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Article by DailyStocks_admin    (01-05-09 03:57 AM)

Checkpoint Systems Inc. CEO MERWE ROBERT P VAN DER bought 50000 shares on 12-29-2008 at $24.06

BUSINESS OVERVIEW

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties and reflect the Company’s judgment as of the date of this report. Forward-looking statements often address our expected future business and financial performance, and often contain words such as “expect,” “forecast,” “anticipate,” “intend,” “plan,” believe,” “seek,” or “will.” By their nature, forward-looking statements address matters that are subject to risks and uncertainties. Any such forward-looking statements may involve risk and uncertainties that could cause actual results to differ materially from any future results encompassed within the forward-looking statements. Factors that could cause or contribute to such differences include: changes in our senior management and other matters relating to implementation of our succession plan; our ability to integrate recent acquisitions and to achieve related financial and operational goals; changes in international business conditions; foreign currency exchange rate and interest rate fluctuations; lower than anticipated demand by retailers and other customers for our products; slower commitments of retail customers to chain-wide installations and/or source tagging adoption or expansion; possible increases in per unit product manufacturing costs due to less than full utilization of manufacturing capacity as a result of slowing economic conditions or other factors; our ability to provide and market innovative and cost-effective products; the development of new competitive technologies; our ability to maintain our intellectual property; competitive pricing pressures causing profit erosion; the availability and pricing of component parts and raw materials; possible increases in the payment time for receivables as a result of economic conditions or other market factors; changes in regulations or standards applicable to our products; the ability to implement cost reduction in field service, sales, and general and administrative expense, and our manufacturing and supply chain operations without significantly impacting revenue and profits; our ability to maintain effective internal control over financial reporting; and additional matters discussed more fully in this report under Item 1A. “Risk Factors Related to Our Business” and Item 7. “Management’s Discussion and Analysis.” We do not undertake to update our forward-looking statements, except as required by applicable securities laws.
Item 1. BUSINESS
Checkpoint Systems, Inc. is a multinational manufacturer and marketer of identification, tracking, security and merchandising solutions for the retail industry. We provide technology-driven integrated supply chain solutions to brand, track, and secure goods for retailers and consumer product manufacturers worldwide.
Retailers and manufacturers have become increasingly focused on identifying and protecting assets that are moving through the supply chain. To address this market opportunity, we have built the necessary infrastructure to be a single source for identification and shrink management solutions worldwide.
We are a leading provider of electronic article surveillance (EAS) systems and tags using radio frequency (RF) and electromagnetic (EM) technology, source tagging security solutions, secure merchandising solutions using RF and acoustic-magnetic (AM) technology, branding tags and labels for apparel, retail display systems (RDS), and hand-held labeling systems (HLS), primarily in Europe. We are also a leading provider and installer of closed-circuit television (CCTV) systems for the retail environment in the U.S. Our labeling systems and services are designed to consolidate tag and label requirements to improve efficiency, reduce costs, and furnish value-added solutions for customers across many markets and industries. Applications for printed tags and labels include brand identification, automatic identification (auto-ID), retail shrink management, and pricing and promotional labels. We have achieved substantial international growth, primarily through acquisitions, and now operate directly in 31 countries. Products are principally developed and manufactured in-house and sold through direct distribution and reseller channels.
COMPANY HISTORY
Founded in 1969, we were incorporated in Pennsylvania as a wholly-owned subsidiary of Logistics Industries Corporation (Logistics). In 1977, Logistics, pursuant to the terms of its merger into Lydall, Inc., distributed our common stock to Logistics’ shareholders as a dividend.
Historically, we have expanded our business both domestically and internationally through acquisitions, internal growth using wholly-owned subsidiaries, and the utilization of independent distributors. In 1993 and 1995, we completed two key acquisitions which gave us direct access into Western Europe. We acquired ID Systems International BV and ID Systems Europe BV in 1993 and Actron Group Limited in 1995. These companies engaged in the manufacture, distribution, and sale of EAS systems throughout Europe.

In December 1999, we acquired Meto AG, a German multinational corporation and a leading provider of value-added labeling solutions for article identification and security. The acquisition doubled our revenues and provided us with an increased breadth of product offerings and global reach.
In January 2001, we acquired A.W. Printing Inc., a Houston, Texas-based printer of tags, labels, and packaging material for the apparel industry.
In January 2006, we completed the sale of our barcode systems business to SATO, a global leader in barcode printing, labeling, and Electronic Product Code (EPC)/Radio Frequency Identification (RFID) solutions.
In November 2006, we acquired ADS Worldwide (ADS). Based in Hull, England, ADS is an established supplier of tags, labels and trim to apparel manufacturers, retailers and brands around the world. ADS provides us with new technological and production capabilities and is in line with our strategy to grow our Check-Net ® service bureau business to create increased value for our customers and stockholders.
In November 2007, we acquired the Alpha S3 business from Alpha Security Products, Inc. Based in Charlotte, North Carolina, the Alpha S3 business offers a comprehensive line of security solutions designed to protect high-theft merchandise in an open-display retail environment. The Alpha S3 product portfolio combines well with our source tagging program, and is in line with our strategy to provide retailers a comprehensive line of shrink management solutions.
In November 2007, we also acquired SIDEP, an established supplier of EAS systems operating in France and China, and Shanghai Asialco Electronics Co. Ltd. (Asialco), a China based manufacturer of RF-EAS labels. With facilities in Shanghai, China, Asialco significantly increases our label manufacturing capacity in Asia. SIDEP and Asialco will help us meet the growing demand in Asian markets.
Products and Offerings
Historically, we have reported our results of operations into three segments: Security, Labeling Services, and Retail Merchandising. During the fourth quarter of 2007, resulting from previously announced changes in our management structure, we began reporting our segments into three new segments: Shrink Management Solutions, Intelligent Labels, and Retail Merchandising. Fiscal 2006 and 2005 have been conformed to reflect the segment change. The margins for each of the segments and the identifiable assets attributable to each reporting segment are set forth in Note 19 “Business Segments and Geographic Information” to the consolidated financial statements.
Each of these segments offer an assortment of products and services that in combination are designed to provide a comprehensive, single source solution to help retailers, manufacturers, and distributors identify, track, and protect their assets throughout the entire supply chain. Each segment and their respective products and services are described below.
SHRINK MANAGEMENT SOLUTIONS
Our largest business is providing shrink management solutions to retailers. Our Company’s diversified security product lines are designed to help retailers prevent inventory losses caused by theft (both by customers and employees) and reduce selling costs through lower staff requirements. Our products facilitate the open display of consumer goods, which allows retailers to maximize sales opportunities through impulse buying. Offering our own proprietary RF-EAS and EM-EAS technologies, we believe that we hold a significant share of worldwide EAS systems installations. EAS systems revenues accounted for 38%, 39%, and 41% of our 2007, 2006, and 2005 total revenues, respectively. CCTV, fire and intrusion systems also fall within the shrink management solutions segment. For 2007, 2006, and 2005, the CCTV business represented 18%, 17%, and 17% of our revenues, respectively. No other product group in this segment accounted for as much as 10% of our revenues.
These broad and flexible product lines, marketed and serviced by our extensive sales and service organizations, have helped us emerge as a preferred supplier to premier retailers around the world. Shrink management solutions represented approximately 57% of total revenues in 2007.

Electronic Article Surveillance
We have designed EAS systems to act as a deterrent to control the problem of merchandise theft in retail stores. Our diversified product lines are designed to help reduce both customer and employee theft, reduce inventory shrinkage, and enable retailers to capitalize on consumer impulse buying by openly displaying high-margin and high-cost items.
We offer a wide variety of RF-EAS and EM-EAS solutions to meet the varied requirements of retail store configurations for multiple market segments worldwide. Our EAS systems are primarily comprised of sensors and deactivation units, which respond to or act upon our tags and labels. We also market an extensive line of reusable security tags that protect apparel items as well as entertainment products. The November 2007 acquisition of the Alpha S3 business expanded our product offering of shrink management solutions to retailers by providing a line of products specifically designed to protect high-theft merchandise in an open-display retail environment. Our EAS products are designed and built to comply with applicable Federal Communications Commission (FCC) and European Community (EC) regulations governing radio frequencies (RF), signal strengths, and other factors.
CCTV, Fire and Intrusion Systems
We offer and install a broad line of closed-circuit television products providing a high-value systems solution package for retail environments. Our video surveillance solutions, including digital video technology, address shoplifting and internal theft as well as customer and employee safety and security needs. The product line consists of fixed and high-speed pan/tilt/zoom camera systems, programmable switcher controls, time-lapse recording, and remote video surveillance.
Our fire and intrusion systems provide life safety and property protection, completing the line of loss prevention solutions. In addition to the system installations, we offer a U.S.-based 24-hour Central Station Monitoring Service.
In 2007, we expanded our systems solution offering in the U.S. by entering the financial services sector, providing branch banks with physical and electronical security solutions.
INTELLIGENT LABELS
Intelligent labels is our second largest business, generating approximately 31% of our revenues in 2007. We offer a wide variety of EAS-RF and EAS-EM labels that provide security solutions that can be matched to the specific retail requirements. Under our source tagging program, tags can be embedded in products or packaging at the point-of-manufacture. All participants in the retail supply chain are concerned with maximizing efficiency. Reducing time-to-market requires refined production and logistics systems to ensure just-in-time delivery, as well as shorter development, design, and production cycles. Services range from full-color branding labels to tracking labels and, ultimately, fully-integrated labels that include an EAS or a RFID circuit. This integration is based on the critical objective of supporting the rapid delivery of goods to market while reducing losses, whether through misdirection, tracking failure, theft or counterfeiting, and to reduce labor costs by tagging and labeling products at the source. We support these objectives with our high-quality tag and label production, a global service bureau network of e-commerce-enabled capabilities (Check-Net ® ), and EAS and RFID technologies. The market is beginning to move toward more sophisticated tag solutions that incorporate RFID components and that will automate many aspects of supply chain tracking and facilitate many new merchandising enhancements for suppliers and consumers. EAS-RF and EAS-EM label revenues represented 14%, 16% and 16% of our total revenues for 2007, 2006, and 2005, respectively. Check-Net ® revenues represented 15%, 13%, and 9% of our total revenues for 2007, 2006, and 2005, respectively. No other product in this segment represented more than 10% of revenues.
Electronic Article Surveillance Labels
We produce EAS-RF and EAS-EM labels that work in combination with our EAS systems to control the problem of merchandise theft in retail stores. Our diversified product line of discrete, disposable labels and one-time-use hard tags are designed to enable retailers to protect a diverse array of easily-pocketed, high shrink merchandise. While EAS labels can be applied in retail stores and distribution centers, an increasing percentage of our customers are taking advantage of our source tagging program. With source tagging, EAS labels and one-time-use hard tags are configured to the merchandise and specific security requirements of the customer and applied at the point of manufacture. Our paper thin EAS labels have characteristics that are easily integrated with high-speed automated application systems. In November, 2007 we expanded our EAS-RF label manufacturing capacity with the acquisition of Asialco. Asialco, which is based in Shanghai, China, provides additional capacity to support the growing Asia market.

Check-Net ® (Service Bureau)
We operate a global service bureau network of more than 24 locations worldwide which supplies customers with customized retail apparel tags and labels, typically to the location where the retail goods are manufactured. A service bureau imprints variable pricing and article identification data and barcode information onto price and apparel branding tags. We also offer a product line that integrates our EAS-RF security labels into customized retail apparel tags.
Check-Net’s ® web-enabled capabilities provide on-time, on-demand printing of custom labels with variable data. Our Check-Net ® service bureau network is one of the most extensive in the industry, and its ability to offer integrated branding, barcode, and EAS security tags places it among just a handful of suppliers of this caliber in the world. CheckNet’s ® printing capacity and service bureau network expanded in November 2006 with the acquisition of ADS.
In addition to our own label integration and service bureau capabilities, we have strategic working relationships with other label integrators.
Intelligent Library Systems
We have established a product line of sophisticated RFID-based intelligent library solutions that offer strong features and benefits compared to competitive offerings. In October 2007, we announced a global strategic sales and marketing alliance with 3M Library Systems, who will become the exclusive worldwide reseller and service provider for our line of library security and productivity products. We will continue our focus on library patron-based marketing services.
RFID Tags and Labels
The company has a RFID initiative aimed at positioning Checkpoint as a quality producer of RFID tags and labels, leveraging its high volume, low cost RF circuit production and manufacturing knowledge. In October 2006, we announced our intention to focus our RFID initiative on our core retail customers and our library business.
RETAIL MERCHANDISING
Our retail merchandising business includes hand-held label applicators and tags, promotional displays, and queuing systems. These traditional products broaden our reach among retailers. Many of the products in this business segment represent high-margin items with a high level of recurring sales of associated consumables such as labels. As a result of the increasing use of scanning technology in retail, our HLS products are serving a declining market. Retail merchandising, which is focused on European and Asian markets, represents approximately 12% of our business, with no product group in this segment accounting for as much as 10% of our revenues.
Hand-held Labeling Systems
Hand-held labeling systems include a complete line of hand-held price marking and label application solutions, primarily sold to retailers. Sales of labels, consumables, and service generate a significant source of recurring revenues. As retail scanning becomes widespread, in-store retail price marking applications have continued to decline. Our HLS products possess a market leading position in several European countries. These systems are no longer sold in the U.S. as a result of the divesture to SATO in January 2006.
Retail Display Systems
Retail display systems include a wide range of products for customers in certain retail sectors, such as supermarkets and do-it-yourself (DIY), where high-quality signage and in-store price promotion are important. Product categories include traditional retail promotional systems for in-store communication and electronic graphics systems, and customer queuing systems. These systems are no longer sold in the U.S. as a result of the divesture to SATO in January 2006.
BUSINESS STRATEGY
Our business strategy focuses on providing comprehensive, single-source solutions that help retailers, manufacturers, and distributors identify, track, and protect their assets. We believe that innovative new products and expanded product offerings will provide significant opportunities to enhance the value of legacy products while expanding the product base in existing customer accounts. We intend to maintain our leadership position in certain key hard goods markets, expand our market share in the soft goods markets, and maximize our position in under-penetrated markets. We also intend to continue to capitalize on our installed base of large global retailers to promote source tagging. Furthermore, we plan to leverage our knowledge of RF and identification technologies to assist retailers and manufacturers in realizing the benefits of RFID.

To achieve these objectives, we plan to work to continually enhance and expand our technologies and products, and provide superior service to our customers. We are focused on providing our customers with a wide variety of integrated shrink management solutions, labeling, and retail merchandising solutions characterized by superior quality, ease of use, good value, and enhanced merchandising opportunities for the retailer, manufacturer, and distributor.
To improve profitability, in 2005, we initiated an evaluation of our business lines and operations globally in order to develop a plan to dramatically improve operating margins, shareholder value, and customer focus. This evaluation resulted in the exiting of underperforming businesses in 2006, including BCS and Access Control, and other actions designed to improve sales productivity, reconfigure our manufacturing and supply chain, and rationalize our overhead structure. We have continued to evaluate our sales productivity, manufacturing and supply chain efficiency, and our overhead structure and have taken actions where we have identified specific opportunities to improve profitability.
Principal Markets and Marketing Strategy
Through our Shrink Management Solutions business segment, we market EAS systems, software and other security solutions, and CCTV products primarily to worldwide retailers in the hard goods market (supermarkets, drug stores, mass merchandisers, and music/electronics) and soft goods market (apparel). We enjoy significant market share, particularly in the supermarket, drug store, hypermarket, and mass merchandiser market segments. Some of our diverse worldwide customers include: Barnes & Noble, Best Buy, Circuit City Stores, CVS/pharmacy, Esprit, GAP/Old Navy, Home Depot, Kohl’s Department Stores, Linens ‘n Things, Sears, Staples, Target Corporation, Walgreen Co., Walmart, and Winn Dixie, Inc. in the U.S.; Safeway and Shoppers Drug Mart/Pharmaprix in Canada; Gigante in Mexico; Pague Menos in Brazil; B&Q in the United Kingdom; Alcampo, Carrefour, El Corte Inglés, and Mercadona in Spain; Carrefour, Casino, FNAC, and Intermarché in France; Metro Group in Germany; Woolworths in Australia; Don Quixote in Japan; and Ahold throughout Europe.
Shoplifting and employee theft are major causes of shrinkage. Data collection systems have highlighted the shrinkage problem to retailers. As a result, retailers recognize that the implementation of effective electronic security solutions can significantly reduce shrinkage and increase profitability.
In addition to providing retail security solutions, we provide a wide variety of integrated shrink management solutions, labeling services, and retail merchandising solutions to manufacturers and retailers worldwide. This entails a broadened focus within the entire retail supply chain by providing branding, tracking, and shrink management solutions to retail stores, distribution centers, and consumer product and apparel manufacturers worldwide.
We are focused on providing our customers with a wide variety of integrated solutions to help them “Sell More and Lose Less.” Our ongoing marketing strategy includes the following:
• open new, and expand existing retail accounts with new products that will increase penetration through integrated value-added solutions for labeling, security, and merchandising;

• establish business-to-business web-based capabilities to enable retailers and manufacturers to initiate and track their orders through the supply chain on a global basis;

• expand market opportunities to manufacturers and distributors, including source tagging and value-added labeling;

• continue to promote source tagging around the world with extensive integration and automation capabilities using new EAS, RFID, and auto-ID technologies; and

• assist retailers in understanding the benefits and implementation of the new Electronic Product Code (EPC) using RFID technology.

We market our products primarily:
• by providing total loss prevention solutions to the retailer;
• by helping retailers sell more merchandise by avoiding stock-outs and making merchandise available to consumers;

• by serving as a single point of contact for auto-ID and EAS labeling and ticketing needs;

• through direct sales efforts and targeted trade show participation;

• through superior service and support capabilities; and

• by emphasizing source tagging benefits.
We focus on partnering with retail suppliers worldwide in our source tagging program. Ongoing strategies to increase acceptance of source tagging are as follows:
• increase installation of EAS equipment on a chain-wide basis with leading retailers around the world;

• offer integrated tag solutions, including custom tag conversion that addresses the needs of branding, tracking, and loss prevention;

• assist retailers in promoting source tagging with vendors;

• broaden penetration of existing accounts by promoting our in-house printing, global service bureau network (Check-Net ® ), and labeling solution capabilities;

• support manufacturers and suppliers to speed implementation;

• expand RF tag technologies and products to accommodate the needs of the packaging industry; and

• develop compatibility with EPC/RFID technologies.
Manufacturing, Raw Materials, and Inventory
Electronic Article Surveillance
We manufacture our EAS systems and labels, including Alpha S3 products, in facilities located in Puerto Rico, Japan, China, the U.S. and the Dominican Republic. Our manufacturing strategy for EAS products is to rely primarily on in-house capability for core components and to outsource manufacturing to the extent economically beneficial. We manage the integration of our in-house capability and our outsourced manufacturing in a way that provides significant control over costs, quality, and responsiveness to market demand, which we believe results in a distinct competitive advantage.
We involve customers, engineering, manufacturing, and marketing in the design and development of our products. For RF sensor production, we purchase raw materials from outside suppliers and assemble electronic components at our facilities in the Dominican Republic for the majority of our sensor product lines. The manufacture of some RF sensors sold in Europe and all EM hardware is outsourced. For our EAS disposable tag production, we purchase raw materials and components from suppliers and complete the manufacturing process at our facilities in Puerto Rico, Japan, and China. We sold approximately 3.8 billion disposable tags in 2007 and have the capacity to produce approximately 6 billion disposable tags per year. For our Alpha S3 secured merchandising production, we purchase raw materials and components from suppliers and complete the manufacturing process at our facilities in the U.S. as well as using outsourced manufacturing in China. The principal raw materials and components used by us in the manufacture of our products are electronic components and circuit boards for our systems; aluminum foil, resins, paper, and ferric chloride and hydrochloric acid solutions for our disposable tags; and polymer resin for our Alpha S3 products. While most of these materials are purchased from several suppliers, there are alternative sources for all such materials. The products that are not manufactured by us are sub-contracted to manufacturers selected for their manufacturing and assembly skills, quality, and price.

CCTV, Fire and Intrusion Systems
We are primarily an integrator of CCTV, fire and intrusion components manufactured by others. In the U.S., we use in-house capabilities to assemble products such as the pan/tilt/zoom dome camera and other products such as the Advanced Public View (APV) CCTV system. The software component of the system is added during product assembly at our operational facilities.
CheckNet ® Service Bureau and Retail Merchandising
We manufacture labels, tags, and hand-held tools. Our main production facilities are located in Germany, the Netherlands, the U.S., the U.K., and Malaysia. Local production facilities are also situated in Hong Kong, China and Turkey. Manufacturing in Germany is focused on HLS labels and print heads for HLS tools. Our facilities in the Netherlands, the U.S., and the U.K. manufacture labels and tags for laser overprinting. The Malaysian facility produces standard bodies for HLS tools for Europe, complete hand-held tools for the rest of the world, and labels for the local market. With the acquisition of ADS in November 2006, we acquired label manufacturing facilities in the U.K., Hong Kong, China, and Turkey.
DISTRIBUTION
For our major product lines, we principally sell our products to end customers using our direct sales force of more than 475 sales people. To improve our sales efficiency, we also distribute products through an independent network of resellers. This distribution channel supports and services smaller customers. This indirect channel, which has primarily sold EAS solutions, will be broadened and expanded to include more product lines as we focus on improved sales productivity.
Electronic Article Surveillance
We sell our EAS systems, labels, and Alpha S3 products principally throughout North America, South America, Europe, and the Asia Pacific region. In North America, we market our EAS products through our own sales personnel and independent representatives.
Internationally, we market our EAS products principally through foreign subsidiaries which sell directly to the end-user and through independent distributors. Our international sales operations are currently located in 15 European countries and in Argentina, Australia, Brazil, Canada, Puerto Rico, Hong Kong, India, Japan, Malaysia, China, Mexico, Turkey and New Zealand.
Foreign distributors sell our products to both the retail and library markets. Pursuant to written distribution agreements, we generally appoint an independent distributor as an exclusive distributor for a specified term and for a specified territory. In October 2007, we announced a global strategic sales and marketing alliance with 3M Library Systems, who will become the exclusive worldwide reseller and service provider for our line of library security and productivity products. We will continue our focus on library patron-based marketing services.
CCTV, Fire and Intrusion Systems
We market CCTV systems and services in selected countries throughout the world using our own sales staff. These products and services are provided to our EAS retail customers, as well as non-EAS retailers. Fire and intrusion systems are marketed exclusively in the U.S. through a direct sales force.
CheckNet ® Service Bureau and Retail Merchandising
We have customers worldwide in the CheckNet ® service bureau and retail merchandising businesses. These customers are primarily found within the retail sector and retail supply chain. Major customers include companies within industries such as food retailing, DIY (Do-It-Yourself), department stores, and apparel retailers.
Large national and international customers are handled centrally by key account sales specialists supported by appropriate business specialists. Smaller customers are served by either a general sales force capable of representing all products or, if the complexity or size of the business demands, a dedicated business specialist.

MANAGEMENT DISCUSSION FROM LATEST 10K

The following section highlights significant factors impacting the consolidated operations and financial condition of the Company and its subsidiaries. The following discussion should be read in conjunction with Item 6. “Selected Financial Data” and Item 8. “Financial Statements and Supplementary Data.”
Overview
We are a multinational manufacturer and marketer of identification, tracking, security and merchandising solutions for the retail industry. We provide technology-driven integrated supply chain solutions to brand, track, and secure goods for retailers and consumer product manufacturers worldwide. We are a leading provider of, and earn revenues primarily from the sale of, electronic article surveillance (EAS), closed-circuit television (CCTV), custom tags and labels (Check-Net ® ), hand-held labeling systems (HLS), retail merchandising systems (RMS), and radio frequency identification (RFID) systems. Applications of these products include retail security, automatic identification, and pricing and promotional labels and signage. Operating directly in 31 countries, we have a global network of subsidiaries and distributors, and provide customer service and technical support around the world.
Historically, we have reported our results of operations into three segments: Security, Labeling Services, and Retail Merchandising. During the fourth quarter of 2007, resulting from previously announced changes in our management structure we began reporting our segments into three new segments: Shrink Management Solutions, Intelligent Labels, and Retail Merchandising. Fiscal 2006 and 2005 have been conformed to reflect the segment change. The margins for each of the segments and the identifiable assets attributable to each reporting segment are set forth in Note 19 “Business Segments and Geographic Information” to the consolidated financial statements.
Our results are heavily dependent upon sales to the retail market. Our customers are dependent upon retail sales, which are susceptible to economic cycles and seasonal fluctuations. Furthermore, as approximately two-thirds of our revenues and operations are located outside the U.S., fluctuations in foreign currency exchange rates have a significant impact on reported results.
Our business plan is to generate sustained revenue growth through selected investments in product development and marketing. We intend to offset the cost of these investments through product cost and operating expense reductions. Revenue growth may also be generated by acquisitions that are targeted to expand our product offerings and customer base.
We are developing new avenues for growth by expanding into new vertical markets, as demonstrated by the Security Systems Group’s (SSG) entry into the financial services sector with technology and physical security solutions. Our library operations are transitioning from a security-based business into Library Patron Services, a new business model focused on interactive patron services, advertising, and community involvement. While these actions are in the early stages, we believe that these business opportunities have the potential to significantly contribute to revenue and profit growth in the future.
On October 29, 2007, we announced a global strategic sales and marketing alliance with 3M Library Systems. Under the terms of this alliance, 3M Library Systems will become the exclusive worldwide reseller and service provider for our line of library security and productivity products. We will continue to expand our patron-based marketing services portfolio and continue selling those offerings directly to libraries worldwide. This alliance will be effective January 1, 2008.
On November 1, 2007, we acquired the S3 business from Alpha Security Products. The transaction is valued at approximately $142 million, subject to post-closing working capital adjustments, plus additional performance-based consideration of $8 million if certain financial performance measures are met. The acquisition included all of the assets associated with Alpha’s S3 business, including the Alpha brand, approximately 150 employees, and its Ohio manufacturing facility. This acquisition has been accretive to our results in 2007 and has added $11 million in revenue for the two months of operation in 2007. For 2008, the Alpha business is expected to add over $83 million in revenue and be accretive to our earnings.
On November 9, 2007, we acquired SIDEP, a provider of Radio Frequency (RF) Electronic Article Surveillance (EAS) products. SIDEP is an established supplier of EAS systems and employs more than 140 people with the majority located in China. SIDEP will help Checkpoint increase market penetration in emerging Asian markets, especially in China. In addition, SIDEP is the majority owner of Shanghai Asialco Electronics Co., Ltd. (Asialco), a China based manufacturer of RF-EAS labels. Upon closing the acquisition of SIDEP, Checkpoint also acquired the remaining interest in Asialco from its minority shareholders. With facilities in Shanghai, China, Asialco will significantly increase Checkpoint’s label manufacturing capacity to help meet the growing demand in emerging Asian markets. Asialco employs more than 250 people. Combined, the SIDEP/Asialco transactions have a total value of approximately $27.9 million, net of cash acquired. The acquisitions are expected to add approximately $20.0 million of annual revenue and to be neutral to Checkpoint’s earnings in 2008.

Future financial results will be dependent upon our ability to expand the functionality of our existing product lines, develop or acquire new products for sale through our global distribution channels, convert new large chain retailers to RF-EAS, and reduce the cost of our products and infrastructure to respond to competitive pricing pressures.
Our strong base of recurring revenue (revenues from the sale of consumables into the installed base of security systems and hand-held labeling tools), repeat customer business, and our borrowing capacity should provide us with adequate cash flow and liquidity to execute our business plan.
Critical Accounting 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 Company’s accounting policies and estimates with the Audit Committee. The critical accounting policies have been consistently applied throughout the accompanying financial statements.
We believe the following accounting policy is critical to the preparation of our consolidated financial statements:
Revenue Recognition. We recognize revenue when installation is complete or other post-shipment obligations have been satisfied. Equipment leased to customers under sales-type leases is accounted for as the equivalent of a sale. The present value of such lease revenues is recorded as net revenues, and the related cost of the equipment is charged to cost of revenues. The deferred finance charges applicable to these leases are recognized over the terms of the leases. Rental revenue from equipment under operating leases is recognized over the term of the lease. Installation revenue from EAS equipment is recognized when the systems are installed. Service revenue is recognized, for service contracts, on a straight-line basis over the contractual period, and, for non-contract work, as services are performed. For arrangements with multiple elements, we determine the fair value of each element and then allocate the total arrangement consideration among the separate elements.
We 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. Historically, our reserves have been adequate to cover all losses associated with doubtful accounts. If the financial condition of our customers were to deteriorate, impairing their ability to make payments, additional allowances may be required. If economic or political conditions were to change in the countries where we do business, it could have a significant impact on the results of operations, and our ability to realize the full value of our accounts receivable. Furthermore, we are dependent on customers in the retail markets. Economic difficulties experienced in those markets could have a significant impact on our results of operations and our ability to realize the full value of our accounts receivables. If our historical experiences changed by 10%, it would require an increase or decrease of $0.4 million to our reserve.

Inventory Valuation. We write down our inventory for estimated obsolescence or unmarketable items equal to the difference between the cost of the inventory and the estimated net realizable value based upon assumptions of future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. If our estimates were to change by 10%, it would cause a change in inventory value of $0.8 million.
Valuation of Long-lived Assets. Our long-lived assets include property, plant, and equipment, goodwill, and identified intangible assets. With the exception of goodwill, 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. We test goodwill for impairment on an annual basis, relying on a number of factors including operating results, business plans, and anticipated future cash flows.
Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the present value of projected future cash flows of each reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds the present value of the projected future cash flows, then the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. The implied fair value of goodwill is dependent upon our estimate of future discounted cash flows and other factors. If the use of these assets or the projections of future cash flows change in the future, we may be required to record impairment charges. An erosion of future business results in any of the business units could create impairment in goodwill or other long-lived assets and require a significant charge in future periods. It is possible that future declines in retail merchandising revenues may lead to future impairments of the goodwill associated with this segment. (See Notes 1 and 5 of the Consolidated Financial Statements.)
Income Taxes. In determining income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of recoverability of certain of the deferred tax assets, which arise from temporary differences between tax and financial statement recognition of revenue and expense. We record a valuation allowance to reduce our deferred tax assets to the amount that it is more likely than not to be realized. In assessing the realizability of deferred tax assets, we consider future taxable income by tax jurisdictions and tax planning strategies. If we were to determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the valuation allowance would decrease income in the period such determination was made. (See Note 13 of the Consolidated Financial Statements.)
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. We are not aware of any such changes that would have a material effect on our results of operations, cash flows or financial position.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We record tax liabilities for the anticipated settlement of tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. 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.
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 a $0.1 million effect on pension expense.

Stock Compensation. Effective December 26, 2005, we adopted the fair value recognition provision of Statement of Financial Accounting Standards (SFAS) 123R “Share-based Payment”, using the modified prospective transition method, and therefore have not restated prior period results. Under this method we recognize compensation expense for all share-based payments granted either after December 25, 2005 or prior to December 26, 2005 but not vested as of that date. Under the fair value recognition provisions of SFAS 123R, we recognize share-based compensation, net of an estimated forfeiture rate, and only recognize compensation cost for those shares expected to vest. For awards granted after the adoption date we recognize the expense on a straight-line basis over the requisite service period of the award. For non-vested awards granted prior to the adoption date, we continue to use the ratable expense allocation method. Prior to SFAS 123R adoption, we accounted for share-based payments under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and accordingly, recognized compensation expense only when we granted options with a discounted exercise price. Pro forma net earnings and earnings per share stated as if we applied the fair value method are included in note 1 of our consolidated financial statement footnotes.
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. (See Note 8 to the Consolidated Condensed Financial Statements for a further discussion on share-based compensation.)
Liquidity and Capital Resources
Our liquidity needs have related to, and are expected to continue to relate to, capital investments, product development costs, potential future restructuring related to the rationalization of the business, acquisitions, and working capital requirements. We have met our liquidity needs over the last four years primarily through cash generated from operations. We believe that cash provided from operating activities and funding available under our current credit agreements should be adequate for the foreseeable future to service debt, meet our capital investment requirements and other potential restructuring requirements, fund potential acquisitions, and product development requirements.
As of December 30, 2007, our cash and cash equivalents were $118.3 million compared to $143.4 million as of December 31, 2006. Cash and cash equivalents decreased in 2007 primarily due to $94.5 million in cash payments related to acquisitions partially offset by cash from operating activities. Our operating activities during fiscal 2007 generated cash of approximately $67.0 million compared to approximately $22.4 million during 2006. In 2007, our cash from operating activities was impacted positively compared to the prior year due to improved earnings and better inventory management in the current year compared to 2006. This was partially offset by increased accounts receivable due to higher revenues and higher prepaid costs incurred in our CCTV business for contracts not yet completed. The increase in prepaid costs resulted from more jobs in progress for our CCTV business in the current year compared to the prior year. Our percentage of total debt to stockholders’ equity in 2007 increased to 16.2% from 3.5%. As of December 30, 2007, our working capital was $282.1 million compared to $254.0 million as of December 31, 2006.
We continue to reinvest in the Company through our investment in our technology and process improvement. In 2007, our investment in research and development amounted to $18.2 million, as compared to $19.4 million in 2006. These amounts are reflected in the cash generated from operations, as we expense our research and development as it is incurred. In 2008, we anticipate spending of approximately $23 to $25 million on research and development.
Our capital expenditures during fiscal 2007 totaled $13.4 million, compared to $11.5 million during fiscal 2006. We anticipate capital expenditures to be used primarily to upgrade technology and improve our production capabilities to approximately $18.5 million in 2008.
We have various unfunded pension plans outside the U.S. These plans have significant pension costs and liabilities that are developed from actuarial valuations. For fiscal 2007, we made payments to employees covered under these plans of $6.9 million. Our funding expectation for 2008 is $4.4 million. We believe our current cash position, cash generated from operations, and the availability of cash under our revolving line of credit will be adequate to fund these requirements. The contractual obligation table details our anticipated funding requirements related to pension obligations for the next 10 years.

On November 1, 2007, Checkpoint Systems, Inc. and one of its direct subsidiaries (collectively, the “Company”) and Alpha Security Products, Inc. and one of its direct subsidiaries (collectively, “Seller of the Alpha business”) entered into an Asset Purchase Agreement and a Dutch Assets Sale and Transfer Agreement (collectively, the “Agreements”) under which the Company purchased all of the assets of Alpha’s S3 business (the “Acquisition”) for approximately $142 million, subject to a post-closing working capital adjustment, plus additional performance-based contingent payments up to a maximum of $8 million plus interest thereon. The contingent payments may be earned if the revenue derived from the S3 business exceeds $70 million during the period from December 31, 2007, until December 28, 2008. In the event that the revenue derived from the S3 business exceeds $83 million during such period, the Seller will be entitled to the maximum payment of $8 million. The purchase price was funded by $67 million of cash and $75 million of borrowings under our unsecured multi-currency revolving credit facility. The borrowing was composed of $55.0 million under the U.S. portion of our revolver and $20 million ( € 13.9 million) under the German portion of this revolver.
In November 2007, we purchased SIDEP, a provider of Radio Frequency (RF) Electronic Article Surveillance (EAS) products. Upon closing, we also acquired the remaining interests in a SIDEP subsidiary, Shanghai Asialco Electronics Co., Ltd. (Asialco), a China based manufacturer of RF-EAS labels. The total purchase price for these acquisitions was $27.9 million, net of cash acquired. The purchase agreement was structured with deferred payments to the minority interest owners of Asialco of $9.3 million, which will be paid over a three year period from the date of acquisition.
In May 2007, the Company purchased the business of SSE Southeast, LLC, for $5.1 million plus $1.0 million of liabilities acquired. The transaction was paid in cash.
In January 2007, the Company purchased the business of Security Systems Technology, Inc., a privately held company, for $0.8 million plus $0.3 million of liabilities acquired. The transaction was paid in cash.
During the first quarter of 2007, borrowings under our senior unsecured revolving credit facility increased by $6.0 million. The proceeds from these borrowings were used to repay the borrowings under our Japanese short-term line of credit.
At December 31, 2006, the Company had a full-recourse factoring arrangement with Mitsubishi UFJ Factoring Co., Ltd., in which the arrangements were secured by trade receivables. As of December 31, 2006, the face amount of receivables sold and not yet collected were $0.8 million. During the first quarter of 2007, the remaining full recourse factoring liability was paid in full.
On September 14, 2007, the Company received cash of $2.2 million from the release of the escrow account related to the Bar-code divestiture. Prior to the release, the escrow account value was recorded as restricted cash on our consolidated balance sheet.
In November 2006, we cancelled a capital lease for one of our buildings with an outstanding amount owed of $10.3 million. This building was sublet to a third party tenant. The Company and the tenant reached a cancellation settlement which resulted in sublease income of $10.2 million. We recorded an impairment of $8.0 million on this building as a result of the transaction. Additionally, we incurred a loss on the retirement of the capital lease of $0.2 million and an additional interest expense charge of $0.2 million. The sublease income, loss on the settlement of the capital lease, and the impairment were recorded in fiscal 2006 in other operating income on our consolidated statement of operations.
On March 4, 2005, we entered into a new $150.0 million five-year senior unsecured multi-currency revolving credit agreement (“Credit Agreement”) with a syndicate of lenders. The Credit Agreement replaces the $375.0 million senior collateralized multi-currency credit facility arranged in December 1999. In connection with the refinancing, we borrowed $60.0 million to repay the outstanding principal, interest and fees and expenses associated with the extinguishment of the previous credit facility. In the first quarter of 2005, we recorded a $1.1 million charge for the unamortized fees from the extinguished credit facility. At December 30, 2007, we had $91.5 million outstanding under this facility. Our available line of credit under this agreement is $57.3 million. Our availability under this facility was reduced by letters of credit totaling $1.2 million.
Borrowings under the Credit Agreement bear interest rates of LIBOR plus an applicable margin ranging from 0.75% to 1.75% and/or prime plus 0.00% to 0.50%. The interest rate matrix is based on our leverage ratio of funded debt to EBITDA, as defined by the Credit Agreement. Under the Credit Agreement, we pay an unused line fee ranging from 0.18% to 0.30% per annum on the unused portion of the commitment.

The Credit Agreement contains certain covenants, as defined in the Credit Agreement, that include requirements for a maximum ratio of debt to EBITDA, a maximum ratio of interest to EBITDA, and a maximum threshold for capital expenditures. At December 30, 2007, we were in compliance with all of our debt covenants.
We have never paid a cash dividend (except for a nominal cash distribution in April 1997 to redeem the rights outstanding under our 1988 Shareholders’ Rights Plan). We do not anticipate paying any cash dividends in the near future.
Management believes that our anticipated cash needs for the foreseeable future can be funded from cash and cash equivalents on hand, the availability of cash under the $150.0 million revolving credit facility, and cash generated from future operations.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Information Relating to Forward-Looking Statements
This report includes forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Except for historical matters, the matters discussed are forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, that reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from historical results or those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Information about potential factors that could affect our business and financial results is included in our Annual Report on Form
10-K for the year ended December 30, 2007, and our other Securities and Exchange Commission filings.
Critical Accounting Policies and Estimates
There has been no change to our critical accounting policies and estimates, contained in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K filed for the year ended December 30, 2007.
Overview
We are a multinational manufacturer and marketer of identification, tracking, security and merchandising solutions for the retail industry. We provide technology-driven integrated supply chain solutions to brand, track, and secure goods for retailers and consumer product manufacturers worldwide. We are a leading provider of, and earn revenues primarily from the sale of, electronic article surveillance (EAS), closed-circuit television (CCTV), custom tags and labels (CheckNet ® ), hand-held labeling systems (HLS), retail merchandising systems (RMS), and radio frequency identification (RFID) systems and software. Applications of these products include primarily retail security, asset and merchandise visibility, automatic identification, and pricing and promotional labels and signage. Operating directly in 31 countries, we have a global network of subsidiaries and distributors, and provide customer service and technical support around the world.
Historically, we have reported our results of operations into three segments: Security, Labeling Services, and Retail Merchandising. During the fourth quarter of 2007, resulting from previously announced changes in our management structure, we began reporting our segments into three new segments: Shrink Management Solutions, Intelligent Labels, and Retail Merchandising. The third quarter of fiscal 2007 has been conformed to reflect the segment change. The gross margins for each of the segments are set forth in Note 14 “Business Segments” to the consolidated financial statements.
Our results are heavily dependent upon sales to the retail market. Our customers are dependent upon retail sales, which are susceptible to economic cycles and seasonal fluctuations. Furthermore, as approximately two-thirds of our revenues and operations are located outside the U.S., material fluctuations in foreign currency exchange rates could have a significant impact on our results.
We believe that some markets we serve are slowing as a result of the unprecedented credit crisis and projected softening of the global economic environment. In response to anticipated market conditions, we will continue to be focused on providing customers with innovative products that will be valuable in addressing shrink, which is particularly important during a difficult economic environment. We are also moving forward with initiatives to reduce costs and improve working capital to mitigate the effects of the economy on our business. We believe that the strength of our core business and our ability to generate positive cash flow will sustain Checkpoint through this challenging period.
Our business plan is to generate sustained revenue growth through selected investments in product development and marketing. We intend to offset the cost of these investments through product cost and operating expense reductions. Revenue growth may also be generated by acquisitions that are targeted to expand our product offerings and customer base.

During early 2008, we introduced Evolve TM , our new state-of-the-art shrink management platform. Evolve™ is our next-generation suite of RF and RFID enabled products that provide enhanced system performance and networking capability information in a more aesthetically pleasing format. Our business model relies upon customer commitments for our security product installations to a large number of their stores over a period of several months (large chain-wide installations). This new product will allow our existing customers to upgrade their security offerings and should result in increased installations for the future. The enhanced capabilities of the Evolve™ platform should also attract interest from new retail customers. As is typical with market introductions of new products in this industry, we expect the Evolve TM roll-out to positively impact our revenues over an 18-month period starting with existing customers.
During June 2008, we acquired OATSystems, Inc., a leader in RFID-based application software and middleware. The addition of OATSystems, Inc. will build on our strategy of helping retailer and suppliers migrate more easily with our Evolve™ Electronic Article Surveillance platform to Electronic Product Code (EPC) RFID. As our industry moves to a common EPC standard, we will now be able to offer solutions that enable retailers and their supply chains to gain deeper visibility of their assets and merchandise- further reducing shrink and increasing the bottom-line profits by enhancing on-shelf merchandise availability for consumers.
Additionally, our acquisitions of Alpha S3 and SIDEP in 2007 have expanded our product portfolio. We anticipate that these acquisitions will help us improve our product offering and, coupled with our external global distribution chain, provide a platform for continued growth. In addition to improving our offering of shrink management solutions, the Alpha S3 acquisition adds products for use with acoustic-magnetic (AM) technology, providing the potential to expand our penetration in retail customers that are not using our RF EAS solutions.
In August 2008, the Company announced a manufacturing and supply chain restructuring program designed to accelerate profitable growth in our CheckNet® business and to support incremental improvements in its EAS hardware and labels businesses. Following additional analysis of its CheckNet® business, we now expect this program to result in total after-tax restructuring charges of approximately $3 million, or $0.07 per diluted share, of which $2 million, or $0.04 per diluted share, is anticipated to be incurred in 2008. The Company continues to expect implementation of this program to be complete in 2010 and to result in annualized cost savings of approximately $6 million. Through the first nine months of 2008, the Company has incurred total charges relating to this program of $0.7 million, or $0.02 per diluted share. In addition to the restructuring charges, the Company now expects costs to expand capacity that are associated with this program to be approximately $0.03 per diluted share in 2008.
Future financial results will be dependent upon our ability to expand the functionality of our existing product lines, develop or acquire new products for sale through our global distribution channels, convert new large chain retailers to RF-EAS, and reduce the cost of our products and infrastructure to respond to competitive pricing pressures.
Our strong base of recurring revenue (revenues from the sale of consumables into the installed base of security systems and hand-held labeling tools), repeat customer business, and our borrowing capacity should provide us with adequate cash flow and liquidity to execute our business plan.
Results of Operations
All comparisons are with the prior year period, unless otherwise stated.
Net Revenues
Our unit volume is driven by product offerings, number of direct sales personnel, recurring sales and, to some extent, pricing. Our base of installed systems provides a source of recurring revenues from the sale of disposable tags, labels, and service revenues.
Our customers are substantially dependent on retail sales, which are seasonal, subject to significant fluctuations, and difficult to predict. Such seasonality and fluctuations impact our sales. Historically, we have experienced lower sales in the first half of each year.

CONF CALL

Bob Powers

Thank you, Nikisha. Good morning and welcome to Checkpoint Systems’ third quarter 2008 results conference call. On the call from the company are Rob van der Merwe, President and Chief Executive Officer, and Ray Andrews, Senior Vice President and Chief Financial Officer.

If you’ve not received a copy of this morning’s third quarter 2008 results it is available on the company’s website at www.checkpointsystems.com. Click on the Investors tab. Additionally, an archived version of this conference call will also be available on our website.

Before we begin I would like to remind you that statements made on this conference call reflecting our future plans and strategies are forward-looking statements that are based on current expectations and assumptions. These expectations and assumptions are subject to risks and uncertainties which could affect our future results. Checkpoint’s actual results and the timing and occurrence of expected events could differ materially from our plans and expectations due to a number of factors, such as changes in overall economic condition and changes in the legal environment, as well as those factors disclosed in the earnings release and in our filings with the Securities and Exchange Commission.

Also, please be aware that all information disclosed and discussed in this conference call is as of November 5, 2008. Checkpoint undertakes no duty to update any forward-looking statements to conform their statements to actual results or changes in the company’s expectations.

At this time I would like to turn the call over to Rob van der Merwe. Rob?

Robert van der Merwe

Thanks, Bob, and good morning, everyone. Thanks for joining us today. I will briefly comment on the third quarter and then Ray will provide more detail on the third quarter numbers and, of course, the guidance for the full year. I will follow that up with closing comments and then we’ll take your questions.

Despite the difficult economic environment that had a significant impact on our July and August results as customers reduced inventories and slowed capital expenditures, and of course as the European market conditions deteriorated, we actually had an excellent September. However, it was not strong enough to compensate for the sluggishness in the beginning of the quarter and as a result we did not achieve the top line and bottom line results we had expected when we entered the quarter.

That said, revenue growth in the quarter remained strong, driven primarily by acquisition growth and foreign currency effects partly offset by an organic decline.

Our sales results benefited from Alpha in the US, which increased by almost 30% from the second quarter this year. We are also very pleased and encouraged by the strong response we have received from the marketplace for our recently introduced Evolve family of products. We’ve now registered over 1,000 installations with over 150 retail customers around the world.

We were particularly pleased that our EAS core, EAS hardware business, which is a significant part of Checkpoint, continued to experience broad based demand despite the general economic slowdown and slowdown in corporate spending.

The CCTV, or video analytics and burglar and fire alarm business, was down year on year, as I’ve mentioned before, primarily due to the slowing of new store openings. The Checknet business in Europe felt the effects of the general economic downturn. There were also some minor erosion in the retail display and handheld labelling businesses in Europe for the same economic reasons.

We were pleased with our gross margins that were effectively level to the quarter a year ago and up marginally from the sequential quarter despite the economic trends. During the quarter we did face some lingering production issues and lower capacity utilization due to product mix. Ray will shortly take you through these and other numbers in more detail.

So to summarize the third quarter, we were very pleased with the stability of our EAS hardware business and the favourable market response to the Evolve product line, and of course the strong and as expected performance of Alpha, particularly in the United States.

With respect to the fourth quarter, the ever-changing economic environment makes it very difficult for us to have a clear view into the quarter. As such, we believe it is prudent to adjust revenue and profit expectations down for the fourth quarter for a number of reasons. Firstly, the magnitude of the seasonal peak we typically experience at this time of the year where we ordinarily see a disproportionately strong fourth quarter will be mitigated by reduced demand, of course, in the marketplace as customers potentially delay buying decisions.

Secondly, as you’ve seen, the US dollar has strengthened significantly over recent weeks. If we assume current exchange rates hold for the quarter this will also translate into lower revenues on a comparative basis in the months ahead regardless of the strong results we’re experiencing in some of our segments. Now, you will recall that over 50% of our revenues are European based.

I still expect the insulating factors that we talked about last quarter to help us going forward. They include escalating levels of shrinkage due to retailer cost cutting and increased theft, new product momentum from Evolve and also from the Alpha range of new products, and market share increases in the apparel labelling business, particularly in the United States.

The down side that lower demand has on our EAS labels business affects the volume throughput and thus overhead recovery at our facilities around the world. We have assumed that the lower levels of EAS label sales we are seeing and saw during the third quarter will continue through the fourth quarter. Accordingly, we are and will continue to take costs out to mitigate the impact of low volumes and to help offset this trend until the economy recovers.

We are looking at additional ways of accelerating the benefits flying from the previously announced restructuring program and this will positively impact both apparel and EAS label costs related to those programs.

I will now turn it over to Ray to take you through the numbers.

Ray Andrews

Thanks, Rob. Revenue for the third quarter was $234 million compared to $204.6 million in the third quarter of last year, a 14.4% increase year over year. Foreign exchange had a positive impact on revenue of approximately $10.6 million or 5.2% of the growth in the third quarter.

Revenue from the businesses we acquired in the past year, including Alpha, [inaudible], and OATSystems business, it accounted for approximately 14.4% of the overall sales growth in the quarter.

We saw a 5.3% organic decline versus the third quarter of last year with softness in the US CCTV business, the EAS labels business, and the Europe Checknet apparel labelling business all playing a role in the decline.

Gross margins in the quarter were 41.7% compared with 41.9% in the comparable period of the prior year. Our third quarter 2008 clearance margins were positively impacted by the improvements in CCTV and Checknet along with a positive impact from the Alpha acquisition. However, this was offset by a decline in EAS labels, EAS hardware, and the [inaudible] gross margins in the quarter.

Now I’ll review results for the segments and then the geography. For the third quarter of 2008 the shrink management solutions segment reported an increase in revenue on a constant dollar basis while revenues in the intelligent labels and retail merchandising segments declined when compared to the third quarter of 2007.

Our shrink management solution segment generated revenue of $148.9 million in the third quarter of 2008 or 64% of total company revenue. This represents a year-over-year increase of 19.7% on a constant dollar basis. The growth in this segment was lead by the Alpha acquisition, which contributed $22.3 million in revenue in the third quarter on a constant dollar basis. The strong Alpha revenue in the third quarter is evidence of the seasonality of the Alpha business where revenues are heavily weighted towards the second half of the year.

Alpha revenue was offset by a decline in US CCTV business and a more modest decline in EAS hardware attributable to weak economic conditions, including reductions in new store openings. We have been successful in partially mitigating this effect by selling new solutions to existing customers and increasing market share, thanks in part to increasing interest in our [Libraries] platform.

The gross profit margin for the shrink management solution segment was 41.6% compared to 41.3% in the same quarter in 2007. An increase in CCTV gross profit margins was partially offset by a year-over-year decline in the EAS hardware business. The improvement in third quarter 2008 CCTV gross profit margins is attributable to the absence of installation efficiencies that we experienced in 2007 as a result of our significant growth in the business last year. While EAS hardware gross profit margins declined year over year, they showed a solid increase over the second quarter this year primarily due to product mix.

Our intelligent label segment reported revenue of $62.2 million for the third quarter or 26% of total company revenue. This represents a decrease in revenue of 5.8% on a constant dollar basis. Weak economic conditions coupled with continuing competitive pricing pressures in the US drove the decline in EAS labels revenue.

Library revenues also declined due to the January 2008 transition to the 3M distributor agreement when compared to direct sales in 2007. While weak economic conditions also impacted the Checknet apparel labelling service Euro business, particularly in Europe this was partially offset by our ability to win new accounts in the US. Overall Checknet revenue declined $200,000 compared to the third quarter of 2007.

The gross profit margin in the Intelligent labels segment was 38.7% compared to 40.4% in the comparable quarter over a year ago. EAS labels gross profit margins were impacted by manufacturing variances that were primarily attributable to reduced volumes that impacted capacity utilizations, production issues in Puerto Rico that resulted in increased craft and labour inefficiencies, and higher energy costs. We have been addressing the production issues by upgrading equipment and processes, although the improvements were not fully realized in the third quarter.

Library gross profit margins also declined due to the shift from a direct sales model to sales through the 3M distributor agreement. These gross margin declines were partially offset by the Checknet service bureau business which saw gross margin improvement due to our business in the US, as well as a shift from Europe to lower cost production facilities in Asia.

Finally, our retail merchandising segment reported revenue of $22.9 million for the third quarter or 10% of total company revenue. This represents the decrease in revenue of 4.6% from prior year on a constant dollar basis. The bulk of the decrease comes from our retail merchandising systems business and our hand-held labelling systems business declining to a smaller extent. The gross profit margin in the retail merchandising segment was 50.5% for the third quarter compared to 49.2% for the same quarter in 2007.

Moving on to geography. European operations reported revenue of $109 million for the third quarter or 47% of total company revenue. Europe revenue increased eight-tenths of a percent on a constant dollar basis over the prior year, primarily attributable to the benefits of the November 2007 acquisitions of Alpha and SIDEP.

US operations reported revenue of $87 million or 37% of total company revenue. This represents a 23% increase in revenue over the third quarter of 2007 and is primarily attributable again to recent acquisitions, including Alpha, and strong year-over-year results in the US Checknet service bureau business.

The Asia Pacific region reported revenue of $27 million or 12% of the total company revenue and generated 8% constant dollar revenue growth in the quarter. This is primarily attributable to the shift of a portion of Checknet service bureau business from Europe to Asia, as well as growth in the EAS hardware including revenue from the November 2007 acquisition of SIDEP.

Finally, the international markets region which represents 4% of total company revenue reported virtually no change in revenue from the third quarter 2007 on a constant dollar basis.

During the third quarter we spent $5.3 million or 2.3% of revenue on R&D, which is a slight increase from the $5.1 million we spent on R&D in the third quarter of 2007. We expect R&D spending for the year to be in the range of $21 million to $23 million.

Our [inaudible] administrative expenses for the third quarter were $73.9 million or 31.6% of revenue as compared to $62.1 million or 30.3% of revenue in the prior year. Foreign exchange increased SG&A by approximately $2.9 million compared to the prior year. On a constant dollar basis the remaining $8.9 million increase is primarily the result of approximately $8.6 million of expenses generated by the businesses we acquired in the last 12 months. The remaining increase in SG&A of approximately $300,000 is the result of an increase in bad debt expense primarily attributable to bankruptcies in Europe and increases in management expense to the additional costs during the transition related to the change in executive management late last year. This is largely offset by a reduction in variable compensation expense and a reduction in the Library selling expense through the 3M agreement when compared to the third quarter of last year.

During the third quarter we generated $5.6 million in cash from operating activities compared to $4.7 million in the third quarter of 2007. An improvement in inventory levels was the most significant factor in the year-to-year comparison partially offset by a reduction in the accounts payable balances.

Our days sales outstanding were 80 days and our days of inventory were 93 days at the end of the third quarter. We continue to work to reduce the accounts receivable and inventory levels.

Our capital expenditures in the third quarter were $3.3 million. We expect capital expenditures for the full year to be in the range of $17 million to $19 million. Interest expense of $1.5 million was partially offset by interest income of just under $700,000 for the quarter. During the third quarter of 2008 other losses or $1.5 million primarily due to foreign currency exchange losses which were largely attributable to the significant volatility in exchange rates we experienced in September.

Our effective income tax rate for the quarter was 19%. The third quarter effective income tax rate was impacted by the update of the expected annualized tax rate which now stands at 22%. This annualized rate excludes the impact of the $4.8 million valuation allowance release that we reported in the second quarter.

Rob noted that the impact of the economic environment on our customers and on foreign currency rates have led us to adjust for revenue and profit projections for the year. As a result, our projection of annual revenues has been amended to $920 million to $930 million and our projection of non-GAAP polluted net earnings per share from continuing operations has been amended to $1.21 to $1.27, including restructuring and other unusual items. This projection includes the dilutive impact of the June 2008 acquisition of OATSystems, which is performing consistent with expectations, and the impact of operational expenses associated with the restructuring plan we announced in August of 2008.

The restructuring plan has been updated and is now expected to result in after-tax restructuring charges of $3 million or approximately $0.07 per share through the completion of the plan which is expected to occur in 2010. After-tax expense of approximately $2 million or $0.04 per share is expected to be incurred in 2008. The plan is expected to result in annualized cost savings of approximately $6 million by also positioning our Checknet service bureau business for accelerated future growth. In addition to the restructuring charges, implementation of the program is now expected to require operating expenditures of approximately $0.03 per share in the second half of this year, including accents to expanding capacity with the objective of broadening growth.

We have reviewed our operating margin projections for the year in light of the impact on revenue of weakening economic conditions and the impact of foreign exchange rates on revenue and expenses. As a result we now expect to achieve operating margins in the range of 7% to 7.5%.

Free cash flow for the year is expected to be in the range of $40 million to $45 million, excluding the impact of future restructuring charges.

As of September 28, 2008, cash and cash equivalents were $93 million. Working capital is $286 million. Total debt was $141 million. The weighted average number of shares outstanding on a fully diluted basis was $39.4 million for the third quarter of 2008.

The recent tightening of the global credit markets has significantly increased the focus on liquidity across most companies, including Checkpoint. We believe that the strength of our core business and our ability to generate positive cash flow will sustain Checkpoint through this challenging period. We are working to reduce liquidity risks by accelerating efforts to improve working capital while reducing expenses in areas that will not adversely impact the future potential of our business.

Now I’ll turn the call back over to Rob.

Robert van der Merwe

Thanks, Ray. In a recent study amongst loss prevention specialists across the US you will recall that we talked about the conclusions of the survey a few months ago. It is clear from what they concluded that shrink typically increases during recessionary times. Secondly, these specialists tell us that when loss prevention budgets are cut shrink increases as a result as well. I expect an increase in shrink levels in the months ahead and this should help us through the turbulent times we face. Also, I fully expect that despite the economic slowdown we will continue to take market share in the apparel labelling business and that the Alpha business will continue to benefit from new product introductions where payback periods are very attractive to our customers.

On the cost front, as I said, we are working on ways to accelerate the benefits from the already announced restructuring program and we are accelerating efforts to reduce discretionary spending and to free up more cash from working capital, as Ray mentioned.

On November the 19th, which is coming up shortly, we will be sharing our long-term vision, our financial goals and strategies for the next three to five-year period in more detail with you at an analyst day that will be hosted in New York City. We will also present product and solution demonstrations which we believe you will find very interesting. We look forward to seeing you that day for a unique opportunity to learn more about Checkpoint, its exciting prospects going forward, and of course to meet some members of management. Please contact Bob Powers for more information and to RSVP, please.

Nikisha, we will now open up the call for questions. Nikisha? Nikisha?

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