Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 leading global manufacturer and provider of technology-driven, loss prevention, inventory management and labeling solutions to the retail and apparel industry. We provide integrated inventory management solutions to brand, track, and secure goods for retailers and consumer product manufacturers worldwide. We are a leading provider of, and earn revenues primarily from the sale of Shrink Management Solutions, Apparel Labeling Solutions, and Retail Merchandising Solutions. Shrink Management Solutions consists of electronic article surveillance (EAS) systems, EAS consumables, Alpha
®
solutions, store security system installations and monitoring solutions (CheckView
®
), and radio frequency identification (RFID) systems, software, tags and labels. Apparel Labeling Solutions includes our web-based data management service and network of service bureaus to manage the printing of variable information on price and promotional tickets, adhesive labels, fabric and woven tags and labels, and apparel branding tags. Retail Merchandising Solutions consists of hand-held labeling systems (HLS) and retail display systems (RDS). Applications of these products include primarily retail security, asset and merchandise visibility, automatic identification, and pricing and promotional labels and signage. Operating directly in
29
countries, we have a global network of subsidiaries and distributors, and provide customer service and technical support around the world.
Our results are heavily dependent upon sales to the retail market. Our customers are dependent upon retail sales, which are susceptible to economic cycles and seasonal fluctuations. Furthermore, as approximately three-quarters of our revenues and operations are located outside the U.S., fluctuations in foreign currency exchange rates have a significant impact on reported results.
In 2012, we refined our business strategy to transition from a product protection business to a provider of inventory management solutions that give retailers ready insight into the on-shelf availability of merchandise in their stores. In support of this strategy, we continue to provide to retailers, manufacturers and distributors our EAS systems and consumables, Alpha
®
high-theft solutions, Merchandise Visibility
™
(RFID) products and services, and METO
®
hand-held labeling products. In apparel labeling, we are focusing on those products that support our refined strategy and leveraging our competitive advantage in the transfer and printing of variable data onto apparel labels. We are and will consider divesting certain businesses and product lines not advantageous to our refined strategy.
Our solutions help customers identify, track, and protect their assets. We believe that innovative new products and expanded product offerings will provide opportunities to enhance the value of legacy products while expanding the product base in existing customer accounts. We intend to maintain our leadership position in key hard goods markets (supermarkets, drug stores, mass merchandisers, and music and electronics retailers); to expand our market share in soft goods markets (specifically apparel), and to maximize our position in under-penetrated markets. We also intend to continue to capitalize on our installed base with large global retailers to promote source tagging. Furthermore, we plan to leverage our knowledge of RF and identification technologies to assist retailers and manufacturers in realizing the benefits of RFID.
Our Apparel Labeling business, which was assembled over the past few years through numerous acquisitions to support our penetration into the apparel industry and to support the growth of our RFID strategy, needs a narrower focus. We will achieve this by right-sizing the Apparel Labeling footprint in order to profitably provide on-time, high quality products to our apparel customers so that retailers can effectively merchandise their products. Simultaneously, we will reduce our Apparel Labeling product offering to only those that are also necessary to support our RFID strategy.
Our operations and results depend significantly on global market worldwide economic conditions, which have experienced deterioration in recent years. In response to these market conditions, we continue to focus on providing customers with innovative products that will be valuable in addressing shrink, which is particularly important during a difficult economic environment. We have also implemented initiatives to reduce costs and improve working capital to mitigate the effects of the economy on our business. We believe that these restructuring initiatives coupled with the strength of our core business and our ability to generate positive cash flow will sustain us through this challenging period.
During 2009, we initiated the SG&A Restructuring Plan focused on reducing our overall operating expenses by consolidating certain administrative functions to improve efficiencies. The first phase of this plan was implemented in the fourth quarter of 2009 with the remaining phases of the plan substantially completed by the end of the first quarter of 2012. In the third quarter of 2011, the Company approved the Global Restructuring Plan, an expansion of our previous SG&A Restructuring Plan to include manufacturing and other cost reduction initiatives.
During September 2011, we initiated the Global Restructuring Plan focused on further reducing our overall operating expenses by including manufacturing and other cost reduction initiatives, such as consolidating certain manufacturing facilities and administrative functions to improve efficiencies. This plan was further expanded in the first quarter of 2012 and again during the second quarter of 2012 to include Project LEAN. The first phase of this plan was implemented in the third quarter of 2011 with the remaining phases of the plan expected to be substantially complete by the end of 2013.
The expanded Global Restructuring Plan including Project LEAN and the SG&A Restructuring Plan will impact over
2,400
existing employees. Total costs of the Global Restructuring Plan including Project LEAN and the SG&A Restructuring Plan are expected to approximate
$70 million
to
$75 million
by the end of 2013, with
$52 million
to
$55 million
in total anticipated costs for the Global Restructuring Plan and
$18 million
of costs incurred for the SG&A Restructuring Plan, which is substantially complete. Total annual savings of the two plans are expected to approximate
$100 million
to
$105 million
by the end of 2013, with
$81 million
to
$85 million
in total anticipated savings for the Global Restructuring Plan including Project LEAN and
$19 million
to
$20 million
in total anticipated savings for the SG&A Restructuring Plan. Through our Global Restructuring Plan including Project LEAN, we plan to stabilize sales, actively manage margins, dramatically reduce operating expenses, more effectively manage working capital and improve global cash management control.
In the third quarter of 2012, following an extensive strategic review, we developed a comprehensive plan to address operational performance in ALS. The business is being fundamentally restructured, including consolidating certain manufacturing operations in order to provide quality merchandising products profitably and on time. We are also reducing our product capabilities to deliver those products that support our refined on-shelf availability strategy and we are rationalizing our customer base.
In August 2008, we announced a manufacturing and supply chain restructuring program designed to accelerate profitable growth in our ALS business and to support incremental improvements in our EAS systems and labels businesses. The implementation of this program was substantially completed in 2010, with total restructuring charges incurred of approximately $4.2 million. We realized approximately $6 million of annualized cost savings related to this program.
On February 17, 2012, we received amendments to our Senior Secured Credit Facility and Senior Secured Notes ("Debt Agreements") which increased the required leverage ratio covenant of adjusted EBITDA to total debt from
2.75
to
3.00
,
3.35
, and
3.25
for the periods ended March 25, 2012, June 24, 2012 and September 23, 2012, respectively. Had we not received these amendments, we would have been in violation of the leverage ratio covenant as of March 25, 2012.
On July 31, 2012, we received additional amendments to our Debt Agreements ("July 2012 Amendments"), which contained several modifications. The July 2012 Amendments reduced the total commitment of the Senior Secured Credit Facility from
$125.0 million
to
$75.0 million
. The July 2012 Amendments reduced the sublimit for the issuance of letters of credit of the Senior Secured Credit Facility from
$25.0 million
to
$5.0 million
. The July 2012 Amendments reduced the sublimit for swingline loans of the Senior Secured Credit Facility from
$25.0 million
to
$5.0 million
. The July 2012 Amendments increased the required leverage ratio covenant of adjusted EBITDA to total debt to
5.25
,
6.50
,
5.50
,
3.50
, and
2.75
for the periods ended June 24, 2012, September 23, 2012, December 30, 2012, March 31, 2013, and June 30, 2013 and thereafter. Cash restructuring of up to $25.0 million is excluded from the calculation of EBITDA beginning in the fiscal quarter ending June 24, 2012. The July 2012 Amendments waived the fixed charge coverage ratio covenant from June 24, 2012 through September 23, 2012 (the "Waiver Period"), decreased it to
1.00
for the period ended December 30, 2012, and returned it to 1.25 for periods thereafter. In addition, the July 2012 Amendments permitted divestitures, acquisitions and transfers of assets to non-credit parties, under certain conditions. The July 2012 Amendments also contained a provision whereby if our cash balance exceeds $65 million as of weekly measurement dates, we must prepay any additional borrowings made subsequent to the July 2012 Amendments. This provision is effective until we are in compliance with our original covenant requirements for two consecutive quarters. There were no required prepayments during 2012.
Absent the waiver and additional July 2012 Amendments, we would have been in violation of the June 24, 2012 leverage ratio and fixed charge coverage ratio covenants. We were in compliance with the amended leverage ratio covenant as of September 23, 2012. Absent the waiver, we would have been in violation of the fixed charge coverage ratio covenant as of September 23, 2012. We are in compliance with the amended leverage ratio and fixed charge coverage ratio covenants as of
December 30, 2012
. Although we cannot provide full assurance, we project to be in compliance with all of our covenants during 2013.
During the Waiver Period, the interest rate spread on the Senior Secured Credit Facility increases to a maximum of
4.25%
over the Base Rate or
5.25%
over the LIBOR rate. The “Base Rate” is the highest of (a) our lender's prime rate, (b) the Federal Funds rate, plus
0.50%
, and (c)
a daily rate equal to the one-month LIBOR rate, plus 1.00%
. The unused line fee will increase to a maximum of
1.00%
per annum. The maximum is based in accordance with changes in our leverage ratio.
During the Waiver Period, and until such time as the financial covenants return to the original covenants for two consecutive quarters, the coupon rate on the Senior Secured Notes will increase to
5.75%
,
6.13%
, and
6.50%
for the Series A Senior Secured Notes, Series B Senior Secured Notes, and Series C Senior Secured Notes, respectively.
In July 2009, we entered into an agreement to purchase the business of Brilliant Label, a China-based manufacturer of woven and printed labels, and settled the acquisition in August 2009. As of the second quarter of 2010, our financial statements reflected the final allocations of the Brilliant Label purchase price based on estimated fair values at the date of acquisition. The results from the acquisition and related goodwill are included in the Apparel Labeling Solutions segment. Through its facilities in Hong Kong and China, Brilliant Label added capacity to our apparel labeling business and expanded our manufacturing footprint, enabling us to meet greater demand.
In January 2011, the Company entered into an agreement to acquire the business of Shore to Shore, through the acquisition of equity and/or assets, which together is a retail apparel and footwear product identification business which designs, manufactures and sells tags and labels, brand protection, and EAS solutions/labels. The acquisition settled in May 2011 for a purchase price of approximately $78.7 million. During the second quarter of 2012, we finalized the purchase accounting for the acquisition and the financial statements reflect the final allocations of the purchase price based on estimated fair values at the date of acquisition. The results from the acquisition and related goodwill are included in the Apparel Labeling Solutions segment. This acquisition further expanded our tag and label production capabilities and global reach.
In October 2012, we completed the sale of the Banking Security Systems Integration business unit, which was focused on the financial services sector and previously was part of our CheckView
®
business. We are also pursuing the divestiture of our U.S. and Canada based CheckView
®
business so that we can focus on the growth of our core business.
Future financial results will be dependent upon our ability to successfully implement our redefined strategic focus, expand the functionality of our existing product lines, develop or acquire new products for sale through our global distribution channels, convert new large chain retailers to our solutions for shrink management, merchandise visibility and apparel labeling, and reduce the cost of our products and infrastructure to respond to competitive pricing pressures.
We believe that our base of recurring revenue (revenues from the sale of consumables into the installed base of security systems, apparel tags and labels, and hand-held labeling tools and services from monitoring and maintenance), repeat customer business, the anticipated effect of our restructuring activities, and our borrowing capacity should provide us with adequate cash flow and liquidity to execute our business plan.
Revision of Previously Issued Consolidated Financial Statements
In December of 2011, we identified errors in our financial statements resulting from improper and fraudulent activities of a certain former employee of our Canada sales subsidiary as part of the transition of our Canadian operations into our shared service environment in North America. Subsequent to the discovery of such errors, we retained outside counsel to undertake an investigation and with the assistance of forensic accountants and internal audit. The results of this investigation concluded that in the period from 2005 through the fourth quarter of 2011, the then Controller of our Canadian operations was able to misappropriate cash through various schemes. The defalcation of cash was concealed by overriding internal controls at the subsidiary which had the effect of misstating certain accounts including cash, accounts receivable, and inventories as well as income taxes and non-income taxes payable and operating expenses. Based on this investigation, it was determined that improper and fraudulent activities by a certain employee of the subsidiary affected the financial reporting of the subsidiary and that the improper and fraudulent activities were contained within the Canada sales subsidiary.
The total cumulative gross financial statement impact of the improper and fraudulent activities was approximately $5.2 million and impacted fiscal years 2005 through 2011 of which $1.1 million was recovered by the Company from the perpetrator during the fourth quarter of 2011, resulting in a net cumulative financial statement impact of $4.1 million. The fiscal year 2011 financial statement impact was $0.2 million income due to the recovery of $1.1 million offset by expense of $0.9 million. The fiscal year 2010 financial statement impact was $1.5 million. We incurred additional expenses related to the improper and fraudulent activities of $0.7 million during 2012. The financial statement impacts of the improper and fraudulent Canadian activities have been included in other expense in the Consolidated Statements of Operations. We filed a claim during the second quarter of 2012 with our insurance provider for the unrecovered amount of the loss. On October 10, 2012, the Company received compensation of $4.7 million for the financial impact of the fraudulent Canadian activities from our insurance provider. The income from the settlement was recorded in the fourth quarter of 2012 as a reduction of other expense in the Consolidated Statement of Operations.
We revised our historical annual and quarterly filings for the effects of these revision adjustments in our 2011 Annual Report on Form 10-K and our 2012 Quarterly Reports on Form 10-Q. All historical amounts presented in this 2012 Annual Report on Form 10-K reflect these historical revision adjustments.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities.
Note 1 of the Notes to the Consolidated Financial Statements describes the significant accounting policies used in the preparation of the Consolidated Financial Statements. Certain of these significant accounting policies are considered to be critical accounting policies. A critical accounting policy is defined as one that is both material to the presentation of our Consolidated Financial Statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition or results of operations.
Specifically, these policies have the following attributes: (1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations. Estimates and assumptions about future events and their effects cannot be determined with certainty. On an on-going basis, we evaluate our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the Consolidated Financial Statements as soon as they became known. Senior management reviews the development and selection of our accounting policies and estimates with the Audit Committee. The critical accounting policies have been consistently applied throughout the accompanying financial statements.
We believe the following accounting policies are critical to the preparation of our Consolidated Financial Statements:
Revenue Recognition.
We recognize revenue when revenue is realized or realizable and earned. Revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price to the buyer is fixed or determinable; and collectability is reasonably assured.
We enter into contracts to sell our products and services, and, while the majority of our sales agreements contain standard terms and conditions, there are agreements that contain multiple elements or non-standard terms and conditions. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and, if so, how the selling price should be allocated among the elements and when to recognize revenue for each element.
For arrangements with multiple elements, we allocate total arrangement consideration to all deliverables based on their relative selling price using a specific hierarchy and recognize revenue when each element’s revenue recognition criteria are met. The hierarchy is as follows: vendor-specific objective evidence (“VSOE”), third-party evidence of selling price (“TPE”) or best estimate of selling price (“BESP”). VSOE of fair value for each element is established based on the price charged when the same element is sold separately. We recognize revenue when installation is complete or other post-shipment obligations have been satisfied. Unearned revenue is recorded when payments are received in advance of performing our service obligations and is recognized over the service period.
Products leased to customers under sales-type leases are accounted for as the equivalent of a sale. The present value of such lease revenues is recorded as net revenues, and the related cost of the products is charged to cost of revenues. The deferred finance charges applicable to these leases are recognized over the terms of the leases, or when sold. Rental revenue from products under operating leases is recognized over the term of the lease. Installation revenue from SMS EAS products is recognized when the systems are installed. Service revenue is recognized, for service contracts, on a straight-line basis over the contractual period, and, for non-contract work, as services are performed.
Revenues from software license agreements are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant vendor obligations are remaining to be fulfilled, the fee is fixed or determinable, and collection is probable. Revenue from software contracts for both licenses and professional services that require significant production, modification, customization, or implementation are recognized together using the percentage of completion method based upon the ratio of labor incurred to total estimated labor to complete each contract. In instances where there is a term license combined with services, revenue is recognized ratably over the term.
We record estimated reductions to revenue for customer incentive offerings, including volume-based incentives and rebates. We record revenues net of an allowance for estimated return activities. Return activity was immaterial to revenue and results of operations for all periods presented.
We believe the following judgments and estimates have a significant effect on our Consolidated Financial Statements:
Allowance for Doubtful Accounts.
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These allowances are based on specific facts and circumstances surrounding individual customers as well as our historical experience. The adequacy of the reserves for doubtful accounts is continually assessed by periodically evaluating each customer’s receivable balance, considering our customers’ financial condition and credit history, and considering current economic conditions. Historically, our reserves have been adequate to cover all losses associated with doubtful accounts. If the financial condition of our customers were to deteriorate, impairing their ability to make payments, additional allowances may be required. If economic or political conditions were to change in the countries where we do business, it could have a significant impact on the results of operations, and our ability to realize the full value of our accounts receivable. Furthermore, we are dependent on customers in the retail markets. Economic difficulties experienced in those markets could have a significant impact on our results of operations and our ability to realize the full value of our accounts receivables. If our historical experiences changed by 10%, it would require an increase or decrease of
$0.4 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
$0.8 million
.
Valuation of Long-lived Assets.
Our long-lived assets include property, plant, and equipment, goodwill, and identified intangible assets.
With the exception of goodwill and indefinite-lived intangible assets, long-lived assets are depreciated or amortized over their estimated
useful lives, and are reviewed for impairment whenever changes in circumstances indicate the carrying value may not be recoverable.
Recoverability is determined based upon our estimates of future undiscounted cash flows. If the carrying value is determined to be not
recoverable, an impairment charge would be necessary to reduce the recorded value of the assets to their fair value. The fair value of the
long-lived assets other than goodwill is based upon appraisals, quoted market prices of similar assets, or discounted cash flows.
Goodwill and indefinite-lived intangible assets are subject to tests for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We test for impairment on an annual basis as of fiscal month end October of each fiscal year, relying on a number of factors including operating results, business plans, and anticipated future cash flows. Our management uses its judgment in assessing whether goodwill has become impaired between annual impairment tests. Reporting units are primarily determined as the geographic areas comprising our business segments, except in situations when aggregation of the reporting units is appropriate. Recoverability of goodwill is evaluated using a two-step process. The first step involves a
comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds the fair value, then the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an
amount equal to the excess. The nonrecurring fair value measurement of goodwill is developed using significant unobservable inputs (Level 3).
The implied fair value of our reporting units is dependent upon our estimate of future discounted cash flows and other factors. Our estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. Estimated future cash flows are adjusted by an appropriate discount rate derived from our market capitalization plus a suitable control premium at the date of evaluation. The financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital that we use to determine our discount rate, and through our stock price that we use to determine our market capitalization. Therefore, changes in the stock price may also affect the result of the impairment test. Market capitalization is determined by multiplying the number of shares outstanding on the assessment date by the average market price of our common stock over a 30-day period before each assessment date. We use this 30-day duration to consider inherent market fluctuations that may affect any individual closing price. We believe that our market capitalization alone does not fully capture the fair value of our business as a whole, or the substantial value that an acquirer would obtain from its ability to obtain control of our business. The difference between the sum total of the fair value of our reporting units and our market capitalization represents the control premium. As of the date of our goodwill impairment test, management has assessed our control premium to be within a reasonable range.
We have not made any changes to our methodology used in our annual impairment test since the adoption of ASC 350. Determination of the fair value of a reporting unit is a matter of judgment and involves the use of estimates and assumptions, which are based on management’s best estimates at the time.
We use an income approach (discounted cash flow approach) for the determination of fair value of our reporting units. Our projected cash flows incorporate many assumptions, the most significant of which include variables such as future sales, growth rates, operating margin, and the discount rates applied.
Assumptions related to revenue, growth rates and operating margin are based on management’s annual and ongoing forecasting, budgeting and planning processes and represent our best estimate of the future results of operations across the company. These estimates are subject to many assumptions, such as the economic environment across the segments in which we operate, end demand for our products, and competitor actions. The use of different assumptions would increase or decrease estimated discounted future cash flows and could increase or decrease an impairment charge. If the use of these assets or the projections of future cash flows change in the future, we may be required to record impairment charges. An erosion of future business results in any of the business units or significant declines in our stock price could result in an impairment to goodwill or other long-lived assets. These risks are discussed in Item 1A. Risk Factors.
During the second quarter of 2012, we experienced deterioration in revenues, gross margins and operating results in each of our segments as compared to the forecasted amounts in the most recent annual impairment test. Due to the declines in operating results in our segments, a change in management, and a revised strategic focus, we determined that impairment triggering events had occurred and that an assessment of goodwill was warranted. This resulted in the Company's assessment that the carrying value of the Apparel Labeling Solutions reporting unit exceeded its fair value. The basis of the fair value was determined by projecting future cash flows using assumptions concerning future operating performance and economic conditions that may differ from actual cash flows. Estimated future cash flows are adjusted by an appropriate discount rate derived from our market capitalization plus a suitable control premium at the date of the evaluation. The financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital that we use to determine our discount rate and through our stock price that we use to determine our market capitalization. As a result of our interim impairment test, a $64.4 million non-cash impairment charge was recorded as of June 24, 2012 in our Apparel Labeling Solutions segment. The goodwill impairment expense was due to the decline in estimated future Apparel Labeling Solutions cash flow impacted by our plan to refocus the business, coupled with recent declines in revenue and profitability. The impairment charge of the entire goodwill balance in our Apparel Labeling Solutions segment was recorded in goodwill impairment on the Consolidated Statement of Operations.
As a result of interim impairment indicators in the second quarter of 2012, we performed a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the long-lived assets in our Apparel Labeling Solutions reporting unit to their carrying amounts. The undiscounted cash flow analysis resulted in no impairment charge.
There were no additional impairment indicators during the third quarter ended September 23, 2012. Our 2012 annual impairment test resulted in our assessment that the carrying value of the Europe and International Americas Retail Merchandising Solutions reporting unit exceeded its fair value. As a result of our annual impairment test, a $38.3 million non-cash goodwill impairment charge was assessed as of October 21, 2012, and recorded in the fourth quarter of 2012. The goodwill impairment expense was due to the decline in estimated future Europe Retail Merchandising Solutions cash flows impacted by current economic conditions in Europe resulting in decreased customer investments in new stores and refurbishments. Additionally, increased competition and pricing pressures are factors that have negatively impacted this business. The impairment charge in our Retail Merchandising Solutions segment was recorded in goodwill impairment on the Consolidated Statement of Operations.
In connection with our annual impairment test, we performed a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the long-lived assets in our Europe Retail Merchandising Solutions reporting unit to their carrying amounts. The undiscounted cash flow analysis resulted in no impairment charge.
As of the date of our fiscal 2012 annual impairment test, the total fair values for the remaining reporting units in all of our segments exceeded their total carrying values by more than 45%. Based on our most recent goodwill impairment assessment of the reporting units of our segments and our understanding of currently projected trends of the business and the economy, we do not believe that there is a significant risk of impairment for these reporting units for a reasonable period of time. Although our analysis regarding the fair values of the goodwill and indefinite lived intangible assets indicates that they exceed their respective carrying values, materially different assumptions regarding the future performance of our businesses or significant declines in our stock price could result in additional goodwill impairment losses. Specifically, an unanticipated deterioration in revenues and gross margins generated by our Shrink Management Solutions and Retail Merchandising Solutions segments could trigger future impairment in those segments. Refer to Notes 1 and 5 of the Consolidated Financial Statements.
Income Taxes.
In determining income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of recoverability of certain of the deferred tax assets, which arise from temporary differences between tax and financial statement recognition of revenue and expense. We record a valuation allowance to reduce our deferred tax assets to the amount that it is more likely than not to be realized. In assessing the realizability of deferred tax assets, we consider future taxable income by tax jurisdictions and tax planning strategies. If we were to determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the valuation allowance would decrease income in the period such determination was made. Refer to Note 12 of the Consolidated Financial Statements.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. We are not aware of any such changes that would have a material effect on our results of operations, cash flows or financial position.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We record tax liabilities for the anticipated settlement of tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. Our income tax expense includes amounts intended to satisfy income tax assessments that result from these audit issues. Determining the income tax expense for these potential assessments and recording the related assets and liabilities requires management judgments and estimates. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from our estimate of tax liabilities. If payment of these amounts ultimately proves to be greater or less than the recorded amounts, the change of the liabilities would result in tax expense or benefit being recognized in that period. We’ve evaluated our uncertain tax positions and believe that our reserve for uncertain tax positions, including related interest and penalty, is adequate.
Pension Plans.
We have various unfunded pension plans outside the U.S. These plans have significant pension costs and liabilities that are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets, mortality rates, and merit and promotion increases. We are required to consider current market conditions, including changes in interest rates, in selecting these assumptions. Changes in the related pension costs or liabilities may occur in the future due to changes in the assumptions. A change in discount rates of 0.25% would have less than a
$0.1 million
effect on pension expense.
Stock Compensation
.
We recognize stock-based compensation expense for all share-based payment awards net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest. Stock compensation expense is recognized for all share-based payments on a straight-line basis over the requisite service period of the award.
Determining the fair value of share-based payment awards requires the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the share-based compensation expense could be significantly different from what we have recorded in the current period. A change in the estimated forfeiture rate of 10% would have a
$0.2 million
effect on stock compensation expense. As of
December 30, 2012
, there was
$1.4 million
and
$1.4 million
of unrecognized stock-based compensation expense related to nonvested stock options and restricted stock units, respectively. Such costs are expected to be recognized over a weighted-average period of
2.1
years and
1.5
years, respectively. Refer to Note 8 of the Consolidated Financial Statements.
Liquidity and Capital Resources
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. Our liquidity needs have been, and are expected to continue to be driven by acquisitions, capital investments, product development costs, potential future restructuring related to the rationalization of the business, and working capital requirements. In 2012 our focus has been on cost control, including restructuring, and working capital management. We have met our liquidity needs primarily through cash generated from operations. The impacts of our restructuring activities and on-going economic conditions put pressure on our debt covenants during 2012. We are addressing the issues discussed below by managing worldwide cash levels and obtaining debt covenant waivers and amendments to facilitate timely execution of our worldwide restructuring efforts. Based on an analysis of liquidity utilizing conservative assumptions for the next twelve months, we believe that cash on hand from operating activities and funding available under our credit agreements should be adequate to service debt and working capital needs, meet our capital investment requirements, other potential restructuring requirements, and product development requirements.
On February 17, 2012, we received amendments to our Senior Secured Credit Facility and Senior Secured Notes ("Debt Agreements") which increased the required leverage ratio covenant of adjusted EBITDA to total debt from
2.75
to
3.00
,
3.35
, and
3.25
for the periods ended March 25, 2012, June 24, 2012, and September 23, 2012. Had we not received these amendments, we would have been in violation of the leverage ratio covenant as of March 25, 2012.
On July 31, 2012, we received additional amendments to our Debt Agreements ("July 2012 Amendments"), which contained several modifications. The July 2012 Amendments reduced the total commitment of the Senior Secured Credit Facility from
$125.0 million
to
$75.0 million
. The July 2012 Amendments reduced the sublimit for the issuance of letters of credit of the Senior Secured Credit Facility from
$25.0 million
to
$5.0 million
. The July 2012 Amendments reduced the sublimit for swingline loans of the Senior Secured Credit Facility from
$25.0 million
to
$5.0 million
. The July 2012 Amendments increased the required leverage ratio covenant of adjusted EBITDA to total debt to
5.25
,
6.50
,
5.50
,
3.50
, and
2.75
for the periods ended June 24, 2012, September 23, 2012, December 30, 2012, March 31, 2013, and June 30, 2013 and thereafter. Cash restructuring of up to $25.0 million is excluded from the calculation of EBITDA beginning in the fiscal quarter ending June 24, 2012. The July 2012 Amendments waived the fixed charge covenant from June 24, 2012 through September 23, 2012 (the "Waiver Period"), decreased it to
1.00
for the period ended December 30, 2012, and returned it to 1.25 for periods thereafter. In addition, the July 2012 Amendments permitted divestitures, acquisitions and transfers of assets to non-credit parties, under certain conditions. The July 2012 Amendments also contained a provision whereby if our cash balance exceeds $65 million as of weekly measurement dates, we must prepay any additional borrowings made subsequent to the July 2012 Amendments. This provision is effective until we are in compliance with our original covenant requirements for two consecutive quarters. There were no required prepayments during 2012.
Absent the waiver and additional July 2012 Amendments, we would have been in violation of the June 24, 2012 leverage ratio and fixed charge coverage covenants. We were in compliance with the amended leverage ratio covenant as of September 23, 2012. Absent the waiver, we would have been in violation of the fixed charge coverage ratio covenant as of September 23, 2012. We are in compliance with the amended leverage ratio covenant and the fixed charge covenant as of
December 30, 2012
. Although we cannot provide full assurance, we project to be in compliance with all of our covenants during 2013.
During the Waiver Period, the interest rate spread on the Senior Secured Credit Facility increases to a maximum of
4.25%
over the Base Rate or
5.25%
over the LIBOR rate. The “Base Rate” is the highest of (a) our lender's prime rate, (b) the Federal Funds rate, plus
0.50%
, and (c)
a daily rate equal to the one-month LIBOR rate, plus 1.00%
. The unused line fee will increase to a maximum of
1.00%
per annum. The maximum is based in accordance with changes in our leverage ratio.
During the Waiver Period, and until such time as the financial covenants return to the original covenants for two consecutive quarters, the coupon rate on the Senior Secured Notes will increase to
5.75%
,
6.13%
, and
6.50%
for the Series A Senior Secured Notes, Series B Senior Secured Notes, and Series C Senior Secured Notes, respectively.
In the fourth quarter of 2011, we changed our assertion on unremitted earnings for certain foreign subsidiaries, primarily due to pressure on our leverage ratio for debt covenants. This resulted in the repatriation of foreign earnings in order to reduce worldwide debt to the levels stipulated by our covenants. Also impacting the change in assertion was the projected cash impact of the 2011 Global Restructuring Plan. As of
December 30, 2012
, the majority of our unremitted earnings of subsidiaries outside the United States were deemed not to be permanently reinvested.
The ongoing financial and credit crisis has reduced credit availability and liquidity for many companies. We believe, however, that the strength of our core business, cash position, access to credit markets, and our ability to generate positive cash flow will sustain us through this challenging period. We are working to reduce our liquidity risk by accelerating efforts to improve working capital while reducing expenses in areas that will not adversely impact the future potential of our business. Additionally, we have increased our monitoring of counterparty risk. We evaluate the creditworthiness of all existing and potential counterparties for all debt, investment, and derivative transactions and instruments. Our policy allows us to enter into transactions with nationally recognized financial institutions with a credit rating of “A” or higher as reported by one of the credit rating agencies that is a nationally recognized statistical rating organization by the U.S. Securities and Exchange Commission. The maximum exposure permitted to any single counterparty is $50.0 million. Counterparty credit ratings and credit exposure are monitored monthly and reviewed quarterly by our Treasury Risk Committee.
As of
December 30, 2012
, our cash and cash equivalents were
$118.8 million
compared to
$93.5 million
as of
December 25, 2011
. Cash and cash equivalents increased in
2012
primarily due to
$62.2 million
of cash provided by operating activities and
$0.8 million
effect of foreign currency, partially offset by
$35.2 million
of cash used in financing activities and
$2.4 million
of cash used in investing activities.
Cash provided by operating activities was
$51.8 million
greater during
2012
compared to
2011
. In
2012
compared to
2011
, our cash from operating activities was impacted positively by decreases in inventories, accounts receivable, and other current assets, which were partially offset by decreases in the restructuring reserve and unearned revenues. Inventory fluctuations are due to decreased customer orders during 2012 in comparison with 2011 combined with a focus on decreasing inventory levels. Accounts receivable decreased primarily due to decreased sales during 2012 compared to 2011 and a concerted effort to improve collections. The fluctuation in other current assets is associated with a decrease in unbilled receivables. The restructuring reserve decreased due to making cash payments for severance related to our existing restructuring plans. Unearned revenues decreased primarily due to the decrease in future contracted customer orders during 2012. This is partially offset by decreases in income excluding non-cash charges.
Cash used in investing activities was
$95.8 million
less during
2012
compared to
2011
. This was primarily due to the Shore to Shore acquisition that took place in the second quarter of 2011. In addition, 2012 increases in cash from investing activities related to a decrease in 2012 capital expenditures, and proceeds from the sales of our Puerto Rico facility, Banking Security Systems Integration business unit and Suzhou, China subsidiary.
Cash used in financing activities was
$41.1 million
greater during
2012
compared to
2011
. The increase was due primarily to the reductions of debt levels during 2012 compared to an increase in borrowings in 2011. In addition, we incurred
$2.1 million
in debt issuance costs during 2012 in connection with the July 2012 Amendments to the Senior Secured Credit Facility and Senior Secured Notes.
Our percentage of total debt to total equity as of
December 30, 2012
, was
30.0%
compared to
28.4%
as of
December 25, 2011
. As of
December 30, 2012
, our working capital was
$227.7 million
compared to
$233.1 million
as of
December 25, 2011
.
We continue to reinvest in the Company through our investment in technology and process improvement. During
2012
, our investment in research and development amounted to
$16.4 million
, as compared to
$19.3 million
in
2011
. These amounts are reflected in cash used in operations, as we expense our research and development as it is incurred. In 2013, we anticipate spending of approximately $20 million on research and development to support the achievement of our strategic plan.
We have various unfunded pension plans outside the U.S. These plans have significant pension costs and liabilities that are developed from actuarial valuations. For fiscal
2012
, our contribution to these plans was
$4.7 million
. Our funding expectation for
2013
is
$5.2 million
. We believe our current cash position, cash generated from operations, and the availability of cash under our revolving line of credit will be adequate to fund these requirements. The Contractual Obligation table details our anticipated funding requirements related to pension obligations for the next ten years.
Acquisition of property, plant, and equipment and intangibles during
2012
totaled
$12.4 million
compared to
$23.0 million
during
2011
. During
2012
, our acquisition of property, plant, and equipment and intangibles included
$1.4 million
of capitalized internal-use software costs related to an ERP system implementation, compared to
$8.3 million
during
2011
. We anticipate our capital expenditures, used primarily to upgrade information technology and improve our production capabilities, to approximate
$19 million
in 2013.
In January 2011, we entered into an agreement to acquire the business of Shore to Shore, through the acquisition of equity and/or assets, which together is a retail apparel and footwear product identification business which designs, manufactures and sells tags and labels, brand protection, and EAS solutions/labels. The acquisition was settled on May 16, 2011 for approximately
$78.7 million
, net of cash acquired of
$1.9 million
and the assumption of debt of
$4.2 million
. The purchase price was funded by
$66.7 million
of cash from operations and
$9.2 million
of borrowings under our Senior Secured Credit Facility. The payment for the acquisition is reflected in the acquisition of businesses line within investing activities on the Consolidated Statement of Cash Flows.
In October 2010, we acquired a software programming and development business based in the Philippines from Napar Contracting and Allied Services, Inc. for
$0.5 million
. The transaction was paid in cash. Based on the terms of the transaction,
60%
of the purchase price was due upon signing the agreement and the remaining
40%
was due on January 1, 2011.
In December 2011,
$4.2 million
(HKD
32.5 million
) was paid in order to extinguish our existing Hong Kong banking facility and other outstanding Hong Kong debt. In December 2011, we entered into a new five-year Hong Kong banking facility. As of
December 25, 2011
,
$8.4 million
(HKD
65.0 million
) was outstanding on the term loan. In June 2012,
$8.0 million
(HKD
61.8 million
) was paid in order to extinguish our existing Hong Kong term loan. The term loan was included in short-term borrowings in the accompanying Consolidated Balance Sheets.
In connection with the acquisition of the Shore to Shore businesses, the Company assumed debt of
$4.2 million
. In June 2012,
$0.7 million
(INR
37.2 million
) was paid in order to extinguish an overdraft facility and other short-term borrowings in the accompanying Consolidated Balance Sheets. As of
December 30, 2012
and
December 25, 2011
,
$3.9 million
and
$3.8 million
related to the assumed debt remained outstanding, respectively. The debt assumed includes capital leases, accounts receivable factoring arrangements, term loans, an overdraft facility, and other short-term loans. With the exception of the capital leases, the banking facilities are subject to the banks’ rights to call the liabilities at any time, and are therefore included in short-term borrowings in the accompanying Consolidated Balance Sheets.
In February 2012, the Company entered into a
$3.2 million
Sri Lanka banking facility, which includes a
$2.7 million
term loan, and a combined
$0.5 million
sublimit for an overdraft/import line. As of
December 30, 2012
,
$2.3 million
and
$0.5 million
were outstanding on the term loan and overdraft/import line, respectively.
In November 2010, we entered into a Japanese local line of credit for
$1.8 million
(
¥150 million
). During the fourth quarter of 2011, our Japanese local line of credit of
$1.9 million
(
¥150 million
) was paid down.
In October 2009, the Company entered into a
$12.0 million
(
€8.0 million
) full-recourse factoring arrangement. As of
December 25, 2011
, our short-term full-recourse factoring arrangement equaled
$8.8 million
(
€6.8 million
) and was included in short-term borrowings in the accompanying Consolidated Balance Sheets. In September 2012,
$7.4 million
(
€5.7 million
) was paid in order to extinguish our existing short-term full-recourse factoring agreement in Germany. The arrangement was included in short-term borrowings in the accompanying Consolidated Balance Sheets.
In December 2009, we entered into a full-recourse factoring arrangements. The arrangements are secured by trade receivables. The Company received a weighted average of
92.4%
of the face amount of receivables that it desired to sell and the bank agreed, at its discretion, to buy. As of
December 30, 2012
the factoring arrangements had a balance of
$0.9 million
(
€0.7 million
), of which
$0.3 million
(
€0.3 million
) was included in the current portion of long-term debt and
$0.6 million
(
€0.4 million
) was included in long-term borrowings in the accompanying Consolidated Balance Sheets since the receivables are collectable through 2016.
On July 1, 1997, Checkpoint Systems Japan Co. Ltd. (Checkpoint Japan), a wholly-owned subsidiary of the Company, issued newly authorized shares to Mitsubishi Materials Corporation (Mitsubishi) in exchange for cash. In February 2006, Checkpoint Japan repurchased
26%
of these shares from Mitsubishi in exchange for
$0.2 million
in cash. In August 2010, Checkpoint Manufacturing Japan Co., LTD. repurchased the remaining
74%
of these shares from Mitsubishi in exchange for
$0.8 million
in cash.
Senior Secured Credit Facility
On July 22, 2010, we entered into an Amended and Restated Senior Secured Credit Facility (the “Senior Secured Credit Facility”) with a syndicate of lenders. The Senior Secured Credit Facility provides us with a
$125.0 million
four-year senior secured multi-currency revolving credit facility.
The Senior Secured Credit Facility amended and restated the terms of our existing
$125.0 million
senior secured multi-currency revolving credit agreement (“Secured Credit Facility”). The amendments primarily reflect an extension of the terms of the Secured Credit Facility, reductions in the interest rates charged on the outstanding balances, and favorable changes with regard to the collateral provided under the Senior Secured Credit Facility. Prior to entering into the Senior Secured Credit Facility,
$102.2 million
of the Secured Credit Facility was paid down during the third quarter of 2010.
On February 17, 2012, we received an amendment to our Senior Secured Credit Facility which increased the required leverage ratio covenant of adjusted EBITDA to total debt from
2.75
to
3.00
,
3.35
, and
3.25
for the periods ended March 25, 2012, June 24, 2012, and September 23, 2012, respectively. Had we not received the amendment, we would have been in violation of the leverage ratio covenant as of March 25, 2012.
On July 31, 2012, we received an additional amendment to our Senior Secured Credit Facility ("July 2012 Amendment"), which contained several modifications. The July 2012 Amendment reduced the total commitment of the Senior Secured Credit Facility from
$125.0 million
to
$75.0 million
. The July 2012 Amendment reduced the sublimit for the issuance of letters of credit from
$25.0 million
to
$5.0 million
. The July 2012 Amendment reduced the sublimit for swingline loans from
$25.0 million
to
$5.0 million
. The July 2012 Amendment increased the required leverage ratio covenant of adjusted EBITDA to total debt to
5.25
,
6.50
,
5.50
,
3.50
, and
2.75
for the periods ended June 24, 2012, September 23, 2012, December 30, 2012, March 31, 2013, and June 30, 2013 and thereafter. Cash restructuring of up to
$25.0 million
is excluded from the calculation of EBITDA beginning in the fiscal quarter ending June 24, 2012. The July 2012 Amendment waived the fixed charge covenant from June 24, 2012 through September 23, 2012 (the "Waiver Period"), decreased it to
1.00
for the period ended
December 30, 2012
, and returned it to
1.25
for periods thereafter. In addition, the July 2012 Amendment permitted divestitures, acquisitions and transfers of assets to non-credit parties, under certain conditions. The July 2012 Amendment also contained a provision whereby if our cash balance exceeds
$65.0 million
as of weekly measurement dates, we must prepay any additional borrowings made subsequent to the July 2012 Amendments. This provision is effective until we are in compliance with our original covenant requirements for two consecutive quarters. There were no required prepayments in 2012.
Absent the waiver and additional July 2012 Amendment, we would have been in violation of the June 24, 2012 leverage ratio and fixed charge coverage covenants. We were in compliance with the amended leverage ratio covenant as of September 23, 2012. Absent the waiver, we would have been in violation of the fixed charge coverage ratio covenant as of September 23, 2012. We are in compliance with the leverage ratio covenant and the fixed charge covenant as of
December 30, 2012
. Although we cannot provide full assurance, we project to be in compliance with all of our covenants during 2013.
During the Waiver Period, the interest rate spread on the Senior Secured Credit Facility increases to a maximum of
4.25%
over the Base Rate or
5.25%
over the LIBOR rate. The “Base Rate” is the highest of (a) our lender's prime rate, (b) the Federal Funds rate, plus
0.50%
, and (c)
a daily rate equal to the one-month LIBOR rate, plus 1.00%
. The unused line fee will increase to a maximum of
1.00%
per annum. The maximum is based in accordance with changes in our leverage ratio.
During the year ended
December 30, 2012
, the Company incurred
$1.3 million
in fees and expenses in connection with the July 2012 Amendment to the Senior Secured Credit Facility, which were capitalized and will be amortized over the term of the Senior Secured Credit Facility to interest expense on the Consolidated Statement of Operations. In connection with the reduction in borrowing capacity of the Senior Secured Credit Facility, the Company recognized
$0.8 million
of unamortized debt issuance costs. The cost was recognized in interest expense on the Consolidated Statement of Operations in 2012.
On September 21, 2012, the Company repaid
$6.1 million
on the Senior Secured Credit Facility. Pursuant to the terms of the July 2012 Amendment, the repayment permanently reduced the outstanding borrowing capacity from
$75.0 million
to
$68.9 million
. In connection with the reduction in borrowing capacity of the Senior Secured Credit Facility, the Company recognized
$0.2 million
of unamortized debt issuance costs. The cost was recognized in interest expense on the Consolidated Statement of Operations in the third quarter of 2012.
The Senior Secured Credit Facility provides for a revolving commitment of up to
$75.0 million
with a term of four years from the effective date of July 22, 2010. We may borrow, prepay and re-borrow under the Senior Secured Credit Facility as long as the sum of the outstanding principal amounts is less than the aggregate facility availability. The Senior Secured Credit Facility also includes an expansion option that will allow us to request an increase in the Senior Secured Credit Facility of up to an aggregate of
$50.0 million
, for a potential total commitment of
$118.9 million
. As of
December 30, 2012
, we were not eligible to request the
$50.0 million
expansion option due to financial covenant restrictions.
As of
December 30, 2012
,
$1.8 million
issued in letters of credit were outstanding under the Senior Secured Credit Facility.
Borrowings under the Senior Secured Credit Facility, other than swingline loans, bear interest at our option of either a spread ranging from
1.25%
to
2.50%
over the Base Rate (as described below), or a spread ranging from
2.25%
to
3.50%
over the LIBOR rate, and in each case fluctuating in accordance with changes in our leverage ratio, as defined in the Senior Secured Credit Facility. The “Base Rate” is the highest of (a) our lender’s prime rate, (b) the Federal Funds rate, plus
0.50%
, and (c) a daily rate equal to the one-month LIBOR rate, plus
1.00%
. Swingline loans bear interest of (i) a spread ranging from
1.25%
to
2.50%
over the Base Rate with respect to swingline loans denominated in U.S. dollars, or (ii) a spread ranging from
2.25%
to
3.50%
over the LIBOR rate for one month U.S. dollar deposits, as of 11:00 a.m., London time. We pay an unused line fee ranging from
0.30%
to
0.75%
per annum based on the unused portion of the commitment under the Senior Secured Credit Facility.
All obligations of domestic borrowers under the Senior Secured Credit Facility are irrevocably and unconditionally guaranteed on a joint and several basis by our domestic subsidiaries. The obligations of foreign borrowers under the Senior Secured Credit Facility are irrevocably and unconditionally guaranteed on a joint and several basis by certain of our foreign subsidiaries as well as the domestic guarantors. Collateral under the Senior Secured Credit Facility includes a
100%
stock pledge of domestic subsidiaries and a
65%
stock pledge of all first-tier foreign subsidiaries, excluding our Japanese sales subsidiary. As a condition of the July 2012 Amendment, all domestic assets are also pledged as collateral. The approximate net book value of the collateral as of
December 30, 2012
was
$143.0 million
.
Pursuant to the original terms of the Senior Secured Credit Facility, we are subject to various requirements, including covenants requiring the maintenance of a maximum total leverage ratio of
2.75
and a minimum fixed charge coverage ratio of
1.25
. The Senior Secured Credit Facility also contains customary representations and warranties, affirmative and negative covenants, notice provisions and events of default, including change of control, cross-defaults to other debt, and judgment defaults. Upon a default under the Senior Secured Credit Facility, including the non-payment of principal or interest, our obligations under the Senior Secured Credit Facility may be accelerated and the assets securing such obligations may be sold. Certain wholly-owned subsidiaries with respect to the Company are guarantors of our obligations under the Senior Secured Credit Facility.
Senior Secured Notes
On July 22, 2010, we entered into a Note Purchase and Private Shelf Agreement (the “Senior Secured Notes Agreement”) with a lender, and certain other purchasers party thereto (together with the lender, the “Purchasers”).
On February 17, 2012, we received an amendment to our Senior Secured Notes which increased the required leverage ratio covenant of adjusted EBITDA to total debt from
2.75
to
3.00
,
3.35
, and
3.25
for the periods ended March 25, 2012, June 24, 2012, and September 23, 2012. Had we not received the amendment, we would have been in violation of the leverage ratio covenant as of March 25, 2012.
On July 31, 2012, we received an additional amendment to our Senior Secured Notes ("July 2012 Note Amendment"), which contained several modifications. The July 2012 Note Amendment increased the required leverage ratio covenant of adjusted EBITDA to total debt to
5.25
,
6.50
,
5.50
,
3.50
, and
2.75
for the periods ended June 24, 2012, September 23, 2012, December 30, 2012, March 31, 2013, June 30, 2013 and thereafter. Cash restructuring of up to
$25.0 million
is excluded from the calculation of EBITDA beginning in the fiscal quarter ending June 24, 2012. The July 2012 Note Amendment waived the fixed charge covenant from June 24, 2012 through September 23, 2012 (the "Waiver Period"), decreased it to
1.00
for the period ended
December 30, 2012
, and returned it to
1.25
for periods thereafter. In addition, the July 2012 Note Amendment permitted divestitures, acquisitions and transfers of assets to non-credit parties, under certain conditions.
Absent the waiver and additional July 2012 Note Amendment, we would have been in violation of the June 24, 2012 leverage ratio and fixed charge coverage covenants. We were in compliance with the amended leverage ratio covenant as of September 23, 2012. Absent the waiver, we would have been in violation of the fixed charge coverage ratio covenant as of September 23, 2012. We are in compliance with the leverage ratio covenant and the fixed charge covenant as of
December 30, 2012
. Although we cannot provide full assurance, we project to be in compliance with all of our covenants during 2013.
During the Waiver Period, and until such time the financial covenants return to the original covenants for two consecutive quarters, the coupon rate on the Senior Secured Notes will increase to
5.75%
,
6.13%
, and
6.50%
for the Series A Senior Secured Notes, Series B Senior Secured Notes, and Series C Senior Secured Notes, respectively.
During the year ended
December 30, 2012
, the Company incurred
$1.4 million
in fees and expenses in connection with the July 2012 Amendment to the Senior Secured Notes, of which
$0.6 million
were recognized in selling, general, and administrative expenses on the Consolidated Statement of Operations in 2012 and
$0.8 million
, which were capitalized and will be amortized over the term of the Senior Secured Notes to interest expense on the Consolidated Statement of Operations.
On September 21, 2012, the Company repaid
$8.9 million
in principal as well as a make-whole premium of
$1.1 million
related to the Senior Secured Notes. In connection with the repayment on the Senior Secured Notes, the Company recognized
$0.1 million
of unamortized debt issuance costs. The unamortized debt issuance costs and make whole premium fees were recognized in interest expense on the Consolidated Statement of Operations in 2012.
Under the Senior Secured Notes Agreement, we issued to the Purchasers its Series A Senior Secured Notes in an aggregate principal amount of
$22.0 million
(the “Series A Notes”), its Series B Senior Secured Notes in an aggregate principal amount of
$22.0 million
(the “Series B Notes”), and its Series C Senior Secured Notes in an aggregate principal amount of
$22.0 million
(the “Series C Notes”); together with the Series A Notes and the Series B Notes, (the “2010 Notes”). The Series A Notes bear interest at a rate of
4.00%
per annum and mature on July 22, 2015. The Series B Notes bear interest at a rate of
4.38%
per annum and mature on July 22, 2016. The Series C Notes bear interest at a rate of
4.75%
per annum and mature on July 22, 2017. The 2010 Notes are not subject to any scheduled prepayments. The entire outstanding principal amount of each of the 2010 Notes shall become due on their respective maturity date.
The Senior Secured Notes Agreement also provides that for a three-year period ending on July 22, 2013, we may issue, and our lender may, in its sole discretion, purchase, additional fixed-rate senior secured notes (the “Shelf Notes”); together with the 2010 Notes, (the “Notes”), up to an aggregate amount of
$50.0 million
. The aggregate principal amount of the Shelf Notes issued at any time shall be no less than
$5.0 million
. The Shelf Notes will have a maturity date of no more than
10
years from the respective maturity date and an average life of no more than
7
years after the date of issue. The Shelf Notes will have such other terms, including principal amount, interest rate and repayment schedule, as agreed with our lender at the time of issuance. As of
December 30, 2012
, we were not eligible to elect to request the
$50.0 million
expansion option due to financial covenant restrictions.
We may prepay the Notes in a minimum principal amount of
$1.0 million
and in
$0.1 million
increments thereafter, at
100%
of the principal amount so prepaid, plus an amount equal to the excess, if any, of the present value of the remaining scheduled payments of principal and interest on the amount repaid, over the principal amount repaid. Either we or our lender may terminate the private shelf facility with respect to undrawn amounts upon 30 days’ written notice, and our lender may terminate the private shelf facility with respect to undrawn amounts upon the occurrence and/or continuation of an event of default or acceleration of any Note.
All obligations under the Senior Secured Notes are irrevocably and unconditionally guaranteed on a joint and several basis by our domestic subsidiaries. Collateral under the Senior Secured Notes includes a
100%
stock pledge of domestic subsidiaries and a
65%
stock pledge of all first-tier foreign subsidiaries, excluding our Japanese sales subsidiary. As a condition of the July 2012 Amendment, all domestic assets are also pledged as collateral. The approximate net book value of the collateral as of
December 30, 2012
was
$143.0 million
.
The original Senior Secured Notes Agreement is subject to covenants that are substantially similar to the covenants in the Senior Secured Credit Facility Agreement, including covenants requiring the maintenance of a maximum total leverage ratio of
2.75
and a minimum fixed charge coverage ratio of
1.25
. The Senior Secured Notes Agreement also contains representations and warranties, affirmative and negative covenants, notice provisions and events of default, including change of control, cross-defaults to other debt, and judgment defaults that are substantially similar to those contained in the Senior Secured Credit Facility, and those that are customary for similar private placement transactions. Upon a default under the Senior Secured Notes Agreement, including the non-payment of principal or interest, our obligations under the Senior Secured Notes Agreement may be accelerated and the assets securing such obligations may be sold. Additionally, the Senior Secured Notes have a make-whole provision that requires the discounted value of the remaining payments on the Senior Secured Notes expected through the end term of each of the Senior Secured Notes to be paid in full upon early termination, acceleration, or prepayment. Certain of our wholly-owned subsidiaries are also guarantors of our obligations under the Senior Secured Notes.
We have never paid a cash dividend (except for a nominal cash distribution in April 1997 to redeem the rights outstanding under our 1988 Shareholders’ Rights Plan). We do not anticipate paying any cash dividends in the near future.
As we continue to implement our strategic plan in a volatile global economic environment, our focus will remain on operating our business in a manner that addresses the reality of the current economic marketplace without sacrificing the capability to effectively execute our strategy when economic conditions and the retail environment stabilize. Based upon an analysis of liquidity using our current forecast, management believes that our anticipated cash needs can be funded from cash and cash equivalents on hand, the availability of cash under the Senior Secured Credit Facility, Senior Secured Notes, and cash generated from future operations over the next twelve months.
Off-Balance Sheet Arrangements
We do not utilize material off-balance sheet arrangements apart from operating leases that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. We use operating leases as an alternative to purchasing certain property, plant, and equipment. Our future rental commitment under all non-cancelable operating leases was
$34.7 million
as of
December 30, 2012
. The scheduled timing of these rental commitments is detailed in our “Contractual Obligations” section.
Contractual Obligations
Our contractual obligations and commercial commitments at
December 30, 2012
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligation
(amounts in thousands)
|
Total
|
|
|
Due in less
than 1 year
|
|
|
Due in
1-3 years
|
|
|
Due in
3-5 years
|
|
|
Due after
5 years
|
|
|
Long-term debt
(1)
|
$
|
123,437
|
|
|
$
|
6,815
|
|
|
$
|
71,684
|
|
|
$
|
44,938
|
|
|
—
|
|
|
Capital leases
(2)
|
544
|
|
|
319
|
|
|
207
|
|
|
18
|
|
|
—
|
|
|
Operating leases
|
34,657
|
|
|
11,150
|
|
|
12,862
|
|
|
7,014
|
|
|
3,631
|
|
|
Pension obligations
(3)
|
50,258
|
|
|
4,689
|
|
|
9,597
|
|
|
9,868
|
|
|
26,104
|
|
|
Inventory purchase commitments
(4)
|
3,269
|
|
|
3,269
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total contractual cash obligations
|
$
|
212,165
|
|
|
$
|
26,242
|
|
|
$
|
94,350
|
|
|
$
|
61,838
|
|
|
$
|
29,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Commitments
(amounts in thousands)
|
Total
|
|
|
Due in less
than 1 year
|
|
|
Due in
1-3 years
|
|
|
Due in
3-5 years
|
|
|
Due after
5 years
|
|
|
Standby letters of credit
|
$
|
1,754
|
|
|
$
|
1,754
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Surety bonds
|
9,960
|
|
|
9,798
|
|
|
162
|
|
|
—
|
|
|
—
|
|
|
Total commercial commitments
|
$
|
11,714
|
|
|
$
|
11,552
|
|
|
$
|
162
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
(1)
|
Includes Senior Secured Credit Facility, Senior Secured Notes, long-term full-recourse factoring liabilities, and related interest payments through maturity of
$14,360
.
|
|
|
|
|
(2)
|
Includes interest payments through maturity of
$62
.
|
|
|
|
|
(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 2012 and include benefits attributable to estimated future employee service of current employees.
|
|
|
|
|
(4)
|
Inventory purchase commitments represent our legally binding agreements to purchase fixed or minimum quantities of goods at determinable prices.
|
The table above excludes our gross liability for uncertain tax positions, including accrued interest and penalties, which totaled
$20.6 million
as of
December 30, 2012
, since we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities.
Pension Plans
We maintain several defined benefit pension plans, principally in Europe. The majority of these pension plans are unfunded. Our pension expense for
2012
,
2011
, and
2010
was
$5.1 million
,
$5.7 million
, and
$5.2 million
, respectively.
We review our pension assumptions annually. Our assumptions for the year ended
December 30, 2012
, were a discount rate of
4.77%
, an expected return of
5.25%
and an expected rate of increase in future compensation of
2.52%
. In developing the discount rate assumption for each country, we use a yield curve approach. The yield curve is based on the AA rated bonds underlying the Barclays Capital corporate bond index. As of
December 30, 2012
, and
December 25, 2011
, the weighted average discount rate was
3.53%
and
4.77%
, respectively. We calculate the weighted average duration of the plans in each country, and then select the discount rate from the appropriate yield curve which best corresponds to the plans' liability profile. The expected rate of the return was developed using the historical rate of returns of the foreign government bonds currently held.
The primary components of the unrecognized losses are actuarial losses, a transition obligation, and prior period service costs. Unrecognized losses are amortized over the average remaining service period of the employees expected to receive the benefit in accordance with pension accounting rules. The weighted average remaining service period is approximately
11
years. The impact of recognizing the actuarial gains on
2012
,
2011
, and
2010
pension expense are
$0.3 million
,
$0.1 million
, and
$0.1 million
, respectively. The total projected amortization for these gains in
2013
is approximately
$1.6 million
.
Exposure to Foreign Currency
We manufacture products in the U.S., Europe, and the Asia Pacific regions for both the local marketplace and for export to our foreign subsidiaries. The foreign subsidiaries, in turn, sell these products to customers in their respective geographic areas of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations on inter-company receivables and payables. Additionally, the sourcing of product in one currency and the sales of product in a different currency can cause gross margin fluctuations due to changes in currency exchange rates.
We selectively purchase currency forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. This allows us to shift the effect of positive or negative currency fluctuations to a third party. Transaction gains or losses resulting from these contracts are recognized at the end of each reporting period. We use the fair value method of accounting, recording realized and unrealized gains and losses on these contracts. These gains and losses are included in other gain (loss), net on our Consolidated Statements of Operations. As of
December 30, 2012
, we had currency forward exchange contracts with notional amounts totaling approximately
$17.1 million
. The fair values of the forward exchange contracts were reflected as a
$0.2 million
asset and
$0.2 million
liability and are included in other current assets and other current liabilities in the accompanying Consolidated Balance Sheets. The contracts are in the various local currencies covering primarily our operations in the U.S., the Caribbean, and Western Europe. Historically, we have not purchased currency forward exchange contracts where it is not economically efficient, specifically for our operations in South America and Asia, with the exception of Japan.
Hedging Activity
Beginning in the second quarter of 2008, we entered into various foreign currency contracts to reduce our exposure to forecasted Euro-denominated inter-company revenues. These contracts were designated as cash flow hedges. The foreign currency contracts mature at various dates from January 2013 to March 2013. The purpose of these cash flow hedges is to reduce the currency risk associated with Euro-denominated forecasted inter-company revenues due to changes in exchange rates. These cash flow hedging instruments are marked to market and the changes are recorded in other comprehensive income. Amounts recorded in other comprehensive income are recognized in cost of goods sold as the inventory is sold to external parties. Any hedge ineffectiveness is charged to other gain (loss), net on our Consolidated Statements of Operations. As of
December 30, 2012
, the fair value of these cash flow hedges was reflected as a
$14 thousand
asset and is included in other current assets in the accompanying Consolidated Balance Sheets. The total notional amount of these hedges is
$3.9 million
(
€2.9 million
) and the unrealized gain recorded in other comprehensive income was
$0.2 million
(net of taxes of
$6 thousand
), of which
$0.2 million
is expected to be reclassified to earnings over the next twelve months. During the year ended
December 30, 2012
, a
$2.0 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 a
$0.1 million
gain during the year ended
December 30, 2012
for hedge ineffectiveness.
During the first quarter of 2008, we entered into an interest rate swap agreement with a notional amount of $40 million. The purpose of this interest rate swap agreement was to hedge potential changes to our cash flows due to the variable interest nature of our senior unsecured credit facility. The interest rate swap was designated as a cash flow hedge. This cash flow hedging instrument was marked to market and the changes were recorded in other comprehensive income. The interest rate swap matured on February 18, 2010.
Provision for Restructuring
During September 2011, we initiated the Global Restructuring Plan focused on further reducing our overall operating expenses by including manufacturing and other cost reduction initiatives, such as consolidating certain manufacturing facilities and administrative functions to improve efficiencies. This plan was further expanded in the first quarter of 2012 and again during the second quarter of 2012 to include Project LEAN. The first phase of this plan was implemented in the third quarter of 2011 with the remaining phases of the plan expected to be substantially complete by the end of 2013.
The expanded Global Restructuring Plan including Project LEAN and the SG&A Restructuring Plan will impact over
2,400
existing employees. Total costs of the Global Restructuring Plan including Project LEAN and the SG&A Restructuring Plan are expected to approximate
$70 million
to
$75 million
by the end of 2013, with
$52 million
to
$55 million
in total anticipated costs for the Global Restructuring Plan and
$18 million
of costs incurred for the SG&A Restructuring Plan, which is substantially complete. Total annual savings of the two plans, including related cost reduction initiatives, are expected to approximate
$100 million
to
$105 million
by the end of 2013, with
$81 million
to
$85 million
in total anticipated savings for the Global Restructuring Plan including Project LEAN and
$19 million
to
$20 million
in total anticipated savings for the SG&A Restructuring Plan. Through our Global Restructuring Plan including Project LEAN, we plan to stabilize sales, actively manage margins, dramatically reduce operating expenses, more effectively manage working capital and improve global cash management control.
Restructuring expense for the periods ended
December 30, 2012
,
December 25, 2011
, and
December 26, 2010
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Global Restructuring Plan (including LEAN)
|
|
|
|
|
|
|
Severance and other employee-related charges
|
$
|
16,945
|
|
|
$
|
11,115
|
|
|
$
|
—
|
|
|
Asset impairments
|
6,506
|
|
|
7,761
|
|
|
—
|
|
|
Other exit costs
|
5,068
|
|
|
519
|
|
|
—
|
|
|
SG&A Restructuring Plan
|
|
|
|
|
|
|
Severance and other employee-related charges
|
(86
|
)
|
|
7,015
|
|
|
6,993
|
|
|
Asset impairments
|
—
|
|
|
72
|
|
|
—
|
|
|
Other exit costs
|
64
|
|
|
2,203
|
|
|
—
|
|
|
Manufacturing Restructuring Plan
|
|
|
|
|
|
|
Severance and other employee-related charges
|
—
|
|
|
(146
|
)
|
|
641
|
|
|
Other exit costs
|
(75
|
)
|
|
101
|
|
|
577
|
|
|
Total
|
$
|
28,422
|
|
|
$
|
28,640
|
|
|
$
|
8,211
|
|
Restructuring accrual activity for the periods ended
December 30, 2012
, and
December 25, 2011
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2012
|
Accrual at
Beginning
of Year
|
|
|
Charged to
Earnings
|
|
|
Charge
Reversed to
Earnings
|
|
|
Cash
Payments
|
|
|
Exchange
Rate
Changes
|
|
|
Accrual at December 30, 2012
|
|
|
Global Restructuring Plan (including LEAN)
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
$
|
9,710
|
|
|
$
|
21,558
|
|
|
$
|
(4,613
|
)
|
|
$
|
(19,044
|
)
|
|
$
|
141
|
|
|
$
|
7,752
|
|
|
Other exit costs
(1)
|
—
|
|
|
5,068
|
|
|
—
|
|
|
(4,600
|
)
|
|
(8
|
)
|
|
460
|
|
|
SG&A Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
(3)
|
6,718
|
|
|
1,100
|
|
|
(1,186
|
)
|
|
(5,363
|
)
|
|
(63
|
)
|
|
1,206
|
|
|
Other exit costs
(2)
|
1,109
|
|
|
64
|
|
|
—
|
|
|
(1,012
|
)
|
|
—
|
|
|
161
|
|
|
Manufacturing Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Other exit costs
|
75
|
|
|
—
|
|
|
(75
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
17,612
|
|
|
$
|
27,790
|
|
|
$
|
(5,874
|
)
|
|
$
|
(30,019
|
)
|
|
$
|
70
|
|
|
$
|
9,579
|
|
|
|
|
|
(1)
|
During 2012, there was a net charge to earnings of
$5.1 million
primarily due to lease termination costs, inventory and equipment moving costs, restructuring agent costs, legal costs, pension settlements, and gains/losses on sale of assets in connection with the restructuring plan.
|
|
|
|
|
(2)
|
During 2012, there was a net charge to earnings of
$0.1 million
primarily due to lease termination costs and outplacement costs in connection with the restructuring plan.
|
|
|
|
|
(3)
|
During 2012, there was a severance charge reversed to earnings of
$5.8 million
primarily due to eliminations of individuals from the plans, replacements of individuals in the plans with other individuals, resignations, and other final accrual adjustments. The eliminations and replacements were primarily the result of our change in management and strategic vision in 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2011
|
Accrual at
Beginning
of Year
|
|
|
Charged to
Earnings
|
|
|
Charge
Reversed to
Earnings
|
|
|
Cash
Payments
|
|
|
Exchange
Rate
Changes
|
|
|
Accrual at December 25, 2011
|
|
|
Global Restructuring Plan (including LEAN)
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
$
|
—
|
|
|
$
|
11,382
|
|
|
$
|
(267
|
)
|
|
$
|
(1,268
|
)
|
|
$
|
(137
|
)
|
|
$
|
9,710
|
|
|
Other exit costs
(1)
|
—
|
|
|
519
|
|
|
—
|
|
|
(519
|
)
|
|
—
|
|
|
—
|
|
|
SG&A Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
$
|
6,660
|
|
|
$
|
7,147
|
|
|
$
|
(132
|
)
|
|
$
|
(6,718
|
)
|
|
$
|
(239
|
)
|
|
$
|
6,718
|
|
|
Other exit costs
(2)
|
—
|
|
|
2,214
|
|
|
(11
|
)
|
|
(1,095
|
)
|
|
1
|
|
|
1,109
|
|
|
Manufacturing Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
719
|
|
|
69
|
|
|
(215
|
)
|
|
(583
|
)
|
|
10
|
|
|
—
|
|
|
Other exit costs
(3)
|
143
|
|
|
112
|
|
|
(11
|
)
|
|
(169
|
)
|
|
—
|
|
|
75
|
|
|
Total
|
$
|
7,522
|
|
|
$
|
21,443
|
|
|
$
|
(636
|
)
|
|
$
|
(10,352
|
)
|
|
$
|
(365
|
)
|
|
$
|
17,612
|
|
|
|
|
|
(1)
|
During 2011, there was a net charge to earnings of
$0.5 million
primarily due to lease termination costs, inventory and equipment moving costs, restructuring agent costs, legal costs, and gains/losses on sale of assets in connection with the restructuring plan.
|
|
|
|
|
(2)
|
During 2011, there was a net charge to earnings of
$2.2 million
primarily due to the closing of an operating facility and one-time payment related to a lease modification for an operating facility as well as lease payment accruals after exiting one of our facilities.
|
|
|
|
|
(3)
|
During 2010, costs were recorded due to the closing of a manufacturing facility. For the year ended 2011, there was a net charge to earnings of
$0.1 million
due to other exit costs associated with the manufacturing closings.
|
Global Restructuring Plan (including LEAN)
During September 2011, we initiated the Global Restructuring Plan focused on further reducing our overall operating expenses by including manufacturing and other cost reduction initiatives, such as consolidating certain manufacturing facilities and administrative functions to improve efficiencies. This plan was further expanded in the first quarter of 2012 and again during the second quarter of 2012 to include Project LEAN. The first phase of this plan was implemented in the third quarter of 2011 with the remaining phases of the plan expected to be substantially complete by the end of 2013.
As of
December 30, 2012
, the net charge to earnings of
$28.5 million
represents the current year activity related to the Global Restructuring Plan including Project LEAN. The anticipated total costs related to the plan are expected to approximate
$52 million
to
$55 million
, of which
$47.9 million
have been incurred. The total number of employees planned to be affected by the Global Restructuring Plan including Project LEAN is approximately
2,100
, of which
1,484
have been terminated. Termination benefits are planned to be paid
one
month to
24 months
after termination.
SG&A Restructuring Plan
During 2009, we initiated the SG&A Restructuring Plan focused on reducing our overall operating expenses by consolidating certain administrative functions to improve efficiencies. The first phase of this plan was implemented in the fourth quarter of 2009 with the remaining phases of the plan substantially completed by the end of the first quarter of 2012.
As of
December 30, 2012
, the net charge reversed earnings of
$22 thousand
represents the current year activity related to the SG&A Restructuring Plan. The implementation of the SG&A Restructuring Plan is substantially complete, with total costs incurred of approximately
$18 million
. The total number of employees planned to be affected by the SG&A Restructuring Plan is approximately
369
, of which substantially all have been terminated. Termination benefits are planned to be paid
one
month to
24 months
after termination.
Manufacturing Restructuring Plan
In August 2008, we announced a manufacturing and supply chain restructuring program designed to accelerate profitable growth in our Apparel Labeling Solutions (ALS) business, formerly Check-Net
®
, and to support incremental improvements in our EAS systems and labels businesses. For the year ended
December 30, 2012
, there was a
$0.1 million
charge reversed to earnings recorded in connection with the Manufacturing Restructuring Plan.
The total number of employees planned to be affected by the Manufacturing Restructuring Plan is
420
, all of which have been terminated. As of
December 30, 2012
the implementation of the Manufacturing Restructuring Plan is substantially complete, with total costs incurred of
$4.1 million
.
Goodwill Impairments
We perform an assessment of goodwill by comparing each individual reporting unit’s carrying amount of net assets, including goodwill, to their fair value at least annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
During the second quarter of 2012, we experienced deterioration in revenues, gross margins and operating results in each of our segments as compared to the forecasted amounts in the most recent impairment test. Due to the declines in operating results in our segments, a change in management, and a revised strategic focus, we determined that impairment triggering events had occurred and that an assessment of goodwill was warranted. This resulted in our assessment that the carrying value of the Apparel Labeling Solutions reporting unit exceeded its fair value. As a result of our interim impairment test, a $64.4 million non-cash goodwill impairment charge was recorded in goodwill impairment expense on the Consolidated Statement of Operations as of June 24, 2012 in our Apparel Labeling Solutions segment. The goodwill impairment expense was due to the decline in estimated future Apparel Labeling Solutions cash flow impacted by our plan to refocus the business, coupled with recent declines in revenue and profitability.
There were no additional impairment indicators during the third quarter ended September 23, 2012. Our 2012 annual impairment test resulted in our assessment that the carrying value of the Europe Retail Merchandising Solutions reporting unit exceeded its fair value. As a result of our annual impairment test, a $38.3 million non-cash goodwill impairment charge was assessed as of October 21, 2012, and recorded in goodwill impairment expense on the Consolidated Statement of Operations in the fourth quarter of 2012 in our Retail Merchandising Solutions segment. The goodwill impairment expense was due to the decline in estimated future Europe Retail Merchandising Solutions cash flows impacted by current economic conditions in Europe resulting in decreased customer investments in new stores and refurbishments. Additionally, increased competition and pricing pressures are factors that have negatively impacted this business.
Our 2011 and 2010 annual assessments did not result in an impairment charge. Future annual assessments could result in impairment charges, which would be accounted for as an operating expense.
As a result of the plan to divest the Banking Security Systems Integration business unit in 2011, we assessed the related goodwill asset for impairment. In the fourth quarter ended December 25, 2011, we recorded a goodwill impairment charge of $3.4 million. During the second quarter of 2012, we performed an impairment test based on updated fair value information regarding the Banking Security Systems Integration business unit. As a result of this impairment test, we determined that there was a $0.4 million impairment charge in the goodwill reporting unit of our Shrink Management Solutions segment. These impairment charges were included in discontinued operations on the Consolidated Statement of Operations during the respective periods.
As a result of the plan to divest our U.S. and Canada based CheckView
®
business unit in 2012, we assessed the related goodwill asset for impairment. In the fourth quarter ended December 30, 2012, we recorded a goodwill impairment charge of $3.3 million in our Shrink Management Solutions segment. These impairment charges were included in discontinued operations on the Consolidated Statement of Operations. After a full impairment of its long-lived assets, the remaining carrying value of our CheckView
®
business at December 30, 2012 exceeded its fair value by approximately $0.8 million.
Asset Impairments
There was no asset impairment expense from continuing operations in 2012 (
$1.8 million
including discontinued operations) as compared to asset impairment expense from continuing operations in 2011 of $0.6 million ($3.4 million including discontinued operations).
During our 2011 goodwill and indefinite-lived intangibles annual impairment test, we determine that an indefinite-lived trade name intangible asset in our SMS segment was impaired. As a result we recorded an impairment charge of $0.6 million in the fourth quarter of 2011. This charge was recorded in asset impairment expense on the Consolidated Statement of Operations.
In the fourth quarter ended December 25, 2011, as a result of the plan to divest the Banking Security Systems Integration business unit, we assessed the related customer relationship intangible assets for impairment and recorded an intangible impairment charge of $2.8 million. The impairment charge was recorded in discontinued operations on the Consolidated Statement of Operations.
During the second quarter of 2012, we performed an impairment test based on updated fair value information regarding the Banking Security Systems Integration business unit. As a result of this impairment test, we determined that there was a $0.7 million impairment of customer relationship intangible assets. During the third quarter of 2012, we performed an impairment test based on final negotiations of the selling price for the Banking Security Systems Integration business unit. As a result of this impairment test, we determined that there was a $0.8 million additional impairment of customer relationship intangible assets. These impairment charges were included in discontinued operations on the Consolidated Statement of Operations during the second and third quarters ended June 24, 2012 and September 23, 2012, respectively.
As a result of the plan to divest our U.S. and Canada based CheckView
®
business unit in 2012, we performed an impairment test of our long-lived assets. In the fourth quarter ended December 30, 2012, we recorded a $0.3 million impairment of property, plant and equipment in our Shrink Management Solutions segment. These impairment charges were included in discontinued operations on the Consolidated Statement of Operations.
As a result of interim impairment indicators in the second quarter of 2012, we performed a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the long-lived assets in our Apparel Labeling Solutions reporting unit to their carrying amounts. The undiscounted cash flow analysis resulted in no impairment charge.
In connection with our annual impairment test, we performed a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the long-lived assets in our Europe Retail Merchandising Solutions reporting unit to their carrying amounts. The undiscounted cash flow analysis resulted in no impairment charge.
Results of Operations
(All comparisons are with the previous fiscal year, unless otherwise stated.)
Net Revenues
Our unit volume is driven by product offerings, number of direct sales personnel, recurring sales and, to some extent, pricing. Our base of installed systems provides a source of recurring revenues from the sale of disposable tags, labels, and service revenues.
Our customers are substantially dependent on retail sales, which are seasonal, subject to significant fluctuations, and difficult to predict. In addition, current economic trends have particularly affected our customers, and consequently our net revenues have been, and may continue to be impacted in the future. Historically, we have experienced lower sales in the first half of each year.
Analysis of Statement of Operations
The following table presents for the periods indicated certain items in the Consolidated Statement of Operations as a percentage of total revenues and the percentage change in dollar amounts of such items compared to the indicated prior period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
Total Revenues
|
|
Percentage Change
in Dollar Amount
|
|
Year ended
|
December 30,
2012
(Fiscal 2012)
|
|
|
December 25,
2011
(Fiscal 2011)
|
|
|
December 26,
2010
(Fiscal 2010)
|
|
|
Fiscal 2012
vs.
Fiscal 2011
|
|
|
Fiscal 2011
vs.
Fiscal 2010
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
65.1
|
%
|
|
64.4
|
%
|
|
65.8
|
%
|
|
(8.5
|
)%
|
|
4.3
|
%
|
|
Apparel Labeling Solutions
|
26.8
|
|
|
26.0
|
|
|
24.1
|
|
|
(6.7
|
)
|
|
14.6
|
|
|
Retail Merchandising Solutions
|
8.1
|
|
|
9.6
|
|
|
10.1
|
|
|
(24.4
|
)
|
|
2.3
|
|
|
Net revenues
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
(9.6
|
)
|
|
6.6
|
|
|
Cost of revenues
|
60.8
|
|
|
59.1
|
|
|
56.1
|
|
|
(7.0
|
)
|
|
12.3
|
|
|
Total gross profit
|
39.2
|
|
|
40.9
|
|
|
43.9
|
|
|
(13.3
|
)
|
|
(0.7
|
)
|
|
Selling, general, and administrative expenses
|
36.1
|
|
|
36.6
|
|
|
35.7
|
|
|
(11.0
|
)
|
|
9.4
|
|
|
Research and development
|
2.4
|
|
|
2.5
|
|
|
2.8
|
|
|
(14.9
|
)
|
|
(2.1
|
)
|
|
Restructuring expenses
|
4.1
|
|
|
3.8
|
|
|
1.1
|
|
|
(0.8
|
)
|
|
248.8
|
|
|
Asset impairment
|
—
|
|
|
0.1
|
|
|
—
|
|
|
(100.0
|
)
|
|
N/A
|
|
|
Goodwill impairment
|
14.9
|
|
|
—
|
|
|
—
|
|
|
N/A
|
|
|
N/A
|
|
|
Litigation settlement
|
—
|
|
|
0.1
|
|
|
—
|
|
|
(68.7
|
)
|
|
N/A
|
|
|
Acquisition costs
|
—
|
|
|
0.3
|
|
|
0.1
|
|
|
(85.7
|
)
|
|
343.4
|
|
|
Other (income) expense
|
(0.6
|
)
|
|
—
|
|
|
0.2
|
|
|
N/A
|
|
|
(111.6
|
)
|
|
Other operating income
|
0.3
|
|
|
2.5
|
|
|
—
|
|
|
(89.4
|
)
|
|
N/A
|
|
|
Operating (loss) income
|
(17.4
|
)
|
|
—
|
|
|
4.0
|
|
|
N/A
|
|
|
(99.4
|
)
|
|
Interest income
|
0.3
|
|
|
0.4
|
|
|
0.4
|
|
|
(48.0
|
)
|
|
8.4
|
|
|
Interest expense
|
1.5
|
|
|
1.0
|
|
|
0.9
|
|
|
34.4
|
|
|
21.8
|
|
|
Other gain (loss), net
|
(0.4
|
)
|
|
(0.2
|
)
|
|
(0.3
|
)
|
|
13.7
|
|
|
(31.9
|
)
|
|
(Loss) earnings from continuing operations before income taxes
|
(19.0
|
)
|
|
(0.8
|
)
|
|
3.2
|
|
|
N/A
|
|
|
(125.5
|
)
|
|
Income taxes expense
|
1.0
|
|
|
7.8
|
|
|
0.5
|
|
|
(87.6
|
)
|
|
N/A
|
|
|
Net (loss) earnings from continuing operations
|
(20.0
|
)
|
|
(8.6
|
)
|
|
2.7
|
|
|
111.5
|
|
|
(439.4
|
)
|
|
(Loss) earnings from discontinued operations, net of tax expense (benefit) of $247, ($378), and $5,134
|
(1.2
|
)
|
|
(0.1
|
)
|
|
1.2
|
|
|
583.2
|
|
|
(114.0
|
)
|
|
Net (loss) earnings
|
(21.2
|
)
|
|
(8.7
|
)
|
|
3.9
|
|
|
119.7
|
|
|
(341.3
|
)
|
|
Less: loss attributable to non-controlling interests
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
828.1
|
|
|
(50.9
|
)
|
|
Net (loss) earnings attributable to Checkpoint Systems, Inc.
|
(21.1
|
)%
|
|
(8.7
|
)%
|
|
3.9
|
%
|
|
119.1
|
|
|
(340.1
|
)%
|
N/A - Comparative percentages are not meaningful.
Fiscal 2012 compared to Fiscal 2011
Net Revenues
During 2012, revenues decreased by
$72.9 million
, or
9.5%
, from
$763.7 million
to
$690.8 million
. Foreign currency translation had a negative impact on revenues of
$25.7 million
for the full year of
2012
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in millions)
|
|
|
|
|
|
|
|
|
Year ended
|
December 30,
2012
(Fiscal 2012)
|
|
|
December 25,
2011
(Fiscal 2011)
|
|
|
Dollar
Amount
Change
Fiscal 2012
vs.
Fiscal 2011
|
|
|
Percentage
Change
Fiscal 2012
vs.
Fiscal 2011
|
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
$
|
450.1
|
|
|
$
|
491.9
|
|
|
$
|
(41.8
|
)
|
|
(8.5
|
)%
|
|
Apparel Labeling Solutions
|
185.0
|
|
|
198.1
|
|
|
(13.1
|
)
|
|
(6.7
|
)
|
|
Retail Merchandising Solutions
|
55.7
|
|
|
73.7
|
|
|
(18.0
|
)
|
|
(24.4
|
)
|
|
Net Revenues
|
$
|
690.8
|
|
|
$
|
763.7
|
|
|
$
|
(72.9
|
)
|
|
(9.5
|
)%
|
Shrink Management Solutions
Shrink Management Solutions (SMS) revenues decreased
$41.8 million
, or
8.5%
, in
2012
compared to
2011
. Foreign currency translation had a negative impact of approximately
$16.4 million
. The remaining decrease of $25.4 million in Shrink Management Solutions was due to declines in EAS consumables, Alpha
®
, EAS systems and CheckView
®
. These decreases were partially offset by an increase in Merchandise Visibility (RFID).
The EAS consumables revenues decrease in 2012 as compared to 2011 was primarily due to a decline in Hard Tag @ Source
™
revenues, which were below levels of one year ago when we experienced high volumes associated with the initial program roll-out to a major European retailer. Also contributing to the decrease was a decline in EAS label volumes with certain customers in Europe, Asia, and the U.S. Economic uncertainty and soft markets present an ongoing challenge to our revenue growth in consumable products. These declines were partially offset by increased orders in International Americas.
Alpha
®
revenues decreased in 2012 as compared to 2011 due to worsened market conditions in Europe, the U.S., and Asia for high theft prevention products during 2012. This factor was partially offset by a strong demand for Alpha
®
products in the International Americas. We expect global Alpha revenues to increase in 2013 as a result of an increased focus on execution as well as increased attention on marketing of existing and new products.
The CheckView
®
revenue from continuing operations in Europe and Asia decreased in 2012 as compared to 2011 was due to the impact of the movement of a portion of this business to a distributor model, as well as lower volumes of installations and on-going services with existing customers. CheckView
®
has been dependent on new store openings and capital spending of our customers, all of which have been adversely impacted, and may continue to be impacted by, current economic trends. We are significantly reducing our focus on CheckView
®
by pursuing the divestiture of our U.S. and Canada CheckView
®
business and will limit our focus on opportunistic sales in Asia.
EAS systems revenues in Europe decreased in 2012 as compared to 2011. The decrease was primarily due to lower volumes of new product installation with existing customers. Historically, new store openings are a significant contributor to EAS systems revenues. These have been scaled back in 2012 by many of our European based customers who have increased their focus on margin improvement at existing stores.
The Merchandise Visibility (RFID) revenues increased in 2012 as compared to 2011, as the business continues to gain traction with installations at several major retailers. The increase was primarily due to a roll-out with RFID enabled technology in Europe in 2012, which did not occur in 2011, as well as increased business in the U.S. We expect RFID revenues to increase in 2013 as a result of the conversion of certain current pilots into installation contracts and the expansion of certain installation contracts to additional stores.
Apparel Labeling Solutions
Apparel Labeling Solutions revenues decreased
$13.1 million
, or
6.7%
, in
2012
as compared to
2011
. After considering the foreign currency translation negative impact of approximately
$5.3 million
, the remaining decrease of $7.8 million was due to a $26.2 million decline in organic revenues, primarily due to declines in sales volumes across Europe, the U.S., and International Americas. The weakness in these markets is broad based. A large portion of our European customer base includes hyper-markets and mainstream apparel retailers which have seen a significant impact from the economic downturn. In the U.S., retailers are recovering slowly. As a result, we have seen a cautious approach to purchases from apparel vendors that resulted in delays in peak season ordering. This decline in revenues was partially offset by the inclusion of $18.3 million in revenues attributable to the Shore to Shore businesses, which we acquired in May 2011.
Retail Merchandising Solutions
Retail Merchandising Solutions revenues decreased
$18.0 million
, or
24.4%
, in
2012
as compared to
2011
. After considering the foreign currency translation negative impact of
$4.0 million
, the $14.0 million decrease in revenues is primarily related to the impact of the movement of a portion of this business to a distributor model and a decrease in Hand-held Labeling Solutions (HLS). We anticipate HLS will face difficult revenue trends due to the continued shifts in market demand for HLS products. Our Retail Merchandising Solutions business has also been negatively impacted by fewer new store openings and remodels of existing stores at our European customers.
Gross Profit
During 2012, gross profit decreased $41.5 million, or
13.3%
, from
$312.3 million
to
$270.8 million
. The negative impact of foreign currency translation on gross profit was approximately
$7.1 million
. Gross profit, as a percentage of net revenues, decreased from
40.9%
to
39.2%
.
Shrink Management Solutions
Shrink Management Solutions gross profit as a percentage of Shrink Management Solutions revenues decreased to
44.1%
in
2012
, from
44.8%
in
2011
. The decrease in the gross profit percentage of Shrink Management Solutions was due primarily to lower margins in EAS consumables and Merchandise Visibility (RFID). The decrease was partially offset by higher margins in EAS systems and Alpha
®
. EAS consumables margins were lower due to the decline in higher margin Hard Tag @ Source revenues, as well as increased Hard Tag @ Source product costs. Merchandise Visibility (RFID) margins were lower due to the impact of a large roll-out with RFID enabled technology in Europe in 2012. EAS systems margins increased due to favorable manufacturing variances and decreased field service costs, primarily related to our restructuring efforts. Alpha margins increased due to decreased inventory costs as well as reduced shipping charges.
Apparel Labeling Solutions
Apparel Labeling Solutions gross profit as a percentage of Apparel Labeling Solutions revenues decreased to
25.2%
in
2012
, from
28.7%
in
2011
. Recent actions to restructure and right size our manufacturing footprint contributed to a temporary reduction in gross margins, including an impact on inventory reserves and shipping costs. The impact of the Shore to Shore acquisition also contributed to the decline. During the third quarter of 2012, we successfully implemented the initial phases of restructuring in Asia and North America and began to see positive gross margin impact starting near the end of the third quarter through the fourth quarter of 2012.
Retail Merchandising Solutions
The Retail Merchandising Solutions gross profit as a percentage of Retail Merchandising Solutions revenues decreased to
45.7%
in
2012
from
47.3%
in
2011
. The decrease in Retail Merchandising Solutions gross profit percentage was primarily due to the net impact of the movement of a portion of this business to a distributor model. Further, lower margins were caused by unfavorable manufacturing variances related to lower volumes in HLS in 2012.
Selling, General, and Administrative Expenses
Selling, general, and administrative (SG&A) expenses decreased
$30.7 million
, or
11.0%
, during
2012
compared to
2011
. Foreign currency translation decreased SG&A expenses by approximately
$7.8 million
. The SG&A and enhanced Global Restructuring programs reduced expenses by $19.9 million. The Shore to Shore acquisition increased SG&A expense by $4.8 million. Also contributing to the decrease were declines in consulting, operations and shared services expenses resulting from the second quarter of 2011 North American and Caribbean implementation of our company wide ERP system, reductions in temporary staff added in the second quarter of 2011 to add capabilities required for future process and cost improvement initiatives, and decreased commissions expenses associated with the renewal/extension of sales-type leases in the second quarter of 2011. Reductions in stock-based compensation expense, bad debt expense. amortization expense on fully amortized intangible assets, and tax consulting fees also contributed to the decline. Partially offsetting the decrease were increases in performance incentive accruals, costs associated with the CEO transition, and increased payroll related costs associated with the 53 week fiscal year 2012.
Research and Development Expenses
Research and development (R&D) expenses were
$16.4 million
, or
2.4%
of revenues, in
2012
and
$19.3 million
, or
2.5%
of revenues in
2011
.
Restructuring Expenses
Restructuring expenses were
$28.4 million
, or
4.1%
of revenues in
2012
compared to
$28.6 million
or
3.8%
of revenues in
2011
.
Asset Impairment
Asset impairment expense was $0.6 million, or 0.1% of revenues in 2011, without a comparable charge in 2012. The 2011 expense is detailed in the "Asset Impairments" section of Item 7.
Goodwill Impairment
Goodwill impairment expense was
$102.7 million
, or
14.9%
of revenues in
2012
, without a comparable charge in
2011
. The non-cash impairment expense in
2012
is detailed in the “Goodwill Impairments” section of Item 7.
Litigation Settlement
Litigation settlement expense was
$0.3 million
in
2012
compared to
$0.9 million
of revenues in
2011
. The 2012 litigation settlement expense is attributable to a
$0.3 million
accrual recorded during the fourth quarter of 2012 related to the settlement of a service contract termination dispute. The 2011 litigation settlement expense is attributable to a $0.9 million accrual recorded during the fourth quarter of 2011 related to a patent infringement counter suit in which we were found liable for the other party’s associated legal fees. We have submitted an appeal of the ruling to the Court but have accrued the full amount of the judgment.
Acquisition Costs
Acquisition Costs in
2012
were
$0.3 million
compared to
$2.3 million
in
2011
. The decrease in acquisition costs was primarily due to the closing of the acquisition of the Shore to Shore businesses in May 2011.
Other (Income) Expense
Other income was
$3.9 million
in
2012
compared to other income of
$0.2 million
in
2011
. These amounts represent the income statement impacts of the improper and fraudulent activities of a certain former employee of the Company's Canada sales subsidiary. During 2012, compensation received from our insurance provider of $4.7 million for the financial impact of the fraudulent Canadian activities was partially offset by legal and forensic costs incurred in connection with the Canada matter.
Other Operating Income
Other operating income was
$2.0 million
, or
0.3%
of revenues in 2012 compared to
$19.3 million
, or
2.5%
of revenues in
2011
. The 2012 other operating income represents the gain on sale of our non-strategic Suzhou, China subsidiary, as well as income attributable to the sale of customer related receivables associated with the renewal and extension of sales-type lease arrangements. The 2011 other operating income was attributable to the sale of customer related receivables associated with the renewal and extension of sales-type lease arrangements. The customers were based mostly in Europe and relate to our Shrink Management Solutions segment.
Interest Income and Interest Expense
Interest income in
2012
decreased
$1.6 million
from the comparable period in
2011
. The decrease in interest income was primarily due to lower cash balances and decreased interest income recognized for sales-type leases during 2012 compared to 2011.
Interest expense for
2012
increased
$2.7 million
from the comparable period in
2011
. The increase in interest expense was primarily due to the amendment of our Senior Secured Credit Facility and Senior Secured Notes, as well as a make-whole premium of $1.1 million on the Senior Secured Notes.
Other Gain (Loss), net
Other gain (loss), net was a net loss of
$1.7 million
in
2012
compared to a net loss of
$1.5 million
in
2011
. There was a
$1.7 million
foreign exchange loss during
2012
compared to a
$2.1 million
foreign exchange loss partially offset by
$0.5 million
of other income during
2011
. During 2012 the primary drivers of the foreign currency loss were fluctuations in the value of the U.S. Dollar to the Euro and Sri Lankan Rupee and the Great British Pound to the Euro.
Income Taxes
The effective tax rate for
2012
was negative
5.6%
as compared to negative
1,011.8%
for
2011
. The 2012 tax rate was impacted by the 2012 goodwill impairment charges. The 2011 tax rate was impacted by a charge of $47.7 million to establish a valuation allowance on the U.S. Federal net deferred tax assets.
Loss from Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax, was
$8.0 million
and
$1.2 million
in
2012
and
2011
, respectively. Consistent with our refined strategy to focus on inventory management systems that focus on on-shelf availability, we decided to reduce our emphasis on CheckView
®
services and solutions. In October 2012, we completed the sale of the Banking Security Systems Integration business unit, which was focused on the financial services sector and previously was part of our CheckView
®
business. We are also pursuing the divestiture of our U.S. and Canada based CheckView
®
business so that we can focus on the growth of our core business. As such, both businesses, which were included in our Shrink Management Solutions segment, are excluded from continuing operations. The loss from discontinued operations included impairment charges of $5.4 million and $6.2 million for 2012 and 2011, respectively.
Net (Loss) Earnings Attributable to Checkpoint Systems, Inc.
Net loss attributable to Checkpoint Systems, Inc. was
$145.9 million
, or
$3.56
per diluted share, during
2012
compared to
$66.6 million
, or
$1.64
per diluted share, during
2011
. The weighted-average number of shares used in the diluted earnings per share computation were 41.0 million and 40.5 million for
2012
and
2011
, respectively.
Fiscal 2011 compared to Fiscal 2010
Net Revenues
During 2011, revenues increased by
$47.2 million
, or
6.6%
, from
$716.5 million
to
$763.7 million
. Foreign currency translation had a positive impact on revenues of
$23.7 million
for the full year of
2011
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in millions)
|
|
|
|
|
|
|
|
|
Year ended
|
December 25,
2011
(Fiscal 2011)
|
|
|
December 26,
2010
(Fiscal 2010)
|
|
|
Dollar
Amount
Change
Fiscal 2011
vs.
Fiscal 2010
|
|
|
Percentage
Change
Fiscal 2011
vs.
Fiscal 2010
|
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
$
|
491.9
|
|
|
$
|
471.6
|
|
|
$
|
20.3
|
|
|
4.3
|
%
|
|
Apparel Labeling Solutions
|
198.1
|
|
|
172.9
|
|
|
25.2
|
|
|
14.6
|
|
|
Retail Merchandising Solutions
|
73.7
|
|
|
72.0
|
|
|
1.7
|
|
|
2.3
|
|
|
Net Revenues
|
$
|
763.7
|
|
|
$
|
716.5
|
|
|
$
|
47.2
|
|
|
6.6
|
%
|
Shrink Management Solutions
Shrink Management Solutions revenues increased
$20.3 million
, or
4.3%
, in
2011
compared to
2010
. Foreign currency translation had a positive impact of approximately
$17.6 million
. After considering the impact of the foreign currency translation, the increases in EAS systems were offset by decreases in EAS consumables.
The EAS systems revenue increase was driven by growth in Asia and Europe resulting from the addition of new customers and also due to the extensions of arrangements and new product installations with existing customers. Historically, new store openings are a significant contributor to EAS systems revenues. These have been scaled back by many of our European and North American based customers, who have increased their focus on margin improvement at existing stores.
The EAS consumables revenue decrease was primarily due to Hard Tag @ Source
™
revenues, which were below levels of one year ago when we experienced high volumes associated with the initial program roll-out to a major European retailer. A decline in Europe EAS label revenues due to reduced volumes with certain customers was also a factor.
Apparel Labeling Solutions
Apparel Labeling Solutions revenues increased
$25.2 million
, or
14.6%
, in
2011
compared to
2010
. After considering the foreign currency translation positive impact of approximately
$2.1 million
, the remaining increase of $23.1 million was due to $35.3 million in revenues from the acquisition of Shore to Shore on May 16, 2011, which were offset by a $12.2 million decline in organic revenues, primarily due to a decline in sales volumes in Europe.
Retail Merchandising Solutions
Retail Merchandising Solutions revenues increased
$1.7 million
, or
2.3%
, in
2011
compared to
2010
. After considering the foreign currency translation positive impact of approximately
$4.0 million
, the decrease in revenues is primarily related to a decrease in Hand-held Labeling Solutions (HLS). HLS has faced difficult trends due to the impact of continued shifts in market demand for HLS products.
Gross Profit
During
2011
, gross profit decreased
$2.1 million
, or
0.7%
, from
$314.4 million
to
$312.3 million
. The positive impact of foreign currency translation on gross profit was approximately
$7.4 million
. Gross profit, as a percentage of net revenues, decreased from
43.9%
to
40.9%
.
Shrink Management Solutions
Shrink Management Solutions gross profit as a percentage of Shrink Management Solutions revenues decreased to
44.8%
in
2011
, from
46.2%
in
2010
. The decrease in the gross profit percentage of Shrink Management Solutions was due primarily to lower margins in Alpha
®
, EAS consumables, and EAS systems. The decline in Alpha
®
margins was due to customer and product mix coupled with rising raw material prices. The decline in EAS consumables margins was due to delays in capturing expected cost efficiencies as we expanded new product and specialty label capacity, coupled with pricing that does not yet reflect the enhanced capabilities of these products that we experienced earlier this year. EAS consumables margins were also impacted by the year over year reduction in higher margin Hard Tag @ Source
™
. The decline in EAS Systems margins were driven by lower volumes and product mix.
Apparel Labeling Solutions
Apparel Labeling Solutions gross profit as a percentage of Apparel Labeling Solutions revenues decreased to
28.7%
in
2011
, from
35.7%
in
2010
. The decline was largely attributable to weaker operational performance at certain Asia facilities, inventory adjustments, and the impact of the Shore to Shore acquisition, which includes a purchase accounting based mark-up of acquired inventory as well as the deferred transfer to the Company of certain Asia based printing operations. The efficiency issues that impacted EAS consumables margins in the Shrink Management Solutions segment also contributed to the Apparel Labeling Solutions margin decline.
Retail Merchandising Solutions
Retail Merchandising Solutions gross profit as a percentage of Retail Merchandising Solutions revenues decreased to
47.3%
in
2011
, from
48.5%
in
2010
. The decrease in Retail Merchandising Solutions gross profit percentage was due primarily to lower margins in HLS resulting from unfavorable manufacturing variances related to lower volumes.
Selling, General, and Administrative Expenses
Selling, general, and administrative (SG&A) expenses increased
$24.0 million
, or
9.4%
, in
2011
compared to
2010
. Foreign currency translation increased SG&A expenses by approximately
$7.9 million
. The remaining increase in SG&A expense of $16.1 million was due primarily to the impact of the Shore to Shore acquisition, increases in selling expenses, and temporary increases in consulting, operations and shared services expenses resulting from the 2011 North American and Caribbean implementation of our company wide ERP system. Also contributing to the increase were additions to staff to add capabilities required for future process and cost improvement initiatives, and increased commissions expenses associated with the renewal/extension of sales-type leases in the 2011. Offsetting these increases were the effects of an incentive compensation adjustment, fee reductions from external service providers and decreased marketing activities. We expect the impact of the SG&A and enhanced Global Restructuring program to contribute to meaningful reductions in SG&A expense.
Research and Development Expenses
Research and development (R&D) expenses were
$19.3 million
, or
2.5%
of revenues, in
2011
and
$19.7 million
, or
2.8%
of revenues in
2010
.
Restructuring Expenses
Restructuring expenses were
$28.6 million
, or
3.8%
of revenues in
2011
compared to
$8.2 million
or
1.1%
of revenues in
2010
. The increase is due to the implementation of the Global Restructuring Plan and continued SG&A Plan activities, which included $7.8 million in restructuring related asset impairment charges for various locations around the world as well as $18.0 million of severance charges and other costs of $2.8 million primarily in connection with the enhanced Global Restructuring Plan and the SG&A Restructuring Plan.
Asset Impairments
Asset impairment expense was
$0.6 million
in
2011
, without a comparable charge in
2010
. The
2011
expense is detailed in the “Asset Impairments” section following “Liquidity and Capital Resources.”
Litigation Settlement Expense
Litigation settlement expense was
$0.9 million
or
0.1%
of revenues in
2011
without comparable expense in
2010
. The litigation settlement expense is primarily attributable to a $0.9 million accrual recorded during the fourth quarter of 2011 related to a patent infringement counter suit in which the Company was found liable for the other party’s associated legal fees. The Company has submitted an appeal of the ruling to the Court but has accrued the full amount of the judgment.
Acquisition Costs
Acquisition costs were
$2.3 million
in
2011
and
$0.5 million
in
2010
.
Other (Income) Expense
Other (income) expense was
$0.2 million
of income in
2011
compared to
$1.5 million
of expense in
2010
. These amounts represent the income statement impacts of the improper and fraudulent activities of a certain former employee of the Company’s Canada sales subsidiary.
Other Operating Income
Other operating income was
$19.3 million
, or
2.5%
of revenues in
2011
without comparable income in
2010
. The increase was due to the sales of customer related receivables associated with the renewal and extension of sales-type lease arrangements. The customers are based mostly in Europe and relate to our Shrink Management Solutions segment.
Interest Income and Interest Expense
Interest income in
2011
increased
$0.3 million
from the comparable period in
2010
. The increase in interest income was primarily due to higher subsidiary cash balances and increased interest income recognized for sales-type leases during 2011 compared to 2010.
Interest expense for
2011
increased
$1.4 million
from the comparable period in
2010
due to an increase in debt related to the Shore to Shore acquisition as well as the funding of the temporary cash flow impact of the 2011 ERP implementation in North America and Caribbean operations. Interest expense was also impacted by an increase in interest charged on our revolving credit facility due to an increase in our total leverage ratio.
Other Gain (Loss), net
Other gain (loss), net was a net loss of
$1.5 million
in
2011
compared to a net loss of
$2.2 million
in
2010
. The change in other net loss was primarily due to a
$2.1 million
foreign currency loss during
2011
compared to a
$2.7 million
foreign currency loss during
2010
. The primary drivers of the change in foreign currency loss were fluctuations in the value of the U.S. Dollar to the Euro and the Japanese Yen.
Income Taxes
The effective rate of tax at
December 25, 2011
was negative
1,011.8%
. At
December 26, 2010
, the effective tax rate was
16.6%
. The 2011 tax rate was primarily impacted by a charge of $47.7 million to establish a valuation allowance on the U.S. Federal net deferred tax assets.
The 2010 tax rate was impacted by a $7.9 million release of tax reserves, partially offset by charges of $5.1 million related to establishing a full valuation allowance against the U.S. State deferred tax assets and provision to return adjustments of $4.0 million and $1.1 million, respectively. The 2010 effective tax rate was also impacted by a $1.7 million adjustment of an acquisition related liability pertaining to the period prior to the acquisition date.
(Loss) Earnings from Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax, was
$1.2 million
2011
, compared to earnings from discontinued operations, net of tax of
$8.3 million
in
2010
, respectively. In December of 2011, we began actively marketing our Banking Security Systems Integration business unit. In December 2012, we also began pursuing the divestiture of our U.S. and Canada based CheckView
®
business so that we can focus on the growth of our core business. As such, both businesses, which were included in our Shrink Management Solutions segment, are excluded from continuing operations. The Banking Security Systems Integration business unit's 2011 loss from discontinued operations included impairment charges of $6.2 million, net of tax.
Net (Loss) Earnings Attributable to Checkpoint Systems, Inc.
Net loss attributable to Checkpoint Systems, Inc. was
$66.6 million
, or
$1.64
per diluted share, for
2011
compared to net earnings attributable to Checkpoint Systems, Inc. of
$27.7 million
, or
$0.69
per diluted share, for
2010
. The weighted-average number of shares used in the diluted earnings per share computation was 40.5 million and 40.4 million for
2011
and
2010
, respectively.
Other Matters
Recently Adopted Accounting Standards
In April 2011, the FASB issued ASU 2011-03 “Reconsideration of Effective Control for Repurchase Agreements” (ASU 2011-03). The amendments to Topic 860 (Transfers and Servicing) affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments do not affect other transfers of financial assets. The amendments remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. ASU 2011-03 is effective for the first interim or annual periods beginning on or after December 15, 2011, which for us was December 26, 2011, the first day of our 2012 fiscal year. This amendment should be applied prospectively to transactions or modifications of existing transactions that occur on or after December 26, 2011. The adoption of the standard has not had a material impact on our Consolidated Results of Operations and Financial Condition.
In May 2011, the FASB issued ASU 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). The amendments to Topic 820 (Fair Value Measurement) establish common requirements for measuring fair value and related disclosures in accordance with accounting principles generally accepted in the United States and international financial reporting standards. This amendment did not require additional fair value measurements. ASU 2011-04 is effective for the first interim and annual periods beginning after December 15, 2011, which for us was December 26, 2011, the first day of our 2012 fiscal year. This amendment should be applied prospectively. The adoption of the standard has not had a material effect on our Consolidated Results of Operations and Financial Condition.
In June 2011, the FASB issued ASU 2011-05 “Presentation of Comprehensive Income” (ASU 2011-05). The amendments to Topic 220 (Comprehensive Income) eliminate the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders' equity, require consecutive presentation of the statement of net income and other comprehensive income and require reclassification adjustments from other comprehensive income to net income to be shown on the financial statements. In December 2011, the FASB issued ASU 2011-12, "Comprehensive Income -- Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in ASU 2011-05," to defer the effective date of the provision requiring entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. However, the remaining requirements of ASU 2011-05 are effective for the first interim and annual periods beginning after December 15, 2011, which for us was December 26, 2011, the first day of our 2012 fiscal year. Any required changes in presentation requirements and disclosures have been included in our Consolidated Financial Statements beginning with the first quarter ended March 25, 2012. The adoption of the standard has not had a material effect on our Consolidated Results of Operations and Financial Condition.
In September 2011, the FASB issued ASU 2011-08, "Intangibles - Goodwill and Other," (ASU 2011-08), which amends current guidance to allow a company to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The amendment also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, which for us was December 26, 2011, the first day of our 2012 fiscal year. The adoption of the standard has not had a material effect on our Consolidated Results of Operations and Financial Condition.
In September 2011, the FASB issued ASU 2011-09, "Compensation - Retirement Benefits - Multiemployer Plans (Subtopic 715-80)," (ASU 2011-09). ASU 2011-09 requires that employers provide additional separate disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans. The additional quantitative and qualitative disclosures will provide users with more detailed information about an employer's involvement in multiemployer pension plans. ASU 2011-09 is effective for fiscal years ending after December 15, 2011. The adoption of this standard has not had a material effect on our Consolidated Results of Operations and Financial Condition.
New Accounting Pronouncements and Other Standards
In December 2011, the FASB issued ASU 2011-11, "Balance Sheet - Disclosures about Offsetting Assets and Liabilities (Topic 210-20)," (ASU 2011-11). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. In January 2013, the FASB issued ASU 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Asset and Liabilities," which clarifies the scope of the offsetting disclosures of ASU 2011-11. Both ASUs are effective for fiscal years beginning on or after January 1, 2013, with retrospective application for all comparable periods presented. The adoption of this standard is not expected to have a material effect on our Consolidated Results of Operations and Financial Condition.
In July 2012, the FASB issued ASU 2012-02, "Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment," (ASU 2012-02). ASU 2012-02 amends the guidance in ASC 350-302 on testing indefinite-lived intangible assets, other than goodwill, for impairment by allowing an entity to perform a qualitative impairment assessment before proceeding to the two-step impairment test. If the entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not (i.e., a likelihood of more than 50 percent) impaired, the entity would not need to calculate the fair value of the asset. In addition, the ASU does not amend the requirement to test these assets for impairment between annual tests if there is a change in events or circumstances; however, it does revise the examples of events and circumstances that an entity should consider in interim periods. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption being permitted. The adoption of this standard is not expected to have a material effect on our Consolidated Results of Operations and Financial Condition.
In October 2012, the FASB issued ASU 2012-04, "Technical Corrections and Improvements," (ASU 2012-04). ASU 2012-04 amends current guidance by clarifying the FASB Accountings Standards Codification (Codification), correcting unintended application of guidance, or making minor improvements to the Codification. These amendments are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Additionally, the amendments included in ASU 2012-04 intend to make the Codification easier to understand and the fair value measurement guidance easier to apply by eliminating inconsistencies and providing needed clarifications. The amendments in ASU 2012-04 that will not have transition guidance will be effective upon issuance. For public entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012. The adoption of this standard is not expected to have a material effect on our Consolidated Results of Operations and Financial Condition.
In February 2013, the FASB issued ASU 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," which requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, entities are required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail on these amounts. This ASU is effective prospectively for reporting periods beginning after December 15, 2012. The Company is currently evaluating the impact of adopting this guidance.
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 30, 2012
, substantially 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
$0.2 million
asset position and
$0.2 million
liability position as of
December 30, 2012
, and a
$0.5 million
asset position and
$0.4 million
liability position as of
December 25, 2011
. 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 30, 2012
, a 10% strengthening of the U.S. dollar versus other currencies would result in an increase of
$0.7 million
in the net asset position, while a 10% weakening of the dollar versus all other currencies would result in a decrease of
$0.7 million
.
Foreign exchange forward contracts are used to hedge certain of our firm foreign currency cash flows. Thus, there is either an asset or cash flow exposure related to all the financial instruments in the above sensitivity analysis for which the impact of a movement in exchange rates would be in the opposite direction and substantially equal to the impact on the instruments in the analysis. Certain of our foreign subsidiaries have restrictions on the remittance of funds generated by our operations outside the U.S. At
December 30, 2012
, the majority of our unremitted earnings of subsidiaries outside the U.S. were deemed not to be permanently reinvested.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
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 (loss) income, equity and cash flows present fairly, in all material respects, the financial position of Checkpoint Systems, Inc. and its subsidiaries at December 30, 2012 and December 25, 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 2012 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 30, 2012, 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.
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.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 5, 2013
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
ASSETS
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
Cash and cash equivalents
|
$
|
118,829
|
|
|
$
|
93,481
|
|
|
Restricted cash
|
—
|
|
|
291
|
|
|
Accounts receivable, net of allowance of $13,242 and $12,627
|
177,173
|
|
|
208,889
|
|
|
Inventories
|
82,154
|
|
|
130,987
|
|
|
Other current assets
|
36,147
|
|
|
44,548
|
|
|
Deferred income taxes
|
8,930
|
|
|
7,720
|
|
|
Assets of discontinued operations held for sale
|
29,864
|
|
|
6,320
|
|
|
Total Current Assets
|
453,097
|
|
|
492,236
|
|
|
REVENUE EQUIPMENT ON OPERATING LEASE, net
|
1,748
|
|
|
1,920
|
|
|
PROPERTY, PLANT, AND EQUIPMENT, net
|
107,184
|
|
|
132,161
|
|
|
GOODWILL
|
182,741
|
|
|
286,103
|
|
|
OTHER INTANGIBLES, net
|
74,950
|
|
|
84,557
|
|
|
DEFERRED INCOME TAXES
|
26,843
|
|
|
27,241
|
|
|
OTHER ASSETS
|
13,246
|
|
|
20,263
|
|
|
TOTAL ASSETS
|
$
|
859,809
|
|
|
$
|
1,044,481
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
Short-term borrowings and current portion of long-term debt
|
$
|
4,367
|
|
|
$
|
21,778
|
|
|
Accounts payable
|
68,929
|
|
|
68,886
|
|
|
Accrued compensation and related taxes
|
28,258
|
|
|
27,620
|
|
|
Other accrued expenses
|
54,425
|
|
|
58,242
|
|
|
Income taxes
|
2,560
|
|
|
4,080
|
|
|
Unearned revenues
|
17,035
|
|
|
22,142
|
|
|
Restructuring reserve
|
9,579
|
|
|
17,612
|
|
|
Accrued pensions — current
|
4,687
|
|
|
4,453
|
|
|
Other current liabilities
|
25,855
|
|
|
32,867
|
|
|
Liabilities of discontinued operations held for sale
|
9,688
|
|
|
1,440
|
|
|
Total Current Liabilities
|
225,383
|
|
|
259,120
|
|
|
LONG-TERM DEBT, LESS CURRENT MATURITIES
|
108,921
|
|
|
128,684
|
|
|
ACCRUED PENSIONS
|
95,839
|
|
|
78,815
|
|
|
OTHER LONG-TERM LIABILITIES
|
36,540
|
|
|
29,894
|
|
|
DEFERRED INCOME TAXES
|
15,580
|
|
|
18,628
|
|
|
COMMITMENTS AND CONTINGENCIES
|
—
|
|
|
—
|
|
|
CHECKPOINT SYSTEMS, INC. STOCKHOLDERS’ EQUITY:
|
|
|
|
|
Preferred stock, no par value, 500,000 shares authorized, none issued
|
—
|
|
|
—
|
|
|
Common stock, par value $.10 per share, 100,000,000 shares authorized, issued 44,763,404 and 44,241,105 shares
|
4,476
|
|
|
4,424
|
|
|
Additional capital
|
424,715
|
|
|
418,211
|
|
|
Retained earnings
|
18,392
|
|
|
164,268
|
|
|
Common stock in treasury, at cost, 4,035,912 and 4,035,912 shares
|
(71,520
|
)
|
|
(71,520
|
)
|
|
Accumulated other comprehensive income, net of tax
|
795
|
|
|
12,741
|
|
|
TOTAL CHECKPOINT SYSTEMS, INC. STOCKHOLDERS’ EQUITY
|
376,858
|
|
|
528,124
|
|
|
NON-CONTROLLING INTERESTS
|
688
|
|
|
1,216
|
|
|
TOTAL EQUITY
|
377,546
|
|
|
529,340
|
|
|
TOTAL LIABILITIES AND EQUITY
|
$
|
859,809
|
|
|
$
|
1,044,481
|
|
See Notes to the Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands, except per share data)
|
|
|
|
|
|
|
Year ended
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Net revenues
|
$
|
690,789
|
|
|
$
|
763,749
|
|
|
$
|
716,451
|
|
|
Cost of revenues
|
419,947
|
|
|
451,459
|
|
|
402,002
|
|
|
Gross profit
|
270,842
|
|
|
312,290
|
|
|
314,449
|
|
|
Selling, general, and administrative expenses
|
249,089
|
|
|
279,791
|
|
|
255,759
|
|
|
Research and development
|
16,400
|
|
|
19,269
|
|
|
19,676
|
|
|
Restructuring expenses
|
28,422
|
|
|
28,640
|
|
|
8,211
|
|
|
Asset impairment
|
—
|
|
|
592
|
|
|
—
|
|
|
Goodwill impairment
|
102,715
|
|
|
—
|
|
|
—
|
|
|
Litigation settlement
|
295
|
|
|
943
|
|
|
—
|
|
|
Acquisition costs
|
332
|
|
|
2,319
|
|
|
523
|
|
|
Other (income) expense
|
(3,907
|
)
|
|
(179
|
)
|
|
1,537
|
|
|
Other operating income
|
2,043
|
|
|
19,262
|
|
|
—
|
|
|
Operating (loss) income
|
(120,461
|
)
|
|
177
|
|
|
28,743
|
|
|
Interest income
|
1,757
|
|
|
3,381
|
|
|
3,118
|
|
|
Interest expense
|
10,647
|
|
|
7,923
|
|
|
6,507
|
|
|
Other gain (loss), net
|
(1,731
|
)
|
|
(1,523
|
)
|
|
(2,237
|
)
|
|
(Loss) earnings from continuing operations before income taxes
|
(131,082
|
)
|
|
(5,888
|
)
|
|
23,117
|
|
|
Income taxes expense
|
7,364
|
|
|
59,573
|
|
|
3,828
|
|
|
Net (loss) earnings from continuing operations
|
(138,446
|
)
|
|
(65,461
|
)
|
|
19,289
|
|
|
(Loss) earnings from discontinued operations, net of tax expense (benefit) of $247, ($378), and $5,134
|
(7,959
|
)
|
|
(1,165
|
)
|
|
8,325
|
|
|
Net (loss) earnings
|
(146,405
|
)
|
|
(66,626
|
)
|
|
27,614
|
|
|
Less: loss attributable to non-controlling interests
|
(529
|
)
|
|
(57
|
)
|
|
(116
|
)
|
|
Net (loss) earnings attributable to Checkpoint Systems, Inc.
|
$
|
(145,876
|
)
|
|
$
|
(66,569
|
)
|
|
$
|
27,730
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings attributable to Checkpoint Systems, Inc. per share:
|
|
|
|
|
|
|
(Loss) earnings from continuing operations
|
$
|
(3.36
|
)
|
|
$
|
(1.61
|
)
|
|
$
|
0.48
|
|
|
(Loss) earnings from discontinued operations, net of tax
|
$
|
(0.20
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.21
|
|
|
Basic (loss) earnings attributable to Checkpoint Systems, Inc. per share
|
$
|
(3.56
|
)
|
|
$
|
(1.64
|
)
|
|
$
|
0.69
|
|
|
Diluted (loss) earnings attributable to Checkpoint Systems, Inc. per share:
|
|
|
|
|
|
|
(Loss) earnings from continuing operations
|
$
|
(3.36
|
)
|
|
$
|
(1.61
|
)
|
|
$
|
0.48
|
|
|
(Loss) earnings from discontinued operations, net of tax
|
$
|
(0.20
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.21
|
|
|
Diluted (loss) earnings attributable to Checkpoint Systems, Inc. per share
|
$
|
(3.56
|
)
|
|
$
|
(1.64
|
)
|
|
$
|
0.69
|
|
See Notes to the Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
|
|
|
|
|
Year ended
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Net (loss) earnings
|
$
|
(146,405
|
)
|
|
$
|
(66,626
|
)
|
|
$
|
27,614
|
|
|
Amortization of pension plan actuarial losses, net of tax expense of $65, $63, and $29
|
218
|
|
|
137
|
|
|
103
|
|
|
Change in realized and unrealized (losses) gains on derivative hedges, net of tax (benefit) expense of ($71), $31, and $247
|
(1,521
|
)
|
|
1,165
|
|
|
679
|
|
|
Recognized loss on pension, net of tax benefit of $4,410, $1,029, and $1,344
|
(11,176
|
)
|
|
(2,571
|
)
|
|
(3,405
|
)
|
|
Foreign currency translation adjustment
|
534
|
|
|
3,542
|
|
|
(15,321
|
)
|
|
Comprehensive (loss) income
|
$
|
(158,350
|
)
|
|
$
|
(64,353
|
)
|
|
$
|
9,670
|
|
|
Less: comprehensive loss attributable to non-controlling interests
|
(528
|
)
|
|
(55
|
)
|
|
(834
|
)
|
|
Comprehensive (loss) income attributable to Checkpoint Systems, Inc.
|
$
|
(157,822
|
)
|
|
$
|
(64,298
|
)
|
|
$
|
10,504
|
|
See Notes to the Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
Checkpoint Systems, Inc. Stockholders
|
|
|
|
|
Common Stock
|
Additional Capital
|
Retained Earnings
|
Treasury Stock
|
Accumulated
Other
Comprehensive
Income
|
Non-controlling Interests
|
Total Equity
|
|
|
Shares
|
Amount
|
Shares
|
Amount
|
|
Balance, December 27, 2009
|
43,078
|
|
$
|
4,307
|
|
$
|
390,379
|
|
$
|
203,107
|
|
4,036
|
|
$
|
(71,520
|
)
|
$
|
28,451
|
|
$
|
834
|
|
$
|
555,558
|
|
|
Net earnings (loss)
|
|
|
|
27,730
|
|
|
|
|
(116
|
)
|
27,614
|
|
|
Exercise of stock-based compensation and awards released
|
765
|
|
77
|
|
5,945
|
|
|
|
|
|
|
6,022
|
|
|
Tax benefit of stock-based compensation
|
|
|
133
|
|
|
|
|
|
|
133
|
|
|
Stock-based compensation expense
|
|
|
8,751
|
|
|
|
|
|
|
8,751
|
|
|
Deferred compensation plan
|
|
|
2,112
|
|
|
|
|
|
|
2,112
|
|
|
Repurchase of non-controlling interests
|
|
|
63
|
|
|
|
|
|
(755
|
)
|
(692
|
)
|
|
Amortization of pension plan actuarial losses, net of tax
|
|
|
|
|
|
|
103
|
|
|
103
|
|
|
Change in realized and unrealized losses on derivative hedges, net of tax
|
|
|
|
|
|
|
679
|
|
|
679
|
|
|
Recognized gain on pension, net of tax
|
|
|
|
|
|
|
(3,405
|
)
|
|
(3,405
|
)
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
(15,358
|
)
|
37
|
|
(15,321
|
)
|
|
Balance, December 26, 2010
|
43,843
|
|
$
|
4,384
|
|
$
|
407,383
|
|
$
|
230,837
|
|
4,036
|
|
$
|
(71,520
|
)
|
$
|
10,470
|
|
$
|
—
|
|
$
|
581,554
|
|
|
Net loss
|
|
|
|
(66,569
|
)
|
|
|
|
(57
|
)
|
(66,626
|
)
|
|
Exercise of stock-based compensation and awards released
|
398
|
|
40
|
|
2,170
|
|
|
|
|
|
|
2,210
|
|
|
Tax benefit on stock-based compensation
|
|
|
77
|
|
|
|
|
|
|
77
|
|
|
Stock-based compensation expense
|
|
|
7,408
|
|
|
|
|
|
|
7,408
|
|
|
Deferred compensation plan
|
|
|
1,173
|
|
|
|
|
|
|
1,173
|
|
|
Non-controlling interest of acquired entities
|
|
|
|
|
|
|
|
1,271
|
|
1,271
|
|
|
Amortization of pension plan actuarial losses, net of tax
|
|
|
|
|
|
|
137
|
|
|
137
|
|
|
Change in realized and unrealized gains on derivative hedges, net of tax
|
|
|
|
|
|
|
1,165
|
|
|
1,165
|
|
|
Recognized loss on pension, net of tax
|
|
|
|
|
|
|
(2,571
|
)
|
|
(2,571
|
)
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
3,540
|
|
2
|
|
3,542
|
|
|
Balance, December 25, 2011
|
44,241
|
|
$
|
4,424
|
|
$
|
418,211
|
|
$
|
164,268
|
|
4,036
|
|
$
|
(71,520
|
)
|
$
|
12,741
|
|
$
|
1,216
|
|
$
|
529,340
|
|
|
Net loss
|
|
|
|
(145,876
|
)
|
|
|
|
(529
|
)
|
(146,405
|
)
|
|
Exercise of stock-based compensation and awards released
|
522
|
|
52
|
|
1,108
|
|
|
|
|
|
|
1,160
|
|
|
Tax benefit on stock-based compensation
|
|
|
(306
|
)
|
|
|
|
|
|
(306
|
)
|
|
Stock-based compensation expense
|
|
|
4,837
|
|
|
|
|
|
|
4,837
|
|
|
Deferred compensation plan
|
|
|
865
|
|
|
|
|
|
|
865
|
|
|
Amortization of pension plan actuarial losses, net of tax
|
|
|
|
|
|
|
218
|
|
|
218
|
|
|
Change in realized and unrealized losses on derivative hedges, net of tax
|
|
|
|
|
|
|
(1,521
|
)
|
|
(1,521
|
)
|
|
Recognized loss on pension, net of tax
|
|
|
|
|
|
|
(11,176
|
)
|
|
(11,176
|
)
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
533
|
|
1
|
|
534
|
|
|
Balance, December 30, 2012
|
44,763
|
|
$
|
4,476
|
|
$
|
424,715
|
|
$
|
18,392
|
|
4,036
|
|
$
|
(71,520
|
)
|
$
|
795
|
|
$
|
688
|
|
$
|
377,546
|
|
See Notes to the Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
|
|
|
|
|
Year ended
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net (loss) earnings
|
$
|
(146,405
|
)
|
|
$
|
(66,626
|
)
|
|
$
|
27,614
|
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
32,714
|
|
|
37,348
|
|
|
34,477
|
|
|
Deferred taxes
|
(2,075
|
)
|
|
47,612
|
|
|
(2,859
|
)
|
|
Stock-based compensation
|
4,753
|
|
|
7,408
|
|
|
8,751
|
|
|
Provision for losses on accounts receivable
|
3,024
|
|
|
3,765
|
|
|
123
|
|
|
Excess tax benefit on stock compensation
|
(98
|
)
|
|
(634
|
)
|
|
(1,662
|
)
|
|
(Gain) loss on disposal of fixed assets
|
(1,326
|
)
|
|
106
|
|
|
133
|
|
|
Asset impairment
|
1,771
|
|
|
3,373
|
|
|
—
|
|
|
Goodwill impairment
|
106,348
|
|
|
3,411
|
|
|
—
|
|
|
Gain on sale of subsidiary
|
(1,657
|
)
|
|
—
|
|
|
—
|
|
|
Loss on sale of discontinued operations
|
15
|
|
|
—
|
|
|
—
|
|
|
Restructuring-related asset impairment
|
6,506
|
|
|
7,843
|
|
|
—
|
|
|
Decrease (increase) in current assets, net of the effects of acquired companies:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
22,105
|
|
|
(25,567
|
)
|
|
(8,753
|
)
|
|
Inventories
|
37,748
|
|
|
(23,821
|
)
|
|
(20,535
|
)
|
|
Other current assets
|
5,357
|
|
|
(14,065
|
)
|
|
162
|
|
|
Increase (decrease) in current liabilities, net of the effects of acquired companies:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
2,631
|
|
|
1,064
|
|
|
2,705
|
|
|
Income taxes
|
(1,502
|
)
|
|
(506
|
)
|
|
(5,653
|
)
|
|
Unearned revenues
|
(4,393
|
)
|
|
10,780
|
|
|
(9,750
|
)
|
|
Restructuring reserve
|
(8,178
|
)
|
|
10,544
|
|
|
3,044
|
|
|
Other current and accrued liabilities
|
4,875
|
|
|
8,350
|
|
|
(16,070
|
)
|
|
Net cash provided by operating activities
|
62,213
|
|
|
10,385
|
|
|
11,727
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Acquisition of property, plant, and equipment and intangibles
|
(12,401
|
)
|
|
(22,981
|
)
|
|
(23,712
|
)
|
|
Acquisitions of businesses, net of cash acquired
|
—
|
|
|
(75,937
|
)
|
|
(300
|
)
|
|
Change in restricted cash
|
291
|
|
|
15
|
|
|
504
|
|
|
Proceeds from sale of real estate
|
4,560
|
|
|
—
|
|
|
—
|
|
|
Net cash proceeds from the sale of discontinued operations
|
1,180
|
|
|
—
|
|
|
—
|
|
|
Net cash proceeds from the sale of subsidiary
|
2,250
|
|
|
—
|
|
|
—
|
|
|
Other investing activities
|
1,671
|
|
|
623
|
|
|
323
|
|
|
Net cash used in investing activities
|
(2,449
|
)
|
|
(98,280
|
)
|
|
(23,185
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from stock issuances
|
1,653
|
|
|
2,210
|
|
|
6,022
|
|
|
Excess tax benefit on stock compensation
|
98
|
|
|
634
|
|
|
1,662
|
|
|
Proceeds from short-term debt
|
3,467
|
|
|
8,565
|
|
|
7,621
|
|
|
Payment of short-term debt
|
(11,869
|
)
|
|
(7,895
|
)
|
|
(12,344
|
)
|
|
Net change in factoring and bank overdrafts
|
(8,932
|
)
|
|
(4,364
|
)
|
|
1,413
|
|
|
Proceeds from long-term debt
|
3,000
|
|
|
74,117
|
|
|
141,747
|
|
|
Payment of long-term debt
|
(20,498
|
)
|
|
(67,370
|
)
|
|
(114,458
|
)
|
|
Debt issuance costs
|
(2,085
|
)
|
|
—
|
|
|
(1,991
|
)
|
|
Repurchase of non-controlling interests
|
—
|
|
|
—
|
|
|
(781
|
)
|
|
Net cash (used in) provided by financing activities
|
(35,166
|
)
|
|
5,897
|
|
|
28,891
|
|
|
Effect of foreign currency rate fluctuations on cash and cash equivalents
|
750
|
|
|
3,006
|
|
|
(4,970
|
)
|
|
Net increase (decrease) in cash and cash equivalents
|
25,348
|
|
|
(78,992
|
)
|
|
12,463
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning of period
|
93,481
|
|
|
172,473
|
|
|
160,010
|
|
|
End of period
|
$
|
118,829
|
|
|
$
|
93,481
|
|
|
$
|
172,473
|
|
See Notes to the Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
We are a leading global manufacturer and provider of technology-driven, loss prevention, inventory management and labeling solutions to the retail and apparel industry. We provide integrated inventory management solutions to brand, track, and secure goods for retailers and consumer product manufacturers worldwide. We are a leading provider of, and earn revenues primarily from the sale of Shrink Management, Apparel Labeling and Retail Merchandising Solutions. Shrink Management Solutions consists of electronic article surveillance (EAS) systems, EAS consumables, Alpha
®
solutions, store security system installations and monitoring solutions (CheckView
®
), and radio frequency identification (RFID) systems, software, tags and labels. Apparel Labeling Solutions includes our web-based data management service and network of service bureaus to manage the printing of variable information on price and promotional tickets, adhesive labels, fabric and woven tags and labels, and apparel branding tags. Retail Merchandising Solutions consists of hand-held labeling systems (HLS) and retail display systems (RDS). Applications of these products include primarily retail security, asset and merchandise visibility, automatic identification, and pricing and promotional labels and signage. Operating directly in
29
countries, we have a global network of subsidiaries and distributors, and provide customer service and technical support around the world.
Revision of Previously Issued Consolidated Financial Statements
In December of 2011, we identified errors in our financial statements resulting from improper and fraudulent activities of a certain former employee of our Canada sales subsidiary as part of the transition of our Canadian operations into our shared service environment in North America. Subsequent to the discovery of such errors, we retained outside counsel to undertake an investigation with the assistance of forensic accountants and internal auditors. The results of this investigation concluded that in the period from 2005 through the fourth quarter of 2011, the then Controller of our Canadian operations was able to misappropriate cash through various schemes. The defalcation of cash was concealed by overriding internal controls at the subsidiary which had the effect of misstating certain accounts including cash, accounts receivable, and inventories as well as income taxes and non-income taxes payable and operating expenses. Based on this investigation, it was determined that improper and fraudulent activities affected the financial reporting of the subsidiary and that the improper and fraudulent activities were contained within the Canada sales subsidiary.
The total cumulative gross financial statement impact of the improper and fraudulent activities was approximately
$5.2 million
and impacted fiscal years 2005 through 2011 of which
$1.1 million
was recovered by the Company from the perpetrator during the fourth quarter of 2011, resulting in a net cumulative financial statement impact of
$4.1 million
. The fiscal year 2011 financial statement impact was
$0.2 million
income due to the recovery of
$1.1 million
offset by expense of
$0.9 million
. The fiscal year 2010 financial statement impact was
$1.5 million
. We incurred additional expenses related to the improper and fraudulent activities of
$0.7 million
during 2012. The financial statement impacts of the improper and fraudulent Canadian activities have been included in other expense in the Consolidated Statements of Operations. We filed a claim during the second quarter of 2012 with our insurance provider for the unrecovered amount of the loss. On October 10, 2012, the Company received compensation of
$4.7 million
for the financial impact of the fraudulent Canadian activities from our insurance provider. The income from the settlement was recorded in the fourth quarter of 2012 in other (income) expense in the Consolidated Statement of Operations.
We revised our historical annual and quarterly filings for the effects of these revision adjustments in our 2011 Annual Report on Form 10-K and our 2012 Quarterly Reports on Form 10-Q. All historical amounts presented in this 2012 Annual Report on Form 10-K reflect these historical revision adjustments.
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
2012
are for the 53 weeks ended
December 30, 2012
, while references to
2011
and
2010
are for the 52 weeks ended
December 25, 2011
and
December 26, 2010
, respectively.
Reclassifications
Certain reclassifications and retrospective adjustments have been made to prior period information to conform to current period presentation.
Discontinued Operations
We evaluate our businesses and product lines periodically for their strategic fit within our operations. In December 2011, we began actively marketing our Banking Security Systems Integration business unit and we completed its sale in October 2012. In December 2012, our U.S. and Canada based CheckView
®
business met held for sale reporting criteria. In connection with our decisions to sell these businesses, for all periods presented, the operating results associated with these businesses have been reclassified into earnings from discontinued operations, net of tax in the Consolidated Statements of Operations. The assets and liabilities associated with the U.S. and Canada based CheckView
®
business have been adjusted to fair value, less costs to sell, and reclassified into assets of discontinued operations, net of tax
and liabilities of discontinued operations, net of tax, as appropriate, in the Consolidated Balance Sheets. Refer to Note 19 of the Consolidated Financial Statements.
Assets Held For Sale
As a result of our restructuring plans, certain long-lived assets of our manufacturing facilities met held for sale criteria during the second quarter ended June 24, 2012 and
$3.7 million
of property, plant, and equipment, net was reclassified into other current assets on the Consolidated Balance Sheet. In the third quarter ended September 23, 2012, these long-lived assets of our manufacturing facilities were sold, resulting in a gain on sale of
$0.8 million
that was recognized in other exit costs within restructuring expenses on the Consolidated Statement of Operations.
Sale of Subsidiary
On November 15, 2012, we sold our Suzhou, China subsidiary, resulting in a gain on sale of
$1.7 million
that was recognized in other operating income on the Consolidated Statement of Operations.
Non-controlling Interests
On May 16, 2011, Checkpoint Holland Holding B.V., a wholly-owned subsidiary of the Company, acquired
51%
of the outstanding voting shares of Shore to Shore PVT Ltd. (Sri Lanka) in exchange for
$1.7 million
in cash. The fair value of the non-controlling interest was estimated by applying a market approach. Key assumptions include control premiums associated with guideline transactions of entities deemed to be similar to Shore to Shore PVT Ltd. (Sri Lanka), and adjustments because of the lack of control that market participants would consider when measuring the fair value of the non-controlling interest. In January 2013, we entered into an agreement to sell our
51%
interest in Sri Lanka to the entity holding the non-controlling interest.
On July 1, 1997, Checkpoint Systems Japan Co. Ltd. (Checkpoint Japan), a wholly-owned subsidiary of the Company, issued newly authorized shares to Mitsubishi Materials Corporation (Mitsubishi) in exchange for cash. In February 2006, Checkpoint Japan repurchased
26%
of these shares from Mitsubishi in exchange for
$0.2 million
in cash. In August 2010, Checkpoint Manufacturing Japan Co., LTD. repurchased the remaining
74%
of these shares from Mitsubishi in exchange for
$0.8 million
in cash.
We have classified non-controlling interests as equity on our Consolidated Balance Sheets as of
December 30, 2012
and
December 25, 2011
and presented net income attributable to non-controlling interests separately on our Consolidated Statements of Operations for the years ended
December 30, 2012
,
December 25, 2011
, and
December 26, 2010
.
Subsequent Events
We perform a review of subsequent events in connection with the preparation of our financial statements. The accounting for and disclosure of events that occur after the balance sheet date, but before our financial statements are issued or available to be issued are reflected where appropriate or required in our financial statements. Refer to Note 20 of the Consolidated Financial Statements.
Cash and Cash Equivalents
Cash in excess of operating requirements is invested in short-term, income-producing instruments or used to pay down debt. Cash equivalents include commercial paper and other securities with original maturities of
90
days or less at the time of purchase. Book value approximates fair value because of the short maturity of those instruments.
Restricted Cash
We classify restricted cash as cash that cannot be made readily available for use. Restrictions may include legally restricted deposits held as compensating balances against short-term borrowing arrangements, contracts entered into with others, or company statements of intention with regard to particular deposits. During the year ended
December 30, 2012
, we completed a project for which we had received a grant from the Chinese government that was recorded within restricted cash in the accompanying Consolidated Balance Sheet.
Accounts Receivable
Accounts receivables are recorded at net realizable values. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These allowances are based on specific facts and circumstances surrounding individual customers as well as our historical experience. Provisions for the losses on receivables are charged to income to maintain the allowance at a level considered adequate to cover losses. Receivables are charged off against the reserve when they are deemed uncollectible. From time to time, we sell customer related receivables to third party financial institutions and evaluate these transactions to determine if they meet the criteria for sale accounting treatment. If it is determined that the criteria for sale treatment is met, the receivables are removed from the Consolidated Balance Sheet and earnings are reported on the Consolidated Statement of Operations. If it is determined that the criteria for sale accounting treatment is not met, the receivables remain on the Consolidated Balance Sheet and the transaction is treated as a secured financing.
During 2011, cash proceeds from the sale of accounts receivable related to sales-type lease extensions with customers to third party financial institutions totaled
$38.0 million
. Proceeds from the initial sale of the accounts receivables are used to fund operations. This transaction meets the criteria for sale accounting treatment. We have presented the earnings recognized on the sale of the receivables and other related matters separately in other operating income on the Consolidated Statements of Operations for the years ended
December 25, 2011
and
December 30, 2012
.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market. A provision is made to reduce excess or obsolete inventory to its net realizable value.
Revenue Equipment on Operating Lease
The cost of the equipment leased to customers under operating leases is depreciated on a straight-line basis over the lesser of the length of the contract or estimated useful life of the asset, which is usually between
three
and
five
years.
Property, Plant, and Equipment
Property, plant, and equipment is carried at cost less accumulated depreciation. Maintenance, repairs, and minor renewals are expensed as incurred. Additions, improvements, and major renewals are capitalized. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets. Assets subject to capital leases are depreciated over the lesser of the estimated useful life of the asset or length of the contract. Buildings, equipment rented to customers, and leased equipment on capitalized leases use the following estimated useful lives of
fifteen
to
thirty
years,
three
to
five
years, and
five
years, respectively. Machinery and equipment estimated useful lives range from
three
to
ten
years. Leasehold improvement useful lives are the lesser of the minimum lease term or the useful life of the item. The cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is included in income.
We review our property, plant, and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If it is determined that an impairment, based on expected future undiscounted cash flows, exists, then the loss is recognized on the Consolidated Statements of Operations. The amount of the impairment is the excess of the carrying amount of the impaired asset over its fair value.
Internal-Use Software
Included in fixed assets is the capitalized cost of internal-use software. We capitalize costs incurred during the application development stage of internal-use software and amortize these costs over their estimated useful lives, which generally range from
three
to
five
years. Costs incurred related to design or maintenance of internal-use software is expensed as incurred.
During 2009, we announced that we were in the initial stages of implementing a company-wide ERP system to handle the business and finance processes within our operations and corporate functions. The total amount of internal-use software costs capitalized since the beginning of the ERP implementation as of
December 30, 2012
and
December 25, 2011
were
$22.8 million
and
$21.4 million
respectively. As of
December 30, 2012
,
$18.1 million
was recorded in machinery and equipment related to portions of the ERP system that were placed in service. The remaining costs of
$4.7 million
and
$6.0 million
as of
December 30, 2012
and
December 25, 2011
, respectively, are capitalized as construction-in-progress until such time as the these portions of the ERP system have been placed in service.
Goodwill
Goodwill is carried at cost and is not amortized. We test goodwill for impairment on an annual basis as of fiscal month end October of each fiscal year, relying on a number of factors including operating results, business plans and anticipated future cash flows. Company management uses its judgment in assessing whether goodwill has become impaired between annual impairment tests. Reporting units are primarily determined as the geographic areas comprising the Company’s business segments, except in situations when aggregation of the reporting units is appropriate. Recoverability of goodwill is evaluated using a two-step process when we conclude a qualitative analysis is not sufficient. 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 implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. The nonrecurring fair value measurement of goodwill is developed using significant unobservable inputs (Level 3). We considered whether applying a purely qualitative assessment of goodwill would be sufficient (i.e. a qualitative assessment without quantitative support and bypassing Step 1). We reviewed the implied headroom for each reporting unit as of the most recent goodwill assessment, noting that three of our reporting units had headroom of less than
12%
and would require a quantitative analysis. Therefore, we decided to proceed to Step 1 for all reporting units.
The fair value of our reporting units is dependent upon our estimate of future discounted cash flows and other factors. Our estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. Estimated future cash flows are adjusted by an appropriate discount rate derived from our market capitalization plus a suitable control premium at the date of evaluation. The financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital that we use to determine our discount rate and through our stock price that we use to determine our market capitalization. Therefore, changes in the stock price may also affect the amount of impairment recorded. Market capitalization is determined by multiplying the shares outstanding on the assessment date by the average market price of our common stock over a 30-day period before each assessment date. We use this 30-day duration to consider inherent market fluctuations that may affect any individual closing price. We believe that our market capitalization alone does not fully capture the fair value of our business as a whole, or the substantial value that an acquirer would obtain from its ability to obtain control of our business. As such, in determining fair value, we add a control premium to our market capitalization. To estimate the control premium, we considered our unique competitive advantages that would likely provide synergies to a market participant. In addition, we considered external market factors which we believe contributed to the decline and volatility in our stock price that did not reflect our underlying fair value. Refer to Note 5 of the Consolidated Financial Statements.
Other Intangibles
Indefinite-lived intangible assets are carried at cost and are not amortized, but are subject to tests for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
Definite-lived intangibles are amortized on a straight-line basis over their useful lives (or legal lives if shorter). We review our other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
If it is determined that an impairment, based on expected future cash flows, exists, then the loss is recognized on the Consolidated Statements of Operations. The amount of the impairment is the excess of the carrying amount of the impaired asset over the fair value of the asset. The fair value represents expected future cash flows from the use of the assets, discounted at the rate used to evaluate potential investments. Refer to Note 5 of the Consolidated Financial Statements.
Other Assets
Included in other assets are
$6.0 million
and
$11.2 million
of net long-term customer-based receivables at
December 30, 2012
and
December 25, 2011
, 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 30, 2012
and
December 25, 2011
were
$2.6 million
and
$2.8 million
, respectively. The financing cost amortization expense was
$2.3 million
,
$1.1 million
, and
$1.2 million
, for
2012
,
2011
, and
2010
, respectively.
Revenue Recognition
We recognize revenue when revenue is realized or realizable and earned. Revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price to the buyer is fixed or determinable; and collectability is reasonably assured.
We enter into contracts to sell our products and services, and, while the majority of our sales agreements contain standard terms and conditions, there are agreements that contain multiple elements or non-standard terms and conditions. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and, if so, how the selling price should be allocated among the elements and when to recognize revenue for each element.
For arrangements with multiple elements, we allocate total arrangement consideration to all deliverables based on their relative selling price using a specific hierarchy and recognize revenue when each element’s revenue recognition criteria are met. The hierarchy is as follows: vendor-specific objective evidence (“VSOE”), third-party evidence of selling price (“TPE”) or best estimate of selling price (“BESP”). VSOE of fair value for each element is established based on the price charged when the same element is sold separately. We recognize revenue when installation is complete or other post-shipment obligations have been satisfied. Unearned revenue is recorded when payments are received in advance of performing our service obligations and is recognized over the service period.
Products leased to customers under sales-type leases are accounted for as the equivalent of a sale. The present value of such lease revenues is recorded as net revenues, and the related cost of the products is charged to cost of revenues. The deferred finance charges applicable to these leases are recognized over the terms of the leases. Rental revenue from products under operating leases is recognized over the term of the lease. Installation revenue from SMS EAS products is recognized when the systems are installed. Service revenue is recognized, for service contracts, on a straight-line basis over the contractual period, and, for non-contract work, as services are performed.
Revenues from software license agreements are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant vendor obligations are remaining to be fulfilled, the fee is fixed or determinable, and collection is probable. Revenue from software contracts for both licenses and professional services that require significant production, modification, customization, or implementation are recognized together using the percentage of completion method based upon the ratio of labor incurred to total estimated labor to complete each contract. In instances where there is a term license combined with services, revenue is recognized ratably over the term.
We record estimated reductions to revenue for customer incentive offerings, including volume-based incentives and rebates. The accrual for these incentives and rebates, which are included in the Other Accrued Expenses section of our Consolidated Balance Sheet, was
$15.2 million
and
$11.7 million
as of
December 30, 2012
and
December 25, 2011
, respectively. We record revenues net of an allowance for estimated return activities. Return activity was immaterial to revenue and results of operations for all periods presented.
Shipping and Handling Fees and Costs
Shipping and handling fees are accounted for in net revenues and shipping and handling costs in cost of revenues.
Cost of Revenues
The principal elements of cost of revenues are product cost, field service and installation cost, freight, and product royalties paid to third parties.
Warranty Reserves
We provide product warranties for our various products. These warranties vary in length depending on product and geographical region. We establish our warranty reserves based on historical data of warranty transactions.
The following table sets forth the movement in the warranty reserve which is located in the Other Accrued Expenses section of our Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
Balance at beginning of year
|
$
|
5,857
|
|
|
$
|
6,170
|
|
|
Accruals for warranties issued
|
5,205
|
|
|
5,882
|
|
|
Settlements made
|
(5,429
|
)
|
|
(6,194
|
)
|
|
Adjustment for discontinued operations
|
(1,668
|
)
|
|
—
|
|
|
Foreign currency translation adjustment
|
30
|
|
|
(1
|
)
|
|
Balance at end of period
|
$
|
3,995
|
|
|
$
|
5,857
|
|
Royalty Expense
Royalty expenses related to security products approximated
$0.2 million
,
$0.2 million
, and
$0.1 million
, in
2012
,
2011
, and
2010
, 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 our existing and potential products and processes. Our research and development expenses relate primarily to payroll costs for engineering personnel, costs associated with various projects, including testing, developing prototypes and related expenses.
Stock Options
We recognize stock-based compensation expense for all share-based payments net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest. Stock compensation expense is recognized for all share-based payments on a straight-line basis over the requisite service period of the award.
We use the Black-Scholes option pricing model to value all stock options. The table below presents the weighted average expected life in years. The expected life computation is based on historical exercise patterns and post-vesting termination behavior. Volatility is determined using changes in historical stock prices. The interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.
The fair value of share-based payment units was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Weighted-average fair value of grants
|
$
|
4.38
|
|
|
$
|
9.74
|
|
|
$
|
7.51
|
|
|
Valuation assumptions:
|
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
Expected volatility
|
.5208
|
|
|
.4991
|
|
|
.4829
|
|
|
Expected life (in years)
|
5.06
|
|
|
4.98
|
|
|
4.93
|
|
|
Risk-free interest rate
|
0.750
|
%
|
|
2.138
|
%
|
|
1.845
|
%
|
Refer to Note 8 of the Consolidated Financial Statements.
Income Taxes
Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and the tax basis of assets and liabilities, using enacted statutory tax rates in effect at the balance sheet date. Changes in enacted tax rates are reflected in the tax provision as they occur. A valuation allowance is recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted.
We utilize a two-step approach to recognizing and measuring uncertain tax positions (tax contingencies). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than
50%
likely of being realized upon ultimate settlement. We include interest and penalties related to our tax contingencies in income tax expense.
Sales and Value Added Taxes Collected from Customers
Sales and value added taxes collected from customers are excluded from revenues. The obligation is included in other current liabilities until the taxes are remitted to the appropriate taxing authorities.
Foreign Currency Translation and Transactions
Our balance sheet accounts of foreign subsidiaries are translated into U.S. dollars at the rate of exchange in effect at the balance sheet dates. Revenues, costs, and expenses of our foreign subsidiaries are translated into U.S. dollars at the year-to-date average rate of exchange. The resulting translation adjustments are recorded as a separate component of shareholders’ equity. Gains or losses on certain long-term inter-company transactions are excluded from the net earnings (loss) and accumulated in the cumulative translation adjustment as a separate component of Consolidated Stockholders’ Equity. All other foreign currency transaction gains and losses are included in net earnings (loss) on our Consolidated Statement of Operations.
Accounting for Hedging Activities
We enter into certain foreign exchange forward contracts in order to hedge anticipated rate fluctuations in Western Europe, Canada, Japan and Australia. Transaction gains or losses resulting from these contracts are recognized at the end of each reporting period. We use the fair value method of accounting, recording realized and unrealized gains and losses on these contracts. These gains and losses are included in other gain (loss), net on our Consolidated Statements of Operations.
We enter into various foreign currency contracts to reduce our exposure to forecasted Euro-denominated inter-company revenues. These cash flow hedging instruments are marked to market and the changes are recorded in other comprehensive income. Amounts recorded in other comprehensive income are recognized in cost of goods sold as the inventory is sold to external parties. Any hedge ineffectiveness is charged to other gain (loss), net on our Consolidated Statements of Operations.
We enter, on occasion, into interest rate swaps to reduce the risk of significant interest rate increases in connection with floating rate debt. This cash flow hedging instrument is marked to market and the changes are recorded in other comprehensive income. Any hedge ineffectiveness is charged to interest expense. Refer to Note 14 of the Consolidated Financial Statements.
Recently Adopted Accounting Standards
In April 2011, the FASB issued ASU 2011-03 “Reconsideration of Effective Control for Repurchase Agreements” (ASU 2011-03). The amendments to Topic 860 (Transfers and Servicing) affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments do not affect other transfers of financial assets. The amendments remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. ASU 2011-03 is effective for the first interim or annual periods beginning on or after December 15, 2011, which for us was December 26, 2011, the first day of our 2012 fiscal year. This amendment should be applied prospectively to transactions or modifications of existing transactions that occur on or after December 26, 2011. The adoption of the standard has not had a material impact on our Consolidated Results of Operations and Financial Condition.
In May 2011, the FASB issued ASU 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). The amendments to Topic 820 (Fair Value Measurement) establish common requirements for measuring fair value and related disclosures in accordance with accounting principles generally accepted in the United States and international financial reporting standards. This amendment did not require additional fair value measurements. ASU 2011-04 is effective for the first interim and annual periods beginning after December 15, 2011, which for us was December 26, 2011, the first day of our 2012 fiscal year. This amendment should be applied prospectively. The adoption of the standard has not had a material effect on our Consolidated Results of Operations and Financial Condition.
In June 2011, the FASB issued ASU 2011-05 “Presentation of Comprehensive Income” (ASU 2011-05). The amendments to Topic 220 (Comprehensive Income) eliminate the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders' equity, require consecutive presentation of the statement of net income and other comprehensive income and require reclassification adjustments from other comprehensive income to net income to be shown on the financial statements. In December 2011, the FASB issued ASU 2011-12, "Comprehensive Income -- Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in ASU 2011-05," to defer the effective date of the provision requiring entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. However, the remaining requirements of ASU 2011-05 are effective for the first interim and annual periods beginning after December 15, 2011, which for us was December 26, 2011, the first day of our 2012 fiscal year. Any required changes in presentation requirements and disclosures have been included in our Consolidated Financial Statements beginning with the first quarter ended March 25, 2012. The adoption of the standard has not had a material effect on our Consolidated Results of Operations and Financial Condition.
In September 2011, the FASB issued ASU 2011-08, "Intangibles - Goodwill and Other," (ASU 2011-08), which amends current guidance to allow a company to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The amendment also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, which for us was December 26, 2011, the first day of our 2012 fiscal year. The adoption of the standard has not had a material effect on our Consolidated Results of Operations and Financial Condition.
In September 2011, the FASB issued ASU 2011-09, "Compensation - Retirement Benefits - Multiemployer Plans (Subtopic 715-80)," (ASU 2011-09). ASU 2011-09 requires that employers provide additional separate disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans. The additional quantitative and qualitative disclosures will provide users with more detailed information about an employer's involvement in multiemployer pension plans. ASU 2011-09 is effective for fiscal years ending after December 15, 2011. The adoption of this standard has not had a material effect on our Consolidated Results of Operations and Financial Condition.
New Accounting Pronouncements and Other Standards
In December 2011, the FASB issued ASU 2011-11, "Balance Sheet - Disclosures about Offsetting Assets and Liabilities (Topic 210-20)," (ASU 2011-11). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. In January 2013, the FASB issued ASU 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Asset and Liabilities," which clarifies the scope of the offsetting disclosures of ASU 2011-11. Both ASUs are effective for fiscal years beginning on or after January 1, 2013, with retrospective application for all comparable periods presented. The adoption of this standard is not expected to have a material effect on our Consolidated Results of Operations and Financial Condition.
In July 2012, the FASB issued ASU 2012-02, "Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment," (ASU 2012-02). ASU 2012-02 amends the guidance in ASC 350-302 on testing indefinite-lived intangible assets, other than goodwill, for impairment by allowing an entity to perform a qualitative impairment assessment before proceeding to the two-step impairment test. If the entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not (i.e., a likelihood of more than 50 percent) impaired, the entity would not need to calculate the fair value of the asset. In addition, the ASU does not amend the requirement to test these assets for impairment between annual tests if there is a change in events or circumstances; however, it does revise the examples of events and circumstances that an entity should consider in interim periods. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption being permitted. The adoption of this standard is not expected to have a material effect on our Consolidated Results of Operations and Financial Condition.
In October 2012, the FASB issued ASU 2012-04, "Technical Corrections and Improvements," (ASU 2012-04). ASU 2012-04 amends current guidance by clarifying the FASB Accountings Standards Codification (Codification), correcting unintended application of guidance, or making minor improvements to the Codification. These amendments are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Additionally, the amendments included in ASU 2012-04 intend to make the Codification easier to understand and the fair value measurement guidance easier to apply by eliminating inconsistencies and providing needed clarifications. The amendments in ASU 2012-04 that will not have transition guidance will be effective upon issuance. For public entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012. The adoption of this standard is not expected to have a material effect on our Consolidated Results of Operations and Financial Condition.
In February 2013, the FASB issued ASU 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," which requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, entities are required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail on these amounts. This ASU is effective prospectively for reporting periods beginning after December 15, 2012. The Company is currently evaluating the impact of adopting this guidance.
Note 2. ACQUISITIONS
Acquisitions in Fiscal 2011
On January 28, 2011, Checkpoint Systems, Inc. and certain of its direct subsidiaries (collectively, the “Company”) entered into a Master Purchase Agreement. The Master Purchase Agreement outlines the general terms and conditions pursuant to which the Company agreed to acquire, through the acquisition of equity and/or assets, a retail apparel and footwear product identification business which designs, manufactures and sells tags and labels, brand protection, and EAS solutions/labels (collectively, the “Shore to Shore businesses”). The acquisition was settled on May 16, 2011 for approximately
$78.7 million
, net of cash acquired of
$1.9 million
and the assumption of debt of
$4.2 million
. The purchase price was funded by
$66.7 million
of cash from operations and
$9.2 million
of borrowings under our Senior Secured Credit Facility, and includes the acquisition of the following:
|
|
|
|
•
|
100%
of the voting equity interests of J&F International, Inc. (U.S.), Shore to Shore Far East (Hong Kong), Shore to Shore MIS (India), Shore to Shore Lacar SA (Guatemala), Adapt Identification (HK) Ltd., and W Print Europe Ltd. (UK);
|
|
|
|
|
•
|
Assets of Shore to Shore, Inc. (U.S.), Shanghai WH Printing Co. Ltd., Wing Hung (Dongguan) Printing Co., Ltd., and Wing Hung Printing Co., Ltd. (U.S.);
|
|
|
|
|
•
|
51%
of the voting equity interests of Shore to Shore PVT Ltd. (Sri Lanka);
|
|
|
|
|
•
|
50%
of the voting equity interests of the Cybsa Adapt SA de CV (El Salvador) joint venture. In accordance with ASC 323 “Investments—Equity Method and Joint Ventures”, we have applied the Equity Method in recording this joint venture.
|
During the second quarter of 2012, we finalized the purchase accounting of the acquisition of the Shore to Shore businesses. At June 24, 2012, the financial statements reflected the final allocation of the purchase price based on estimated fair values at the date of acquisition, including
$17.1 million
in Property, Plant, and Equipment,
$7.1 million
in Accounts Receivable, and
$2.2 million
in Inventories. This final allocation resulted in acquired goodwill of
$59.7 million
, of which
$9.8 million
is tax deductible, and intangible assets of
$10.5 million
. The intangible assets were composed of a non-compete agreement (
$0.3 million
), customer lists (
$9.8 million
), and trade names (
$0.4 million
). The useful lives were
5
years for the non-compete agreement,
10
years for the customer lists, and 7.5 months for the trade names. The results from the acquisition date through December 25, 2011 are included in the Apparel Labeling Solutions segment (revenues of
$35.3 million
and a net loss of
$9 thousand
).
The purchase price includes a payment to escrow of
$17.5 million
related to the 2010 performance of the acquired business. This amount is subject to adjustment pending final determination of the 2010 performance and could result in an additional purchase price payment of up to
$6.3 million
. We are currently involved in an arbitration process in order to require the seller to provide audited financial information related to the 2010 performance. When this information is received, the final adjustment to the purchase price will be reflected through earnings. Acquisition costs incurred in connection with the transaction are recognized within acquisition costs in the Consolidated Statement of Operations and approximate
$0.3 million
and
$2.3 million
for the years ended
December 30, 2012
and
December 25, 2011
, respectively.
As the Company acquired
51%
of the outstanding voting shares of Shore to Shore PVT Ltd. (Sri Lanka) in exchange for
$1.7 million
in cash, we have classified the non-controlling interests as equity on our Consolidated Balance Sheets as of
December 30, 2012
and
December 25, 2011
, and presented net income attributable to non-controlling interests separately on our Consolidated Statement of Operations for the years ended
December 30, 2012
and
December 25, 2011
. The fair value of the non-controlling interest was estimated by applying a market approach. Key assumptions include control premiums associated with guideline transactions of entities deemed to be similar to Shore to Shore PVT Ltd. (Sri Lanka), and adjustments because of the lack of control that market participants would consider when measuring the fair value of the non-controlling interest.
Pro forma results of operations have not been presented individually or in the aggregate for this acquisition because the effects of the acquisition were not material to our Consolidated Financial Statements.
Acquisitions in Fiscal 2010
In October, 2010 the Company entered into a Services and Purchase Agreement with Napar Contracting and Allied Services, Inc. (“Napar”) a Philippines based job contracting & outsourcing company with expertise in web development, software development, software quality assurance and such other similar services for
$0.5 million
. The transaction was paid in cash. Based on the terms of the transaction,
60%
of the purchase price was due upon signing the agreement and the remaining
40%
was paid on January 1, 2011.
At December 26, 2010, the financial statements reflected the final allocation of the Napar purchase price. This allocation resulted in acquired goodwill of
$0.5 million
, which is not tax deductible. Equipment included in this acquisition totaled
$33 thousand
, and is included in property, plant, & equipment, net in the accompanying Consolidated Balance Sheets. The results from the acquisition are included in the Apparel Labeling Solutions segment and were not material to the Consolidated Financial Statements.
Pro forma results of operations have not been presented individually or in the aggregate for this acquisition because the effects of the acquisition were not material to our Consolidated Financial Statements.
Note 3. INVENTORIES
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
Raw materials
|
$
|
16,702
|
|
|
$
|
28,128
|
|
|
Work-in-process
|
6,554
|
|
|
10,481
|
|
|
Finished goods
|
58,898
|
|
|
92,378
|
|
|
Total
|
$
|
82,154
|
|
|
$
|
130,987
|
|
Note 4. REVENUE EQUIPMENT ON OPERATING LEASE AND PROPERTY, PLANT, AND EQUIPMENT
The major classes are:
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
Revenue equipment on operating lease
|
|
|
|
|
Equipment rented to customers
|
$
|
3,522
|
|
|
$
|
3,732
|
|
|
Accumulated depreciation
|
(1,774
|
)
|
|
(1,812
|
)
|
|
Total revenue equipment on operating lease
|
$
|
1,748
|
|
|
$
|
1,920
|
|
|
|
|
|
|
|
Property, plant, and equipment
|
|
|
|
|
Land
|
$
|
8,894
|
|
|
$
|
9,862
|
|
|
Buildings
|
56,577
|
|
|
74,402
|
|
|
Machinery and equipment
|
172,398
|
|
|
204,215
|
|
|
Leasehold improvements
|
15,218
|
|
|
15,003
|
|
|
Construction in progress
|
5,724
|
|
|
10,282
|
|
|
|
258,811
|
|
|
313,764
|
|
|
Accumulated depreciation
|
(151,627
|
)
|
|
(181,603
|
)
|
|
Total property, plant, and equipment
|
$
|
107,184
|
|
|
$
|
132,161
|
|
Property, plant, and equipment under capital lease had gross values of
$2.0 million
and
$2.2 million
and accumulated depreciation of
$1.5 million
and
$1.5 million
, as of
December 30, 2012
and
December 25, 2011
, respectively.
Included in property, plant, and equipment as of
December 30, 2012
and
December 25, 2011
, is the impact of asset impairment adjustments of
$6.5 million
and
$7.8 million
, respectively, related to our restructuring activities.
Depreciation expense on our revenue equipment on operating lease and property, plant, and equipment was
$20.3 million
,
$24.4 million
, and
$21.0 million
, for
2012
,
2011
, and
2010
, respectively.
Note 5. GOODWILL AND OTHER INTANGIBLE ASSETS
We had intangible assets with a net book value of
$75.0 million
, and
$84.6 million
as of
December 30, 2012
and
December 25, 2011
, respectively.
The following table reflects the components of intangible assets as of
December 30, 2012
and
December 25, 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2012
|
|
December 25, 2011
|
|
(amounts in thousands)
|
Amortizable
Life
(years)
|
|
Gross
Amount
|
|
|
Gross
Accumulated
Amortization
|
|
|
Gross
Amount
|
|
|
Gross
Accumulated
Amortization
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Customer lists
|
6 to 20
|
|
$
|
81,895
|
|
|
$
|
50,215
|
|
|
$
|
81,348
|
|
|
$
|
43,945
|
|
|
Trade name
|
1 to 30
|
|
30,414
|
|
|
19,143
|
|
|
30,007
|
|
|
18,237
|
|
|
Patents, license agreements
|
3 to 14
|
|
60,682
|
|
|
50,826
|
|
|
60,249
|
|
|
47,704
|
|
|
Other
|
2 to 6
|
|
7,178
|
|
|
6,546
|
|
|
7,160
|
|
|
5,830
|
|
|
Total amortized finite-lived intangible assets
|
|
|
180,169
|
|
|
126,730
|
|
|
178,764
|
|
|
115,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
21,511
|
|
|
—
|
|
|
21,509
|
|
|
—
|
|
|
Total identifiable intangible assets
|
|
|
$
|
201,680
|
|
|
$
|
126,730
|
|
|
$
|
200,273
|
|
|
$
|
115,716
|
|
We recorded
$11.3 million
,
$10.8 million
, and
$11.2 million
of amortization expense for
2012
,
2011
, and
2010
, respectively.
During the second quarter of 2012, we experienced deterioration in revenues, gross margins and operating results in each of our segments as compared to the forecasted amounts in the most recent impairment test. Due to the declines in operating results in our segments, a change in management, and a revised strategic focus, we determined that impairment triggering events had occurred and that an assessment of goodwill was warranted. As a result of interim impairment indicators in the second quarter of 2012, we performed a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the long-lived assets in our Apparel Labeling Solutions reporting unit to their carrying amounts. The undiscounted cash flow analysis resulted in no impairment charge in the quarter ended June 24, 2012. Also, as part of the annual impairment testing, the undiscounted cash flow analysis attributable to the long-lived assets in our European Retail Merchandising Solutions reporting unit resulted in no impairment charge in the quarter ended December 30, 2012. While we currently believe that our projected results will not result in future impairment, a continued deterioration in results could trigger a future impairment.
In December 2011, as a result of our annual impairment test of our indefinite-lived trade names, we recorded a
$0.6 million
impairment charge to the SIDEP trade name. The impairment charge was recorded in asset impairment expense in the Shrink Management Solutions segment on the Consolidated Statement of Operations.
Estimated amortization expense for each of the five succeeding years is anticipated to be:
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
|
2013
|
$
|
8,764
|
|
|
2014
|
$
|
8,276
|
|
|
2015
|
$
|
8,120
|
|
|
2016
|
$
|
7,857
|
|
|
2017
|
$
|
6,821
|
|
The changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
Shrink
Management
Solutions
|
|
|
Apparel
Labeling
Solutions
|
|
|
Retail
Merchandising
Solutions
|
|
|
Total
|
|
|
Balance as of December 26, 2010
|
$
|
165,324
|
|
|
$
|
3,915
|
|
|
$
|
62,086
|
|
|
$
|
231,325
|
|
|
Acquired during the year
|
$
|
—
|
|
|
58,008
|
|
|
$
|
—
|
|
|
58,008
|
|
|
Discontinued operations
|
(3,782
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(3,782
|
)
|
|
Translation adjustments
|
269
|
|
|
661
|
|
|
(378
|
)
|
|
552
|
|
|
Balance as of December 25, 2011
|
$
|
161,811
|
|
|
$
|
62,584
|
|
|
$
|
61,708
|
|
|
$
|
286,103
|
|
|
Purchase accounting adjustment
|
$
|
—
|
|
|
1,624
|
|
|
$
|
—
|
|
|
1,624
|
|
|
Discontinued operations
|
$
|
(3,263
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(3,263
|
)
|
|
Impairment losses
|
$
|
—
|
|
|
(64,437
|
)
|
|
$
|
(38,278
|
)
|
|
(102,715
|
)
|
|
Translation adjustments
|
483
|
|
|
229
|
|
|
280
|
|
|
992
|
|
|
Balance as of December 30, 2012
|
$
|
159,031
|
|
|
$
|
—
|
|
|
$
|
23,710
|
|
|
$
|
182,741
|
|
The following table reflects the components of goodwill as of
December 30, 2012
and
December 25, 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2012
|
|
December 25, 2011
|
|
(amounts in thousands)
|
Gross
Amount
|
|
|
Accumulated
Impairment
Losses
|
|
|
Goodwill,
Net
|
|
|
Gross
Amount
|
|
|
Accumulated
Impairment
Losses
|
|
|
Goodwill,
net
|
|
|
Shrink Management Solutions
|
$
|
208,835
|
|
|
$
|
49,804
|
|
|
$
|
159,031
|
|
|
$
|
213,836
|
|
|
$
|
52,025
|
|
|
$
|
161,811
|
|
|
Apparel Labeling Solutions
|
84,059
|
|
|
84,059
|
|
|
—
|
|
|
81,662
|
|
|
19,078
|
|
|
62,584
|
|
|
Retail Merchandising Solutions
|
133,707
|
|
|
109,997
|
|
|
23,710
|
|
|
130,640
|
|
|
68,932
|
|
|
61,708
|
|
|
Total goodwill
|
$
|
426,601
|
|
|
$
|
243,860
|
|
|
$
|
182,741
|
|
|
$
|
426,138
|
|
|
$
|
140,035
|
|
|
$
|
286,103
|
|
During fiscal 2011 and 2010 we completed acquisitions which impacted goodwill and intangible assets. Refer to Note 2 of the Consolidated Financial Statements for more information on these acquisitions, including any impact of purchase accounting adjustments.
We perform an assessment of goodwill by comparing each individual reporting unit’s carrying amount of net assets, including goodwill, to their fair value at least annually during the October month-end close and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The
2011
and
2010
, annual assessments did not result in an impairment charge.
During the second quarter of 2012, we experienced deterioration in revenues, gross margins and operating results in each of our segments as compared to the forecasted amounts in the most recent annual impairment test. Due to the declines in operating results in our segments, a change in management, and a revised strategic focus, we determined that impairment triggering events had occurred and that an assessment of goodwill was warranted. This resulted in the Company's assessment that the carrying value of the Apparel Labeling Solutions reporting unit exceeded its fair value. The basis of the fair value was determined by projecting future cash flows using assumptions concerning future operating performance and economic conditions that may differ from actual cash flows. Estimated future cash flows are adjusted by an appropriate discount rate derived from our market capitalization plus a suitable control premium at the date of the evaluation. The financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital that we use to determine our discount rate and through our stock price that we use to determine our market capitalization. As a result of our interim impairment test, a
$64.4 million
non-cash impairment charge was recorded as of June 24, 2012 in our Apparel Labeling Solutions segment. The goodwill impairment expense was due to the decline in estimated future Apparel Labeling Solutions cash flow impacted by our plan to refocus the business, coupled with recent declines in revenue and profitability. The impairment charge of the entire goodwill balance in our Apparel Labeling Solutions segment was recorded in goodwill impairment on the Consolidated Statement of Operations.
There were no additional impairment indicators during the third quarter ended September 23, 2012. Our 2012 annual impairment test resulted in our assessment that the carrying value of the European Retail Merchandising Solutions reporting unit exceeded its fair value. As a result of our annual impairment test, a
$38.3 million
non-cash goodwill impairment charge was assessed as of October 21, 2012, and recorded in goodwill impairment expense on the Consolidated Statement of Operations in the fourth quarter of 2012 in our Retail Merchandising Solutions segment. The goodwill impairment was due to the decline in estimated future European Retail Merchandising Solutions cash flows impacted by current economic conditions in Europe resulting in decreased customer investments in new stores and refurbishments. Additionally, increased competition and pricing pressures are factors that have negatively impacted this business.
Determining the fair value of a reporting unit is a matter of judgment and 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.
As of the date of our fiscal 2012 annual impairment test, the total fair values for the remaining reporting units in all of our segments exceeded their total carrying values by more than
45%
. Based on our most recent goodwill impairment assessment of the reporting units of our segments and our understanding of currently projected trends of the business and the economy, we do not believe that there is a significant risk of impairment for these reporting units for a reasonable period of time. Although our analysis regarding the fair values of the goodwill and indefinite lived intangible assets indicates that they exceed their respective carrying values, materially different assumptions regarding the future performance of our businesses or significant declines in our stock price could result in additional goodwill impairment losses. Specifically, an unanticipated deterioration in revenues and gross margins generated by our Shrink Management Solutions and Retail Merchandising Solutions segments could trigger future impairment in those segments.
Note 6. SHORT-TERM BORROWINGS AND CURRENT PORTION OF LONG-TERM DEBT
Short-term borrowings and current portion of long-term debt at
December 30, 2012
and at
December 25, 2011
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
Overdraft
|
$
|
568
|
|
|
$
|
405
|
|
|
Full-recourse factoring liabilities
|
—
|
|
|
8,809
|
|
|
Term loans
|
2,272
|
|
|
9,125
|
|
|
Other short-term borrowings
|
889
|
|
|
2,529
|
|
|
Current portion of long-term debt
|
638
|
|
|
910
|
|
|
Total short-term borrowings and current portion of long-term debt
|
$
|
4,367
|
|
|
$
|
21,778
|
|
In December 2011,
$4.2 million
(HKD
32.5 million
) was paid in order to extinguish our existing Hong Kong banking facility and other outstanding Hong Kong debt. In December 2011, we entered into a new five-year Hong Kong banking facility. As of
December 25, 2011
,
$8.4 million
(HKD
65.0 million
) was outstanding on the term loan. In June 2012,
$8.0 million
(HKD
61.8 million
) was paid in order to extinguish our existing Hong Kong term loan. The term loan was included in short-term borrowings in the accompanying Consolidated Balance Sheets.
In connection with the acquisition of the Shore to Shore businesses, the Company assumed debt of
$4.2 million
. In June 2012,
$0.7 million
(INR
37.2 million
) was paid in order to extinguish an overdraft facility and other short-term borrowings in the accompanying Consolidated Balance Sheets. As of
December 30, 2012
and
December 25, 2011
,
$3.9 million
and
$3.8 million
related to the assumed debt remained outstanding, respectively. The debt assumed includes capital leases, accounts receivable factoring arrangements, term loans, an overdraft facility, and other short-term loans. With the exception of the capital leases, the banking facilities are subject to the banks’ rights to call the liabilities at any time, and are therefore included in short-term borrowings in the accompanying Consolidated Balance Sheets.
In February 2012, the Company entered into a
$3.2 million
Sri Lanka banking facility, which includes a
$2.7 million
term loan, and a combined
$0.5 million
sublimit for an overdraft/import line. As of
December 30, 2012
,
$2.3 million
and
$0.5 million
were outstanding on the term loan and overdraft/import line, respectively.
In November 2010, we entered into a Japanese local line of credit for
$1.8 million
(
¥150 million
). During the fourth quarter of 2011, our Japanese local line of credit of
$1.9 million
(
¥150 million
) was paid down.
In October 2009, the Company entered into a
$12.0 million
(
€8.0 million
) full-recourse factoring arrangement. As of
December 25, 2011
, our short-term full-recourse factoring arrangement equaled
$8.8 million
(
€6.8 million
) and was included in short-term borrowings in the accompanying Consolidated Balance Sheets. In September 2012,
$7.4 million
(
€5.7 million
) was paid in order to extinguish our existing short-term full-recourse factoring agreement in Germany. The arrangement was included in short-term borrowings in the accompanying Consolidated Balance Sheets.
Note 7. LONG-TERM DEBT
Long-term debt at
December 30, 2012
and
December 25, 2011
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
Senior Secured Credit Facility:
|
|
|
|
|
$69 million variable interest rate revolving credit facility maturing in 2014
|
$
|
42,021
|
|
|
$
|
52,248
|
|
|
Senior Secured Notes:
|
|
|
|
|
$22 million 4.00% fixed interest rate Series A senior secured notes maturing in 2015
|
22,038
|
|
|
25,000
|
|
|
$22 million 4.38% fixed interest rate Series B senior secured notes maturing in 2016
|
22,038
|
|
|
25,000
|
|
|
$22 million 4.75% fixed interest rate Series C senior secured notes maturing in 2017
|
22,038
|
|
|
25,000
|
|
|
Full-recourse factoring liabilities
|
942
|
|
|
1,333
|
|
|
Other capital leases with maturities through 2016
|
482
|
|
|
1,013
|
|
|
Total
(1)
|
109,559
|
|
|
129,594
|
|
|
Less current portion
|
638
|
|
|
910
|
|
|
Total long-term portion
|
$
|
108,921
|
|
|
$
|
128,684
|
|
|
|
|
|
(1)
|
The weighted average interest rates for
2012
and
2011
were
5.9%
and
4.0%
, respectively.
|
Senior Secured Credit Facility
On July 22, 2010, we entered into an Amended and Restated Senior Secured Credit Facility (the “Senior Secured Credit Facility”) with a syndicate of lenders. The Senior Secured Credit Facility provides us with a
$125.0 million
four-year senior secured multi-currency revolving credit facility.
The Senior Secured Credit Facility amended and restated the terms of our existing
$125.0 million
senior secured multi-currency revolving credit agreement (“Secured Credit Facility”). The amendments primarily reflect an extension of the terms of the Secured Credit Facility, reductions in the interest rates charged on the outstanding balances, and favorable changes with regard to the collateral provided under the Senior Secured Credit Facility. Prior to entering into the Senior Secured Credit Facility,
$102.2 million
of the Secured Credit Facility was paid down during the third quarter of 2010.
On February 17, 2012, we received an amendment to our Senior Secured Credit Facility which increased the required leverage ratio covenant of adjusted EBITDA to total debt from
2.75
to
3.00
,
3.35
and
3.25
for the periods ended March 25, 2012, June 24, 2012, and September 23, 2012, respectively. Had we not received the amendment, we would have been in violation of the leverage ratio covenant as of March 25, 2012.
On July 31, 2012, we received an additional amendment to our Senior Secured Credit Facility ("July 2012 Amendment"), which contained several modifications. The July 2012 Amendment reduced the total commitment of the Senior Secured Credit Facility from
$125.0 million
to
$75.0 million
. The July 2012 Amendment reduced the sublimit for the issuance of letters of credit from
$25.0 million
to
$5.0 million
. The July 2012 Amendment reduced the sublimit for swingline loans from
$25.0 million
to
$5.0 million
. The July 2012 Amendment increased the required leverage ratio covenant of adjusted EBITDA to total debt to
5.25
,
6.50
,
5.50
,
3.50
, and
2.75
for the periods ended June 24, 2012, September 23, 2012, December 30, 2012, March 31, 2013, and June 30, 2013 and thereafter. Cash restructuring of up to
$25.0 million
is excluded from the calculation of EBITDA beginning in the fiscal quarter ending June 24, 2012. The July 2012 Amendment waived the fixed charge covenant from June 24, 2012 through September 23, 2012 (the "Waiver Period"), decreased it to
1.00
for the period ended
December 30, 2012
, and returned it to
1.25
for periods thereafter. In addition, the July 2012 Amendment permitted divestitures, acquisitions and transfers of assets to non-credit parties, under certain conditions. The July 2012 Amendment also contained a provision whereby if our cash balance exceeds
$65.0 million
as of weekly measurement dates, we must prepay any additional borrowings made subsequent to the July 2012 Amendments. This provision is effective until we are in compliance with our original covenant requirements for two consecutive quarters. There were no required prepayments during 2012.
Absent the waiver and additional July 2012 Amendment, we would have been in violation of the June 24, 2012 leverage ratio and fixed charge coverage covenants. We were in compliance with the amended leverage ratio covenant as of September 23, 2012. Absent the waiver, we would have been in violation of the fixed charge coverage ratio covenant as of September 23, 2012. We are in compliance with the amended leverage ratio covenant and the fixed charge covenant as of
December 30, 2012
.
During the Waiver Period, the interest rate spread on the Senior Secured Credit Facility increases to a maximum of
4.25%
over the Base Rate or
5.25%
over the LIBOR rate. The “Base Rate” is the highest of (a) our lender's prime rate, (b) the Federal Funds rate, plus
0.50%
, and (c)
a daily rate equal to the one-month LIBOR rate, plus 1.00%
. The unused line fee will increase to a maximum of
1.00%
per annum. The maximum is based in accordance with changes in our leverage ratio.
During the year ended
December 30, 2012
, the Company incurred
$1.3 million
in fees and expenses in connection with the July 2012 Amendment to the Senior Secured Credit Facility, which were capitalized and will be amortized over the term of the Senior Secured Credit Facility to interest expense on the Consolidated Statement of Operations. In connection with the reduction in borrowing capacity of the Senior Secured Credit Facility, the Company recognized
$0.8 million
of unamortized debt issuance costs. The cost was recognized in interest expense on the Consolidated Statement of Operations in 2012.
On September 21, 2012, the Company repaid
$6.1 million
on the Senior Secured Credit Facility. Pursuant to the terms of the July 2012 Amendment, the repayment permanently reduced the outstanding borrowing capacity from
$75.0 million
to
$68.9 million
. In connection with the reduction in borrowing capacity of the Senior Secured Credit Facility, the Company recognized
$0.2 million
of unamortized debt issuance costs. The cost was recognized in interest expense on the Consolidated Statement of Operations in the third quarter of 2012.
The Senior Secured Credit Facility provides for a revolving commitment of up to
$75.0 million
with a term of four years from the effective date of July 22, 2010. We may borrow, prepay and re-borrow under the Senior Secured Credit Facility as long as the sum of the outstanding principal amounts is less than the aggregate facility availability. The Senior Secured Credit Facility also includes an expansion option that will allow us to request an increase in the Senior Secured Credit Facility of up to an aggregate of
$50.0 million
, for a potential total commitment of
$118.9 million
. As of
December 30, 2012
, we were not eligible to request the
$50.0 million
expansion option due to financial covenant restrictions.
As of
December 30, 2012
,
$1.8 million
, issued in letters of credit were outstanding under the Senior Secured Credit Facility.
Borrowings under the Senior Secured Credit Facility, other than swingline loans, bear interest at our option of either a spread ranging from
1.25%
to
2.50%
over the Base Rate (as described below), or a spread ranging from
2.25%
to
3.50%
over the LIBOR rate, and in each case fluctuating in accordance with changes in our leverage ratio, as defined in the Senior Secured Credit Facility. The “Base Rate” is the highest of (a) our lender’s prime rate, (b) the Federal Funds rate, plus
0.50%
, and (c) a daily rate equal to the one-month LIBOR rate, plus
1.00%
. Swingline loans bear interest of (i) a spread ranging from
1.25%
to
2.50%
over the Base Rate with respect to swingline loans denominated in U.S. dollars, or (ii) a spread ranging from
2.25%
to
3.50%
over the LIBOR rate for one month U.S. dollar deposits, as of 11:00 a.m., London time. We pay an unused line fee ranging from
0.30%
to
0.75%
per annum based on the unused portion of the commitment under the Senior Secured Credit Facility.
All obligations of domestic borrowers under the Senior Secured Credit Facility are irrevocably and unconditionally guaranteed on a joint and several basis by our domestic subsidiaries. The obligations of foreign borrowers under the Senior Secured Credit Facility are irrevocably and unconditionally guaranteed on a joint and several basis by certain of our foreign subsidiaries as well as the domestic guarantors. Collateral under the Senior Secured Credit Facility includes a
100%
stock pledge of domestic subsidiaries and a
65%
stock pledge of all first-tier foreign subsidiaries, excluding our Japanese sales subsidiary. As a condition of the July 2012 Amendment, all domestic assets are also pledged as collateral. The approximate net book value of the collateral as of
December 30, 2012
was
$143 million
.
Pursuant to the original terms of the Senior Secured Credit Facility, we are subject to various requirements, including covenants requiring the maintenance of a maximum total leverage ratio of
2.75
and a minimum fixed charge coverage ratio of
1.25
. The Senior Secured Credit Facility also contains customary representations and warranties, affirmative and negative covenants, notice provisions and events of default, including change of control, cross-defaults to other debt, and judgment defaults. Upon a default under the Senior Secured Credit Facility, including the non-payment of principal or interest, our obligations under the Senior Secured Credit Facility may be accelerated and the assets securing such obligations may be sold. Certain wholly-owned subsidiaries with respect to the Company are guarantors of our obligations under the Senior Secured Credit Facility.
Senior Secured Notes
Also on July 22, 2010, we entered into a Note Purchase and Private Shelf Agreement (the “Senior Secured Notes Agreement”) with a lender, and certain other purchasers party thereto (together with the lender, the “Purchasers”).
On February 17, 2012, we received an amendment to our Senior Secured Notes which increased the required leverage ratio covenant of adjusted EBITDA to total debt from
2.75
to
3.00
,
3.35
and
3.25
for the periods ended March 25, 2012, June 24, 2012, and September 23, 2012. Had we not received the amendment, we would have been in violation of the leverage ratio covenant as of March 25, 2012.
On July 31, 2012, we received an additional amendment to our Senior Secured Notes ("July 2012 Note Amendment"), which contained several modifications. The July 2012 Note Amendment increased the required leverage ratio covenant of adjusted EBITDA to total debt to
5.25
,
6.50
,
5.50
,
3.50
, and
2.75
for the periods ended June 24, 2012, September 23, 2012, December 30, 2012, March 31, 2013, June 30, 2013 and thereafter. Cash restructuring of up to
$25.0 million
is excluded from the calculation of EBITDA beginning in the fiscal quarter ending June 24, 2012. The July 2012 Amendment waived the fixed charge covenant from June 24, 2012 through September 23, 2012 (the "Waiver Period"), decreased it to
1.00
for the period ended
December 30, 2012
, and returned it to
1.25
for periods thereafter. In addition, the July 2012 Amendment permitted divestitures, acquisitions and transfers of assets to non-credit parties, under certain conditions.
Absent the waiver and additional July 2012 Note Amendment, we would have been in violation of the June 24, 2012 leverage ratio and fixed charge coverage covenants. We were in compliance with the amended leverage ratio covenant as of September 23, 2012. Absent the waiver, we would have been in violation of the fixed charge coverage ratio covenant as of September 23, 2012. We are in compliance with the amended leverage ratio covenant and the fixed charge covenant as of
December 30, 2012
.
During the Waiver Period, and until such time as the financial covenants return to the original covenants for two consecutive quarters, the coupon rate on the Senior Secured Notes will increase to
5.75%
,
6.13%
, and
6.50%
for the Series A Senior Secured Notes, Series B Senior Secured Notes, and Series C Senior Secured Notes, respectively.
During the year ended
December 30, 2012
, the Company incurred
$1.4 million
in fees and expenses in connection with the July 2012 Amendment to the Senior Secured Notes, of which
$0.6 million
were recognized in selling, general, and administrative expenses on the Consolidated Statement of Operations in 2012 and
$0.8 million
, which were capitalized and will be amortized over the term of the Senior Secured Notes to interest expense on the Consolidated Statement of Operations.
On September 21, 2012, the Company repaid
$8.9 million
in principal as well as a make-whole premium of
$1.1 million
related to the Senior Secured Notes. In connection with the repayment on the Senior Secured Notes, the Company recognized
$0.1 million
of unamortized debt issuance costs. The unamortized debt issuance costs and make whole premium fees were recognized in interest expense on the Consolidated Statement of Operations in 2012.
Under the Senior Secured Notes Agreement, we issued to the Purchasers its Series A Senior Secured Notes in an aggregate principal amount of
$22.0 million
(the “Series A Notes”), its Series B Senior Secured Notes in an aggregate principal amount of
$22.0 million
(the “Series B Notes”), and its Series C Senior Secured Notes in an aggregate principal amount of
$22.0 million
(the “Series C Notes”); together with the Series A Notes and the Series B Notes, (the “2010 Notes”). The Series A Notes bear interest at a rate of
4.00%
per annum and mature on July 22, 2015. The Series B Notes bear interest at a rate of
4.38%
per annum and mature on July 22, 2016. The Series C Notes bear interest at a rate of
4.75%
per annum and mature on July 22, 2017. The 2010 Notes are not subject to any scheduled prepayments. The entire outstanding principal amount of each of the 2010 Notes shall become due on their respective maturity date.
The Senior Secured Notes Agreement also provides that for a three-year period ending on July 22, 2013, we may issue, and our lender may, in its sole discretion, purchase, additional fixed-rate senior secured notes (the “Shelf Notes”); together with the 2010 Notes, (the “Notes”), up to an aggregate amount of
$50.0 million
. The aggregate principal amount of the Shelf Notes issued at any time shall be no less than
$5.0 million
. The Shelf Notes will have a maturity date of no more than
10
years from the respective maturity date and an average life of no more than
7
years after the date of issue. The Shelf Notes will have such other terms, including principal amount, interest rate and repayment schedule, as agreed with our lender at the time of issuance. As of
December 30, 2012
, we were not eligible to elect to request the
$50.0 million
expansion option due to financial covenant restrictions.
We may prepay the Notes in a minimum principal amount of
$1.0 million
and in
$0.1 million
increments thereafter, at
100%
of the principal amount so prepaid, plus an amount equal to the excess, if any, of the present value of the remaining scheduled payments of principal and interest on the amount repaid, over the principal amount repaid. Either we or our lender may terminate the private shelf facility with respect to undrawn amounts upon 30 days’ written notice, and our lender may terminate the private shelf facility with respect to undrawn amounts upon the occurrence and/or continuation of an event of default or acceleration of any Note.
All obligations under the Senior Secured Notes are irrevocably and unconditionally guaranteed on a joint and several basis by our domestic subsidiaries. Collateral under the Senior Secured Notes includes a
100%
stock pledge of domestic subsidiaries and a
65%
stock pledge of all first-tier foreign subsidiaries, excluding our Japanese sales subsidiary. As a condition of the July 2012 Amendment, all domestic assets are also pledged as collateral. The approximate net book value of the collateral as of
December 30, 2012
was
$143.0 million
.
The original Senior Secured Notes Agreement is subject to covenants that are substantially similar to the covenants in the Senior Secured Credit Facility Agreement, including covenants requiring the maintenance of a maximum total leverage ratio of
2.75
and a minimum fixed charge coverage ratio of
1.25
. The Senior Secured Notes Agreement also contains representations and warranties, affirmative and negative covenants, notice provisions and events of default, including change of control, cross-defaults to other debt, and judgment defaults that are substantially similar to those contained in the Senior Secured Credit Facility, and those that are customary for similar private placement transactions. Upon a default under the Senior Secured Notes Agreement, including the non-payment of principal or interest, our obligations under the Senior Secured Notes Agreement may be accelerated and the assets securing such obligations may be sold. Additionally, the Senior Secured Notes have a make-whole provision that requires the discounted value of the remaining payments on the Senior Secured Notes expected through the end term of each of the Senior Secured Notes to be paid in full upon early termination, acceleration, or prepayment. Certain of our wholly-owned subsidiaries are also guarantors of our obligations under the Senior Secured Notes.
Full-recourse Factoring Arrangements
In December 2009, we entered into a full-recourse factoring arrangements. The arrangements are secured by trade receivables. The Company received a weighted average of
92.4%
of the face amount of receivables that it desired to sell and the bank agreed, at its discretion, to buy. As of
December 30, 2012
the factoring arrangements had a balance of
$0.9 million
(
€0.7 million
), of which
$0.3 million
(
€0.3 million
) was included in the current portion of long-term debt and
$0.6 million
(
€0.4 million
) was included in long-term borrowings in the accompanying Consolidated Balance Sheets since the receivables are collectible through 2016.
The aggregate maturities on all long-term debt (including current portion) are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
Debt
|
|
|
Capital
Leases
|
|
|
Total
Debt
|
|
|
2013
|
$
|
351
|
|
|
$
|
287
|
|
|
$
|
638
|
|
|
2014
|
42,342
|
|
|
122
|
|
|
42,464
|
|
|
2015
|
22,262
|
|
|
56
|
|
|
22,318
|
|
|
2016
|
22,084
|
|
|
15
|
|
|
22,099
|
|
|
2017
|
22,038
|
|
|
2
|
|
|
22,040
|
|
|
Thereafter
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
109,077
|
|
|
$
|
482
|
|
|
$
|
109,559
|
|
Note 8. STOCK-BASED COMPENSATION
At
December 30, 2012
, we had stock-based employee compensation plans as described below. For the years ended
December 30, 2012
,
December 25, 2011
, and
December 26, 2010
, the total compensation expense (included in selling, general, and administrative expense) related to these plans was
$4.7 million
,
$7.3 million
, and
$8.5 million
(
$4.5 million
,
$7.1 million
, and
$6.2 million
, net of tax), respectively.
Stock Plans
On April 29, 2004, the shareholders approved the Checkpoint Systems, Inc. 2004 Omnibus Incentive Compensation Plan (2004 Plan). The initial shares available under the 2004 Plan were approximately
3,500,000
, which represent the shares that were available at that time under the 1992 Stock Option Plan (1992 Plan). All cancellations and forfeitures related to share units outstanding under the 1992 Plan will be added back to the shares available for grant under the 2004 Plan. No further awards will be issued under the 1992 Plan. The 2004 Plan is designed to provide incentives to employees, non-employee directors, and independent contractors through the award of stock options, stock appreciation rights, stock units, phantom shares, dividend equivalent rights and cash awards. The Compensation Committee (Committee) of our Board of Directors administers the 2004 Plan and determines the terms and conditions of each award. Stock options issued under the 2004 Plan primarily vest over a
three
-year period and expire not more than
10
years from date of grant. Restricted stock units vest over
three
to
five
year periods from date of grant. On June 3, 2009, at the 2009 Annual Meeting of Shareholders of Checkpoint Systems, Inc., the shareholders of the Company approved the Checkpoint Systems, Inc. Amended and Restated 2004 Omnibus Incentive Compensation Plan, Effective Date: February 17, 2009 (the “Omnibus Incentive Plan”), which was amended and restated to extend the term of the Omnibus Incentive Plan by an additional five years and to re-approve the performance goals set forth under the Omnibus Incentive Plan. The 2004 Plan was further amended on June 2, 2010, at the 2010 Annual Meeting of Shareholders of Checkpoint Systems, Inc., when our shareholders approved the Checkpoint Systems, Inc. Amended and Restated 2004 Omnibus Incentive Compensation Plan (the “Plan”), which was amended and restated to:
|
|
|
|
•
|
increase the number of shares of the Company’s common stock reserved for issuance under the Plan by
3,250,000
shares to an aggregate of
6,687,956
shares;
|
|
|
|
|
•
|
revise the “repricing” provision such that the new provision will provide that, except in respect of certain corporate transactions, the terms of outstanding awards may not be amended to (i) reduce the exercise price of outstanding stock options or stock appreciation rights (“SARs”), or (ii) cancel, exchange, substitute, buy out or surrender outstanding options or SARs in exchange for cash, other awards, stock options or SARs with an exercise price that is less than the exercise price of the original stock options or SARs (as applicable) without shareholder approval;
|
|
|
|
|
•
|
impose a limitation on certain shares of the Company’s common stock from again being made available for issuance under the Plan such that the following shares of the Company’s common stock may not again be made available for issuance: (i) shares of common stock not issued or delivered as a result of the net settlement of an outstanding SAR or stock option, (ii) shares of common stock used to pay the exercise price or withholding taxes related to an outstanding award, or (iii) shares of common stock repurchased on the open market with the proceeds of the stock option exercise price;
|
|
|
|
|
•
|
establish a minimum exercise price with respect to stock options or SARs to be granted under the Plan such that no stock option or SAR may be granted under the Plan with a per share exercise price that is less than
100%
of the fair market value of one share of the Company’s common stock on the date of grant; and
|
|
|
|
|
•
|
establish a limitation against the payment of any cash dividend or dividend equivalent right (“DER”) with respect to awards that vest based upon the attainment of one or more performance measures such that no awards granted under the Plan based upon the attainment of one or more performance measures will be entitled to receive payment of any cash dividends or DERs with respect to such awards unless and until such awards vest.
|
As of
December 30, 2012
, there were
3,308,264
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 30, 2012
, there were
no
shares available for grant under the 1992 Plan.
On December 27, 2007, we adopted a stand alone inducement stock option plan authorizing the issuance of options to purchase up to
270,000
shares of our common stock, which were granted to the newly elected President and CEO of the Company in connection with his hire. The non-qualified stock options provide for three vesting instances:
60%
on December 31, 2010;
20%
on December 31, 2011; and
20%
on December 31, 2012. The options also have a market condition. The market condition specifies that any unvested tranche will vest immediately as soon as the Company’s stock price exceeds
200%
of the December 27, 2007, strike price of
$22.71
. In addition, there were
230,000
shares issued out of our Omnibus Incentive Compensation Plan with similar vesting and market based criteria as described above.
To determine the fair value of stock options with market conditions we used the Monte Carlo simulation lattice model using the following assumptions: (i) expected volatility of
37.04%
, (ii) risk-free rate of
4.1%
, (iii) expected term of
10
years, and (iv) an expected dividend yield of
zero
. The weighted average fair value of the stock options with market conditions was
$12.43
per share.
During fiscal 2005, we initiated a Long-Term Incentive Plan (LTIP). Under this plan, restricted stock units (RSUs) were awarded to eligible executives. During fiscal 2006, we expanded the scope of the LTIP. Under the expanded plan, RSUs were awarded to eligible key employees.
On December 4, 2007, RSUs were awarded to certain key employees of the Company’s Alpha Security Products Division as part of the LTIP plan. The number of shares for these units varies based on the Company’s Alpha
®
product revenues. These units had the potential to vest
33%
per year, over a
three
-year period ending at the end of fiscal 2010. The weighted average price for these RSUs was
$21.84
per share. At December 26, 2010, we reversed
$0.6 million
of previously recognized compensation cost since it was determined that the Company did not achieve the revenue targets set forth in the plan. Accordingly,
no
remaining RSUs were earned under this plan.
On February 17, 2009, RSUs were awarded to certain key employees of the Company as part of the LTIP 2009 plan. The number of shares for these units varies based on the Company achieving specific relative performance goals versus a pool of peer companies during the January 2009 to December 2011 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The weighted average price for these RSUs was
$8.12
per share. At December 25, 2011, we reversed
$0.5 million
of previously recognized compensation cost since it was determined that the Company did not achieve the specific relative performance goals set forth in the plan. Accordingly, no RSUs were earned under this plan.
On February 12, 2010, RSUs were awarded to certain key employees of the Company as part of the LTIP 2010 plan. The number of shares for these units varies based on the Company achieving specific relative performance goals versus a pool of peer companies during the January 2010 to December 2012 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The weighted average price for these RSUs was
$15.83
per share. Additional RSUs related to the LTIP 2010 plan were awarded on February 22, 2010, and March 11, 2010, with a weighted average price of
$17.06
and
$21.76
per share, respectively. At June 24, 2012, we reversed
$0.8 million
of previously recognized compensation cost since it was determined that the Company would not achieve the specific relative performance goals set forth in the plan. Accordingly, no RSUs were earned under this plan.
On February 17, 2011, RSUs were awarded to certain key employees of the Company as part of the LTIP 2011 plan. The number of shares for these units varies based on the Company achieving specific relative performance goals versus the Russell 2000 index during the January 2011 to December 2013 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The weighted average price for these RSUs was
$22.54
per share. At September 23, 2012, we assessed our performance versus the Russell 2000 index and determined that a portion of the goals identified in the plan would not be achieved. As a result, at September 23, 2012, we reversed
$0.3 million
of previously recognized compensation cost attributable to these goals. For fiscal year 2012,
$0.1 million
of income was charged against compensation expense. As of
December 30, 2012
, total unamortized compensation expense for this grant was
$0.2 million
. As of
December 30, 2012
, the maximum achievable RSUs outstanding under this plan are
37,356
units. These RSUs reduce the shares available to grant under the 2004 Plan.
On February 22, 2012, RSUs were awarded to certain key employees of the Company as part of the LTIP 2012 plan. The number of shares for these units varies based on the Company achieving certain levels of earnings before interest, taxes, depreciation, and amortization (EBITDA) during the January 2012 to December 2014 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The weighted average price for these RSUs was
$11.93
per share. For fiscal year 2012,
$0.1 million
was charged to compensation expense. As of December 30, 2012, total unamortized compensation expense for this grant was
$0.2 million
. As of December 30, 2012, the maximum achievable RSUs outstanding under this plan are
29,820
units. These RSUs reduce the shares available to grant under the 2004 Plan.
On July 24, 2012, RSUs were awarded to certain key employees of the Company as part of the LTIP Second Half 2012 plan. The number of shares for these units varies based on individual performance versus second half 2012 goals. These goals were developed for employees who can influence key metrics set forth in the new business strategy during the July 2012 to December 2012 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The weighted average price for these RSUs was
$7.59
per share. For fiscal year 2012,
$0.6 million
was charged to compensation expense. Final assessment of these goals, including any compensation expense true-up will be completed in the first half of 2013. As of December 30, 2012, the maximum achievable RSUs outstanding under this plan are
108,960
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 30, 2012
and changes during the year then ended were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
|
Outstanding at December 25, 2011
|
2,600,805
|
|
|
$
|
19.54
|
|
|
4.39
|
|
$
|
512
|
|
|
Granted
|
801,880
|
|
|
9.70
|
|
|
|
|
|
|
Exercised
|
(62,247
|
)
|
|
8.61
|
|
|
|
|
|
|
Forfeited or expired
|
(596,381
|
)
|
|
18.03
|
|
|
|
|
|
|
Outstanding at December 30, 2012
|
2,744,057
|
|
|
$
|
17.24
|
|
|
5.01
|
|
$
|
1,321
|
|
|
Vested and expected to vest at December 30, 2012
|
2,545,483
|
|
|
$
|
17.83
|
|
|
4.67
|
|
$
|
1,002
|
|
|
Exercisable at December 30, 2012
|
2,052,214
|
|
|
$
|
19.54
|
|
|
3.58
|
|
$
|
371
|
|
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
2012
and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on
December 30, 2012
. 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 30, 2012
,
December 25, 2011
, and
December 26, 2010
, was
$0.1 million
,
$1.1 million
, and
$4.3 million
, respectively.
As of
December 30, 2012
,
$1.4 million
of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of
2.1
years.
Tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are classified as financing cash flows. Cash received from option exercises and purchases under the ESPP for the year ended
December 30, 2012
was
$1.7 million
. The actual tax benefit realized for the tax deduction from option exercises of the share-based payment units totaled
$0.1 million
and
$1.3 million
for the fiscal years ended
December 30, 2012
and
December 25, 2011
. We have applied the “Short-cut” method in calculating the historical windfall tax benefits. All tax short falls will be applied against this windfall before being charged to earnings.
Restricted Stock Units
We issue service-based restricted stock units with vesting periods up 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 30, 2012
and changes during the year ended
December 30, 2012
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Vest Date
(in years)
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
|
Nonvested at December 25, 2011
|
617,672
|
|
|
0.79
|
|
|
$
|
21.29
|
|
|
Granted
|
223,795
|
|
|
|
|
$
|
10.58
|
|
|
Vested
|
(196,254
|
)
|
|
|
|
$
|
11.24
|
|
|
Forfeited
|
(82,107
|
)
|
|
|
|
$
|
17.15
|
|
|
Nonvested at December 30, 2012
|
563,106
|
|
|
0.79
|
|
|
$
|
21.14
|
|
|
Vested and expected to vest at December 30, 2012
|
511,026
|
|
|
0.65
|
|
|
|
|
|
Vested at December 30, 2012
|
61,250
|
|
|
—
|
|
|
|
|
The total fair value of restricted stock awards vested during
2012
was
$2.2 million
as compared to
$4.0 million
during
2011
. As of
December 30, 2012
, there was
$1.4 million
unrecognized stock-based compensation expense related to nonvested restricted stock units. That cost is expected to be recognized over a weighted-average period of
1.5
years.
Other Compensation Arrangements
During fiscal 2010, we initiated a plan in which time-vested cash unit awards were granted to eligible employees. The time-vested cash unit awards under this plan vest evenly over two or three years from the date of grant. The total amount accrued related to the plan equaled
$1.0 million
at
December 30, 2012
, of which
$1.2 million
,
$0.6 million
, and
$0.2 million
was expensed for the years ended
December 30, 2012
,
December 25, 2011
, and
December 26, 2010
, respectively. The associated liability is included in Accrued Compensation and Related Taxes in the accompanying Consolidated Balance Sheets.
Note 9. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments in
2012
,
2011
, and
2010
includes payments for interest of
$8.7 million
,
$6.7 million
, and
$3.6 million
, respectively and also includes payments for income taxes of
$10.8 million
,
$17.9 million
, and
$22.4 million
, respectively.
In January 2011, the Company entered into an agreement to acquire the business of Shore to Shore, through the acquisition of equity and/or assets, which together is a retail apparel and footwear product identification business which designs, manufactures and sells tags and labels, brand protection, and EAS solutions/labels. The acquisition was settled on May 16, 2011 for approximately
$78.7 million
, net of cash acquired of
$1.9 million
and the assumption of debt of
$4.2 million
. The purchase price was funded by
$66.7 million
of cash from operations and
$9.2 million
of borrowings under our Senior Secured Credit Facility. The acquisition payment, net of cash acquired, is reflected in the acquisition of businesses line within investing activities on the Consolidated Statement of Cash Flows.
At
December 30, 2012
and
December 25, 2011
, the Company accrued
$0.5 million
and
$2.3 million
, respectively of capital expenditures, with
no
comparable accrual at
December 26, 2010
. These amounts were excluded from the Consolidated Statements of Cash Flows at
December 30, 2012
,
December 25, 2011
, and
December 26, 2010
since they represent non-cash investing activities. Accrued capital expenditures at
December 30, 2012
,
December 25, 2011
, and
December 26, 2010
are included in accounts payable and other accrued expenses on the Consolidated Balance Sheets.
Also excluded from the Consolidated Statement of Cash Flows for the years ended
December 30, 2012
,
December 25, 2011
, and
December 26, 2010
are
$27 thousand
,
$0.1 million
, and
$0.4 million
, respectively, of new capital lease obligations and related capitalized assets.
Business Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Fair value of tangible assets acquired, less cash acquired
|
$
|
—
|
|
|
$
|
28,535
|
|
|
$
|
33
|
|
|
Goodwill and identified intangible assets
|
—
|
|
|
68,458
|
|
|
467
|
|
|
Liabilities assumed
|
—
|
|
|
(20,270
|
)
|
|
—
|
|
|
Payment obligation
|
—
|
|
|
(786
|
)
|
|
(200
|
)
|
|
Cash paid for acquisitions
|
$
|
—
|
|
|
$
|
75,937
|
|
|
$
|
300
|
|
Note 10. STOCKHOLDERS’ EQUITY
The components of accumulated other comprehensive income at
December 30, 2012
and at
December 25, 2011
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
Actuarial losses on pension plans, net of tax
|
$
|
(17,538
|
)
|
|
$
|
(6,580
|
)
|
|
Derivative hedge contracts, net of tax
|
21
|
|
|
1,542
|
|
|
Foreign currency translation adjustment
|
18,312
|
|
|
17,779
|
|
|
Total
|
$
|
795
|
|
|
$
|
12,741
|
|
Note 11. EARNINGS PER SHARE
For fiscal years
2012
,
2011
, and
2010
, basic earnings per share are based on net earnings divided by the weighted average number of shares outstanding during the period. The following data shows the amounts used in computing earnings per share and the effect on net earnings from continuing operations and the weighted average number of shares of dilutive potential common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands, except per share data)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Basic (loss) earnings from continuing operations attributable to Checkpoint Systems, Inc. available to common stockholders
|
$
|
(137,917
|
)
|
|
$
|
(65,404
|
)
|
|
$
|
19,405
|
|
|
Basic (loss) earnings from discontinued operations, net of tax expense (benefit) of $247, ($378), and $5,134
|
$
|
(7,959
|
)
|
|
$
|
(1,165
|
)
|
|
$
|
8,325
|
|
|
Diluted (loss) earnings from continuing operations attributable to Checkpoint Systems, Inc. available to common stockholders
|
$
|
(137,917
|
)
|
|
$
|
(65,404
|
)
|
|
$
|
19,405
|
|
|
Diluted (loss) earnings from discontinued operations, net of tax expense (benefit) of $247, ($378), and $5,134
|
$
|
(7,959
|
)
|
|
$
|
(1,165
|
)
|
|
$
|
8,325
|
|
|
Shares:
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
40,476
|
|
|
40,070
|
|
|
39,483
|
|
|
Shares issuable under deferred compensation agreements
|
524
|
|
|
462
|
|
|
452
|
|
|
Basic weighted average number of common shares outstanding
|
41,000
|
|
|
40,532
|
|
|
39,935
|
|
|
Common shares assumed upon exercise of stock options and awards
|
—
|
|
|
—
|
|
|
505
|
|
|
Shares issuable under deferred compensation arrangements
|
—
|
|
|
—
|
|
|
5
|
|
|
Dilutive weighted average number of common shares outstanding
|
41,000
|
|
|
40,532
|
|
|
40,445
|
|
|
Basic (loss) earnings attributable to Checkpoint Systems, Inc. per share:
|
|
|
|
|
|
|
(Loss) earnings from continuing operations
|
$
|
(3.36
|
)
|
|
$
|
(1.61
|
)
|
|
$
|
0.48
|
|
|
(Loss) earnings from discontinued operations, net of tax
|
(0.20
|
)
|
|
(0.03
|
)
|
|
0.21
|
|
|
Basic (loss) earnings attributable to Checkpoint Systems, Inc. per share
|
$
|
(3.56
|
)
|
|
$
|
(1.64
|
)
|
|
$
|
0.69
|
|
|
Diluted (loss) earnings attributable to Checkpoint Systems, Inc. per share:
|
|
|
|
|
|
|
(Loss) earnings from continuing operations
|
$
|
(3.36
|
)
|
|
$
|
(1.61
|
)
|
|
$
|
0.48
|
|
|
(Loss) earnings from discontinued operations, net of tax
|
(0.20
|
)
|
|
(0.03
|
)
|
|
0.21
|
|
|
Diluted (loss) earnings attributable to Checkpoint Systems, Inc. per share
|
$
|
(3.56
|
)
|
|
$
|
(1.64
|
)
|
|
$
|
0.69
|
|
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 30, 2012
,
December 25, 2011
, and
December 26, 2010
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Weighted average common share equivalents associated with anti-dilutive stock options and restricted stock units excluded from the computation of diluted EPS
(
1)
|
3,107
|
|
|
2,380
|
|
|
1,516
|
|
|
|
|
|
(1)
|
Adjustments for stock options and awards of
61
shares and
329
shares and deferred compensation arrangements of
12
shares and
11
shares were anti-dilutive in fiscal
2012
and
2011
, respectively. These shares were therefore excluded from the earnings per share calculation due to our net loss for the years.
|
Note 12. INCOME TAXES
The domestic and foreign components of earnings from continuing operations before income taxes are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Domestic
|
$
|
(54,230
|
)
|
|
$
|
(41,664
|
)
|
|
$
|
(32,985
|
)
|
|
Foreign
|
(76,852
|
)
|
|
35,776
|
|
|
56,102
|
|
|
Total
|
$
|
(131,082
|
)
|
|
$
|
(5,888
|
)
|
|
$
|
23,117
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Currently payable
|
|
|
|
|
|
|
Federal
|
$
|
2,544
|
|
|
$
|
365
|
|
|
$
|
(4,004
|
)
|
|
State
|
88
|
|
|
99
|
|
|
(404
|
)
|
|
Puerto Rico
|
354
|
|
|
23
|
|
|
(3,950
|
)
|
|
Foreign
|
6,453
|
|
|
11,474
|
|
|
15,045
|
|
|
Total currently payable
|
9,439
|
|
|
11,961
|
|
|
6,687
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
Federal
|
(792
|
)
|
|
49,395
|
|
|
(5,128
|
)
|
|
State
|
226
|
|
|
526
|
|
|
4,321
|
|
|
Puerto Rico
|
765
|
|
|
(377
|
)
|
|
(707
|
)
|
|
Foreign
|
(2,274
|
)
|
|
(1,932
|
)
|
|
(1,345
|
)
|
|
Total deferred
|
(2,075
|
)
|
|
47,612
|
|
|
(2,859
|
)
|
|
Total provision
|
$
|
7,364
|
|
|
$
|
59,573
|
|
|
$
|
3,828
|
|
Adjustments have been made to prior year figures in the table above to be more presentable with the current year.
Deferred tax assets/liabilities at
December 30, 2012
and
December 25, 2011
consist of:
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
Inventory
|
$
|
5,390
|
|
|
$
|
4,930
|
|
|
Accounts receivable
|
2,733
|
|
|
2,513
|
|
|
Capitalized research and development costs
|
21,173
|
|
|
18,476
|
|
|
Net operating loss and foreign tax credit carryforwards
|
65,951
|
|
|
62,685
|
|
|
Restructuring
|
491
|
|
|
2,537
|
|
|
Pension
|
12,874
|
|
|
7,890
|
|
|
Warranty
|
1,138
|
|
|
1,507
|
|
|
Deferred compensation
|
3,630
|
|
|
4,980
|
|
|
Stock based compensation
|
7,506
|
|
|
8,148
|
|
|
Depreciation
|
1,753
|
|
|
1,052
|
|
|
Other
|
11,759
|
|
|
12,349
|
|
|
Valuation allowance
|
(104,514
|
)
|
|
(102,148
|
)
|
|
Deferred tax assets
|
29,884
|
|
|
24,919
|
|
|
Deferred revenue
|
546
|
|
|
1,316
|
|
|
Intangibles
|
8,327
|
|
|
9,542
|
|
|
Unremitted earnings
|
3,081
|
|
|
2,365
|
|
|
Deferred tax liabilities
|
11,954
|
|
|
13,223
|
|
|
Net deferred tax assets
|
$
|
17,930
|
|
|
$
|
11,696
|
|
At
December 30, 2012
, we had
$35.9 million
of net operating loss carryforwards (tax effected) in certain non-U.S. jurisdictions. Of these,
$25.4 million
have no expiration, and the remaining
$10.5 million
will expire in future years through
2022
. In the U.S., there were approximately
$5.7 million
of federal and
$6.7 million
of state net operating loss carryforwards, which will expire in future years through
2032
. Of the
$5.7 million
of federal net operating loss carryforwards,
$5.3 million
is subject to IRC § 382 limitations.
In the U.S., a
$1.1 million
and
$3.5 million
windfall benefit on stock compensation occurred in 2011 and 2010, respectively. We have not recorded these amounts to additional capital or increased its related net operating loss carryforward due to the fact that the windfall benefits have not reduced income taxes payable. There was
no
windfall benefit on stock compensation in 2012. We have adopted a “with and without” approach with regards to utilization of windfall benefits.
At
December 30, 2012
, we had U.S. foreign tax credit carryforwards of
$16.6 million
with expiration dates ranging from
2016
to
2022
.
We operate under tax holidays in other countries, which are effective through dates ranging from 2015 through 2017, and may be extended if certain additional requirements are satisfied. The tax holidays are conditional upon our meeting certain employment and investment thresholds.
In accordance with ASC 740, “Accounting for Income Taxes”, we evaluate our deferred income taxes quarterly to determine if valuation allowances are required or should be adjusted. ASC 740 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on all available evidence, both positive and negative, using a “more likely than not” standard. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with loss carryforwards not expiring and tax planning alternatives. We operate and derive income from multiple lines of business across multiple jurisdictions. As each of the respective lines of business experiences changes in operating results across their geographic footprint, we may encounter losses in jurisdictions that have been historically profitable, and as a result might require additional valuation allowances to be recorded against certain deferred tax asset balances. We are committed to implementing tax planning actions, when deemed appropriate, in jurisdictions that experience losses in order to realize deferred tax assets prior to their expiration. At
December 30, 2012
and
December 25, 2011
, we had net deferred tax assets of
$17.9 million
and
$11.7 million
, respectively.
During 2010, negative evidence arose in the form of cumulative losses in the U.S. and Germany, with net deferred tax assets of
$41.7 million
and
$9.6 million
, respectively. In 2010, and the first six months of 2011, we considered all available evidence and were able to conclude on a more likely than not basis that the effects of our commitment to specific tax planning actions provided a sufficient amount of positive evidence to support the continued benefit of the jurisdictions’ deferred tax assets.
During the quarter ending September 25, 2011, a valuation allowance in the amount of
$48 million
was established related to all components of the domestic net deferred tax assets based on the determination after the above considerations that it was more likely than not that the deferred tax assets would not be fully realized. The amount of valuation allowance recorded was greater than the net domestic deferred tax asset after consideration of deferred tax liabilities associated with non-amortizable assets such as goodwill and indefinite lived intangibles. This charge was primarily a result of the trend of significant domestic losses experienced in recent years, as well as the reduction of our global earnings experienced during the first nine months of 2011.
We have not recorded a valuation allowance on the net German deferred tax asset and continue to rely on a tax planning action that has been executed in the fourth quarter of 2011 and have provided evidence during 2012 to support the realization of the German deferred tax assets. The German tax planning action does not significantly rely on our global earnings to utilize German deferred tax assets.
In May 2011, we acquired a retail apparel and footwear product identification business which designs, manufactures and sells tags and labels, brand protection, and EAS solutions/labels (collectively, the “Shore to Shore businesses”) through the acquisition of equity and/or assets. As of December 25, 2011, we have established a preliminary opening net deferred tax liability of
$3.0 million
. In addition, we have established
$3.1 million
of income tax liabilities related to uncertain tax positions in pre-acquisition tax years. The income tax adjustments related to purchase accounting for the Shore to Shore businesses were finalized in 2012. Our preliminary opening net deferred tax liability increased to
$3.1 million
and the income tax liabilities related to uncertain tax positions in pre-acquisition years was increased to
$7.1 million
.
During 2012, negative evidence arose in the form of cumulative losses in the Netherlands, with net deferred assets of
$0.3 million
. During the quarter ending June 24, 2012, a valuation allowance was established related to certain components of the Netherlands deferred tax asset based on the determination after the above considerations that it was more likely than not that the net deferred tax assets would not be fully utilized.
Undistributed earnings of certain foreign subsidiaries for which taxes have not been provided approximate
$4.0 million
as of
December 30, 2012
. Such undistributed earnings are considered to be indefinitely reinvested in foreign operations. A liability could arise if our intention to permanently reinvest such earnings were to change and amounts are distributed by such subsidiaries or if such subsidiaries are ultimately disposed. It is not practicable to estimate the additional income taxes related to permanently reinvested earnings or the basis differences related to investments in subsidiaries.
In the fourth quarter of 2011, we changed our assertion on unremitted earnings for certain foreign subsidiaries, primarily due to pressure on our leverage ratio for debt covenants. This resulted in the repatriation of foreign earnings in order to reduce worldwide debt to the levels stipulated by our covenants and the projected future cash impact of our refined business strategy. Our assertion on unremitted earnings remains unchanged in 2012.
As of
December 30, 2012
, we provided a deferred tax liability of approximately
$3.1 million
primarily for withholding taxes associated with future repatriation of earnings for certain subsidiaries. We have not provided deferred tax liabilities for temporary differences related to basis differences in investments in subsidiaries, as such earnings are expected to be permanently reinvested, the investments are essentially permanent in duration, or we have concluded that no additional tax liability will arise as a result of the distribution of such earnings.
A reconciliation of the tax provision at the statutory U.S. Federal income tax rate with the tax provision at the effective income tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Tax provision at the statutory federal income tax rate
|
$
|
(45,879
|
)
|
|
$
|
(2,061
|
)
|
|
$
|
8,091
|
|
|
Unremitted earnings
|
690
|
|
|
1,430
|
|
|
—
|
|
|
Non-deductible permanent items
|
1,566
|
|
|
1,748
|
|
|
1,467
|
|
|
Non-deductible goodwill impairment
|
32,503
|
|
|
—
|
|
|
—
|
|
|
State and local income taxes, net of federal benefit
|
314
|
|
|
625
|
|
|
3,917
|
|
|
Losses for which no tax benefit recognized and release of allowance on current year income
|
1,135
|
|
|
14,224
|
|
|
1,408
|
|
|
Effect of foreign operations
|
17,671
|
|
|
(3,668
|
)
|
|
(7,794
|
)
|
|
Tax settlements
|
—
|
|
|
—
|
|
|
(47
|
)
|
|
Potential tax contingencies
|
(547
|
)
|
|
(1,086
|
)
|
|
(3,488
|
)
|
|
Change in valuation allowance
|
283
|
|
|
47,684
|
|
|
—
|
|
|
Stock based compensation
|
994
|
|
|
366
|
|
|
441
|
|
|
Other
|
(1,366
|
)
|
|
311
|
|
|
(167
|
)
|
|
Tax provision at the effective tax rate
|
$
|
7,364
|
|
|
$
|
59,573
|
|
|
$
|
3,828
|
|
Included in the effect of foreign operations is the U.S. tax impact of certain foreign income inclusions. Due to the U.S. valuation allowance, there was
no
related impact on overall tax expense in 2012 and 2011.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Gross unrecognized tax benefits at beginning of year
|
$
|
15,850
|
|
|
$
|
12,846
|
|
|
$
|
14,884
|
|
|
Increases in tax positions for prior years
|
225
|
|
|
997
|
|
|
1,161
|
|
|
Decreases in tax positions for prior years
|
(1,068
|
)
|
|
(44
|
)
|
|
—
|
|
|
Increases in tax positions for current year
|
3,800
|
|
|
808
|
|
|
1,229
|
|
|
Settlements
|
(683
|
)
|
|
(443
|
)
|
|
(928
|
)
|
|
Acquisition reserves
|
1,167
|
|
|
4,640
|
|
|
240
|
|
|
Lapse in statute of limitations
|
(2,956
|
)
|
|
(2,954
|
)
|
|
(3,740
|
)
|
|
Gross unrecognized tax benefits at end of year
|
$
|
16,335
|
|
|
$
|
15,850
|
|
|
$
|
12,846
|
|
The total amount of gross unrecognized tax benefits that, if recognized, would affect the effective tax rate was
$16.3 million
and
$15.9 million
at
December 30, 2012
and
December 25, 2011
, respectively. Penalties and tax-related interest expense are reported as a component of income tax expense. During fiscal years ended
December 30, 2012
,
December 25, 2011
and
December 26, 2010
, we recognized interest and penalties of
$(0.3) million
,
$1.0 million
, and
$(2.8) million
, respectively in the statement of operations. At
December 30, 2012
and
December 25, 2011
, we have accrued interest and penalties related to unrecognized tax benefits of
$4.3 million
and
$4.6 million
, respectively.
We file income tax returns in the U.S. and in various states, local and foreign jurisdictions. We are routinely examined by tax authorities in these jurisdictions. It is possible that these examinations may be resolved within the next twelve months. Due to the potential for resolution of Federal, state and foreign examinations, and the expiration of various statutes of limitation, it is reasonably possible that the gross unrecognized tax benefits balance may change within the next twelve months by a range of
$5.0 million
to
$3.4 million
.
We are currently under audit in the following major jurisdictions: Germany
2006
–
2009
, Finland
2008
–
2009
, and India
2008
-
2012
.
Note 13. EMPLOYEE BENEFIT PLANS
Under our defined contribution savings plans, eligible employees may make basic (up to
6%
of an employee’s earnings) and supplemental contributions. We match in cash
50%
of the participant’s basic contributions. Company contributions vest to participants in increasing percentages over
one
to
five
years of service. Our contributions under the plans approximated
$1.4 million
,
$1.5 million
, and
$1.3 million
, in
2012
,
2011
, and
2010
, respectively.
Generally, all employees in the U.S. may participate in our U.S. Savings Plan. All full-time employees of the Puerto Rico subsidiary who have completed three months of service may participate in our Puerto Rico Savings Plan.
During fiscal 2005, we initiated a 423(b) Employee Stock Purchase Plan (ESPP), which was adopted by the shareholders at the Annual Shareholder Meeting on April 29, 2004. This plan replaces the non-qualified Employee Stock Purchase Plan. Under the provisions of the 423(b) plan, eligible employees may contribute from
1%
to
25%
of their base compensation to purchase shares of our common stock at
85%
of the fair market value on the offering date or the exercise date of the offering period, whichever is lower.
On May 31, 2012, at the 2012 Annual Meeting of Shareholders of Checkpoint, our shareholders amended the ESPP in order to increase the number of shares of the Company’s common stock reserved for issuance under the ESPP by
400,000
shares to an aggregate of
1,050,000
shares. Our expense for this plan in fiscal
2012
,
2011
and
2010
was
$0.4 million
,
$0.6 million
, and
$0.6 million
, respectively. As of
December 30, 2012
, there were
400,340
shares authorized and available to be issued. During fiscal year
2012
,
139,135
shares were issued under this plan as compared to
100,475
shares in
2011
and
102,769
shares in
2010
.
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
2012
,
2011
, and
2010
were approximately
$0.2 million
,
$0.2 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
$24 thousand
,
$40 thousand
, and
$46 thousand
for fiscal years
2012
,
2011
, and
2010
, respectively.
Pension Plans
We maintain several defined benefit pension plans, principally in Europe. The plans covered approximately
5%
of the total workforce at
December 30, 2012
. The benefits accrue according to the length of service, age, and remuneration of the employee. We recognize the funded status of our defined benefit postretirement plans in the Company’s statement of financial position.
The amounts recognized in accumulated other comprehensive income at
December 30, 2012
, and
December 25, 2011
consist of:
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
Transition obligation
|
$
|
—
|
|
|
$
|
58
|
|
|
Prior service costs
|
10
|
|
|
12
|
|
|
Actuarial losses
|
26,588
|
|
|
10,638
|
|
|
Total
|
26,598
|
|
|
10,708
|
|
|
Deferred tax
|
(8,833
|
)
|
|
(4,311
|
)
|
|
Net
|
$
|
17,765
|
|
|
$
|
6,397
|
|
The amounts included in accumulated other comprehensive income at
December 30, 2012
and expected to be recognized in net periodic pension cost during the year ended
December 29, 2013
is as follows:
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 29, 2013
|
|
|
Prior service costs
|
$
|
2
|
|
|
Actuarial loss
|
1,559
|
|
|
Total
|
$
|
1,561
|
|
The Company expects to make contributions of
$5.2 million
during the year ended
December 29, 2013
.
The pension plans included the following net cost components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Service cost
|
$
|
851
|
|
|
$
|
972
|
|
|
$
|
855
|
|
|
Interest cost
|
3,874
|
|
|
4,418
|
|
|
4,331
|
|
|
Expected return on plan assets
|
41
|
|
|
155
|
|
|
(60
|
)
|
|
Amortization of actuarial loss (gain)
|
224
|
|
|
50
|
|
|
(24
|
)
|
|
Amortization of transition obligation
|
57
|
|
|
129
|
|
|
124
|
|
|
Amortization of prior service costs
|
2
|
|
|
2
|
|
|
2
|
|
|
Net periodic pension cost
|
5,049
|
|
|
5,726
|
|
|
5,228
|
|
|
Settlement loss
|
—
|
|
|
46
|
|
|
—
|
|
|
Curtailment loss (gain)
|
72
|
|
|
(104
|
)
|
|
—
|
|
|
Total pension expense
|
$
|
5,121
|
|
|
$
|
5,668
|
|
|
$
|
5,228
|
|
The table below sets forth the funded status of our plans and amounts recognized in the accompanying Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
Change in benefit obligation
|
|
|
|
|
Net benefit obligation at beginning of year
|
$
|
84,674
|
|
|
$
|
81,226
|
|
|
Service cost
|
851
|
|
|
972
|
|
|
Interest cost
|
3,874
|
|
|
4,418
|
|
|
Actuarial loss
|
16,269
|
|
|
4,439
|
|
|
Gross benefits paid
|
(4,324
|
)
|
|
(4,537
|
)
|
|
Plan curtailments
|
(575
|
)
|
|
(618
|
)
|
|
Plan settlements
|
(295
|
)
|
|
(470
|
)
|
|
Foreign currency exchange rate changes
|
1,540
|
|
|
(756
|
)
|
|
Net benefit obligation at end of year
|
$
|
102,014
|
|
|
$
|
84,674
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
1,406
|
|
|
$
|
1,472
|
|
|
Actual return on assets
|
(5
|
)
|
|
145
|
|
|
Employer contributions
|
4,686
|
|
|
4,801
|
|
|
Gross benefits paid
|
(4,324
|
)
|
|
(4,537
|
)
|
|
Plan settlements
|
(295
|
)
|
|
(470
|
)
|
|
Foreign currency exchange rate changes
|
20
|
|
|
(5
|
)
|
|
Fair value of plan assets at end of year
|
$
|
1,488
|
|
|
$
|
1,406
|
|
|
|
|
|
|
|
Reconciliation of funded status
|
|
|
|
|
Funded status at end of year
|
$
|
(100,526
|
)
|
|
$
|
(83,268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
Amounts recognized in accrued benefit consist of:
|
|
|
|
|
Accrued pensions — current
|
$
|
4,687
|
|
|
$
|
4,453
|
|
|
Accrued pensions
|
95,839
|
|
|
78,815
|
|
|
Net amount recognized at end of year
|
$
|
100,526
|
|
|
$
|
83,268
|
|
|
Accumulated benefit obligation at end of year
|
$
|
96,774
|
|
|
$
|
80,744
|
|
The following table sets forth additional fiscal year-ended information for pension plans for which the accumulated benefit is in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
Projected benefit obligation
|
$
|
102,014
|
|
|
$
|
84,674
|
|
|
Accumulated benefit obligation
|
$
|
96,774
|
|
|
$
|
80,744
|
|
|
Fair value of plan assets
|
$
|
1,488
|
|
|
$
|
1,406
|
|
The weighted average rate assumptions used in determining pension costs and the projected benefit obligation are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Weighted average assumptions for year-end benefit obligations:
|
|
|
|
|
|
|
Discount rate
(1)
|
3.53
|
%
|
|
4.77
|
%
|
|
|
|
Expected rate of increase in future compensation levels
|
2.52
|
%
|
|
2.52
|
%
|
|
|
|
Weighted average assumptions for net periodic benefit cost development:
|
|
|
|
|
|
|
Discount rate
(1)
|
4.77
|
%
|
|
5.27
|
%
|
|
5.77
|
%
|
|
Expected rate of return on plan assets
|
5.25
|
%
|
|
5.75
|
%
|
|
4.00
|
%
|
|
Expected rate of increase in future compensation levels
|
2.52
|
%
|
|
2.52
|
%
|
|
2.52
|
%
|
|
Measurement Date:
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
(1)
|
Represents the weighted average rate for all pension plans.
|
In developing the discount rate assumption for each country, we use a yield curve approach. The yield curve is based on the AA rated bonds underlying the Barclays Capital corporate bond index. The weighted average discount rate was
3.53%
in
2012
and
4.77%
in
2011
. We calculate the weighted average duration of the plans in each country, then select the discount rate from the appropriate yield curve which best corresponds to the plans' liability profile.
The majority of our pension plans are unfunded plans. The expected rate of the return was developed using the historical rate of returns of the foreign government bonds currently held. This resulted in the selection of the
5.25%
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:
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
|
2013
|
$
|
4,689
|
|
|
2014
|
$
|
4,753
|
|
|
2015
|
$
|
4,844
|
|
|
2016
|
$
|
4,864
|
|
|
2017
|
$
|
5,004
|
|
|
2018 through 2022
|
$
|
26,104
|
|
The following table provides a summary of the fair value of the Company's pension plan assets at
December 30, 2012
utilizing the fair value hierarchy discussed in Note 14:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
Total Fair Value Measurement December 30, 2012
|
|
|
Quoted Prices
In Active Markets for Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Global insurance assets
|
$
|
1,488
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,488
|
|
All investments consist of fixed-income global insurance. The investment objective of fixed-income funds is to maximize investment return while preserving investment principal.
Additional information pertaining to the changes in the fair value of the pension plan assets classified as Level 3 for the year ended
December 30, 2012
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
Balance as of December 25, 2011
|
|
|
Actual Return
on Plan Assets, Relating to Assets Still Held at the Reporting Date
|
|
|
Actual Return
on Plan Assets,
Relating to
Assets Sold
During the
Period
|
|
|
Purchases,
Sales and
Settlements
|
|
|
Transfer
into / (out of)
Level 3
|
|
|
Change due
to Exchange
Rate Changes
|
|
|
Balance as of December 30, 2012
|
|
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global insurance assets
|
$
|
1,406
|
|
|
$
|
791
|
|
|
$
|
(209
|
)
|
|
$
|
(520
|
)
|
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
1,488
|
|
|
Total Level 3 Assets
|
$
|
1,406
|
|
|
$
|
791
|
|
|
$
|
(209
|
)
|
|
$
|
(520
|
)
|
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
1,488
|
|
Note 14. FAIR VALUE MEASUREMENT, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Fair Value Measurement
We utilize the market approach to measure fair value for our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Our financial assets and liabilities are measured using a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
|
|
|
|
|
|
|
|
Level 1
|
Inputs are quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
|
|
Level 2
|
Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
|
|
|
|
|
|
|
Level 3
|
Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
|
Because the Company’s derivatives are not listed on an exchange, the Company values these instruments using a valuation model with pricing inputs that are observable in the market or that can be derived principally from or corroborated by observable market data. The Company’s methodology also incorporates the impact of both the Company’s and the counterparty’s credit standing.
The following tables represent our assets and liabilities measured at fair value on a recurring basis as of
December 30, 2012
and
December 25, 2011
and the basis for that measurement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
Total Fair Value Measurement December 30, 2012
|
|
|
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Foreign currency forward exchange contracts
|
$
|
179
|
|
|
$
|
—
|
|
|
$
|
179
|
|
|
$
|
—
|
|
|
Foreign currency revenue forecast contracts
|
14
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
Total assets
|
$
|
193
|
|
|
$
|
—
|
|
|
$
|
193
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
$
|
208
|
|
|
$
|
—
|
|
|
$
|
208
|
|
|
$
|
—
|
|
|
Total liabilities
|
$
|
208
|
|
|
$
|
—
|
|
|
$
|
208
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
Total Fair Value Measurement December 25, 2011
|
|
|
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Foreign currency forward exchange contracts
|
$
|
463
|
|
|
$
|
—
|
|
|
$
|
463
|
|
|
$
|
—
|
|
|
Foreign currency revenue forecast contracts
|
1,120
|
|
|
—
|
|
|
1,120
|
|
|
—
|
|
|
Total assets
|
$
|
1,583
|
|
|
$
|
—
|
|
|
$
|
1,583
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
$
|
415
|
|
|
$
|
—
|
|
|
$
|
415
|
|
|
$
|
—
|
|
|
Total liabilities
|
$
|
415
|
|
|
$
|
—
|
|
|
$
|
415
|
|
|
$
|
—
|
|
The following table provides a summary of the activity associated with all of our designated cash flow hedges (foreign currency) reflected in accumulated other comprehensive income for the years ended
December 30, 2012
and
December 25, 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
Beginning balance, net of tax
|
$
|
1,542
|
|
|
$
|
377
|
|
|
Changes in fair value gain, net of tax
|
481
|
|
|
(643
|
)
|
|
Reclass to earnings, net of tax
|
(2,002
|
)
|
|
1,808
|
|
|
Ending balance, net of tax
|
$
|
21
|
|
|
$
|
1,542
|
|
We believe that the fair values of our current assets and current liabilities (cash, restricted cash, accounts receivable, accounts payable, and other current liabilities) approximate their reported carrying amounts. The carrying values and the estimated fair values of non-current financial assets and liabilities that qualify as financial instruments and are not measured at fair value on a recurring basis at
December 30, 2012
and
December 25, 2011
are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2012
|
|
December 25, 2011
|
|
(amounts in thousands)
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Long-term debt (including current maturities and excluding capital leases and factoring)
(1)
|
|
|
|
|
|
|
|
|
Senior secured credit facility
|
$
|
42,021
|
|
|
$
|
42,021
|
|
|
$
|
52,248
|
|
|
$
|
52,248
|
|
|
Senior secured notes
|
$
|
66,114
|
|
|
$
|
66,549
|
|
|
$
|
75,000
|
|
|
$
|
75,686
|
|
|
|
|
|
(1)
|
The carrying amounts are reported on the balance sheet under the indicated captions.
|
Long-term debt is carried at the original offering price, less any payments of principal. Rates currently available to us for long-term borrowings with similar terms and remaining maturities are used to estimate the fair value of existing borrowings as the present value of expected cash flows. The Senior Secured Credit Facility’s maturity date is in the year
2014
and the Senior Secured Notes mature in the years
2015
through
2017
.
Nonrecurring Fair Value Measurements
In 2012, in connection with our annual impairment test, goodwill with a carrying amount of
$61.5 million
was written down to its implied fair value of
$23.2 million
. This resulted in a
$38.3 million
goodwill impairment charge that was recorded in goodwill impairment expense in the Retail Merchandising Solutions segment on the Consolidated Statement of Operations. The nonrecurring fair value measurement was developed using significant unobservable inputs (Level 3). The fair value was computed using a discounted cash flow valuation methodology. Refer to Note 5 of the Consolidated Financial Statements.
In 2011, as a result of our annual impairment test, our SIDEP indefinite-lived trade name with a carrying amount of
$0.8 million
was written down to its implied fair value of
$0.2 million
. This resulted in a
$0.6 million
impairment charge that was recorded in asset impairment in the Shrink Management Solutions segment on the Consolidated Statement of Operations. The nonrecurring fair value measurement was developed using significant unobservable inputs (Level 3). The fair value was computed using the relief from royalty income valuation approach. Refer to Note 5 of the Consolidated Financial Statements.
Severance costs included in our restructuring charges are calculated using internal estimates and are therefore classified as Level 3 in the fair value hierarchy. Refer to Note 15 of the Consolidated Financial Statements.
Accrued restructuring costs for lease termination liabilities were valued using a discounted cash flow model. Significant assumptions used in determining the amount of the estimated liability include the estimated liabilities for future rental payments on vacant facilities as of their respective cease-use dates and the discount rate utilized to determine the present value of the future expected cash flows. If our assumptions regarding early terminations and the timing and amounts of sublease payments prove to be inaccurate, we may be required to record additional losses or gains in the Consolidated Financial Statements. Given that the restructuring charges were valued using our internal estimates using a discounted cash flow model, we have classified the accrued restructuring costs as Level 3 in the fair value hierarchy. Refer to Note 15 of the Consolidated Financial Statements.
In connection with our restructuring plans, we have recorded impairment losses in restructuring expense during the years ended December 30, 2012 and December 25, 2011 due to the impairment of certain long-lived assets for which the carrying value of those assets may not be recoverable based upon our estimated cash flows. Given that the impairment losses were determined using internal estimates of future cash flows or upon non-identical assets using significant unobservable inputs, we have classified the remaining fair value of long-lived assets as Level 3 in the fair value hierarchy. Refer to Note 15 of the Consolidated Financial Statements.
Financial Instruments and Risk Management
We manufacture products in the U.S., Europe, and the Asia Pacific region for both the local marketplace and for export to our foreign subsidiaries. The foreign subsidiaries, in turn, sell these products to customers in their respective geographic areas of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations on inter-company receivables and payables. Additionally, the sourcing of product in one currency and the sales of product in a different currency can cause gross margin fluctuations due to changes in currency exchange rates.
Our major market risk exposures are movements in foreign currency and interest rates. We have historically not used financial instruments to minimize our exposure to currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries. We have used third-party borrowings in foreign currencies to hedge a portion of our net investments in and cash flows derived from our foreign subsidiaries. A reduction in our third party foreign currency borrowings will result in an increase of foreign currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries.
We enter into forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts are entered into with major financial institutions, thereby minimizing the risk of credit loss. We will consider using interest rate derivatives to manage interest rate risks when there is a disproportionate ratio of floating and fixed-rate debt. We do not hold or issue derivative financial instruments for speculative or trading purposes. We are subject to other foreign exchange market risk exposure resulting from anticipated non-financial instrument foreign currency cash flows which are difficult to reasonably predict, and have therefore not been included in the table of fair values. All listed items described are non-trading.
The following table presents the fair values of derivative instruments included within the Consolidated Balance Sheets as of
December 30, 2012
and
December 25, 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2012
|
|
December 25, 2011
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
(amounts in thousands)
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency revenue forecast contracts
|
Other current
assets
|
|
$
|
14
|
|
|
Other current
liabilities
|
|
$
|
—
|
|
|
Other current
assets
|
|
$
|
1,120
|
|
|
Other current
liabilities
|
|
$
|
—
|
|
|
Total derivatives designated as hedging instruments
|
|
|
14
|
|
|
|
|
—
|
|
|
|
|
1,120
|
|
|
|
|
—
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
Other current
assets
|
|
179
|
|
|
Other current
liabilities
|
|
208
|
|
|
Other current
assets
|
|
463
|
|
|
Other current
liabilities
|
|
415
|
|
|
Total derivatives not designated as hedging instruments
|
|
|
179
|
|
|
|
|
208
|
|
|
|
|
463
|
|
|
|
|
415
|
|
|
Total derivatives
|
|
|
$
|
193
|
|
|
|
|
$
|
208
|
|
|
|
|
$
|
1,583
|
|
|
|
|
$
|
415
|
|
The following tables present the amounts affecting the Consolidated Statement of Operations for the years ended
December 30, 2012
,
December 25, 2011
, and
December 26, 2010
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2012
|
|
(amounts in thousands)
|
Amount of
Gain (Loss)
Recognized
in Other
Comprehensive
Income on
Derivatives
|
|
|
Location of
Gain (Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income into
Income
|
|
Amount of
Gain (Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income into
Income
|
|
|
Amount of
Forward
Points
Recognized
in
Other Gain
(Loss), net
|
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency revenue forecast contracts
|
$
|
507
|
|
|
Cost of sales
|
|
$
|
(1,994
|
)
|
|
$
|
102
|
|
|
Total designated cash flow hedges
|
$
|
507
|
|
|
|
|
$
|
(1,994
|
)
|
|
$
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2011
|
|
(amounts in thousands)
|
Amount of
Gain (Loss)
Recognized
in Other
Comprehensive
Income on
Derivatives
|
|
|
Location of
Gain (Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income into
Income
|
|
Amount of
Gain (Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income into
Income
|
|
|
Amount of
Forward
Points
Recognized
in
Other Gain
(Loss), net
|
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency revenue forecast contracts
|
$
|
(658
|
)
|
|
Cost of sales
|
|
$
|
(1,792
|
)
|
|
$
|
(296
|
)
|
|
Total designated cash flow hedges
|
$
|
(658
|
)
|
|
|
|
$
|
(1,792
|
)
|
|
$
|
(296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2010
|
|
(amounts in thousands)
|
Amount of
Gain (Loss)
Recognized
in Other
Comprehensive
Income on
Derivatives
|
|
|
Location of
Gain (Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income into
Income
|
|
Amount of
Gain (Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income into
Income
|
|
|
Amount of
Forward
Points
Recognized
in
Other Gain
(Loss), net
|
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency revenue forecast contracts
|
$
|
1,940
|
|
|
Cost of sales
|
|
$
|
1,194
|
|
|
$
|
(124
|
)
|
|
Interest rate swap contracts
|
171
|
|
|
Interest expense
|
|
(159
|
)
|
|
—
|
|
|
Total designated cash flow hedges
|
$
|
2,111
|
|
|
|
|
$
|
1,035
|
|
|
$
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2012
|
|
December 25, 2011
|
|
December 26, 2010
|
|
(amounts in thousands)
|
Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
|
|
|
Location of
Gain (Loss)
Recognized in
Income on
Derivatives
|
|
Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
|
|
|
Location of
Gain(Loss)
Recognized in
Income on
Derivatives
|
|
Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
|
|
|
Location of
Gain(Loss)
Recognized in
Income on
Derivatives
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forwards and options
|
$
|
261
|
|
|
Other gain
(loss), net
|
|
$
|
(155
|
)
|
|
Other gain
(loss), net
|
|
$
|
77
|
|
|
Other gain
(loss), net
|
We selectively purchase currency forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. This allows us to shift the effect of positive or negative currency fluctuations to a third party. Transaction gains or losses resulting from these contracts are recognized at the end of each reporting period. We use the fair value method of accounting, recording realized and unrealized gains and losses on these contracts. These gains and losses are included in other gain (loss), net on our Consolidated Statements of Operations. As of
December 30, 2012
, we had currency forward exchange contracts with notional amounts totaling approximately
$17.1 million
. The fair values of the forward exchange contracts were reflected as a
$0.2 million
asset and
$0.2 million
liability and are included in other current assets and other current liabilities in the accompanying Consolidated Balance Sheets. The contracts are in the various local currencies covering primarily our operations in the U.S., the Caribbean, and Western Europe. Historically, we have not purchased currency forward exchange contracts where it is not economically efficient, specifically for our operations in South America and Asia, with the exception of Japan.
Beginning in the second quarter of 2008, we entered into various foreign currency contracts to reduce our exposure to forecasted Euro-denominated inter-company revenues. These contracts were designated as cash flow hedges. The foreign currency contracts mature at various dates from January 2013 to March 2013. The purpose of these cash flow hedges is to reduce the currency risk associated with Euro-denominated forecasted inter-company revenues due to changes in exchange rates. These cash flow hedging instruments are marked to market and the changes are recorded in other comprehensive income. Amounts recorded in other comprehensive income are recognized in cost of goods sold as the inventory is sold to external parties. Any hedge ineffectiveness is charged to other gain (loss), net on our Consolidated Statements of Operations. As of
December 30, 2012
, the fair value of these cash flow hedges was reflected as a
$14 thousand
asset and is included in other current assets in the accompanying Consolidated Balance Sheets. The total notional amount of these hedges is
$3.9 million
(
€2.9 million
) and the unrealized gain recorded in other comprehensive income was
$0.2 million
(net of taxes of
$6 thousand
), of which
$0.2 million
is expected to be reclassified to earnings over the next twelve months. During the year ended
December 30, 2012
, a
$2.0 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 a
$0.1 million
gain during the year ended
December 30, 2012
for hedge ineffectiveness.
During the first quarter of 2008, we entered into an interest rate swap agreement with a notional amount of
$40 million
. The purpose of this interest rate swap agreement was to hedge potential changes to our cash flows due to the variable interest nature of our senior unsecured credit facility. The interest rate swap was designated as a cash flow hedge. This cash flow hedging instrument was marked to market and the changes were recorded in other comprehensive income. The interest rate swap matured on February 18, 2010.
Aggregate foreign currency transaction losses in
2012
,
2011
, and
2010
, were
$1.7 million
,
$2.1 million
, and
$2.7 million
, respectively, and are included in other gain (loss), net on the Consolidated Statements of Operations.
Additionally, there were no deferrals of gains or losses on currency forward exchange contracts at
December 30, 2012
.
Note 15. PROVISION FOR RESTRUCTURING
During September 2011, we initiated the Global Restructuring Plan focused on further reducing our overall operating expenses by including manufacturing and other cost reduction initiatives, such as consolidating certain manufacturing facilities and administrative functions to improve efficiencies. This plan was further expanded in the first quarter of 2012 and again during the second quarter of 2012 to include Project LEAN. The first phase of this plan was implemented in the third quarter of 2011 with the remaining phases of the plan expected to be substantially complete by the end of 2013.
The expanded Global Restructuring Plan including Project LEAN and the SG&A Restructuring Plan will impact over
2,400
existing employees. Total costs of the Global Restructuring Plan including Project LEAN and the SG&A Restructuring Plan are expected to approximate
$70 million
to
$75 million
by the end of 2013, with
$52 million
to
$55 million
in total anticipated costs for the Global Restructuring Plan and
$18 million
of costs incurred for the SG&A Restructuring Plan, which is substantially complete.
Restructuring expense for the periods ended
December 30, 2012
,
December 25, 2011
, and
December 26, 2010
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Global Restructuring Plan (including LEAN)
|
|
|
|
|
|
|
Severance and other employee-related charges
|
$
|
16,945
|
|
|
$
|
11,115
|
|
|
$
|
—
|
|
|
Asset impairments
|
6,506
|
|
|
7,761
|
|
|
—
|
|
|
Other exit costs
|
5,068
|
|
|
519
|
|
|
—
|
|
|
SG&A Restructuring Plan
|
|
|
|
|
|
|
Severance and other employee-related charges
|
(86
|
)
|
|
7,015
|
|
|
6,993
|
|
|
Asset impairments
|
—
|
|
|
72
|
|
|
—
|
|
|
Other exit costs
|
64
|
|
|
2,203
|
|
|
—
|
|
|
Manufacturing Restructuring Plan
|
|
|
|
|
|
|
Severance and other employee-related charges
|
—
|
|
|
(146
|
)
|
|
641
|
|
|
Other exit costs
|
(75
|
)
|
|
101
|
|
|
577
|
|
|
Total
|
$
|
28,422
|
|
|
$
|
28,640
|
|
|
$
|
8,211
|
|
Restructuring accrual activity for the periods ended
December 30, 2012
, and
December 25, 2011
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2012
|
Accrual at
Beginning
of Year
|
|
|
Charged to
Earnings
|
|
|
Charge
Reversed to
Earnings
|
|
|
Cash
Payments
|
|
|
Exchange
Rate
Changes
|
|
|
Accrual at December 30, 2012
|
|
|
Global Restructuring Plan (including LEAN)
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
(3)
|
$
|
9,710
|
|
|
$
|
21,558
|
|
|
$
|
(4,613
|
)
|
|
$
|
(19,044
|
)
|
|
$
|
141
|
|
|
$
|
7,752
|
|
|
Other exit costs
(1)
|
—
|
|
|
5,068
|
|
|
—
|
|
|
(4,600
|
)
|
|
(8
|
)
|
|
460
|
|
|
SG&A Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
(3)
|
6,718
|
|
|
1,100
|
|
|
(1,186
|
)
|
|
(5,363
|
)
|
|
(63
|
)
|
|
1,206
|
|
|
Other exit costs
(2)
|
1,109
|
|
|
64
|
|
|
—
|
|
|
(1,012
|
)
|
|
—
|
|
|
161
|
|
|
Manufacturing Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Other exit costs
|
75
|
|
|
—
|
|
|
(75
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
17,612
|
|
|
$
|
27,790
|
|
|
$
|
(5,874
|
)
|
|
$
|
(30,019
|
)
|
|
$
|
70
|
|
|
$
|
9,579
|
|
|
|
|
|
(1)
|
During 2012, there was a net charge to earnings of
$5.1 million
primarily due to lease termination costs, inventory and equipment moving costs, restructuring agent costs, legal costs, pension settlements, and gains/losses on sale of assets in connection with the restructuring plan.
|
|
|
|
|
(2)
|
During 2012, there was a net charge to earnings of
$0.1 million
primarily due to lease termination costs and outplacement costs in connection with the restructuring plan.
|
|
|
|
|
(3)
|
During 2012, there was a severance charge reversed to earnings of
$5.8 million
primarily due to eliminations of individuals from the plans, replacements of individuals in the plans with other individuals, resignations, and other final accrual adjustments. The eliminations and replacements were primarily the result of our change in management and strategic vision in 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2011
|
Accrual at
Beginning
of Year
|
|
|
Charged to
Earnings
|
|
|
Charge
Reversed to
Earnings
|
|
|
Cash
Payments
|
|
|
Exchange
Rate
Changes
|
|
|
Accrual at December 25, 2011
|
|
|
Global Restructuring Plan (including LEAN)
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
$
|
—
|
|
|
$
|
11,382
|
|
|
$
|
(267
|
)
|
|
$
|
(1,268
|
)
|
|
$
|
(137
|
)
|
|
$
|
9,710
|
|
|
Other exit costs
(1)
|
—
|
|
|
519
|
|
|
—
|
|
|
(519
|
)
|
|
—
|
|
|
—
|
|
|
SG&A Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
6,660
|
|
|
7,147
|
|
|
(132
|
)
|
|
(6,718
|
)
|
|
(239
|
)
|
|
6,718
|
|
|
Other exit costs
(2)
|
—
|
|
|
2,214
|
|
|
(11
|
)
|
|
(1,095
|
)
|
|
1
|
|
|
1,109
|
|
|
Manufacturing Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee-related charges
|
719
|
|
|
69
|
|
|
(215
|
)
|
|
(583
|
)
|
|
10
|
|
|
—
|
|
|
Other exit costs
(3)
|
143
|
|
|
112
|
|
|
(11
|
)
|
|
(169
|
)
|
|
—
|
|
|
75
|
|
|
Total
|
$
|
7,522
|
|
|
$
|
21,443
|
|
|
$
|
(636
|
)
|
|
$
|
(10,352
|
)
|
|
$
|
(365
|
)
|
|
$
|
17,612
|
|
|
|
|
|
(1)
|
During 2011, there was a net charge to earnings of
$0.5 million
primarily due to lease termination costs, inventory and equipment moving costs, restructuring agent costs, legal costs, and gains/losses on sale of assets in connection with the restructuring plan.
|
|
|
|
|
(2)
|
During 2011, there was a net charge to earnings of
$2.2 million
primarily due to the closing of an operating facility and one-time payment related to a lease modification for an operating facility as well as lease payment accruals after exiting one of our facilities.
|
|
|
|
|
(3)
|
During 2010, costs were recorded due to the closing of a manufacturing facility. For the year ended 2011, there was a net charge to earnings of
$0.1 million
due to other exit costs associated with the manufacturing closings.
|
Global Restructuring Plan (including LEAN)
During September 2011, we initiated the Global Restructuring Plan focused on further reducing our overall operating expenses by including manufacturing and other cost reduction initiatives, such as consolidating certain manufacturing facilities and administrative functions to improve efficiencies. This plan was further expanded in the first quarter of 2012 and again during the second quarter of 2012 to include Project LEAN. The first phase of this plan was implemented in the third quarter of 2011 with the remaining phases of the plan expected to be substantially complete by the end of 2013.
As of
December 30, 2012
, the net charge to earnings of
$28.5 million
represents the current year activity related to the Global Restructuring Plan including Project LEAN. The anticipated total costs related to the plan are expected to approximate
$52 million
to
$55 million
, of which
$47.9 million
have been incurred. The total number of employees planned to be affected by the Global Restructuring Plan including Project LEAN is approximately
2,100
, of which
1,484
have been terminated. Termination benefits are planned to be paid
one
month to
24 months
after termination.
SG&A Restructuring Plan
During 2009, we initiated the SG&A Restructuring Plan focused on reducing our overall operating expenses by consolidating certain administrative functions to improve efficiencies. The first phase of this plan was implemented in the fourth quarter of 2009 with the remaining phases of the plan substantially completed by the end of the first quarter of 2012.
As of
December 30, 2012
, the net charge reversed to earnings of
$22 thousand
represents the current year activity related to the SG&A Restructuring Plan. The implementation of the SG&A Restructuring Plan is substantially complete, with total costs incurred of approximately
$18 million
. The total number of employees planned to be affected by the SG&A Restructuring Plan is approximately
369
, of which substantially all have been terminated. Termination benefits are planned to be paid
one
month to
24 months
after termination.
Manufacturing Restructuring Plan
In August 2008, we announced a manufacturing and supply chain restructuring program designed to accelerate profitable growth in our Apparel Labeling Solutions (ALS) business, formerly Check-Net
®
, and to support incremental improvements in our EAS systems and labels businesses. For the year ended
December 30, 2012
, there was a
$0.1 million
charge reversed to earnings recorded in connection with the Manufacturing Restructuring Plan.
The total number of employees planned to be affected by the Manufacturing Restructuring Plan is
420
, all of which have been terminated. As of
December 30, 2012
the implementation of the Manufacturing Restructuring Plan is substantially complete, with total costs incurred of
$4.1 million
.
Note 16. COMMITMENTS AND CONTINGENCIES
We lease certain production facilities, offices, distribution centers, and equipment. Rental expense for all operating leases approximated
$15.4 million
,
$17.3 million
, and
$16.9 million
, in
2012
,
2011
, and
2010
, respectively.
Future minimum payments for operating leases and capital leases having non-cancelable terms in excess of one year at
December 30, 2012
are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
Capital
Leases
|
|
|
Operating
Leases
|
|
|
Total
|
|
|
2013
|
$
|
319
|
|
|
$
|
11,150
|
|
|
$
|
11,469
|
|
|
2014
|
146
|
|
|
7,781
|
|
|
7,927
|
|
|
2015
|
61
|
|
|
5,081
|
|
|
5,142
|
|
|
2016
|
16
|
|
|
3,862
|
|
|
3,878
|
|
|
2017
|
2
|
|
|
3,152
|
|
|
3,154
|
|
|
Thereafter
|
—
|
|
|
3,631
|
|
|
3,631
|
|
|
Total minimum lease payments
|
$
|
544
|
|
|
$
|
34,657
|
|
|
$
|
35,201
|
|
|
Less: amounts representing interest
|
62
|
|
|
|
|
|
|
Present value of minimum lease payments
|
$
|
482
|
|
|
|
|
|
Contingencies
We are involved in certain legal and regulatory actions, all of which have arisen in the ordinary course of business. Management believes that the ultimate resolution of such matters is unlikely to have a material adverse effect on our Consolidated Results of Operations and/or Financial Condition, except as described below.
Matter related to All-Tag Security S.A., et al
We originally filed suit on May 1, 2001, alleging that the disposable, deactivatable radio frequency security tag manufactured by All-Tag Security S.A. and All-Tag Security Americas, Inc.’s (jointly “All-Tag”) and sold by Sensormatic Electronics Corporation (Sensormatic) infringed on a U.S. Patent No. 4,876,555 (Patent) owned by us. On April 22, 2004, the United States District Court for the Eastern District of Pennsylvania granted summary judgment to defendants All-Tag and Sensormatic on the ground that our Patent was invalid for incorrect inventorship. We appealed this decision. On June 20, 2005, we won an appeal when the Federal Circuit reversed the grant of summary judgment and remanded the case to the District Court for further proceedings. On January 29, 2007 the case went to trial, and on February 13, 2007, a jury found in favor of the defendants on infringement, the validity of the Patent and the enforceability of the Patent. On June 20, 2008, the Court entered judgment in favor of defendants based on the jury’s infringement and enforceability findings. On February 10, 2009, the Court granted defendants’ motions for attorneys’ fees designating the case as an exceptional case and awarding an unspecified portion of defendants’ attorneys’ fees under 35 U.S.C. § 285. Defendants are seeking approximately
$5.7 million
plus interest. We recognized this amount during the fourth fiscal quarter ended December 28, 2008 in litigation settlements on the Consolidated Statement of Operations. On March 6, 2009, we filed objections to the defendants’ bill of attorneys’ fees. On November 2, 2011, the Court finalized the decision to order the Company to pay the attorneys’ fees and costs of the defendants in the amount of
$6.6 million
. The additional amount of
$0.9 million
was recorded in the fourth quarter ended December 25, 2011 in the Consolidated Statement of Operations. On November 15, 2011, we filed objections to and appealed the Court's award of attorneys' fees to the defendants.
Note 17. CONCENTRATION OF CREDIT RISK
Our foreign subsidiaries, along with many foreign distributors, provide diversified international sales thus minimizing credit risk to one or a few distributors. Our sales are well diversified among numerous retailers in the apparel, drug, home entertainment, mass merchandise, music, shoe, supermarket, and video markets. We perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral from our customers.
Note 18. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
Our reportable business segments are strategic business units that offer distinctive products and services that are marketed through different channels. We have three reportable business segments:
|
|
|
|
i.
|
Shrink Management Solutions — includes electronic article surveillance (EAS) systems, EAS consumables, Alpha
®
, CheckView
®
, and radio frequency identification (RFID) tags and labels.
|
|
|
|
|
ii.
|
Apparel Labeling Solutions — includes our web-enabled apparel labeling solutions platform and network of service bureaus to manage the printing of variable information on price and promotional tickets, adhesive labels, fabric and woven tags and labels, and apparel branding tags.
|
|
|
|
|
iii.
|
Retail Merchandising Solutions — includes hand-held labeling systems (HLS) and retail display systems (RDS).
|
The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
The business segment information set forth below is that viewed by the chief operating decision maker:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
|
Business segment net revenue:
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
$
|
450,120
|
|
|
$
|
491,925
|
|
|
$
|
471,522
|
|
|
|
Apparel Labeling Solutions
|
184,967
|
|
|
198,158
|
|
|
172,937
|
|
|
|
Retail Merchandising Solutions
|
55,702
|
|
|
73,666
|
|
|
71,992
|
|
|
|
Total
|
$
|
690,789
|
|
|
$
|
763,749
|
|
|
$
|
716,451
|
|
|
|
Business segment gross profit:
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
$
|
198,703
|
|
|
$
|
220,607
|
|
|
$
|
217,715
|
|
|
|
Apparel Labeling Solutions
|
46,661
|
|
|
56,860
|
|
|
61,805
|
|
|
|
Retail Merchandising Solutions
|
25,478
|
|
|
34,823
|
|
|
34,929
|
|
|
|
Total gross profit
|
270,842
|
|
|
312,290
|
|
|
314,449
|
|
|
|
Operating expenses
|
391,303
|
|
(1)
|
312,113
|
|
(2)
|
285,706
|
|
(3)
|
|
Interest expense
|
(8,890
|
)
|
|
(4,542
|
)
|
|
(3,389
|
)
|
|
|
Other gain (loss), net
|
(1,731
|
)
|
|
(1,523
|
)
|
|
(2,237
|
)
|
|
|
(Loss) earnings from continuing operations before income taxes
|
$
|
(131,082
|
)
|
|
$
|
(5,888
|
)
|
|
$
|
23,117
|
|
|
|
|
|
|
|
|
|
|
|
Business segment total assets:
|
|
|
|
|
|
|
|
Shrink Management Solutions
|
$
|
601,468
|
|
|
$
|
652,895
|
|
|
|
|
|
Apparel Labeling Solutions
|
172,064
|
|
|
284,301
|
|
|
|
|
|
Retail Merchandising Solutions
|
86,277
|
|
|
107,285
|
|
|
|
|
|
Total
|
$
|
859,809
|
|
|
$
|
1,044,481
|
|
|
|
|
|
|
|
|
(1)
|
Includes a
$102.7 million
goodwill impairment charge,
$28.4 million
restructuring charge, a
$2.9 million
charge related to our CEO transition, a
$0.3 million
acquisition charge, a
$0.3 million
litigation settlement,
$3.9 million
of income resulting from compensation for the financial impact of the fraudulent Canadian activities received from our insurance provider, partially offset by charges for forensic and legal fees associated with the improper and fraudulent Canadian activities, and a
$1.7 million
gain on sale of our non-strategic Suzhou, China subsidiary.
|
|
|
|
|
(2)
|
Includes a
$28.6 million
restructuring charge,
$2.3 million
in acquisition costs, a
$0.9 million
litigation settlement, a
$0.6 million
intangible asset impairment, and income of
$0.2 million
related to improper and fraudulent Canadian activities.
|
|
|
|
|
(3)
|
Includes an
$8.2 million
restructuring charge, a
$0.8 million
selling, general and administrative charge related to an adjustment to an acquisition related liability pertaining to the period prior to the acquisition date, and a
$1.5 million
charge related to improper and fraudulent Canadian activities.
|
(B) Geographic Information
Operating results are prepared on a “country of domicile” basis, meaning that net revenues are included in the geographic area where the selling entity is located. Assets are included in the geographic area in which the producing entities are located. A direct sale from the U.S. to an unaffiliated customer in South America is reported as a sale in the U.S. Inter-area sales between our locations are made at transfer prices that approximate market price and have been eliminated from consolidated net revenues. International Americas is defined as all countries in North and South America, excluding the United States, Puerto Rico, and Dominican Republic.
The following table shows net revenues, and other financial information by geographic area for the years
2012
,
2011
, and
2010
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
United States,
Puerto Rico, &
Dominican Republic
|
|
|
Europe
|
|
|
International
Americas
|
|
|
Asia
Pacific
|
|
|
Total
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Net revenues from unaffiliated customers
|
$
|
184,900
|
|
(1)
|
$
|
276,902
|
|
(2)
|
$
|
37,131
|
|
|
$
|
191,856
|
|
|
$
|
690,789
|
|
|
Long-lived assets
|
$
|
27,875
|
|
(3)
|
$
|
15,890
|
|
|
$
|
2,255
|
|
|
$
|
62,912
|
|
(4)
|
$
|
108,932
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Net revenues from unaffiliated customers
|
$
|
192,194
|
|
(5)
|
$
|
346,834
|
|
|
$
|
35,193
|
|
|
$
|
189,528
|
|
|
$
|
763,749
|
|
|
Long-lived assets
|
$
|
37,179
|
|
(6)
|
$
|
16,698
|
|
|
$
|
3,557
|
|
|
$
|
76,647
|
|
(7)
|
$
|
134,081
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Net revenues from unaffiliated customers
|
$
|
186,442
|
|
(8)
|
$
|
352,347
|
|
(9)
|
$
|
25,661
|
|
|
$
|
152,001
|
|
|
$
|
716,451
|
|
|
|
|
|
(1)
|
Includes net revenue from the United States of
$184.9 million
.
|
|
|
|
|
(2)
|
Includes net revenue from Germany of
$74.8 million
.
|
|
|
|
|
(3)
|
Includes long-lived assets from the United States of
$27.8 million
.
|
|
|
|
|
(4)
|
Includes long-lived assets from China and Japan of
$36.3 million
and
$12.8 million
, respectively.
|
|
|
|
|
(5)
|
Includes net revenue from the United States of
$192.2 million
.
|
|
|
|
|
(6)
|
Includes long-lived assets from the United States of
$29.9 million
.
|
|
|
|
|
(7)
|
Includes long-lived assets from China and Japan of
$40.3 million
and
$15.0 million
, respectively.
|
|
|
|
|
(8)
|
Includes net revenue from the United States of
$186.4 million
.
|
|
|
|
|
(9)
|
Includes net revenue from Germany of
$73.7 million
.
|
Note 19. DISCONTINUED OPERATIONS
On October 1, 2012, the Company completed the sale of the Banking Security Systems Integration business unit for
$3.5 million
subject to closing adjustments related to a non-compete agreement and third-party consents. On October 1, 2012, the Company received cash proceeds of
$1.2 million
(net of selling costs) and a promissory note of
$1.4 million
from the purchaser. The note receivable is due in consecutive monthly installments beginning on November 1, 2012, with the last scheduled payment due on October 1, 2017. The promissory note bears interest at the
30 day LIBOR
rate plus
5.5%
. The selling price is also subject to a contingent consideration payment up to a maximum amount of
$0.9 million
. The contingent payment is based on the purchaser's revenues for the first year of its ownership of the Banking Security Systems Integration business unit. If these revenues exceed
$10 million
, the Company is entitled to a contingent payment amount of
10.0%
of the revenues above
$10.0 million
, subject to certain adjustments, not to exceed a total contingent consideration payment of
$0.9 million
. The loss on sale of the Banking Security Systems Integration business unit of
$15 thousand
is recorded through discontinued operations on the Consolidated Statement of Operations for the year ended
December 30, 2012
.
Our discontinued operations reflect the operating results for the disposal group through the date of disposition. Impairments in 2011 and 2012 reflect write-downs to estimates of fair value less costs to sell the Banking Security Systems Integration business unit. These nonrecurring fair value measurements, which fall within Level 3 of the fair value hierarchy, were determined utilizing an expected selling price less costs to sell approach.
In December, 2011, we classified our Banking Security Systems Integration business unit as held for sale. At December 25, 2011, the Banking Security Systems Integration business unit had recorded goodwill of
$3.8 million
related to a series of
three
acquisitions completed during 2007 and 2008. As a result of the conclusion to report the business as held for sale, we tested the goodwill of the disposal group and determined that there was a
$3.4 million
impairment charge. We also recorded an impairment of definite-lived customer relationships of
$2.8 million
as a result of our decision to sell the Banking Security Systems Integration business unit. The impairment charges were recorded in discontinued operations on the Consolidated Statement of Operations.
During the second quarter of 2012, we performed an impairment test based on updated fair value information regarding the Banking Security Systems Integration business unit. As a result of this impairment test, we determined that there was a
$0.4 million
impairment charge in the goodwill reporting unit of our Shrink Management Solutions segment and a
$0.7 million
impairment of customer relationship intangible assets. During the third quarter of 2012, we performed an impairment test based on final negotiations of the selling price for the Banking Security Systems Integration business unit. As a result of this impairment test, we determined that there was an
$0.8 million
additional impairment of customer relationship intangible assets.
These impairment charges were included in discontinued operations on the Consolidated Statement of Operations during the second and third quarters ended June 24, 2012 and September 23, 2012, respectively.
The results for the years ended
December 30, 2012
,
December 25, 2011
and
December 26, 2010
have been reclassified to show the results of operations for the Banking Security Systems Integration business unit as discontinued operations, net of tax, on the Consolidated Statement of Operations. Below is a summary of these results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Net revenue
|
$
|
10,751
|
|
|
$
|
13,565
|
|
|
$
|
12,820
|
|
|
Gross profit
|
1,335
|
|
|
2,541
|
|
|
2,874
|
|
|
Selling, general, & administrative expense
|
2,550
|
|
|
4,095
|
|
|
4,043
|
|
|
Restructuring expenses
|
—
|
|
|
113
|
|
|
—
|
|
|
Asset impairment
|
1,442
|
|
|
2,781
|
|
|
—
|
|
|
Goodwill impairment
|
370
|
|
|
3,411
|
|
|
—
|
|
|
Operating loss
|
(3,027
|
)
|
|
(7,859
|
)
|
|
(1,169
|
)
|
|
Loss on disposal
|
(15
|
)
|
|
—
|
|
|
—
|
|
|
Loss from discontinued operations before income taxes
|
(3,042
|
)
|
|
(7,859
|
)
|
|
(1,169
|
)
|
|
Loss from discontinued operations, net of tax
|
$
|
(3,042
|
)
|
|
$
|
(7,514
|
)
|
|
$
|
(773
|
)
|
The assets and liabilities associated with this business have been adjusted to fair value, less costs to sell, and reclassified into assets of discontinued operations held for sale and liabilities of discontinued operations held for sale, as appropriate, on the Consolidated Balance Sheet. As of
December 25, 2011
the classification was as follows:
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 25, 2011
|
|
|
Accounts receivable, net
|
$
|
1,519
|
|
|
Inventories
|
1,087
|
|
|
Property, plant, and equipment , net
|
11
|
|
|
Goodwill
|
370
|
|
|
Other intangibles, net
|
1,754
|
|
|
Other assets
|
1,579
|
|
|
Assets of discontinued operations held for sale
|
$
|
6,320
|
|
|
|
|
|
Accounts payable
|
$
|
551
|
|
|
Accrued compensation and related taxes
|
40
|
|
|
Other accrued expenses
|
599
|
|
|
Unearned revenues
|
169
|
|
|
Restructuring reserve
|
78
|
|
|
Other liabilities
|
3
|
|
|
Liabilities of discontinued operations held for sale
|
$
|
1,440
|
|
In December of 2012, our U.S. and Canada based CheckView
®
business included in our Shrink Management Solutions segment met the criteria for classification as discontinued operations. The classification of this business as discontinued operations was determined to be a triggering event for testing goodwill impairment. As a result of this impairment test, we determined that there was a
$3.3 million
impairment charge of goodwill in our Shrink Management Solutions segment and a
$0.3 million
impairment of property, plant and equipment. These impairment charges were included in discontinued operations on the Consolidated Statement of Operations. After a full impairment of its long-lived assets, the remaining carrying value of our CheckView
®
business at December 30, 2012 exceeded its fair value by approximately
$0.8 million
.
Our discontinued operations reflect the operating results for the disposal group. Impairments in 2012 reflect write-downs to estimates of fair value less costs to sell the U.S. and Canada based CheckView
®
business. These nonrecurring fair value measurements, which fall within Level 3 of the fair value hierarchy, were determined utilizing an expected selling price less costs to sell approach. The results for the years ended
December 30, 2012
,
December 25, 2011
, and
December 26, 2010
have been reclassified to show the results of operations for the U.S. and Canada based CheckView
®
business as discontinued operations, net of tax, on the Consolidated Statement of Operations. Below is a summary of these results:
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Net revenue
|
76,519
|
|
|
101,594
|
|
|
105,227
|
|
|
Gross profit
|
11,585
|
|
|
20,560
|
|
|
29,325
|
|
|
Selling, general, & administrative expense
|
12,253
|
|
|
13,700
|
|
|
13,866
|
|
|
Research and development
|
410
|
|
|
544
|
|
|
831
|
|
|
Asset impairment
|
329
|
|
|
—
|
|
|
—
|
|
|
Goodwill impairment
|
3,263
|
|
|
—
|
|
|
—
|
|
|
Operating (loss) income
|
(4,670
|
)
|
|
6,316
|
|
|
14,628
|
|
|
(Loss) earnings from discontinued operations before income taxes
|
(4,670
|
)
|
|
6,316
|
|
|
14,628
|
|
|
(Loss) earnings from discontinued operations, net of tax
|
(4,917
|
)
|
|
6,349
|
|
|
9,098
|
|
The assets and liabilities associated with this business have been adjusted to fair value, less costs to sell, and reclassified into assets of discontinued operations held for sale and liabilities of discontinued operations held for sale, as appropriate, on the Consolidated Balance Sheet. As of
December 30, 2012
the classification was as follows:
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 30, 2012
|
|
|
Accounts receivable, net
|
$
|
14,558
|
|
|
Inventories
|
9,721
|
|
|
Property, plant, and equipment, net
|
—
|
|
|
Other assets
|
5,347
|
|
|
Deferred income taxes
|
$
|
238
|
|
|
Assets of discontinued operations held for sale
|
$
|
29,864
|
|
|
|
|
|
Accounts payable
|
$
|
3,413
|
|
|
Accrued compensation and related taxes
|
94
|
|
|
Other accrued expenses
|
5,600
|
|
|
Unearned revenues
|
581
|
|
|
Liabilities of discontinued operations held for sale
|
$
|
9,688
|
|
Net cash flows of our discontinued operations from each of the categories of operating, investing and financing activities were not significant.
Note 20. SUBSEQUENT EVENTS
In January 2013, we entered into an agreement to sell our
51%
interest in Sri Lanka to the entity holding the non-controlling interest. On May 16, 2011, Checkpoint Holland Holding B.V., a wholly-owned subsidiary of the Company, acquired
51%
of the outstanding voting shares of Shore to Shore PVT Ltd. (Sri Lanka) in exchange for
$1.7 million
in cash. The fair value of the non-controlling interest was estimated by applying a market approach. Key assumptions include control premiums associated with guideline transactions of entities deemed to be similar to Shore to Shore PVT Ltd. (Sri Lanka), and adjustments because of the lack of control that market participants would consider when measuring the fair value of the non-controlling interest.
Note 21. QUARTERLY INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QUARTERS (unaudited)
|
|
|
|
(amounts in thousands, except per share data)
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Year
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
144,194
|
|
|
$
|
177,604
|
|
|
$
|
168,813
|
|
|
$
|
200,178
|
|
|
$
|
690,789
|
|
|
Gross profit
|
53,021
|
|
|
70,524
|
|
|
68,660
|
|
|
78,637
|
|
|
270,842
|
|
|
Net loss from continuing operations
|
(10,902
|
)
|
(1)
|
(91,829
|
)
|
(2)
|
(4,280
|
)
|
(4)
|
(31,435
|
)
|
(6)
|
(138,446
|
)
|
|
Net loss attributable to Checkpoint Systems, Inc.
|
(10,991
|
)
|
(1)
|
(94,161
|
)
|
(3)
|
(5,334
|
)
|
(5)
|
(35,390
|
)
|
(7)
|
(145,876
|
)
|
|
Net loss from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.26
|
)
|
|
$
|
(2.24
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
(3.36
|
)
|
|
Diluted
|
$
|
(0.26
|
)
|
|
$
|
(2.24
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
(3.36
|
)
|
|
Net loss attributable to Checkpoint Systems, Inc. per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.27
|
)
|
|
$
|
(2.30
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
(3.56
|
)
|
|
Diluted
|
$
|
(0.27
|
)
|
|
$
|
(2.30
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
(3.56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Year
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
160,201
|
|
|
$
|
193,272
|
|
|
$
|
185,222
|
|
|
$
|
225,054
|
|
|
$
|
763,749
|
|
|
Gross profit
|
65,622
|
|
|
80,071
|
|
|
74,000
|
|
|
92,597
|
|
|
312,290
|
|
|
Net (loss) earnings from continuing operations
|
(8,790
|
)
|
(8)
|
9,219
|
|
(9)
|
(51,481
|
)
|
(10)
|
(14,409
|
)
|
(11)
|
(65,461
|
)
|
|
Net (loss) earnings attributable to Checkpoint Systems, Inc.
|
(8,695
|
)
|
(8)
|
9,842
|
|
(9)
|
(48,662
|
)
|
(10)
|
(19,054
|
)
|
(12)
|
(66,569
|
)
|
|
Net (loss) earnings from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.22
|
)
|
|
$
|
0.23
|
|
|
$
|
(1.27
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(1.61
|
)
|
|
Diluted
|
$
|
(0.22
|
)
|
|
$
|
0.23
|
|
|
$
|
(1.27
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(1.61
|
)
|
|
Net (loss) earnings attributable to Checkpoint Systems, Inc. per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.22
|
)
|
|
$
|
0.24
|
|
|
$
|
(1.20
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(1.64
|
)
|
|
Diluted
|
$
|
(0.22
|
)
|
|
$
|
0.24
|
|
|
$
|
(1.20
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(1.64
|
)
|
|
|
|
|
(1)
|
Includes a
$1.6 million
restructuring charge (net of tax),
$0.5 million
expense related to improper and fraudulent Canadian activities (net of tax), and
$14 thousand
in acquisition costs (net of tax).
|
|
|
|
|
(2)
|
Includes a
$64.4 million
goodwill impairment charge (net of tax), a
$17.0 million
restructuring charge (net of tax), a
$2.9 million
charge related to our CEO transition (net of tax), a
$0.5 million
valuation allowance adjustment, and
$0.1 million
in acquisition costs (net of tax).
|
|
|
|
|
(3)
|
Includes a
$64.8 million
goodwill impairment charge (net of tax), a
$17.0 million
restructuring charge (net of tax), a
$2.9 million
charge related to our CEO transition (net of tax), a
$0.7 million
intangible impairment charge (net of tax), a
$0.5 million
valuation allowance adjustment, and
$0.1 million
in acquisition costs (net of tax).
|
|
|
|
|
(4)
|
Includes a
$3.8 million
restructuring charge (net of tax), a
$1.1 million
make-whole premium on debt charge (net of tax), a
$0.1 million
valuation allowance adjustment, and
$17 thousand
in acquisition costs (net of tax).
|
|
|
|
|
(5)
|
Includes a
$3.8 million
restructuring charge (net of tax), a
$1.1 million
make-whole premium on debt charge (net of tax), an
$0.8 million
intangible impairment charge (net of tax), a
$0.1 million
valuation allowance adjustment, and
$17 thousand
in acquisition costs (net of tax).
|
|
|
|
|
(6)
|
Includes a
$38.3 million
goodwill impairment (net of tax), a
$1.5 million
restructuring charge (net of tax), a
$0.3 million
litigation settlement (net of tax), a
$0.3 million
valuation allowance release,
$0.2 million
in acquisition costs (net of tax), compensation of
$3.4 million
for the financial impact of the fraudulent Canadian activities (net of tax), and a
$1.4 million
gain on sale of our non-strategic Suzhou, China subsidiary (net of tax).
|
|
|
|
|
(7)
|
Includes a
$41.5 million
goodwill impairment (net of tax), a
$1.5 million
restructuring charge (net of tax), a
$0.3 million
litigation settlement (net of tax) a
$0.3 million
valuation allowance release, a
$0.3 million
asset impairment (net of tax),
$0.2 million
in acquisition costs (net of tax),
$3.4 million
related to improper and fraudulent Canadian activities including insurance proceeds (net of tax), and a
$1.4 million
gain on sale of our non-strategic Suzhou, China subsidiary (net of tax).
|
|
|
|
|
(8)
|
Includes a
$1.1 million
restructuring charge (net of tax) and a
$0.2 million
expense related to improper and fraudulent Canadian activities (net of tax).
|
|
|
|
|
(9)
|
Includes
$2.0 million
in acquisition costs (net of tax), a
$1.1 million
restructuring charge (net of tax), and a
$38 thousand
expense related to improper and fraudulent Canadian activities (net of tax).
|
|
|
|
|
(10)
|
Includes a
$48.0 million
valuation allowance adjustment, a
$16.6 million
restructuring charge (net of tax), a
$0.2 million
expense related to improper and fraudulent Canadian activities (net of tax), and
$2 thousand
in acquisition costs (net of tax).
|
|
|
|
|
(11)
|
Includes a
$7.0 million
restructuring charge (net of tax), a
$1.0 million
change in indefinite reversal assertion, a
$0.9 million
litigation settlement (net of tax), a
$0.6 million
income related to improper and fraudulent Canadian activities (net of tax), a
$0.4 million
intangible impairment (net of tax), a
$0.3 million
reduction in valuation allowance, and
$0.1 million
in acquisition costs (net of tax).
|
|
|
|
|
(12)
|
Includes a
$7.0 million
restructuring charge (net of tax), a
$3.2 million
intangible impairment (net of tax), a
$3.1 million
goodwill impairment (net of tax), a
$1.0 million
change in indefinite reversal assertion, a
$0.9 million
litigation settlement (net of tax), a
$0.6 million
income related to improper and fraudulent Canadian activities (net of tax), a
$0.3 million
reduction in valuation allowance, and
$0.1 million
in acquisition costs (net of tax).
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