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| CKP > SEC Filings for CKP > Form 10-K on 26-Feb-2009 | All Recent SEC Filings |
26-Feb-2009
Annual Report
In August 2008, we announced a manufacturing and supply chain restructuring
program designed to accelerate profitable growth in our Check-Net® business and
to support incremental improvements in its EAS hardware and labels businesses.
We anticipate this program to result in total restructuring charges of
approximately $3 million to $4 million, or $0.06 to $0.08 per diluted share, of
which $1.5 million, or $0.03 per diluted share, has been incurred in 2008. We
continue to expect implementation of this program to be complete in 2010 and to
result in annualized cost savings of approximately $6 million.
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 and services
from monitoring and maintenance), repeat customer business, and our borrowing
capacity should provide us with adequate cash flow and liquidity to execute our
business plan.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with generally accepted accounting principles (GAAP) in the United
States of America. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosure of contingent
assets and liabilities.
Note 1 of the notes to the consolidated financial statements describes the
significant accounting policies used in the preparation of the consolidated
financial statements. Certain of these significant accounting policies are
considered to be critical accounting policies. A critical accounting policy is
defined as one that is both material to the presentation of our consolidated
financial statements and requires management to make difficult, subjective or
complex judgments that could have a material effect on our financial condition
or results of operations.
Specifically, these policies have the following attributes: (1) we are required
to make assumptions about matters that are highly uncertain at the time of the
estimate; and (2) different estimates we could reasonably have used, or changes
in the estimate that are reasonably likely to occur, would have a material
effect on our financial condition or results of operations. Estimates and
assumptions about future events and their effects cannot be determined with
certainty. On an on-going basis, we evaluate our estimates on historical
experience and on various other assumptions believed to be applicable and
reasonable under the circumstances. These estimates may change as new events
occur, as additional information is obtained and as our operating environment
changes. These changes have historically been minor and have been included in
the consolidated financial statements as soon as they became known. Senior
management reviews the development and selection of our accounting policies and
estimates with the Audit Committee. The critical accounting policies have been
consistently applied throughout the accompanying financial statements.
We believe the following accounting policies are critical to the preparation of
our consolidated financial statements:
Revenue Recognition. We recognize revenue in accordance with Staff Accounting
Bulletin ("SAB") No. 104, "Revenue Recognition," which states that revenue is
realized or realizable and earned when all of the following criteria are met:
persuasive evidence of an arrangement exists; delivery has occurred or services
have been rendered; the price to the buyer is fixed or determinable; and
collectability is reasonably assured. We enter into contracts to sell our
products and services, and, while the majority of our sales agreements contain
standard terms and conditions, there are agreements that contain multiple
elements or non-standard terms and conditions. As a result, significant contract
interpretation is sometimes required to determine the appropriate accounting,
including whether the deliverables specified in a multiple element arrangement
should be treated as separate units of accounting for revenue recognition
purposes, and, if so, how the price should be allocated among the elements and
when to recognize revenue for each element. Unearned revenue is recorded when
payments are received in advance of performing our service obligations and is
recognized over the service period.
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 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. Software license fee revenues are
recognized in accordance with Statement of Position ("SOP") 97-2, "Software
Revenue Recognition", as amended by SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain Transactions." Revenues
from software license agreements are recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant vendor
obligations are remaining to be fulfilled, the fee is fixed and determinable,
and collection is probable. Revenue from software contracts that require
significant production, modification, customization, or implementation is
recognized in accordance with SOP 81-1, "Accounting For Performance of
Construction-Type and Certain Production-Type Contracts". Revenue from these
arrangements for both licenses and professional services are recognized together
using the percentage of completion method based upon the ratio of labor incurred
to total estimated labor to complete each contract. In instances where there is
a term license combined with services, revenue is recognized ratably over the
term. We record estimated reductions to revenue for customer incentive
offerings, including volume-based incentives and rebates. We record revenues net
of an allowance for estimated return activities. Return activity was immaterial
to revenue and results of operations for all periods presented.
We believe the following judgments and estimates have a significant effect on
our consolidated financial statements:
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. These allowances are based on specific facts and
circumstances surrounding individual customers as well as our historical
experience. The adequacy of the reserves for doubtful accounts is continually
assessed by periodically evaluating each customer's receivable balance,
considering our customers' financial condition and credit history, and
considering current economic conditions. Historically, our reserves have been
adequate to cover all losses associated with doubtful accounts. If the financial
condition of our customers were to deteriorate, impairing their ability to make
payments, additional allowances may be required. If economic or political
conditions were to change in the countries where we do business, it could have a
significant impact on the results of operations, and our ability to realize the
full value of our accounts receivable. Furthermore, we are dependent on
customers in the retail markets. Economic difficulties experienced in those
markets could have a significant impact on our results of operations and our
ability to realize the full value of our accounts receivables. If our historical
experiences changed by 10%, it would require an increase or decrease of
$0.4 million to our reserve.
Inventory Valuation. We write down our inventory for estimated obsolescence or
unmarketable items equal to the difference between the cost of the inventory and
the estimated net realizable value based upon assumptions of future demand and
market conditions. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required. If
our estimates were to change by 10%, it would cause a change in inventory value
of $0.7 million.
Valuation of Long-lived Assets. Our long-lived assets include property, plant,
and equipment, goodwill, and identified intangible assets. With the exception of
goodwill and indefinite-lived intangible assets, long-lived assets are
depreciated or amortized over their estimated useful lives, and are reviewed for
impairment whenever changes in circumstances indicate the carrying value may not
be recoverable. Recoverability is determined based upon our estimates of future
undiscounted cash flows. If the carrying value is determined to be not
recoverable an impairment charge would be necessary to reduce the recorded value
of the assets to their fair value. The fair value of the long-lived assets other
than goodwill is based upon appraisals, quoted market prices of similar assets,
or discounted cash flows.
Goodwill and indefinite-lived intangible assets are subject to tests for
impairment at least annually or whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. We test
for impairment on an annual basis as of fiscal month end October of each fiscal
year, relying on a number of factors including operating results, business
plans, and anticipated future cash flows. Our management uses its judgment in
assessing whether goodwill has become impaired between annual impairment tests.
Reporting units are primarily determined as the geographic areas comprising our
business segments, except in situations when aggregation of the reporting units
is appropriate pursuant to FAS 142. Recoverability of goodwill is evaluated
using a two-step process. The first step involves a comparison of the fair value
of a reporting unit with its carrying value. If the carrying amount of the
reporting unit exceeds the fair value, then the second step of the process
involves a comparison of the implied fair value and carrying value of the
goodwill of that reporting unit. If the carrying value of the goodwill of a
reporting unit exceeds the fair value of that goodwill, an impairment loss is
recognized in an amount equal to the excess.
The implied fair value of our reporting units is dependent upon our estimate of
future discounted cash flows and other factors. Our estimates of future cash
flows include assumptions concerning future operating performance and economic
conditions and may differ from actual future cash flows. Estimated future cash
flows are adjusted by an appropriate discount rate derived from our market
capitalization plus a suitable control premium at the date of evaluation. The
financial and credit market volatility directly impacts our fair value
measurement through our weighted average cost of capital that we use to
determine our discount rate and through our stock price that we use to determine
our market capitalization. Therefore, changes in the stock price may also affect
the amount of impairment recorded. Market capitalization is determined by
multiplying the shares outstanding on the assessment date by the average market
price of our common stock over a 30-day period before each assessment date. We
use this 30-day duration to consider inherent market fluctuations that may
affect any individual closing price. We believe that our market capitalization
alone does not fully capture the fair value of our business as a whole, or the
substantial value that an acquirer would obtain from its ability to obtain
control of our business. As such, in determining fair value, we add a control
premium to our market capitalization. To estimate the control premium, we
considered our unique competitive advantages that would likely provide synergies
to a market participant. In addition, we considered external market factors
which we believe contributed to the decline and volatility in our stock price
that did not reflect our underlying fair value.
We have not made any material changes in the methodology used in the assessment
of whether or not goodwill is impaired during the past three fiscal years.
Determining the fair value of a reporting unit is a matter of judgment and often
involves the use of significant
estimates and assumptions. The use of different assumptions would increase or
decrease estimated discounted future cash flows and could increase or decrease
an impairment charge. If the use of these assets or the projections of future
cash flows change in the future, we may be required to record 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. (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. Our income tax expense includes amounts intended
to satisfy income tax assessments that result from these audit issues in
accordance with Financial Accounting Standards Board (FASB) Interpretation
No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109" (FIN 48). Determining the income tax expense for these
potential assessments and recording the related assets and liabilities requires
management judgments and estimates. Due to the complexity of some of these
uncertainties, the ultimate resolution may result in a payment that is different
from our estimate of tax liabilities. If payment of these amounts ultimately
proves to be greater or less than the recorded amounts, the change of the
liabilities would result in tax expense or benefit being recognized in that
period. We evaluate our uncertain tax positions in accordance with FIN 48. We
believe that our reserve for uncertain tax positions, including related
interest, is adequate.
Pension Plans. We have various unfunded pension plans outside the U.S. These
plans have significant pension costs and liabilities that are developed from
actuarial valuations. Inherent in these valuations are key assumptions including
discount rates, expected return on plan assets, mortality rates, and merit and
promotion increases. We are required to consider current market conditions,
including changes in interest rates, in selecting these assumptions. Changes in
the related pension costs or liabilities may occur in the future due to changes
in the assumptions. A change in discount rates of 0.25% would have less than a
$0.1 million effect on pension expense.
Stock Compensation. We recognize stock-based compensation expense for all
share-based payment awards granted after December 25, 2005 and granted prior to
but not yet vested as of December 25, 2005, in accordance with Statement of
Financial Accounting Standards (SFAS) 123R "Share-Based Payment" (SFAS 123R).
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 SFAS 123R 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.
Determining the fair value of share-based payment awards requires the input of
highly subjective assumptions, including the expected life of the share-based
payment awards and stock price volatility. The assumptions used in calculating
the fair value of share-based payment awards represent management's best
estimates, but these estimates involve inherent uncertainties and the
application of management judgment. As a result, if factors change and we use
different assumptions, our share-based compensation expense could be materially
different in the future. In addition, we are required to estimate the expected
forfeiture rate and only recognize expense for those shares expected to vest. If
our actual forfeiture rate is materially different from our estimate, the
share-based compensation expense could be significantly different from what we
have recorded in the current period. A change in the estimated forfeiture rate
of 10% would have a $0.2 million effect on stock compensation expense. As of
December 28, 2008, there was $5.2 million and $4.3 million of unrecognized
stock-based compensation expense related to nonvested stock options and
restricted stock units, respectively. Such costs are expected to be recognized
over a weighted-average period of 2.3 years. (See Note 8 to the Consolidated
Condensed Financial Statements for further discussion on share-based
compensation.)
Liquidity and Capital Resources
Our liquidity needs have related to, and are expected to continue to relate to,
acquisitions, capital investments, product development costs, potential future
restructuring related to the rationalization of the business, and working
capital requirements. We have met our liquidity needs over the last four years
primarily through cash generated from operations. Based on an analysis of
liquidity utilizing conservative assumptions for 2009, we believe that cash
provided from operating activities and funding available under our current
credit agreements should be adequate to service debt and working capital needs,
meet our capital investment requirements, other potential restructuring
requirements, and product development requirements.
The recent financial and credit crisis has reduced credit availability and
liquidity for many companies. We believe, however, that the strength of our core
business, cash position, access to credit markets, and our ability to generate
positive cash flow will sustain us through this challenging period. We are
working to reduce our liquidity risk by accelerating efforts to improve working
capital while reducing expenses in areas that will not adversely impact the
future potential of our business. Additionally, we have increased our monitoring
of counterparty risk. We evaluate the creditworthiness of all existing and
potential counterparties for all debt, investment, and derivative transactions
and instruments. Our policy allows us to enter into transactions with nationally
recognized financial institutions with an S&P rating of "A" or higher. The
maximum exposure permitted to any single counterparty is $50.0 million.
Counterparty credit ratings and credit exposure are monitored monthly and
reviewed quarterly by our Treasury Risk Committee.
As of December 28, 2008, our cash and cash equivalents were $132.2 million
compared to $118.3 million as of December 30, 2007. Cash and cash equivalents
increased in 2008 primarily due to $77.2 million in cash from operating
activities, partially offset by $54.7 million of cash used in investing
activities. Cash from operating activities improved $10.2 million in 2008
compared to 2007 due primarily to improvements in accounts receivables and a
decrease in inventory offset by a negative cash impact related to lower accounts
payable and lower earnings. The improvement in accounts receivable in 2008
resulted primarily from large chain-wide installation revenue billed at the end
of 2007 and collected in 2008 coupled with a concentrated effort to improve
working capital through enhanced collection efforts and increased monitoring of
inventory levels. The decline in inventory and accounts payable were the result
of lower revenue and backlog at the end of 2008 compared to 2007. Cash used in
investing activities was $51.4 million less in 2008 compared to 2007. This was
due primarily to the amount paid in the acquisition of Alpha and SIDEP in 2007
. . .
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