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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 2002 Commission File Number 1-9335
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SCHAWK, INC.
(Exact name of Registrant
as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
36-2545354
(I.R.S. Employer Identification No.)
1695 RIVER ROAD
DES PLAINES, ILLINOIS
(Address of principal executive office)
60018
(Zip Code)
847-827-9494
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Title of Each Class Name of Exchange on Which Registered
--------------------- -------------------------------------
CLASS A COMMON STOCK, NEW YORK STOCK EXCHANGE
$.008 PAR VALUE
Indicated 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 X No
--- ---
The number of shares outstanding of each of the issuer's classes of common stock
as of March 31, 2002, is:
21,480,388 shares, Common Stock, $.008 par value
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DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to the Securities Exchange Act of 1934 Release 15502 and Rule
240.03(b), the pages of this document have been numbered sequentially. The total
number of pages contained herein is 12.
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1
PART I
Schawk, Inc.
Consolidated Balance Sheets
(In Thousands)
MARCH 31,
2002 DECEMBER 31,
(UNAUDITED) 2001
---------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,237 $ 1,112
Trade accounts receivable, less allowance for doubtful accounts
of $800 at March 31, 2002 and $813 at December 31, 2001 40,045 38,302
Inventories 10,088 7,925
Prepaid expenses and other 3,836 5,091
Refundable income taxes 560 875
Deferred income taxes 1,249 1,241
---------------------------------
Total current assets 57,015 54,546
Property and equipment less accumulated depreciation of
$77,153 at March 31, 2002 and 46,048 47,606
$73,736 at December 31, 2001
Goodwill, less accumulated amortization of $11,496 at March 31, 2002 and
December 31, 2001 60,016 60,023
Other assets 3,963 3,950
---------------------------------
Total assets $ 167,042 $ 166,125
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 4,433 $ 3,580
Accrued expenses 10,695 12,854
Income taxes payable 2,932 2,080
Notes payable to banks 8,992 2,963
Current portion of long-term debt and capital lease obligations 6,260 6,273
---------------------------------
Total current liabilities 33,312 27,750
Long-term debt 46,000 52,000
Capital lease obligations 74 131
Other 1,069 1,342
Deferred income taxes 3,955 4,443
Minority interest in consolidated subsidiary 884 922
Stockholders' Equity:
Common stock, $0.008 par value, 40,000,000 shares authorized, 23,327,095 and
23,301,084 shares issued at March 31, 2002 and December 31, 2001,
respectively; 21,480,388 and 21,453,725 shares outstanding at March 31,
2002 and December 31, 2001,
respectively 185 185
Additional paid-in capital 85,357 85,157
Retained earnings 18,543 16,512
Accumulated comprehensive loss, net (1,270) (1,247)
---------------------------------
102,815 100,607
Treasury stock, at cost, 1,846,707 and 1,847,359 shares of common
stock at March 31, 2002 and December 31, 2001, respectively (21,067) (21,070)
---------------------------------
Total stockholders' equity 81,748 79,537
---------------------------------
Total liabilities and stockholders' equity $ 167,042 $ 166,125
=================================
See accompanying notes.
2
Schawk, Inc.
Consolidated Statements of Operations
Three Months Ended March 31, 2002 and 2001
(Unaudited)
(In Thousands, Except Per Share Amounts)
2002 2001
-----------------------------
Net sales $ 42,849 $ 45,970
Cost of sales 25,289 27,508
Selling, general, and administrative expenses 12,504 14,161
Goodwill amortization -- 540
Restructuring and other charges -- 265
-----------------------------
Operating income 5,056 3,496
Other income (expense)
Interest and dividend income 5 18
Interest expense (747) (1,233)
Other income 42 8
-----------------------------
(700) (1,207)
-----------------------------
Income before income taxes and minority interest 4,356 2,289
Income tax provision 1,670 938
-----------------------------
Income before minority interest 2,686 1,351
Minority interest in net loss of subsidiary 38 52
-----------------------------
Net income $ 2,724 $ 1,403
=============================
Earnings per share:
Basic $ 0.13 $ 0.07
Diluted $ 0.13 $ 0.07
Weighted average number of common and common
equivalent shares outstanding 21,651 21,475
Dividends per common share $ 0.0325 $ 0.0325
See accompanying notes.
3
Schawk, Inc.
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2002 and 2001
(In Thousands)
2002 2001
-------------------------------------------
OPERATING ACTIVITIES
Net income $ 2,724 $ 1,403
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization 3,167 3,652
Deferred income taxes (496) (8)
Gain realized on sale of equipment (42) --
Minority interest (38) (52)
Changes in operating assets and liabilities, net of effects from
acquisitions:
Trade accounts receivable (1,743) 149
Inventories (2,163) (1,545)
Prepaid expenses and other 1,255 (127)
Trade accounts payable and accrued expenses (1,306) (2,099)
Income taxes refundable/payable 1,167 525
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Net cash provided by operating activities 2,525 1,898
INVESTING ACTIVITIES
Capital expenditures (1,621) (4,889)
Other (241) 539
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Net cash used in investing activities (1,862) (4,350)
FINANCING ACTIVITIES
Proceeds from debt 6,029 3,774
Principal payments on debt (6,000) --
Principal payments on capital lease obligations (70) (62)
Common stock dividends (693) (689)
Issuance of common stock 203 132
Effect of foreign currency rate changes (7) (259)
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Net cash provided by (used in) financing activities (538) 2,896
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Net increase in cash and cash equivalents 125 444
Cash and cash equivalents beginning of period 1,112 357
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Cash and cash equivalents end of period $ 1,237 $ 801
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SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 1,131 $ 1,227
Cash paid for income taxes 558 357
See accompanying notes.
4
Schawk, Inc.
Notes to Consolidated Interim Financial Statements
(Thousands of dollars, except per share data)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in annual financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations, although Schawk, Inc. (the Company) believes the disclosures
included are adequate to make the information presented not misleading. In
addition, certain prior year amounts have been reclassified to conform to the
current year presentation. In the opinion of management, all adjustments
necessary for a fair presentation for the periods presented have been reflected
and are of a normal recurring nature. These financial statements should be read
in conjunction with the Company's consolidated financial statements and the
notes thereto for the three years ended December 31, 2001.
NOTE 2. NEW ACCOUNTING PRINCIPLES
During the first quarter of 2002, the Company adopted SFAS 141, Business
Combinations and SFAS 142, Goodwill and Other Intangible Assets. SFAS requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, and eliminates the pooling-of-interests method of
accounting for future acquisitions. SFAS 141 also includes guidance on the
initial recognition and measurement of goodwill and other intangible assets.
SFAS 142 requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to be amortized over
their estimated useful lives. For more information, please refer to Note 10,
Goodwill and Intangible Assets.
NOTE 3. INTERIM RESULTS
Results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
NOTE 4. DESCRIPTION OF BUSINESS
The Company is a leading provider of digital imaging prepress services for the
consumer products industry. The Company focuses on providing these services to
multi-national clients in three primary markets: consumer products packaging,
advertising agencies and promotion.
NOTE 5. 2001 RESTRUCTURING AND OTHER CHARGES
During 2001, the Company incurred restructuring charges related to severance
payments for 140 positions that were eliminated at several Company facilities.
In addition, expenses were incurred related to additional lease termination and
asset write offs relating to an east coast facility closed in 2000. These
actions resulted in total charges of $1,120, consisting of severance and other
employee termination costs of $792, lease termination costs of $230, and asset
write offs of $98.
Below is an analysis of the activity related to the Company's 2001 restructuring
programs and their status as of March 31, 2002:
Balance at Balance at
Description of Reserve 12/31/01 Payments 3/31/02
- ---------------------- ---------- -------- ------------
Severance and other employee benefits $310 ($35) $275
Other $ 20 --- $ 20
---------------------------------------
$330 $(35) $295
The majority of the remaining severance and other employee benefits will be paid
in accordance with the termination agreements.
5
NOTE 6. INVENTORIES
Inventories consist of the following:
March 31 December 31
2002 2001
---- ----
Raw materials $ 2,196 $ 2,315
Work in process 8,934 6,652
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11,130 8,967
Less: LIFO reserve (1,042) (1,042)
-------- --------
$ 10,088 $ 7,925
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NOTE 7. EARNINGS PER SHARE
Basic earnings per share and diluted earnings per share are shown on the face of
the statement of operations. Basic earnings per share is computed by dividing
net income by the weighted average shares outstanding for the period. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common shares and common stock equivalent shares outstanding (stock
options) for the period.
The following table sets forth the computation of basic and diluted earnings per
share:
Three months ended March 31
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2002 2001
----------------- -----------------
Net income $ 2,724 $ 1,403
================= =================
Weighted average shares 21,466 21,364
Effect of dilutive stock options 185 111
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Adjusted weighted average shares and
assumed conversions 21,651 21,475
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Basic earnings per share $ 0.13 $ 0.07
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Diluted earnings per share $ 0.13 $ 0.07
================= =================
NOTE 8. SEGMENT REPORTING
The Company operates in a single business segment, Imaging and Information
Technologies. The Company operates primarily in two geographic areas, the United
States and Canada. Summary financial information by geographic area is as
follows:
Three months ended March 31
---------------------------
2002 United States Canada Other Foreign Total
- ---- ------------- ------ ------------- -----
Sales $35,303 $5,692 $1,854 $42,849
Long-lived assets 86,137 15,456 8,434 110,027
Three months ended March 31
---------------------------
2001 United States Canada Other Foreign Total
- ---- ------------- ------ ------------- -----
Sales $36,228 $7,685 $2,057 $45,970
Long-lived assets 87,964 16,697 7,791 112,452
6
NOTE 9. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the quarters
ended March 31, 2002 and 2001 are as follows:
Three months ended March 31
----------------------------------------------------
2002 2001
----------------- -----------------
Net income $2,724 $1,403
Foreign currency translation adjustments (23) (707)
----------------- -----------------
Comprehensive income $ 2,701 $ 696
================= =================
The components of accumulated comprehensive loss, net of related tax as of March
31, 2002 and December 31, 2001 consisted entirely of foreign currency
translation adjustments.
NOTE 10. GOODWILL AND OTHER INTANGIBLE ASSETS
In its initial application of SFAS 142, the Company determined that it operated
in one reporting unit for purposes of completing the impairment review of
goodwill. Therefore, the Company tested for impairment at the consolidated
entity level and determined that a potential impairment did not exist. As a
result, no further actions were required. The Company plans to perform its
annual impairment review in the fourth quarter of each year.
Below is a comparison of the results of operations for the quarter ended March
31, 2002, with the proforma results of operations for the quarter ended March
31, 2001, adjusted to exclude goodwill amortization expense.
Three months ended March 31
--------------------------
2002 2001
---------- ----------
NET INCOME
Reported net income $ 2,724 $ 1,403
Goodwill amortization (net of tax) -- 393
---------- ----------
Adjusted net income $ 2,724 $ 1,796
========== ==========
BASIC EARNINGS PER SHARE
Reported net income $ 0.13 $ 0.07
Goodwill amortization (net of tax) -- .01
---------- ----------
Adjusted net income $ 0.13 $ 0.08
========== ==========
DILUTED EARNINGS PER SHARE
Reported net income $ 0.13 $ 0.07
Goodwill amortization (net of tax) -- .01
---------- ----------
Adjusted net income $ 0.13 $ 0.08
========== ==========
Average number of common shares outstanding 21,466 21,364
Average number of common shares outstanding
Assuming dilution 21,651 21,475
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Thousands of dollars, except per share amounts)
Certain statements contained herein that relate to the Company's beliefs or
expectations as to future events relating to, among other things, an improvement
in operating results as a result of the Company's restructuring efforts, 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
and are subject to the "Safe Harbor" created thereby. 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 business and
operations, it can give no assurance the assumptions will prove to have been
correct. Important factors that could cause actual results to differ materially
and adversely from the Company's expectations and beliefs include, among other
things, soft market conditions for graphics design changes in the consumer
products industry, the continued demand for Schawk's services, retention of key
management and operational personnel, the ability of the Company to implement
its growth strategy, the stability of state, federal and foreign tax laws, the
ability of the Company to identify and exploit industry trends and to exploit
technological advances in the imaging industry, as well as other factors
detailed in the Company's filings with the Securities and Exchange Commission.
NEW GOODWILL ACCOUNTING RULES
On January 1, 2002, the Company adopted SFAS 142, the new accounting
pronouncement on goodwill accounting. Previously, the Company recorded monthly
amortization of goodwill, generally over a 40-year period. The new rules that
became effective January 1, 2002 prohibit the amortization of goodwill. Rather,
goodwill is to be reviewed on a periodic basis, and if a write-down is required,
the write-down must be taken at that time, similar to an impairment charge on
other long-lived assets. The goodwill amortization was $540 in the quarter ended
March 31, 2001. The Company's results with the pro forma effect of the new
accounting rules on the prior year first quarter are as follows:
Proforma results excluding goodwill amortization
Three months ended March 31, 2001
(In thousands, Except Per Share Amounts)
Reported net income $ 1,403
Add back: Goodwill amortization 540
Subtract: tax effect of goodwill amortization (147)
---------
Adjusted net income $ 1,796
Basic earnings per share:
Reported net income $ 0.07
Add back: Goodwill amortization $ 0.01
Subtract: tax effect of goodwill amortization ($ 0.00)
---------
Adjusted net income $ 0.08
Diluted earnings per share:
Reported net income $ 0.07
Add back: Goodwill amortization $ 0.01
Subtract: tax effect of goodwill amortization ($ 0.00)
---------
Adjusted net income $ 0.08
NET SALES of $42,849 for the first quarter of 2002 decreased 6.8% from net sales
of $45,970 for the same period in 2001. The decrease was primarily attributable
to lower sales in the prepress for advertising agency business due to the
weakest advertising market in the last 20 years. Since only 30% of the Company's
business is in the advertising agency market, the overall drop in sales was not
as significant as it would have been otherwise. On the consumer products
packaging prepress side of the business, which represents 70% of the Company's
overall business, revenues with the Company's top twenty accounts increased
12.5% in the first quarter of 2002 versus the prior year first quarter. However,
lower revenues with smaller accounts in this part of the business resulted in
sales that were essentially flat with the prior year first quarter.
8
COST OF SALES as a percentage of net sales for the first quarter of 2002
decreased to 59.0% from 59.8% for the comparable period in the prior year. Given
the fact that net sales dropped 6.8%, a decrease in cost of sales as a
percentage of sales is a very positive result. The decrease in the cost of sales
percentage indicates that the cost cutting moves the Company initiated through
its restructurings over the past two years are having a positive effect.
OPERATING INCOME in the first quarter of 2002 increased 45% to $5,056 from
$3,496 for the same period in 2001. The increase was primarily the result of
lower selling, general and administrative expenses (SG&A) as compared to the
prior year period and the discontinued amortization of goodwill. The SG&A
reduction was due to staffing reductions and lower sales commissions in the
first quarter of 2002 as compared to the prior year first quarter. Also
contributing to the higher operating income was the absence of restructuring
charges in 2002 as compared to $265 in 2001. The Company's operating margin
increased to 11.8% in the first quarter of 2002 from 7.6% in the prior year
first quarter. This increase is significant given the fact that it was achieved
on lower sales than in the previous year's first quarter.
OTHER INCOME (EXPENSE) - NET decreased to $(700) of net expense for the first
quarter of 2002 compared with $(1,207) of net expense for the same period of
2001. Interest expense for the first quarter of 2001 decreased to $747 versus
$1,233 in the comparable prior year period. The decrease in interest expense was
from a combination of lower interest rates and lower borrowing levels in the
first quarter of 2002 as compared to the same period in the prior year. The
lower borrowing levels were due to strong cash flows in the first two months of
2002 that were utilized, in part, to pay down debt. Interest expense also
benefited from lower rates in 2002 versus 2001 as approximately 60% of the
Company's debt was at floating rates during the first quarter of 2002.
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST increased to $4,356 for the
first quarter of 2002 from $2,289 for the same period of 2001 for the reasons
previously discussed.
INCOME TAX PROVISION decreased to 38.3% of pretax income during the first
quarter of 2002 versus 41.0% for the comparable prior year period. The decrease
in the effective tax rate is primarily attributable to the impact of removing
non-deductible goodwill amortization from the calculation of income tax expense
in 2002.
NET INCOME increased to $2,724 for the first quarter of 2002 from $1,403 for the
same period of 2001 for the reasons previously discussed.
BASIC AND DILUTED EARNINGS PER SHARE was $0.13 for the first quarter of 2002
compared with $0.07 for the same period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company presently finances its business from available cash and from cash
generated from operations. The Company maintains a $65 million unsecured credit
facility, which expires in May 2004, of which approximately $37.0 million was
available for borrowings at March 31, 2002. The Company also maintains a $15
million unsecured line of credit to provide financing and working capital
flexibility. At March 31, 2002, approximately $7.4 million was available for
borrowing under the demand line of credit. The company also maintains working
capital demand lines of credit in Canada (US $3.5 million) and Malaysia (US $1.3
million).
Long-term debt and capital lease obligations decreased to $46.1 million at March
31, 2002 from $52.1 million at December 31, 2001. The Company decreased
long-term debt by payment of $6.0 million on its unsecured credit facility while
increasing the amount outstanding on its demand line of credit, included in
current liabilities, by $5.9 million.
At March 31, 2002, outstanding debt of the Company consisted of: (i) unsecured
notes issued pursuant to a Note Purchase Agreement dated August 18, 1995, for
$24.0 million with terms ranging from 2001 through 2005 at an interest rate of
6.98%; (ii) $28.0 million of borrowings under the Company's unsecured credit
facility; (iii) $7.6 million of borrowings under its unsecured demand credit
line; and (iv) $1.4 million of borrowings under its Malaysian line of credit.
9
Management believes that the level of working capital is adequate for the
Company's liquidity needs related to normal operations both currently and in the
foreseeable future, and that the Company has sufficient resources to support its
growth, either through currently available cash, through cash generated from
future operations or through short-term financing.
Capital expenditures of $1,621 were made during the first quarter of 2002 for
computer hardware and software, machinery and equipment, and building
renovations. Depreciation for the first quarter of 2002 was $3,167.
SEASONALITY
With respect to consumer products packaging, the prepress market is not
currently seasonal. On the other hand, there is generally a two to three year
cycle for major design changes that the Company has experienced in the last six
years resulting in greater volumes in certain years followed by more modest
volumes in subsequent years.
With respect to the advertising and promotional markets, some seasonality exists
in that the months of December and January are typically the slowest of the year
because advertising agencies and their clients typically finish their work by
mid-December and don't start up again until mid-January. In addition,
advertising and promotion is generally cyclical as the consumer economy is
cyclical. When consumer spending and GDP decrease, ad pages decline. Generally,
when ad pages decline the Company's advertising and promotion business declines.
IMPACT OF INFLATION
The Company believes that over the past three years inflation has not had a
significant impact on the Company's results of operations.
PART II - OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are not applicable and have been omitted.
Item 14. Exhibits and Reports on Form 8-K
(A) Reports on Form 8-K
None.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 10th day of May 2002.
SCHAWK, INC.
- ------------
(Registrant)
/s/ David A. Schawk
- ------------------------------------
President, Chief Executive Officer and Director
/s/ James J. Patterson
- ------------------------------------
Senior Vice President and Chief Financial Officer
11