SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 001-09335
SCHAWK, INC.
(Exact name of Registrant as specified in its charter)
| Delaware | | 66-0323724 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | |
| 1695 South River Road | | 60018 |
| Des Plaines, Illinois | | (Zip Code) |
| (Address of principal executive office) | | |
847-827-9494
| | (Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | | Accelerated filer þ |
| | | |
Non-accelerated filer o | | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Act).
Yes o No þ
The number of shares of the Registrant’s Common Stock outstanding as of April 22, 2013 was 26,161,111.
SCHAWK, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2013
Schawk, Inc.
(In thousands, except share amounts)
| | | March 31, 2013 | | | December 31, 2012 | |
| | | (unaudited) | | | | |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 5,983 | | | $ | 9,651 | |
Trade accounts receivable, less allowance for doubtful accounts of $2,286 at March 31, 2013 and $2,052 at December 31, 2012 | | | 94,290 | | | | 93,696 | |
| Inventories | | | 21,536 | | | | 22,121 | |
| Prepaid expenses and other current assets | | | 10,447 | | | | 10,156 | |
| Income tax receivable | | | 4,498 | | | | 3,171 | |
| Deferred income taxes | | | 227 | | | | 235 | |
| Total current assets | | | 136,981 | | | | 139,030 | |
| | | | | | | | | |
Property and equipment, less accumulated depreciation of $120,324 at March 31, 2013 and $119,257 at December 31, 2012 | | | 65,646 | | | | 65,491 | |
| Goodwill, net | | | 210,975 | | | | 211,903 | |
| Other intangible assets, net: | | | | | | | | |
Customer relationships | | | 27,512 | | | | 29,010 | |
Other | | | 577 | | | | 633 | |
| Deferred income taxes | | | 5,685 | | | | 5,983 | |
| Other assets | | | 6,811 | | | | 6,771 | |
| | | | | | | | | |
| Total assets | | $ | 454,187 | | | $ | 458,821 | |
| | | | | | | | | |
| Liabilities and stockholders’ equity | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Trade accounts payable | | $ | 23,177 | | | $ | 18,137 | |
| Accrued expenses | | | 59,513 | | | | 57,080 | |
| Deferred income taxes | | | 2,475 | | | | 2,482 | |
| Income taxes payable | | | 501 | | | | 609 | |
| Current portion of long-term debt | | | 3,904 | | | | 4,262 | |
| Total current liabilities | | | 89,570 | | | | 82,570 | |
| | | | | | | | | |
| Long-term liabilities: | | | | | | | | |
| Long-term debt | | | 69,875 | | | | 78,724 | |
| Deferred income taxes | | | 3,184 | | | | 3,208 | |
| Other long-term liabilities | | | 43,022 | | | | 43,536 | |
| Total long-term liabilities | | | 116,081 | | | | 125,468 | |
| | | | | | | | | |
| Stockholders’ equity: | | | | | | | | |
Common stock, $0.008 par value, 40,000,000 shares authorized, 31,252,263 and 31,172,666 shares issued at March 31, 2013 and December 31, 2012, respectively, 26,161,107 and 26,113,544 shares outstanding at March 31, 2013 and December 31, 2012, respectively | | | 228 | | | | 227 | |
| Additional paid-in capital | | | 210,741 | | | | 209,556 | |
| Retained earnings | | | 93,248 | | | | 93,897 | |
| Accumulated other comprehensive income, net | | | 9,518 | | | | 11,859 | |
Treasury stock, at cost, 5,091,156 and 5,059,122 shares of common stock at March 31, 2013 and December 31, 2012, respectively | | | (65,199 | ) | | | (64,756 | ) |
| Total stockholders’ equity | | | 248,536 | | | | 250,783 | |
| | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 454,187 | | | $ | 458,821 | |
The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
Schawk, Inc.
(Unaudited)
(In thousands, except per share amounts)
| | | Three Months Ended March 31, | | |
| | | 2013 | | | 2012 | | |
| | | | | | | | |
| Net sales | | $ | 111,003 | | | $ | 112,750 | | |
| Cost of sales | | | 73,052 | | | | 75,750 | | |
| Gross profit | | | 37,951 | | | | 37,000 | | |
| | | | | | | | | | |
| Selling, general and administrative expenses | | | 33,281 | | | | 33,862 | | |
| Business and systems integration expenses | | | 2,658 | | | | 3,170 | | |
| Acquisition integration and restructuring expenses | | | 247 | | | | 1,084 | | |
| Impairment of long-lived assets | | | 36 | | | | -- | | |
| Foreign exchange (gain) loss | | | (242 | ) | | | 470 | | |
| Operating income (loss) | | | 1,971 | | | | (1,586 | ) | |
| | | | | | | | | | |
| Other income (expense): | | | | | | | | | |
| Interest income | | | 26 | | | | 16 | | |
| Interest expense | | | (1,095 | ) | | | (842 | ) | |
| | | | | | | | | | |
| Income (loss) before income taxes | | | 902 | | | | (2,412 | ) | |
| Income tax benefit | | | (553 | ) | | | (805 | ) | |
| | | | | | | | | | |
| Net income (loss) | | $ | 1,455 | | | $ | (1,607 | ) | |
| | | | | | | | | | |
| Earnings (loss) per share: | | | | | | | | | |
| Basic | | $ | 0.06 | | | $ | (0.06 | ) | |
| Diluted | | $ | 0.06 | | | $ | (0.06 | ) | |
| | | | | | | | | | |
| Weighted average number of common and common equivalent shares outstanding: | | | | | | | | | |
| Basic | | | 26,154 | | | | 25,767 | | |
| Diluted | | | 26,224 | | | | 25,767 | | |
| | | | | | | | | | |
| Dividends per Class A common share | | $ | 0.08 | | | $ | 0.08 | | |
| | | | | | | | | | |
| Net income (loss) | | $ | 1,455 | | | $ | (1,607 | ) | |
| Foreign currency translation adjustments | | | (2,341 | ) | | | 2,457 | | |
Comprehensive income (loss) | | $ | (886 | ) | | $ | 850 | | |
The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
Schawk, Inc.
Three Months Ended March 31, 2013 and 2012
(Unaudited)
(In thousands)
| | | 2013 | | | 2012 | | |
| | | | | | | | |
| Cash flows from operating activities | | | | | | | |
| Net income (loss) | | $ | 1,455 | | | $ | (1,607 | ) | |
| Adjustments to reconcile net income (loss) to cash provided by operating activities: | | | | | | | | | |
| Depreciation | | | 3,398 | | | | 3,300 | | |
| Amortization | | | 1,049 | | | | 1,355 | | |
| Impairment of long-lived assets | | | 36 | | | | -- | | |
| Non-cash restructuring charge | | | -- | | | | 65 | | |
| Amortization of deferred financing fees | | | 62 | | | | 95 | | |
| Gain realized on sale of property and equipment | | | (69 | ) | | | (9 | ) | |
| Stock based compensation expense | | | 416 | | | | 1,832 | | |
| Changes in operating assets and liabilities, net of acquisitions: | | | | | | | | | |
| Trade accounts receivable | | | (1,740 | ) | | | 4,813 | | |
| Inventories | | | 439 | | | | (3,105 | ) | |
| Prepaid expenses and other current assets | | | (948 | ) | | | 1,317 | | |
| Trade accounts payable, accrued expenses and other liabilities | | | 7,944 | | | | 6,978 | | |
| Income taxes refundable | | | (1,339 | ) | | | 1,748 | | |
| Net cash provided by operating activities | | | 10,703 | | | | 16,782 | | |
| | | | | | | | | | |
| Cash flows from investing activities | | | | | | | | | |
| Proceeds from sales of property and equipment | | | 8 | | | | 12 | | |
| Purchases of property and equipment | | | (3,738 | ) | | | (5,516 | ) | |
| Net cash used in investing activities | | | (3,730 | ) | | | (5,504 | ) | |
| | | | | | | | | | |
| Cash flows from financing activities | | | | | | | | | |
| Issuance of common stock | | | 696 | | | | 738 | | |
| Proceeds from issuance of long-term debt | | | 36,775 | | | | 76,864 | | |
| Payments of long-term debt including current portion | | | (45,871 | ) | | | (92,042 | ) | |
| Payment of deferred financing fees | | | -- | | | | (831 | ) | |
| Cash dividends | | | (2,090 | ) | | | (2,056 | ) | |
| Net cash used in financing activities | | | (10,490 | ) | | | (17,327 | ) | |
| | | | | | | | | | |
| Effect of foreign currency rate changes | | | (151 | ) | | | 509 | | |
| | | | | | | | | | |
| Net decrease in cash and cash equivalents | | | (3,668 | ) | | | (5,540 | ) | |
| Cash and cash equivalents at beginning of period | | | 9,651 | | | | 13,732 | | |
| | | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 5,983 | | | $ | 8,192 | | |
| | | | | | | | | | |
The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
Schawk, Inc.
(Unaudited)
(In thousands, except per share data)
Note 1 – Significant Accounting Policies
The significant accounting policies of Schawk, Inc. (“Schawk” or the “Company”) are included in Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”). There have been no material changes in the Company’s significant accounting policies since December 31, 2012.
Interim Financial Statements
The unaudited consolidated interim financial statements of the Company have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Certain previously reported immaterial amounts have been reclassified to conform to the current-period presentation. In the opinion of management, all adjustments necessary for a fair presentation for the periods presented have been recorded.
These financial statements should be read in conjunction with, and have been prepared in conformity with, the accounting principles reflected in the Company’s consolidated financial statements and the notes thereto for the three years ended December 31, 2012, as filed with its 2012 Form 10-K. The results of operations for the three month period ended March 31, 2013 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2013.
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220). The amendments in ASU 2013-02 supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU 2011-05 and ASU 2011-12 for all public and private organizations. The amendments would require an entity to provide additional information about reclassifications out of accumulated other comprehensive income. The amendments in ASU 2013-02 are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company adopted ASU 2013-02 effective January 1, 2013. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
Note 2 – Inventories
The Company’s inventories consist primarily of work-in-process inventory, as well as raw materials and finished goods inventory related to the Company’s Los Angeles print operation. Work-in-process consists primarily of unbilled labor and overhead costs. Raw materials are stated at the lower of cost or market.
The majority of the Company’s inventories are valued on the first-in, first-out (FIFO) basis. The remaining inventories are valued using the last-in, first-out (LIFO) method. The Company periodically evaluates the realizability of inventories and adjusts the carrying value as necessary.
Inventories consist of the following:
| | | March 31, | | | December 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Raw materials | | $ | 1,921 | | | $ | 2,087 | |
| Work-in-process | | | 20,033 | | | | 20,251 | |
| Finished goods | | | 318 | | | | 449 | |
| | | | 22,272 | | | | 22,787 | |
| Less: LIFO reserve | | | (736 | ) | | | (666 | ) |
| | | | | | | | | |
| Total | | $ | 21,536 | | | $ | 22,121 | |
Note 3 – Earnings (Loss) Per Share
Basic earnings per share are computed by dividing net income (loss) by the weighted average shares outstanding for the period. Diluted earnings per share are computed by dividing net income (loss) by the weighted average number of common shares, including common stock equivalent shares (stock options and stock-settled stock appreciation rights) outstanding for the period. Certain share-based payment awards which entitle holders to receive non-forfeitable dividends before vesting are considered participating securities and are included in the calculation of basic earnings per share. There were no reconciling items to net income to arrive at income (loss) available to common stockholders.
The following table details the computation of basic and diluted earnings (loss) per common share:
| | | Three Months Ended March 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Net income (loss) | | $ | 1,455 | | | $ | (1,607 | ) |
| | | | | | | | | |
| Weighted average shares – Basic | | | 26,154 | | | | 25,767 | |
| Effect of dilutive stock options | | | 70 | | | | -- | |
| Adjusted weighted average shares and assumed conversions - Diluted | | | 26,224 | | | | 25,767 | |
| | | | | | | | | |
| Basic earnings (loss) per common share | | $ | 0.06 | | | $ | (0.06 | ) |
| Diluted earnings (loss) per common share | | $ | 0.06 | | | $ | (0.06 | ) |
Since the Company was in a net loss position for the three month period ended March 31, 2012, there was no difference between the number of shares used to calculate basic and diluted loss per share for that period. There were 149 potentially dilutive stock options not included in the diluted per share calculation for the three month period ended March 31, 2012, because they would be anti-dilutive. In addition, the following table presents the potentially dilutive outstanding stock options excluded from the computation of diluted earnings per share for each period because they would be anti-dilutive:
| | | Three Months Ended March 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Anti-dilutive options | | | 1,550 | | | | 1,416 | |
| Exercise price range | | $ | 11.71-21.08 | | | $ | 11.71-21.08 | |
Note 4 – Comprehensive Income (Loss)
The Company reports certain changes in equity during a period in accordance with current accounting guidance for comprehensive income. Accumulated other comprehensive income, net includes cumulative translation adjustments and changes in gains and losses on hedged transactions, net of tax. The components of comprehensive income for the three month periods ended March 31, 2013 and March 31, 2012 are as follows:
| | | Three Months Ended March 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Net income (loss) | | $ | 1,455 | | | $ | (1,607 | ) |
| Foreign currency translation adjustments | | | (2,341 | ) | | | 2,457 | |
Comprehensive income (loss) | | $ | (886 | ) | | $ | 850 | |
Note 5 – Stock Based Compensation
The Company recognizes the cost of employee services received in exchange for awards of equity instruments based upon the grant date fair value of those awards using the straight-line expense attribution method. The equity compensation grants made by the Company during the first quarter of 2013 were in the form of stock-settled stock appreciation rights and restricted stock units, rather than stock options and shares of restricted stock, as had been granted in prior periods.
The Company records compensation expense for employee stock options and stock appreciation rights based on the estimated fair value of the options and stock appreciation rights on the date of grant using the Black-Scholes option-pricing model with the assumptions included in the table below. The Company uses historical data among other factors to estimate the expected price volatility, the expected term and the expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The following assumptions were used to estimate the fair value of options and stock appreciation rights granted during the three-month periods ended March 31, 2013 and March 31, 2012, using the Black-Scholes option-pricing model.
| | | Three Months Ended | | | | Three Months Ended | | | |
| | | March 31, 2013 | | | | March 31, 2012 | | | |
| | | | | | | | | | |
| Expected dividend yield | | | 2.84 | | % | | | 2.73 | | % | |
| Expected stock price volatility | | | 56.36 | | % | | | 57.19 | | % | |
| Risk-free interest rate | | | 1.26 | | % | | | 1.33 | | % | |
| Weighted-average expected life of options | | | 6.47 | | years | | | 6.21 | | years | |
| Forfeiture rate | | | 2.5 | | % | | | 3.0 | | % | |
The number of stock appreciation rights and restricted stock units granted during the three-month period ended March 31, 2013 was 207. The number of stock options and shares of restricted stock granted during the three month period ended March 31, 2012 was 180.
The total fair value of stock appreciation rights and restricted stock units granted during the three-month period ended March 31, 2013 was $1,674. The total fair value of stock options and shares of restricted stock granted during the three-month period ended March 31, 2012 was $1,604. As of March 31, 2013 and March 31, 2012, respectively, there was $3,605 and $2,714 of total unrecognized compensation cost related to nonvested stock-based compensation awards. That cost is expected to be recognized over a weighted average period of approximately two years. Expense recognized for the three-month periods ended March 31, 2013 and March 31, 2012 was $416 and $1,832, respectively. The higher expense level during the first quarter of 2012 reflected provisions for vesting rights upon retirement.
Note 6 – Impairment of Long-lived Assets and Insurance Recoveries
For the three month period ended March 31, 2013, the Company recorded impairment charges of $27 and $9, for customer relationship and trade name assets, respectively, in the Asia Pacific operating segment. The impairment charges reflect the Company’s decision to close the Seoul, Korea office acquired in its 2011 Brandimage acquisition. The impairment charges are included in Impairment of long-lived assets in the Consolidated Statements of Comprehensive Income (Loss).
For the three month period ended March 31, 2012, the Company recorded impairment charges of $65 related to leasehold improvements no longer being utilized as a result of an office consolidation. Since the impairments relate to the Company’s ongoing restructuring and cost reduction initiatives, the impairment charges are included in Acquisition integration and restructuring expenses in the Consolidated Statements of Comprehensive Income (Loss). See Note 12 – Acquisition Integration and Restructuring.
Note 7 – Acquisitions
Lipson Associates, Inc. and Laga, Inc.
Effective October 19, 2011, the Company acquired substantially all of the domestic assets and assumed certain trade account and business related liabilities of Lipson Associates, Inc. and Laga, Inc., as well as the stock of their foreign operations. Lipson Associates, Inc. and Laga, Inc. does business as Brandimage – Desgrippes & Laga (“Brandimage”).
Brandimage is a leading branding and design network specializing in providing services that seek to engage and enhance the brand experience, including brand positioning and strategy, product development and structural design, package design and environmental design. Brandimage has operations in Chicago, Cincinnati, Paris, Brussels, Shanghai, Seoul and Hong Kong. The net assets and results of operations of Brandimage are included in the Consolidated Financial Statements as of October 19, 2011 in all three of the Company’s operating segments: Americas, Europe and Asia Pacific. The Brandimage business was acquired to enhance the Company’s service offerings related to branding and design and operates in conjunction with Schawk's legacy brand development capabilities, which are performed under its Anthem Worldwide brand.
The purchase price of $24,562 consisted of $27,011 paid in cash at closing, less $2,449 received in 2012 for a net working capital adjustment. The Company recorded a purchase price allocation based on a fair value appraisal performed by an independent consulting company. The goodwill ascribed to this acquisition consists largely of expected profitability from future services and is deductible for tax purposes.
During the first quarter of 2013, the Company made a decision to close the Seoul, Korea office acquired in the Brandimage acquisition and recorded impairment charges of $27 and $9, for customer relationship and trade name assets, respectively. The impairment charges represented the remaining unamortized value of the customer relationship and trade name assets assigned to the Brandimage Korea subsidiary and were charged to the Asia-Pacific operating segment.
Exit Reserves from Prior Acquisitions
The Company recorded exit reserves related to its acquisitions of Weir Holdings Limited and Seven Worldwide Holdings, Inc., which occurred in 2004 and 2005, respectively. The major expenses included in the exit reserves were employee severance and lease termination expenses. The exit reserve balances related to employee severance were paid in prior years. The remaining exit reserve relates to lease termination expenses for a facility with a lease expiring in 2014. The remaining reserve balance of $272 is included on the Consolidated Balance Sheets as of March 31, 2013 as follows: $116 is included in Accrued expenses and $156 is included in Other long-term liabilities.
The following table summarizes the reserve activity from December 31, 2012 through March 31, 2013:
| | | Beginning of | | | | | | | | | End of | |
| | | Period | | | Adjustments | | | Payments | | | Period | |
| | | | | | | | | | | | | |
| First quarter | | $ | 324 | | | $ | (31 | ) | | $ | (21 | ) | | $ | 272 | |
Note 8 – Debt
Debt obligations consist of the following:
| | | March 31, 2013 | | | December 31, 2012 | |
| | | | | | | |
| Revolving credit agreement | | $ | 43,646 | | | $ | 52,495 | |
| Series A senior note payable - Tranche A | | | 1,843 | | | | 1,843 | |
| Series A senior note payable - Tranche B | | | 2,458 | | | | 2,458 | |
| Series F senior note payable | | | 25,000 | | | | 25,000 | |
| Other | | | 832 | | | | 1,190 | |
| | | | 73,779 | | | | 82,986 | |
| Less amounts due in one year or less | | | (3,904 | ) | | | (4,262 | ) |
| | | | | | | | | |
| Total | | $ | 69,875 | | | $ | 78,724 | |
Credit Facility and Senior Notes
Revolving Credit Facility
Amended and Restated Credit Facility. On January 27, 2012, the Company entered into a Second Amended and Restated Credit Agreement (the “2012 Credit Agreement”), among the Company, certain subsidiary borrowers of the Company, the financial institutions party thereto as lenders, JPMorgan Chase Bank, N.A., on behalf of itself and the other lenders as agent, and PNC Bank, National Association, on behalf of itself and the other lenders as syndication agent, in order to amend and restate the Company’s prior credit agreement that was scheduled to terminate on July 12, 2012.
The 2012 Credit Agreement provides for a five-year unsecured, multicurrency revolving credit facility in the principal amount of $125,000 (the “New Facility”), including a $10,000 swing-line loan subfacility and a $10,000 subfacility for letters of credit. The Company may, at its option and subject to certain conditions, increase the amount of the New Facility by up to $50,000 by obtaining one or more new commitments from new or existing lenders to fund such increase. Loans under the New Facility generally bear interest at a LIBOR or Federal funds rate plus a margin that varies with the Company’s cash flow leverage ratio, in addition to applicable commitment fees, with a maximum rate of LIBOR plus 225 basis points. At closing, the applicable margin on LIBOR-based loans was 175 basis points. The unutilized portion of the New Facility will be used primarily for general corporate purposes, such as working capital and capital expenditures, and, to the extent opportunities arise, acquisitions and investments.
At March 31, 2013, there was $40,500 outstanding under the LIBOR portion of the facility at an interest rate of approximately 2.43 percent. At the Company’s option, loans under the facility could bear interest at prime plus 1.5 percent. At March 31, 2013 there were no prime rate borrowings outstanding. The Company’s Canadian subsidiary borrowed under the revolving credit facility in the form of bankers’ acceptance agreements and prime rate borrowings. At March 31, 2013, there was $2,949 outstanding under bankers’ acceptance agreements at an interest rate of approximately 3.55 percent and $197 outstanding under prime rate borrowings at an interest rate of approximately 4.25 percent.
The 2012 Credit Agreement contains various customary affirmative and negative covenants and events of default. Under the terms of the 2012 Credit Agreement, the Company is no longer subject to restrictive covenants on permitted capital expenditures. Certain restricted payments, such as regular dividends and stock repurchases, are permitted provided that the Company maintains compliance with its minimum fixed-charge coverage ratio (with respect to regular dividends) and a specified maximum cash-flow leverage ratio (with respect to other permitted restricted payments). Other covenants include, among other things, restrictions on the Company’s and in certain cases its subsidiaries’ ability to incur additional indebtedness; dispose of assets; create or permit liens on assets; make loans, advances or other investments; incur certain guarantee obligations; engage in mergers, consolidations or acquisitions, other than those meeting the requirements of the 2012 Credit Agreement; engage in certain transactions with affiliates; engage in sale/leaseback transactions; and engage in certain hedging arrangements. The 2012 Credit Agreement also requires compliance with specified financial ratios and tests, including a minimum fixed-charge coverage ratio and a maximum cash-flow ratio.
Amendment to the 2012 Credit Agreement. On September 12, 2012, the Company entered into Amendment No. 1 (the “Credit Agreement Amendment”) to the 2012 Credit Agreement. The Credit Agreement Amendment amended the definition of “EBITDA” in the 2012 Credit Agreement to permit the Company, for purposes of calculating EBITDA for financial covenant compliance, to add back certain expenses associated with the Company’s enterprise resource planning system up to certain amounts as specified in the Credit Agreement Amendment.
Senior Notes
In 2003 and 2005, the Company entered into two private placements of debt to provide long-term financing in which it issued senior notes pursuant to note purchase agreements, which have since been amended as further discussed below. The senior notes that were outstanding at March 31, 2013 bear interest at rates from 8.90 percent to 8.98 percent. The remaining aggregate balance of the notes, $4,301, is included on the March 31, 2013 Consolidated Balance Sheets as follows: $3,072 is included in Current portion of long-term debt and $1,229 is included in Long-term debt.
Amended and Restated Private Shelf Agreement. Concurrently with its entry into the 2012 Credit Agreement, on January 27, 2012, the Company entered into an Amended and Restated Note Purchase and Private Shelf Agreement with Prudential Investment Management, Inc. (“Prudential”) and certain existing noteholders and note purchasers named therein (the “Private Shelf Agreement”), which provides for a $75,000 private shelf facility for a period of up to three years (the “Private Shelf Facility”). At closing, the Company issued $25,000 aggregate principal amount of its 4.38% Series F Senior Notes due January 27, 2019 (the “Notes”) under the Private Shelf Agreement.
The Private Shelf Agreement contains financial and other covenants that are the same or substantially equivalent to covenants under the 2012 Credit Agreement described above. Notes issued under the Private Shelf Facility may have maturities of up to ten years and are unsecured. Either the Company or Prudential may terminate the unused portion of the Private Shelf Facility prior to its scheduled termination upon 30 days’ written notice. Any future borrowings under the Private Shelf Facility may be used for general corporate purposes, such as working capital and capital expenditures.
Amendment to Note Purchase Agreement. Concurrently with the entry into the Private Shelf Agreement, the Company entered into the Fifth Amendment (the “Fifth Amendment”) to the Note Purchase Agreement, dated as of December 23, 2003, as amended (the “Note Purchase Agreement”), with the noteholders party thereto (the “Mass Mutual Noteholders”). The Fifth Amendment amended certain financial and other covenants in the Note Purchase Agreement so that such financial and other covenants are the same or substantially equivalent to covenants under the 2012 Credit Agreement described above. The Fifth Amendment also amended certain provisions contained in the Note Purchase Agreement to reflect that amounts due under existing senior notes issued to the Mass Mutual Noteholders are no longer secured.
Amendments to Private Shelf Agreement and Note Purchase Agreement. Concurrently with its entry into the Credit Agreement Amendment, the Company entered into (i) the First Amendment (the “First Amendment”) to the Private Shelf Agreement and (ii) the Sixth Amendment (the “Sixth Amendment”) to the Note Purchase Agreement. The First Amendment and the Sixth Amendment amend the respective definitions of “EBITDA” in the Private Shelf Agreement and the Note Purchase Agreement to conform to the amended EBITDA definition contained in the Credit Agreement Amendment.
Debt Covenant Compliance and Noteholders Consent
The Company was in compliance with all covenant obligations under the aforementioned credit and note purchase agreements at March 31, 2013. In connection with its compliance with the covenant obligations as of December 31, 2012, the Company received a consent from its lender group to make a partial or complete withdrawal from the GCC/IBT National Pension Plan, and in connection with such withdrawal the Company recorded a withdrawal liability with an estimated present value of $31,683. The lender group agreed to waive any event of default under the credit agreement that might occur as a result of such withdrawal and the incurrence of such withdrawal liability and acknowledged that the withdrawal liability incurred by the Company will not constitute indebtedness. See Note 15 – Multiemployer Pension Plans for more information regarding the withdrawal liability.
Other Debt Arrangements
In September 2012, the Company financed $1,075 of business insurance premiums for a 2012 – 2013 policy term. The premiums are due in equal quarterly payments ending in June 2013. The total balance outstanding for insurance premiums at March 31, 2013 is $361 and is included in Current portion of long-term debt on the March 31, 2013 Consolidated Balance Sheets.
In September 2011, the Company financed $906 of three-year software license agreements effective through September 2014. The payments are due in annual installments ending in September 2013. The total balance outstanding for the software license fees at March 31, 2013 is $252 and is included in Current portion of long-term debt.
In October 2011, the Company financed a $649 three-year equipment and software maintenance agreement effective through November 2014. The payments are due in annual installments ending in December 2013. The total balance outstanding for the equipment and software maintenance fees at March 31, 2013 is $216 and is included in Current portion of long-term debt.
The Company also had $3 of various notes payable from its October 2011 acquisition of Brandimage, included in Current portion of long-term debt on the March 31, 2013 Consolidated Balance Sheets.
Deferred Financing Fees
At March 31, 2013, the Company had $871 of unamortized deferred financing fees related to prior revolving credit facility and note purchase agreement amendments. During the first quarter of 2013, the Company amortized deferred financing fees totaling $62. During the first quarter of 2012, the Company amortized deferred financing fees totaling $95. These amounts are included in Interest expense on the Consolidated Statements of Comprehensive Income (Loss.)
Note 9 – Goodwill and Intangible Assets
The Company’s intangible assets not subject to amortization consist entirely of goodwill. Under current accounting guidance, the Company’s goodwill is not amortized throughout the period, but is subject to an annual impairment test. The Company performs an impairment test annually as of October 1, or more frequently if events or changes in business circumstances indicate that the carrying value may not be recoverable.
The changes in the carrying amount of goodwill by reportable segment during the three-month period ended March 31, 2013, were as follows:
| | | | | | | | | Asia | | | | |
| | | Americas | | | Europe | | | Pacific | | | Total | |
| Cost: | | | | | | | | | | | | |
| December 31, 2012 | | $ | 203,987 | | | $ | 43,025 | | | $ | 9,830 | | | $ | 256,842 | |
| Foreign currency translation | | | (446 | ) | | | (2,235 | ) | | | (35 | ) | | | (2,716 | ) |
| | | | | | | | | | | | | | | | | |
| March 31, 2013 | | $ | 203,541 | | | $ | 40,790 | | | $ | 9,795 | | | $ | 254,126 | |
| | | | | | | | | | | | | | | | | |
| Accumulated impairment: | | | | | | | | | | | | | | | | |
| December 31, 2012 | | $ | (14,540 | ) | | $ | (29,129 | ) | | $ | (1,270 | ) | | $ | (44,939 | ) |
| Foreign currency translation | | | 105 | | | | 1,689 | | | | (6 | ) | | | 1,788 | |
| | | | | | | | | | | | | | | | | |
| March 31, 2013 | | $ | (14,435 | ) | | $ | (27,440 | ) | | $ | (1,276 | ) | | $ | (43,151 | ) |
| | | | | | | | | | | | | | | | | |
| Net book value: | | | | | | | | | | | | | | | | |
| December 31, 2012 | | $ | 189,447 | | | $ | 13,896 | | | $ | 8,560 | | | $ | 211,903 | |
| | | | | | | | | | | | | | | | | |
| March 31, 2013 | | $ | 189,106 | | | $ | 13,350 | | | $ | 8,519 | | | $ | 210,975 | |
| | | | | | | | | | | | | | | | | |
The Company’s other intangible assets subject to amortization are as follows:
| | | | March 31, 2013 | |
| | Weighted Average Life | | Cost | | | Accumulated Amortization | | | Net | |
| | | | | | | | | | | |
| Customer relationships | 13.7 years | | $ | 56,908 | | | $ | (29,396 | ) | | $ | 27,512 | |
| Digital images | 5.0 years | | | 450 | | | | (450 | ) | | | -- | |
| Developed technologies | 3.0 years | | | 712 | | | | (712 | ) | | | -- | |
| Non-compete agreements | 3.6 years | | | 868 | | | | (816 | ) | | | 52 | |
| Trade names | 3.9 years | | | 1,441 | | | | (916 | ) | | | 525 | |
| Contract acquisition cost | 3.0 years | | | 1,220 | | | | (1,220 | ) | | | -- | |
| | | | | | | | | | | | | | |
| | 12.9 years | | $ | 61,599 | | | $ | (33,510 | ) | | $ | 28,089 | |
| | | | December 31, 2012 | |
| | Weighted Average Life | | Cost | | | Accumulated Amortization | | | Net | |
| | | | | | | | | | | |
| Customer relationships | 13.7 years | | $ | 57,904 | | | $ | (28,894 | ) | | $ | 29,010 | |
| Digital images | 5.0 years | | | 450 | | | | (450 | ) | | | -- | |
| Developed technologies | 3.0 years | | | 712 | | | | (712 | ) | | | -- | |
| Non-compete agreements | 3.6 years | | | 877 | | | | (821 | ) | | | 56 | |
| Trade names | 3.9 years | | | 1,469 | | | | (892 | ) | | | 577 | |
| Contract acquisition cost | 3.0 years | | | 1,220 | | | | (1,220 | ) | | | -- | |
| | | | | | | | | | | | | | |
| | 13.0 years | | $ | 62,632 | | | $ | (32,989 | ) | | $ | 29,643 | |
Other intangible assets were recorded at fair market value as of the dates of the acquisitions based upon independent third party appraisals. The fair values and useful lives assigned to customer relationship assets are based on the period over which these relationships are expected to contribute directly or indirectly to the future cash flows of the Company. The acquired companies typically have had key long-term relationships with Fortune 500 companies lasting 15 years or more. Because of the custom nature of the work that the Company does, it has been the Company’s experience that clients are reluctant to change suppliers.
During the first quarter of 2013, the Company recorded impairment charges of $27 and $9, for customer relationship and trade name assets, respectively, in the Asia Pacific operating segment. The impairment charges reflect the Company’s decision to close the Seoul, Korea office acquired in its 2011 Brandimage acquisition. The impairment charges are included in Impairment of long-lived assets in the Consolidated Statements of Comprehensive Income. See Note 6 – Impairment of Long-lived Assets and Insurance Recoveries for more information.
Amortization expense related to the other intangible assets totaled $1,049 and $1,355 for the three-month periods ended March 31, 2013 and March 31, 2012, respectively. Amortization expense for each of the next five twelve-month periods beginning April 1, 2013, is expected to be approximately $4,031 for 2014, $3,991 for 2015, $3,851 for 2016, $3,774 for 2017, and $3,543 for 2018.
Note 10 – Income Taxes
The Company’s interim period income tax provision is determined as follows:
| · | At the end of each fiscal quarter, the Company estimates the income tax that will be provided for the fiscal year. |
| · | The forecasted annual effective tax rate is applied to the year-to-date ordinary income (loss) at the end of each quarter to compute the year-to-date tax applicable to ordinary income (loss). The term ordinary income (loss) refers to income (loss) from continuing operations before income taxes, excluding significant, unusual or infrequently occurring items. The tax provision or benefit related to ordinary income (loss) in each quarter is the difference between the most recent year-to-date and the prior quarter-to-date computations. |
| · | The tax effects of significant or infrequently occurring items are recognized as discrete items in the interim periods in which the events occur. The impact of changes in tax laws or rates on deferred tax amounts, the effects of changes in judgment about valuation allowances established in prior years, and changes in tax reserves resulting from the finalization of tax audits or reviews are examples of significant, unusual or infrequently occurring items which are recognized as discrete items in the interim period in which the event occurs. |
The determination of the forecasted annual effective tax rate is based upon a number of significant estimates and judgments, including the forecasted annual income (loss) before income taxes of the corporation in each tax jurisdiction in which it operates, the development of tax planning strategies during the year, and the need for a valuation allowance. In addition, the Company’s tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, as well as other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.
The forecasted annual effective tax rate is 37.75 percent and 36.15 percent for 2013 and 2012, respectively. The difference reflects changes in the mix of income between foreign and domestic operations.
The following table sets out the tax benefit and the effective tax rates of the Company:
| | | Three Months Ended March 31, | | | |
| | | 2013 | | | 2012 | | | |
| | | | | | | | | |
| Income (loss) before income taxes | | $ | 902 | | | $ | (2,412 | ) | | |
| Income tax benefit | | $ | (553 | ) | | $ | (805 | ) | | |
| Effective tax rate | | | (61.3 | ) | % | | 33.4 | | % | |
| | | | | | | | | | | |
In the first quarter of 2013, the Company recognized a tax benefit of $553 on income before income taxes of $902, or an effective tax rate of (61.3) percent, as compared to an effective tax rate of 33.4 percent for the first quarter of 2012. During the first quarter of 2013, the U.S. Congress enacted tax legislation that retroactively reinstated certain tax benefits. The first quarter of 2013 effective tax rate reflects the retroactive benefits of this legislation and the tax benefit of certain effectively settled uncertain tax positions in the amount of $834.
The effective tax rate for the first three months of 2013, as compared to rate for the first three months of 2012, is primarily due to the discrete benefits recorded during the quarter.
The Company had reserves for unrecognized tax benefits, exclusive of interest and penalties, of $1,794 and $2,093 at March 31, 2013 and December 31, 2012, respectively. The reserve for uncertain tax positions as of March 31, 2013 decreased primarily due to the effective settlement of previously recorded uncertain tax positions.
Note 11 – Segment Reporting
Accounting guidance requires that a public business enterprise report financial information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance.
The Company organizes and manages its operations primarily by geographic area and measures profit and loss of its segments based on operating income (loss). The accounting policies used to measure operating income of the segments are the same as those used to prepare the consolidated financial statements.
The Company’s Americas segment includes all of the Company’s operations located in North and South America, including its operations in the United States, Canada, Mexico and Brazil, its U.S. brand strategy and design business and its U.S. digital solutions business. The Company’s Europe segment includes all operations located in Europe, including its European brand strategy and design business and its digital solutions business in London. The Company’s Asia Pacific segment includes all operations in Asia and Australia, including its Asia Pacific brand strategy and design business. The Company has determined that each of its operating segments is also a reportable segment.
Corporate consists of unallocated general and administrative activities and associated expenses, including executive, legal, finance, information technology, human resources and certain facility costs. In addition, certain costs and employee benefit plans are included in Corporate and not allocated to operating segments.
The Company has disclosed operating income (loss) as the primary measure of segment profitability. This is the measure of profitability used by the Company’s CODM and is most consistent with the presentation of profitability reported within the consolidated financial statements.
The segment sales disclosure for the three-month period ended March 31, 2012 has been reclassified to conform to the current presentation of segment sales as presented for the three-month period ended March 31, 2013. The Americas segment sales and intersegment sales elimination originally reported for the three-month period ended March 31, 2012 have both been reduced by $6,491 to reflect the elimination of intra-segment sales within the Americas segment.
Segment information relating to results of operations was as follows:
| | | Three Months Ended March 31, | | |
| | | 2013 | | | 2012 | | |
| | | | | | | | |
| Sales to clients: | | | | | | | |
| Americas | | $ | 86,514 | | | $ | 86,346 | | |
| Europe | | | 19,681 | | | | 22,392 | | |
| Asia Pacific | | | 9,706 | | | | 8,120 | | |
| Intersegment sales elimination | | | (4,898 | ) | | | (4,108 | ) | |
| | | | | | | | | | |
| Net sales | | $ | 111,003 | | | $ | 112,750 | | |
| | | | | | | | | | |
| Operating segment income (loss): | | | | | | | | | |
| Americas | | $ | 12,093 | | | $ | 7,951 | | |
| Europe | | | (201 | ) | | | 1,423 | | |
| Asia Pacific | | | 347 | | | | 114 | | |
| Corporate | | | (10,268 | ) | | | (11,074 | ) | |
| Operating income (loss) | | | 1,971 | | | | (1,586 | ) | |
| Interest expense, net | | | (1,069 | ) | | | (826 | ) | |
Income (loss) before income taxes | | $ | 902 | | | $ | (2,412 | ) | |
Note 12 – Acquisition Integration and Restructuring
In 2008, the Company initiated a cost reduction and restructuring plan involving a consolidation and realignment of its workforce and incurred costs for employee terminations, obligations for future lease payments, fixed asset impairments, and other associated costs. The Company continued its cost reduction efforts and incurred additional costs for facility closings and employee termination expenses during the years 2009 through 2012 and the first quarter of 2013.
The following table summarizes the accruals recorded, adjustments, and the cash payments during the three-month period ended March 31, 2013, related to cost reduction and restructuring actions initiated during 2008, 2010, 2011, 2012 and 2013. The adjustments are comprised principally of changes to previously recorded expense accruals. The remaining reserve balance of $4,201 is included on the Consolidated Balance Sheets at March 31, 2013 as follows: $2,487 in Accrued expenses and $1,714 in Other long-term liabilities.
| | | Employee | | | Lease | | | | |
| | | Terminations | | | Obligations | | | Total | |
| | | | | | | | | | |
| Actions Initiated in 2008 | | | | | | | | | |
| Liability balance at December 31, 2012 | | $ | -- | | | $ | 2,761 | | | $ | 2,761 | |
| Adjustments | | | -- | | | | 52 | | | | 52 | |
| Cash payments | | | -- | | | | (203 | ) | | | (203 | ) |
| | | | | | | | | | | | | |
| Liability balance at March 31, 2013 | | $ | -- | | | $ | 2,610 | | | $ | 2,610 | |
| | | | | | | | | | | | | |
| Actions Initiated in 2010 | | | | | | | | | | | | |
| Liability balance at December 31, 2012 | | $ | 402 | | | $ | -- | | | $ | 402 | |
| Adjustments | | | (8 | ) | | | -- | | | | (8 | ) |
| Cash payments | | | (394 | ) | | | -- | | | | (394 | ) |
| | | | | | | | | | | | | |
| Liability balance at March 31, 2013 | | $ | -- | | | $ | -- | | | $ | -- | |
| | | | | | | | | | | | | |
| Actions Initiated in 2011 | | | | | | | | | | | | |
| Liability balance at December 31, 2012 | | $ | 15 | | | $ | -- | | | $ | 15 | |
| Adjustments | | | (15 | ) | | | -- | | | | (15 | ) |
| | | | | | | | | | | | | |
| Liability balance at March 31, 2013 | | $ | -- | | | $ | -- | | | $ | -- | |
| | | | | | | | | | | | | |
| Actions Initiated in 2012 | | | | | | | | | | | | |
| Liability balance at December 31, 2012 | | $ | 1,390 | | | $ | 1,187 | | | $ | 2,577 | |
| New accruals | | | 6 | | | | -- | | | | 6 | |
| Adjustments | | | (5 | ) | | | 21 | | | | 16 | |
| Cash payments | | | (860 | ) | | | (239 | ) | | | (1,099 | ) |
| | | | | | | | | | | | | |
| Liability balance at March 31, 2013 | | $ | 531 | | | $ | 969 | | | $ | 1,500 | |
| | | | | | | | | | | | | |
| Actions Initiated in 2013 | | | | | | | | | | | | |
| Liability balance at December 31, 2012 | | $ | -- | | | $ | -- | | | $ | -- | |
| New accruals | | | 218 | | | | -- | | | | 218 | |
| Adjustments | | | (1 | ) | | | -- | | | | (1 | ) |
| Cash payments | | | (126 | ) | | | -- | | | | (126 | ) |
| | | | | | | | | | | | | |
| Liability balance at March 31, 2013 | | $ | 91 | | | $ | -- | | | $ | 91 | |
The combined expenses for the cost reduction and restructuring actions initiated in 2008, 2010, 2011, 2012, and 2013 shown above was $268 for the three-month period ended March 31, 2013. In addition, the Company recorded legal costs of $19 and reversed reserves of $40 related to a facility closure during the three-month period ended March 31, 2013. The total expenses for the three-month period ended March 31, 2013 was $247 and is presented as Acquisition integration and restructuring expense in the Consolidated Statements of Comprehensive Income (Loss).
The expenses for the three-month periods ended March 31, 2013 and March 31, 2012 and the cumulative expense since the cost reduction program’s inception were recorded in the following segments:
| | | | | | | | | Asia | | | | | | | |
| | | Americas | | | Europe | | | Pacific | | | Corporate | | | Total | |
| | | | | | | | | | | | | | | | |
| Three months ended March 31, 2013 | | $ | 213 | | | $ | 75 | | | $ | (41 | ) | | $ | -- | | | $ | 247 | |
| Three months ended March 31, 2012 | | $ | 718 | | | $ | 331 | | | $ | 35 | | | $ | -- | | | $ | 1,084 | |
| Cumulative since program inception | | $ | 15,962 | | | $ | 7,049 | | | $ | 1,258 | | | $ | 1,911 | | | $ | 26,180 | |
Note 13 – Derivative Financial Instruments
Fair Value Hedge
In order to mitigate foreign exchange rate exposure, the Company entered into several forward contracts during 2012. The forward contracts were designated as fair value hedges at inception. The derivative fair value gains or losses from these fair value hedges are recorded in the Consolidated Statements of Comprehensive Income (Loss.) The forward contracts are measured at fair value on a recurring basis and are classified as Level 2 inputs under the fair value hierarchy established in Note 14 – Fair Value Measurements. In May 2012, the Company discontinued its foreign currency hedging program using forward contracts. There was no effect on earnings for the three-month period ended March 31, 2013. The effect on earnings of the derivative instruments on the Consolidated Statements of Comprehensive Income (Loss) for the three month period ended March 31, 2012 was a loss of $121.
Note 14 – Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.
| | · | Level 1 – Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets. |
| | · | Level 2 – Inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. These are typically obtained from readily-available pricing sources for comparable instruments. |
| | · | Level 3 – Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own assumptions of the data that market participants would use in pricing the asset or liability, based on the best information available in the circumstances. |
For purposes of financial reporting, the Company has determined that the fair value of such financial instruments as cash and cash equivalents, accounts receivable, accounts payable and long-term debt approximates carrying value at March 31, 2013.
The Company’s multiemployer pension withdrawal liability is categorized as Level 3 within the fair value hierarchy. The fair value of the multiemployer pension withdrawal liability was estimated using a present value analysis as of December 31, 2012. See Note 15 – Multiemployer Pension Withdrawal for more information regarding the multiemployer withdrawal liability. The following table summarizes the changes in the fair value of the Company’s multiemployer pension withdrawal liability during the first three months of 2013:
| | | Contingent | |
| | | Consideration | |
| | | Fair Value | |
| | | | |
| Liability balance at January 1, 2013 | | $ | 31,683 | |
| Accretion of present value discount | | | 209 | |
| | | | | |
| Liability balance at March 31, 2013 | | $ | 31,892 | |
The following table summarizes the fair values as of March 31, 2013:
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Other long-term liabilities: | | | | | | | | | | | | |
| Multiemployer pension withdrawal liability | | $ | -- | | | $ | -- | | | $ | 31,892 | | | $ | 31,892 | |
Note 15 – Multiemployer Pension Withdrawal
The Company has participated in the Graphic Communications Conference International Brotherhood of Teamsters National Pension Fund (“NPF”), formerly known as the Graphic Communications Conference International Brotherhood of Teamsters Supplemental Retirement and Disability Fund (“SRDF”), pursuant to collective bargaining agreements at eight locations. During the fourth quarter of 2012, the Schawk Board of Directors executed a resolution to authorize management to enter into good faith negotiations with the local bargaining units to effect a complete withdrawal from the NPF. The negotiations with the local bargaining units continued during the first quarter of 2013. The decision to exit the NPF was made in order to mitigate potentially greater financial exposure to the Company in the future under the plan, which is significantly underfunded, and to facilitate the consideration of future changes to the Company’s operations in the United States. A withdrawal liability should be recorded if circumstances that give rise to an obligation become probable and estimable. Management concluded that a complete withdrawal from the NPF was both probable and estimable, subject to the Company’s good faith bargaining obligations. Based on an analysis prepared by an independent actuary, the Company recorded an estimated liability for its withdrawal from the NPF of $31,683 as of December 31, 2012, which is the present value of the estimated future payments required for withdrawal. The payments are expected to total approximately $41,186, payable $2,059 per year over a 20 year period, with the annual cash payments expected to commence on or about May 1, 2014. These payments were discounted at a risk free rate of 2.54 percent. During the first quarter of 2013, the Company accreted $209 of the present value discount, resulting in an estimated liability balance of $31,892 at March 31, 2013, which is included in Other long-term liabilities on the Consolidated Balance Sheets as of March 31, 2013. The expense associated with the accretion of the present value discount is reflected in Interest expense on the Consolidated Statements of Comprehensive Income (Loss).
The Company previously participated in the San Francisco Lithographers Pension Trust (“SF LPT”) pursuant to collective bargaining agreements with the Teamsters Local 853. Effective June 30, 2011, the Company decided to terminate participation in the SF LPT and provided notification that it would no longer be making contributions to the plan. The Company’s decision triggered a withdrawal liability. The Company recorded an estimated liability of $1,846 as of June 30, 2011 to reflect this obligation. The Company made payments during 2012 to settle the liability in full.
Cautionary Statement Regarding Forward-Looking Information
Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report that relate to the Company’s beliefs or expectations as to future events are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Company intends any such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Although the Company believes that the assumptions upon which such forward-looking statements are based are reasonable within the bounds of its knowledge of its industry, business and operations, it can give no assurance the assumptions will prove to have been correct and undue reliance should not be placed on such statements. Important factors that could cause actual results to differ materially and adversely from the Company’s expectations and beliefs include, among other things, the strength of the United States economy in general and specifically market conditions for the consumer products industry; the level of demand for the Company’s services; unfavorable foreign exchange fluctuations; changes in or weak consumer confidence and consumer spending; loss of key management and operational personnel; the ability of the Company to implement its business strategy and cost reduction plans and to realize anticipated cost savings; the ability of the Company to comply with the financial covenants contained in its debt agreements and obtain waivers or amendments in the event of non-compliance; the ability of the Company to maintain an effective system of disclosure and internal controls and the discovery of any future control deficiencies or weaknesses, which may require substantial costs and resources to rectify; the stability of state, federal and foreign tax laws; the ability of the Company to identify and capitalize on industry trends and technological advances in the imaging industry; higher than expected costs associated with compliance with legal and regulatory requirements; higher than anticipated costs or lower than anticipated benefits associated with the Company’s ongoing information technology and business process improvement initiative; unanticipated costs or difficulties associated with integrating acquired operations; any impairment charges due to declines in the value of the Company’s fixed and intangible assets, including goodwill; the stability of political conditions in foreign countries in which the Company has production capabilities; terrorist attacks and the U.S. response to such attacks; as well as other factors detailed in the Company’s filings with the Securities and Exchange Commission. The Company assumes no obligation to update publicly any of these statements in light of future events.
Business Overview
Schawk, Inc., and its subsidiaries (“Schawk” or the “Company”) provide strategic, creative and executional graphic services and solutions to clients in the consumer products packaging, retail, pharmaceutical and advertising markets. In so doing, the Company helps its clients develop, deploy and promote their brands and products through its comprehensive offering of integrated strategic, creative and executional services across print and digital mediums. The Company, headquartered in Des Plaines, Illinois, has been in operation since 1953 and is incorporated under the laws of the State of Delaware.
The Company is one of the world’s largest independent business service providers in the graphics industry. The Company currently delivers these services through more than 155 locations in 26 countries across North and South America, Europe, Asia and Australia. By leveraging its global comprehensive portfolio of strategic, creative and executional capabilities, the Company believes it helps companies of all sizes create compelling and consistent brand experiences that strengthen consumers’ affinity for these brands. The Company does this by helping its clients “activate” their brands worldwide.
The Company believes that it is positioned to deliver its offering in a category that is unique to its competition. This category, brand development and deployment services, reflects Schawk’s ability to provide integrated strategic, creative and executional services globally across the four primary points in which its clients’ brands touch consumers: at home, on the go, at the store and on the shelf. “At Home” includes brand touchpoints such as direct mail, catalogs, advertising, circulars, and the internet. “On the Go” includes brand touchpoints such as outdoor advertising, mobile/cellular and the internet. “In the Store” includes brand touchpoints such as point-of-sale displays, in-store merchandising and interactive displays. “On the Shelf” focuses on packaging as a key brand touchpoint.
The Company’s strategic services are delivered primarily through its branding and design capabilities, performed under its Anthem Worldwide (“Anthem”) and Brandimage brands. These services include brand analysis and articulation, design strategy and design. These services help clients revitalize existing brands and bring new products to market that respond to changing consumer desires and trends. Anthem’s services also help certain retailers optimize their brand portfolios, helping them create fewer, smarter and potentially more profitable brands. The impact of changes to design and brand strategy can potentially exert a significant impact on a company’s brand, category, market share, equity and sales. Strategic services also represent some of Schawk’s highest value, highest margin services.
The Company’s creative services are delivered through Anthem and Brandimage, and through various sub-specialty capabilities whose services include digital photography, 3D imaging, creative retouching, CGI (computer generated images), packaging mock-ups/sales samples, brand compliance, retail marketing (catalogs, circulars, point-of-sale displays), interactive media, large-format printing, and digital promotion and advertising. These services support the creation, adaptation and maintenance of brand imagery used across brand touchpoints – including packaging, advertising, marketing and sales promotion materials – offline in printed materials and online in visual media such as the internet, mobile/cellular, interactive displays and television. The Company believes that creative services, since they often represent the creation of clients’ original intellectual property, present a high-margin growth opportunity for Schawk.
The Company’s executional services are delivered primarily through its legacy premedia business, which at this time continues to account for the most significant portion of its revenues. Premedia products such as color proofs, production artwork, digital files and flexographic, lithographic and gravure image carriers are supported by color management and print management services that the Company believes provides a vital interface between the creative design and production processes. The Company believes this ensures the production of consistent, high quality brand/graphic images on a global scale at the speed required by clients to remain competitive in today’s markets on global, regional and local scales. Increasingly, the Company has been offering executional services in the growing digital space, in order to meet growing client demand to market their brands on the internet and via mobile and interactive technologies. Additionally, the Company’s graphic lifecycle content management software and services facilitates the organization, management, application and re-use of proprietary brand assets. The Company believes that products such as BLUE™ confer the benefits of brand consistency, accuracy and speed to market for its clients.
As the only truly global supplier of integrated strategic, creative and executional graphics capabilities, Schawk helps clients meet their growing need for consistency across brand touchpoints from a single coordinated contact. A high level of consistency can impact clients’ businesses in potentially significant ways such as the retention and growth of the equity in their brands and improved consumer recognition, familiarity and affinity. The latter has the potential to help clients improve sales and market share of their brands. Additionally, through its global systems, the Company provides processes that reduce opportunities for third parties to counterfeit its clients’ brands, which is an issue in both mature and developing regions. The Company also believes that its integrated and comprehensive capabilities provide clients with the potential for long-term cost-reductions across their graphic workflows.
Organization
The Company is organized on a geographic basis, in three operating and reportable segments: Americas, Europe and Asia Pacific. The Company’s Americas segment includes all of the Company’s operations located in North and South America, including its operations in the United States, Canada, Mexico and Brazil, its U.S. branding and design capabilities and its U.S. digital solutions business. The Company’s Europe segment includes all operations located in Europe, including its European branding and design capabilities and its digital solutions business in London. The Company’s Asia Pacific segment includes all operations in Asia and Australia, including its Asia Pacific branding and design capabilities.
Financial Overview
Net sales decreased $1.7 million or 1.5 percent in the first quarter of 2013 to $111.0 million from $112.8 million in the first quarter of 2012. The sales decrease in the first quarter of 2013 compared to the prior year’s quarter reflects a decrease in promotional activity from the Company’s advertising and retail and entertainment accounts partially offset by an increase in sales from the Company’s consumer products packaging accounts. Sales in the current quarter compared to the prior year’s quarter were negatively impacted by changes in foreign currency translation rates of approximately $0.3 million, as the U.S. dollar increased in value relative to the local currencies of certain of the Company’s non-U.S. subsidiaries. Net sales increased in the Americas and Asia Pacific segments in the first quarter of 2013 compared to the prior year’s quarter, but were offset by a decrease in sales in the Europe segment. The Americas segment increased by $0.2 million, or 0.2 percent and the Asia Pacific segment increased by $1.6 million, or 19.5 percent. The Europe segment decreased by $2.7 million, or 12.1 percent. The Company’s inventories, composed principally of the cost of unbilled client services, decreased $0.6 million during the first quarter of 2013.
Cost of sales was $73.1 million, or 65.8 percent of sales, in the first quarter of 2013, a decrease of $2.7 million, or 3.6 percent, from $75.8 million, or 67.2 percent of sales, in the first quarter of 2012. The decrease in cost of sales during the first quarter of 2013 compared to 2012 was mainly due to a decrease in production services purchased from outside contractors.
Gross profit increased by $1.0 million or 2.6 percent in the first quarter of 2013 to $38.0 million from $37.0 million in the first quarter of 2012. The increase in gross profit in the current quarter compared to the prior year’s quarter is attributable to the decrease in cost of sales partially offset by the decrease in net sales quarter-over-quarter. Gross profit in the Americas operating segment increased by $2.3 million or 8.7 percent and increased in the Asia Pacific operating segment by $0.6 million or 19.7 percent. Gross profit in the Europe operating segment decreased by $1.9 million or 25.2 percent.
The Company recorded an operating profit of $2.0 million in the first quarter of 2013 compared to an operating loss of $1.6 million in the first quarter of 2012, an increase of $3.6 million. The operating income in the current quarter compared to the operating loss in the prior year’s quarter is due in part to the higher gross profit in the first quarter of 2013 compared to the first quarter of 2012, as well as to the following items:
Selling, general and administrative expenses decreased $0.6 million, or 1.7 percent, in the first quarter of 2013 to $33.3 million from $33.9 million in the first quarter of 2012. Business and systems integration expenses related to the Company’s information technology and business process improvement initiative decreased $0.5 million to $2.7 million in the first quarter of 2013 from $3.2 million in the first quarter of 2012. Acquisition integration and restructuring expenses, related to the Company’s cost reduction and capacity utilization initiatives, decreased by $0.8 million, from $1.1 million in the first quarter of 2012 to $0.2 million in the first quarter of 2013. Also, the Company recorded a net gain of $0.2 million on foreign exchange exposures in the first quarter of 2013 compared to a net loss of $0.5 million on foreign exchange exposures in the first quarter of 2012. In addition, the Company recorded a charge of less than $0.1 million for impairment of long-lived assets in the first quarter of 2013 for customer relationship and trade name intangible assets in the Asia Pacific segment. The impairment was related to the Company’s decision in the first quarter of 2013 to close the Seoul, Korea office acquired in the 2011 Brandimage acquisition. There was no impairment of long-lived assets in the first quarter of 2012.
The Company recorded an income tax benefit of $0.6 million in the first quarter of 2013 compared to an income tax benefit of $0.8 million in the first quarter of 2012. The income tax benefit in the first quarter of 2013 reflects discrete tax benefits for the release of uncertain tax positions and other discrete tax adjustments. The effective tax rate was (61.3) percent for the first quarter of 2013 compared to an effective tax rate of 33.4 percent in the first quarter of 2012.
In the first quarter of 2013, the Company recorded net income of $1.5 million, or $0.06 per diluted share, as compared to net loss of $1.6 million, or $0.06 per diluted share, in the first quarter of 2012. The increase in profitability, period-over-period, is principally due to expense decreases related to cost of sales, business systems and integration and acquisition integration and restructuring, as well as a net gain on foreign exchange exposures in the first quarter of 2013 compared to a net loss on foreign exchange exposures in the first quarter of 2012.
Cost Reduction and Capacity Utilization Actions
Beginning in 2008, and continuing to-date, the Company incurred restructuring costs for employee terminations, obligations for future lease payments, fixed asset impairments, and other associated costs as part of its previously announced plan to reduce costs through a consolidation and realignment of its work force and facilities. The total expense recorded for the three-month periods ended March 31, 2013 and March 31, 2012 was $0.2 million and $1.1 million, respectively, and is presented as Acquisition integration and restructuring expense in the Consolidated Statements of Comprehensive Income (Loss). See Note 12 – Acquisition Integration and Restructuring in Part I, Item 1 for additional information.
The expense for each of the years 2008 through 2012 and for the first three months of 2013, and the cumulative expense since the cost reduction program’s inception, was recorded in the following operating segments:
| | | | | | | | | Asia | | | | | | | |
| (in millions) | | Americas | | | Europe | | | Pacific | | | Corporate | | | Total | |
| | | | | | | | | | | | | | | | |
| Three months ended March 31, 2013 | | $ | 0.2 | | | $ | 0.1 | | | $ | (0.1 | ) | | $ | -- | | | $ | 0.2 | |
| Year ended December 31, 2012 | | | 4.4 | | | | 0.9 | | | | 0.1 | | | | -- | | | | 5.4 | |
| Year ended December 31, 2011 | | | 0.8 | | | | 0.6 | | | | -- | | | | 0.1 | | | | 1.5 | |
| Year ended December 31, 2010 | | | 1.3 | | | | 0.5 | | | | -- | | | | 0.5 | | | | 2.3 | |
| Year ended December 31, 2009 | | | 3.6 | | | | 1.4 | | | | 1.0 | | | | 0.4 | | | | 6.4 | |
| Year ended December 31, 2008 | | | 5.7 | | | | 3.6 | | | | 0.2 | | | | 0.9 | | | | 10.4 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cumulative since program inception | | $ | 16.0 | | | $ | 7.1 | | | $ | 1.2 | | | $ | 1.9 | | | $ | 26.2 | |
The Company is exploring various additional cost reduction actions that could be taken, particularly in the Americas segment, if revenue does not improve.
Multiemployer pension withdrawal expense
The Company has eight bargaining units in the United States that participate in the GCC/IBT National Pension Plan pursuant to a number of collective bargaining agreements. In December 2012, the Schawk Board of Directors authorized management to enter into good faith negotiations with the local bargaining units to effect a complete withdrawal from the pension plan. The negotiations with the local bargaining units continued during the first quarter of 2013. The decision to exit the plan was made in order to mitigate potentially greater financial exposure to the Company in the future under the plan, which is significantly underfunded, and to facilitate the consideration of future changes to the Company’s operations in the United States. Based on an analysis prepared by an independent actuary, the Company recorded an estimated liability in the fourth quarter of 2012 for its withdrawal from the pension plan of $31.7 million, which is the present value of the estimated future payments required for withdrawal. The payments are expected to total approximately $41.2 million, payable $2.1 million per year over a 20 year period, with the annual cash payments expected to commence on or about May 1, 2014. These payments were discounted at a risk free rate of 2.54 percent. During the first quarter of 2013, the Company accreted $0.2 million of the present value discount, resulting in an estimated liability balance of $31.9 million at March 31, 2013, which is included in Other long-term liabilities on the Consolidated Balance Sheets as of March 31, 2013. The expense associated with the accretion of the present value discount is reflected in Interest expense on the Consolidated Statements of Comprehensive Income (Loss).
Results of Operations
Consolidated
The following table sets forth certain amounts, ratios and relationships calculated from the Consolidated Statements of Comprehensive Income (Loss) for the three-month periods ended:
| | | Three Months Ended March 31, | | | 2013 vs. 2012 Increase (Decrease) | | |
| | | | | | | | | $ | | % | | |
| | | 2013 | | | 2012 | | | Change | | Change | | |
| | | | | | | | | | | | | |
| Net sales | | $ | 111,003 | | | $ | 112,750 | | | $ | (1,747 | ) | (1.5 | ) % | |
| Cost of sales | | | 73,052 | | | | 75,750 | | | | (2,698 | ) | (3.6 | ) % | |
| Gross profit | | | 37,951 | | | | 37,000 | | | | 951 | | 2.6 | % | |
| Gross profit percentage | | | 34.2 | | % | | 32.8 | | % | | | | | | |
| | | | | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | 33,281 | | | | 33,862 | | | | (581 | ) | (1.7 | ) % | |
| Business and systems integration expenses | | | 2,658 | | | | 3,170 | | | | (512 | ) | (16.2 | ) % | |
| Acquisition integration and restructuring expenses | | | 247 | | | | 1,084 | | | | (837 | ) | (77.2 | ) % | |
| Impairment of long-lived assets | | | 36 | | | | -- | | | | 36 | | nm | | |
| Foreign exchange (gain) loss | | | (242 | ) | | | 470 | | | | (712 | ) | nm | | |
| Operating income (loss) | | | 1,971 | | | | (1,586 | ) | | | 3,557 | | nm | | |
| Operating margin percentage | | | 1.8 | | % | | (1.4 | ) | % | | | | | | |
| | | | | | | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | | | | | | |
| Interest income | | | 26 | | | | 16 | | | | 10 | | 62.5 | % | |
| Interest expense | | | (1,095 | ) | | | (842 | ) | | | (253 | ) | 30.0 | % | |
| | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | 902 | | | | (2,412 | ) | | | 3,314 | | nm | | |
| Income tax benefit | | | (553 | ) | | | (805 | ) | | | 252 | | (31.3 | ) % | |
| | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 1,455 | | | $ | (1,607 | ) | | $ | 3,062 | | nm | | |
| | | | | | | | | | | | | | | | |
| Effective income tax rate | | | (61.3 | ) | % | | 33.4 | | % | | | | | | |
| | | | | | | | | | | | | | | | |
| Expressed as a percentage of Net Sales: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Cost of Sales | | | 65.8 | | % | | 67.2 | | % | | (140 | ) | bp | | |
| Gross margin | | | 34.2 | | % | | 32.8 | | % | | 140 | | bp | | |
| Selling, general and administrative expenses | | | 30.0 | | % | | 30.0 | | % | | -- | | bp | | |
| Business and systems integration expenses | | | 2.4 | | % | | 2.8 | | % | | (40 | ) | bp | | |
| Acquisition integration and restructuring expenses | | | 0.2 | | % | | 1.0 | | % | | (80 | ) | bp | | |
| Foreign exchange loss | | | (0.2 | ) | % | | 0.4 | | % | | (60 | ) | bp | | |
| Operating margin | | | 1.8 | | % | | (1.4 | ) | % | | 320 | | bp | | |
bp = basis points
nm = not meaningful
Net sales in the first quarter of 2013 were $111.0 million compared to $112.8 million in the first quarter of 2012, a decrease of $1.7 million, or 1.5 percent. The sales decrease in the first quarter of 2013 compared to the prior year’s quarter reflects a decrease in promotional activity from the Company’s advertising and retail and entertainment accounts, partially offset by an increase in sales from the Company’s consumer products packaging accounts. Sales in the current quarter compared to the prior year’s quarter were negatively impacted by changes in foreign currency translation rates of approximately $0.3 million, as the U.S. dollar increased in value relative to the local currencies of certain of the Company’s non-U.S. subsidiaries. Net sales increased in the Americas and Asia Pacific segments in the first quarter of 2013 compared to the prior year’s quarter, but were offset by a decrease in sales in the Europe segment. The Americas segment increased by $0.2 million, or 0.2 percent and the Asia Pacific segment increased by $1.6 million, or 19.5 percent. The Europe segment decreased by $2.7 million, or 12.1 percent.
Consumer products packaging accounts sales in the first quarter of 2013 were $91.5 million, or 82.4 percent of total sales, as compared to $89.9 million, or 79.7 percent of total sales, in the same period of the prior year, representing an increase of 1.7 percent. Retail and advertising accounts sales of $15.0 million in the first quarter of 2013, or 13.5 percent of total sales, decreased 13.4 percent from $17.3 million in the first quarter of 2012. Entertainment account sales of $4.5 million in the first quarter of 2013, or 4.1 percent of total sales, decreased 18.0 percent from $5.5 million in the first quarter of 2012. During the first quarter of 2013, the Company continued to see measured progress with its largest client channel, consumer packaged goods accounts, with their continued product and brand innovation activity in the areas of strategy and design. However, new product introductions and packaging changes were slower than anticipated for the quarter as consumer packaged goods clients continue to exercise caution based on economic uncertainties and higher commodity prices.
Cost of sales was $73.1 million, or 65.8 percent of sales, in the first quarter of 2013, a decrease of $2.7 million, or 3.6 percent, from $75.8 million, or 67.2 percent of sales, in the first quarter of 2012. The decrease in cost of sales during the first quarter of 2013 compared to 2012 was mainly due to a decrease in production services purchased from outside contractors.
Gross profit increased by $1.0 million or 2.6 percent in the first quarter of 2013 to $38.0 million from $37.0 million in the first quarter of 2012. The increase in gross profit in the current quarter compared to the prior year’s quarter is attributable to the decrease in cost of sales partially offset by the decrease in net sales quarter-over-quarter. Gross profit in the Americas operating segment increased by $2.3 million or 8.7 percent and increased in the Asia Pacific operating segment by $0.6 million or 19.7 percent. Gross profit in the Europe operating segment decreased by $1.9 million or 25.2 percent.
The Company recorded an operating profit of $2.0 million in the first quarter of 2013 compared to an operating loss of $1.6 million in the first quarter of 2012, an increase of $3.6 million. The operating income percentage was 1.8 percent for the first quarter of 2013, compared to a 1.4 percent operating loss percentage in the first quarter of 2012. The operating income in the current quarter compared to the operating loss in the prior year’s quarter is due in part to the higher gross profit in the first quarter of 2013 compared to the first quarter of 2012, as well as to the following items:
Selling, general and administrative expenses decreased $0.6 million, or 1.7 percent, in the first quarter of 2013 to $33.3 million from $33.9 million in the first quarter of 2012. Business and systems integration expenses related to the Company’s information technology and business process improvement initiative decreased $0.5 million to $2.7 million in the first quarter of 2013 from $3.2 million in the first quarter of 2012. Acquisition integration and restructuring expenses, related to the Company’s cost reduction and capacity utilization initiatives, decreased by $0.8 million, from $1.1 million in the first quarter of 2012 to $0.2 million in the first quarter of 2013. The Company recorded a net gain of $0.2 million on foreign exchange exposures in the first quarter of 2013 compared to a net loss of $0.5 million on foreign exchange exposures in the first quarter of 2012. In addition, the Company recorded a charge of less than $0.1 million for impairment of long-lived assets in the first quarter of 2013 for customer relationship and trade name intangible assets in the Asia Pacific segment. The impairment was related to the Company’s decision in the first quarter of 2013 to close the Seoul, Korea office acquired in the 2011 Brandimage acquisition. There was no impairment of long-lived assets in the first quarter of 2012.
Interest expense in the first quarter of 2013 was $1.1 million compared to $0.8 million in the first quarter of 2012, an increase of $0.3 million, or 30.0 percent. The increase in interest expense in the first quarter of 2013 compared to the first quarter of 2012 includes $0.2 million of interest related to accretion of the present value discount recorded at year-end 2012 in conjunction with the Company’s estimated multiemployer pension withdrawal liability.
The Company recorded an income tax benefit of $0.6 million in the first quarter of 2013 compared to an income tax benefit of $0.8 million in the first quarter of 2012. The income tax benefit in the first quarter of 2013 reflects discrete tax benefits for the release of uncertain tax positions and other discrete tax adjustments. The effective tax rate was (61.3) percent for the first quarter of 2013 compared to an effective tax rate of 33.4 percent in the first quarter of 2012.
In the first quarter of 2013, the Company recorded net income of $1.5 million, or $0.06 per diluted share, as compared to net loss of $1.6 million, or $0.06 per diluted share, in the first quarter of 2012. The increase in profitability, period-over-period, is principally due to expense decreases related to cost of sales, business systems and integration and acquisition integration and restructuring, as well as a net gain on foreign exchange exposures in the first quarter of 2013 compared to a net loss on foreign exchange exposures in the first quarter of 2012.
Other Information
Depreciation and amortization expense was $4.4 million for the first quarter of 2013 as compared to $4.7 million for the same period of 2012.
Capital expenditures in the first quarter of 2013 were $3.7 million compared to $5.5 million in the same period of 2012. The capital expenditures in both periods are primarily related to the Company’s information technology and business process improvement initiatives.
Segment Information
Americas
The following table sets forth Americas segment results for the three-month periods ended March 31, 2013 and 2012:
| | | Three Months Ended March 31, | | 2013 vs. 2012 Increase (Decrease) | | |
| (in thousands) | | 2013 | | 2012 | | $ | | | % | | |
| | | | | | | | | | | | |
| Net sales | | $ | 86,514 | | $ | 86,346 | | $ | 168 | | | 0.2 | % | |
| Cost of sales | | $ | 58,123 | | $ | 60,223 | | $ | (2,100 | ) | | (3.5 | ) % | |
| Gross profit | | $ | 28,391 | | $ | 26,123 | | $ | 2,268 | | | 8.7 | % | |
| Gross profit percentage | | | 32.8 | % | | 30.3 | % | | | | | 250 | bp | |
| Acquisition integration and restructuring expenses | | $ | 213 | | $ | 718 | | $ | (505 | ) | | (70.3 | ) % | |
| Foreign exchange (gain) loss | | $ | (3 | ) | $ | 15 | | $ | (18 | ) | nm | | |
| Depreciation and amortization | | $ | 2,807 | | $ | 2,658 | | $ | 149 | | | 5.6 | % | |
| Operating income | | $ | 12,093 | | $ | 7,951 | | $ | 4,142 | | | 52.1 | % | |
| Operating margin | | | 14.0 | % | | 9.2 | % | | | | | 480 | bp | |
| Capital expenditures | | $ | 976 | | $ | 2,780 | | $ | (1,804 | ) | | (64.9 | ) % | |
| Total assets | | $ | 351,789 | | $ | 358,960 | | $ | (7,171 | ) | | (2.0 | ) % | |
nm = not meaningful
bp = basis points
Net sales in the first quarter of 2013 for the Americas segment were $86.5 million compared to $86.3 million in the same period of the prior year, an increase of $0.2 million or 0.2 percent. The sales increase in the first quarter of 2013 compared to the prior year’s quarter reflects an increase in sales from the Company’s consumer products packaging accounts partially offset by a decrease in promotional activity from the Company’s advertising and retail accounts. Sales in the current quarter compared to the prior year’s quarter were negatively impacted by changes in foreign currency translation rates of less than $0.1 million, as the U.S. dollar increased in value relative to the local currencies of certain of the Company’s non-U.S. subsidiaries.
Cost of sales in the first quarter of 2013 was $58.1 million, or 67.2 percent of sales, compared to $60.2 million, or 69.7 percent of sales, in the same period of the prior year, a decrease of $2.1 million or 3.5 percent. The reduction in cost of sales was mainly due to a decrease in production services purchased from outside contractors.
Operating income was $12.1 million or 14.0 percent of sales, in the first quarter of 2013 compared to $8.0 million, or 9.2 percent of sales, in the first quarter of 2012, an increase of $4.1 million or 52.1 percent. The increase in operating income is principally due to the decrease in cost of sales, as well as decreases in other operating expenses compared to the previous period.
Europe
The following table sets forth Europe segment results for the three-month periods ended March 31, 2013 and 2012:
| | | Three Months Ended March 31, | | 2013 vs. 2012 Increase (Decrease) | | |
| (in thousands) | | 2013 | | 2012 | | $ | | | % | | |
| | | | | | | | | | | | |
| Net sales | | $ | 19,681 | | $ | 22,392 | | $ | (2,711 | ) | | (12.1 | ) % | |
| Cost of sales | | $ | 13,924 | | $ | 14,692 | | $ | (768 | ) | | (5.2 | ) % | |
| Gross profit | | $ | 5,757 | | $ | 7,700 | | $ | (1,943 | ) | | (25.2 | ) % | |
| Gross profit percentage | | | 29.3 | % | | 34.4 | % | | | | | (510 | ) bp | |
| Acquisition integration and restructuring expenses | | $ | 75 | | $ | 331 | | $ | (256 | ) | | (77.3 | ) % | |
| Foreign exchange (gain) loss | | $ | 2 | | $ | (44 | ) | $ | 46 | | nm | | |
| Depreciation and amortization | | $ | 631 | | $ | 840 | | $ | (209 | ) | | (24.9 | ) % | |
| Operating income (loss) | | $ | (201 | ) | $ | 1,423 | | $ | (1,624 | ) | nm | | |
| Operating margin | | | (1.0 | ) % | | 6.4 | % | | | | | (740 | ) bp | |
| Capital expenditures | | $ | 572 | | $ | 205 | | $ | 367 | | nm | | |
| Total assets | | $ | 52,886 | | $ | 61,371 | | $ | (8,485 | ) | | (13.8 | ) % | |
nm = not meaningful
bp = basis points
Net sales in the Europe segment in the first quarter of 2013 were $19.7 million compared to $22.4 million in the same period of the prior year, a decrease of $2.7 million or 12.1 percent. New product introductions and packaging changes were slower than anticipated for the first quarter of 2013 as the Company’s European clients continue to exercise caution based on economic uncertainties. Sales in the current quarter compared to the prior year’s quarter were negatively impacted by changes in foreign currency translation rates of approximately $0.1 million, as the U.S. dollar increased in value relative to the local currencies of certain of the Company’s non-U.S. subsidiaries.
The cost of sales was $13.9 million, or 70.7 percent of sales, in the first quarter of 2013 compared to $14.7 million or 65.6 percent of sales in the first quarter of 2012, a decrease of $0.8 million or 5.2 percent. The decrease in cost of sales during the first quarter of 2013 compared to 2012 was mainly due to a decrease in production services purchased from outside contractors.
Gross profit decreased by $1.9 million or 25.2 percent in the first quarter of 2013 to $5.8 million from $7.7 million in the first quarter of 2012. The decrease in gross profit in the current quarter compared to the prior year’s quarter is attributable to the decrease in net sales partially offset by the decrease in cost of goods sold quarter-over-quarter.
The operating loss was $0.2 million, or 1.0 percent of sales, in the first quarter of 2013 compared to an operating income of $1.4 million or 6.4 percent of sales in the first quarter of 2012, a decrease of $1.6 million. The decrease in operating income in the current period compared to the prior year’s period is mainly due to decrease in net sales quarter-over-quarter.
Asia Pacific
The following table sets forth Asia Pacific segment results for the three-month periods ended March 31, 2013 and 2012:
| | | Three Months Ended March 31, | | 2013 vs. 2012 Increase (Decrease) | | |
| (in thousands) | | 2013 | | 2012 | | $ | | | % | | |
| | | | | | | | | | | | |
| Net sales | | $ | 9,706 | | $ | 8,120 | | $ | 1,586 | | | 19.5 | % | |
| Cost of sales | | $ | 5,903 | | $ | 4,943 | | $ | 960 | | | 19.4 | % | |
| Gross profit | | $ | 3,803 | | $ | 3,177 | | $ | 626 | | | 19.7 | % | |
| Gross profit percentage | | | 39.2 | % | | 39.1 | % | | | | | 10 | bp | |
| Acquisition integration and restructuring expenses | | $ | (41 | ) | $ | 35 | | $ | (76 | ) | nm | | |
| Impairment of long-lived assets | | $ | 36 | | $ | -- | | $ | 36 | | nm | | |
| Foreign exchange gain (loss) | | $ | (46 | ) | $ | 168 | | $ | (214 | ) | nm | | |
| Depreciation and amortization | | $ | 369 | | $ | 393 | | $ | (24 | ) | | (6.1 | ) % | |
| Operating income | | $ | 347 | | $ | 114 | | $ | 233 | | nm | | |
| Operating margin | | | 3.6 | % | | 1.4 | % | | | | | 220 | bp | |
| Capital expenditures | | $ | 314 | | $ | 197 | | $ | 117 | | | 59.4 | % | |
| Total assets | | $ | 26,943 | | $ | 29,094 | | $ | (2,151 | ) | | (7.4 | ) % | |
nm = not meaningful
bp = basis points
Net sales in the Asia Pacific segment in the first quarter of 2013 were $9.7 million compared to $8.1 million in the same period of the prior year, an increase of $1.6 million or 19.5 percent, reflecting an increase in promotional activity from the Company’s packaging accounts. Sales for the first quarter of 2013, as compared to the first quarter of 2012, were negatively impacted by changes in foreign currency translation rates of approximately $0.1 million, as the U.S. dollar increased in value relative to the local currencies of certain of the Company’s non-U.S. subsidiaries.
Cost of sales was $5.9 million in the first quarter of 2013, or 60.8 percent of sales, as compared to $4.9 million, or 60.9 percent of sales, in the first quarter of 2012, an increase of $1.0 million, or 19.4 percent. The increase in cost of sales during the first quarter of 2013 compared to 2012 was mainly due to an increase in labor costs reflecting the Company’s recent acquisitions and expansion of client service offerings and increases in production services purchased from outside contractors.
Operating income was $0.3 million in the first quarter of 2013, or 3.6 percent of sales, as compared to $0.1 million, or 1.4 percent of sales, in the first quarter of 2012, an increase of $0.2 million. The increase in operating income in the current period compared to the prior year’s period is due principally to the increase in net sales.
Liquidity and Capital Resources
The Company’s primary liquidity needs are to fund capital expenditures, support working capital requirements and service indebtedness. The Company’s principal sources of liquidity are cash generated from its operating activities and borrowings under its credit agreement. The Company’s total debt outstanding at March 31, 2013 was $73.8 million compared to $83.0 million at December 31, 2012.
As of March 31, 2013, the Company had $6.0 million in consolidated cash and cash equivalents, compared to $9.7 million at December 31, 2012. The decrease in cash and cash equivalents at March 31, 2013 compared to December 31, 2012 reflects the Company’s efforts to minimize cash on hand in order to pay down its revolving credit facility.
Cash provided by operating activities. Cash provided by operating activities was $10.7 million in the first quarter of 2013 compared to cash provided by operating activities of $16.8 million in the first quarter of 2012. The cash provided by operating activities in the 2013 period compared to the 2012 period reflects the increase in net income, from a net loss of $1.6 million for the first quarter of 2012 to net income of $1.5 million in the first quarter of 2013. The cash provided from operations in the 2013 period compared to the 2012 period also reflects less favorable changes in the operating assets and liabilities in the first quarter of 2013 compared to the first quarter of 2012. The quarter-over-quarter change in operating assets and liabilities includes a decrease in cash provided by operating activities attributable to an increase in trade accounts receivable of $1.7 million in the 2013 period compared to an increase in cash provided by operating activities attributable to a decrease in trade accounts receivable of $4.8 million in the 2012 period. The decrease in cash provided by operating activities attributable to an increase in trade accounts receivable in the first quarter of 2013 was partially offset by an increase in cash provided by operating activities attributable to a decrease in inventories of $0.4 million in the first quarter of 2013 compared to an increase in inventories of $3.1 million in the first quarter of 2012. In addition, the quarter-over-quarter change in operating assets and liabilities includes a decrease in cash provided by operating activities attributable to a decrease in income taxes payable of $1.3 million in the first quarter of 2013 compared to an increase in taxes payable of $1.7 million in the first quarter of 2012.
Depreciation and intangible asset amortization expense in the first quarter of 2013 was $3.4 million and $1.0 million, respectively, as compared to $3.3 million and $1.4 million, respectively, in the first quarter of 2012.
Cash used in investing activities. Cash used in investing activities was $3.7 million in the first quarter of 2013 compared to $5.5 million used in investing activities during the comparable 2012 period. Capital expenditures were $3.7 million in the first quarter of 2012 compared to $5.5 million in the first quarter of 2012. The capital expenditures in both periods principally reflect expenditures related to the Company’s ongoing information technology and business process improvement initiative designed to improve customer service, business effectiveness and internal controls, as well as to reduce operating costs. Over the next five years, assuming no significant business acquisitions, routine capital expenditures are expected to be in the range of $9.0 to $11.0 million annually.
Cash used in financing activities. Cash used in financing activities in the first quarter of 2013 was $10.5 million compared to cash used in financing activities of $17.3 million during the first quarter of 2012. The cash used in financing activities in the first quarter of 2013 reflects $9.1 million of net payments of debt compared to $15.2 million of net payments of debt during the first quarter of 2012. The Company received proceeds of $0.7 million from the issuance of common stock during both the first quarter of 2013 and the first quarter of 2012. The issuance of common stock in both periods is attributable to stock option exercises and issuance of shares pursuant to the Company’s employee stock purchase plan. During the first quarter of 2012, the Company paid $0.8 million for deferred financing fees related to its January 2012 credit facility refinancing and note purchase agreement amendments. Dividend payments on common stock at $0.08 per share quarterly were $2.1 million for both the first quarter of 2013 and the first quarter of 2012. Subject to a declaration at the discretion of the Board of Directors, the Company expects to pay a quarterly dividend of $0.08 per share for the remainder of 2013.
Revolving Credit Facility
Amended and Restated Credit Facility. On January 27, 2012, the Company entered into a Second Amended and Restated Credit Agreement (the “2012 Credit Agreement”), among the Company, certain subsidiary borrowers of the Company, the financial institutions party thereto as lenders, JPMorgan Chase Bank, N.A., on behalf of itself and the other lenders as agent, and PNC Bank, National Association, on behalf of itself and the other lenders as syndication agent, in order to amend and restate the Company’s prior credit agreement that was scheduled to terminate on July 12, 2012.
The 2012 Credit Agreement provides for a five-year unsecured, multicurrency revolving credit facility in the principal amount of $125.0 million (the “New Facility”), including a $10.0 million swing-line loan subfacility and a $10.0 million subfacility for letters of credit. The Company may, at its option and subject to certain conditions, increase the amount of the New Facility by up to $50.0 million by obtaining one or more new commitments from new or existing lenders to fund such increase. Loans under the New Facility generally bear interest at a LIBOR or Federal funds rate plus a margin that varies with the Company’s cash flow leverage ratio, in addition to applicable commitment fees, with a maximum rate of LIBOR plus 225 basis points. At closing, the applicable margin on LIBOR-based loans was 175 basis points. The unutilized portion of the New Facility will be used primarily for general corporate purposes, such as working capital and capital expenditures, and, to the extent opportunities arise, acquisitions and investments.
At March 31, 2013, there was $40.5 million outstanding under the LIBOR portion of the facility at an interest rate of approximately 2.43 percent. At the Company’s option, loans under the facility could bear interest at prime plus 1.5 percent. At March 31, 2013 there were no prime rate borrowings outstanding. The Company’s Canadian subsidiary borrowed under the revolving credit facility in the form of bankers’ acceptance agreements and prime rate borrowings. At March 31, 2013, there was $2.9 million outstanding under bankers’ acceptance agreements at an interest rate of approximately 3.55 percent and $0.2 million outstanding under prime rate borrowings at an interest rate of approximately 4.25 percent.
The 2012 Credit Agreement contains various customary affirmative and negative covenants and events of default. Under the terms of the 2012 Credit Agreement, the Company is no longer subject to restrictive covenants on permitted capital expenditures. Certain restricted payments, such as regular dividends and stock repurchases, are permitted provided that the Company maintains compliance with its minimum fixed-charge coverage ratio (with respect to regular dividends) and a specified maximum cash-flow leverage ratio (with respect to other permitted restricted payments). Other covenants include, among other things, restrictions on the Company’s and in certain cases its subsidiaries’ ability to incur additional indebtedness; dispose of assets; create or permit liens on assets; make loans, advances or other investments; incur certain guarantee obligations; engage in mergers, consolidations or acquisitions, other than those meeting the requirements of the 2012 Credit Agreement; engage in certain transactions with affiliates; engage in sale/leaseback transactions; and engage in certain hedging arrangements. The 2012 Credit Agreement also requires compliance with specified financial ratios and tests, including a minimum fixed-charge coverage ratio and a maximum cash-flow ratio.
Amendment to the 2012 Credit Agreement. On September 12, 2012, the Company entered into Amendment No. 1 (the “Credit Agreement Amendment”) to the 2012 Credit Agreement. The Credit Agreement Amendment amended the definition of “EBITDA” in the 2012 Credit Agreement to permit the Company, for purposes of calculating EBITDA for financial covenant compliance, to add back certain expenses associated with the Company’s enterprise resource planning system up to certain amounts as specified in the Credit Agreement Amendment.
Senior Notes
In 2003 and 2005, the Company entered into two private placements of debt to provide long-term financing in which it issued senior notes pursuant to note purchase agreements, which have since been amended as further discussed below. The senior notes that were outstanding at March 31, 2013 bear interest at rates from 8.90 percent to 8.98 percent. The remaining aggregate balance of the notes, $4.3 million, is included on the March 31, 2013 Consolidated Balance Sheets as follows: $3.1 million is included in Current portion of long-term debt and $1.2 million is included in Long-term debt.
Amended and Restated Private Shelf Agreement. Concurrently with its entry into the 2012 Credit Agreement, on January 27, 2012, the Company entered into an Amended and Restated Note Purchase and Private Shelf Agreement with Prudential Investment Management, Inc. (“Prudential”) and certain existing noteholders and note purchasers named therein (the “Private Shelf Agreement”), which provides for a $75.0 million private shelf facility for a period of up to three years (the “Private Shelf Facility”). At closing, the Company issued $25.0 million aggregate principal amount of its 4.38% Series F Senior Notes due January 27, 2019 (the “Notes”) under the Private Shelf Agreement.
The Private Shelf Agreement contains financial and other covenants that are the same or substantially equivalent to covenants under the 2012 Credit Agreement described above. Notes issued under the Private Shelf Facility may have maturities of up to ten years and are unsecured. Either the Company or Prudential may terminate the unused portion of the Private Shelf Facility prior to its scheduled termination upon 30 days’ written notice. Any future borrowings under the Private Shelf Facility may be used for general corporate purposes, such as working capital and capital expenditures.
Amendment to Note Purchase Agreement. Concurrently with the entry into the Private Shelf Agreement, the Company entered into the Fifth Amendment (the “Fifth Amendment”) to the Note Purchase Agreement, dated as of December 23, 2003, as amended (the “Note Purchase Agreement”), with the noteholders party thereto (the “Mass Mutual Noteholders”). The Fifth Amendment amended certain financial and other covenants in the Note Purchase Agreement so that such financial and other covenants are the same or substantially equivalent to covenants under the 2012 Credit Agreement described above. The Fifth Amendment also amended certain provisions contained in the Note Purchase Agreement to reflect that amounts due under existing senior notes issued to the Mass Mutual Noteholders are no longer secured.
Amendments to Private Shelf Agreement and Note Purchase Agreement. Concurrently with its entry into the Credit Agreement Amendment, the Company entered into (i) the First Amendment (the “First Amendment”) to the Private Shelf Agreement and (ii) the Sixth Amendment (the “Sixth Amendment”) to the Note Purchase Agreement. The First Amendment and the Sixth Amendment amend the respective definitions of “EBITDA” in the Private Shelf Agreement and the Note Purchase Agreement to conform to the amended EBITDA definition contained in the Credit Agreement Amendment.
Debt Covenant Compliance and Noteholders Consent
The Company was in compliance with all covenant obligations under the aforementioned credit and note purchase agreements at March 31, 2013. In connection with its compliance with the covenant obligations as of December 31, 2012, the Company received a consent from its lender group to make a partial or complete withdrawal from the GCC/IBT National Pension Plan, and in connection with such withdrawal the Company recorded a withdrawal liability with an estimated present value of $31.7 million. The lender group agreed to waive any event of default under the 2012 Credit Agreement that might occur as a result of such withdrawal and the incurrence of such withdrawal liability and acknowledged that the withdrawal liability incurred by the Company will not constitute indebtedness. See Note 15 – Multiemployer Pension Plans for more information regarding the withdrawal liability.
Other Debt Arrangements
In September 2012, the Company financed $1.1 million of business insurance premiums for a 2012 – 2013 policy term. The premiums are due in equal quarterly payments ending in June 2013. The total balance outstanding for insurance premiums at March 31, 2013 is $0.4 million and is included in Current portion of long-term debt on the March 31, 2013 Consolidated Balance Sheets.
In September 2011, the Company financed $0.9 million of three-year software license agreements effective through September 2014. The payments are due in annual installments ending in September 2013. The total balance outstanding for the software license fees at March 31, 2013 is $0.3 million and is included in Current portion of long-term debt.
In October 2011, the Company financed a $0.6 million three-year equipment and software maintenance agreement effective through November 2014. The payments are due in annual installments ending in December 2013. The total balance outstanding for the equipment and software maintenance fees at March 31, 2013 is $0.2 million and is included in Current portion of long-term debt.
Off-balance sheet arrangements and contractual obligations
The Company does not have any material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on its financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
There were no material changes in the Company’s minimum debt, lease and other material noncancelable commitments as of March 31, 2013 from those reported in the Company’s Form 10-K for the year ended December 31, 2012.
Recent Accounting Pronouncements
See Note 1 – Significant Accounting Policies to the Consolidated Financial Statements, included in Part I, Item 1, for information on recent accounting pronouncements.
Critical accounting policies and estimates
The discussion and analysis of the Company’s financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of its financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting estimates are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies” in the Company’s Form 10-K for the year ended December 31, 2012 for further discussion of the Company’s critical accounting estimates and policies.
A discussion regarding market risk is included in the Company’s Form 10-K for the year ended December 31, 2012. There have been no material changes in information regarding market risk relating to the Company’s business on a consolidated basis since December 31, 2012.
(a) Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors as appropriate to allow timely decisions regarding required disclosure.
Based on their evaluation as of March 31, 2013, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective.
(b) Changes in Internal Control Over Financial Reporting
Other than as follows, there have been no changes in our internal controls over financial reporting during the first quarter of fiscal 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting: In connection with the Company’s information technology and business process improvement initiative, the Company is currently implementing a new global Enterprise Resource Planning (“ERP”) system, which will replace multiple legacy financial systems used for job production and invoicing, and which includes upgrades to the Company’s general accounting, financial reporting and human resource systems. The first phase of the new ERP system, consisting principally of an upgrade of the Company’s general accounting, human resources and financial reporting systems, was implemented during 2012. In addition, during the second half of 2012 and the first quarter of 2013, the Company implemented job production and invoicing modules at certain of the Company’s locations. During the remainder of 2013 and possibly into 2014, additional phases of the ERP system are anticipated to be implemented, including the job production and invoicing modules at the remainder of the Company’s locations. As a result of the implementation of the new ERP system, certain of the Company’s internal controls over financial reporting and related processes will be modified or redesigned to conform with and support the new ERP system.
The Company has included in Part I, Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2012 (the “Annual Report”) descriptions of certain risks and uncertainties that could affect the Company’s business, future performance or financial condition. The risk factors described in the Annual Report (collectively, the “Risk Factors”) could materially adversely affect the Company’s business, financial condition, future results or trading price of the Company’s common stock. In addition to the other information contained in the reports the Company files with the SEC, investors should consider these Risk Factors prior to making an investment decision with respect to the Company’s stock. The risks described in the Risk Factors, however, are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or those that are currently considered to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.
Purchases of Equity Securities by the Company
In November 2010, the Board of Directors of the Company reinstated the Company’s share repurchase program, which authorizes the Company to repurchase from time to time up to two million shares of Schawk Inc. common stock per year, subject to the restricted payment limitations of the Company’s credit facility. The Company did not repurchase any shares of its common stock during either the three-month period ended March 31, 2013 or the three-month period ended March 31, 2012. In addition, shares of common stock are occasionally tendered to the Company by certain employee and director stockholders in payment of stock options exercised. No shares of Schawk, Inc. common stock were tendered to the Company in connection with stock option exercises during either the three-month period ended March 31, 2013 or March 31, 2012. During the three-month period ended March 31, 2013, certain officers of the Company tendered 33,317 shares of Schawk Inc. common stock to the Company in satisfaction of tax liabilities associated with retirement-age vesting provisions of their restricted stock awards. The shares tendered had a market value of $0.5 million based on a $13.70 per share closing price on the date the shares were tendered. The receipt of the shares was recorded by the Company as an addition to Treasury Stock and a reduction of a receivable from the Company officers.
| 3.1 | Certificate of Incorporation of Schawk, Inc., as amended. Incorporated herein by reference to Exhibit 4.2 to Registration Statement No. 333-39113. |
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| 3.2 | By-Laws of Schawk, Inc., as amended. Incorporated herein by reference to Exhibit 3.2 to Form 8-K filed with the SEC on December 18, 2007. |
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4.1 | Specimen Class A Common Stock Certificate. Incorporated herein by reference to Exhibit 4.1 to Registration Statement No. 33-85152. |
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| 10.1 | Consent Memorandum, dated as of February 27, 2013, among Schawk, Inc., certain subsidiary borrowers of Schawk, Inc., and the lenders under the Second Amended and Restated Credit Agreement, dated as of January 27, 2012. Incorporated by reference to Exhibit 10.32 to Form 10-K filed with the SEC on March 7, 2013. |
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| 10.2 | Consent, dated as of February 27, 2013, among Schawk, Inc., certain subsidiary borrowers of Schawk, Inc., Prudential Investment Management, Inc. and the other noteholders party thereto. Incorporated by reference to Exhibit 10.33 to Form 10-K filed with the SEC on March 7, 2013. |
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| 10.3 | Consent, dated as of February 27, 2013, among Schawk, Inc., certain subsidiary borrowers of Schawk, Inc., Massachusetts Mutual Life Insurance Company and the other noteholders party thereto. Incorporated by reference to Exhibit 10.34 to Form 10-K filed with the SEC on March 7, 2013. |
| 10.4 | Letter and Relocation Agreement between Eric N. Ashworth and Schawk, Inc.* |
| 10.5 | Form of Restricted Stock Unit Award Agreement* |
| 10.6 | Form of Stock-Settled Stock Appreciation Rights Award Agreement* |
| 10.7 | Form of Long-Term Cash Incentive Award Agreement* |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. * |
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| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. * |
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| 32 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * |
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| 101 | The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (Unaudited), (ii) Consolidated Statements of Comprehensive Income (Loss) (Unaudited), (iii) Consolidated Statements of Cash Flows (Unaudited) and (iv) Notes to Consolidated Financial Statements. ** |
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| | * Filed or furnished herewith |
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| | ** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files submitted under Exhibit 101 are not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 1st day of May, 2013.
Schawk, Inc.
(Registrant)
| By: | /s/ John B. Toher |
| | John B. Toher |
| | Vice President and |
| | Corporate Controller |
