certain foreign exchange forward contracts in order to hedge anticipated rate fluctuations in Western Europe, Canada, Japan and Australia. Transaction gains or losses resulting from these contracts are recognized at the end of each reporting period. We use the fair value method of accounting, recording realized and unrealized gains and losses on these contracts. These gains and losses are included in other gain (loss), net on our consolidated statements of operations.
We enter into various foreign currency contracts to reduce our exposure to forecasted Euro-denominated inter-company revenues. These cash flow hedging instruments are marked to market and the changes are recorded in other comprehensive income. Amounts recorded in other comprehensive income are recognized in cost of goods sold as the inventory is sold to external parties. Any hedge ineffectiveness is charged to other gain (loss), net on our consolidated statements of operations.
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We enter, on occasion, into interest rate swaps to reduce the risk of significant interest rate increases in connection with floating rate debt. This cash flow hedging instrument is marked to market and the changes are recorded in other comprehensive income. Any hedge ineffectiveness is charged to interest expense.
See Note 15 for further information.
Recently Adopted Accounting Standards
We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, on January 1, 2007. As a result of adoption, we recognized a charge of approximately $1.7 million to the January 1, 2007 retained earnings balance. Additionally, we reclassified $13.9 million of the unrecognized tax benefits, and interest and penalties from income taxes to other long-term liabilities on our consolidated balance sheet. As of the adoption date, we had $10.6 million of unrecognized tax benefits, all of which would affect our effective tax rate if recognized. Also as of the adoption date, we had accrued interest expense and penalties related to the unrecognized tax benefits of $3.8 million and $0.3 million, respectively.
We adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS 157) on December 31, 2007. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2 (SFAS 157-2), which deferred the effective date of FAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) until January 1, 2009. Accordingly, our adoption of this standard in 2008 was limited to financial assets and liabilities, which primarily affects the valuation of our derivative contracts. In October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” (FSP FAS 157-3), which clarifies the application of SFAS No. 157 for financial assets in a market that is not active. FSP FAS 157-3 was effective upon issuance. The adoption of FAS 157 did not have a material effect on our financial condition or results of operations The Company does not expect the adoption of FAS 157 for non-financial assets and liabilities on December 29, 2008 to have a material impact on the Company’s consolidated results of operations and financial condition. Non-financial assets and liabilities for which we have not applied the provisions of FAS 157 include those measured at fair value in impairment testing and those initially measured at fair value in a business combination.
We adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (SFAS 159) on December 31, 2007. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with few exceptions. SFAS 159 also establishes presentation and disclosure requirements to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. The adoption of FAS 159 did not have an effect on our financial condition or results of operations as we did not elect this fair value option, nor is it expected to have a material impact on future periods as the election of this option for our financial instruments is expected to be limited.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS 162 directs the hierarchy to the entity, rather than the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with generally accepted accounting principles. SFAS 162 became effective on November 15, 2008. The adoption of SFAS 162 did not have a material impact on the Company’s consolidated results of operations and financial condition.
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New Accounting Pronouncements and Other Standards
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141R). SFAS 141R retains the underlying concepts of SFAS 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting but SFAS 141R changed the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date, until either abandoned or completed, at which point the useful lives will be determined; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS 141R is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS 141R amends SFAS No. 109, “Accounting for Income Taxes” (SFAS 109) such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS 141R would also apply the provisions of SFAS 141R. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. For the Company, SFAS No. 141R will be effective for business combinations occurring after December 28, 2008. Upon adoption, SFAS 141R will not have a significant impact on our financial position and results of operations; however, any business combination entered into after the adoption may significantly impact our financial position and results of operations when compared to acquisitions accounted for under existing U.S. Generally Accepted Accounting Principles (GAAP) and result in more earnings volatility and generally lower earnings due to the expensing of deal costs and restructuring costs of acquired companies. Also, since we have significant acquired deferred tax assets for which full valuation allowances were recorded at the acquisition date, SFAS 141R could significantly affect the results of operations if changes in the valuation allowances occur subsequent to adoption. As of December 28, 2008, such deferred tax valuation allowances amounted to $4.2 million. For additional discussion on deferred tax valuation allowances, refer to Note 13 to the Consolidated Financial Statements in the 2008 Form 10-K.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51” (SFAS 160). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. As of December 28, 2008, our minority interest totaled $0.9 million, which was included in the long-term liabilities section of our Consolidated Balance Sheet. The Company will incorporate presentation and disclosure requirements as outlined in SFAS 160 in the Company’s Quarterly Report on Form 10-Q for the period ending March 29, 2009.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. We will be required to provide enhanced disclosures about (a) how and why derivative instruments are used, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Certain Hedging Activities (SFAS 133), and its related interpretations, and (c) how derivative instruments and related hedged items affect our financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will adopt this standard in the first fiscal quarter of 2009 and believes that upon adoption, there will be no material impact on the Company’s consolidated results of operations and financial condition.
In April 2008, the FASB issued Staff Position FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets” (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. The intent of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under other accounting principles generally accepted in the United States of America. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. We do not expect FSP FAS 142-3 to have a material impact on our accounting for future acquisitions of intangible assets.
In June 2008, the FASB issued Staff Position FSP EITF No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-6-1). FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform to the provisions in FSP EITF 03-6-1. Early application of FSP EITF 03-6-1 is prohibited and will be adopted by us in the first fiscal quarter of 2009. We do not expect that the adoption of FSP EITF 03-6-1 will have a material impact on our calculation of EPS.
In November 2008, the FASB ratified Staff Position FSP EITF 08-6, “Equity Method Investment Accounting Considerations,” (EITF 08-6). EITF 08-6 clarifies that the initial carrying value of an equity method investment should be determined in accordance with SFAS No. 141(R). Other-than-temporary impairment of an equity method investment should be recognized in accordance with FSP No. APB 18-1, “Accounting by an Investor for Its Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for under the Equity Method in Accordance with APB Opinion No. 18 upon a Loss of Significant Influence.”
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EITF 08-6 is effective on a prospective basis in fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years, and will be adopted by us in the first quarter of fiscal year 2009. The adoption of EITF 08-6 will not have a material impact on our consolidated results of operations and financial condition.
In November 2008, the FASB ratified EITF 08-7, “Accounting for Defensive Intangible Assets,” (EITF 08-7). EITF 08-7 applies to defensive assets which are acquired intangible assets which the acquirer does not intend to actively use, but intends to hold to prevent its competitors from obtaining access to the asset. EITF 08-7 clarifies that defensive intangible assets are separately identifiable and should be accounted for as a separate unit of accounting in accordance with SFAS No. 141(R) and SFAS No. 157, “Fair Value Measurements,” or SFAS No. 157. EITF 08-7 is effective for intangible assets acquired in fiscal years beginning on or after December 15, 2008 and will be applied by us to intangible assets acquired on or after December 29, 2008.
In November 2008, the FASB ratified EITF No. 08-8, “Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That Is Based on the Stock of an Entity’s Consolidated Subsidiary,” (EITF 08-8). EITF 08-8 clarifies whether a financial instrument for which the payoff to the counterparty is based, in whole or in part, on the stock of an entity’s consolidated subsidiary is indexed to the reporting entity’s own stock and therefore should not be precluded from qualifying for the first part of the scope exception in paragraph 11 (a) of SFAS No. 133, “ Accounting for Derivative Instruments and Hedging Activities” or from being within the scope of EITF No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and, Potentially Settled in, a Company’s Own Stock.” EITF 08-8 is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years, and will be adopted by us in the first quarter of fiscal year 2009. The adoption of EITF 08-8 will not have a material impact on our consolidated results of operations and financial condition.
In December 2008, the FASB issued FASB Staff Position (FSP) No.132 (R)-1, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (FSP 132R-1). FSP 132R-1 requires enhanced disclosures about the plan assets of a Company’s defined benefit pension and other postretirement plans. The enhanced disclosures required by this FSP are intended to provide users of financial statements with a greater understanding of: (1) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (2) the major categories of plan assets; (3) the inputs and valuation techniques used to measure the fair value of plan assets; (4) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and (5) significant concentrations of risk within plan assets. This FSP is effective for us for the fiscal year ending December 27, 2009.
In December 2008, the FASB issued FSP FAS No. 140-4 and FIN No. 46R-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” The FSP, which is effective in the first reporting period ending after December 15, 2008, requires additional disclosures concerning transfers of financial assets. The FSP also requires additional disclosures concerning an enterprise’s involvement with variable interest entities and qualifying special purpose entities under certain conditions, none of which apply to the Company. The Company will include additional required disclosures concerning transfers of financial assets, as applicable, in its interim consolidated financial statements for the period ending March 29, 2009.
Note 2. ACQUISITIONS
On November 1, 2007, Checkpoint Systems, Inc. and one of its direct subsidiaries (collectively, the “Company”) and Alpha Security Products, Inc. and one of its direct subsidiaries (collectively, “the Seller”) entered into an Asset Purchase Agreement and a Dutch Assets Sale and Transfer Agreement (collectively, the “Agreements”) under which the Company purchased all of the assets of Alpha’s S3 business (the “Acquisition”) for approximately $142 million, subject to a post-closing working capital adjustment, plus additional performance-based contingent payments up to a maximum of $8 million plus interest thereon. The purchase price was funded by $67 million of cash and $75 million of borrowings under our senior unsecured credit facility. Subject to the Agreements, contingent payments were earned if the revenue derived from the S3 business exceeded $70 million during the period from December 31, 2007, until December 28, 2008. In the event that the revenue derived from the S3 business exceeded $83 million during such period, the Seller was entitled to a maximum payment of $8 million. During the fourth fiscal quarter ended December 28, 2008, revenues for the S3 business exceeded the minimum contingency payment thresholds. An accrual of $6.8 million is recognized at December 28, 2008 for the contingent payment, with a corresponding increase to goodwill recorded on the acquisition.
The S3 business includes the development, manufacture, distribution, and sale of retail store applied security products requiring removal by store personnel at the cash register.
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The purchase price allocation as of the date of acquisition was as follows:
| | | | | |
| | | November 1, | |
| (dollar amounts in thousands) | | 2007 | |
| |
| Cash | | $ | 67,000 | |
| Long-term debt | | | 75,000 | |
| Contingent payment | | | 6,796 | |
| |
| Purchase price (1) | | | 148,796 | |
| |
| Fair value of net assets acquired: | | | | |
| Accounts receivable | | | 6,986 | |
| Inventories | | | 6,882 | |
| Other current assets | | | 73 | |
| Property, plant, and equipment | | | 9,148 | |
| Intangible assets (2) | | | 71,053 | |
| Accounts payable | | | (2,526 | ) |
| Accrued compensation and related taxes | | | (810 | ) |
| Other accrued expenses | | | (799 | ) |
| |
| Fair value of the net assets acquired | | | 90,007 | |
| Excess cost over net assets acquired | | | 58,789 | |
| Adjustment to the realization of deferred tax assets for Checkpoint | | | (59 | ) |
| Estimated acquisition costs | | | 648 | |
| |
| Goodwill (3) | | $ | 59,378 | |
| |
Notes:
| (1) | | Represents the cash, long-term debt, and contingent payment used to finance the acquisition. |
| |
| (2) | | Intangible assets consist of customer relationships ($33.4 million), trade names ($19.4 million), and developed technologies ($18.3 million). The weighted-average useful lives for the customer relationships and developed technologies are approximately 10 years. The intangible assets related to the trade name are deemed to have an indefinite life. The amortization of definite life intangibles are calculated on a straight-line basis. |
| |
| (3) | | Goodwill of $59.4 million was assigned to the Shrink Management Solutions reporting segment. Of that total amount, $59.4 million is expected to be deductible for tax purposes over a 15 year period. |
The allocation of the purchase price for the Alpha Acquisition, which primarily used a discounted cash flow approach with respect to identified intangible assets and a combination of the cost and market approaches with respect to property, plant and equipment, was finalized during fiscal year 2008. The discounted cash flow approach was based upon management’s estimated future cash flows from the acquired assets and liabilities and utilized a discount rate consistent with the inherent risk associated with the acquired assets and liabilities. The results of the assets acquired and liabilities assumed in connection with the Alpha Acquisition have been included in the consolidated statement of operations since the closing of the transaction on November 1, 2007, as part of the SMS segment.
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The following schedule presents 2007 and 2006 supplemental unaudited pro forma information as if the Alpha Acquisition had occurred on December 26, 2005. The unaudited pro forma information is presented based on information available, is intended for informational purposes only and is not necessarily indicative of and does not purport to represent what Checkpoint’s future financial condition or operating results will be after giving effect to the Alpha Acquisition and does not reflect actions that may be undertaken by management in integrating these businesses. In addition, this information does not reflect financial and operating benefits Checkpoint expects to realize as a result of the acquisition.
| | | | | | | | | |
| | | Pro Forma | |
| | | December 30, | | | December 31, | |
| Year ended | | 2007 | | | 2006 | |
| |
| | | (Unaudited) | | | (Unaudited) | |
| Net revenues | | $ | 880,790 | | | $ | 739,033 | |
| Earnings from continuing operations | | | 58,225 | | | | 34,920 | |
| Earnings from discontinued operations, net of tax | | | 359 | | | | 903 | |
| |
| Net earnings | | $ | 58,584 | | | $ | 35,823 | |
| |
Basic Earnings Per Share: | | | | | | | | |
| Earnings from continuing operations | | $ | 1.46 | | | $ | .89 | |
| Earnings from discontinued operations, net of tax | | | .01 | | | | .02 | |
| |
Basic Earnings Per Share | | $ | 1.47 | | | $ | .91 | |
| |
Diluted Earnings Per Share: | | | | | | | | |
| Earnings from continuing operations | | $ | 1.43 | | | $ | .87 | |
| Earnings from discontinued operations, net of tax | | | .01 | | | | .02 | |
| |
Diluted Earnings Per Share | | $ | 1.44 | | | $ | .89 | |
| |
Other Acquisitions in Fiscal 2008
In June 2008, the Company purchased the business of OATSystems, Inc., a privately held company, for approximately $37.2 million, net of cash acquired of $0.9 million, and including the assumption of $3.2 million of OATSystems, Inc. debt. The transaction was paid in cash. Additionally, we acquired $1.3 million in liabilities.
The financial statements reflect the preliminary allocations of the OATSystems, Inc. purchase price based on estimated fair values at the date of acquisition. This allocation has resulted in acquired goodwill of $22.8 million, which is not tax deductible. We also acquired intangibles of $6.1 million consisting of a trade name and proprietary technologies. The trade name is an indefinite-lived intangible asset while the proprietary technologies are finite-lived intangible assets that have a useful life of 4 years. The results from the acquisition date through
December 28, 2008 are included in the Shrink Management Solutions segment and were not material to the consolidated financial statements. The allocation of the purchase price is expected to be completed during the first half of fiscal year 2009.
In January 2008, the Company purchased the business of Security Corporation, Inc., a privately held company, for $7.9 million plus $1.0 million of liabilities acquired. The transaction was paid in cash. The financial statements reflect the final allocation of the purchase price based on estimated fair values at the date of acquisition. This allocation has resulted in acquired goodwill of $1.3 million, which is deductible for tax purposes. We also acquired intangibles of $5.2 million related to customer relationships with a useful life of 10 years. The results from the acquisition date through December 28, 2008 are included in the Shrink Management Solutions segment and were not material to the consolidated financial statements.
Pro forma results of operations have not been presented individually or in the aggregate for these acquisitions, described in “Other Acquisitions in Fiscal 2008”, because the effects of these acquisitions were not material to our consolidated financial statements.
Other Acquisitions in Fiscal 2007
In November 2007, we purchased SIDEP, a provider of Radio Frequency (RF) Electronic Article Surveillance (EAS) products. Upon closing, we also acquired the remaining minority interests in a SIDEP subsidiary, Shanghai Asialco Electronics Co., Ltd. (Asialco), a China based manufacturer of RF-EAS labels. The total purchase price for these acquisitions was $27.9 million, net of cash acquired. The purchase agreement was structured with deferred payments to the minority interest owners of Asialco of $9.3 million. These payments will be paid over a three-year period from the date of acquisition and were recorded as a liability on the date of acquisition. The financial statements reflect the preliminary allocations of the purchase price based on estimated fair values at the date of acquisition. This allocation has resulted in acquired goodwill of $14.0 million, which is non-deductible for tax purposes. Intangible assets included in this acquisition were $10.7 million. The intangible assets were composed of customer lists ($5.2 million), non-compete agreement ($3.8 million), trademarks ($1.1 million), and technology ($0.6 million). The useful lives were 8 to 13 years for customer lists, 3 years for the non-compete agreement, indefinite for trademarks, and 3 years for technology. The allocation of the purchase price was finalized during fiscal year 2008. The results from the acquisition date through December 30, 2007 are included in the Shrink Management Solutions segment and Intelligent Labels segment and were not material to the consolidated financial statements.
During 2008, we recorded working capital adjustments for the SIDEP acquisition which increased goodwill by $1.8 million. The working capital adjustments were primarily related to income tax adjustments. We also paid $4.9 million to the minority interest owners of Asialco as part of the deferred payment arrangement established in the SIDEP purchase agreement.
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In May 2007, the Company purchased the business of SSE Southeast, LLC, for $5.1 million plus $1.0 million of liabilities acquired. The transaction was paid in cash. The financial statements reflect the final allocations of the purchase price based on estimated fair values at the date of acquisition. This allocation has resulted in acquired goodwill of $1.8 million, which is deductible for tax purposes. We also acquired intangibles of $2.7 million related to customer lists with a useful life of 9 years. The results from the acquisition date through December 30, 2007 are included in the Shrink Management Solutions segment and were not material to the consolidated financial statements. The purchase agreement has a working capital adjustment, which was settled during 2008.
In January 2007, the Company purchased the business of Security Systems Technology, Inc., a privately held company, for $0.8 million plus $0.3 million of liabilities acquired. The transaction was paid in cash. The financial statements reflect the final allocation of the purchase price based on estimated fair values at the date of acquisition. This allocation has resulted in acquired goodwill of $0.8 million, which is deductible for tax purposes. We also acquired intangibles of $0.2 million related to customer lists with a useful life of 9 years. The results from the acquisition date through December 30, 2007 are included in the Shrink Management Solutions segment and were not material to the consolidated financial statements.
Pro forma results of operations have not been presented individually or in the aggregate for these acquisitions, described in “Other Acquisitions in Fiscal 2007”, because the effects of these acquisitions were not material to our consolidated financial statements.
Other Acquisitions in Fiscal 2006
In November 2006, the Company purchased ADS Worldwide (ADS), a privately held company, for $7.4 million, net of cash acquired. The transaction was paid in cash. The final allocation of the purchase price resulted in acquired goodwill of $3.4 million, which is non-deductible for tax purposes. We also acquired intangibles of $2.9 million related to customer lists ($1.9 million) and software ($1.0 million). The intangibles have useful lives of 6 years and 4 years, respectively.
Note 3. INVENTORIES
Inventories consist of the following:
| | | | | | | | | |
| | | December 28, | | | December 30, | |
| (dollar amounts in thousands) | | 2008 | | | 2007 | |
| |
| Raw materials | | $ | 16,287 | | | $ | 16,352 | |
| Work-in-process | | | 6,100 | | | | 6,497 | |
| Finished goods | | | 79,735 | | | | 86,480 | |
| |
| Total | | $ | 102,122 | | | $ | 109,329 | |
| |
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Note 4. REVENUE EQUIPMENT ON OPERATING LEASE AND PROPERTY, PLANT, AND EQUIPMENT
The major classes are:
| | | | | | | | | |
| | | December 28, | | | December 30, | |
| (dollar amounts in thousands) | | 2008 | | | 2007 | |
| |
Revenue equipment on operating lease | | | | | | | | |
| Equipment rented to customers | | $ | 22,795 | | | $ | 31,290 | |
| Accumulated depreciation | | | (20,755 | ) | | | (26,790 | ) |
| |
| Total revenue equipment on operating lease | | $ | 2,040 | | | $ | 4,500 | |
| |
Property, plant, and equipment | | | | | | | | |
| Land | | $ | 9,809 | | | $ | 8,741 | |
| Buildings | | | 56,014 | | | | 59,463 | |
| Machinery and equipment | | | 144,717 | | | | 140,982 | |
| Leasehold improvements | | | 13,385 | | | | 11,938 | |
| Construction in progress | | | 3,429 | | | | 4,672 | |
| |
| | | | 227,354 | | | | 225,796 | |
| Accumulated depreciation | | | (140,619 | ) | | | (137,700 | ) |
| |
| Total property, plant, and equipment | | $ | 86,735 | | | $ | 88,096 | |
| |
Property, plant, and equipment under capital lease had gross values of $1.4 million and $1.7 million and accumulated depreciation of $0.9 million and $0.7 million, as of December 28, 2008 and December 30, 2007, respectively.
As of December 28, 2008, the outstanding Asialco loan balance of $3.6 million (RMB25 million) is collateralized by land and buildings with an aggregate carrying value of $6.0 million at December 28, 2008. The loans mature at various times through May 2009.
Depreciation expense on our revenue equipment on operating lease and property, plant, and equipment was $18.1 million, $15.4 million, and $16.2 million, for 2008, 2007, and 2006, respectively.
In 2008, we recorded a $1.5 million fixed asset impairment. The charge consisted of $1.1 million related to the write down of a building in France and $0.4 million related to the write down of land and a building in Japan. These impairments were recorded in asset impairments on the consolidated statement of operations.
In November 2006, we cancelled a capital lease for one of our buildings with an outstanding amount owed of $10.3 million. This building was sublet to a third party tenant. The Company and the tenant reached a cancellation settlement which resulted in sublease income of $10.2 million. We recorded a $8.0 million impairment on this building as a result of the transaction. Additionally, we incurred a loss on the retirement of the capital lease of $0.2 million and an additional interest expense charge of $0.2 million. The sublease income, loss on the settlement of the capital lease, and the impairment were recorded in other operating income on our consolidated statement of operations.
Note 5. GOODWILL AND OTHER INTANGIBLE ASSETS
We had intangible assets with a net book value of $113.8 million, and $119.3 million as of December 28, 2008 and December 30, 2007, respectively.
The following table reflects the components of intangible assets as of December 28, 2008 and December 30, 2007:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | December 28, 2008 | | | December 30, 2007 | |
| | | Amortizable | | | | | | | Gross | | | | | | | Gross | |
| | | Life | | | Carrying | | | Accumulated | | | Carrying | | | Accumulated | |
| (dollar amounts in thousands) | | (years) | | | Amount | | | Amortization | | | Amount | | | Amortization | |
| |
Finite-lived intangible assets: | | | | | | | | | | | | | | | | | | | | |
| Customer lists | | | 20 | | | $ | 81,037 | | | $ | 31,184 | | | $ | 80,104 | | | $ | 26,535 | |
| Trade name | | | 30 | | | | 30,610 | | | | 16,107 | | | | 31,662 | | | | 15,695 | |
| Patents, license agreements | | | 5 to 14 | | | | 60,986 | | | | 40,277 | | | | 62,716 | | | | 38,076 | |
| Other | | | 3 to 6 | | | | 9,700 | | | | 3,140 | | | | 5,890 | | | | 1,322 | |
| |
| Total amortized finite-lived intangible assets | | | | | | | 182,333 | | | | 90,708 | | | | 180,372 | | | | 81,628 | |
| | | | | | | | | | | | | | | | | | | | | |
Indefinite-lived intangible assets: | | | | | | | | | | | | | | | | | | | | |
| Trade name | | | | | | | 22,130 | | | | — | | | | 20,550 | | | | — | |
| |
| Total identifiable intangible assets | | | | | | $ | 204,463 | | | $ | 90,708 | | | $ | 200,922 | | | $ | 81,628 | |
| |
63
We recorded $12.5 million, $5.5 million, and $3.2 million of amortization expense for 2008, 2007, and 2006, respectively.
During our 2008 annual goodwill and indefinite-lived intangibles annual impairment test, we determine our indefinite-lived intangible trade mark intangible in our i-Labels segment was impaired. As a result we recorded an impairment charge of $0.4 million in the fourth quarter of 2008. This charge was recorded in asset impairments on the consolidated statement of operations.
As a result of changes in business circumstances related to the customer list intangible asset recognized in connection with the SIDEP/Asialco acquisition, we recorded an impairment charge of $2.6 million in the fourth quarter ended December 28, 2008. The impairment charge was recorded in asset impairments in the Intelligent Labels segment on the consolidated statement of operations.
Estimated amortization expense for each of the five succeeding years is anticipated to be:
| | | | | |
| (dollar amounts in thousands) | | | | |
| |
| 2009 | | $ | 12,470 | |
| 2010 | | $ | 11,874 | |
| 2011 | | $ | 10,428 | |
| 2012 | | $ | 9,622 | |
| 2013 | | $ | 8,429 | |
| |
The changes in the carrying amount of goodwill are as follows:
| | | | | | | | | | | | | | | | | |
| | | Shrink | | | | | | | | | | |
| | | Management | | | Intelligent | | | Retail | | | | |
| (dollar amounts in thousands) | | Solutions | | | Labels | | | Merchandising | | | Total | |
| |
| Balance as of December 31, 2006 | | $ | 69,335 | | | $ | 47,774 | | | $ | 70,179 | | | $ | 187,288 | |
| Acquired during the year | | | 63,584 | | | | 6,446 | | | | — | | | | 70,030 | |
| Purchase accounting adjustments | | | — | | | | (2,687 | ) | | | — | | | | (2,687 | ) |
| Translation adjustment and other | | | 7,025 | | | | 4,781 | | | | 8,164 | | | | 19,970 | |
| |
| Balance as of December 30, 2007 | | $ | 139,944 | | | $ | 56,314 | | | $ | 78,343 | | | $ | 274,601 | |
| Acquired during the year | | | 24,130 | | | | — | | | | — | | | | 24,130 | |
| Purchase accounting adjustments | | | 7,697 | | | | 1,429 | | | | — | | | | 9,126 | |
| Impairment losses | | | — | | | | (51,770 | ) | | | (7,813 | ) | | | (59,583 | ) |
| Translation adjustment and other | | | (2,278 | ) | | | (5,973 | ) | | | (4,491 | ) | | | (12,742 | ) |
| |
| Balance as of December 28, 2008 | | $ | 169,493 | | | $ | — | | | $ | 66,039 | | | $ | 235,532 | |
| |
During fiscal 2008, 2007, and 2006 we made multiple acquisitions, which impacted goodwill and intangible assets. Please refer to Note 2 of these consolidated financial statements for more information on these acquisitions and their impact.
The Company has completed step one of its fiscal 2008 annual analysis and test for impairment of goodwill and it was determined that certain goodwill related to the Intelligent Labels and Retail Merchandising segments was impaired. As a result, a $59.6 million estimated impairment charge was recorded as of December 28, 2008. The impairment charge was recorded in goodwill impairment on the consolidated statement of operations. This amount may change upon completion of step two of the impairment test. It is anticipated that the impairment testing will be complete by the first quarter of fiscal 2009 at which time an adjustment to the estimate will be recorded. The impairment charge is attributed to a combination of a decline in our market capitalization of the Company and a decline in the estimated forecasted discounted cash flows expected by the Company. Fair values exceeded their respective carrying values by more than 25% in the remaining reporting units for which no impairment charge was recorded.
The 2007 and 2006 annual assessments did not result in an impairment charge. Significant turmoil in the financial markets and weakness in macroeconomic conditions globally have recently contributed to volatility in our stock price, including a significant decline in our stock price during the third and fourth quarters of 2008 during which our stock price fluctuated from a high of $23.43 to a low of $9.01. These factors have contributed to the estimated impairment loss recorded in the fourth quarter ended December 28, 2008. There can be no certainty as to the duration of the current economic conditions and their potential impact on our stock price performance or future goodwill impairment.
We have not made any material changes in the methodology used in the assessment of whether or not goodwill is impaired during the past three fiscal years. Determining the fair value of a reporting unit is a matter of judgment and often involves the use of significant estimates and assumptions. The use of different assumptions would increase or decrease estimated discounted future cash flows and could increase or decrease an impairment charge. If the use of these assets or the projections of future cash flows change in the future, we may be required to record additional impairment charges. An erosion of future business results in any of the business units could create impairment in goodwill or other long-lived assets and require a significant charge in future periods.
64
Note 6. SHORT-TERM BORROWINGS AND CURRENT PORTION OF LONG-TERM DEBT
Short-term borrowings and current portion of long-term debt at December 28, 2008 and at December 30, 2007 consisted of the following:
| | | | | | | | | |
| | | December 28, | | | December 30, | |
| (dollar amounts in thousands) | | 2008 | | | 2007 | |
| |
| Lines of credit with interest rates ranging from 1.43% to 1.47% (1) | | $ | 7,707 | | | $ | — | |
| Asialco loans | | | 3,645 | | | | 3,418 | |
| Current portion of long-term debt | | | 230 | | | | 338 | |
| |
| Total short-term borrowings and current portion of long-term debt | | $ | 11,582 | | | $ | 3,756 | |
| |
| (1) | | The weighted average interest rate for 2008 was 1.45%. |
At December 28, 2008, our $8.8 million (¥800 million) Japanese local line of credit had an outstanding balance of $7.7 million (¥700 million) and availability of $1.1 million (¥100 million). The line of credit expires in March 2009.
In November 2007, we acquired SIDEP and the remaining interest in Asialco from its minority shareholders. As part of the acquisition, we acquired $3.4 million (RMB25 million) of outstanding debt of Asialco. The loans were paid down in April and May 2008 and were renewed for 12 month periods under the original terms of the loan agreement. As of December 28, 2008, the outstanding Asialco loan balance is $3.6 million (RMB25 million) and has an interest rate of 5.31%. The loans are collateralized by land and buildings with an aggregate carrying value of $6.0 million at December 28, 2008. The loans mature at various times through May 2009.
Note 7. LONG-TERM DEBT
Long-term debt at December 28, 2008 and December 30, 2007 consisted of the following:
| | | | | | | | | |
| | | December 28, | | | December 30, | |
| (dollar amounts in thousands) | | 2008 | | | 2007 | |
| |
| Senior unsecured credit facility: | | | | | | | | |
| $150 million variable interest rate revolving credit facility maturing in 2010 | | $ | 133,596 | | | $ | 91,496 | |
| Other capital leases with maturities through 2013 | | | 338 | | | | 598 | |
| |
| Total(1) | | | 133,934 | | | | 92,094 | |
| Less current portion | | | 230 | | | | 338 | |
| |
| Total long-term portion | | $ | 133,704 | | | $ | 91,756 | |
| |
| (1) | | The weighted average interest rates for 2008 and 2007 were 3.0% and 4.9%, respectively. |
On March 4, 2005, we entered into a new $150.0 million five-year senior unsecured multi-currency revolving credit agreement (“Credit Agreement”) with a syndicate of lenders.
Borrowings under the Credit Agreement bear interest rates of LIBOR plus an applicable margin ranging from 0.75% to 1.75% and/or prime plus 0.00% to 0.50%. The interest rate matrix is based on our leverage ratio of funded debt to EBITDA, as defined by the Credit Agreement. Under the Credit Agreement, we pay an unused line fee ranging from 0.18% to 0.30% per annum on the unused portion of the commitment. In connection with the 2005 refinancing, our aggregate fees and expenses were $0.7 million, which are being amortized over the term of the Credit Agreement. At December 28, 2008, we had $133.6 million outstanding under this facility. Our available line of credit under this agreement is $15.2 million. Our availability under this facility was reduced by letters of credit totaling $1.2 million. There are no restrictions on our ability to draw down on the available portion of our line of credit.
The senior unsecured credit facility increased by $42.1 million since December 30, 2007. The increase in borrowings was primarily used to finance our stock repurchase program and the OATSystems, Inc. acquisition.
In November 2007, we acquired the Alpha S3 business. As part of the funding for this acquisition, we borrowed $75.0 million under our unsecured multi-currency revolving credit facility. The borrowing was composed of $55.0 million under the U.S. portion of our revolver and $20.0 million (€13.9 million) under the German portion of this revolver.
The Credit Agreement contains certain covenants, as defined in the Credit Agreement, that include requirements for a maximum ratio of debt to EBITDA, a maximum ratio of interest to EBITDA, and a maximum threshold for capital expenditures. As of December 28, 2008, we were in compliance with all covenants.
65
The aggregate maturities on all long-term debt (including current portion) are:
| | | | | | | | | | | | | |
| | | | | | | Capital | | | Total | |
| (dollar amounts in thousands) | | Debt | | | Leases | | | Debt | |
| |
| 2009 | | $ | — | | | $ | 230 | | | $ | 230 | |
| 2010 | | | 133,596 | | | | 68 | | | | 133,664 | |
| 2011 | | | — | | | | 24 | | | | 24 | |
| 2012 | | | — | | | | 13 | | | | 13 | |
| 2013 | | | — | | | | 3 | | | | 3 | |
| Thereafter | | | — | | | | — | | | | — | |
| |
| Total | | $ | 133,596 | | | $ | 338 | | | $ | 133,934 | |
| |
Note 8. STOCK-BASED COMPENSATION
At December 28, 2008, we had stock-based employee compensation plans as described below. For the years ended December 28, 2008, December 30, 2007, and December 31, 2006, the total compensation expense (included in selling general, and administrative expense) related to these plans was $7.1 million, $6.5 million, and $5.7 million ($4.9 million, $4.6 million, and $4.2 million, net of tax), respectively.
On December 27, 2007, there was a change of our President and CEO. As a result of this management transition and in accordance with the former CEO’s contract, we recorded a one-time charge of $1.4 million ($1.0 million, net of tax) related to stock compensation costs associated with the former CEO. This charge was recorded in the fourth quarter of 2007.
In 2006, we changed the method in which we issue share-based awards to our key employees. In prior years, share-based compensation for key employees consisted primarily of stock options. Upon consideration of several factors, we began in 2006 to award key employees a combination of stock options and restricted stock units. Therefore, this change resulted in an increase in stock-based compensation from restricted stock units.
Stock Plans
On April 29, 2004, the shareholders approved the Checkpoint Systems, Inc. 2004 Omnibus Incentive Compensation Plan (2004 Plan). The initial shares available under the 2004 Plan were approximately 3,500,000, which represent the shares that were available at that time under the 1992 Stock Option Plan (1992 Plan). All cancellations and forfeitures related to share units outstanding under the 1992 Plan will be added back to the shares available for grant under the 2004 Plan. No further awards will be issued under the 1992 Plan. The 2004 Plan is designed to provide incentives to employees, non-employee directors, and independent contractors through the award of stock options, stock appreciation rights, stock units, phantom shares, dividend equivalent rights and cash awards. The Compensation Committee (Committee) of our Board of Directors administers the 2004 Plan and determines the terms and conditions of each award. Stock options issued under the 2004 Plan primarily vest over a three-year period and expire not more than 10 years from date of grant. Restricted stock units vest over three to five year periods from date of grant. As of December 28, 2008, there were 1,573,746 shares available for grant under the 2004 plan.
Our 1992 Stock Option Plan (1992 Plan) allowed us to grant either Incentive Stock Options (ISOs) or Non-Incentive Stock Options (NSOs) to purchase up to 16,000,000 shares of common stock. Only employees were eligible to receive ISOs and both employees and non-employee directors of the Company were eligible to receive NSOs. On February 17, 2004, the Plan was amended to allow an independent consultant to receive NSOs. All ISOs under the 1992 Plan expire not more than ten years (plus six months in the case of NSOs) from the date of grant. Both ISOs and NSOs require a purchase price of not less than 100% of the fair market value of the stock at the date of grant. As of
December 28, 2008, there were no shares available for grant under the 1992 Plan.
On December 27, 2007, we adopted a stand alone inducement stock option plan authorizing the issuance of options to purchase up to 270,000 shares of our common stock, which were granted to the newly elected President and CEO of the Company in connection with his hire. The non-qualified stock options provide for three vesting instances: 60% on December 31, 2010; 20% on December 31, 2011; and 20% on December 31, 2012. The options also have a market condition. The market condition specifies that any unvested tranche will vest immediately as soon as the Company’s stock price exceeds 200% of the December 27, 2007, strike price of $22.71. In addition, there were 230,000 shares issued out of our Omnibus Incentive Compensation Plan with similar vesting and market based criteria as described above.
To determine the fair value of stock options with market conditions we used the Monte Carlo simulation lattice model using the following assumptions: (i) expected volatility of 37.04%, (ii) risk-free rate of 4.1%, (iii) expected term of 10 years, and (iv) an expected dividend yield of zero. The weighted average fair value of the stock options with market conditions was $12.43 per share.
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During fiscal 2005, we initiated a Long-Term Incentive Plan (LTIP). Under this plan, restricted stock units (RSUs) were awarded to eligible executives. The number of shares for these units varies based on the Company’s operating income and operating margin. These units cliff vest at the end of fiscal 2007. At December 30, 2007, the Company did not achieve the operating margin required by the plan and as a result no RSUs were earned under this plan. During 2007, $0.4 million of previously recognized compensation cost was reversed related to the 2005 LTIP.
During fiscal 2006, we expanded the scope of the LTIP. Under the expanded plan, RSUs were awarded to eligible key employees. The number of shares for these units varies based on the Company’s cash flow. These units cliff vest at the end of fiscal 2008. During fiscal 2007, 34,996 units vested at a grant price of $28.89 per share in accordance with the former CEO’s retirement plan. At December 28, 2008, the Company did not achieve the cash flow targets required by the plan and as a result no remaining RSUs were earned under this plan. During fiscal 2008, $2.0 million of previously recognized compensation cost was reversed related to the 2006 LTIP.
The LTIP plan was further expanded during fiscal 2007. Under the 2007 LTIP plan, RSUs were awarded to eligible key employees. The number of shares for these units varies based on the Company’s revenue and earnings per share. These units cliff vest at the end of fiscal 2009. As of December 30, 2007, 20,000 units vested at a grant price of $23.91 per share in accordance with the former CEO’s retirement plan. At December 28, 2008, we reversed $1.7 million of previously recognized compensation cost since it was determined that the Company will not achieve the revenue and earnings per share targets set for in the 2007 LTIP plan during fiscal 2009.
On December 4, 2007, RSUs were awarded to certain key employees of the Company’s Alpha Security Products Division as part of the LTIP plan. The number of shares for these units varies based on the Company’s Alpha product revenues. These units have the potential to vest 33% per year, over a three-year period ending at the end of fiscal 2010. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The weighted average price for these RSUs was $21.84 per share. For fiscal year 2008, $0.2 million was charged to compensation expense. As of December 28, 2008, total unamortized compensation expense for this grant was $0.3 million. As of December 28, 2008, the maximum achievable RSUs outstanding under this plan are 53,200 units. These RSUs reduce the shares available to grant under the 2004 Plan.
Stock Options
Option activity under the principal option plans as of December 28, 2008 and changes during the year then ended were as follows:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Weighted | | | | |
| | | | | | | | | | | Average | | | | |
| | | | | | | Weighted- | | | Remaining | | | Aggregate | |
| | | | | | | Average | | | Contractual | | | Intrinsic | |
| | | | | | | Exercise | | | Term | | | Value | |
| | | Shares | | | Price | | | (in years) | | | (in thousands) | |
| |
| Outstanding at December 30, 2007 | | | 3,405,902 | | | $ | 17.45 | | | | 6.21 | | | $ | 28,950 | |
| Granted | | | 328,481 | | | | 21.82 | | | | | | | | | |
| Exercised | | | (687,504 | ) | | | 12.42 | | | | | | | | | |
| Forfeited or expired | | | (166,553 | ) | | | 22.60 | | | | | | | | | |
| |
| Outstanding at December 28, 2008 | | | 2,880,326 | | | $ | 18.85 | | | | 6.42 | | | $ | 25,079 | |
| |
| Vested and expected to vest at December 28, 2008 | | | 2,691,674 | | | $ | 18.60 | | | | 6.24 | | | $ | 25,079 | |
| |
| Exercisable at December 28, 2008 | | | 1,866,847 | | | $ | 16.60 | | | | 5.13 | | | $ | 25,079 | |
| |
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of fiscal 2008 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 28, 2008. This amount changes based on the fair market value of the Company’s stock. The total intrinsic value of options exercised for the years ended December 28, 2008,
December 30, 2007, and December 31, 2006, was $8.2 million, $3.1 million, and $5.8 million, respectively.
As of December 28, 2008, $5.2 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.3 years.
67
Prior to the adoption of SFAS 123R, the Company presented the tax benefit of stock option exercises as operating cash flows. Upon the adoption of SFAS 123R, tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are classified as financing cash flows. Cash received from option exercises and purchases under the ESPP for the year ended December 28, 2008 was $9.0 million. The actual tax benefit realized for the tax deduction from option exercises of the share-based payment units totaled $3.1 million and $1.7 million for the fiscal years ended December 28, 2008 and December 30, 2007. In adopting SFAS 123R, we have applied the “Short-cut” method in calculating the historical windfall tax benefits. All tax short falls will be applied against this windfall before being charged to earnings.
Restricted Stock Units
In 2006, 2007, and 2008 we issued service-based restricted stock units with vesting periods of three to five years. These awards are valued using their intrinsic value on the date of grant. The compensation expense is recognized straight-line over the vesting term.
Nonvested service-based restricted stock units as of December 28, 2008 and changes during the year ended December 28, 2008 were as follows:
| | | | | | | | | | | | | |
| | | | | | | Weighted- | | | | |
| | | | | | | Average Vest | | | Weighted- | |
| | | | | | | Date | | | Average Grant | |
| | | Shares | | | (in years) | | | Date Fair Value | |
| |
| Nonvested at December 30, 2007 | | | 376,386 | | | | 1.48 | | | $ | 32.70 | |
| Granted | | | 280,074 | | | | — | | | | 19.63 | |
| Vested | | | (85,483 | ) | | | — | | | | 21.77 | |
| Forfeited | | | (17,992 | ) | | | — | | | | 27.40 | |
| |
| Nonvested at December 28, 2008 | | | 552,985 | | | | 1.34 | | | $ | 36.45 | |
| |
| Vested and expected to vest at December 28, 2008 | | | 456,684 | | | | 1.13 | | | | | |
| |
| Vested at December 28, 2008 | | | 8,400 | | | | — | | | | | |
| |
The total fair value of restricted stock awards vested during 2008 was $1.9 million as compared to $0.8 million during 2007. As of December 28, 2008, there was $4.3 million unrecognized stock-based compensation expense related to nonvested restricted stock units. That cost is expected to be recognized over a weighted-average period of 2.3 years.
Note 9. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments in 2008, 2007, and 2006, included payments for interest of $5.2 million, $2.1 million, and $2.0 million, and income taxes of $17.0 million, $18.7 million, and $13.6 million, respectively.
Non-cash investing and financing activities are excluded from the consolidated statement of cash flows. For 2006, non-cash transfer of a sublease receivable of $10.3 million was transferred to settle our capital lease obligation and excluded from our consolidated cash flow. The net of the transaction was shown as an adjustment to reconcile net earnings to cash provided by operating activities. Additionally, we entered into new capital leases in 2006 of $0.4 million which were excluded from the cash flow as they were non-cash transactions.
Business Acquisitions
| | | | | | | | | | | | | |
| | | December 28, | | | December 30, | | | December 31, | |
| (dollar amounts in thousands) | | 2008 | | | 2007 | | | 2006 | |
| |
| Fair value of tangible assets acquired, less cash acquired | | $ | 12,492 | | | $ | 45,883 | | | $ | 10,755 | |
| Goodwill and identified intangible assets | | | 44,246 | | | | 155,239 | | | | 5,733 | |
| Liabilities assumed | | | (17,109 | ) | | | (31,600 | ) | | | (9,135 | ) |
| Borrowings to fund acquisition | | | — | | | | (75,000 | ) | | | — | |
| |
| Cash paid for acquisitions | | $ | 39,629 | | | $ | 94,522 | | | $ | 7,353 | |
| |
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Note 10. STOCKHOLDERS’ EQUITY
In October 2006, our Board of Directors approved a share repurchase program that allowed for the purchase of up to 2 million shares of the Company’s common stock. During the first six months of 2008, the Company repurchased 2 million shares of its common stock at an average cost of $25.42, spending a total of $50.9 million. This completed the repurchase of shares under the Company’s repurchase authorization that was put in place during the fourth quarter of 2006. Common stock obtained by the Company through the repurchase program has been added to our treasury stock holdings.
In March 1997, our Board of Directors adopted a new Shareholder’s Rights Plan (1997 Plan). The Rights under the 1997 Plan attached to the common shares of the Company as of March 24, 1997. The Rights are designed to ensure all Company shareholders fair and equal treatment in the event of a proposed takeover of the Company, and to guard against partial tender offers and other abusive tactics to gain control of the Company without paying all shareholders a fair price.
The Rights are exercisable only as a result of certain actions of an acquiring person. Initially, upon payment of the exercise price (currently $100.00), each Right will be exercisable for one share of common stock. Upon the occurrence of certain events each Right will entitle its holder (other than the acquiring person) to purchase a number of our or an acquiring person’s common shares having a market value of twice the Right’s exercise price. The Rights expire on March 10, 2017.
The components of accumulated other comprehensive income at December 28, 2008 and at December 30, 2007 are as follows:
| | | | | | | | | |
| (dollar amounts in thousands) | | 2008 | | | 2007 | |
| |
| Actuarial losses on pension plans, net of tax | | $ | (2,862 | ) | | $ | (2,883 | ) |
| Unrealized gain adjustment on marketable securities, net of tax | | | — | | | | 16 | |
| Derivative hedge contracts, net of tax | | | 880 | | | | — | |
| Foreign currency translation adjustment | | | 18,132 | | | | 43,232 | |
| |
| Total | | $ | 16,150 | | | $ | 40,365 | |
| |
Note 11. EARNINGS PER SHARE
For fiscal years 2008, 2007, and 2006, basic earnings per share are based on net earnings divided by the weighted average number of shares outstanding during the period. The following data shows the amounts used in computing earnings per share and the effect on net earnings from continuing operations and the weighted average number of shares of dilutive potential common stock:
| | | | | | | | | | | | | |
| | | December 28, | | | December 30, | | | December 31, | |
| (Amounts in thousands, except per share data) | | 2008 | | | 2007 | | | 2006 | |
| |
Basic earnings available to common stockholders: | | | | | | | | | | | | |
| Net (loss) earnings available to common stockholders from continuing operations | | $ | (29,805 | ) | | $ | 58,409 | | | $ | 35,019 | |
| |
| Diluted (loss) earnings available to common stockholders from continuing operations | | $ | (29,805 | ) | | $ | 58,409 | | | $ | 35,019 | |
| |
Shares: | | | | | | | | | | | | |
| Weighted average number of common shares outstanding | | | 39,071 | | | | 39,550 | | | | 39,136 | |
| Shares issuable under deferred compensation agreements | | | 337 | | | | 311 | | | | 240 | |
| |
| Basic weighted average number of common shares Outstanding | | | 39,408 | | | | 39,861 | | | | 39,376 | |
| Common shares assumed upon exercise of stock options and awards | | | — | | | | 853 | | | | 839 | |
| Shares issuable under deferred compensation arrangements | | | — | | | | 10 | | | | 18 | |
| |
| Dilutive weighted average number of common shares outstanding | | | 39,408 | | | | 40,724 | | | | 40,233 | |
| |
Basic (Loss) Earnings per Share: | | | | | | | | | | | | |
| (Loss) earnings from continuing operations | | $ | (.76 | ) | | $ | 1.46 | | | $ | .89 | |
| Earnings from discontinued operations, net of tax | | | — | | | | .01 | | | | .02 | |
| |
| Basic (loss) earnings per share | | $ | (.76 | ) | | $ | 1.47 | | | $ | .91 | |
| |
Diluted (Loss) Earnings per Share: | | | | | | | | | | | | |
| (Loss) earnings from continuing operations | | $ | (.76 | ) | | $ | 1.43 | | | $ | .87 | |
| Earnings from discontinued operations, net of tax | | | — | | | | .01 | | | | .02 | |
| |
| Diluted (loss) earnings per share | | $ | (.76 | ) | | $ | 1.44 | | | $ | .89 | |
| |
Anti-dilutive potential common shares are not included in our earnings per share calculation. The Long-term Incentive Plan restricted stock units were excluded from our calculation due to the performance of vesting criteria not being met.
The number of anti-dilutive common share equivalents for the years ended December 28, 2008, December 30, 2007, and December 31, 2006 were as follows:
| | | | | | | | | | | | | |
| | | December 28, | | | December 30, | | | December 31, | |
| (share amounts in thousands) | | 2008 | | | 2007 | | | 2006 | |
| |
| Weighted average common share equivalents associated with anti-dilutive stock options and restricted stock units excluded from the computation of diluted EPS (1): | | | 2,151 | | | | 524 | | | | 541 | |
| |
(1) Adjustments for stock options and awards of 518 shares and deferred compensation arrangements of 22 shares were anti-dilutive in fiscal 2008 and therefore excluded from the earnings per share calculation due to our net loss for the year.
69
Note 12. DISCONTINUED OPERATIONS
On January 30, 2006, the Company completed the sale of its global barcode businesses included in our Intelligent Labels segment, and the U.S. hand-held labeling and Turn-O-Matic® businesses included in the Shrink Management Solutions segment for cash proceeds of $37 million, plus the assumption of $5 million in liabilities. The Company recorded a pre-tax gain of $2.8 million ($1.3 million, net of tax), included in discontinued operations, net of tax in the consolidated statement of operations. During fiscal 2007, the post closing adjustments were finalized and an additional gain of $0.4 million, net of tax, was recorded in discontinued operations.
The Company’s discontinued operations reflect the operating results for the disposal group through the date of disposition. The results for the years ended December 30, 2007 and December 31, 2006 have been reclassified to show the results of operations for the barcode labeling systems and U.S. hand-held labeling and Turn-O-Matic® businesses as discontinued operations. Below is a summary of these results:
| | | | | | | | | |
| | | December 30, | | | December 31, | |
| (dollar amounts in thousands) | | 2007 | | | 2006 | |
| |
| Net revenue | | $ | — | | | $ | 7,446 | |
| Gross profit | | | — | | | | 1,433 | |
| Selling, general, & administrative expenses | | | — | | | | 2,239 | |
| |
| Operating (loss) | | | — | | | | (806 | ) |
| Gain on disposal | | | 710 | | | | 2,768 | |
| |
| Earnings from discontinued operations before income taxes | | | 710 | | | | 1,962 | |
| Income taxes | | | 351 | | | | 1,059 | |
| |
| Earnings from discontinued operations, net of tax | | $ | 359 | | | $ | 903 | |
| |
Note 13. INCOME TAXES
The domestic and foreign components of earnings from continuing operations before income taxes and minority interest are:
| | | | | | | | | | | | | |
| (dollar amounts in thousands) | | 2008 | | 2007 | | 2006 |
| |
| Domestic | | $ | (16,448 | ) | | $ | 4,730 | | | $ | (778 | ) |
| Foreign | | | (12,761 | ) | | | 65,846 | | | | 42,753 | |
| |
| Total | | $ | (29,209 | ) | | $ | 70,576 | | | $ | 41,975 | |
| |
Provision for income taxes — continuing operations:
| | | | | | | | | | | | | |
| (dollar amounts in thousands) | | 2008 | | 2007 | | 2006 |
| |
Currently payable | | | | | | | | | | | | |
| Federal | | $ | 36 | | | $ | (1,240 | ) | | $ | (760 | ) |
| State | | | 12 | | | | 981 | | | | 582 | |
| Puerto Rico | | | 243 | | | | 1,058 | | | | (58 | ) |
| Foreign | | | 11,826 | | | | 18,255 | | | | 7,645 | |
| |
| Total currently payable | | | 12,117 | | | | 19,054 | | | | 7,409 | |
Deferred | | | | | | | | | | | | |
| Federal | | | (4,259 | ) | | | (80 | ) | | | 1,315 | |
| State | | | 902 | | | | (5,493 | ) | | | — | |
| Puerto Rico | | | 12 | | | | (9 | ) | | | (121 | ) |
| Foreign | | | (8,053 | ) | | | (1,298 | ) | | | (1,616 | ) |
| |
| Total deferred | | | (11,398 | ) | | | (6,880 | ) | | | (422 | ) |
| |
| Total provision | | $ | 719 | | | $ | 12,174 | | | $ | 6,987 | |
| |
70
Deferred tax assets/liabilities at December 28, 2008 and December 30, 2007 consist of:
| | | | | | | | | |
| | | December 28, | | | December 30, | |
| (dollar amounts in thousands) | | 2008 | | | 2007 | |
| |
| Inventory | | $ | 6,650 | | | $ | 7,963 | |
| Accounts receivable | | | 2,158 | | | | 3,305 | |
| Capitalized research and development costs | | | 3,161 | | | | — | |
| Net operating loss and foreign tax credit carryforwards | | | 53,635 | | | | 44,743 | |
| Restructuring | | | 31 | | | | 350 | |
| Deferred revenue | | | 1,345 | | | | 454 | |
| Pension | | | 6,555 | | | | 6,401 | |
| Warranty | | | 2,171 | | | | 1,529 | |
| Deferred compensation | | | 1,712 | | | | 2,194 | |
| Stock based compensation | | | 3,885 | | | | 2,647 | |
| Valuation allowance | | | (22,717 | ) | | | (27,572 | ) |
| |
| Deferred tax assets | | | 58,586 | | | | 42,014 | |
| |
| Depreciation | | | (28 | ) | | | (724 | ) |
| Intangibles | | | 10,993 | | | | 9,980 | |
| Other | | | (1,095 | ) | | | 2,658 | |
| Withholding tax liabilities | | | 945 | | | | 1,031 | |
| |
| Deferred tax liabilities | | | 10,815 | | | | 12,945 | |
| |
| Net deferred tax assets | | $ | 47,771 | | | $ | 29,069 | |
| |
At December 28, 2008, the net deferred tax asset related to net operating loss carryforwards is $22.6 million, detailed as follows:
| | | | | | | | | | | | | | | | | |
| Expiration | | Federal | | | State | | | International | | | Total | |
| |
| 2009 — 2015 | | $ | — | | | $ | 3,172 | | | $ | 1,459 | | | $ | 4,631 | |
| 2016 — 2022 | | | — | | | | 2,127 | | | | 35 | | | | 2,162 | |
| 2023 — 2029 | | | 7,160 | | | | 2,125 | | | | — | | | | 9,285 | |
| Indefinite life | | | — | | | | — | | | | 27,808 | | | | 27,808 | |
| |
| Deferred tax asset | | | 7,160 | | | | 7,424 | | | | 29,302 | | | | 43,886 | |
| Valuation allowance | | | — | | | | (3,240 | ) | | | (18,018 | ) | | | (21,258 | ) |
| |
| Net deferred position | | $ | 7,160 | | | $ | 4,184 | | | $ | 11,284 | | | $ | 22,628 | |
| |
We have U.S. and U.K. foreign tax credit carryforwards of $9.7 million. The U.S. credits of $9.4 million have expiration dates ranging from 2012 to 2018. Realization is dependent on generating sufficient taxable income prior to expiration of the foreign tax credit and loss carryforwards. Although realization is not assured, management believes it is more likely than not that the net deferred position will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
In June 2008, the Company purchased the stock of OATSystems, Inc. As of December 28, 2008, we have provided a net deferred tax asset of $8.4 million of which $7.7 million relates to a federal net operating loss carryforward. The federal net operating loss carryforward is subject to IRC § 382 limitation. We feel that it is more likely than not the federal net operating loss will be utilized in the carryforward period. In addition, OATSystems has a deferred tax asset of $1.4 million related to state net operating loss carryforwards on which a full valuation allowance has been provided. The purchase accounting for OATSystems will be completed in 2009.
The tax effect of net operating losses includes $4.2 million which was acquired in connection with the acquisition of ID Systems Group, Actron Group Limited, Meto AG and OATSystems, Inc.
At December 28, 2008, unremitted earnings of subsidiaries outside the United States totaling $78.3 million were deemed to be permanently reinvested. No deferred tax liability has been recognized with regards to the remittance of such earnings. It is not practical to estimate the income tax liability that might be incurred if such earnings were remitted to the United States.
In 2007, we recorded an adjustment of $2.1 million to reduce deferred income tax expense, and increase earnings from continuing operations and net earnings. We have determined that this adjustment related to errors made in prior years associated with the impact of changes in statutory rates on deferred taxes. Had these errors been recorded in the proper periods, earnings from continuing operations and net earnings as reported would increase by $0.2 million in 2006 and increase by $1.9 million for years prior to 2005. We have determined that these adjustments did not have a material effect on the current and prior years’ financial statements. Without the reduction to our income tax provision our 2007 effective rate would have been 20.3% rather than 17.2%.
71
A reconciliation of the tax provision at the statutory U.S. Federal income tax rate with the tax provision at the effective income tax rate follows:
| | | | | | | | | | | | | |
| (dollar amounts in thousands) | | 2008 | | 2007 | | 2006 |
| |
| Tax provision at the statutory Federal income tax rate | | $ | (10,222 | ) | | $ | 24,702 | | | $ | 14,692 | |
| Non-deductible goodwill | | | 20,994 | | | | — | | | | — | |
| Non-deductible permanent items | | | 1,258 | | | | (165 | ) | | | 260 | |
| State and local income taxes, net of Federal benefit | | | 207 | | | | 634 | | | | 186 | |
| Benefit from extraterritorial income | | | — | | | | — | | | | (70 | ) |
| Foreign losses for which no tax benefit recognized | | | 3,122 | | | | 1,348 | | | | 801 | |
| Foreign rate differentials | | | (13,356 | ) | | | (12,028 | ) | | | (6,982 | ) |
| Tax settlements | | | 730 | | | | — | | | | — | |
| Potential tax contingencies | | | 1,214 | | | | 1,984 | | | | (1,528 | ) |
| Change in valuation allowance | | | (3,574 | ) | | | (4,527 | ) | | | (453 | ) |
| Stock based compensation | | | 365 | | | | 384 | | | | 308 | |
| Other | | | (19 | ) | | | (158 | ) | | | (227 | ) |
| |
| Tax provision at the effective tax rate | | $ | 719 | | | $ | 12,174 | | | $ | 6,987 | |
| |
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | | |
| | | December 28, | | | December 30, | |
| (dollar amounts in thousands) | | 2008 | | | 2007 | |
| |
| Gross unrecognized tax benefits | | $ | 12,714 | | | $ | 10,197 | |
| Increases in tax positions for prior years | | | — | | | | 384 | |
| Decreases in tax positions for prior years | | | (966 | ) | | | — | |
| Increases in tax positions for current year | | | 1,843 | | | | 1,128 | |
| Settlements | | | (965 | ) | | | — | |
| Acquisition reserves | | | — | | | | 1,063 | |
| Lapse in statute of limitations | | | (106 | ) | | | (58 | ) |
| |
| Gross unrecognized tax benefits | | $ | 12,520 | | | $ | 12,714 | |
| |
We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, on January 1, 2007. As a result of adoption, we recognized a charge of $1.7 million to the January 1, 2007, retained earnings opening balance. The total amount of gross unrecognized tax benefits that, if recognized, would affect the effective tax rate was $12.5 million at December 28, 2008. We have accrued interest and penalties related to unrecognized tax benefits in its provision for income taxes. During fiscal year ending December 28, 2008, we accrued $0.8 million for interest and penalties. At December 28, 2008, we had accrued interest and penalties related to unrecognized tax benefits of $6.1 million.
We file income tax returns in the U.S. and in various states, local and foreign jurisdictions. We are routinely examined by tax authorities in these jurisdictions. It is possible that these examinations may be resolved within twelve months. Due to the potential for resolution of Federal, state and foreign examinations, and the expiration of various statutes of limitation, it is reasonably possible that the gross unrecognized tax benefits balance may change within the next twelve months by a range of $2.0 million to $3.6 million.
We are currently under audit in the following jurisdictions: United States 2005 – 2006, France 2005 – 2007, Germany 2002 – 2004, and the United Kingdom 2001 – 2005.
Note 14. EMPLOYEE BENEFIT PLANS
Under our defined contribution savings plans, eligible employees may make basic (up to 6% of an employee’s earnings) and supplemental contributions. We match in cash 50% of the participant’s basic contributions. Company contributions vest to participants in increasing percentages over one to five years of service. Our contributions under the plans approximated $1.2 million, $1.0 million, and $1.0 million, in 2008, 2007, and 2006, respectively.
Generally, all employees in the U.S. may participate in our U.S. Savings Plan. All full-time employees of the Puerto Rico subsidiary who have completed three months of service may participate in our Puerto Rico Savings Plan.
During fiscal 2005, we initiated a 423(b) Employee Stock Purchase Plan, which was adopted by the shareholders at the Annual Shareholder Meeting on April 29, 2004. This plan replaces the non-qualified Employee Stock Purchase Plan. Under the provisions of the 423(b) plan, eligible employees may contribute from 1% to 25% of their base compensation to purchase shares of our common stock at 85 percent of the fair market value on the offering date or the exercise date of the offering period, whichever is lower. Our expense for this plan in fiscal 2008, 2007 and 2006 was $0.4 million, $0.2 million, and $0.2 million, respectively. As of December 28, 2008, there were 75,416 shares authorized and available to be issued. During fiscal year 2008, 51,315 shares were issued under this plan as compared to 52,352 shares in 2007 and 45,680 shares in 2006.
72
We maintain deferred compensation plans for executives and non-employee directors. The executive deferred compensation plan allows certain executives to defer portions of their salary and bonus (up to 50% and 100%, respectively) into a deferred stock account. All deferrals in this plan are matched 25% by the Company. The match vests in thirds at each calendar year end for three years following the match. For executives over the age of 55 years old, the matching contribution vests immediately. The settlement of this deferred stock account is required by the plan to be made only in Company common stock. The deferral shares held in the deferred compensation plan are considered outstanding for purposes of calculating basic and diluted earnings per share. The unvested match is considered in the calculation of diluted earnings per share. Our match into the deferred stock account under the executive plan for fiscal years 2008, 2007, and 2006 were approximately $0.3 million, $0.4 million, and $0.4 million, respectively. The match will be expensed ratably over a three year vesting period for executives under 55 years old and immediate for those older than 55 years.
The director deferred compensation plan allows non-employee directors to defer their compensation into a deferred stock account. All deferrals in this plan are matched 25% by the Company. The match vests immediately. The settlement of this deferred stock account is required by the plan to be made only in Company common stock. The deferral shares held in the deferred compensation plan are considered outstanding for purposes of calculating basic and diluted earnings per share. Our match into the deferred stock account under the director’s plan approximated $0.1 million for fiscal years 2008, 2007, and 2006.
Pension Plans
We maintain several defined benefit pension plans, principally in Europe. The plans covered approximately 10% of the total workforce at December 28, 2008. The benefits accrue according to the length of service, age, and remuneration of the employee.
In September 2006, the Financial Accounting Standards Board issued Statement 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans: an amendment of FASB Statements No. 87, 88, 106, and 132(R). Statement 158 requires the Company to recognize the funded status of its defined benefit postretirement plan in the Company’s statement of financial position. The funded status was previously disclosed in the notes to the Company’s financial statements, but differed from the amount recognized in the statement of financial position.
The amounts recognized in accumulated other comprehensive income at December 28, 2008, and December 30, 2007, consist of:
| | | | | | | | | |
| | | December 28, | | | December 30, | |
| (dollar amounts in thousands) | | 2008 | | | 2007 | |
| |
| Transition obligation | | $ | 473 | | | $ | 633 | |
| Prior service costs | | | 23 | | | | 26 | |
| Actuarial losses | | | 5,441 | | | | 5,456 | |
| |
| Total | | | 5,937 | | | | 6,115 | |
| Deferred tax | | | (3,075 | ) | | | (3,232 | ) |
| |
| Net | | $ | 2,862 | | | $ | 2,883 | |
| |
73
The amounts included in accumulated other comprehensive income at December 28, 2008 and expected to be recognized in net periodic pension cost during the years ended December 27, 2009 are as follows:
| | | | | |
| | | December 29, | |
| (dollar amounts in thousands) | | 2009 | |
| |
| Transition obligation | | $ | 130 | |
| Prior service costs | | | 3 | |
| Actuarial gain | | | (10 | ) |
| |
| Total | | $ | 123 | |
| |
The Company does not expect to have any plan assets returned during the year ended December 27, 2009.
The Company expects to make contributions of $4.8 million during the year ended December 27, 2009.
The pension plans included the following net cost components:
| | | | | | | | | | | | | |
| (dollar amounts in thousands) | | 2008 | | 2007 | | 2006 |
| |
| Service cost | | $ | 1,088 | | | $ | 1,420 | | | $ | 1,350 | |
| Interest cost | | | 4,623 | | | | 4,094 | | | | 3,505 | |
| Expected return on plan assets | | | (72 | ) | | | (144 | ) | | | (144 | ) |
| Amortization of actuarial loss | | | (44 | ) | | | 477 | | | | 569 | |
| Amortization of transition obligation | | | 137 | | | | 128 | | | | 117 | |
| Amortization of prior service costs | | | 2 | | | | 2 | | | | 2 | |
| |
| Net periodic pension cost | | | 5,734 | | | | 5,977 | | | | 5,399 | |
| Settlement (gain) loss | | | (37 | ) | | | (462 | ) | | | 736 | |
| Special termination benefit recognized | | | — | | | | — | | | | 226 | |
| Curtailment gain | | | — | | | | — | | | | (337 | ) |
| |
| Total pension expense | | $ | 5,697 | | | $ | 5,515 | | | $ | 6,024 | |
| |
The table below sets forth the funded status of our plans and amounts recognized in the accompanying balance sheets.
| | | | | | | | | |
| | | December 28, | | | December 30, | |
| (dollar amounts in thousands) | | 2008 | | | 2007 | |
| |
Change in benefit obligation | | | | | | | | |
| Net benefit obligation at beginning of year | | $ | 86,340 | | | $ | 89,566 | |
| Service cost | | | 1,088 | | | | 1,420 | |
| Interest cost | | | 4,623 | | | | 4,094 | |
| Actuarial (gain) | | | (60 | ) | | | (10,082 | ) |
| Gross benefits paid | | | (4,366 | ) | | | (6,925 | ) |
| Plan settlements | | | (37 | ) | | | (91 | ) |
| Divestment | | | — | | | | (1,165 | ) |
| Acquisition | | | — | | | | 118 | |
| Foreign currency exchange rate changes | | | (4,110 | ) | | | 9,405 | |
| |
| Net benefit obligation at end of year | | $ | 83,478 | | | $ | 86,340 | |
| |
Change in plan assets | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 1,454 | | | $ | 3,234 | |
| Actual return on assets | | | (196 | ) | | | (613 | ) |
| Employer contributions | | | 4,734 | | | | 5,534 | |
| Gross benefits paid | | | (4,366 | ) | | | (6,925 | ) |
| Foreign currency exchange rate changes | | | (76 | ) | | | 224 | |
| |
| Fair value of plan assets at end of year | | $ | 1,550 | | | $ | 1,454 | |
| |
Reconciliation of funded status | | | | | | | | |
| Funded status at end of year | | $ | (81,928 | ) | | $ | (84,886 | ) |
| |
74
| | | | | | | | | |
| | | December 28, | | | December 30, | |
| (dollar amounts in thousands) | | 2008 | | | 2007 | |
| |
Amounts recognized in accrued benefit consist of: | | | | | | | | |
| Accrued pensions — current | | $ | 4,305 | | | $ | 4,337 | |
| Accrued pensions | | | 77,623 | | | | 80,549 | |
| |
| Net amount recognized at end of year | | $ | 81,928 | | | $ | 84,886 | |
| |
| Other comprehensive income attributable to change in additional minimum liability recognition | | $ | — | | | $ | — | |
| Accumulated benefit obligation at end of year | | $ | 79,165 | | | $ | 81,824 | |
| |
The following table sets forth additional fiscal year-ended information for pension plans for which the accumulated benefit is in excess of plan assets:
| | | | | | | | | |
| | | December 28, | | | December 30, | |
| (dollar amounts in thousands) | | 2008 | | | 2007 | |
| |
| Projected benefit obligation | | $ | 83,478 | | | $ | 86,340 | |
| Accumulated benefit obligation | | $ | 79,165 | | | $ | 81,824 | |
| Fair value of plan assets | | $ | 1,550 | | | $ | 1,454 | |
| |
The weighted average rate assumptions used in determining pension costs and the projected benefit obligation are as follows:
| | | | | | | | | |
| | | December 28, | | | December 30, | |
| | | 2008 | | | 2007 | |
| |
Weighted average assumptions for year-end benefit obligations: | | | | | | | | |
| Discount rate (1) | | | 5.75 | % | | | 5.50 | % |
| Expected rate of increase in future compensation levels | | | 2.77 | % | | | 2.50 | % |
Weighted average assumptions for net periodic benefit cost development: | | | | | | | | |
| Discount rate (1) | | | 5.50 | % | | | 4.50 | % |
| Expected rate of return on plan assets | | | 4.25 | % | | | 3.80 | % |
| Expected rate of increase in future compensation levels | | | 2.52 | % | | | 2.50 | % |
Measurement Date: | | December 28, 2008 | | December 30, 2007 |
| |
| (1) | | Represents the weighted average rate for all pension plans. |
In developing the discount rate assumption, we considered the estimated plan durations of each of our plans and selected a rate of a corresponding length of time. The source of the discount rate was obtained by considering the yield curves available on AA rated corporate bonds in the Eurozone, specifically the iboxx AA 10+ index. This resulted in a discount rate of 5.75% and 5.50% for 2008 and 2007, respectively.
The majority of our pension plans are unfunded plans. The expected rate of the return was developed using the historical rate of returns of the foreign government bonds currently held. This resulted in the selection of the 4.25% long-term rate of return on asset assumption. For funded plans, all assets are held in foreign government bonds.
The benefits expected to be paid over the next five years and the five aggregated years after:
| | | | | |
| (dollar amounts in thousands) | | | | |
| |
| 2009 | | $ | 4,357 | |
| 2010 | | | 4,595 | |
| 2011 | | | 4,825 | |
| 2012 | | | 4,879 | |
| 2013 | | | 5,257 | |
| 2014 through 2017 | | $ | 26,862 | |
| |
75
Note 15. FAIR VALUE MEASUREMENT,FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Fair Value Measurement
As discussed in Note 1, we adopted FAS 157 on December 31, 2007, which among other things, requires enhanced disclosures about assets and liabilities measured at fair value. Our adoption of FAS 157 was limited to financial assets and liabilities, which primarily relate to our derivative contracts.
We utilize the market approach to measure fair value for our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
FAS 157 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
| | | | | |
| Level 1 | | - | | Inputs are quoted prices in active markets for identical assets or liabilities. |
| | | | | |
| Level 2 | | - | | Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. |
| | | | | |
| Level 3 | | - | | Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. |
Because the Company’s derivatives are not listed on an exchange, the Company values these instruments using a valuation model with pricing inputs that are observable in the market or that can be derived principally from or corroborated by observable market data. The Company’s methodology also incorporates the impact of both the Company’s and the counterparty’s credit standing.
The following table represents our financial assets and liabilities measured at fair value as of December 28, 2008 and the basis for that measurement:
| | | | | | | | | | | | | | | | | |
| | | Total Fair Value | | | Quoted Prices in | | | | | | | |
| | | Measurement | | | Active Markets for | | | Significant Other | | | Significant | |
| | | December 28, | | | Identical Asset | | | Observable Inputs | | | Unobservable Inputs | |
| (dollar amounts in thousands) | | 2008 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| |
| Foreign currency forward exchange contracts | | $ | 901 | | | $ | — | | | $ | 901 | | | $ | — | |
| Foreign currency revenue forecast contracts | | | 48 | | | | — | | | | 48 | | | | — | |
| Interest rate swap | | | 916 | | | | — | | | | 916 | | | | — | |
| |
| Total liabilities | | $ | 1,865 | | | $ | — | | | $ | 1,865 | | | $ | — | |
| |
The following table provides a summary of the activity associated with all of our designated cash flow hedges (interest rate and foreign currency) reflected in accumulated other comprehensive income for the years ended December 28, 2008 and December 30, 2007:
| | | | | | | | | |
| | | December 28, | | | December 30, | |
| (dollar amounts in thousands) | | 2008 | | | 2007 | |
| |
| Beginning balance, net of tax | | $ | — | | | $ | — | |
| Changes in fair value gain, net of tax | | | 1,508 | | | | — | |
| Reclass to earnings, net of tax | | | (628 | ) | | | — | |
| |
| Ending balance, net of tax | | $ | 880 | | | $ | — | |
| |
76
The following table represents the carrying amounts and fair values of our financial instruments not measured at fair value on a recurring basis at December 28, 2008 and December 30, 2007:
| | | | | | | | | | | | | | | | | |
| | | December 28, 2008 | | | December 30, 2007 | |
| | | Carrying | | | Estimated | | | Carrying | | | Estimated | |
| (dollar amounts in thousands) | | Amount | | | Fair Value | | | Amount | | | Fair Value | |
| |
| Long-term debt (including current maturities and excluding capital leases) (1) | | $ | 133,596 | | | $ | 133,596 | | | $ | 94,914 | | | $ | 94,914 | |
| |
| (1) | | The carrying amounts are reported on the balance sheet under the indicated captions. |
Long-term debt is carried at the original offering price, less any payments of principal. Rates currently available to us for long-term borrowings with similar terms and remaining maturities are used to estimate the fair value of existing borrowings as the present value of expected cash flows. The senior unsecured credit facility maturity date is in the year 2010.
The carrying value approximates fair value for cash, restricted cash, accounts receivable, and accounts payable.
Financial Instruments and Risk Management
We manufacture products in the USA, the Caribbean, Europe, the U.K.,and the Asia Pacific region for both the local marketplace, and for export to our foreign subsidiaries. The subsidiaries, in turn, sell these products to customers in their respective geographic areas of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations on inter-company receivables and payables. Additionally, the sourcing of product in one currency and the sales of product in a different currency can cause gross margin fluctuations due to changes in currency exchange rates.
Our major market risk exposures are movements in foreign currency and interest rates. We have historically not used financial instruments to minimize our exposure to currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries. We have used third-party borrowings in foreign currencies to hedge a portion of our net investments in and cash flows derived from our foreign subsidiaries. We enter into forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts are entered into with major financial institutions, thereby minimizing the risk of credit loss. Our policy is to manage interest rates through the use of interest rate caps or swaps. We do not hold or issue derivative financial instruments for speculative or trading purposes. We are subject to other foreign exchange market risk exposure resulting from anticipated non-financial instrument foreign currency cash flows which are difficult to reasonably predict, and have therefore not been included in the table of Fair Values. All listed items described are non-trading.
We have used third party borrowings in foreign currencies to hedge a portion of our net investments in and cash flows derived from our foreign subsidiaries. As we reduce our third party foreign currency borrowings, the effect of foreign currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries increases.
We selectively purchase currency forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. This allows us to shift the effect of positive or negative currency fluctuations to a third party. As of December 28, 2008, we had currency forward exchange contracts totaling approximately $9.7 million. The fair value of the forward exchange contracts was reflected as a $0.9 million liability and is included in other current liabilities in the accompanying balance sheets. The contracts are in the various local currencies covering primarily our Western European, Canadian, and Australian operations. Historically, we have not purchased currency forward exchange contracts where it is not economically efficient, specifically for our operations in South America and Asia.
Beginning in the second quarter of 2008, we entered into various foreign currency contracts to reduce our exposure to forecasted Euro-denominated inter-company revenues. These contracts were designated as cash flow hedges. The foreign currency contracts mature at various dates from January 2009 to September 2009. The purpose of these cash flow hedges is to eliminate the currency risk associated with Euro-denominated forecasted revenues due to changes in exchange rates. As of December 28, 2008, the fair value of these cash flow hedges were reflected as a $48,000 liability and are included in other current liabilities in the accompanying consolidated balance sheets. The total notional amount of these hedges is $15.1 million (€10.7 million) and the unrealized gain recorded in other comprehensive income was $1.5 million (net of taxes of $29,000). During the year ended December 28, 2008, a $0.6 million benefit related to these foreign currency hedges was recorded to cost of goods sold as the inventory was sold to external parties. The Company recognized no gain or loss during the year ended December 28, 2008 for hedge ineffectiveness. As of December 28, 2008, deferred net gains or losses included in accumulated other comprehensive income that are expected to be reclassified as earnings during the next twelve months are approximately $1.5 million.
During the first quarter of 2008, we entered into an interest rate swap agreement with a notional amount of $40 million and a maturity date of February 18, 2010. The purpose of this interest rate swap agreement is to hedge potential changes to our cash flows due to the variable interest nature of our senior unsecured credit facility. This interest rate swap was designated as a cash flow hedge under SFAS 133. As of December 28, 2008, the fair value of the interest rate swap agreement was reflected as a $0.9 million liability and is included in other long-term liabilities in the accompanying consolidated balance sheets and the unrealized loss recorded in other comprehensive income was $0.6 million (net of taxes of $0.3 million). The Company recognized no gain or loss during the year ended December 28, 2008 for hedge ineffectiveness.
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During the second quarter of 2007, the Company entered into a foreign currency option contract, at a notional amount of€5 million, to mitigate the effect of fluctuating foreign exchange rates on the reporting of a portion of its expected 2007 foreign currency denominated earnings. Changes in the fair value of this foreign currency option contract, which is not designated as a hedge, are recorded in earnings immediately. The premium paid on the option contract was $73,000. The foreign currency option contract expired on December 28, 2007. The fair market value on this option at the expiration date was zero.
Aggregate foreign currency transaction gains (losses) in 2008, 2007, and 2006, were $(9.2) million, $0.3 million, and $(0.4) million, respectively, and are included in other gain, net on the consolidated statements of operations.
Additionally, there were no deferrals of gains or losses on currency forward exchange contracts at December 28, 2008.
Note 16. PROVISION FOR RESTRUCTURING
Restructuring expense for the periods ended December 28, 2008, December 30, 2007, and December 31, 2006 were as follows:
(dollar amounts are in thousands)
| | | | | | | | | | | | | |
| | | December 28, | | | December 30, | | | December 31, | |
| Fiscal 2008 | | 2008 | | | 2007 | | | 2006 | |
| |
Manufacturing Restructuring Plan | | | | | | | | | | | | |
| Severance and other employee-related charges | | $ | 699 | | | $ | — | | | $ | — | |
| Consulting fees | | | 838 | | | | — | | | | — | |
2005 Restructuring Plan | | | | | | | | | | | | |
| Severance and other employee-related charges | | | 4,563 | | | | 1,215 | | | | 7,915 | |
| Acquisition integration costs | | | 519 | | | | — | | | | — | |
| Pension curtailment | | | — | | | | (420 | ) | | | (339 | ) |
| Pension termination benefit expense | | | — | | | | — | | | | 226 | |
| Lease termination costs | | | — | | | | 2,051 | | | | — | |
2003 Restructuring Plan | | | | | | | | | | | | |
| Severance and other employee-related charges | | | (253 | ) | | | (145 | ) | | | (409 | ) |
| Lease termination costs | | | 76 | | | | — | | | | (386 | ) |
| |
| Total | | $ | 6,442 | | | $ | 2,701 | | | $ | 7,007 | |
| |
Restructuring accrual activity for the periods ended December 28, 2008, and December 30, 2007, were as follows:
(dollar amounts are in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Charge | | | | | | | | | | | |
| | | Accrual at | | | Charged | | | Reversed | | | | | | | Exchange | | | | |
| | | Beginning | | | to | | | to | | | Cash | | | Rate | | | Accrual at | |
| Fiscal 2008 | | of Year | | | Earnings | | | Earnings | | | Payments | | | Changes | | | 12/28/08 | |
| |
Manufacturing Restructuring Plan | | | | | | | | | | | | | | | | | | | | | | | | |
| Severance and other employee-related charges | | $ | — | | | $ | 701 | | | $ | (2 | ) | | $ | (37 | ) | | $ | (10 | ) | | $ | 652 | |
2005 Restructuring Plan | | | | | | | | | | | | | | | | | | | | | | | | |
| Severance and other employee-related charges | | | 3,015 | | | | 5,362 | | | | (799 | ) | | | (4,141 | ) | | | (135 | ) | | | 3,302 | |
| Acquisition restructuring costs | | | 1,209 | | | | — | | | | — | | | | (612 | ) | | | (29 | ) | | | 568 | |
| |
| Total | | $ | 4,224 | | | $ | 6,063 | | | $ | (801 | ) | | $ | (4,790 | ) | | $ | (174 | ) | | $ | 4,522 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Charge | | | | | | | | | | | |
| | | Accrual at | | | | | | | Charged | | | Reversed | | | | | | | Exchange | | | | |
| | | Beginning | | | Acquisition | | | to | | | to | | | Cash | | | Rate | | | Accrual at | |
| Fiscal 2007 | | of Year | | | Restructuring | | | Earnings | | | Earnings | | | Payments | | | Changes | | | 12/30/07 | |
| |
2005 Restructuring Plan | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Severance and other employee-related charges | | $ | 6,786 | | | $ | — | | | $ | 2,096 | | | $ | (881 | ) | | $ | (5,287 | ) | | $ | 301 | | | $ | 3,015 | |
| Acquisition restructuring costs (1) | | | — | | | | 1,125 | | | | — | | | | — | | | | — | | | | 84 | | | | 1,209 | |
| |
| Total | | $ | 6,786 | | | $ | 1,125 | | | $ | 2,096 | | | $ | (881 | ) | | $ | (5,287 | ) | | $ | 385 | | | $ | 4,224 | |
| |
| (1) | | During 2007, restructuring costs of $1.2 million included as a cost of the SIDEP acquisition ($1.1 million related to employee severance and $0.1 million related to the cost to abandon facilities) were accounted for under Emerging Issues Task Force Issue No. 95-3 “Recognition of Liabilities in Connection with Purchase Business Combinations.” These costs were recognized as an assumed liability in the acquisition and were included in the purchase price allocation at November 9, 2007. |
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Manufacturing Restructuring Plan
In August 2008, we announced a manufacturing and supply chain restructuring program designed to accelerate profitable growth in our Check-Net® business and to support incremental improvements in our EAS hardware and labels businesses.
For the year ended December 28, 2008, a net charge of $1.5 million was recorded in connection with the Manufacturing Restructuring Plan. The charge was composed of $0.7 million of severance accruals and $0.8 million of consulting fees.
The total number of employees affected by the Manufacturing Restructuring Plan were 18, of which 3 have been terminated. The remaining terminations are expected to be completed by the end of fiscal year 2010. The anticipated total cost is expected to approximate $3.0 million to $4.0 million, of which $1.5 million has been incurred and $0.9 million has been paid. Termination benefits are planned to be paid one month to 24 months after termination.
2005 Restructuring Plan
In the second quarter of 2005, we initiated actions focused on reducing our overall operating expenses. This plan included the implementation of a cost reduction plan designed to consolidate certain administrative functions in Europe and a commitment to a plan to restructure a portion of our supply chain manufacturing to lower cost areas. During the fourth quarter 2006, we continued to review the results of the overall initiatives and added an additional reduction focused on the reorganization of senior management to focus on key markets and customers. This additional restructuring reduced our management by 25%.
For the year ended December 28, 2008, a net charge of $5.1 million was recorded in connection with the 2005 Restructuring Plan. The charge was composed of $4.6 million of severance accruals and $0.5 million related to SIDEP acquisition integration costs.
A net charge of $2.8 million was recorded in 2007 in connection with the 2005 Restructuring Plan. The charge was composed of $1.2 million of severance accruals and $2.0 million of lease termination and related costs, partially offset by $0.4 million related to settlements on pension liabilities resulting from employees who left due to the restructuring plan.
A net charge of $7.8 million was recorded in 2006 in connection with the 2005 Restructuring Plan. Included in the net charge was $7.2 million related to severance and a $0.7 million litigation settlement accrual related to employees previously terminated according to the restructuring plan in certain countries. Also included in the net charge was a $0.3 million pension curtailment gain related to employees previously terminated according to the restructuring plan in certain countries and an expense of $0.2 million for a special termination benefit provided to one employee according to the employee’s termination agreement.
The total number of employees affected by the 2005 Restructuring Plan were 858, of which 853 have been terminated. The remaining terminations are expected to be completed by the end of fiscal year 2009. The anticipated total cost is expected to approximate $30 million to $31 million, of which $30 million has been incurred and $27 million has been paid. Termination benefits are planned to be paid one month to 24 months after termination.
2003 Restructuring Plan
During 2008, we reversed $0.3 million of previously accrued severance and incurred $0.1 million of lease termination costs related to the 2003 Restructuring Plan.
During 2007, we reversed $0.1 million of previously accrued severance related to the 2003 Restructuring Plan.
During 2006, we reversed $0.8 million related to the 2003 Restructuring Plan. This was composed of $0.4 million related to the release of our lease reserve to income as we have obtained a sublease for the property previously reserved and a $0.4 million severance reversal.
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Note 17. COMMITMENTS AND CONTINGENCIES
We lease certain production facilities, offices, distribution centers, and equipment. Rental expense for all operating leases approximated $15.1 million, $26.7 million, and $14.7 million, in 2008, 2007, and 2006, respectively.
Future minimum payments for operating leases and capital leases having non-cancelable terms in excess of one year at December 28, 2008 are:
| | | | | | | | | | | | | |
| | | Capital | | | Operating | | | | |
| (dollar amounts in thousands) | | Leases | | | Leases | | | Total | |
| |
| 2009 | | $ | 258 | | | $ | 14,613 | | | $ | 14,871 | |
| 2010 | | | 72 | | | | 10,602 | | | | 10,674 | |
| 2011 | | | 26 | | | | 6,686 | | | | 6,712 | |
| 2012 | | | 13 | | | | 4,944 | | | | 4,957 | |
| 2013 | | | 3 | | | | 2,777 | | | | 2,780 | |
| Thereafter | | | — | | | | 3,101 | | | | 3,101 | |
| |
| Total minimum lease payments | | | 372 | | | $ | 42,723 | | | $ | 43,095 | |
| Less: amounts representing interest | | | 34 | | | | | | | | | |
| | | | | | | | | |
| Present value of minimum lease payments | | $ | 338 | | | | | | | | | |
| |
Contingencies
We are involved in certain legal and regulatory actions, all of which have arisen in the ordinary course of business. Management believes that the ultimate resolution of such matters is unlikely to have a material adverse effect on our consolidated results of operations and/or financial condition, except as described below.
Matters related to ID Security Systems Canada Inc. versus Checkpoint Systems, Inc.
On June 22, 2006, the Company settled the follow-on purported class action suits that were filed in connection with the ID Security Systems Canada Inc. litigation. The purported class action complaints generally alleged a claim of monopolization. The settlement was for $1.45 million in cash and credits for the purchase of 90 million radio frequency label tags. As a result, we recorded a pre-tax charge to earnings of $2.3 million in fiscal 2006. As a portion of the settlement is in the form of vouchers for the future purchases of tags, the settlement is anticipated to impact revenue and margin over the term of the redemption period for the vouchers.
Matter related to All-Tag Security S.A., et al
The Company originally filed suit on May 1, 2001, alleging that the disposable, deactivatable radio frequency security tag manufactured by All-Tag Security S.A. and All-Tag Security Americas, Inc.’s (jointly “All-Tag”) and sold by Sensormatic Electronics Corporation (Sensormatic) infringed on a U.S. Patent No. 4,876,555 (Patent) owned by the Company. On April 22, 2004, the United States District Court for the Eastern District of Pennsylvania granted summary judgment to defendants All-Tag and Sensormatic on the ground that the Company’s Patent was invalid for incorrect inventorship. The Company appealed this decision. On June 20, 2005, the Company won an appeal when the Federal Circuit reversed the grant of summary judgment and remanded the case to the District Court for further proceedings. On January 29, 2007 the case went to trial. On February 13, 2007, a jury found in favor of the defendants on infringement, the validity of the Patent and the enforceability of the Patent. On June 20, 2008, the Court entered judgment in favor of defendants based on the jury’s infringement and enforceability findings. On February 10, 2009 the Court granted defendants’ motions for attorneys’ fees under Section 285 of the Patent Statute. The district court will have to quantify the amount of attorneys’ fees to be awarded, but it is expected that defendants will request approximately $5.7 million plus interest. The Company recognized this amount during the fourth fiscal quarter ended December 28, 2008 in litigation settlements on the consolidated statement of operations. The Company intends to appeal any award of legal fees.
Note 18. CONCENTRATION OF CREDIT RISK
Our foreign subsidiaries, along with many foreign distributors, provide diversified international sales thus minimizing credit risk to one or a few distributors. Domestically, our sales are well diversified among numerous retailers in the apparel, drug, home entertainment, mass merchandise, music, shoe, supermarket, and video markets. We perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral from our customers.
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Note 19. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
Historically, we have reported our results of operations into three segments: Security, Labeling Services, and Retail Merchandising. During the fourth quarter of 2007, we began reporting our segments into three new segments: Shrink Management Solutions, Intelligent Labels, and Retail Merchandising. Fiscal 2006 has been conformed to reflect the segment change.
Our reportable business segments are strategic business units that offer distinctive products and services that are marketed through different channels. We have three reportable business segments:
| | i | | Shrink Management Solutions — includes electronic article surveillance (EAS) systems, closed-circuit television (CCTV) systems, and fire and intrusion systems. |
| |
| | ii | | Intelligent Labels — includes electronic article surveillance labels, Check-Net® (service bureau), intelligent library systems, and radio frequency identification (RFID) tags and labels. |
| | iii | | Retail Merchandising — includes hand-held labeling systems (HLS) and retail display systems (RDS). |
The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
The business segment information set forth below is that viewed by the chief operating decision maker:
| | | | | | | | | | | | | |
| (dollar amounts in thousands) | | 2008 | | | 2007 | | | 2006 | |
| |
Business segment net revenue: | | | | | | | | | | | | |
| Shrink Management Solutions | | $ | 565,067 | | | $ | 478,526 | | | $ | 383,932 | |
| Intelligent Labels | | | 257,635 | | | | 259,282 | | | | 219,389 | |
| Retail Merchandising | | | 94,380 | | | | 96,348 | | | | 84,454 | |
| |
| Total | | $ | 917,082 | | | $ | 834,156 | | | $ | 687,775 | |
| |
Business segment gross profit: | | | | | | | | | | | | |
| Shrink Management Solutions | | $ | 230,453 | | | $ | 190,379 | | | $ | 149,505 | |
| Intelligent Labels | | | 100,983 | | | | 109,487 | | | | 100,654 | |
| Retail Merchandising | | | 46,663 | | | | 46,106 | | | | 41,532 | |
| |
| Total gross profit | | | 378,099 | | | | 345,972 | | | | 291,691 | |
| Operating expenses | | | 395,276 | (1) | | | 279,154 | (2) | | | 253,608 | (3) |
| Interest (expense) income, net | | | (3,108 | ) | | | 3,096 | | | | 2,751 | |
| Other (loss) gain, net | | | (8,924 | ) | | | 662 | | | | 1,141 | |
| |
| (Loss) earnings from continuing operations before income taxes and minority interest | | $ | (29,209 | ) | | $ | 70,576 | | | $ | 41,975 | |
| |
Business segment total assets: | | | | | | | | | | | | |
| Shrink Management Solutions | | $ | 495,187 | | | $ | 548,071 | | | | | |
| Intelligent Labels | | | 421,239 | | | | 334,865 | | | | | |
| Retail Merchandising | | | 69,290 | | | | 148,108 | | | | | |
| | | | | |
| Total | | $ | 985,716 | | | $ | 1,031,044 | | | | | |
| | | | | |
| (1) | | Includes a $59.6 million goodwill impairment charge, $6.4 million restructuring charge, a $6.2 million litigation settlement charge, a $3.0 million intangible asset impairment charge, a $1.5 million fixed asset impairment charge, and a $1.0 million gain from the sale of our Czech subsidiary. |
| |
| (2) | | Includes a $2.7 million restructuring charge, a $4.4 million charge related to our CEO transition, and a $2.6 million gain from the sale of our Austria subsidiary. |
| |
| (3) | | Includes a $7.0 million restructuring charge, a $2.3 million litigation settlement charge, and a $2.0 million gain from the settlement of a capital lease. |
| | (B) | | Geographic Information |
Operating results are prepared on a “country of domicile” basis, meaning that net revenues and gross profit are included in the geographic area where the selling entity is located. Assets are included in the geographic area in which the producing entities are located. A direct sale from the U.S. to an unaffiliated customer in South America is reported as a sale in the U.S. Inter-area sales between our locations are made at transfer prices that approximate market price and have been eliminated from consolidated net
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revenues. Gross profit for the individual area includes the profitability on a transfer price basis, generated by sales of our products imported from other geographic areas. International Americas is defined as all countries in North and South America, excluding the United States Puerto Rico, and Dominican Republic.
The following table shows net revenues, gross profit, and other financial information by geographic area for the years 2008, 2007, and 2006:
| | | | | | | | | | | | | | | | | | | | | |
| | United States, | | | | | | | | | | | | | | |
| | Puerto Rico, & | | | | | | International | | | Asia | | | | |
| (dollar amounts in thousands) | Dominican Republic | | | Europe | | Americas | | | Pacific | | | Total | |
| |
2008 | | | | | | | | | | | | | | | | | | | | |
| Net revenues from unaffiliated customers | | $ | 319,929 | | | $ | 438,011 | | | $ | 35,433 | | | $ | 123,709 | | | $ | 917,082 | |
| Gross profit | | | 143,795 | | | | 168,013 | | | | 14,529 | | | | 51,762 | | | | 378,099 | |
| Long-lived assets | | $ | 196,241 | | | $ | 192,627 | | | $ | 3,286 | | | $ | 45,908 | | | $ | 438,062 | |
| |
2007 | | | | | | | | | | | | | | | | | | | | |
| Net revenues from unaffiliated customers | | $ | 275,212 | | | $ | 412,416 | | | $ | 37,125 | | | $ | 109,403 | | | $ | 834,156 | |
| Gross profit | | | 122,630 | | | | 161,457 | | | | 12,462 | | | | 49,423 | | | | 345,972 | |
| Long-lived assets | | $ | 158,127 | | | $ | 262,377 | | | $ | 7,021 | | | $ | 58,966 | | | $ | 486,491 | |
| |
2006 | | | | | | | | | | | | | | | | | | | | |
| Net revenues from unaffiliated customers | | $ | 237,108 | | | $ | 340,171 | | | $ | 31,048 | | | $ | 79,448 | | | $ | 687,775 | |
| Gross profit | | $ | 102,987 | | | $ | 136,534 | | | $ | 12,269 | | | $ | 39,901 | | | $ | 291,691 | |
| |
Note 20. MINORITY INTEREST
On July 1, 1997, Checkpoint Systems Japan Co. Ltd. (Checkpoint Japan), a wholly-owned subsidiary of the Company, issued newly authorized shares to Mitsubishi Materials Corporation (Mitsubishi) in exchange for cash.
In February 2006, Checkpoint Japan repurchased 26% of these shares from Mitsubishi in exchange for $0.2 million in cash. The remaining shares held by Mitsubishi represent 15% of the adjusted outstanding shares of Checkpoint Japan.
Our consolidated balance sheets include 100% of the assets and liabilities of Checkpoint Japan. Mitsubishi’s 15% interest in Checkpoint Japan and the earnings there from have been reflected as minority interest on our consolidated balance sheets and consolidated statements of operations, respectively.
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Note 21. QUARTERLY INFORMATION (UNAUDITED)
QUARTERS (unaudited)
| | | | | | | | | | | | | | | | | | | | | |
| (dollar amounts in thousands, except per share data) | | First | | | Second | | | Third | | | Fourth | | | Year | |
| |
2008 | | | | | | | | | | | | | | | | | | | | |
| Net revenues | | $ | 209,620 | | | $ | 236,200 | | | $ | 233,995 | | | $ | 237,267 | | | $ | 917,082 | |
| Gross profit | | | 86,479 | | | | 97,941 | | | | 97,631 | | | | 96,048 | | | | 378,099 | |
| Earnings (loss) from continuing operations | | | 4,798 | (1) | | | 14,356 | (2) | | | 12,776 | (3) | | | (61,735) | (4) (5) | | | (29,805 | ) |
| Net earnings | | | 4,798 | (1) | | | 14,356 | (2) | | | 12,776 | (3) | | | (61,735) | (4) (5) | | | (29,805 | ) |
| Earnings (loss) per share from continuing operations: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | .12 | | | $ | .36 | | | $ | .33 | | | $ | (1.58 | ) | | $ | (.76 | ) |
| Diluted | | $ | .12 | | | $ | .36 | | | $ | .33 | | | $ | (1.58 | ) | | $ | (.76 | ) |
| Net earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | .12 | | | $ | .36 | | | $ | .32 | | | $ | (1.58 | ) | | $ | (.76 | ) |
| Diluted | | $ | .12 | | | $ | .36 | | | $ | .32 | | | $ | (1.58 | ) | | $ | (.76 | ) |
| |
| | | First | | | Second | | | Third | | | Fourth | | | Year | |
| |
2007 | | | | | | | | | | | | | | | | | | | | |
| Net revenues | | $ | 171,202 | | | $ | 195,702 | | | $ | 204,589 | | | $ | 262,663 | | | $ | 834,156 | |
| Gross profit | | | 70,279 | | | | 82,995 | | | | 85,648 | | | | 107,050 | | | | 345,972 | |
| Earnings from continuing operations | | | 4,966 | (6) | | | 14,574 | (7) | | | 14,347 | | | | 24,522 | (8) (9) | | | 58,409 | |
| Net earnings | | | 4,966 | (6) | | | 15,097 | (7) | | | 14,338 | | | | 24,367 | (8) (9) | | | 58,768 | |
| Earnings per share from continuing operations: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | .13 | | | $ | .37 | | | $ | .36 | | | $ | .61 | | | $ | 1.46 | |
| Diluted | | $ | .12 | | | $ | .36 | | | $ | .35 | | | $ | .60 | | | $ | 1.43 | |
| Net earnings per share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | .13 | | | $ | .38 | | | $ | .36 | | | $ | .61 | | | $ | 1.47 | |
| Diluted | | $ | .12 | | | $ | .37 | | | $ | .35 | | | $ | .59 | | | $ | 1.44 | |
| |
| (1) | | Includes a $0.7 million restructuring charge (net of tax) and a $0.8 deferred compensation adjustment (net of tax) from prior periods (see Note 1 “ Out of Period Adjustments” for additional information). |
| |
| (2) | | Includes a $2.1 million restructuring charge (net of tax) and a $4.8 million valuation allowance adjustment. |
| |
| (3) | | Includes a $0.5 million restructuring charge (net of tax), $0.3 million litigation settlement expense (net of tax), and a $1.0 million gain from the sale of the Czech Republic subsidiary (net of tax). |
| |
| (4) | | Includes a $58.5 million goodwill impairment charge (net of tax), a $3.5 million litigation settlement charge (net of tax), a $2.2 million intangible asset impairment charge (net of tax), a $1.6 million restructuring charge (net of tax), and a $0.8 million fixed asset impairment charge (net of tax). |
| |
| (5) | | Includes a $0.8 million out of period adjustment related to the accounting for a building impairment in France (see Note 1 “ Out of Period Adjustments” for additional information). |
| |
| (6) | | Includes a $0.3 million restructuring charge (net of tax). |
| |
| (7) | | Includes a $0.2 million restructuring charge (net of tax). |
| |
| (8) | | Includes a $2.0 million restructuring charge (net of tax), a $2.9 million charge related to our CEO transition (net of tax), and a $2.5 million gain from the sale of our Austrian subsidiary (net of tax). |
| |
| (9) | | Includes a $2.1 million out of period adjustment related to income taxes (see Note 1 “ Out of Period Adjustments” for additional information). |
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| Item 9. | | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
There are no changes or disagreements to report under this item.
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a — 15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of December 28, 2008.
Management’s Annual Report On Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. With the participation of our Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 28, 2008 based on theInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 28, 2008.
The scope of management’s assessment of internal control over financial reporting as of December 28, 2008 excluded OATSystems because it was acquired in a purchase business combination in June 2008. OATSystems represented 3.9% of total assets at December 28, 2008, and generated 0.3% of total revenue during fiscal year 2008.
Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has issued an audit report on the effectiveness of our internal control over financial reporting, which appears in Item 8 of this report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting that occurred during the Company’s fourth fiscal quarter of 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
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PART III
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| Item 10. | | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this Item (except for the information regarding executive officers called for by Item 401 of Regulation S-K, which is included in Part I hereof in accordance with General Instruction G (3)) is hereby incorporated by reference to the Registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on June 3, 2009, which management expects to file with the SEC within 120 days of the end of the Registrant’s fiscal year.
We have adopted a code of business conduct and ethics (the “Code of Ethics”) as required by the listing standards of the New York Stock Exchange and the rules of the SEC. This Code of Ethics applies to all of our directors, officers and employees. We have also adopted corporate governance guidelines (the “Governance Guidelines”) and a charter for each of our Audit Committee, Compensation Committee and Governance and Nominating Committee (collectively, the “Committee Charters”). We have posted the Code of Ethics, the Governance Guidelines and each of the Committee Charters on our website at www.checkpointsystems.com, and will post on our website any amendments to, or waivers from, the Code of Ethics applicable to any of its directors or executive officers. The foregoing information will also be available in print upon request.
| | |
| Item 11. | | EXECUTIVE COMPENSATION |
The information required by this Item is hereby incorporated by reference to the Registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on June 3, 2009, which management expects to file with the SEC within 120 days of the end of the Registrant’s fiscal year.
Note that the sections of our Definitive Proxy Statement entitled “Compensation and Stock Option Committee Report on Executive Compensation” pursuant to Regulation S-K Item 402 (a)(9) are not deemed “soliciting material” or “filed” as part of this report.
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| Item 12. | | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
The information required by this Item is hereby incorporated by reference to the Registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on June 3, 2009, which management expects to file with the SEC within 120 days of the end of the Registrant’s fiscal year.
| | |
| Item 13. | | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item is hereby incorporated by reference to the Registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on June 3, 2009, which management expects to file with the SEC within 120 days of the end of the Registrant’s fiscal year.
| | |
| Item 14. | | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this Item is hereby incorporated by reference to the Registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on June 3, 2009, which management expects to file with the SEC within 120 days of the end of the Registrant’s fiscal year.
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PART IV
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| Item 15. | | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
All other schedules are omitted either because they are not applicable, not required, or because the required information is included in the financial statements or notes thereto:
| 1. | | The following consolidated financial statements of Checkpoint Systems, Inc. were included in Item 8 | |
| | | Consolidated Balance Sheets as of December 28, 2008 and December 30, 2007 | 47 |
| | | Consolidated Statements of Operations for each of the years in the three-year period ended December 28, 2008 | 48 |
| | | Consolidated Statements of Stockholders’ Equity for each of the years in the three-year period ended December 28, 2008 | 49 |
| | | Consolidated Statements of Comprehensive (Loss) Income for each of the years in the three-year period ended December 28, 2008 | 50 |
| | | Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 28, 2008 | 51 |
| | | Notes to Consolidated Financial Statements | 52-83 |
| |
| 2. | | The following consolidated financial statements schedules of Checkpoint Systems, Inc. is included
Financial Statement Schedule, Schedule II — Valuation and Qualifying Accounts | 89 |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in Thorofare, New Jersey, on February 26, 2009.
| | | | | |
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 | | February 26, 2009 |
| | | | | |
| /s/ Raymond D. Andrews | | Senior Vice President and Chief Financial Officer | | February 26, 2009 |
| | | | | |
| | | | | |
| /s/ William S. Antle, III | | Director | | February 26, 2009 |
| | | | | |
| | | | | |
| /s/ George Babich, Jr. | | Director | | February 26, 2009 |
| | | | | |
| | | | | |
| /s/ Harald Einsmann | | Director | | February 26, 2009 |
| | | | | |
| | | | | |
| /s/ R. Keith Elliott | | Director | | February 26, 2009 |
| | | | | |
| | | | | |
| /s/ Alan R. Hirsig | | Director | | February 26, 2009 |
| | | | | |
| | | | | |
| /s/ George W. Off | | Director | | February 26, 2009 |
| | | | | |
| | | | | |
| /s/ Jack W. Partridge | | Director | | February 26, 2009 |
| | | | | |
| | | | | |
| /s/ Sally Pearson | | Director | | February 26, 2009 |
| | | | | |
| | | | | |
| /s/ Robert N. Wildrick | | Director | | February 26, 2009 |
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3. Exhibits
| | | |
| Exhibit 3.1 | | Articles of Incorporation, as amended, are hereby incorporated by reference to Item 14(a), Exhibit 3(i) of the Registrant’s 1990 Form 10-K, filed with the SEC on March 14, 1991. |
| Exhibit 3.2 | | By-Laws, as Amended and Restated, are hereby incorporated by reference Item 5.03, Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 28, 2007. |
| Exhibit 3.3 | | Articles of Amendment to the Articles of Incorporation are hereby incorporated by reference to Item 5.03, Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 28, 2007. |
| Exhibit 4.1 | | Rights Agreement by and between Registrant and American Stock and Transfer and Trust Company dated as of March 10, 1997, is hereby incorporated by reference to Item 14(a), Exhibit 4.1 of the Registrant’s 1996 Form 10-K filed with the SEC on March 17, 1997. |
| Exhibit 4.2 | | Amendment No. 1 to Rights Agreement dated as of March 2, 2007 is hereby incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on March 8, 2007. |
| Exhibit 10.1* | | Amended and Restated Stock Option Plan (1992) is hereby incorporated by reference to Registrant’s Form 10-K for 1997 filed with the SEC on March 23, 1998. |
| Exhibit 10.2 | | Consulting and Deferred Compensation Agreement with Albert E. Wolf, are incorporated by reference to Item(a), Exhibit 10(c) of the Registrant’s 1994 Form 10-K. |
| Exhibit 10.3 | | Credit Agreement dated March 4, 2005, by and among Registrant, Wachovia Bank N.A., as Administrative Agent, and the lenders named therein, is incorporated herein by reference to Exhibit 99.1 of the Registrant’s Form 8-K filed on March 9, 2005. |
| Exhibit 10.4* | | Employment Agreement with Per Harold Levin is incorporated by reference to Item 6(a), Exhibit 10.4 of the Registrant’s Form 10-Q filed on May 13, 2004. |
| Exhibit 10.5* | | Amendment to Employment Agreement with Per Harold Levin is incorporated by reference to Item 6(a), Exhibit 10.5 of the Registrant’s Form 10-Q filed on May 13, 2004. |
| Exhibit 10.6* | | Employment Agreement with John R. Van Zile is Incorporated by reference to Item 6(a), Exhibit 10.7 of the Registrant’s Form 10-Q filed on May 13, 2004. |
| Exhibit 10.7* | | 2004 Omnibus Incentive Compensation Plan as Appendix A to the Company’s Definitive Proxy Statement, filed with the SEC on March 29, 2004, is incorporated by reference. |
| Exhibit 10.8* | | 423 Employee Stock Purchase Plan as Appendix A to the Company’s Definitive Proxy Statement, filed with the SEC on March 29, 2004, is incorporated by reference. |
| Exhibit 10.9* | | Employment Agreement by and between Robert P. van der Merwe and Checkpoint Systems, Inc. dated December 27, 2007 is incorporated by reference to Registrant’s Form 10-K for 2007 filed with the SEC on February 28, 2008. |
| Exhibit 12 | | Ratio of Earnings to Fixed Charges. |
| Exhibit 21 | | Subsidiaries of Registrant. |
| Exhibit 23 | | Consent of Independent Registered Public Accounting Firm. |
| Exhibit 31.1 | | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. |
| Exhibit 31.2 | | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. |
| Exhibit 32 | | Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002. |
| * | | Management contract or compensatory plan or arrangement. |
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SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(dollar amounts in thousands)
Allowance For Doubtful Accounts
| | | | | | | | | | | | | | | | | | | | | |
| | | Balance at | | | Additions | | | Charged to | | | Deductions | | | | |
| | | Beginning | | | Through | | | Costs and | | | (Write-Offs and | | | Balance at | |
| Year | | of Year | | | Acquisition | | | Expenses | | | Recoveries, net) | | | End of Year | |
| |
| 2008 | | $ | 15,839 | | | $ | 27 | | | $ | 5,783 | | | $ | (3,235 | ) | | $ | 18,414 | |
| |
| 2007 | | $ | 12,417 | | | $ | 2,244 | | | $ | 2,330 | | | $ | (1,152 | ) | | $ | 15,839 | |
| |
| 2006 | | $ | 11,823 | | | $ | — | | | $ | 2,442 | | | $ | (1,848 | ) | | $ | 12,417 | |
| |
Deferred Tax Valuation Allowance
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Release of | | | | |
| | | | | | | | | | | Allowance | | | Release of | | | Allowance on | | | | |
| | | Balance at | | | Additions | | | Recorded on | | | Allowance on | | | Losses | | | | |
| | | Beginning | | | Through | | | Current Year | | | Current Year | | | Expired or | | | Balance at | |
| Year | | of Year | | | Acquisition | | | Losses | | | Utilization | | | Revalued | | | End of Year | |
| |
| 2008 | | $ | 27,572 | | | $ | 1,449 | | | $ | 3,122 | | | $ | (697 | ) | | $ | (8,729 | ) | | $ | 22,717 | |
| |
| 2007 | | $ | 34,510 | | | $ | — | | | $ | 1,563 | | | $ | 854 | | | $ | (9,355 | ) | | $ | 27,572 | |
| |
| 2006 | | $ | 26,477 | | | $ | — | | | $ | 801 | | | $ | (151 | ) | | $ | 7,383 | | | $ | 34,510 | |
| |
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