10-K 1 ckp-20141228x10k.htm 10-K CKP-2014.12.28-10K
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
 FORM 10-K

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

For the fiscal year ended December 28, 2014
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 29, 2014, the aggregate market value of the Common Stock held by non-affiliates of the Registrant was approximately $577,525,584.
As of March 2, 2015, there were 41,830,156 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.
 



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; our ability to manage growth effectively including our ability to integrate acquisitions and to achieve our financial and operational goals for our acquisitions; 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 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. 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 27 countries. Our products are principally developed and manufactured in-house and sold through direct distribution and reseller channels.
 
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 have 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.

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.


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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.

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), 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. In 2014, we reiterated our commitment to this strategy and our focus on innovation and internally-developed technologies with the appointment of a Senior Vice President of Innovation. We are building a corporate development and mergers and acquisitions (M&A) team to complement our internally-developed innovation with targeted strategic acquisitions.

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

We report our financial results in three segments: Merchandise Availability Solutions (MAS), Apparel Labeling Solutions (ALS), and Retail Merchandising Solutions (RMS).

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. ALS includes the results of our radio frequency identification (RFID) labels business, coupled with our data management platform and network of service bureaus that manage the printing of variable information on apparel labels and tags. Our RMS segment includes hand-held labeling applicators and tags, promotional displays, and customer queuing systems. 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.

MERCHANDISE AVAILABILITY SOLUTIONS

Our largest segment provides shrink management and inventory management (RFID) solutions to retailers. Merchandise Availability Solutions represented approximately 66%, 67%, and 65% of total revenues in 2014, 2013, and 2012, 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 technologies. EAS systems revenues accounted for 27%, 28%, and 28% of our 2014, 2013, and 2012 total revenues, respectively.


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We offer a wide variety of EAS-RF 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 16%, 15% and 14% of our total revenues for 2014, 2013, and 2012, 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 2014, 2013, and 2012, our Alpha® business represented 19%, 19%, 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 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 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. 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.

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 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 or packaging.

We believe our enhanced performance (EP) labels carry the smallest circuit design on the worldwide market, while simultaneously delivering superior performance in both 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

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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 ensures 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 complement 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 or RF 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 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%, 26%, and 27% of our total revenues for 2014, 2013, and 2012, 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 19 service bureaus strategically located in 16 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.

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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 8% 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 digital 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.

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, return-on-investment analysis and superior benefit visualization.

We design, engineer, and manufacture the majority of our 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.


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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. 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 earned 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 2013 Global Retail Theft Barometer estimates that shrink averages 1.29% 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 (lost sales) or over-stocks (that later need to be marked-down to sell) 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 over-stocks and increase both sales and contribution margin significantly.

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
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
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
Assisting retailers in maximizing the benefits of merchandise visibility through their supply chain all the way to their stores' exit doors - from source to shopper

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

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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
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 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. For our RFID product line, we primarily rely on outside sources for the bonding of chips to antennas to assemble wet and dry inlays. These inlays are further converted to finished products in Checkpoint facilities in Europe, North America, and Asia.

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 hydrochloric acid solutions for our disposable tags; outsourced inlays, paper and adhesive for our RFID tags, and polymer resin and electronic components for our Alpha® products. While most of these materials are purchased from several suppliers, there are alternative sources for all such materials. The products that are not manufactured by us are sub-contracted to manufacturers selected for their manufacturing and assembly skills, quality, and price.

Apparel Labeling Solutions

We manufacture labels and tags for apparel. Our ALS network of 19 service bureaus located in 16 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 16 countries, all in close proximity to garment manufacturers. Our main production facilities are located in the Netherlands, Bangladesh, and China, with other key production facilities situated in the U.S., China, Hong Kong, 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.


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DISTRIBUTION

For our major product lines, we principally sell to end customers using our direct sales force of more than 350 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, China, Hong Kong, India, Japan, Malaysia, 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 $29.0 million at December 28, 2014, compared to approximately $25.3 million at December 29, 2013. We anticipate that substantially all of the backlog at the end of 2014 will be delivered during 2015. In the opinion of management, the amount of backlog is not indicative of trends in our business. Our security business generally follows the retail cycle so that revenues are weighted toward the last half of the calendar year as retailers prepare for the holiday season.

TECHNOLOGY, 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.




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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 2014 revenues were approximately $10.3 billion, of which $7.8 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 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.

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 $15.3 million, $17.5 million, and $16.4 million, in research and development activities during 2014, 2013, and 2012, 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 28, 2014, we had 4,894 employees, including eight executive officers, 112 employees engaged in research and development activities, 362 field service employees, and 386 employees engaged in sales and marketing activities. There were

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184 fewer employees on December 28, 2014 than on December 29, 2013. In the United States, none of our employees are represented by a union. In Europe, approximately 297 of our employees are represented by various unions or work councils.

Financial Information about Geographic and Business Segments

We operate both domestically and internationally in the three distinct business segments described previously. The financial information regarding our geographic and business segments, which includes net revenues and gross profit for each of the years in the three-year period ended December 28, 2014, and long-lived assets as of December 28, 2014 and December 29, 2013, 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.

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.
62
8 years
President and Chief Executive Officer since February 2013; Director since 2006
Jeffrey O. Richard
47
2 years
Executive Vice President and Chief Financial Officer since May 2013
Per H. Levin
57
20 years
President, Merchandise Availability Solutions since January 2015
Farrokh Abadi
53
10 years
Chief Strategy and Development Officer since January 2015
S. James Wrigley
61
5 years
President and Chief Operating Officer, Apparel Labeling Solutions since June 2012
Bryan T. R. Rowland
35
12 years
Vice President, General Counsel and Secretary since May 2014
Carol P. Roy
63
7 years
Chief Human Resources Officer since February 2015
Uwe Sydon
52
1 year
Senior Vice President of Innovation since May 2014

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.


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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, Merchandise Availability Solutions on January 6, 2015. He was President and Chief Sales Officer, Merchandise Availability Solutions and Merchandise Visibility from June 2012 to January 2015. 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. Mr. Levin was President, Merchandise Availability 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 Chief Strategy and Development Officer on January 6, 2015. He was President and Chief Operating Officer, Merchandise Availability Solutions from June 2012 to January 2015. Mr. Abadi was President, Merchandise Availability Solutions from September 2010 until June 2012. He was Senior Vice President and Chief Innovation Officer from October 2008 until September 2010. 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 and Chief Operating Officer, 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.

Mr. Rowland was appointed Vice President, General Counsel and Secretary in May 2014. Mr. Rowland served as Associate General Counsel, Chief Compliance Officer and Corporate Secretary from September 2012 until May 2014; Assistant General Counsel from May 2011 until September 2012 and Counsel from September 2005 until May 2011. Mr. Rowland graduated from Towson University with a bachelor’s degree in Psychology and Philosophy and earned his Juris Doctor degree from Villanova University School of Law. 

Ms. Roy was appointed Chief Human Resources Officer in February 2015. Ms. Roy served as Senior Vice President, Global Human Resources for Checkpoint Systems, Inc. from March 2013 until February 2015. Previously, she was Vice President, Global Human Resource Operations since August 2011 and Vice President Human Resources, The Americas and Caribbean since 2008. Prior to Checkpoint, Ms. Roy spent 11 years at Citigroup first as Vice President & Senior Human Resource Officer during the formation of Citigroup Business Services and then as Vice President, Global Flexible Work Strategies. Prior to joining Citigroup, Ms. Roy held diverse human resource roles at GE Aerospace/Lockheed Martin including University Relations, EEO & Practices, Organizational Effectiveness, Executive Development and business partnerships. During her last four years at GE, she was Division HR Director for the company’s Simulation business. Earlier in her career, Ms. Roy was an operations manager for Progressive Insurance at the company’s headquarters in Cleveland, Ohio. Ms. Roy has a Master’s degree in Personnel Services and a Bachelor of Science degree in Human Development from The Pennsylvania State University.   

Mr. Sydon was appointed Senior Vice President of Innovation in May 2014. Prior to Checkpoint, Mr. Sydon served as Vice President of Product Management for BlackBerry (RIM) in Canada. Prior to his work with BlackBerry he held a variety of innovation and product management leadership positions in Siemens AG and Nokia Siemens Networks. Mr. Sydon has over 22 years of international experience in the telecom industry and has a track record of establishing operational excellence, leading product strategies for global development and launch, and driving sustainable, scalable growth in markets worldwide. Mr.

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Sydon holds an Elektrotechnik, Nachrichtentechnik (Diplom Ingenieur), which is equivalent to a U.S. Master of Engineering from Bergische Universität Gesamthochschule, Wuppertal, Germany.

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 27 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:

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
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.

Our global operations expose us to risks associated with conducting business internationally, including violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.

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. Due to our global operations, we are subject to many laws governing international relations, including those that prohibit improper payments to government officials and commercial customers, and restrict where we can do business, what information or products we can supply to certain countries and what

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information we can provide to a non-U.S. government, including but not limited to the Foreign Corrupt Practices Act, U.K. Bribery Act and the U.S. Export Administration Act. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. Given the high level of complexity of these laws, there is a risk that some provisions may be inadvertently or intentionally breached, for example through fraudulent or negligent behavior of individual employees, our failure to comply with certain formal documentation requirements or otherwise. Additionally, we may be held liable for actions taken by our local dealers and partners. If we are found to be liable for FCPA or other violations (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we could suffer from civil and criminal penalties or other sanctions, which could have a material adverse impact on our business, financial condition, and results of operations.

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 Item 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 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 within MAS 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

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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 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
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, delays 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

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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 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.

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

During 2012, we redefined our strategic plan and in 2014 we reiterated our commitment to this plan. Our strategic plan is designed to improve revenues and profitability, reduce costs, and improve working capital management. In addition to our restructuring plans including our Profit Enhancement Plan, 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

18


Systematic talent assessment process
Developing a culture focused on accountability
Improved supply chain management

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 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.

19


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 deterioration in results could trigger a future impairment.
Our senior secured credit facility agreement 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

20


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

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

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

Risks generally associated with a company-wide implementation of an enterprise resource planning (ERP) system may adversely affect our business and results of operations or the effectiveness of 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. We plan to implement our South China ALS ERP system by the end of 2016. 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.

Information technology failures and cyber-attacks on our networks could harm our business and results of operations.

We use information technology and other computer resources to carry out important operational and marketing activities and to maintain our business records. These information technology systems are dependent upon global communications providers, web browsers, telephone systems and other aspects of the Internet infrastructure that have experienced security breaches, cyber-attacks, significant systems failures and electrical outages in the past. Thus, maintaining the security of computers, computer networks and data storage resources is a critical issue for us and our customers and suppliers, because security breaches could result in reduced or lost ability to carry on our business and loss of and unauthorized access to confidential information. We have designed our information technology systems to protect against failures in security and service disruption. Despite the precautions we take, we may be subject to computer viruses, worms or other malicious codes, unauthorized access attempts, and cyber- or phishing-attacks, which, if successful, could compromise our confidential information, including identifiable personal information, disrupt our operations and expose us to customer, supplier, and other third party liabilities.

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

Since we conduct operations worldwide through our foreign subsidiaries, we are subject to complex transfer pricing regulations in the countries in which we operate. Transfer pricing regulations generally require that, for tax purposes, transactions between us and our foreign affiliates be priced on a basis that would be comparable to an arm's length transaction and that contemporaneous documentation be maintained to support the tax allocation. Although uniform transfer pricing standards are emerging in many of the countries in which we operate, there is still a relatively high degree of uncertainty and inherent subjectivity in complying with these rules. To the extent that any foreign tax authorities disagree with our transfer pricing policies, we could become subject to significant tax liabilities and penalties. Our tax returns are subject to review by taxing authorities in the jurisdictions in which we operate. Although we believe that we have provided for all tax exposures, the ultimate outcome of a tax review could differ materially from our provisions.


21


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 28, 2014, 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

See Note 16 to the Consolidated Financial Statements for the discussion of legal proceedings under Contingencies, which is incorporated herein by reference.

Item 4. MINE SAFETY DISCLOSURES

Not Applicable.


22


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 28, 2014
 
 
 
First Quarter
$
15.88

 
$
12.07

Second Quarter
$
14.48

 
$
11.94

Third Quarter
$
14.35

 
$
11.93

Fourth Quarter
$
14.12

 
$
11.55

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


Holders of Record

As of March 2, 2015, there were 465 holders of record of our common stock.

Dividends

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). On March 5, 2015 we declared a dividend of $0.50 per outstanding common share for all shareholders of record as of March 20, 2015. The dividend is payable on April 10, 2015. 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 2014, 2013, or 2012.

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 3, 2015, 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 27, 2009 and ending on December 28, 2014, 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.


23


 
 
Year
 
Checkpoint
Systems, Inc.
 
 
NYSE/AMEX/NASDAQ
Stock Market Index
 
NASDAQ Electronic
Components and
Accessories Index
2009
100.00

 
100.00

 
100.00

2010
135.77

 
116.50

 
115.90

2011
73.37

 
118.38

 
107.14

2012
68.15

 
134.56

 
109.05

2013
99.61

 
181.87

 
149.71

2014
91.58

 
207.18

 
194.03


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. 
 
12/27/2009
12/26/2010
12/25/2011
12/30/2012
12/29/2013
12/28/2014
Checkpoint Systems, Inc.
100.00

135.77

73.37

68.15

99.61

91.58

NYSE/AMEX/NASDAQ Stock Market Index
100.00

116.50

118.38

134.56

181.87

207.18

NASDAQ Electronic Components and Accessories Index
100.00

115.90

107.14

109.05

149.71

194.03


Repurchase of Securities

There has been no repurchase of securities in fiscal years 2014, 2013, or 2012.


24


Item 6. SELECTED FINANCIAL DATA

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 28, 2014

 
December 29, 2013

 
December 30, 2012

 
December 25, 2011

 
December 26, 2010

 
STATEMENT OF OPERATIONS DATA
 
 
 
 
 
 
 

 
 
 
Net revenues
$
662,040

 
$
689,738

 
$
689,920

 
$
758,400

 
$
717,554

 
Earnings (loss) from continuing operations before income taxes
$
34,174

 
$
1,900

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

 
Income taxes expense
$
23,221

 
$
3,671

 
$
6,005

 
$
53,353

 
$
4,536

 
Net earnings (loss) from continuing operations
$
10,953

 
$
(1,771
)
 
$
(139,020
)
 
$
(82,396
)
 
$
20,054

 
Earnings (loss) from discontinued operations, net of tax
$

 
$
(17,156
)
 
$
(7,959
)
 
$
(1,165
)
 
$
8,325

 
Net earnings (loss) attributable to Checkpoint Systems, Inc.
$
10,953

(1) 
$
(18,928
)
(2) 
$
(146,450
)
(3) 
$
(83,504
)
(4) 
$
28,495

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

 
 
 
 
 
  Basic
$
0.26

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

 
  Diluted
$
0.26

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

 
Net earnings (loss) attributable to Checkpoint Systems, Inc. per share:
 
 
 
 
 
 
 
 
 
 
  Basic
$
0.26

 
$
(0.46
)
 
$
(3.57
)
 
$
(2.06
)
 
$
0.71

 
  Diluted
$
0.26

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

 
Depreciation and amortization
$
25,150

 
$
28,580

 
$
32,714

 
$
37,348

 
$
34,477

 
 
(1) 
Includes a $11.3 million valuation allowance expense, a $6.7 million restructuring charge ($5.9 million, net of tax), $2.2 million in financing liability interest expense ($1.7 million, net of tax), a $1.6 million litigation settlement ($1.6 million, net of tax), a $0.9 million asset impairment ($0.6 million, net of tax), and $0.4 million in acquisition costs ($0.4 million, net of tax).
(2) 
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 benefit, 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).
(3) 
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 expense, $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 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).
(4) 
Includes a $47.7 million valuation allowance expense, 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).


25


(5) 
Includes an $8.2 million restructuring charge ($6.2 million, net of tax), a valuation allowance expense 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.

 
(amounts in thousands, except ratios)
December 28, 2014

 
December 29, 2013

 
December 30, 2012

 
December 25, 2011

 
December 26, 2010

AT YEAR END
 
 
 
 
 
 
 
 
 
Working capital
$
232,551

 
$
233,452

 
$
229,720

 
$
233,179

 
$
293,836

Total debt
$
65,397

 
$
91,622

 
$
113,288

 
$
150,462

 
$
141,949

Total equity
$
327,931

 
$
346,325

 
$
354,309

 
$
508,645

 
$
576,714

Total assets
$
738,666

 
$
799,493

 
$
869,115

 
$
1,058,983

 
$
1,035,993

FOR THE YEAR ENDED
 

 
 

 
 

 
 

 
 

Capital expenditures
$
(17,971
)
 
$
(8,946
)
 
$
(12,401
)
 
$
(22,981
)
 
$
(23,712
)
Cash provided by (used in) operating activities
$
65,542

 
$
21,070

 
$
62,365

 
$
(20,073
)
 
$
11,727

Cash used in investing activities
$
(17,605
)
 
$
(5,298
)
 
$
(2,449
)
 
$
(98,280
)
 
$
(23,185
)
Cash (used in) provided by financing activities
$
(24,135
)
 
$
(11,337
)
 
$
(35,166
)
 
$
37,304

 
$
28,891

RATIOS
 

 
 

 
 

 
 

 
 

Return on net sales(a)
1.65
%
 
(2.74
)%
 
(21.23
)%
 
(11.01
)%
 
3.97
%
Return on average equity(b)
3.25
%
 
(5.40
)%
 
(33.94
)%
 
(15.39
)%
 
5.06
%
Return on average assets(c)
1.42
%
 
(2.27
)%
 
(15.19
)%
 
(7.97
)%
 
2.76
%
Current ratio(d)
2.47

 
2.31
 
2.05
 
1.90
 
2.35
Percent of total debt to capital(e)
16.63
%
 
20.92
 %
 
24.23
 %
 
22.83
 %
 
19.75
%

(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.

(amounts in thousands, except employee data)
December 28, 2014

 
December 29, 2013

 
December 30, 2012

 
December 25, 2011

 
December 26, 2010

OTHER INFORMATION
 
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding - diluted
42,374
 
41,903
 
41,000
 
40,532
 
40,445
Number of employees
4,894
 
4,710
 
5,132
 
6,565
 
5,814
Backlog
$
28,995

 
$
25,273

 
$
48,212

 
$
52,204

 
$
47,974



26


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

The following section highlights significant factors impacting the consolidated operations and financial condition of the Company and its subsidiaries. The following discussion should be read in conjunction with Item 6 “Selected Financial Data” and Item 8 “Financial Statements and Supplementary Data.”

Overview

We are a leading global manufacturer and provider of technology-driven, loss prevention, inventory management and labeling solutions to the retail and apparel industry. We provide integrated inventory management solutions to brand, track, and secure goods for retailers and consumer product manufacturers worldwide. We are a leading provider of, and earn revenues primarily from the sale of 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 27 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.

We report our financial results in three segments: Merchandise Availability Solutions (MAS), Apparel Labeling Solutions (ALS), and Retail Merchandising Solutions (RMS).

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®. ALS includes the results of our RFID labels business, coupled with our data management platform and network of service bureaus that manage the printing of variable information on apparel labels and tags. Our RMS segment includes hand-held labeling applicators and tags, promotional displays, and customer queuing systems. The revenues, gross profit, and total assets 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. Additionally, our business strategy is focusing on improving revenues and profitability, reducing costs, and improving working capital management. 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 also consider acquisitions that are aligned with our strategic plan.

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), 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 with large global retailers to promote source tagging. Furthermore, we plan to leverage our knowledge of radio-frequency (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. In 2014, we reiterated our commitment to this strategy and our focus on innovation and internally-developed technologies with the appointment of a Senior Vice President of Innovation. We are building a corporate

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development and mergers and acquisitions (M&A) team to complement our internally-developed innovation with targeted strategic acquisitions.

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.

During September 2014, we initiated the Profit Enhancement Plan focused on increasing profitability through strategic headcount reductions and the streamlining of manufacturing processes. Total costs of the plan through December 28, 2014 are $5.3 million. Total annual savings of the Profit Enhancement Plan are expected to approximate $7 million, with an expected $6 million in savings to be realized in 2015.

As of December 2014, our expanded Global Restructuring Plan including Project LEAN and the SG&A Restructuring Plan have been substantially completed with total costs incurred to date of $78 million. With initiatives to stabilize sales, actively manage margins, reduce operating expense and effectively manage working capital, the plans are estimated to produce annual cost savings of $108 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.

Future financial results will be dependent upon our ability to successfully implement our 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.

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

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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.

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 was 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 $0.1 million to our reserve.


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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 $0.4 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 acquiring entity would obtain from its ability to obtain control of our business. The difference between the sum total of the fair value of our reporting units and our market capitalization represents the control premium. As of the date of our goodwill impairment test, management has assessed our control premium to be within a reasonable range.

We have not made any changes to our methodology used in our annual impairment test since the adoption of ASC 350. Determination of the fair value of a reporting unit is a matter of judgment and involves the use of estimates and assumptions, which are based on management’s best estimates at the time.

We use an income approach (discounted cash flow approach) for the determination of fair value of our reporting units. Our projected cash flows incorporate many assumptions, the most significant of which include variables such as future sales, growth rates, operating margin, and the discount rates applied.

Assumptions related to revenue, growth rates and operating margin are based on management’s annual and ongoing forecasting, budgeting and planning processes and represent our best estimate of the future results of operations across the company. These estimates are subject to many assumptions, such as the economic environment across the segments in which we operate, end demand for our products, and competitor actions. The use of different assumptions would increase or decrease estimated discounted future cash flows and could increase or decrease an impairment charge. If the use of these assets or the projections of future cash flows change in the future, we may be required to record impairment charges. An erosion of future business results in any of the business units or significant declines in our stock price could result in an impairment charge to goodwill or other long-lived assets. These risks are discussed in Item 1A. Risk Factors.

Our 2013 and 2014 annual impairment assessments as of October month end did not result in any recognized impairment charges. As of the date of our fiscal 2014 annual impairment test, the total estimated fair values for the reporting units in all of our segments substantially exceeded their total carrying values. 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

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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. While there is an overall significant percentage excess in comparing the discounted cash flow value to the overall book value of each reporting unit, the amount by which the Retail Merchandising Solutions Europe and International Americas reporting unit fair value exceeds its carrying value is approximately $7 million. Although our analysis regarding the fair values of the goodwill and indefinite lived intangible assets indicates that they exceed their respective carrying values, materially different assumptions regarding the future performance of our businesses or significant declines in our stock price could result in additional goodwill impairment losses. Specifically, an unanticipated deterioration in revenues and gross margins generated by our 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 have 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 $0.3 million effect on pension expense. Refer to Note 13 of the Consolidated Financial Statements.

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 28, 2014, there was $1.1 million and $3.3 million of unrecognized stock-based compensation

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expense related to unvested stock options and restricted stock units, respectively. Such costs are expected to be recognized over a weighted-average period of 1.7 years and 1.7 years, respectively. Refer to Note 8 of the Consolidated Financial Statements.

Liquidity and Capital Resources

We continue to execute our strategic plan in a volatile global economic environment. Our liquidity needs have been, and are expected to continue to be driven by acquisitions, capital investments, product development costs, potential future restructuring related to the rationalization of the business, and working capital requirements. We have met our liquidity needs primarily through cash generated from operations. Based on an analysis of liquidity utilizing conservative assumptions for the next twelve months, we believe that cash on hand from operating activities and funding available under our credit agreement should be adequate to service debt and working capital needs, meet our capital investment requirements, other potential restructuring requirements, product development requirements, including internally developed innovation and targeted strategic acquisitions.

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 our Global Restructuring Plan. As of December 28, 2014, 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 28, 2014, our cash and cash equivalents were $135.5 million compared to $121.6 million as of December 29, 2013. 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 2014 primarily due to $65.5 million of cash provided by operating activities, partially offset by $24.1 million of cash used in financing activities, $17.6 million of cash used in investing activities and $9.9 million effect of foreign currency.

Cash provided by operating activities was $44.5 million more during 2014 compared to 2013. In 2014 compared to 2013, our cash from operating activities was positively impacted by the significant increase in operating income and improvements in accounts receivable collections partially offset by decreased accounts payable balances and increased inventory investments to support forecasted demand including new market share gains. The remainder of the variances is explained by changes in other current liabilities, unearned revenues, income taxes, other current assets, and the restructuring reserve.

Cash used in investing activities was $12.3 million higher during 2014 compared to 2013. This was primarily due to an increase in the acquisition of property, plant, and equipment during 2014 compared to 2013. In addition, the 2013 cash from investing activities includes proceeds from the sale of our U.S. and Canada based CheckView® business unit, sale of our 51% interest in our Shore to Shore Sri Lanka entity, and from the sale of property, plant and equipment.

Cash used in financing activities was $12.8 million higher during 2014 compared to 2013. This was due primarily to greater reductions of debt levels during 2014 compared to 2013.

Our percentage of total debt to total equity as of December 28, 2014, was 19.9% compared to 26.5% as of December 29, 2013. As of December 28, 2014, our working capital was $232.6 million compared to $233.5 million as of December 29, 2013.

We continue to reinvest in the Company through our investment in technology and process improvement. During 2014, our investment in research and development amounted to $15.3 million, as compared to $17.5 million in 2013. These amounts are reflected in cash used in operations, as we expense our research and development as it is incurred. In 2015, we anticipate spending on research and development to support the achievement of our strategic plan to be in the range of $18 million to $20 million.

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We have various unfunded pension plans outside of the U.S. These plans have significant pension costs and liabilities that are developed from actuarial valuations. For fiscal 2014, our contribution to these plans was $4.9 million. Our funding expectation for 2015 is $4.7 million. We believe our current cash position, cash generated from operations, and the availability of cash under our revolving line of credit will be adequate to fund these requirements. The Contractual Obligation table details our anticipated funding requirements related to pension obligations for the next ten years.

Acquisition of property, plant, and equipment and intangibles during 2014 totaled $18.0 million compared to $8.9 million during 2013. During 2014, our acquisition of property, plant, and equipment and intangibles included $5.4 million of costs related to establishing a new manufacturing facility in China. We anticipate our capital expenditures, used primarily to improve our production capabilities, to be in the range of $20 million to $25 million in 2015.

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. As of December 28, 2014, we were in compliance with all of our covenants, and although we cannot provide full assurance, we expect to be in compliance throughout 2015.

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 also amortized over the term of the 2013 Senior Secured Credit Facility to interest expense on the Consolidated Statement of Operations.

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 September 21, 2012, we repaid $6.1 million on the 2010 Senior Secured Credit Facility. In connection with the repayment, 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. In connection with the repayment, 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. In connection with the repayment, 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.

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.

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 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

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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
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, 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). On March 5, 2015 we declared a dividend of $0.50 per outstanding common share for all shareholders of record as of March 20, 2015. The dividend is payable on April 10, 2015. This special dividend reflects our commitment to building stockholder value through the execution of our strategic plan and a disciplined approach to capital allocation. After the special dividend, we believe we have the appropriate level of liquidity both to fund our internal initiatives and act quickly on any inorganic strategic opportunities.

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.

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 $21.1 million as of December 28, 2014. The scheduled timing of these rental commitments is detailed in our “Contractual Obligations” section.

Contractual Obligations

Our contractual obligations as of December 28, 2014 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)
$
68,874

 
$
1,044

 
$
1,928

 
$
65,902

 

Capital leases(2)
269

 
100

 
154

 
15

 

Operating leases
21,065

 
8,639

 
9,184

 
2,502

 
740

Pension obligations(3)
47,817

 
4,474

 
9,036

 
9,353

 
24,954

Purchase obligations(4)
1,552

 
1,552

 

 

 

Total contractual cash obligations
$
139,577

 
$
15,809

 
$
20,302

 
$
77,772

 
$
25,694


Our commercial commitments as of December 28, 2014 are summarized below:


34


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
$
1,415

 
$
1,415

 
$

 
$

 
$

Surety bonds
1,064

 
867

 
197

 

 

Total commercial commitments
$
2,479

 
$
2,282

 
$
197

 
$

 
$

 
(1) 
Includes the 2013 Senior Secured Credit Facility, long-term full-recourse factoring liabilities, and related interest payments through maturity of $3.8 million.
(2) 
Includes interest payments through maturity of $20 thousand.
(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 2014 and include benefits attributable to estimated future employee service of current employees.
(4) 
Purchase obligations represent our legally binding agreements to purchase services or goods at fixed prices or minimum quantities.

The table above excludes our gross liability for uncertain tax positions, including accrued interest and penalties, which totaled $31.3 million as of December 28, 2014, 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 2014, 2013, and 2012 was $6.2 million, $6.3 million, and $5.1 million, respectively.

We review our pension assumptions annually. Our assumptions for the year ended December 28, 2014, were a discount rate of 3.52%, an expected return of 3.90% and an expected rate of increase in future compensation of 2.53%. 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 28, 2014 and December 29, 2013, the weighted average discount rate was 2.01% and 3.52%, 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 10 years. The impact of recognizing the actuarial losses on 2014, 2013, and 2012 pension expense was $1.5 million, $1.6 million, and $0.3 million, respectively. The total projected amortization for these losses in 2015 is approximately $3.3 million.

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 28, 2014, we had currency forward exchange contracts with notional amounts totaling approximately $3.6 million. The fair values of the forward exchange contracts were reflected as a $55 thousand asset and a $23 thousand liability included in other current assets and other current liabilities in the

35


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 28, 2014, 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 28, 2014, there were no unrealized gains or losses recorded in other comprehensive income. During the year ended December 28, 2014, no 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 28, 2014.

Provision for Restructuring

During September 2014, we initiated the Profit Enhancement Plan focused on increasing profitability through strategic headcount reductions and the streamlining of manufacturing processes. Total costs of the plan through December 28, 2014 are $5.3 million. Total annual savings of the Profit Enhancement Plan are expected to approximate $7 million, with an expected $6 million in savings to be realized in 2015.

As of December 2014, our expanded Global Restructuring Plan including Project LEAN and the SG&A Restructuring Plan have been substantially completed with total costs incurred to date of $78 million. With initiatives to stabilize sales, actively manage margins, reduce operating expense and effectively manage working capital, the estimated cost savings over the life of the plans is $108 million. Refer to Note 15 of the Consolidated Financial Statements.

Goodwill Impairments

We perform an assessment of goodwill by comparing each individual reporting unit’s carrying amount of net assets, including goodwill, to their estimated 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 2014 and 2013 annual assessments did not result in impairment charges. Future annual assessments could result in impairment charges, which would be accounted for as operating expense.

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 of 2012. We determined that there was a $3.3 million non-cash goodwill impairment charge within our Merchandise Availability Solutions segment. This impairment charge was included in discontinued operations on the Consolidated Statement of Operations.

Our annual impairment test in 2012 resulted in a $38.3 million non-cash goodwill impairment charge within our Retail Merchandising Solutions segment. The impairment was due to the decline in estimated future cash flows of our European Retail Merchandising Solutions reporting unit impacted by economic conditions in Europe resulting in decreased customer investments in new stores and refurbishments, as well as increased competition and pricing pressures.

In the second quarter of 2012, we performed an interim impairment assessment as a result of the deterioration in revenues, gross margins and operating results in each of our segments as compared to the forecasted amounts in the previous year's impairment test. As a result of our interim impairment test, a $64.4 million non-cash goodwill impairment charge was recorded in our Apparel Labeling Solutions segment. The impairment was due to a decline in estimated future Apparel Labeling Solutions cash flow impacted by our plan to refocus the business, coupled with declines in revenue and profitability.

As a result of the plan to divest the Banking Security Systems Integration business unit, we performed interim impairment testing in the second quarter of 2012. We determined that there was a $0.4 million non-cash goodwill impairment charge within our Merchandise Availability Solutions segment. This impairment charge was included in discontinued operations on the Consolidated Statement of Operations.

Asset Impairments

36



In December 2014, as a result of our annual impairment test of our indefinite-lived trade names, we recorded a $0.9 million impairment charge to the value of the OAT trade name. The impairment charge was recorded in asset impairment expense in the Merchandise Availability Solutions segment on the Consolidated Statement of Operations. The impairment is due to minimal anticipated growth in our legacy OAT asset tracking business, as our Merchandising Visibility focus shifts towards end-to-end retail inventory visibility solutions.

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.

In the fourth quarter of 2012, as a result of the plan to divest our U.S. and Canada based CheckView® business unit, we performed impairment testing of the long-lived assets and recorded a $0.3 million impairment charge to the property, plant and equipment in our Merchandise Availability Solutions segment. This impairment charge was included in discontinued operations on the Consolidated Statement of Operations.

In 2012, as a result of the plan to divest the Banking Security Systems Integration business unit, we performed interim impairment testing of the long-lived assets and recorded impairment charges to the customer relationship intangible assets of $0.7 million and $0.8 million in the second and third quarters, respectively. These impairment charges were included in discontinued operations on the Consolidated Statement of Operations.

Results of Operations

(All comparisons are with the previous fiscal year, unless otherwise stated.)

Net Revenues

Our unit volume is driven by product offerings, number of direct sales personnel, recurring sales and, to some extent, pricing. Our base of installed systems provides a source of recurring revenues from the sale of disposable tags, labels, and service revenues.

Our customers are substantially dependent on retail sales, which are seasonal, subject to significant fluctuations, and difficult to predict. In addition, current economic trends have particularly affected our customers, and consequently our net revenues have been, and may continue to be impacted in the future. Historically, we have experienced lower sales in the first half of each year.




















37












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 28,
2014
(Fiscal 2014)

 
December 29,
2013
(Fiscal 2013)

 
December 30,
2012
(Fiscal 2012)

 
Fiscal 2014
vs.
Fiscal 2013

 
Fiscal 2013
vs.
Fiscal 2012

Net revenues:
 
 
 
 
 
 
 
 
 
Merchandise Availability Solutions
66.2
 %
 
66.2
 %
 
64.8
 %
 
(3.8
)%
 
2.1
 %
Apparel Labeling Solutions
26.4

 
26.4

 
27.1

 
(4.3
)
 
(2.8
)
Retail Merchandising Solutions
7.4

 
7.4

 
8.1

 
(4.9
)
 
(7.8
)
Net revenues
100.0

 
100.0

 
100.0

 
(4.0
)
 

Cost of revenues
56.9

 
61.0

 
60.9

 
(10.4
)
 
0.1

Total gross profit
43.1

 
39.0

 
39.1

 
5.9

 
(0.3
)
Selling, general, and administrative expenses
33.5

 
31.7

 
36.0

 
1.3

 
(11.8
)
Research and development
2.3

 
2.5

 
2.4

 
(12.7
)
 
6.9

Restructuring expense
1.0

 
1.6

 
4.1

 
(38.8
)
 
(61.8
)
Asset impairment
0.1

 
0.7

 

 
(82.1
)
 
N/A
Goodwill impairment

 

 
14.9

 
N/A
 
(100.0
)
Litigation settlement
0.2

 
(0.9
)
 

 
(124.3
)
 
N/A
Acquisition costs
0.1

 
0.1

 
0.1

 
(62.1
)
 
189.2

Other income

 

 
(0.6
)
 
N/A
 
(100.0
)
Other operating income

 
(0.1
)
 
(0.3
)
 
(100.0
)
 
(71.7
)
Operating income (loss)
5.9

 
3.4

 
(17.5
)
 
66.4

 
(119.3
)
Interest income
0.2

 
0.2

 
0.3

 
(22.1
)
 
(13.8
)
Interest expense
0.7

 
2.7

 
1.8

 
(75.5
)
 
51.2

Other gain (loss), net
(0.2
)
 
(0.6
)
 
(0.3
)
 
(72.0
)
 
127.4

Earnings (loss) from continuing operations before income taxes
5.2

 
0.3

 
(19.3
)
 
1,698.6

 
(101.4
)
Income taxes expense
3.5

 
0.5

 
0.9

 
532.6

 
(38.9
)
Net earnings (loss) from continuing operations
1.7

 
(0.2
)
 
(20.2
)
 
(718.5
)
 
(98.7
)
Loss from discontinued operations, net of tax (benefit) expense of $0, ($68), and $247

 
(2.5
)
 
(1.1
)
 
(100.0
)
 
115.6

Net earnings (loss)
1.7

 
(2.7
)
 
(21.3
)
 
(157.9
)
 
(87.1
)
Less: gain (loss) attributable to non-controlling interests

 

 
(0.1
)
 
(100.0
)
 
(100.2
)
Net earnings (loss) attributable to Checkpoint Systems, Inc.
1.7
 %
 
(2.7
)%
 
(21.2
)%
 
(157.9
)
 
(87.1
)%
 

38


N/A - Comparative percentages are not meaningful.

Fiscal 2014 compared to Fiscal 2013

Net Revenues

During 2014, revenues decreased by $27.7 million, or 4.0%, to $662.0 million from $689.7 million. Foreign currency translation had a negative impact on revenues of $7.8 million for the full year of 2014.
(amounts in millions)
 
 
 
 
 
 
 
Year ended
December 28,
2014
(Fiscal 2014)

 
December 29,
2013
(Fiscal 2013)

 
Dollar
Amount
Change
Fiscal 2014
vs.
Fiscal 2013

 
Percentage
Change
Fiscal 2014
vs.
Fiscal 2013

Net Revenues:
 
 
 
 
 
 
 
Merchandise Availability Solutions
$
438.8

 
$
456.1

 
$
(17.3
)
 
(3.8
)%
Apparel Labeling Solutions
174.3

 
182.2

 
(7.9
)
 
(4.3
)%
Retail Merchandising Solutions
48.9

 
51.4

 
(2.5
)
 
(4.9
)%
Net Revenues
$
662.0

 
$
689.7

 
$
(27.7
)
 
(4.0
)%

Merchandise Availability Solutions

Merchandise Availability Solutions (MAS) revenues decreased $17.3 million, or 3.8% in 2014 compared to 2013. Foreign currency translation had a negative impact of $6.2 million for the year. The adjusted decrease of $11.1 million in MAS was primarily due to decreases in EAS Systems and Merchandise Visibility (RFID). There were also decreases to a lesser extent in Alpha® and CheckView®. These decreases were partially offset by an increase in EAS consumables.
EAS Systems revenues decreased due to the completion of two major 2013 chain-wide installations. This decrease was partially offset by a major U.S. chain-wide installation that occurred primarily in 2014.

EAS consumable revenues grew considerably in the U.S. and Europe due to the new, recurring business as a result of the three major chain-wide installations which occurred in 2013 and 2014. We expect operational and financial challenges faced by key retailers in certain markets to put pressure on our consumables volumes. We expect to largely mitigate these challenges by gains in recurring consumables business resulting from recent competitive EAS Systems wins and chain-wide roll-outs.

The Merchandise Visibility (RFID) revenues decreased primarily due to a substantial roll-out with RFID enabled technology at a major retailer in the U.S. that was completed in 2013 compared to less significant roll-outs in 2014. The decrease was partially offset by increases in Europe as the business continues to gain traction with installations at several major retailers. Overall, RFID installation revenues are lower than expected in 2014 as retailers are being extremely cautious with their in-store capital investments. We continue to expand the number of retailers piloting with RFID-based inventory management solutions. We remain confident in our ability to grow this business as our solutions continue to deliver strong return on investment results to our customers. The rate of adoption remains under pressure due to financial challenges at key retail customers.

Alpha® revenues decreased due to weaker sales in the U.S. and Europe. The decrease is primarily due to large build-up orders in 2013 without comparable orders in 2014. We expect our global Alpha® revenues in 2015 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 previous years and increased competitive pressure.

We now only provide CheckView® CCTV services in Asia in connection with EAS systems when our customers require a combined security solution. Our CheckView® Asia revenues decreased due to our decreased focus on this business.

Apparel Labeling Solutions

Apparel Labeling Solutions revenues decreased $7.9 million, or 4.3% in 2014 compared to 2013. After considering the foreign currency translation negative impact of $1.3 million, the $6.6 million decrease in revenues is driven by declines in legacy labeling business sales volumes in the U.S., Europe, and Asia due to the effect of some market share loss and the impact of customers moving to lower priced trim solutions. The decrease was partially offset by increases in RFID labels revenue in Asia

39


and Europe resulting from higher demand for RFID labels due to a substantial customer roll-out with RFID enabled technology. However, the U.S. saw a decline in RFID labels revenue due to a substantial roll-out with RFID enabled technology in 2013, without a comparable roll-out in 2014. We expect modest growth in Apparel Labeling Solutions as we focus on winning increased share with existing customers and build on some recent wins in both our core and RFID labels business.

Retail Merchandising Solutions

Retail Merchandising Solutions revenues decreased $2.5 million, or 4.9% in 2014 compared to 2013. After considering the foreign currency translation negative impact of $0.3 million for the year, the $2.2 million decrease in revenues is primarily due to the impact of the movement of a portion of this business to a distributor model and pricing pressures. 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. Hand-held Labeling Solutions (HLS) revenues increased slightly in 2014 compared to 2013, but is expected to face difficult revenue trends due to the continued shifts in market demand for HLS products.

Gross Profit

During 2014, gross profit increased $16.0 million, or 5.9%, to $285.1 million from $269.1 million. The negative impact of foreign currency translation on gross profit was $3.2 million for the year. Gross profit, as a percentage of net revenues, increased to 43.1% from 39.0%.

Merchandise Availability Solutions

Merchandise Availability Solutions gross profit as a percentage of Merchandise Availability Solutions revenues increased to 47.2% in 2014 from 42.9% in 2013. The increase in the gross profit percentage was driven by continued cost reduction efforts across all product lines as well as a major focus on margin enhancement initiatives, which include pricing, new product, field service, and freight initiatives. We expect to maintain approximately level margins through 2015 as our continued focus on margin enhancement initiatives is expected to mitigate the negative impact of increased competition and wage and material inflation at key manufacturing sites.

Apparel Labeling Solutions

Apparel Labeling Solutions gross profit as a percentage of Apparel Labeling Solutions revenues increased to 34.5% in 2014 from 30.0% in 2013. 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, improved manufacturing efficiencies, and supply chain optimization. We expect a more modest growth in margins through targeted productivity initiatives and further supply chain improvements.

Retail Merchandising Solutions

The Retail Merchandising Solutions gross profit as a percentage of Retail Merchandising Solutions revenues slightly decreased to 36.4% in 2014 from 36.7% in 2013. The decrease in Retail Merchandising Solutions gross profit percentage was primarily due to market pricing pressures, as well as the movement of a portion of this business to a distributor model, partially offset by margin enhancement initiatives. We expect the trends in pricing pressures to continue to impact this business in 2015.

Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses increased $2.8 million, or 1.3% in 2014 compared to 2013. Foreign currency translation decreased SG&A expenses by $1.9 million for the year. The adjusted increase in SG&A expenses of $4.7 million was primarily due to increases in employee-related costs including increases in staffing and performance incentive compensation as well as management consulting costs. Partly offsetting these increases, the SG&A and enhanced Global Restructuring programs continued to reduce SG&A expenses by approximately $9.8 million. Also offsetting the decrease was a reduction in CFO transition costs recorded in the second quarter of 2013 without comparable expense in 2014 as well as a reduction of stock-based compensation expense.

Research and Development Expenses


40


Research and development (R&D) expenses were $15.3 million, or 2.3% of revenues, in 2014 compared to $17.5 million, or 2.5% of revenues, in 2013. This decrease is the result of focus placed on operational efficiency specifically through our Global Restructuring Plan including Project LEAN.
Restructuring Expense

Restructuring expense was $6.7 million, or 1.0% of revenues, in 2014 compared to $10.9 million, or 1.6% of revenues, in 2013. The decrease is a result of the completion of our Global Restructuring Plan including Project LEAN partially offset by additional expense incurred related to the initiation of our Profit Enhancement Plan in 2014.

Asset Impairment

Asset impairment expense was $0.9 million, or 0.1% of revenues, in 2014 compared to $4.8 million, or 0.7% of revenues, in 2013. Both the 2014 and 2013 expenses are detailed in the "Asset Impairments" section of Item 7 following "Liquidity and Capital Resources".

Litigation Settlement

Litigation settlement in 2014 was a net expense of $1.6 million compared to $6.6 million of litigation settlement benefit in 2013. The 2014 litigation settlement expense, net is attributable to three separate matters in which settlements were reached during the fourth quarter of 2014. On November 20, 2014, we reached a settlement agreement in a commercial matter against one of our competitors for an amount in our favor of $0.6 million. On December 22, 2014, a settlement was reached with All-Tag Security Americas related to the patent infringement suit whereby we agreed to pay $1.2 million in exchange for a full and final settlement of all claims. Lastly, on December 28, 2014, we reached a settlement agreement related to a commercial matter in the amount of $1.0 million. 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.

Acquisition Costs

Acquisition costs in 2014 were $0.4 million compared to $1.0 million in 2013. The decrease in acquisition costs was primarily due to the timing of legal and professional services 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 Operating Income

Other operating income was $0.6 million, or 0.1% of revenues in 2013, without a comparable amount in 2014. 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.

Interest Income and Interest Expense

Interest income in 2014 decreased $0.3 million from the comparable period in 2013. The decrease in interest income was primarily due to a decrease in interest income recognized for sales-type leases.

Interest expense for 2014 decreased $14.3 million from the comparable period in 2013. The decrease 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, without a comparable amount incurred in 2014. The remaining decrease in interest expense was due to securing the new Senior Secured Credit Facility in December 2013, which reduced the cost of debt from approximately 6% to 2%.

Other Gain (Loss), net

Other gain (loss), net was a net loss of $1.1 million in 2014 compared to a net loss of $3.9 million in 2013. There was a $1.0 million foreign exchange loss during 2014 compared to a $4.1 million foreign exchange loss during 2013. The decreased foreign exchange loss is primarily attributed to decreased volatility of currencies in the emerging markets versus the U.S. dollar and the Euro.

Income Taxes


41


The effective tax rate was 67.9% for 2014 as compared to negative 193.2% for 2013. The 2014 effective tax rate was impacted by changes in valuation allowance assertions primarily related to a valuation allowance of $14.0 million recorded against the German net deferred tax assets, net of a release of the valuation allowance recorded against the Netherlands net deferred tax assets of $2.4 million. 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.

Loss from Discontinued Operations, Net of Tax

Loss from discontinued operations, net of tax, was $17.2 million in 2013, without a comparable amount in 2014. 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. The results of operations for the CheckView® business from 2013, which was previously included in our MAS segment, was excluded from continuing operations and reported within loss from discontinued operations, net of tax.

Net Earnings (Loss) Attributable to Checkpoint Systems, Inc.

Net earnings (loss) attributable to Checkpoint Systems, Inc. was $11.0 million, or $0.26 per diluted share, during 2014 compared to a net loss of $18.9 million, or $(0.46) per diluted share, during 2013. The weighted-average number of shares used in the diluted earnings per share computation was 42.4 million and 41.5 million for 2014 and 2013, respectively.

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

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.


42


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.
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.

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.

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.

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

43


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.

Retail Merchandising Solutions

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 Expense

Restructuring expense was $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

44


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.

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.


45





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.

Recently Adopted Accounting Standards

See Note 1 to the Consolidated Financial Statements for additional information related to recently adopted accounting standards, which is incorporated herein by reference.

New Accounting Pronouncements and Other Standards

See Note 1 to the Consolidated Financial Statements for additional information related to new accounting pronouncements and other standards, which is incorporated herein by reference.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Factors

Fluctuations in interest and foreign currency exchange rates affect our financial position and results of operations. We enter into forward exchange contracts denominated in foreign currency to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. We also enter into various foreign currency contracts to reduce our exposure to forecasted Euro-denominated inter-company revenues. We have historically not used financial instruments to minimize our exposure to currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries. We have used third party borrowings in foreign currencies to hedge a portion of our net investments in and cash flows derived from our foreign subsidiaries. As of December 28, 2014, substantially all third party borrowings were in the functional currency of the subsidiary borrower. Additionally, we enter, on occasion, into interest rate swaps to reduce the risk of significant interest rate increases in connection with our floating rate debt. Based on the contractual interest rates on the floating rate debt at December 28, 2014, a hypothetical 10% increase in rates would increase cash outflows by approximately $0.1 million over a twelve-month period.

We are subject to foreign currency exchange risk on our foreign currency forward exchange contracts which represent a $55 thousand asset position and $23 thousand liability position as of December 28, 2014, and a $18 thousand liability position as of December 29, 2013. The sensitivity analysis assumes an instantaneous 10% change in foreign currency exchange rates from year-end levels, with all other variables held constant. At December 28, 2014, a 10% strengthening or 10% weakening of the U.S. dollar versus other currencies would result in an immaterial impact in the net asset position.

Foreign exchange forward contracts are used to hedge certain of our firm foreign currency cash flows. Thus, there is either an asset or cash flow exposure related to all the financial instruments in the above sensitivity analysis for which the impact of a movement in exchange rates would be in the opposite direction and substantially equal to the impact on the instruments in the analysis. Certain of our foreign subsidiaries have restrictions on the remittance of funds generated by our operations outside of the U.S. At December 28, 2014, the majority of our unremitted earnings of subsidiaries outside the U.S. were deemed not to be permanently reinvested.


46


Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

47


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Checkpoint Systems, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss), equity and cash flows present fairly, in all material respects, the financial position of Checkpoint Systems, Inc. and its subsidiaries at December 28, 2014 and December 29, 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 28, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 5, 2015


48


CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS

(amounts in thousands)
December 28, 2014

 
December 29, 2013

ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
135,537

 
$
121,573

Accounts receivable, net of allowance of $8,526 and $12,404
131,720

 
167,864

Inventories
91,860

 
83,521

Other current assets
25,928

 
29,119

Deferred income taxes
5,557

 
9,108

Total Current Assets
390,602

 
411,185

REVENUE EQUIPMENT ON OPERATING LEASE, net
1,057

 
1,267

PROPERTY, PLANT, AND EQUIPMENT, net
76,332

 
75,067

GOODWILL
173,569

 
185,864

OTHER INTANGIBLES, net
64,940

 
78,166

DEFERRED INCOME TAXES
25,284

 
38,131

OTHER ASSETS
6,882

 
9,813

TOTAL ASSETS
$
738,666

 
$
799,493

LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Short-term borrowings and current portion of long-term debt
$
236

 
$
435

Accounts payable
48,928

 
67,203

Accrued compensation and related taxes
27,511

 
24,341

Other accrued expenses
44,204

 
41,580

Income taxes
1,278

 
2,439

Unearned revenues
7,663

 
9,011

Restructuring reserve
6,255

 
8,175

Accrued pensions — current
4,472

 
5,013

Other current liabilities
17,504

 
19,536

Total Current Liabilities
158,051

 
177,733

LONG-TERM DEBT, LESS CURRENT MATURITIES
65,161

 
91,187

FINANCING LIABILITY
33,094

 
35,068

ACCRUED PENSIONS
108,920

 
99,677

OTHER LONG-TERM LIABILITIES
30,140

 
36,436

DEFERRED INCOME TAXES
15,369

 
13,067

COMMITMENTS AND CONTINGENCIES

 

CHECKPOINT SYSTEMS, INC. STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock, no par value, 500,000 shares authorized, none issued

 

Common stock, $.10 par value, 100,000,000 shares authorized, 45,840,171 and 45,484,524 shares issued, 41,804,259 and 41,448,612 shares outstanding
4,584

 
4,548

Additional capital
441,882

 
434,336

Accumulated deficit
(12,331
)
 
(23,284
)
Common stock in treasury, at cost, 4,035,912 and 4,035,912 shares
(71,520
)
 
(71,520
)
Accumulated other comprehensive income, net of tax
(34,684
)
 
2,245

TOTAL STOCKHOLDERS’ EQUITY
327,931

 
346,325

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
738,666

 
$
799,493


See Notes to the Consolidated Financial Statements.

49


CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share data)
 
 
 
 
 
Year ended
December 28, 2014

 
December 29, 2013

 
December 30, 2012

Net revenues
$
662,040

 
$
689,738

 
$
689,920

Cost of revenues
376,956

 
420,647

 
420,084

Gross profit
285,084

 
269,091

 
269,836

Selling, general, and administrative expenses
221,566

 
218,807

 
248,107

Research and development
15,303

 
17,524

 
16,400

Restructuring expense
6,654

 
10,866

 
28,438

Asset impairment
864

 
4,820

 

Goodwill impairment

 

 
102,715

Litigation settlement
1,600

 
(6,584
)
 
295

Acquisition costs
364

 
960

 
332

Other income

 

 
(3,907
)
Other operating income

 
(578
)
 
(2,043
)
Operating income (loss)
38,733

 
23,276

 
(120,501
)
Interest income
1,180

 
1,515

 
1,757

Interest expense
4,637

 
18,955

 
12,540

Other gain (loss), net
(1,102
)
 
(3,936
)
 
(1,731
)
Earnings (loss) from continuing operations before income taxes
34,174

 
1,900

 
(133,015
)
Income taxes expense
23,221

 
3,671

 
6,005

Net earnings (loss) from continuing operations
10,953

 
(1,771
)
 
(139,020
)
Loss from discontinued operations, net of tax (benefit) expense of $0, ($68), and $247

 
(17,156
)
 
(7,959
)
Net earnings (loss)
10,953

 
(18,927
)
 
(146,979
)
Less: gain (loss) attributable to non-controlling interests

 
1

 
(529
)
Net earnings (loss) attributable to Checkpoint Systems, Inc.
$
10,953

 
$
(18,928
)
 
$
(146,450
)
 
 
 
 
 
 
Basic earnings (loss) attributable to Checkpoint Systems, Inc. per share:
 
 
 
 
 
Earnings (loss) from continuing operations
$
0.26

 
$
(0.05
)
 
$
(3.37
)
Loss from discontinued operations, net of tax
$

 
$
(0.41
)
 
$
(0.20
)
Basic earnings (loss) attributable to Checkpoint Systems, Inc. per share
$
0.26

 
$
(0.46
)
 
$
(3.57
)
Diluted earnings (loss) attributable to Checkpoint Systems, Inc. per share:
 
 
 
 
 
Earnings (loss) from continuing operations
$
0.26

 
$
(0.05
)
 
$
(3.37
)
Loss from discontinued operations, net of tax
$

 
$
(0.41
)
 
$
(0.20
)
Diluted earnings (loss) attributable to Checkpoint Systems, Inc. per share
$
0.26

 
$
(0.46
)
 
$
(3.57
)

See Notes to the Consolidated Financial Statements.

50


CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(amounts in thousands)
 
 
 
 
 
Year ended
December 28, 2014

 
December 29, 2013

 
December 30, 2012

Net earnings (loss)
$
10,953

 
$
(18,927
)
 
$
(146,979
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
Amortization of pension plan actuarial losses, net of tax expense of $6, $449, and $65
1,501

 
1,120

 
218

Change in realized and unrealized losses on derivative hedges, net of tax expense (benefit) of $0, $139, and ($71)