10-K 1 ckp-20131229x10k.htm 10-K CKP-2013.12.29-10K
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
 FORM 10-K

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

For the fiscal year ended December 29, 2013
Commission File No. 1-11257

CHECKPOINT SYSTEMS, INC.
(Exact name of Registrant as specified in its Articles of Incorporation)
 
Pennsylvania
 
22-1895850
 
 
(State of Incorporation)
 
(IRS Employer Identification No.)
 
 
 
 
 
 
 
101 Wolf Drive, PO Box 188, Thorofare, New Jersey
 
08086
 
 
(Address of principal executive offices)
 
(Zip Code)
 
 
856-848-1800
 
 
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
so registered
 
Name of each exchange on which
registered
 
 
Common Stock, Par Value $.10 Per Share
 
New York Stock Exchange
 
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
 
(Title of class)
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o   No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o   No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ    No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.05 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer o
 
Accelerated filer þ
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No þ
As of June 30, 2013, the aggregate market value of the Common Stock held by non-affiliates of the Registrant was approximately $581,101,941.
As of March 27, 2014, there were 41,608,793 shares of the Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Definitive Proxy Statement for its 2014 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.
 




Explanatory Note

Restatement of Previously Issued Consolidated Financial Statements

In this Annual Report on Form 10-K for the fiscal year ended December 29, 2013 ("Annual Report"), we are restating our previously issued consolidated financial statements and the related disclosures for the years ended December 30, 2012 and December 25, 2011 and the previously issued consolidated financial statements for each quarterly period in the year ended December 30, 2012 and the first three quarters in the year ended December 29, 2013 (the “Restated Periods”). We are also restating the Selected Financial Data in Item 6 for fiscal 2011 and fiscal 2012. The restatement is the result of our corrections for the combined effect of financial statement errors attributable to the accounting for the future extension of a sales-type lease arrangement in Spain during the second quarter ended June 26, 2011 as well as certain other previously disclosed out-of-period adjustments and balance sheet reclassifications. We assessed the impact of these errors on our prior interim and annual financial statements and concluded that the combined impact of these errors was material to these financial statements. Consequently, we have restated the prior period financial statements identified above. All amounts in this Annual Report affected by the restatement adjustments reflect such amounts as restated including the Consolidated Balance Sheet as of December 30, 2012, the Consolidated Statements of Operations, Comprehensive Income (Loss), Equity, and Cash Flows for the years ended December 30, 2012 and December 25, 2011 and the unaudited interim financial information for each of the quarters in the year ended December 30, 2012 and for the first three quarters in the fiscal year ended December 29, 2013. In addition, the following items of this Annual Report include restated financial data: (i) Part II, Item 6: Selected Financial Data; (ii) Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations; and (iii) Part II, Item 8: Financial Statements and Supplementary Data. We also have provided disclosure regarding the impact of the restatement on the adequacy of our internal control over financial reporting and disclosure controls and procedures for the relevant restatement periods in Part II, Item 9A: Controls and Procedures. In addition to the restated consolidated financial information for the Restated Periods, the Selected Financial Data for fiscal 2009 and 2010 included in Item 6 of this Annual Report has been revised to reflect the immaterial effect of the errors impacting the Restated Periods that also impacted fiscal 2009 and 2010.

For a more detailed explanation of these matters and resulting restatements, please see Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations – Restatement of Previously Issued Consolidated Financial Statements, Item 8: Financial Statements and Supplementary Data – Note 1 to the Consolidated Financial Statements, and Item 8: Financial Statements and Supplementary Data – Note 20 to the Consolidated Financial Statements.
We have not amended our previously-filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for any fiscal year or interim period affected by the restatement discussed above. Instead, the financial information that has been previously filed or otherwise reported for these periods is superseded by the information in this Annual Report, and the financial information contained in such previously-filed reports should no longer be relied upon.



























CHECKPOINT SYSTEMS, INC.

FORM 10-K

Table of Contents

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties and reflect the Company’s judgment as of the date of this report. Forward-looking statements often address our expected future business and financial performance, and often contain words such as “expect,” “forecast,” “anticipate,” “intend,” “plan,” “believe,” “seek,” or “will.” By their nature, forward-looking statements address matters that are subject to risks and uncertainties. Any such forward-looking statements may involve risk and uncertainties that could cause actual results to differ materially from any future results encompassed within the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited, to the following: the impact upon operations of legal and tax compliance matters or internal controls review, improvement and remediation, including the detection of wrongdoing, improper activities, or circumvention of internal controls; our ability to successfully implement our strategic plan; the impact of our working capital improvement initiatives; our ability to manage growth effectively including our ability to integrate acquisitions and to achieve our financial and operational goals for our acquisitions; our ability to manage risks associated with business divestitures; changes in economic or international business conditions; foreign currency exchange rate and interest rate fluctuations; lower than anticipated demand by retailers and other customers for our products; slower commitments of retail customers to chain-wide installations and/or source tagging adoption or expansion; possible increases in per unit product manufacturing costs due to less than full utilization of manufacturing capacity as a result of slowing economic conditions or other factors; our ability to provide and market innovative and cost-effective products; the development of new competitive technologies; our ability to maintain our intellectual property; competitive pricing pressures causing profit erosion; the availability and pricing of component parts and raw materials; possible increases in the payment time for receivables as a result of economic conditions or other market factors; our ability to comply with covenants and other requirements of our debt agreements; changes in regulations or standards applicable to our products; our ability to successfully implement global cost reductions in operating expenses including, field service, sales, and general and administrative expense, and our manufacturing and supply chain operations without significantly impacting revenue and profits; our ability to maintain effective internal control over financial reporting; risks generally associated with information systems upgrades and our company-wide implementation of an enterprise resource planning (ERP) system; and additional matters discussed more fully in this report under Item 1A. “Risk Factors Related to Our Business” and Item 7. “Management’s Discussion and Analysis.” Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We do not undertake to update our forward-looking statements, except as required by applicable securities laws.

Item 1. BUSINESS

Checkpoint Systems, Inc. is a leading global manufacturer and provider of technology-driven loss prevention, inventory management and labeling solutions to the retail and apparel industries. Our core loss-prevention business is built on more than 40 years of radio-frequency (RF) technology expertise. The systems and services included in this business enable retailers and their suppliers to reduce shrink while leveraging real-time data generated by our systems to improve operational efficiency.

Within loss-prevention, we are a leading provider of electronic article surveillance (EAS) systems and tags using RF and electro-magnetic (EM) technology. We also engineer systems using RF and acousto-magnetic (AM) technology. Our loss prevention solutions enable retailers to safely display merchandise in an open environment. We also offer customers the convenience of tagging their merchandise or associated packaging at the manufacturing source.

Increasingly, retailers and manufacturers are focused on tracking assets moving through the supply chain. In response to this growing market opportunity, we provide a portfolio of inventory management solutions in the form of Radio Frequency Identification (RFID) products and services principally for closed-loop apparel retailers and department stores. Our products give customers precise details on merchandise location and quantity as it travels from the manufacturing source through to the retail store.

We manufacture and sell worldwide a variety of tickets, tags and labels for customers in the retail and apparel industry. Applications include variable data management and printing, with size, care, content, pricing information, and brand identification. In addition, we offer barcode printing and integrated EAS tags for loss prevention and integrated RFID tags for item tracking and inventory management.

In Europe, we are a leading provider of retail display systems (RDS) and hand-held labeling systems (HLS) used for retail price marking and industrial applications.
 

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We operate directly in 28 countries. Our products are principally developed and manufactured in-house and sold through direct distribution and reseller channels.

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. In April 2013, we completed the sale 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 are excluded from continuing operations. Unless otherwise noted, all information in this Annual Report on Form 10-K is presented on the basis of continuing operations.
 
COMPANY HISTORY

We were founded in 1969 and incorporated in Pennsylvania as a wholly-owned subsidiary of Logistics Industries Corporation (Logistics). In 1977, pursuant to the terms of its merger into Lydall, Inc., Logistics distributed our common stock to Logistics' shareholders as a dividend.

Historically, we expanded our business both domestically and internationally through acquisitions, internal growth via wholly-owned subsidiaries, and independent distributors. In 1993 and 1995, we completed two acquisitions that gave us direct access into Western Europe. We acquired ID Systems International BV and ID Systems Europe BV in 1993 and Actron Group Limited in 1995. These companies manufactured, distributed, and sold EAS systems throughout Europe.

In December 1999, we acquired Meto AG, a German multinational corporation and a leading provider of value-added labeling solutions for article identification and security. This acquisition doubled our revenues and broadened our product offering and global reach.

In January 2001, we acquired A.W. Printing Inc., a U.S.-based printer of tags, labels, and packaging material for the apparel industry.

In January 2006, we completed the sale of our barcode systems business to SATO, a global leader in barcode printing, labeling, and Electronic Product Code (EPC)/ RFID solutions.

In November 2006, we acquired ADS Worldwide (ADS). Based in the U.K., ADS supplied tags, labels and trim to apparel manufacturers, retailers and brands around the world. This acquisition gave us new technological and production capabilities and enhanced our product offerings and solutions for apparel customers.

In November 2007, we acquired the Alpha S3 business from Alpha Security Products, Inc. Headquartered in the U.S., the Alpha S3 business offers security solutions designed to protect merchandise most likely to be stolen on open display in retail environments. The Alpha® S3 portfolio complements our EAS source tagging program, and is in line with our strategy to provide retailers with a comprehensive line of loss-prevention solutions.

In November 2007, we also acquired SIDEP, an established supplier of EAS systems operating in France and China, and Shanghai Asialco Electronics Co. Ltd. (Asialco), a China-based manufacturer of RF-EAS labels. With facilities in Shanghai, China, Asialco significantly increased our label manufacturing capacity in Asia. These businesses are helping us to meet growing regional demand.

In January 2008, we purchased the business of Security Corporation, Inc., a privately held company that provided technology and physical security solutions to the financial services sector and served as the foundation for the Banking Security Systems Integration business unit that was focused on the southeast region of the U.S. In October 2012, we completed the sale of this non-strategic business unit that was formerly part of our Merchandise Availability Solutions (MAS) segment.

In June 2008, we acquired OATSystems, Inc., a recognized leader in RFID-based application software. This acquisition positioned us to offer a complete end-to-end solution of RFID hardware and software, tags and labels, service and supply to closed-loop apparel retailers and department stores for inventory tracking and management purposes. We believe this single-source capability gives us an advantage over competing providers.

In August 2009, we acquired Brilliant Label Manufacturing Ltd., a China-based manufacturer of paper, fabric and woven tags and labels. Through its facilities in Hong Kong and China, Brilliant Label added capacity to Checkpoint's apparel labeling business and expanded our manufacturing footprint, enabling us to meet greater demand.

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In May 2011, through the acquisition of equity and/or assets, we acquired the Shore to Shore businesses. Shore to Shore designs, manufactures and sells tags and labels, brand protection and EAS solutions for apparel and footwear application. This acquisition further expanded our tag and label production capabilities and global reach.

In April 2013, we completed the sale of our U.S. and Canada based CheckView® business, formerly part of our MAS segment, in order to focus on the growth of our core business.

BUSINESS STRATEGY

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, and Merchandise Visibility™ (RFID) products and services. 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 will also consider acquisitions that are aligned with our strategic plan. We will continue to consider divesting certain businesses and product lines that are 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 maximize our position in under-penetrated markets. We also intend to continue to capitalize on our installed base of large global retailers to promote source tagging. Furthermore, we plan to leverage our knowledge of RF and identification technologies to assist retailers and manufacturers in realizing the benefits of RFID.

To achieve these objectives, we expect to continuously enhance and expand our technologies and products, and provide superior service to our customers. We intend to offer customers a wide variety of integrated shrink management solutions, apparel labeling, and retail merchandising solutions characterized by superior quality, ease-of-use, and good value, with enhanced merchandising opportunities.

We continue to evaluate our sales, productivity, manufacturing, supply chain efficiency and overhead structure, and we will take action where specific opportunities exist to improve profitability.

Products and Offerings

Historically, we have reported our results of operations in three segments: Shrink Management Solutions (SMS), Apparel Labeling Solutions (ALS), and Retail Merchandising Solutions (RMS). During the third quarter of 2013, we adjusted the product allocation between our SMS and ALS segments, renamed the SMS segment Merchandise Availability Solutions (MAS) and began reporting our segments as: Merchandise Availability Solutions, Apparel Labeling Solutions, and Retail Merchandising Solutions. Prior periods have been conformed to reflect the segment change.

ALS now includes the results of our radio frequency identification (RFID) labels business (previously reported in SMS), coupled with our data management platform and network of service bureaus that manage the printing of variable information on apparel labels and tags. This change aligns us with our refined ALS strategy to be a leading supplier of apparel labeling solutions, with expertise in intelligent apparel labels for item-level tracking and loss prevention. Our MAS segment, which is focused on loss prevention and Merchandise Visibility™ (RFID), includes EAS systems, EAS consumables, Alpha® high-theft solutions, RFID systems and software and CheckView® in Asia. There were no changes to the RMS Segment. The revenues, gross profit and total assets for each of the segments are included in Note 18 of the Consolidated Financial Statements.

Each of these segments offers an assortment of products and services that in combination are designed to provide a comprehensive, single stop shop solution to help retailers, manufacturers, and distributors identify, track, and protect their assets throughout the supply chain. Each segment and its respective products and services are described below.







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MERCHANDISE AVAILABILITY SOLUTIONS

Our largest segment provides shrink management and inventory management (RFID) solutions to retailers. Merchandise Availability Solutions represented approximately 67%, 65%, and 64% of total revenues in 2013, 2012, and 2011, respectively.
The diversified line of products offered in this segment is designed to help retailers in a number of ways: prevent inventory losses caused by theft, reduce selling costs through lower staff requirements, enhance consumer shopping experiences, improve inventory management, and boost sales by having the right goods available when consumers are ready to buy. These broad and flexible product lines are marketed and serviced by our direct sales and service organizations, in all major markets, complemented by an extensive distributor and franchisee network, positioning Checkpoint to be a preferred supplier to retailers around the world.

Our EAS products let retailers openly display their merchandise, which contributes to maximizing sales. We believe that we hold a significant share of installed worldwide EAS systems through the deployment of our proprietary EAS-RF and EAS-EM technologies. EAS systems revenues accounted for 28%, 28%, and 27% of our 2013, 2012, and 2011 total revenues, respectively.

We offer a wide variety of EAS-RF and EAS-EM labels and tags, collectively called EAS consumables, matched to specific retail requirements. Under our source tagging program, EAS labels and tags are attached to, or embedded in, products or packaging at the point of manufacture. Our Hard Tag @ Source™ program is designed for apparel customers who prefer to use hard tags for garment security but who also wish to avoid the expense of in-store tag application. These light-weight tags are recyclable, which is a global service program that we offer to our customers.

All participants in the retail supply chain look for ways to operate with maximum efficiency. Many of our products and services, including labels that are fully integrated with EAS and/or RFID capability, help our customers to achieve critical objectives, such as meeting tight delivery schedules and preventing losses caused by tracking failure, theft, misplacement or counterfeiting. EAS consumables revenues represented 15%, 14% and 15% of our total revenues for 2013, 2012, and 2011, respectively.

Our Alpha® solutions are focused on two niche areas in retail theft: the need to protect high-risk merchandise and the need to safely display merchandise in ways that permit consumers to pick up and handle goods before deciding to buy. For 2013, 2012, and 2011, our Alpha® business represented 19%, 18%, and 18% of our revenues, respectively.

Our U.S. and Canada CheckView® business has been divested. We will continue to provide CheckView® CCTV services in Asia in connection with EAS systems when our customers require combined security solutions.

No other product group in this segment accounted for as much as 10% of our revenues. Our Merchandise Visibility(RFID) business enables us to offer a complete end-to-end solution of RFID hardware and software, service and supply to our customers for inventory tracking and management purposes.

Electronic Article Surveillance Systems

We offer a wide variety of EAS-RF and EAS-EM systems tailored to meet the varied requirements of retail store configurations in multiple market segments. Our systems are designed to act as a visible deterrent to merchandise theft. They are comprised of antennas and deactivation units which respond to or act upon our EAS tags and labels. Antennas include readers, sometimes integrated, sometimes external, that can be RFID-enabled. Our business model typically relies on customer commitments for EAS product installations in a large number of stores over a period of several months.

Our antennas and deactivators are technology-rich and upgradable. Our foremost EVOLVE™ platform sets a new standard in retail loss prevention and customer tracking. With its advanced data analytics and networking capabilities, EVOLVE™ delivers superior performance coupled with significant energy savings. Its data analytics enable customers to maximize returns on investments. EVOLVE™ is compatible with our EAS software suite and EAS and RFID tags and labels, as well as products of other suppliers.

In 2012, we introduced a new range of antennas that provides retailers with similarly enhanced functionality. Available in varied design options, including aesthetically pleasing formats to complement our customers' retail stores, the CLASSIC IP range offers wider aisle-width protection plus the energy-savings electronics found in EVOLVETM. In 2013, we added a new floor antenna and a new dual RF/RFID pedestal series to our Evolve Exclusive Series.


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Our EAS products are designed and built to comply with applicable Federal Communications Commission (FCC) and European Community (EC) regulations governing RF, signal strengths, and other factors.

Electronic Article Surveillance Consumables

We offer a wide variety of EAS-RF and EAS-EM labels that work in combination with our EAS systems to protect a wide range of merchandise for several types of retail environments. Our diversified line of discrete, disposable labels is designed to enable retailers to protect a wide array of easily-pocketed, high-shrink merchandise. Our paper-thin EAS labels have characteristics that are easily integrated with high-speed, automated application systems. While EAS labels can be applied in retail stores and distribution centers, many customers take advantage of our source tagging program. In source tagging programs, EAS labels and hard tags are configured to customers' merchandise and specific security requirements and applied at the point of manufacture.

We believe our enhanced performance (EP) labels carry the smallest circuit design on the worldwide market, while simultaneously delivering superior detection and deactivation. These labels offer protection to health and beauty items and other small-sized merchandise. Included in this range is EP CLEAR, a see-through format that that allows brand and packaging information to remain visible. The EP CLEAR Tamper Tag, features an added benefit, a strong adhesive bond designed to degrade packaging if removed. This acts as a further deterrent to thieves intending to steal and then resell the merchandise.

Our Hard Tag@Source (HT@S) program combines the benefits of a strong visual theft deterrent with point-of-manufacture tagging. These tags are lightweight, reusable and visually pleasing, while offering superior detection and easy removal upon purchase. HT@S ensure consistency and tagging compliance while removing the high cost of in-store tagging labor.

In 2012, we introduced our Infinite Solutions (iS) product series developed based on input from our retail customers who desired to have a merchandise protection solution for merchandise that might otherwise be left unprotected. Available in varying formats, this disposable product line offers the visual protection of a hard tag with flexible options for attaching to merchandise.

Alpha® 

Alpha® high-theft solutions compliment our EAS systems. Alpha® pioneered the “open display” security philosophy by providing retailers a truly safe means to bring merchandise from behind locked cabinets and openly display it. The Alpha® product line supplies retailers with innovative and technically advanced solutions to protect high-risk, and in some cases, high-value, merchandise. Applications are many and varied depending on the merchandise and location to be protected. Products include Keepers™, Spider Wraps®, Bottle Security, Cable Loks®, hard tags, NanoGates® and Showsafe™. All Alpha® products are available in AM, RF, or EM formats.

In 2013, Alpha responded to market challenges facing health and beauty merchandise (perfumes, skin care, cosmetics) with new additions to its Keepers™ category. It also launched next generation offerings of Spider Wraps® and Specialty Hard Tags.

Merchandise Visibility Solutions (RFID)

Our Merchandise Visibility product line gives retailers and their suppliers key insights into the location and quantity of merchandise as it travels through the supply chain. Our solutions integrate RFID at point of manufacture, through logistics and distribution operations, into and throughout the store, including exit points. Our Merchandise Visibility Solutions encompass a comprehensive, integrated set of hardware, software, tags and services. These solutions are based on RFID technology, and enable closed-loop apparel retailers and department stores to achieve key operational objectives including reducing out-of-stocks, maximizing on-shelf availability, reducing working capital requirements, and increasing sales.

Our Merchandise Visibility solutions are tailored to each retailer's unique requirements, and we take full, end-to-end responsibility for all aspects of planning, development, deployment and training. We are unique in our ability to provide and support the full range of products and services needed to implement a complete RFID solution for retailers. These solutions employ a number of innovative products and technologies, including a broad range of RFID tags and labels for a wide variety of products and applications. Among our key enabling and differentiable technologies is Wirama Radar™, a patented technology that improves tag-reading accuracy at a store's point of exit and helps retailers make better use of valuable front-of-store real estate by reducing “stray reads” and improving tag-reading integrity. Another unique capability is our RFID middleware and application software, which was the catalyst behind the company's 2008 acquisition of RFID software pioneer OATSystems Inc. Our Merchandise Visibilitysoftware automates the supply chain and in-store inventory management

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processes, while enabling retailers' existing systems or real-time capabilities. This software is built on the OAT Foundation Suite™.

We also have taken the important step of using our technical and applications expertise to develop solutions that seamlessly integrate Merchandise Visibility with loss prevention; the RFID Based EAS Overhead Solution helps retailers improve their operations by using a single RFID tag to deliver both benefits. In 2013, we launched our unique next generation Overhead Solution for very wide and very high openings, in addition to our best in class dual RF/RFID pedestals and a range of store compliance and on shelf availability software applications.

APPAREL LABELING SOLUTIONS

Apparel Labeling Solutions (ALS) is our second largest segment. ALS revenues represented 26%, 27%, and 26% of our total revenues for 2013, 2012, and 2011, respectively. We provide apparel retailers, brand owners, and manufacturers with a single source for their apparel labeling requirements. ALS also includes our web-based data management service and network of 20 service bureaus strategically located in 17 countries close to where apparel is manufactured. Our data management service offers order entry, logistics, and data management capabilities. It facilitates on-demand printing of variable information onto apparel tags and labels.

Apparel labels and the systems that manage them have many different but synergistic roles including variable data management, brand identity, merchandise visibility, shrink management and supply chain management. The apparel labeling business is growing from conveying essential information to the consumer to also sharing critical data about tagged apparel merchandise at the factory, in the store, or at any point in between. We integrate loss prevention and/or merchandise visibility functionality into traditional apparel tags, helping retailers reduce costs and improve operational synergies in their stores and throughout their supply chains. Products include graphic tags and labels, variable data tags and labels, woven labels, care and content labels, printed fabric and specialty trim labels, fully integrated tags and labels and RFID tags and labels.

In the third quarter of 2012, following an extensive strategic review, we developed a comprehensive plan to address operational performance in ALS. The business was fundamentally restructured, including consolidating certain manufacturing operations in order to provide quality merchandising products profitably and on time. We also rationalized our customer base and reviewed our product capabilities to be aligned with our on-shelf availability strategy.

In line with our refined strategy, we are leveraging our competitive advantage in the transfer and printing of variable data onto apparel labels, which increasingly serve as carriers for RFID solutions used in item-level tagging. We believe that our data management and service bureau network is one of the most robust in the industry and we believe our ability to integrate RFID as well as EAS-RF at manufacturing source will place Checkpoint Systems among just a handful of suppliers offering fully integrated, intelligent apparel labeling.

As we narrow our manufacturing focus in apparel labeling, we intend to continue offering our customers all the labeling solutions they need to effectively merchandise their products.

RETAIL MERCHANDISING SOLUTIONS

The Retail Merchandising Solutions (RMS) segment includes hand-held labeling applicators and tags, promotional displays, and customer queuing systems. RMS, which is focused on European and Asian markets, represents approximately 7% of our business, with no product group in this segment accounting for as much as 10% of our revenues. These traditional products broaden our reach among retailers, promote their products and enable them to communicate with their customers in an effective manner. Many of the products in this segment represent high-margin items with a high level of recurring sales of associated consumables such as labels. As a result of the increasing use of scanning technology in retail, our hand-held labeling systems serve a declining market.
 
Hand-held Labeling Systems

Our METO® hand-held labeling systems (HLS) include a complete line of hand-held price marking and label application solutions, primarily sold to retailers and manufacturing industry. Sales of labels, consumables, and service generate a significant source of recurring revenues. As retail scanning becomes widespread, in-store retail price marking applications continue to decline. Our HLS products possess a market-leading position in several European countries.




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Retail Display Systems

Our retail display systems (RDS) include a wide range of products for customers in certain retail sectors, such as supermarkets and do-it-yourself, where high-quality signage and in-store price promotion are important. Product categories include traditional retail promotional systems for in-store communication and electronic graphics display, and customer queuing systems. Product categories include traditional in-store retail promotional systems, shelf management solutions and customer queuing systems.

PRINCIPAL MARKETS AND MARKETING STRATEGY

Our mission is to discover meaningful insights into what retailers need in order to sell more and lose less merchandise. We translate those insights into noticeably superior products and solutions that address retailers' needs with a clear return on their investment. We communicate the superiority of our solutions through compelling claims, performance demonstrations and superior benefit visualization.

We design, engineer, and manufacture the majority of our products, and in particular our key differentiated products. Additionally, we distribute, sell, service and support all of our products. Our core business has evolved from helping retailers reduce theft to improving retailers' merchandise availability at their stores. We do this through merchandise protection, improving inventory visibility to prevent out-of-stocks, and helping improve shoppers' experiences.

We offer a broad product portfolio that includes EAS systems comprised of hardware, consumables and software, Alpha® high-theft security solutions, and RFID merchandise visibility solutions including hardware, software, tags and labels. All of this is complemented by our global field services expertise in worldwide installations, maintenance and monitoring of our solutions. As an innovative technology company, we consistently measure our revenues with the expectation that 25% will come from new product innovations. We invest time and resources with our partner customers in identifying their critical needs and we commission our innovation team to continue developing solutions that address those needs.

We provide major retailers, brand owners and manufacturers with a single source for their apparel labeling needs using a web-based data management platform, which automatically allocates customer orders to our global manufacturing network.

We sell our product solutions primarily to retailers worldwide in traditional brick-and-mortar stores, and also for extended use in their supply chains. As the retail marketplace continues to change, our solutions have also evolved to help retailers address new challenges. We also work closely with merchandise brand owners to apply our security and inventory management solutions at the point of manufacture, and develop innovative display merchandising that helps to promote their brand in stores. As one of the industry leaders, we enjoy significant market share, particularly in the supermarket, drug store, hypermarket, and mass merchandiser market segments.

In addition, we offer integrated shrink management and merchandise visibility solutions to retail customers worldwide through our Intelligent Merchandise Availability Program (iMAP). This approach entails a broadened focus within the entire retail market to deliver integrated solutions for loss prevention and inventory management, working seamlessly together to help retailers ensure they have the right merchandise available, at the right place at the right time, when consumers want to buy.

Shoplifting and employee theft are major causes of retail shrinkage. The Global Retail Theft Barometer estimates that shrink averages 1.4% of retail sales. As a result, retailers recognize that the implementation of effective electronic security solutions can significantly reduce shrinkage, increase their merchandise availability, and enhance their customers' shopping experience. These are among the ways that we help retailers lose less merchandise.

As reported by the University of Arkansas, average retail inventory accuracy is 60-65%, which can lead to out-of-stocks when retailers make buying decisions with imperfect data. With RFID, however, inventory accuracy typically increases to between 95% and 99%. This increase in inventory accuracy enables retailers to reduce out-of-stocks and increase sales significantly. Checkpoint's RFID-based solutions help retailers sell more merchandise.

We are committed to helping retailers grow profitability by providing our customers with a wide variety of solutions. Our ongoing marketing strategy includes the following:

communicating the synergies within our product portfolio to demonstrate the collective value they offer in enhancing merchandise availability, preventing out-of-stocks and improving shoppers' experience;
continuing to develop new product solutions that offer a compelling return-on-investment for retailers to enable us to expand penetration within existing retail accounts and gain new customer accounts;

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establishing business-to-business web-based capabilities to enable retailers and manufacturers to initiate and track their orders through the supply chain on a global basis;
continuing to promote source tagging around the world with extensive integration and automation capabilities;
measuring and improving retailers' merchandise availability ratio, which has a direct impact on a consumer's shopping experience and the retailers' profitability;
providing a clear migration path from EAS to RFID and from shrink management to merchandise availability that protects retailers' past investment while improving the effectiveness of their purchased assets; and
assisting retailers in maximizing the benefits of merchandise visibility through their supply chain all the way to their stores' exit doors.

We market our products primarily by:

becoming a trusted advisor to our retail customers where we can offer actionable insights to protect merchandise, prevent out-of-stocks, and improve display merchandising;
communicating, messaging and highlighting Checkpoint's unique position as a one-stop provider of integrated and complete solutions for retailers;
demonstrating a return-on-investment model that will deliver proven results;
helping retailers sell more merchandise by avoiding stock-outs, reducing shrink, and making merchandise available to consumers;
working directly with brand owners to improve source-tagging automation;
implementing sales, marketing, comprehensive public relations, and targeted trade show participation;
delivering superior field service and support capabilities; and
actively participating in and supporting industry associations focused on setting standards, identifying needs, trends, and innovation.

We focus on partnering with retail suppliers worldwide in our source tagging program. Ongoing strategies to increase acceptance of source tagging are as follows:

increasing installation of EAS equipment on a chain-wide basis with leading retailers around the world;
offering integrated tag solutions, including custom tag conversion, that address the multiple but synergistic needs for branding, tracking, and loss prevention;
assisting retailers in promoting source tagging with vendors and brand owners;
broadening the penetration of existing accounts by promoting our in-house printing, global service bureau network, and labeling solution capabilities;
supporting manufacturers and suppliers to speed implementation;
expanding RF tag technologies and products to accommodate the needs of the packaging industry; and
developing compatibility with EPC/RFID technologies.

MANUFACTURING, RAW MATERIALS, AND INVENTORY

Merchandise Availability Solutions

We manufacture our EAS systems and consumables, including Alpha® and RFID products, in facilities located in Japan, China, the U.S., and Germany. Our manufacturing strategy for EAS products is to rely primarily on in-house capability for core components and to outsource manufacturing to the extent economically beneficial. We manage the integration of our in-house capability and our outsourced manufacturing in a way that provides significant control over costs, quality, and responsiveness to market demand, which we believe results in a distinct competitive advantage.

We involve customers, engineering, manufacturing, and marketing in the design and development of our products. For the majority of our RF sensor product lines, we purchase raw materials from outside suppliers and assemble electronic components at our facilities in China. The manufacture of some RF sensors sold in Europe and all EM hardware is outsourced. For our EAS disposable tag production, we purchase raw materials and components from suppliers and complete the manufacturing process at our facilities in Japan, Germany, and China. For our Alpha® product line production, we purchase raw materials and components from suppliers and complete the manufacturing process at our facilities in the U.S. as well as using outsourced manufacturing in China.

The principal raw materials and components used by us in the manufacture of our products are electronic components and circuit boards for our systems; aluminum foil, resins, paper, and ferric chloride and hydrochloric acid solutions for our disposable tags; and polymer resin for our Alpha® products. While most of these materials are purchased from several

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suppliers, there are alternative sources for all such materials. The products that are not manufactured by us are sub-contracted to manufacturers selected for their manufacturing and assembly skills, quality, and price.

Apparel Labeling Solutions

We manufacture labels and tags for apparel. Our ALS network of 20 service bureaus located in 17 countries supplies apparel customers with customized apparel tags and labels to the location where their goods are manufactured. We have an expansive manufacturing presence in 17 countries, all in close proximity to garment manufacturers. Our main production facilities are located in the Netherlands, the U.S., and China, with other key production facilities situated in China, Hong Kong, Bangladesh, India, and Turkey.

Retail Merchandising Solutions

We manufacture hand-held labeling tools and price-marking labels for retail merchandising and manufacturing industry. Our main production facilities are located in Germany and Malaysia. Price-marking labels and print heads for hand-held labeling tools are manufactured in Germany. Our Malaysian facility produces standard bodies for hand-held labeling tools for the European market, completes hand-held tools for the rest of the world, and manufactures price-marking labels for the local market.

DISTRIBUTION

For our major product lines, we principally sell to end customers using our direct sales force of more than 402 people. To improve our sales efficiency, we also distribute products through an independent network of resellers. This distribution channel supports and services smaller customers. This indirect channel, which has primarily sold EAS solutions, is being broadened and expanded to include more product lines, including Retail Merchandising Solutions, as we focus on improved sales productivity.

Merchandise Availability Solutions

We sell our EAS systems and consumables, including Alpha® and RFID products principally throughout North America, South America, Europe, and the Asia Pacific regions. In North America, we market our EAS products through our own sales personnel and independent representatives.

Internationally, we market our EAS products principally through foreign subsidiaries which sell directly to the end user and through independent distributors. Our international sales operations are currently located in 11 European countries and in Argentina, Australia, Brazil, Canada, Hong Kong, India, Japan, Malaysia, China, Mexico, New Zealand and Turkey.

Apparel Labeling Solutions

We market our apparel labeling products to apparel retailers and manufacturers, brand owners, and department stores. Large national and international customers are handled centrally by key account sales specialists supported by appropriate business specialists.

Retail Merchandising Solutions

We market our retail merchandising solutions to customers in food retailing and other branches including do-it-yourself (DIY). Large national and international customers are handled centrally by key account sales specialists supported by appropriate business specialists. Smaller customers are served by a general sales force capable of representing all products, a valued partner such as a distributor or franchisee or, if the complexity or size of the business demands, a dedicated business specialist.

BACKLOG

Our backlog of orders was approximately $25.3 million at December 29, 2013, compared to approximately $48.2 million at December 30, 2012. The decrease in our backlog in 2013 as compared to 2012 can be primarily attributed to our sale of the U.S. and Canada CheckView® business in April 2013. We anticipate that substantially all of the backlog at the end of 2013 will be delivered during 2014. In the opinion of management, the amount of backlog is not indicative of trends in our business. Our security business generally follows the retail cycle so that revenues are weighted toward the last half of the calendar year as retailers prepare for the holiday season.



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TECHNOLOGY, PATENTS & LICENSING

We believe that our patented and proprietary technologies are important to our business and future growth opportunities, and provide us with distinct competitive advantages. We continually evaluate our domestic and international patent portfolio, and where the cost of maintaining the patent exceeds its value, such patent may not be renewed. The majority of our revenues are derived from products or technologies that are patented or licensed. There can be no assurance, however, that a competitor could not develop products comparable to ours. Our competitive position is also supported by our extensive manufacturing experience and know-how.

We focus our in-house development efforts on product areas where we believe we can achieve and sustain a competitive cost and positioning advantage, and where service delivery is critical. We also develop and maintain technological expertise in areas that are believed to be important for new product development in our principal business areas. In our apparel labeling business, we have a base of technology expertise in the variable data management, flexographic, offset, laser and thermal transfer printing business and have a particular focus on RF and RFID insertion capabilities to support the development of higher value-added labels.

We license technologies relating to RFID applications and EAS products. These license arrangements have various expiration dates and royalty terms, which are not considered by us to be material.

SEASONALITY

Our business is subject to seasonal influences, which generally results in higher levels of sales and income in the second half of the year. The seasonality of our business substantially follows the retail cycle of our customers, which generally has revenues weighted toward the last half of the calendar year in preparation for the holiday season.

COMPETITION

Merchandise Availability Solutions

Currently, our EAS systems and consumables are sold primarily to retail establishments. Our principal global competitor in the EAS industry is Tyco International Ltd. (Tyco), through its Tyco Retail Solutions business within the NA Installation & Services and ROW Installation & Services segments. Tyco is a diversified global company with interests in security products and services, fire protection and detection products and services, valves and controls and other industrial products. Tyco’s 2013 revenues were approximately $10.6 billion, of which $8.3 billion was attributable to the NA Installation & Services and ROW Installation & Services segments.

Within the U.S. market, additional competitors include Sentry Technology Corporation and Ketec, Inc. in EAS systems and consumables, and All-Tag Security in EAS-RF labels, principally in the retail market. Within our international markets, mainly Europe, Nedap® is our most significant competitor. The largest competitors of the Alpha® product line include Universal Surveillance Systems, Vanguard Protex Global Corporation, Se-Kure Controls, Inc., Invue Security Products, and Century. The largest competitors of the RFID product line are the Tyco Retail Solutions business, Avery Dennison Corporation and Nedap®.

We believe that our product line offers a more extensive, varied range of products than our competition with robust systems, a wide variety of disposable and reusable tags and labels, integrated scan/deactivation capabilities, and RF source tagging embedded into products or packaging. As a result, we compete in marketing our products primarily on the basis of their versatility, reliability, affordability, accuracy, and integration into operations. This combination provides many system solutions and gives excellent protection against retail merchandise theft.

Apparel Labeling Solutions

We sell our apparel labeling solutions to apparel retailers, brand owners and apparel manufacturers. Major competitors are the Retail Branding and Information Solutions business at Avery Dennison Corporation, SML Group, R-Pac International Corporation, NexGen, and Fineline Technologies. Several competitive labeling companies are also customers since they purchase EAS circuits from Checkpoint Systems to integrate into their labels.






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Retail Merchandising Solutions

We face no single competitor in any international market across our entire retail merchandising solutions product range. HL Display AB and VFK Renzel GMBH are our largest competitors in retail display systems, primarily in Europe. In hand-held labeling solutions, we compete with Contact Labeling Systems, SATO DCS & Labeling Worldwide, Garvey Products Inc., Hallo, Avery Dennison Corporation, and Prix International.

OTHER MATTERS

Research and Development

We spent $17.5 million, $16.4 million, and $19.3 million, in research and development activities during 2013, 2012, and 2011, respectively. Our R&D emphasis is on continually broadening our product lines, reducing costs, and expanding the markets and applications for all products. We believe that our future growth is dependent, in part, on the products and technologies resulting from these efforts.

We continue to develop and expand our product lines with new solutions, performance improvements, and the introduction of products targeted toward international growth markets. We intend to continue to develop and introduce technologies and processes that support our single source, best-in-class RFID capability.

Employees

As of December 29, 2013, we had 4,710 employees, including five executive officers, 133 employees engaged in research and development activities, 359 field service employees, and 493 employees engaged in sales and marketing activities. There were 422 fewer employees on December 29, 2013 than on December 30, 2012. In the United States, none of our employees are represented by a union. In Europe, approximately 303 of our employees are represented by various unions or work councils.

Financial Information about Geographic and Business Segments

We operate both domestically and internationally in the three distinct business segments described previously. The financial information regarding our geographic and business segments, which includes net revenues and gross profit for each of the years in the three-year period ended December 29, 2013, and long-lived assets as of December 29, 2013 and December 30, 2012, is provided in Note 18 of the Consolidated Financial Statements.

Available Information

Our internet website is at www.checkpointsystems.com. Information on our website is not part of this Annual Report on Form 10-K. Investors can obtain copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act on our website as soon as reasonably practicable after we have filed such materials with, or furnished them to, the Securities and Exchange Commission (SEC). We will also furnish a paper copy of such filings free of charge upon request. Investors can also read and copy any materials filed by us with the SEC at the SEC's Public Reference Room which is located at 100 F Street, NE, Room 1580, Washington, DC 20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our filings can also be accessed at the SEC's internet website: www.sec.gov.

We have adopted a code of business conduct and ethics (the “Code of Ethics”) as required by the listing standards of the New York Stock Exchange and the rules of the SEC. This Code of Ethics applies to all of our directors, officers, and employees. We have also adopted corporate governance guidelines (the “Governance Guidelines”) and a charter for each of our Audit Committee, Compensation Committee and Governance and Nominating Committee (collectively, the “Committee Charters”). We have posted the Code of Ethics, the Governance Guidelines and each of the Committee Charters on our website at www.checkpointsystems.com, and will post on our website any amendments to, or waivers from, the Code of Ethics applicable to any of our directors or executive officers. The foregoing information will also be available in print upon request.








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Executive Officers of the Company

The following table sets forth certain current information concerning our executive officers, including their ages, position, and tenure as of the date hereof:
 
 
Name
 
 
Age
Tenure
with
Company
 
Position with the Company and
Date of Election to Position
George Babich, Jr.
61
7 years
President and Chief Executive Officer since February 2013; Director since 2006
Jeffrey O. Richard
46
1 year
Executive Vice President and Chief Financial Officer since May 2013
Per H. Levin
56
19 years
President and Chief Sales Officer, Merchandise Availability Solutions since June 2012
Farrokh Abadi
52
9 years
President and Chief Operating Officer, Merchandise Availability Solutions since June 2012
S. James Wrigley
60
4 years
President and Chief Operating Officer, Apparel Labeling Solutions since June 2012

Mr. Babich was appointed President and Chief Executive Officer of Checkpoint Systems, Inc. on February 4, 2013, after serving as Interim President and Chief Executive Officer since May 3, 2012. He has served as a member of the Board of Checkpoint since 2006. Mr. Babich was President of Pep Boys - Manny Moe & Jack from 2002 until 2005; from 2000 until 2004 he was Chief Financial Officer of Pep Boys and served as an Officer of Pep Boys since 1996. Previously, he was a Financial Executive for Morgan, Lewis & Bockius, The Franklin Mint, Pepsico Inc. and Ford Motor Company. Mr. Babich has served as a member of the Board of Teleflex Inc. from 2005 to present and has served on their Audit Committee from 2005 to present. He holds a BS in Accounting from the University of Michigan.

Mr. Richard was appointed Executive Vice President and Chief Financial Officer on May 28, 2013. Prior to Checkpoint, Mr. Richard served as Executive Vice President and Chief Financial Officer at Safety-Kleen Systems, Inc., from 2010 to 2013, where he led a broad set of turnaround initiatives to drive profitable, sustainable growth. He recapitalized the company and led a dual-path liquidity IPO and sale plan that concluded with the sale of Safety-Kleen in December 2012. From 2006 to 2010, Mr. Richard served as Chief Operating Officer and Chief Financial Officer at Pavestone Company and previously he was Vice President of Financial Planning & Analysis at Electronic Data Systems Corp. and Chief Financial Officer and Vice President of Americas Operations at Jacuzzi Brands, Inc. Earlier in his career, Mr. Richard worked in a variety of financial positions at Tyco International Ltd., ultimately serving as Chief Financial Officer for Tyco’s $2.2 billion Plastics & Adhesives segment. Mr. Richard has a Bachelor’s degree in Business Administration from Louisiana State University.

Mr. Levin was appointed President and Chief Sales Officer, Shrink Management Solutions and Merchandise Visibility in June 2012. He was President Merchandise Visibility and Apparel Labeling Solutions from September 2011 until June 2012 and was President Merchandise Visibility from September 2010 until September 2011. He was President, Shrink Management and Merchandise Visibility Solutions from March 2006 until September 2010. He was President of Europe from June 2004 until March 2006, Executive Vice President, General Manager, Europe from May 2003 until June 2004, and Vice President, General Manager, Europe from February 2001 until May 2003. Mr. Levin was Regional Director, Southern Europe from 1997 to 2001 and joined the Company in January 1995 as Managing Director of Spain.

Mr. Abadi was appointed President and Chief Operating Officer, Shrink Management Solutions in June 2012. He was President, Shrink Management Solutions from September 2010 until June 2012. He was Senior Vice President and Chief Innovation Officer from October 2008 until September 2010. Mr. Abadi retains responsibility for our procurement and systems supply chain. He also served as Senior Vice President, Worldwide Operations from April 2006 until October 2008 and Vice President and General Manager, Worldwide Research and Development from November 2004 until April 2006. Prior to joining Checkpoint, Mr. Abadi was Senior Vice President of Global Cross-Industry Practices at Atos Origin from February 2004 until November 2004. Mr. Abadi held various senior management positions with Schlumberger for over eighteen years.

Mr. Wrigley was appointed President, Apparel Labeling Solutions in June 2012. He joined Checkpoint as Group President, Global Customer Management in March 2010. Prior to joining Checkpoint, Mr. Wrigley was Vice President, EMEA and South Asia, at Avery Dennison Corporation's Retail Information Services business from June 2007 to March 2010. Prior to Avery's acquisition of Paxar Corporation in 2007, Mr. Wrigley was Group President, Global Apparel Solutions from January 2007 until June 2007. Mr. Wrigley was President, Paxar EMEA from 1996 to 2006. Mr. Wrigley served as International Director of the Pepe Group from 1991 until 1996.

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Item 1A. RISK FACTORS

The risks described below are among those that could materially and adversely affect our business, financial condition or results of operations. These risks could cause actual results to differ materially from historical experience and from results predicted by any forward-looking statements related to conditions or events that may occur in the future.

Current economic conditions could adversely impact our business and results of operations.

Our operations and results depend significantly on global market worldwide economic conditions, which have experienced deterioration in recent years. Future economic factors may continue to be less favorable than in years past and may continue to result in diminished liquidity and tighter credit conditions, leading to decreased credit availability, as well as declines in economic growth and employment levels. These conditions may increase the difficulty for us to accurately forecast and plan future business. Customer demand could be impacted by decreased spending by businesses and consumers alike, and competitive pricing pressures could increase. We are unable to predict the length or severity of the current economic conditions. A continuation or further deterioration of these economic factors may have a material and adverse effect on the liquidity and financial condition of our customers and on our results of operations, financial condition, liquidity, including our ability to refinance maturing liabilities, and access the capital markets to meet liquidity needs.

We have significant foreign operations, which are subject to political, economic and other risks inherent in operating in foreign countries.

We are a multinational manufacturer and marketer of identification, tracking security, and merchandising solutions for the retail industry. We have significant operations outside of the U.S. We currently operate directly in 28 countries, and our international operations generate approximately 71% of our revenue. We expect net revenue generated outside of the U.S. to continue to represent a significant portion of total net revenue. Business operations outside of the U.S. are subject to political, economic and other risks inherent in operating in certain countries, such as:

The difficulty in enforcing agreements, collecting receivables and protecting assets through foreign legal systems;
trade protection measures and import or export licensing requirements;
difficulty in staffing and managing widespread operations and the application of foreign labor regulations;
compliance with a variety of foreign laws and regulations;
compliance with the Foreign Corrupt Practices Act, the UK Bribery Act and the Office of Foreign Assets Control;
changes in the general political and economic conditions in the countries where we operate, particularly in emerging markets;
the threat of nationalization and expropriation;
increased costs and risks of doing business in a number of foreign jurisdictions;
changes in enacted tax laws;
limitations on repatriation of earnings; and
fluctuations in equity and revenues due to changes in foreign currency exchange rates.
 
Changes in the political or economic environments in the countries in which we operate, as well as the impact of economic conditions on underlying demand for our products could have a material adverse effect on our financial condition, results of operations or cash flows.

As we continue to explore the expansion of our global reach, an increasing focus of our business may be in emerging markets, including South America and Southern Asia. In many of these emerging markets, we may be faced with risks that are more significant than if we were to do business in developed countries, including undeveloped legal systems, unstable governments and economies, and potential governmental actions affecting the flow of goods and currency.

Volatility in currency exchange rates and interest rates may adversely affect our financial condition, results of operations or cash flows.

We are exposed to a variety of market risks, including the effects of changes in currency exchange rates and interest rates. Refer to Part 7A. Quantitative and Qualitative Disclosures about Market Risk.

Our net revenue derived from sales in non-U.S. markets is approximately 71% of our total net revenue, and we expect revenue from non-U.S. markets to continue to represent a significant portion of our net revenue. When the U.S. dollar strengthens in relation to the currencies of the foreign countries where we sell our products, our U.S. dollar reported revenue and income will decrease. Changes in the relative values of currencies occur regularly and, in some instances, may have a significant effect on

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our results of operations. Our financial statements reflect recalculations of items denominated in non-U.S. currencies to U.S. dollars, which is our functional currency.

We monitor these exposures as an integral part of our overall risk management program. In some cases, we enter into contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables, and on projected future billings in non-functional currencies and use third-party borrowings in foreign currencies to hedge a portion of our net investments in, and cash flows derived from, our foreign subsidiaries. Nevertheless, changes in currency exchange rates and interest rates may have a material adverse effect on our financial condition, results of operations, or cash flows.

Our business could be materially adversely affected as a result of lower than anticipated demand by retailers and other customers for our products, particularly in the current economic environment.

Our business is heavily dependent on the retail marketplace. Changes in the economic environment including the liquidity and financial condition of our customers, the impact of online customer spending, or reductions in retailer spending could adversely affect our revenues and results of operations. In a period of decreased consumer spending, retailers could respond by reducing their spending on new store openings and loss prevention budgets. This reduction could directly impact our MAS business, as a reduction in new store openings will lower demand for SMS EAS systems and consumables as well as RFID solutions. Additionally, lower loss prevention budgets could reduce the amount retailers will be willing to spend to upgrade existing store technology. Label demand could also be impacted due to lower loss prevention budgets as retailers may reduce the percentage of items covered. In addition, our label volume increases as more items are sold through the retailer and lower demand decreases the volume related to the items tagged by the retailer. As retail sales volumes decline, label demand may also decline. These factors could also impact our Apparel Labeling Solutions and Retail Merchandising Solutions businesses. A decrease in the demand for our products resulting from reduced spending by retailers due to fewer store openings, reduced loss prevention budgets and slower adoption of our new technology could have a material adverse effect on our revenues and results of operations.

Our business could be materially adversely affected as a result of slower commitments of retail customers to chain-wide installations and/or source tagging adoption or expansion.

Our revenues are dependent on our ability to maintain and increase our system installation base. The SMS EAS system installation base leads to additional revenues, which we term as “recurring revenues,” through the sale of maintenance services and SMS EAS consumables, including labels and tags, as well as our Alpha® high-theft solutions. In addition, we partner with manufacturers to include our sensor tags into the product during manufacturing, an approach known as source tagging.

The level of commitments for chain-wide installations may decline due to decreased consumer spending which results in reduced spending on loss prevention by our retail customers, our failure to develop new technology that entices the customer to maintain their commitment to our loss prevention products and services, competing technologies and retailers' decisions to defer the capital investment and expense. A reduction in the commitment for chain-wide installations may also impact our ability to expand utilization of our source tagging program. A reduction in commitments to chain-wide installations and utilization of our source tagging program could have an adverse effect on our revenues and results of operations.
 
The markets we serve are highly competitive and we may be unable to compete effectively if we are unable to provide and market innovative and cost-effective products at competitive prices.

We face competition around the world, including competition from other large, multinational companies and other regional companies. Some of these companies may have substantially greater financial and other resources than us. We face competition in several aspects of our business. In the SMS EAS systems, Alpha® high-theft solutions and SMS EAS consumables businesses, we compete primarily on the basis of integrated security solutions and diversified, sophisticated, and quality product lines targeted at meeting the loss prevention needs of our retail customers. We also compete on the basis of merchandise visibility (RFID) solutions that meet the item level product identification and inventory management needs of our customers. In the ALS business, we compete primarily on the capability to effectively and quickly deliver retail customer specified tags and labels to manufacturing sites in multiple countries. It is possible that our competitors will be able to offer additional products, services, lower prices, or other incentives that we cannot offer or that will make our products less profitable. It is also possible that our competitors will offer incentive programs or will market and advertise their products in a way that will impact customers' preferences, and we may not be able to compete effectively.

We may be unable to anticipate the timing and scale of our competitors' activities and initiatives, or we may be unable to successfully counteract them, which could harm our business. In addition, the cost of responding to our competitors' activities may affect our financial performance in the relevant period. Our ability to compete also depends on our ability to attract and

17


retain key talent, protect patent and trademark rights, and develop innovative and cost-effective products. A failure to compete effectively could adversely affect our growth and profitability.

Our long term success is largely dependent upon our ability to develop new technologies, and if we are unable to successfully develop those technologies, our business could be materially adversely affected.

Our growth depends on continued sales of existing products, as well as the successful development and introduction of new products, which face the uncertainty of retail and consumer acceptance and reaction from competitors. In addition, our ability to create new products and to sustain existing products is affected by whether we can:

develop and fund technological innovations, such as those related to our next generation EAS product solutions, evolving RFID technologies, and other innovative security device, software, and systems initiatives;
receive and maintain necessary patent and trademark protection; and
successfully anticipate customer needs and preferences.
 
The failure to develop and launch successful new products could hinder the growth of our business. Research and development for each of our operating segments is complex and uncertain and requires innovation and anticipation of market trends. Also, delay in the development or launch of a new product could compromise our competitive position, particularly if our competitors announce or introduce new products and services in advance of us.

An inability to acquire, protect or maintain our intellectual property, including patents, could harm our ability to compete or grow.

Because our products involve complex technology and chemistry, we rely on protections of our intellectual property and proprietary information to maintain a competitive advantage. The expiration of these patents will reduce the barriers to entry into our existing lines of business and may result in loss of market share and a decrease in our competitive abilities, thus having a potential adverse effect on our financial condition, results of operations and cash flows. At this time we do not anticipate any significant impact from the expiration of patents over the next two to three years.

There is no assurance that the patents we have obtained will provide adequate protection to ensure any competitive advantages for our products. We also cannot assure investors that those patents will not be successfully challenged, invalidated or circumvented prior to their expiration. In addition, we cannot provide assurance that competitors have not already applied for or obtained, or will not seek to apply for and obtain, patents that will prevent, limit or interfere with our ability to make, use and sell our products either in the U.S. or in international markets.

We cannot assure you that we will not become subject to patent infringement claims. The defense and prosecution of intellectual property lawsuits generally are costly and time-consuming. If other parties violate our proprietary rights, further litigation may be necessary to enforce our patents, to protect trade secrets or know-how we own or to determine the enforceability, scope and validity of the proprietary rights of others. Any litigation will be costly and cause significant diversion of effort by our technical and management personnel.

Our business could be materially adversely affected as a result of possible increases in per unit product manufacturing costs as a result of slowing economic conditions or other factors.

Our manufacturing capacity is designed to meet our current and future anticipated demands. If our product demand decreases as a result of economic conditions and other factors, it could increase our cost per unit. If an increase in our cost per unit is passed on to our customers, it may decrease our competitive position, which may have an adverse effect on our revenues and results of operations. If an increase in cost per unit is not passed on to our customers, it may reduce our gross margins, which may have an adverse effect on our results of operations. Our SMS EAS consumables, RFID consumables, Alpha® and ALS products have various low price competitors globally. In order for us to maintain and improve our market position, we need to continuously monitor and seek to improve our manufacturing effectiveness, capacity utilization and demand planning while maintaining our high quality standard. If we are unsuccessful in our efforts to improve manufacturing and supply chain effectiveness, then our cost per unit may increase which could have an adverse impact on our results of operations.

If we cannot obtain sufficient quantities of raw materials and component parts required for our manufacturing activities at competitive prices and quality and on a timely basis, our financial condition, results of operations or cash flows may suffer.

We purchase materials and component parts from third parties for use in our manufacturing operations. Our ability to grow earnings will be affected by inflationary and other increases in the cost of component parts and raw materials, including

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electronic components, circuit boards, aluminum foil, resins, paper, and ferric chloride, hydrochloric acid solutions and rare earth magnets. Inflationary and other increases in the costs of raw materials, labor, and energy have occurred in the past and are expected to recur, and our performance depends in part on our ability to pass these cost increases on to customers in the prices for our products and to effect improvements in productivity. We may not be able to fully offset the effects of higher component parts and raw material costs through price increases, productivity improvements or cost reduction programs. If we cannot obtain sufficient quantities of these items at competitive prices and quality and on a timely basis, we may not be able to produce sufficient quantities of product to satisfy market demand, product shipments may be delayed, or our material or manufacturing costs may increase. A disruption to our supply chain could adversely affect our sales and profitability. Any of these problems could result in the loss of customers and revenue, provide an opportunity for competing products to gain market acceptance and otherwise adversely affect our financial condition, results of operations, or cash flows.

Possible increases in the payment time for receivables as a result of economic conditions or other market factors could have a material effect on our results from operations and anticipated cash from operating activities.

The majority of our customer base is in the retail marketplace. Although we have a rigorous process to administer credit granted to customers and believe our allowance for doubtful accounts is adequate, we have experienced, and in the future may experience, losses as a result of our inability to collect our accounts receivable. During the past several years, various retailers have experienced significant financial difficulties, which in some cases have resulted in bankruptcies, liquidations and store closings. The financial difficulties of a customer could result in reduced business with that customer. We may also assume higher credit risk relating to receivables of a customer experiencing financial difficulty. If these developments occur, our inability to shift sales to other customers or to collect on our trade accounts receivable from a major customer could substantially reduce our income and have a material adverse effect on our results of operations and cash flows from operating activities.

Our working capital initiatives may fail to deliver our expected cash flow improvements.

We have implemented enhanced cash flow controls to tighten our cash flow management of accounts receivable, inventory, accounts payable and local operating cash flows. There can be no assurance that these controls and initiatives or others will continue to be beneficial to the extent experienced or anticipated, or that the incremental cost savings or cash flow improvements will continue to be realized as anticipated or at all. Our failure to administer, monitor, and effectively manage cash related activities could result in our failure to deliver our expected cash flow improvements.

The effectiveness of our strategic plan is subject to the successful implementation of our plans and actions.

During 2012, we redefined our strategic focus. Our strategic plan is designed to improve revenues and profitability, reduce costs, and improve working capital management. In addition to our restructuring plans including Project LEAN and its expanded initiatives, we have many plans and actions underway to improve the management of our business. These include the following:    

Margin enhancement initiatives
Improved financial forecasting abilities
Enhanced management reporting
New sales compensation incentive plans
Refined product pricing approach
Continuous cost-improvement process improvement plans
Systematic talent assessment process
Developing a culture focused on accountability

There is a risk that we may not be successful in our continued execution of these measures to achieve the expected results for a variety of reasons, including market developments, economic conditions, shortcomings in establishing appropriate action plans, or challenges with executing multiple initiatives simultaneously. We may not be able to acquire businesses that fit our strategic plan or divest of those that do not fit our strategic plan on acceptable business terms, and we may not achieve our other strategic priorities.

Our ability to maintain cost reductions in field services, selling, general and administrative expenses, and our manufacturing and supply chain operations may have a significant impact on our business and future revenues and profits.

We have implemented actions to rationalize our field service, improve our sales productivity, reduce our general and administrative expenses, and reconfigure our manufacturing and supply chain operations. Such rationalization actions require

19


management judgment on the development of cost reduction strategies and precision on the execution of those strategies. We may not be able to maintain, in full or in part, the benefits from these initiatives, and other events and circumstances, such as difficulties, delays, or unexpected costs may occur, which could result in our not maintaining realization of all or any of the anticipated benefits. We also cannot predict whether we will maintain our improved operating performance as a result of any cost reduction strategies. Further, in the event the market continues to fluctuate, we may not have the appropriate level of resources and personnel to react to the change. We are also subject to the risk of business disruption in connection with our restructuring initiatives, which could have a material adverse effect on our business and future revenues and profits.

We continue to evaluate opportunities to restructure our business and rationalize our operations in an effort to optimize our cost structure and efficiencies consistent with our strategy. As a result of these evaluations, we may take similar rationalization steps in the future. Future actions could result in restructuring and related charges, including but not limited to workforce reduction costs and charges relating to consolidation of excess facilities that could be significant.

If we fail to manage our growth effectively, our business could be harmed.

Our strategy is to maximize value by achieving growth both organically and through acquisitions. Our ability to effectively manage and control any future growth may be limited. To manage any growth, our management must continue to improve our operational, information and financial systems, procedures and controls and expand, train, retain and effectively manage our employees. If our systems, procedures and controls are inadequate to support our operations, any expansion could effectively decrease or stop, and investors may lose confidence in our operations or financial results. If we are unable to manage growth effectively, our business and operating results could be adversely affected, and any failure to develop and maintain adequate internal controls over financial reporting could cause the trading price of our shares to decline substantially.

Our ability to integrate acquisitions and to achieve our financial and operational goals for acquired businesses could have an impact on future revenues and profits.

Historically, we have had difficulties integrating certain of our acquisitions. Various risks, uncertainties and costs are associated with acquisitions. Effective integration of systems, key business processes, controls, objectives, personnel, management practices, product lines, markets, customers, supply chain operations, and production facilities can be difficult to achieve and the results are uncertain, particularly across our internationally diverse organization. We may not be able to retain key personnel of an acquired company and we may not be able to successfully execute integration strategies or achieve projected performance targets set for the business segment into which an acquired company is integrated. Our ability to execute the integration plans could have an impact on future revenues and profits and may adversely affect our financial condition, results of operations or cash flows. There can be no assurance that these acquisitions or others will be successful and contribute to our profitability.

Any acquisition, strategic relationship, joint venture or investment could disrupt our business and harm our financial condition.

We actively pursue acquisitions, strategic relationships, joint ventures, collaborations and investments that we believe may allow us to complement our growth strategy, increase market share in our current markets or expand into adjacent markets, or broaden our technology and intellectual property. Such transactions may be complex, time consuming and expensive, and may present numerous challenges and risks. Lack of control over the actions of our business partners in any strategic relationship, joint venture or collaboration, could significantly delay the introduction of planned products or otherwise make it difficult or impossible to realize the expected benefits of such relationship.

Divestitures of some of our businesses or product lines may materially adversely affect our financial condition, results of operations or cash flows.

We continually evaluate the performance of all of our businesses and may sell businesses or product lines. Specifically, we reduced our focus on CheckView® by divesting of our non-strategic Banking Security Systems Integration business unit in October 2012 and our U.S. and Canada CheckView® business in April 2013. In June 2013, we completed the divestiture of our 51% interest in Shore to Shore PVT Ltd. (Sri Lanka) in our Apparel Labeling Solutions segment. Divestitures involve risks, including difficulties in the separation of operations, services, products and personnel, the diversion of management's attention from other business concerns, the disruption of our business, the potential loss of key employees and the retention of uncertain environmental or other contingent liabilities related to the divested business. In addition, asset impairment charges related to divestitures may arise, including those related to goodwill and other intangible assets, which could have a material adverse effect on our financial condition and results of operations. We cannot assure you that we will be successful in managing these or any other significant risks that we encounter in divesting a business or product line.


20


An impairment in the carrying value of goodwill or other assets could negatively affect our consolidated results of operations and net worth.

Pursuant to accounting principles generally accepted in the United States, we are required to annually assess our goodwill, intangibles and other long-lived assets to determine if they are impaired. In addition, interim reviews must be performed whenever events or changes in circumstances indicate that impairment may have occurred. If the testing performed indicates that impairment has occurred, we are required to record a non-cash impairment charge for the difference between the carrying value of the goodwill or other intangible assets and the implied fair value of the goodwill or other intangible assets in the period the determination is made. Disruptions to our business, end market conditions and protracted economic weakness, unexpected significant declines in operating results of reporting units, divestitures and market capitalization declines may result in additional charges for goodwill and other asset impairments. We have significant intangible assets, including goodwill with an indefinite life, which are susceptible to valuation adjustments as a result of changes in such factors and conditions. We assess the potential impairment of goodwill and indefinite lived intangible assets on an annual basis, as well as when interim events or changes in circumstances indicate that the carrying value may not be recoverable. We assess definite lived intangible assets when events or changes in circumstances indicate that the carrying value may not be recoverable.
The basis of the fair value for our impairment assessments is 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. Although our last analysis regarding the fair values of the goodwill and indefinite lived intangible assets for our reporting units 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 and intangible impairment losses. Specifically, an unanticipated deterioration in revenues and gross margins generated by our Merchandise Availability Solutions, Apparel Labeling Solutions and Retail Merchandising Solutions segments could trigger future impairment in those segments. While we currently believe that our projected results will not result in future impairment, a continued deterioration in results could trigger a future impairment.
We have entered into a senior secured credit facility agreement that restricts certain activities, and failure to comply with this agreement may have an adverse effect on our financial condition, results of operations and cash flows.

We maintain a senior secured credit facility that contains restrictive financial covenants, including financial covenants that require us to comply with specified financial ratios. We may have to curtail some of our operations to comply with these covenants. In addition, our senior secured credit facility contains other affirmative and negative covenants that could restrict our operating and financing activities. These provisions may limit our ability to, among other things, incur future indebtedness, contingent obligations or liens, guarantee indebtedness, make certain investments, sell stock or assets and pay dividends, and consummate certain mergers or acquisitions. Because of the restrictions on our ability to create or assume liens, we may find it difficult to secure additional indebtedness if required. Furthermore, if we fail to comply with the requirements of the senior secured credit facility, we may be in default, and we may not be able to obtain the necessary amendments to the agreement or waivers of an event of default. Upon an event of default, if the agreement is not amended or the event of default is not waived, the lenders could declare all amounts outstanding, together with accrued interest, to be immediately due and payable. If this happens, we may not be able to make those payments or borrow sufficient funds from alternative sources to make those payments. Even if we were to obtain additional financing, that financing may be on unfavorable terms.
Changes in legislation or governmental regulations, policies or standards applicable to our products may have a significant impact on our ability to compete in our target markets.

We operate in regulated industries. Our U.S. operations are subject to regulation by federal, state, and local governmental agencies with respect to safety of operations and equipment, labor and employment matters, and financial responsibility. Our SMS EAS products are subject to FCC regulation, and our international operations are regulated by the countries in which they operate, including regulation of the Conformité Européene (CE) in Europe. Failure to comply with laws or regulations could result in substantial fines or revocation of our operating permits or licenses. If laws and regulations change and we fail to comply, our financial condition, results of operations, or cash flows could be materially and adversely affected.

Our future results may be affected by various legal and regulatory proceedings.

We cannot predict with certainty the outcome of litigation matters, government proceedings and investigations, and other contingencies and uncertainties that may arise out of the conduct of our business, including matters relating to intellectual

21


property, employment, commercial and other matters. Resolution of such matters can be prolonged and costly, and the ultimate results or judgments are uncertain due to the inherent uncertainty in litigation and other proceedings. Moreover, our potential liabilities are subject to change over time due to new developments, changes in settlement strategy or the impact of evidentiary requirements, and we may be required to pay fines, damage awards or settlements, or become subject to fines, damage awards or settlements, that could have a material adverse effect on our results of operations, financial condition, and liquidity.

If our internal controls are not effective, investors could lose confidence in our financial reporting.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to conduct a comprehensive evaluation of our internal control over financial reporting. To comply with this statute, we are required to document and test our internal control over financial reporting, our management is required to assess and issue a report concerning our internal control over financial reporting, and our independent registered public accounting firm is required to attest to and report on our assessment of the effectiveness of internal control over financial reporting. We have determined that a material weakness, as described in Part II - Item 9A, Controls and Procedures, of this Annual Report existed as of December 29, 2013. Accordingly, we have concluded that our internal control over financial reporting and disclosure controls and procedures were not effective as of December 29, 2013.
Management, with oversight from the Audit Committee of the Board of Directors, has developed and presented a plan for the completion of remediation measures to address this weakness. Although we believe we are taking appropriate actions to remediate the control deficiencies we have previously identified, we cannot assure you that we will be successful in remediating the material weakness or that we will not discover other material weaknesses in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in implementation, could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our Consolidated Financial Statements, and substantial costs and resources may be required to rectify these or other internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our common stock could decline significantly, and our business, financial condition, and reputation could be harmed. We expect to be successful in remediating this material weakness.

The failure to effectively maintain and upgrade our information systems could adversely affect our business.

Our business depends significantly on effective information systems, and we have many different information systems for our various businesses. Our information systems require an ongoing commitment of significant resources to maintain and enhance existing systems and develop new systems in order to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards, and changing customer preferences. In addition, we may from time to time obtain significant portions of our systems-related or other services or facilities from independent third parties, which may make our operations vulnerable to such third parties' failure to perform adequately. Our failure to maintain effective and efficient information systems, or our failure to efficiently and effectively consolidate our information systems to eliminate redundant or obsolete applications, could have a material adverse effect on our business, financial condition and results of operations. Additionally, any disruption or failure of such networks, systems, or other technology may disrupt our operations, cause customer dissatisfaction, and loss of customer revenues.

Risks generally associated with a company-wide implementation of an enterprise resource planning (ERP) system may adversely affect our business and results of operations or the effectiveness of our internal control over financial reporting.

We have been implementing a company-wide ERP system to handle the business and financial processes within our operations and corporate functions. Our implementations for Europe and Asia have been postponed. ERP implementations are complex and time-consuming projects that involve substantial expenditures on system software and implementation activities that can continue for several years. ERP implementations also require transformation of business and financial processes in order to reap the benefits of the ERP system. Our business and results of operations may be adversely affected if we experience operating problems and/or cost overruns during the ERP implementation process, decide to forgo a company-wide implementation, or if the ERP system and the associated process changes do not give rise to the benefits that we expect. Additionally, if we do not effectively implement the ERP system as planned or if the system does not operate as intended, it could adversely affect the effectiveness of our internal control over financial reporting.

As a global business, we have a relatively complex tax structure, and there is a risk that tax authorities will disagree with our tax positions.

Since we conduct operations worldwide through our foreign subsidiaries, we are subject to complex transfer pricing regulations in the countries in which we operate. Transfer pricing regulations generally require that, for tax purposes, transactions between us and our foreign affiliates be priced on a basis that would be comparable to an arm's length transaction and that contemporaneous documentation be maintained to support the tax allocation. Although uniform transfer pricing standards are

22


emerging in many of the countries in which we operate, there is still a relatively high degree of uncertainty and inherent subjectivity in complying with these rules. To the extent that any foreign tax authorities disagree with our transfer pricing policies, we could become subject to significant tax liabilities and penalties. Our tax returns are subject to review by taxing authorities in the jurisdictions in which we operate. Although we believe that we have provided for all tax exposures, the ultimate outcome of a tax review could differ materially from our provisions.

We record a valuation allowance to reduce our deferred tax assets to the amount that it is more likely than not to be realized. Our assessments about the realizability of our deferred tax assets are based on estimates of our future taxable income by tax jurisdiction, the prudence and feasibility of possible tax planning strategies, and the economic environments in which we do business. Any changes in these assessments could have a material impact on our results of operations.

Regulations that impose disclosure requirements regarding the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries in our products will result in additional cost and expense and could result in other significant adverse effects.

Rules adopted by the SEC implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act impose diligence and disclosure requirements regarding the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries in our products. Compliance with these rules may result in additional cost and expense, including for due diligence to determine and verify the sources of any conflict minerals used in our products, in addition to the cost of remediation and other changes to products, processes, or sources of supply as a consequence of such verification activities. These rules may also affect the sourcing and availability of minerals used in the manufacture of our products to the extent that there may be only a limited number of suppliers offering “conflict free” metals that can be used in our products. There can be no assurance that we will be able to obtain such metals in sufficient quantities or at competitive prices. Also, since our supply chain is complex, we may face reputational challenges with our customers, stockholders and other stakeholders if we are unable to sufficiently verify the origins of the metals used in our products. We may also encounter customers who require that all of the components of our products be certified as conflict free. If we are not able to meet customer requirements, such customers may choose to disqualify us as a supplier, which could impact our sales and the value of portions of our inventory.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

Our principal corporate offices are located at 101 Wolf Drive, Thorofare, New Jersey. As of December 29, 2013, we owned or leased approximately 2.2 million square feet of space worldwide which is used primarily for sales, distribution, manufacturing, and general administration. These facilities include offices located throughout North and South America, Europe, Asia, and Australia. Our principal manufacturing facilities are located in Bangladesh, China, Germany, Hong Kong, India, Japan, Malaysia, the Netherlands, Turkey, the U.K. and the U.S. We believe our current manufacturing capacity will support our needs for the foreseeable future.

Item 3. LEGAL PROCEEDINGS

We are involved in certain legal and regulatory actions, all of which have arisen in the ordinary course of business, except for the matters described in the following paragraphs.

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 (the “ Pennsylvania Court”) 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 United States Court of Appeals for the Federal Circuit (the “Appellate Court”) reversed the grant of summary judgment and remanded the case to the Pennsylvania 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 Pennsylvania Court entered judgment in favor of defendants based on the jury's infringement and enforceability findings. On February 10, 2009, the Pennsylvania Court granted defendants' motions for attorneys' fees designating the case as an exceptional case and awarding an unspecified portion

23


of defendants' attorneys' fees under 35 U.S.C. § 285. Defendants sought 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 Pennsylvania Court finalized the decision to order us to pay the attorneys' fees and costs of the defendants in the amount of $6.6 million. The additional amount of $0.9 million was recorded in the fourth quarter ended December 25, 2011 in the Consolidated Statement of Operations. On November 15, 2011, we filed objections to and appealed the Pennsylvania Court's award of attorneys' fees to the defendants. Following the filing of briefs and the completion of oral arguments, the Appellate Court reversed the decision of the Pennsylvania Court on March 25, 2013. As a result of the final decision, we reversed the All-Tag reserve of $6.6 million in the first quarter ended March 31, 2013.

Matter related to Universal Surveillance Corporation EAS RF Anti-trust Litigation

Universal Surveillance Corporation (“USS”) filed a complaint against us in the United States Federal District Court of the Northern District of Ohio (the “Ohio Court”) on August 19, 2011. USS claims that, in connection with our competition in the electronic article surveillance market, we violated the federal antitrust laws (Sherman Act and Clayton Act) and state antitrust laws (Ohio Valentine Act). USS also claims that we violated the federal Lanham Act, the Ohio Deceptive Trade Practices Act, and the Ohio Trade Secrets Act, and engaged in conduct that allegedly disparaged USS and tortiously interfered with USS's business relationships and contracts. USS is seeking injunctive relief as well as approximately $65 million in claimed damages for alleged lost profits, plus treble damages and attorney's fees under the Sherman Act. As of December 29, 2013, we have neither recorded a reserve for this matter nor do we believe that there is a reasonable possibility that a loss has been incurred.

Item 4. MINE SAFETY DISCLOSURES

Not Applicable.

24


PART II

Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol CKP. The following table sets forth, for the periods indicated, the high and low sale prices for our common stock as reported on the NYSE Composite Tape.

 
Market Price
Per Share
 
High
 
Low
Fiscal year ended December 29, 2013
 
 
 
First Quarter
$
13.95

 
$
10.27

Second Quarter
$
14.91

 
$
10.50

Third Quarter
$
17.78

 
$
14.04

Fourth Quarter
$
18.25

 
$
12.81

Fiscal year ended December 30, 2012
 
 
 
First Quarter
$
12.64

 
$
10.50

Second Quarter
$
11.66

 
$
7.12

Third Quarter
$
9.32

 
$
6.69

Fourth Quarter
$
10.77

 
$
7.70


Holders of Record

As of March 27, 2014, there were 522 holders of record of our common stock.

Dividends

We have never paid a cash dividend on our common stock (except for a nominal cash distribution in April 1997 to redeem the rights outstanding under our 1988 Shareholders’ Rights Plan). We do not anticipate paying any cash dividends in the near future. We have retained, and expect to continue to retain, our earnings for reinvestment into the business. The declaration and payment of dividends in the future, and their amounts, will be determined by the Board of Directors in light of conditions then existing, including our earnings, our financial condition and business requirements (including working capital needs), and other factors.

Recent Sales of Unregistered Securities

There has been no sale of unregistered securities in fiscal years 2013, 2012, or 2011.

Equity Compensation Plan Information

The information required by this Item is hereby incorporated by reference to the Registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on June 4, 2014, which management expects to file with the SEC within 120 days of the end of the Registrant’s fiscal year.

STOCK PERFORMANCE GRAPH
 
The following graph compares the cumulative total shareholder return on the Common Stock of the Company for the period beginning December 28, 2008 and ending on December 29, 2013, with the cumulative total return on the Center for Research in Security Prices Index (CRSP Index) for NYSE/AMEX/NASDAQ Stock market, and the CRSP Index for NASDAQ Electronic Components and Accessories, assuming the investment of $100 in the Company’s Stock, the CRSP Index for NYSE/AMEX/NASDAQ Stock market, and the CRSP Index for NASDAQ Electronic Components and Accessories and the reinvestment of all dividends.


25


 
 
Year
 
Checkpoint
Systems, Inc.
 
 
NYSE/AMEX/NASDAQ
Stock Market Index
 
NASDAQ Electronic
Components and
Accessories Index
2008
100.00

 
100.00

 
100.00

2009
154.90

 
134.94

 
161.72

2010
210.31

 
157.22

 
189.72

2011
113.65

 
159.81

 
173.37

2012
105.56

 
181.66

 
173.57

2013
154.30

 
245.57

 
267.53


This Stock Performance Graph shall not be deemed incorporated by reference by any general statement incorporating by reference this annual report into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts. 
 
12/28/2008
12/27/2009
12/26/2010
12/25/2011
12/30/2012
12/29/2013
Checkpoint Systems, Inc.
100.00

154.90

210.31

113.65

105.56

154.30

NYSE/AMEX/NASDAQ Stock Market Index
100.00

134.94

157.22

159.81

181.66

245.57

NASDAQ Electronic Components and Accessories Index
100.00

161.72

189.72

173.37

173.57

267.53


Repurchase of Securities

There has been no repurchase of securities in fiscal years 2013, 2012, or 2011.


26


Item 6. SELECTED FINANCIAL DATA

We have restated the selected financial data presented in this Annual Report as of and for each of the years ended December 30, 2012 and December 25, 2011. This Part II, Item 6, Selected Financial Data of this Annual Report includes the following:

The restated selected financial data for the annual periods described above;
The revised selected financial data for fiscal 2009 and 2010 to reflect the immaterial effect of the errors impacting the Restated Periods;
The selected financial data for the year ended December 29, 2013.

For information regarding our restatement, see Note 1, Summary of Significant Accounting Policies - Restatement of Previously Issued Consolidated Financial Statements, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. The adjustments related to the fiscal years prior to 2009 are reflected in the beginning retained earnings for 2009. The cumulative impact of these adjusting entries decreased retained earnings by $6.2 million, net of tax, at the beginning of fiscal 2009.

The following tables set forth our selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto included elsewhere herein.
(amounts in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
Year ended
December 29, 2013

 
December 30, 2012

 
December 25, 2011

 
December 26, 2010

 
December 27, 2009

 
 
 
 
(As Restated)

 
(As Restated)

 
(As Revised)

(6) 
(As Revised)

(7) 
STATEMENT OF OPERATIONS DATA
 
 
 
 
 
 
 

 
 
 
Net revenues
$
689,738

 
$
689,920

 
$
758,400

 
$
717,554

 
$
675,373

 
Earnings (loss) from continuing operations before income taxes
$
1,900

 
$
(133,015
)
 
$
(29,043
)
 
$
24,590

 
$
22,965

 
Income taxes expense
$
3,671

 
$
6,005

 
$
53,353

 
$
4,536

 
$
5,805

 
Net earnings (loss) from continuing operations
$
(1,771
)
 
$
(139,020
)
 
$
(82,396
)
 
$
20,054

 
$
17,160

 
(Loss) earnings from discontinued operations, net of tax
$
(17,156
)
 
$
(7,959
)
 
$
(1,165
)
 
$
8,325

 
$
6,690

 
Net (loss) earnings attributable to Checkpoint Systems, Inc.
$
(18,928
)
(1) 
$
(146,450
)
(2) 
$
(83,504
)
(3) 
$
28,495

(4) 
$
24,297

(5) 
Net earnings (loss) from continuing operations per share:
 
 
 
 
 

 
 
 
 
 
  Basic
$
(0.05
)
 
$
(3.37
)
 
$
(2.03
)
 
$
0.50

 
$
0.45

 
  Diluted
$
(0.05
)
 
$
(3.37
)
 
$
(2.03
)
 
$
0.49

 
$
0.44

 
Net (loss) earnings attributable to Checkpoint Systems, Inc. per share:
 
 
 
 
 
 
 
 
 
 
  Basic
$
(0.46
)
 
$
(3.57
)
 
$
(2.06
)
 
$
0.71

 
$
0.62

 
  Diluted
$
(0.46
)
 
$
(3.57
)
 
$
(2.06
)
 
$
0.70

 
$
0.61

 
Depreciation and amortization
28,580

 
32,714

 
37,348

 
$
34,477

 
$
32,325

 
 
(1) 
Includes a $10.9 million restructuring charge ($8.8 million, net of tax), a $9.2 million make-whole premium on Senior Secured Notes ($9.2 million, net of tax), a $4.8 million asset impairment ($4.6 million net of tax), $2.1 million in financing liability interest expense ($1.5 million net of tax), a $1.2 million charge related to our CFO transition ($1.2 million, net of tax), $1.0 million in acquisition costs ($0.9 million, net of tax), a $0.1 million valuation allowance adjustment, a benefit of $6.6 million due to a litigation ruling reversal ($6.6 million, net of tax), and a $0.2 million gain on sale of our interest in the non-strategic Sri Lanka subsidiary ($0.2 million, net of tax).
(2) 
Includes a $106.3 million goodwill impairment ($106.3 million, net of tax), a $28.4 million restructuring charge ($23.9 million, net of tax), a $2.9 million charge related to our CEO transition ($2.9 million, net of tax), $1.9 million in financing liability interest expense ($1.3 million net of tax), a $1.8 million asset impairment ($1.8 million, net of tax), a $1.1 million make-whole premium on Senior Secured Notes ($1.1 million, net of tax), a $0.3 million valuation allowance adjustment, $0.3 million in acquisition costs ($0.3 million, net of tax), $0.3 million litigation settlement ($0.3 million, net of tax), income of $3.9 million related to improper and fraudulent Canadian

27


activities including insurance proceeds ($2.9 million, net of tax) and a $1.7 million gain on sale of non-strategic Suzhou, China subsidiary ($1.4 million, net of tax).
(3) 
Includes a $47.7 million valuation allowance adjustment, a $28.6 million restructuring charge ($25.8 million, net of tax), a $3.4 million intangible impairment ($3.2 million, net of tax), a $3.4 million goodwill impairment ($3.1 million, net of tax), a $2.3 million in acquisition costs ($2.3 million, net of tax), a $1.0 million change related to an indefinite tax reversal assertion, $1.0 million in financing liability interest expense ($0.7 million net of tax), a $0.9 million litigation settlement ($0.9 million, net of tax), and income of $0.2 million related to improper and fraudulent Canadian activities ($0.1 million, net of tax).
(4) 
Includes an $8.2 million restructuring charge ($6.2 million, net of tax), a valuation allowance adjustment of $4.3 million, a $1.7 million tax charge, a $1.5 million expense related to improper and fraudulent Canadian activities ($1.2 million, net of tax), and a $0.8 million selling, general and administrative charge ($0.8 million, net of tax) related to adjustments to acquisition related liabilities pertaining to the period prior to the acquisition date.
(5) 
Includes a $5.4 million restructuring charge ($4.0 million, net of tax), a valuation allowance adjustment of $5.3 million, a $1.3 million expense related to improper and fraudulent Canadian activities ($1.1 million, net of tax), and a $1.3 million litigation settlement charge ($0.8 million, net of tax).
(6) 
Includes revision adjustments with a total impact of a $0.8 million decrease in net loss.
(7) 
Includes revision adjustments with a total net impact of a $0.2 million decrease in net loss.
 
(amounts in thousands)
December 29, 2013

 
December 30, 2012

 
December 25, 2011

 
December 26, 2010

 
December 27, 2009

 
 
 
(As Restated)

 
(As Restated)

 
(As Revised) (f)

 
(As Revised) (g)

AT YEAR END
 
 
 
 
 
 
 
 
 
Working capital
$
233,452

 
$
229,720

 
$
233,179

 
$
293,836

 
$
236,690

Total debt
$
91,622

 
$
113,288

 
$
150,462

 
$
141,949

 
$
116,872

Total equity
$
346,325

 
$
354,309

 
$
508,645

 
$
576,714

 
$
549,399

Total assets
$
799,493

 
$
869,115

 
$
1,058,983

 
$
1,035,993

 
$
1,025,320

FOR THE YEAR ENDED
 

 
 

 
 

 
 

 
 

Capital expenditures
$
(8,946
)
 
$
(12,401
)
 
$
(22,981
)
 
$
(23,712
)
 
$
(13,757
)
Cash provided by (used in) operating activities
$
21,070

 
$
62,365

 
$
(20,073
)
 
$
11,727

 
$
113,045

Cash used in investing activities
$
(5,298
)
 
$
(2,449
)
 
$
(98,280
)
 
$
(23,185
)
 
$
(38,645
)
Cash (used in) provided by financing activities
$
(11,337
)
 
$
(35,166
)
 
$
37,304

 
$
28,891

 
$
(50,316
)
RATIOS
 

 
 

 
 

 
 

 
 

Return on net sales(a)
(2.74
)%
 
(21.23
)%
 
(11.01
)%
 
3.97
%
 
3.60
%
Return on average equity(b)
(5.40
)%
 
(33.94
)%
 
(15.39
)%
 
5.06
%
 
4.59
%
Return on average assets(c)
(2.27
)%
 
(15.19
)%
 
(7.97
)%
 
2.76
%
 
2.41
%
Current ratio(d)
2.31

 
2.05
 
1.90
 
2.35
 
1.97
Percent of total debt to capital(e)
20.92
 %
 
24.23
 %
 
22.83
 %
 
19.75
%
 
17.54
%

(a) 
“Return on net sales” is calculated by dividing net earnings (loss) by net sales.
(b) 
“Return on average equity” is calculated by dividing net earnings (loss) by average equity.
(c) 
“Return on average assets” is calculated by dividing net earnings (loss) by average assets.
(d) 
“Current ratio” is calculated by dividing current assets by current liabilities.
(e) 
“Percent of total debt to capital” is calculated by dividing total debt by total debt and equity.
(f) 
Includes revision adjustments with a total net impact of a $2.1 million increase in total assets, a $2.1 million increase in total current liabilities and a $4.8 million increase in total other long-term liabilities.
(g) 
Includes revision adjustments with a total net impact of a $3.0 million increase in total assets, a $3.0 million increase in total current liabilities and a $6.2 million increase in total other long-term liabilities.

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(amounts in thousands, except employee data)
December 29, 2013

 
December 30, 2012

 
December 25, 2011

 
December 26, 2010

 
December 27, 2009

 
OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding - diluted
41,903
 
41,000
(1) 
40,532
(2) 
40,445
 
39,552
 
Number of employees
4,710
 
5,132
 
6,565
 
5,814
 
5,785
 
Backlog
$
25,273

 
$
48,212

 
$
52,204

 
$
47,974

 
$
50,186

 

(1) 
Excludes 61 common shares from stock options and awards and 12 common shares from deferred compensation arrangements as they are anti-dilutive due to our net loss for the year.
(2) 
Excludes 329 common shares from stock options and awards and 11 common shares from deferred compensation arrangements as they are anti-dilutive due to our net loss for the year.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Restatement of Previously Issued Consolidated Financial Statements

As discussed further in Note 1, Summary of Significant Accounting Policies - Restatement of Previously Issued Consolidated Financial Statements, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report, we have restated our consolidated financial statements for the years ended December 30, 2012 and December 25, 2011 and our unaudited interim financial information for each of the quarters in the year ended December 30, 2012 and for the first three quarters in the fiscal year ended December 29, 2013. Refer to the Explanatory Note preceding Part 1, Item 1, Item 8: Financial Statements and Supplementary Data – Note 1 to the Consolidated Financial Statements, and Item 8: Financial Statements and Supplementary Data – Note 20 to the Consolidated Financial Statements for additional details regarding the aforementioned restatement adjustments.
For information regarding our controls and procedures, see Part II, Item 9A - Controls and Procedures, of this Annual Report.

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 Merchandise Availability Solutions, Apparel Labeling Solutions, and Retail Merchandising Solutions. Merchandise Availability Solutions consists of electronic article surveillance (EAS) systems, EAS consumables, Alpha® solutions, and radio frequency identification (RFID) systems, software and services. 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, graphic tags and labels, adhesive labels, fabric and woven tags and labels, apparel branding tags, fully integrated tags and labels and RFID tags and labels. 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 28 countries, we have a global network of subsidiaries and distributors, and provide customer service and technical support around the world.

Our results are heavily dependent upon sales to the retail market. Our customers are dependent upon retail sales, which are susceptible to economic cycles and seasonal fluctuations. Furthermore, as approximately two-thirds of our revenues and operations are located outside the U.S., fluctuations in foreign currency exchange rates have a significant impact on reported results.

Historically, we have reported our results of operations in three segments: Shrink Management Solutions (SMS), Apparel Labeling Solutions (ALS), and Retail Merchandising Solutions (RMS). During the third quarter of 2013, we adjusted the

29


product allocation between our SMS and ALS segments, renamed the SMS segment Merchandise Availability Solutions (MAS) and began reporting our segments as: Merchandise Availability Solutions, Apparel Labeling Solutions, and Retail Merchandising Solutions. Prior periods have been conformed to reflect the segment change.

ALS now includes the results of our radio frequency identification (RFID) labels business (previously reported in SMS), coupled with our data management platform and network of service bureaus that manage the printing of variable information on apparel labels and tags. This change aligns us with our refined ALS strategy to be a leading supplier of apparel labeling solutions, with expertise in intelligent apparel labels for item-level tracking and loss prevention. Our MAS segment, which is focused on loss prevention and Merchandise Visibility™ (RFID), includes EAS systems, EAS consumables, Alpha® high-theft solutions, RFID systems and software and non-U.S. and Canada-based CheckView®. There were no changes to the RMS Segment. The revenues and gross profit for each of the segments are included in Note 18 of the Consolidated Financial Statements.

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 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 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. We have made changes to right-size 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 reduced our Apparel Labeling product offerings 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 continue to 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.
  
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, including final headcount terminations, expected to be substantially complete by the third quarter of 2014.

The expanded Global Restructuring Plan including Project LEAN and the SG&A Restructuring Plan will impact over 2,600 existing employees. Total costs of the Global Restructuring Plan including Project LEAN and the SG&A Restructuring Plan are expected to approximate $78 million to $81 million by the end of the first quarter of 2014, with $60 million to $63 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 $106 million to $108 million by the end of the third quarter of 2015, with $87 million to $88 million in total anticipated savings for the Global

30


Restructuring Plan including Project LEAN and $19 million to $20 million in total anticipated savings for the SG&A Restructuring Plan. During the fourth quarter of 2013, after additional cost savings reviews, we expanded some of the existing initiatives of Project LEAN, and therefore our total expected costs and savings as well as the completion date for the plan were adjusted. 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 was fundamentally restructured, including the consolidation of certain manufacturing operations in order to provide quality merchandising products profitably and on time. We also rationalized our customer base and reviewed our product capabilities to be aligned with our on-shelf availability strategy.

In the third quarter of 2013, we announced that we will continue to develop additional cost savings and margin enhancement initiatives over and above those in the current global restructuring initiatives. The value of these opportunities is expected to approximate between $10 million and $15 million by the end of 2014, with an annualized benefit of $15 million to $20 million.

On December 11, 2013, we entered into a new $200.0 million five-year senior secured multi-currency revolving credit facility("2013 Senior Secured Credit Facility") agreement ("2013 Credit Agreement") with a syndicate of lenders. The 2013 Senior Secured Credit Facility was used to repay $32.0 million outstanding under the 2010 Senior Secured Credit Facility as well as the $55.6 million outstanding under the Senior Secured Notes. We may borrow, prepay and re-borrow under the 2013 Senior Secured Credit Facility as long as the sum of the outstanding principal amounts is less than the aggregate facility availability. The 2013 Senior Secured Credit Facility also includes an expansion option that will allow us to request an increase in the 2013 Senior Secured Credit Facility of up to an aggregate of $100.0 million, for a potential total commitment of $300.0 million.
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. In April 2013, we completed the sale 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, hand-held labeling tools and services from 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 strategic plan.
Other Income

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. 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.

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 us 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. 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, we received compensation of $4.7 million for the financial impact of the fraudulent Canadian activities from our insurance provider.



31


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 is 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.

32



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 $0.2 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 $0.5 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.


33


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 our 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 2012 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 2012 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 2012 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.
Our 2013 annual assessment as of October month end did not result in an impairment charge. As of the date of our fiscal 2013 annual impairment test, the total fair values for the reporting units in all of our segments exceeded their total carrying values by more than 54%. 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

34


our Merchandise Availability Solutions, Apparel Labeling 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. (See 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 $0.1 million effect on stock compensation expense. As of December 29, 2013, there was $0.9 million and $2.4 million of unrecognized stock-based compensation expense related to nonvested stock options and restricted stock units, respectively. Such costs are expected to be recognized over a weighted-average period of 1.5 years and 1.5 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 2013 our focus has been on cost

35


control, including restructuring, as well as working capital management, profitability improvement measures and obtaining a more favorable financing arrangement. We have met our liquidity needs primarily through cash generated from operations. Based on an analysis of liquidity utilizing conservative assumptions for the next twelve months, we believe that cash on hand from operating activities and funding available under our credit agreement should be adequate to service debt and working capital needs, meet our capital investment requirements, other potential restructuring requirements, and product development requirements.

On December 11, 2013, we entered into a new $200.0 million five-year senior secured multi-currency revolving credit facility("2013 Senior Secured Credit Facility") agreement ("2013 Credit Agreement") with a syndicate of lenders. The 2013 Senior Secured Credit Facility was used to repay $32.0 million outstanding under the 2010 Senior Secured Credit Facility as well as the $55.6 million outstanding under the Senior Secured Notes. We may borrow, prepay and re-borrow under the 2013 Senior Secured Credit Facility as long as the sum of the outstanding principal amounts is less than the aggregate facility availability. The 2013 Senior Secured Credit Facility also includes an expansion option that will allow us to request an increase in the 2013 Senior Secured Credit Facility of up to an aggregate of $100.0 million, for a potential total commitment of $300.0 million. We made make-whole payments of $8.2 million and $1.1 million in 2013 and 2012, respectively, related to prepayments on our 2010 Senior Secured Credit Facility and Senior Secured Notes.
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 29, 2013, the majority of our unremitted earnings of subsidiaries outside of the United States were deemed not to be permanently reinvested.

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, hand-held labeling tools and services from maintenance), repeat customer business, the anticipated effect of our restructuring activities, and our cash position and borrowing capacity should continue to provide us with adequate cash flow and liquidity to continue with the successful execution of our strategic plan. We have worked to reduce our liquidity risk by implementing working capital improvements while reducing expenses in areas that will not adversely impact the future potential of our business. We evaluate the risk and 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 29, 2013, our cash and cash equivalents were $121.6 million compared to $118.8 million as of December 30, 2012. A significant portion of this cash is held overseas and can be repatriated. We do not expect to incur material costs associated with repatriation. Cash and cash equivalents increased in 2013 primarily due to $21.1 million of cash provided by operating activities, partially offset by $11.3 million of cash used in financing activities, $5.3 million of cash used in investing activities and $1.7 million effect of foreign currency.

Cash provided by operating activities was $41.3 million less during 2013 compared to 2012. In 2013 compared to 2012, our cash from operating activities was positively impacted by the significant increase in operating income, which was offset by incremental interest expense in connection with our refinancing as well as investments in working capital. The significant reductions in inventories and accounts receivable achieved in 2012 as a result of our working capital improvement initiatives were not repeatable to the same extent in 2013. The remainder of the variance is explained by reductions in other liabilities, accounts payable and unearned revenues, partially offset by changes in the restructuring reserve, other current assets, and income taxes.

Cash used in investing activities was $2.8 million higher during 2013 compared to 2012. This was primarily due to proceeds from the sales of our Puerto Rico facility, Banking Security Systems Integration business unit and Suzhou, China subsidiary in 2012. This is partially offset by a decrease in 2013 capital expenditures.

Cash used in financing activities was $23.8 million less during 2013 compared to 2012. This was due primarily to greater reductions of debt levels during 2012 compared to 2013.

Our percentage of total debt to total equity as of December 29, 2013, was 26.5% compared to 32.0% as of December 30, 2012. As of December 29, 2013, our working capital was $233.5 million compared to $229.7 million as of December 30, 2012.


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We continue to reinvest in the Company through our investment in technology and process improvement. During 2013, our investment in research and development amounted to $17.5 million, as compared to $16.4 million in 2012. These amounts are reflected in cash used in operations, as we expense our research and development as it is incurred. In 2014, we anticipate spending of approximately $17 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 2013, our contribution to these plans was $5.2 million. Our funding expectation for 2014 is $5.4 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 2013 totaled $8.9 million compared to $12.4 million during 2012. 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, without a comparable amount in 2013. We anticipate our capital expenditures, used primarily to improve our production capabilities, to approximate $20 million in 2014.

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 2010 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 December 2011, we entered into a new five-year Hong Kong banking facility. In June 2012, $8.0 million (HKD 61.8 million) was paid in order to extinguish our existing Hong Kong term loan.

In February 2012, we 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. In June 2013, in connection with the sale of our 51% interest in our Shore to Shore Sri Lanka entity, the outstanding balance of the banking facility was transferred to the entity holding the non-controlling interest. The balance of the banking facility at the date of transfer was $1.5 million.

In March 2013, we entered into a new $2.3 million Sri Lanka term loan. Borrowings under this loan were used to pay down the Sri Lanka banking facility in the second quarter of 2013. In June 2013, in connection with the sale of our 51% interest in our Shore to Shore Sri Lanka entity, the outstanding balance of the term loan was transferred to the entity holding the non-controlling interest. The balance of the term loan at the date of transfer was $2.2 million.

In October 2009, we entered into a $12.0 million (€8.0 million) full-recourse factoring arrangement in Germany. In September 2012, $7.4 million (€5.7 million) was paid in order to extinguish this short-term full-recourse factoring agreement.

In December 2013, we entered into a sale-lease-back transaction in Spain. As of December 29, 2013, the lease had a balance of $1.2 million (€0.9 million), of which $0.2 million (€0.2 million) was included in the current portion of long-term debt and $1.0 million (€0.7 million) was included in long-term borrowings in the accompanying Consolidated Balance Sheets.

In December 2009, we entered into a full-recourse factoring arrangement. The arrangement is secured by trade receivables. We received a weighted average of 92.4% of the face amount of receivables that it desired to sell and the bank agreed, at its discretion, to buy. As of December 29, 2013 the factoring arrangements had a balance of $0.3 million (€0.2 million), of which $0.2 million (€0.1 million) was included in the current portion of long-term debt and $0.1 million (€0.1 million) was included in long-term borrowings in the accompanying Consolidated Balance Sheets since the receivables are collectible through 2016.

2013 Senior Secured Credit Facility
On December 11, 2013, we entered into a new $200.0 million five-year senior secured multi-currency revolving credit facility("2013 Senior Secured Credit Facility") agreement ("2013 Credit Agreement") with a syndicate of lenders. The 2013 Senior Secured Credit Facility was used to repay $32.0 million outstanding under the 2010 Senior Secured Credit Facility as well as the $55.6 million outstanding under the Senior Secured Notes. We may borrow, prepay and re-borrow under the 2013 Senior Secured Credit Facility as long as the sum of the outstanding principal amounts is less than the aggregate facility availability. The 2013 Senior Secured Credit Facility also includes an expansion option that will allow us to request an increase in the 2013 Senior Secured Credit Facility of up to an aggregate of $100.0 million, for a potential total commitment of $300.0 million.

37


All obligations under the 2013 Senior Secured Credit Facility are irrevocably and unconditionally guaranteed on a joint and several basis by certain domestic subsidiaries. Collateral under the 2013 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 subsidiary. All domestic tangible and intangible personal property, excluding real property under $5 million are also pledged as collateral.
Borrowings under the 2013 Senior Secured Credit Facility, other than swingline loans, bear interest at our option of either (i) a spread ranging from 0.25% to 1.25% over the Base Rate (as described below), or (ii) a spread ranging from 1.25% to 2.25% over the LIBOR rate, and in each case fluctuating in accordance with changes in our leverage ratio, as defined in the 2013 Credit Agreement.  The “Base Rate” is the highest of (a) the Federal Funds Rate, plus 0.50%, (b) the Administrative Agent’s prime rate, and (c) a daily rate equal to the one-month LIBOR rate, plus 1.0%.  Swingline loans bear interest of (i) a spread ranging from 0.25% to 1.25% over the Base Rate.  We pay an unused line fee ranging from 0.20% to 0.40% per annum on the unused portion of the 2013 Senior Secured Credit Facility.
Pursuant to the terms of the 2013 Senior Secured Credit Facility, we are subject to various requirements, including covenants requiring the maintenance of (i) a maximum total leverage ratio of 3.00 and (ii) a minimum interest coverage ratio of 3.00. We are in compliance with the maximum total leverage ratio and minimum interest coverage ration as of December 29, 2013. Although we cannot provide full assurance, we expect to be in compliance with all of our covenants during 2014. The 2013 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 2013 Senior Secured Credit Facility, including the non-payment of principal or interest, our obligations under the 2013 Credit Agreement may be accelerated and the assets securing such obligations may be sold.
As of December 29, 2013, we incurred $1.8 million in fees and expenses in connection with the 2013 Senior Secured Credit Facility, which are amortized over the term of the 2013 Senior Secured Credit Facility to interest expense on the Consolidated Statement of Operations. The remaining unamortized debt issuance costs recognized in connection with the 2010 Secured Credit Facility of $0.4 million are amortized over the term of the 2013 Senior Secured Credit Facility to interest expense on the Consolidated Statement of Operations.

As of December 29, 2013, $1.8 million, issued in letters of credit, were outstanding under the 2013 Senior Secured Credit Facility.

2010 Senior Secured Credit Facility

On July 22, 2010, we entered into an Amended and Restated Senior Secured Credit Facility (“2010 Senior Secured Credit Facility”) with a syndicate of lenders. The 2010 Senior Secured Credit Facility provided us with a $125.0 million four-year senior secured multi-currency revolving credit facility.

On February 17, 2012, we entered into an amendment to our 2010 Senior Secured Credit Facility which increased the required leverage ratio covenant of adjusted EBITDA to total debt. 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 entered into an additional amendment to our 2010 Senior Secured Credit Facility ("July 2012 Amendment"), which contained several modifications. The July 2012 Amendment reduced the total commitment of the 2010 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, reduced the sublimit for swingline loans from $25.0 million to $5.0 million, increased the required leverage ratio covenant of adjusted EBITDA to total debt and reduced the fixed charged covenant. 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 exceeded $65 million as of weekly measurement dates, we were required to prepay any additional borrowings made subsequent to the July 2012 Amendments. This provision was effective until we were in compliance with our original covenant requirements for two consecutive quarters.

During the Waiver Period, the interest rate spread on the 2010 Senior Secured Credit Facility increased 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 increased to a maximum of 1.00% per annum. The maximum was based in accordance with changes in our leverage ratio.

During the year ended December 30, 2012, we incurred $1.3 million in fees and expenses in connection with the July 2012 Amendment to the 2010 Senior Secured Credit Facility, which were capitalized and amortized over the term of the 2010 Senior

38


Secured Credit Facility to interest expense on the Consolidated Statement of Operations. In connection with the reduction in borrowing capacity of the 2010 Senior Secured Credit Facility, we 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, we repaid $6.1 million on the 2010 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 2010 Senior Secured Credit Facility, we 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.

On June 28, 2013, we repaid $3.8 million on the 2010 Senior Secured Credit Facility. Pursuant to the terms of the July 2012 Amendment, the repayment permanently reduced the outstanding borrowing capacity from $68.9 million to $65.1 million. In connection with the reduction in borrowing capacity of the 2010 Senior Secured Credit Facility, we recognized $71 thousand of unamortized debt issuance costs. The costs were recognized in interest expense on the Consolidated Statement of Operations in the second quarter of 2013.

On September 27, 2013, we repaid $2.7 million on the 2010 Senior Secured Credit Facility. Pursuant to the terms of the July 2012 Amendment, the repayment permanently reduced the outstanding borrowing capacity from $65.1 million to $62.4 million. In connection with the reduction in borrowing capacity of the 2010 Senior Secured Credit Facility, we recognized $38 thousand of unamortized debt issuance costs. The costs were recognized in interest expense on the Consolidated Statement of Operations in the third quarter of 2013.

On December 11, 2013, we repaid the $32.0 million outstanding under the 2010 Senior Secured Credit Facility and terminated the 2010 Senior Secured Credit Facility. In connection with the paydown, we recognized $0.3 million of unamortized debt issuance costs related to lenders that are not included in the 2013 Senior Secured Credit Facility in interest expense on the Consolidated Statement of Operations in the fourth quarter of 2013. The remaining unamortized debt issuance costs recognized in connection with the 2010 Secured Credit Facility of $0.4 million are amortized over the term of the 2013 Senior Secured Credit Facility to interest expense on the Consolidated Statement of Operations.

Senior Secured Notes

Also on July 22, 2010, we entered into a Note Purchase and Private Shelf Agreement (the “Senior Secured Notes Agreement”) with a lender, and certain other purchasers party thereto (together with the lender, the “Purchasers”).

On February 17, 2012, we entered into an amendment to our Senior Secured Notes which increased the required leverage ratio covenant of adjusted EBITDA to total debt. 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 entered into 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 and reduced the fixed charge covenant. In addition, the July 2012 Amendment permitted divestitures, acquisitions and transfers of assets to non-credit parties, under certain conditions.

During the Waiver Period, and until such time as the financial covenants returned to the original covenants for two consecutive quarters, the coupon rate on the Senior Secured Notes increased 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, we 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, we 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, we 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.

On June 28, 2013, we repaid $6.2 million in principal as well as a make-whole premium of $0.6 million related to the Senior Secured Notes. In connection with the repayment on the Senior Secured Notes, we recognized $57 thousand of unamortized

39


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 the second quarter of 2013.

On September 27, 2013, we repaid $4.3 million in principal as well as a make-whole premium of $0.4 million related to the Senior Secured Notes. In connection with the repayment on the Senior Secured Notes, we recognized $36 thousand 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 the third quarter of 2013.

On December 11, 2013, we repaid the outstanding amounts of $55.6 million in principal as well as a make-whole premium of $7.3 million related to the Senior Secured Notes and terminated the Senior Secured Notes. In connection with the repayment on the Senior Secured Notes, we recognized $0.4 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 the fourth quarter of 2013.

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.

Based upon an analysis of liquidity using our current forecast, management believes that our anticipated cash needs over the next twelve months can be funded from cash and cash equivalents on hand, the availability of cash under the 2013 Senior Secured Credit Facility and cash generated from future operations.

Financing Liability

In June 2011, we sold, to a financial institution in Spain, rights to future customer receivables resulting from the negotiated extension of previously executed sales-type lease arrangements, whose receivables were previously sold. The 2011 transaction qualified as a legal sale without recourse. However, until the receivables are recognized, the proceeds from the fiscal 2011 legal sale are accounted for as a financing arrangement and reflected as a financing liability in our consolidated balance sheet. The balance of the financing liability is $35.1 million and $31.6 million as of December 29, 2013 and December 30, 2012, respectively. We impute a non-cash interest charge on the financing liability using a rate of 6.365%, which we recognize as interest expense, until our right to recognize the legal sales permits us to de-recognize the liability and record operating income on the sale. We recognized interest expense related to the financing liability of $2.1 million and $1.9 million in the years ended December 29, 2013 and December 30, 2012, respectively.
 
During fiscal 2016 through 2018, when we are permitted to recognize the lease receivables upon the commencement of the lease extensions, we expect to de-recognize both the associated receivables and the related financing liability and record other operating income on the sale. At this point, our obligation under the financing liability will have been extinguished.  
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 $28.2 million as of December 29, 2013. The scheduled timing of these rental commitments is detailed in our “Contractual Obligations” section.
















40


Contractual Obligations

Our contractual obligations and commercial commitments at December 29, 2013 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)
$
99,094

 
$
1,952

 
$
3,653

 
$
93,489

 

Capital leases(2)
1,617

 
366

 
685

 
566

 

Operating leases
28,154

 
9,610

 
11,662

 
5,304

 
1,578

Pension obligations(3)
53,045

 
5,014

 
10,132

 
10,491

 
27,408

Inventory purchase commitments(4)
1,527

 
1,527

 

 

 

Total contractual cash obligations
$
183,437

 
$
18,469

 
$
26,132

 
$
109,850

 
$
28,986


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
$
1,843

 
$
1,843

 
$

 
$

 
$

Surety bonds
9,263

 
8,823

 
440

 

 

Total commercial commitments
$
11,106

 
$
10,666

 
$
440

 
$

 
$

 
(1) 
Includes 2013 Senior Secured Credit Facility, long-term full-recourse factoring liabilities, and related interest payments through maturity of $8,837.
(2) 
Includes interest payments through maturity of $252.
(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 2013 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 $31.9 million as of December 29, 2013, 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 2013, 2012, and 2011 was $6.3 million, $5.1 million, and $5.7 million, respectively.

We review our pension assumptions annually. Our assumptions for the year ended December 29, 2013, were a discount rate of 3.53%, an expected return of 4.50% 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 29, 2013 and December 30, 2012, the weighted average discount rate was 3.52% and 3.28%, 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 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 2013, 2012, and 2011 pension expense are $1.6 million, $0.3 million, and $0.1 million, respectively. The total projected amortization for these gains in 2014 is approximately $1.6 million.



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Exposure to Foreign Currency

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.

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 29, 2013, we had currency forward exchange contracts with notional amounts totaling approximately $3.3 million. The fair values of the forward exchange contracts were reflected as a $18 thousand 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. 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. As of December 29, 2013, there were no outstanding foreign currency revenue forecast contracts. 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 29, 2013, there were no unrealized gains or losses recorded in other comprehensive income. During the year ended December 29, 2013, a $0.2 million benefit related to these foreign currency hedges was recorded to cost of goods sold as the inventory was sold to external parties. We recognized no hedge ineffectiveness during the year ended December 29, 2013.

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, including final headcount terminations, expected to be substantially complete by the third quarter of 2014.

The expanded Global Restructuring Plan including Project LEAN and the SG&A Restructuring Plan will impact over 2,600 existing employees since inception. Total costs of the Global Restructuring Plan including Project LEAN and the SG&A Restructuring Plan are expected to approximate $78 million to $81 million by the end of the first quarter of 2014, with $60 million to $63 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 $106 million to $108 million by the end of the third quarter of 2015, with $87 million to $88 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. During the fourth quarter of 2013, after additional cost savings reviews, we expanded some of the existing initiatives of Project LEAN, and therefore our total expected costs and savings as well as the completion date for the plan were adjusted. 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.


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Restructuring expense for the years ended December 29, 2013, December 30, 2012, and December 25, 2011 were as follows:

(amounts in thousands)
December 29, 2013

 
December 30, 2012

 
December 25, 2011

 
 
 
(As Restated)

 
 
Global Restructuring Plan (including LEAN)
 
 
 
 
 
Severance and other employee-related charges
$
7,421

 
$
16,945

 
$
11,115

Asset impairments
1,210

 
6,506

 
7,761

Other exit costs
2,389

 
5,084

 
519

SG&A Restructuring Plan
 
 
 
 
 
Severance and other employee-related charges
(222
)
 
(86
)
 
7,015

Asset impairments

 

 
72

Other exit costs
68

 
64

 
2,203

Manufacturing Restructuring Plan
 
 
 
 
 
Severance and other employee-related charges

 

 
(146
)
Other exit costs

 
(75
)
 
101

Total
$
10,866

 
$
28,438

 
$
28,640



Restructuring accrual activity for the years ended December 29, 2013, and December 30, 2012, were as follows:

(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2013
Accrual at
Beginning
of Year

 
Charged to
Earnings

 
Charge
Reversed to
Earnings

 
Cash
Payments

 
Exchange
Rate
Changes

 
Accrual at December 29, 2013

Global Restructuring Plan (including LEAN)
 
 
 
 
 
 
 
 
 
 
 
Severance and other employee-related charges(3)
$
7,752

 
$
9,799

 
$
(2,378
)
 
$
(7,469
)
 
$
197

 
$
7,901

Other exit costs(1)
460

 
2,389

 

 
(2,763
)
 
(20
)
 
66

SG&A Restructuring Plan
 
 
 
 
 
 
 
 
 
 
 
Severance and other employee-related charges(3)
1,206

 
104

 
(326
)
 
(780
)
 
4

 
208

Other exit costs(2)
161

 
68

 

 
(228
)
 
(1
)
 

Total
$
9,579

 
$
12,360

 
$
(2,704
)
 
$
(11,240
)
 
$
180

 
$
8,175


(1) 
During 2013, there was a net charge to earnings of $2.4 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 2013, 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 2013, there were a severance charges reversed to earnings of $(2.7) 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 2013.

43


(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

 
 
 
(As Restated)

 
 
 
(As Restated)

 
 
 
 
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)

 
5,084

 

 
(4,616
)
 
(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

 
$
27,806

 
$
(5,874
)
 
$
(30,035
)
 
$
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, 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 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 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.

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, including final headcount terminations, expected to be substantially complete by the third quarter of 2014.

For the year ended December 29, 2013, the net charge to earnings of $11.0 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 $60 million to $63 million, of which $59.1 million have been incurred. The total number of employees planned to be affected by the Global Restructuring Plan including Project LEAN is approximately 2,273, of which 2,139 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 29, 2013, the net charge reversed earnings of $0.2 million 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 affected by the SG&A Restructuring Plan was 369, all of which 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.

44



The total number of employees affected by the Manufacturing Restructuring Plan was 420, all of which have been terminated. As of December 25, 2011 the implementation of the Manufacturing Restructuring Plan was 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.

Our 2013 annual assessment did not result in an impairment charge. Future annual assessments could result in impairment charges, which would be accounted for as an operating expense.

During the 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.
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 Merchandise Availability 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 Merchandise Availability Solutions segment. These impairment charges were included in discontinued operations on the Consolidated Statement of Operations.

Asset Impairments

In the fourth quarter of 2013, through the budgeting process, working capital prioritization activities, and other strategic direction reviews, it was determined that our ERP system implementation was no longer a strategic priority for 2014 through 2016. Therefore, during the fourth quarter of 2013, we recorded an impairment of the $4.7 million in internal-use software related to the European ERP system implementation. The impairment charge was recorded in asset impairment expense in the Consolidated Statement of Operations.

In December 2013, as a result of our annual impairment test of our indefinite-lived trade names, we recorded a $0.1 million impairment charge to the remaining value of the SIDEP trade name. This charge was recorded in asset impairment expense on the Consolidated Statement of Operations.


45


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 determined that an indefinite-lived trade name intangible asset in our MAS segment was impaired. As a result we recorded an impairment charge of $0.6 million in the fourth quarter of 2011.

In the 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 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 quarter ended December 30, 2012, we recorded a $0.3 million impairment of property, plant and equipment in our Merchandise Availibility 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 2012 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.













46


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 29,
2013
(Fiscal 2013)

 
December 30,
2012
(Fiscal 2012)

 
December 25,
2011
(Fiscal 2011)

 
Fiscal 2013
vs.
Fiscal 2012

 
Fiscal 2012
vs.
Fiscal 2011

 
 
 
(As Restated)

 
(As Restated)

 
 
 
 
Net revenues:
 
 
 
 
 
 
 
 
 
Merchandise Availability Solutions
66.2
 %
 
64.8
 %
 
63.9
 %
 
2.1
 %
 
(7.8
)%
Apparel Labeling Solutions
26.4

 
27.1

 
26.4

 
(2.8
)
 
(6.3
)
Retail Merchandising Solutions
7.4

 
8.1

 
9.7

 
(7.8
)
 
(24.4
)
Net revenues
100.0

 
100.0

 
100.0

 

 
(9.0
)
Cost of revenues
61.0

 
60.9

 
59.4

 
0.1

 
(6.8
)
Total gross profit
39.0

 
39.1

 
40.6

 
(0.3
)
 
(12.4
)
Selling, general, and administrative expenses
31.7

 
36.0

 
36.9

 
(11.8
)
 
(11.4
)
Research and development
2.5

 
2.4

 
2.5

 
6.9

 
(14.9
)
Restructuring expenses
1.6

 
4.1

 
3.8

 
(61.8
)
 
(0.7
)
Asset impairment
0.7

 

 
0.1

 
N/A

 
(100.0
)
Goodwill impairment

 
14.9

 

 
(100.0
)
 
N/A

Litigation settlement
(0.9
)
 

 
0.1

 
N/A

 
(68.7
)
Acquisition costs
0.1

 
0.1

 
0.3

 
189.2

 
(85.7
)
Other income

 
(0.6
)
 

 
(100.0
)
 
N/A

Other operating income
(0.1
)
 
(0.3
)
 
(0.2
)
 
(71.7
)
 
11.8

Operating income (loss)
3.4

 
(17.5
)
 
(2.9
)
 
(119.3
)
 
N/A

Interest income
0.2

 
0.3

 
0.5

 
(13.8
)
 
(48.0
)
Interest expense, net
2.7

 
1.8

 
1.2

 
51.2

 
40.9

Other gain (loss), net
(0.6
)
 
(0.3
)
 
(0.2
)
 
127.4

 
13.7

Earnings (loss) from continuing operations before income taxes
0.3

 
(19.3
)
 
(3.8
)
 
(101.4
)
 
N/A

Income taxes expense
0.5

 
0.9

 
7.1

 
(38.9
)
 
(88.7
)
Net loss from continuing operations
(0.2
)
 
(20.2
)
 
(10.9
)
 
(98.7
)
 
68.7

Loss from discontinued operations, net of tax (benefit) expense of ($68), $247, and ($378)
(2.5
)
 
(1.1
)
 
(0.1
)
 
115.6

 
583.2

Net loss
(2.7
)
 
(21.3
)
 
(11.0
)
 
(87.1
)
 
75.9

Less: gain (loss) attributable to non-controlling interests

 
(0.1
)
 

 
(100.2
)
 
828.1

Net loss attributable to Checkpoint Systems, Inc.
(2.7
)%
 
(21.2
)%
 
(11.0
)%
 
(87.1
)
 
75.4
 %
 
N/A - Comparative percentages are not meaningful.


47


Fiscal 2013 compared to Fiscal 2012

Net Revenues

During 2013, revenues decreased slightly by $0.2 million, or 0.0%, from $689.9 million to $689.7 million. Foreign currency translation had a negative impact on revenues of $2.3 million for the full year of 2013.
(amounts in millions)
 
 
 
 
 
 
 
Year ended
December 29,
2013
(Fiscal 2013)

 
December 30,
2012
(Fiscal 2012)

 
Dollar
Amount
Change
Fiscal 2013
vs.
Fiscal 2012

 
Percentage
Change
Fiscal 2013
vs.
Fiscal 2012

 
 
 
(As Restated)

 
 
 
 
Net Revenues:
 
 
 
 
 
 
 
Merchandise Availability Solutions
$
456.1

 
$
446.8

 
$
9.3

 
2.1
 %
Apparel Labeling Solutions
182.2

 
187.4

 
(5.2
)
 
(2.8
)%
Retail Merchandising Solutions
51.4

 
55.7

 
(4.3
)
 
(7.8
)
Net Revenues
$
689.7

 
$
689.9

 
$
(0.2
)
 
 %

Merchandise Availability Solutions

Merchandise Availability Solutions (MAS) revenues increased $9.3 million, or 2.1%, in 2013 compared to 2012. Foreign currency translation had a negative impact of approximately $3.6 million. The adjusted increase of $12.9 million in MAS was due to increases in EAS consumables, Alpha® and Merchandise Visibility (RFID) . These increases were partially offset by a decrease in our business that supports shrink management in libraries (Library), CheckView® and EAS Systems.
EAS consumables revenues increased in 2013 as compared to 2012, primarily due to increased Hard Tag @ Source revenues in the U.S., Asia, and Europe resulting from increased volumes from both new and existing customers. EAS label revenues in the U.S. and Europe also contributed to the increase as a result of new protection programs with new and existing customers including the impact of recent market share wins in EAS systems. The increase in EAS label revenues was partially offset by decreased demand in Asia. Economic uncertainty and soft markets present an ongoing challenge to our revenue growth in consumable products. We expect our EAS consumables business to be favorably impacted in 2014 by our recent market share wins in our EAS systems business.

Alpha® revenues increased in 2013 as compared to 2012 due to strong sales in the U.S. with key customers in 2013 without comparable levels of demand in 2012. The increase was offset by declines in Europe and International Americas primarily due to large orders in 2012 without comparable demand in 2013. We expect our global Alpha® revenues in 2014 to remain constant despite significant competition entering the market. Growth is expected to be hindered due to lack of certain new customer build-ups which occurred in 2013 and increased competitive pressure.

The Merchandise Visibility (RFID) revenues increased in 2013 as compared to 2012, primarily due to a substantial roll-out with RFID enabled technology in the U.S. The increase was partially offset by overall declines in Europe, primarily due to a substantial roll-out with RFID enabled technology in 2012, with less significant roll-outs in 2013. Our RFID business continues to gain traction with installations at several major retailers, with a significant roll-out with a major U.S. retailer completed, a significant roll-out with a major European retailer underway and the initial stages of a U.S. asset tracking roll-out also underway. We expect RFID revenues to increase and continue on their forecasted path for strong growth in 2014 as a result of asset tracking business delayed from 2013 to 2014, the conversion of certain pilots into installation contracts and the expansion of certain installation contracts to additional stores.

Library revenues decreased in 2013 as compared to 2012, primarily due to the expiration of a licensing agreement in the U.S. We do not consider our Library business to be strategically important to our operations.

We sold our U.S. and Canada CheckView® business in 2013. The results of this business are included in discontinued operations. We will continue to provide CheckView® CCTV services in Asia in connection with EAS systems when our customers require a combined security solution. Due to our decreased focus on this business, our CheckView® Asia revenues decreased in 2013 as compared to 2012.


48


EAS Systems revenues decreased in 2013 as compared to 2012, primarily due to a decline in Europe resulting from the lower volume of new product installations with existing customers. The decrease was offset by increases in the U.S. and Asia due to large roll-outs in 2013, including the impact of the initial stages of a large U.S. roll-out during the fourth quarter of 2013. We expect 2014 EAS Systems revenues to be unfavorably impacted by fewer product installations in Europe with our existing customers.

Apparel Labeling Solutions

Apparel Labeling Solutions revenues decreased $5.2 million, or 2.8%, in 2013 as compared to 2012. After considering the foreign currency translation positive impact of approximately $0.4 million, the $5.6 million decrease in revenues is driven by declines in sales volumes in the U.S. and Europe, as well as International Americas where we closed operations in 2012 as part of our Global Restructuring Plan. The weakness in these markets is broad based, but the decline in ALS revenues can also be attributed to the effects of our ALS business rationalization, including the deliberate strategic loss of certain customers and the downsizing of our woven business. The decrease was partially offset by an increase of ALS revenues in Asia as the result of increased sales with our strategic key accounts. The impact of revenue reductions that resulted from our ALS business rationalization more than offset the growth in key account revenue in Asia. We are experiencing strong demand from certain customers, with a continued cautious approach from others. The decrease in ALS revenues is also partially offset by increased RFID labels revenue in the U.S., Asia, and Europe resulting from higher demand for RFID labels due to substantial roll-outs with RFID enabled technology. We expect modest growth in our Apparel Labeling Solutions business as we complete our business rationalization process and switch our focus to building on recent new business development in both our core and RFID labels businesses.
Retail Merchandising Solutions

Retail Merchandising Solutions revenues decreased $4.3 million, or 7.8%, in 2013 as compared to 2012. After considering the foreign currency translation positive impact of $0.9 million, the $5.2 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 soft economic conditions in Europe resulting in fewer new store openings and remodels of existing stores at our European customers.
Gross Profit

During 2013, gross profit decreased $0.7 million, or 0.3%, from $269.8 million to $269.1 million . The negative impact of foreign currency translation on gross profit was approximately $1.9 million. Gross profit, as a percentage of net revenues, decreased slightly from 39.1% to 39.0%.

Merchandise Availability Solutions

Merchandise Availability Solutions gross profit as a percentage of Merchandise Availability Solutions revenues decreased to 42.9% in 2013, from 44.2% in 2012. The decrease in the gross profit percentage of Merchandise Availability Solutions was due primarily to lower margins in EAS systems, Library, and RFID. The decrease was partially offset by higher margins in Alpha® and EAS consumables. EAS systems and RFID margins were lower due to product and customer mix offset partially by a reduction in low margin roll-outs in Europe as well as the effects of our cost reductions. RFID margins were also negatively impacted as we continue pilot programs and make additional investments with new and existing customers. RFID margins were also impacted by increased field service costs resulting from a significant roll-out in the U.S. Library margins decreased, primarily due to the expiration of a licensing agreement in the U.S. Alpha® margins increased due to product mix and favorable manufacturing variances. EAS consumables margins increased due primarily to favorable manufacturing variances, driven by high volumes and improved utilization of our manufacturing facilities as a result of our restructuring activities.
Apparel Labeling Solutions

Apparel Labeling Solutions gross profit as a percentage of Apparel Labeling Solutions revenues increased to 30.0% in 2013, from 25.1% in 2012. Due to the recent actions of Project LEAN to restructure and right size our manufacturing footprint, we are beginning to see positive gross margin impact most notably from business rationalization, inventory management, and improved efficiencies.


49


Retail Merchandising Solutions

The Retail Merchandising Solutions gross profit as a percentage of Retail Merchandising Solutions revenues decreased to 36.7% in 2013 from 45.7% in 2012. The decrease in Retail Merchandising Solutions gross profit percentage was primarily due to the full year impact of the movement of a portion of this business to a distributor model in 2012 and increased pension costs. Further, lower margins in 2013 were caused by increased inventory costs and unfavorable manufacturing variances related to lower volumes in HLS.
Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses decreased $29.3 million, or 11.8%, during 2013 compared to 2012. Foreign currency translation decreased SG&A expenses by approximately $0.2 million. The SG&A and enhanced Global Restructuring programs reduced expenses by approximately $30.4 million. Offsetting these cost reductions were increases in long-term incentive compensation, increased marketing efforts, costs associated with the CFO transition, and increases in external tax services. These increases were partially offset by decreases in SG&A expenses due to CEO transition costs recorded in 2012 without comparable expense in 2013, less amortization expense in 2013 due to fully amortized intangible assets, reductions in performance incentive compensation, reductions in bad debt expense of $0.3 million due to improved collection efforts, reductions in external legal and audit services and decreased payroll related costs associated with the 53 week fiscal year 2012.
Research and Development Expenses

Research and development (R&D) expenses were $17.5 million, or 2.5% of revenues, in 2013 and $16.4 million, or 2.4% of revenues in 2012, as we have increased our investment in the development of new products and solutions.
Restructuring Expenses

Restructuring expenses were $10.9 million, or 1.6% of revenues in 2013 compared to $28.4 million or 4.1% of revenues in 2012. The decrease is due to the expansion of the Global Restructuring Plan to include Project LEAN during the second quarter of 2012.
Asset Impairment
Asset impairment expense was $4.8 million, or 0.7% of revenues in 2013, without a comparable charge in 2012. The 2013 expense is detailed in the "Asset Impairments" section of Item 7 following "Liquidity and Capital Resources".
Goodwill Impairment

Goodwill impairment expense was $102.7 million, or 14.9% of revenues in 2012, without a comparable charge in 2013. The non-cash impairment expense in 2012 is detailed in the “Goodwill Impairments” section of Item 7.
Litigation Settlement

Litigation settlement in 2013 was a benefit of $6.6 million compared to $0.3 million of litigation settlement expense in 2012. The 2013 benefit is related to the All-Tag Security S.A., et al litigation in which a decision was reversed in our favor. As a result, we reversed previously accrued charges for the attorneys' fees and costs of the defendants. 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.

Acquisition Costs

Acquisition Costs in 2013 were $1.0 million compared to $0.3 million in 2012. The increase in acquisition costs was primarily due to legal and other arbitration-related costs incurred in connection with the ongoing EBITDA contingent payment arbitration process related to the acquisition of the Shore to Shore businesses in May 2011.

Other (Income) Expense

Other income was $3.9 million in 2012 without comparable expense in 2013. 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.

50


Other Operating Income

Other operating income was $0.6 million, or 0.1% of revenues in 2013 compared to $2.0 million, or 0.3% of revenues in 2012. The 2013 other operating income includes $0.3 million of income attributable to the renewal and extension of sales-type lease arrangements and a $0.2 million gain on sale of our interest in the non-strategic Sri Lanka subsidiary.
The 2012 other operating income represents the gain on sale of our non-strategic Suzhou, China subsidiary, as well as income attributable to the renewal and extension of sales-type lease arrangements.
Interest Income and Interest Expense

Interest income in 2013 decreased $0.2 million from the comparable period in 2012. The decrease in interest income was primarily due to decreased interest income recognized for sales-type leases during 2013 compared to 2012.
Interest expense for 2013 increased $6.4 million from the comparable period in 2012. The increase in interest expense was primarily due to make-whole premiums and write off of debt issuance costs of $9.2 million in 2013 in connection with payments of the 2010 Senior Secured Credit Facility and Senior Secured Notes compared to $2.3 million in make-whole premiums and write off of debt issuance costs in 2012.
Other Gain (Loss), net

Other gain (loss), net was a net loss of $3.9 million in 2013 compared to a net loss of $1.7 million in 2012. There was a $4.1 million foreign exchange loss during 2013 compared to a $1.7 million foreign exchange loss during 2012. The increased foreign exchange loss is primarily attributable to U.S. Dollar and Euro fluctuations versus currencies in emerging markets where hedging is either impossible or impractical.
Income Taxes

The effective tax rate for 2013 was 193.2% as compared to negative 4.5% for 2012. The 2013 effective tax rate was impacted by $9.2 million of debt modification expense without a tax benefit due to the U.S. valuation allowance. The 2012 tax rate was impacted by the 2012 goodwill impairment charges.
Loss from Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax, was $17.2 million and $8.0 million in 2013 and 2012, respectively. Consistent with our refined strategy to focus on inventory management systems relating to on-shelf availability, we decided to reduce our emphasis on CheckView® services and solutions. In April 2013, we completed the sale of our U.S. and Canada based CheckView® business so that we can focus on the growth of our core business. We recognized a loss of $13.6 million on the sale of our U.S. and Canada based CheckView® business in 2013, including selling costs of $1.1 million, as well as $0.4 million of costs incurred to carve-out the U.S. and Canada CheckView® business from our enterprise resource planning system. 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. As such, both businesses, which were included in our Merchandise Availability Solutions segment, are excluded from continuing operations.
Net (Loss) Earnings Attributable to Checkpoint Systems, Inc.

Net loss attributable to Checkpoint Systems, Inc. was $18.9 million, or $0.46 per diluted share, during 2013 compared to $146.5 million, or $3.57 per diluted share, during 2012. The weighted-average number of shares used in the diluted earnings per share computation was 41.5 million and 41.0 million for 2013 and 2012, respectively.











51


Fiscal 2012 compared to Fiscal 2011

Net Revenues

During 2011, revenues decreased by $68.5 million, or 9.0%, from $758.4 million to $689.9 million. Foreign currency translation had a negative impact on revenues of $25.0 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

 
(As Restated)