Summary of CHECKPOINT SYSTEMS INC

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.

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During early 2008, we introduced EvolveTM, our new state-of-the-art shrink management platform. Evolve™ is our next-generation suite of RF and RFID enabled products that provide enhanced system performance and networking capability information in a more aesthetically pleasing format. Our business model relies upon customer commitments for our security product installations to a large number of their stores over a period of several months (large chain-wide installations). This new product will allow our existing customers to upgrade their security offerings and should result in increased installations for the future. The enhanced capabilities of the Evolve™ platform should also attract interest from new retail customers. As is typical with market introductions of new products in this industry, we expect the EvolveTM 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.

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