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 June 30, 2002 Commission File Number 1-9335
--------
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 August 8, 2002 is: 21,503,191 Class A Common Stock, $.008 par value
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 18.
- --------------------------------------------------------------------------------
SCHAWK, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
JUNE 30, 2002
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Schawk, Inc.
Consolidated Balance Sheets
(In Thousands)
JUNE 30, DECEMBER 31,
2002 2001
(UNAUDITED)
-------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,614 $ 1,112
Trade accounts receivable, less allowance for doubtful accounts
of $906 at June 30, 2002 and $813 at December 31, 2001 37,714 38,302
Inventories 10,137 7,925
Prepaid expenses and other 4,018 5,091
Refundable income taxes 643 875
Deferred income taxes 1,262 1,241
-------------------------------------------
Total current assets 55,388 54,546
Property and equipment, less accumulated depreciation of $74,977
at June 30, 2002 and $73,736 at December 31, 2001 42,507 47,606
Goodwill, less accumulated amortization of $11,496 at June 30, 2002 and
December 31, 2001 60,507 60,023
Other assets 3,798 3,950
-------------------------------------------
Total assets $162,200 $166,125
===========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 5,236 $ 3,580
Accrued expenses 12,446 12,854
Income taxes payable 1,418 2,080
Notes payable to banks 2,136 2,963
Current portion of long-term debt and capital lease obligations 6,328 6,273
-------------------------------------------
Total current liabilities 27,564 27,750
Long-term debt 45,186 52,000
Capital lease obligations 99 131
Other 1,031 1,342
Deferred income taxes 2,682 4,443
Minority interest in consolidated subsidiary -- 922
Stockholders' Equity:
Common stock, $0.008 par value, 40,000,000 shares authorized,
23,349,490 and 23,301,084 shares issued at June 30, 2002 and
December 31, 2001, respectively; 21,503,185 and 21,453,725 shares
outstanding at June 30, 2002 and December 31, 2001, respectively 185 185
Additional paid-in capital 85,550 85,157
Retained earnings 21,845 16,512
Accumulated comprehensive loss, net (881) (1,247)
-------------------------------------------
106,699 100,607
Treasury stock, at cost, 1,846,305 and 1,847,359 shares of common
stock at June 30, 2002 and December 31, 2001, respectively (21,061) (21,070)
-------------------------------------------
Total stockholders' equity 85,638 79,537
-------------------------------------------
Total liabilities and stockholders' equity $162,200 $166,125
===========================================
See accompanying notes.
3
Schawk, Inc.
Consolidated Statements of Operations
Three Months Ended June 30, 2002 and 2001
(Unaudited)
(In Thousands, Except Per Share Amounts)
2002 2001
-------------------------------------------
Net sales $46,195 $47,454
Cost of sales 26,713 28,075
Selling, general, and administrative expenses 12,921 14,052
Goodwill amortization -- 538
Restructuring and other charges 2,121 420
-------------------------------------------
Operating income 4,440 4,369
Other income (expense)
Interest and dividend income 223 1
Interest expense (721) (1,131)
Other income 111 306
-------------------------------------------
(387) (824)
-------------------------------------------
Income before income taxes and minority interest 4,053 3,545
Income tax provision 34 1,464
-------------------------------------------
Income before minority interest 4,019 2,081
Minority interest in net income of subsidiary (17) (21)
-------------------------------------------
Net income $ 4,002 $ 2,060
===========================================
Earnings per share:
Basic $ 0.19 $ 0.10
Diluted $ 0.18 $ 0.10
Weighted average number of common and common
equivalent shares outstanding 21,715 21,562
Dividends per common share $0.0325 $0.0325
See accompanying notes.
4
Schawk, Inc.
Consolidated Statements of Operations
Six Months Ended June 30, 2002 and 2001
(Unaudited)
(In Thousands, Except Per Share Amounts)
2002 2001
-------------------------------------------
Net sales $89,044 $93,424
Cost of sales 52,002 55,583
Selling, general, and administrative expenses 25,425 28,213
Goodwill amortization -- 1,078
Restructuring and other charges 2,121 685
-------------------------------------------
Operating income 9,496 7,865
Other income (expense)
Interest and dividend income 228 19
Interest expense (1,468) (2,364)
Other income 153 314
-------------------------------------------
(1,087) (2,031)
-------------------------------------------
Income before income taxes and minority interest 8,409 5,834
Income tax provision 1,704 2,402
-------------------------------------------
Income before minority interest 6,705 3,432
Minority interest in net loss of subsidiary 21 31
-------------------------------------------
Net income $ 6,726 $ 3,463
===========================================
Earnings per share:
Basic $ 0.31 $ 0.16
Diluted $ 0.31 $ 0.16
Weighted average number of common and common
equivalent shares outstanding 21,684 21,496
Dividends per common share $ 0.065 $ 0.065
See accompanying notes.
5
Schawk, Inc.
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001
(In Thousands)
2002 2001
-------------------------------------------
OPERATING ACTIVITIES
Net income $ 6,726 $ 3,463
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization 6,293 7,283
Deferred income taxes (1,782) (12)
Asset impairment charge 2,121 --
Gain realized on sale of equipment (153) (291)
Minority interest (21) (31)
Changes in operating assets and liabilities, net of effects from
acquisitions:
Trade accounts receivable 588 1,792
Inventories (2,212) (1,844)
Prepaid expenses and other 428 18
Trade accounts payable and accrued expenses 1,248 (3,495)
Income taxes refundable/payable (430) 1,734
-------------------------------------------
Net cash provided by operating activities 12,806 8,617
INVESTING ACTIVITIES
Proceeds from sales of fixed assets 1,014 291
Capital expenditures (3,492) (8,805)
Acquisitions (1,200) --
Other (159) 487
-------------------------------------------
Net cash used in investing activities (3,837) (8,027)
FINANCING ACTIVITIES
Proceeds from debt 6,192 1,732
Principal payments on debt (13,785) --
Principal payments on capital lease obligations (134) (20)
Common stock dividends (1,393) (1,384)
Purchase of common stock -- (1,419)
Issuance of common stock 402 1,534
-------------------------------------------
Net cash provided by (used in) financing activities (8,718) 443
-------------------------------------------
Effect of foreign currency rate changes 251 126
-------------------------------------------
Net increase in cash and cash equivalents 502 1,159
Cash and cash equivalents beginning of period 1,112 357
-------------------------------------------
Cash and cash equivalents end of period $ 1,614 $ 1,516
===========================================
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 1,792 $ 2,576
Cash paid for income taxes 3,340 652
See accompanying notes.
6
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, as filed with our
2001 annual report on form 10K.
NOTE 2. NEW ACCOUNTING PRINCIPLES
Effective January 1, 2002, the Company adopted SFAS 141, Business Combinations,
SFAS 142, Goodwill and Other Intangible Assets, (see note 11) and SFAS 144,
Accounting for the Impairment or Disposal of Long-lived Assets, (see Note 5),
SFAS 141 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. SFAS No. 144 requires that
long-lived assets be reviewed for impairment.
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. IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Standards No. 144 (see Note 2, New
Accounting Principles), the Company continues to review all of its long-lived
assets on an ongoing basis. As a result of the review performed during the
second quarter, certain assets were identified to be either no longer in use
and/or their future cash flows were not sufficient to support the book value of
the asset and an asset impairment charge of $2,121 was recorded and included in
"Restructuring and Other Charges" on the Statement of Operations.
7
NOTE 6. RESTRUCTURING
During 2001, the Company eliminated 140 positions at several company facilities.
In addition, lease termination expenses and asset write-offs related to an east
coast facility closed in 2000 were incurred. As a result of these actions,
restructuring charges of $420 and $685 were recorded for the quarter and six
months ended June 30, 2001, respectively, and are included in "Restructuring and
Other Charges" on the Statement of Operations.
Below is an analysis of the activity related to the Company's 2001 restructuring
programs and their status as of June 30, 2002:
Balance at Balance at Balance at
Description of Reserve 12/31/01 Payments 3/31/02 Payments 6/30/02
- ---------------------- -------- -------- ------- -------- -------
Severance and other employee benefits $310 $(35) $275 $(39) $236
Other $ 20 -- $ 20 -- $ 20
-----------------------------------------------------------------
$330 $(35) $295 $(39) $256
The majority of the remaining severance and other employee benefits will be paid
in accordance with the termination agreements. There have been no additional
restructuring charges incurred since December 31, 2001.
NOTE 7. INVENTORIES
Inventories consist of the following:
June 30, June 30,
2002 2001
---- ----
Raw materials $ 2,248 $2,315
Work in process 8,931 6,652
------- ------
11,179 8,967
Less: LIFO reserve (1,042) (1,042)
------- ------
$10,137 $7,925
======= ======
8
NOTE 8. EARNINGS PER SHARE
Basic earnings per share and diluted earnings per share are shown on the
consolidated 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 June 30,
---------------------------
2002 2001
----------------- -----------------
Net income $ 4,002 $ 2,060
================= =================
Weighted average shares 21,487 21,374
Effect of dilutive stock options 228 188
----------------- -----------------
Adjusted weighted average shares and
assumed conversions 21,715 21,562
================= =================
Basic earnings per share $ 0.19 $ 0.10
================= =================
Diluted earnings per share $ 0.18 $ 0.10
================= =================
Six Months ended June 30,
-------------------------
2002 2001
----------------- -----------------
Net income $ 6,726 $ 3,463
================= =================
Weighted average shares 21,477 21,369
Effect of dilutive stock options 207 127
----------------- -----------------
Adjusted weighted average shares and
assumed conversions 21,684 21,496
================= =================
Basic earnings per share $ 0.31 $ 0.16
================= =================
Diluted earnings per share $ 0.31 $ 0.16
================= =================
9
NOTE 9. 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 June 30
--------------------------
2002 United States Canada Other Foreign Total
- ---- ------------- ------ ------------- -----
Sales $38,138 $ 6,152 $1,905 $ 46,195
Long-lived assets 82,955 15,576 8,281 106,812
Three months ended June 30
--------------------------
2001 United States Canada Other Foreign Total
- ---- ------------- ------ ------------- -----
Sales $38,491 $ 7,106 $1,857 $ 47,454
Long-lived assets 88,236 16,845 7,964 113,045
Six months ended June 30
------------------------
2002 United States Canada Other Foreign Total
- ---- ------------- ------ ------------- -----
Sales $73,441 $11,844 $3,759 $ 89,044
Long-lived assets 82,955 15,576 8,281 106,812
Six months ended June 30
------------------------
2001 United States Canada Other Foreign Total
- ---- ------------- ------ ------------- -----
Sales $74,944 $14,998 $3,482 $ 93,424
Long-lived assets 88,236 16,845 7,964 113,045
NOTE 10. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the quarter and
six months ended June 30, 2002 and 2001, respectively, are as follows:
Three months ended June 30
----------------------------------------------------
2002 2001
----------------- -----------------
Net income $4,002 $2,060
Foreign currency translation adjustments 389 724
----------------- -----------------
Comprehensive income $4,391 $2,784
================= =================
Six months ended June 30
----------------------------------------------------
2002 2001
----------------- -----------------
Net income $6,726 $3,463
Foreign currency translation adjustments 366 17
----------------- -----------------
Comprehensive income $7,092 $3,480
================= =================
10
NOTE 11. 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 and six
months ended June 30, 2002, with the proforma results of operations for the
quarter and six months ended June 30, 2001, adjusted to exclude goodwill
amortization.
Three months ended June 30
----------------------------------------------------
2002 2001
----------------- -----------------
NET INCOME
Reported net income $ 4,002 $ 2,060
Goodwill amortization (net of tax) -- 392
----------------- -----------------
Adjusted net income $ 4,002 $ 2,452
================= =================
BASIC EARNINGS PER SHARE
Reported net income $ 0.19 $ 0.10
Goodwill amortization (net of tax) -- .01
----------------- -----------------
Adjusted net income $ 0.19 $ 0.11
================= =================
DILUTED EARNINGS PER SHARE
Reported net income $ 0.18 $ 0.10
Goodwill amortization (net of tax) -- .01
----------------- -----------------
Adjusted net income $ 0.18 $ 0.11
================= =================
Average number of common shares outstanding 21,487 21,374
Average number of common shares outstanding
Assuming dilution 21,715 21,562
Six months ended June 30
----------------------------------------------------
2002 2001
----------------- -----------------
NET INCOME
Reported net income $ 6,726 $ 3,463
Goodwill amortization (net of tax) -- 785
----------------- -----------------
Adjusted net income $ 6,726 $ 4,248
================= =================
BASIC EARNINGS PER SHARE
Reported net income $ 0.31 $ 0.16
Goodwill amortization (net of tax) -- .04
----------------- -----------------
Adjusted net income $ 0.31 $ 0.20
================= =================
DILUTED EARNINGS PER SHARE
Reported net income $ 0.31 $ 0.16
Goodwill amortization (net of tax) -- .04
----------------- -----------------
Adjusted net income $ 0.31 $ 0.20
================= =================
Average number of common shares outstanding 21,477 21,369
Average number of common shares outstanding
Assuming dilution 21,684 21,496
11
NOTE 12. RELATED PARTY TRANSACTIONS
On April 1, 2002, 1655 LLC, an Illinois limited liability company whose sole
member is Clarence W. Schawk, purchased from the Company the property and
building located at 1655 River Road, Des Plaines, Illinois, for $750. Based
on a third party appraisal, management believes that the purchase price it
received is as favorable or better than the price that would have been obtained
in an arm's-length transaction. The building located on the property is not
currently being leased. The Company retained a right of first refusal to
repurchase the land and building from 1655 LLC. A gain of $145 on the sale is
included in "Other Income" on the Consolidated Statement of Operations.
NOTE 13. INCOME TAXES
State income tax refunds received and the settlement of an outstanding tax
obligation during the second quarter reduced income tax expense for the quarter
and six-month period ended June 30, 2002. The state tax refunds, in the amount
of $824, were recorded as a credit to income tax expense net of federal income
tax of $288. The outstanding tax obligation, for which $2,108 was accrued as of
year-end, was settled for $1,145, resulting in $963 being recorded as a tax
benefit in the period. The reduction of the estimated tax liabilities was
recorded as a credit to income tax expense.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Thousands of dollars, except per share amounts)
Statements contained 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 of 1933 and Section 21E of the Securities Exchange Act and 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 1999. 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 No. 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 $538 and $1,078 for the
quarter and six months ended June 30, 2001, respectively. The Company's results
with the pro-forma effect of the new accounting rules on the quarter and six
months ended June 30, 2001 are as follows:
Proforma results excluding goodwill amortization
Quarter and six months ended June 30, 2001
(In thousands, Except Per Share Amounts)
Period Ended June 30, 2001
--------------------------
Quarter Six Months
------- ----------
Reported net income $2,060 $3,463
Add back: Goodwill amortization 538 1,078
Subtract: tax effect of goodwill amortization (146) (293)
----- -----
Adjusted net income $2,452 $4,248
Basic earnings per share:
Reported net income $0.10 $0.16
Add back: Goodwill amortization $0.02 $0.05
Subtract: tax effect of goodwill amortization ($0.01) ($0.01)
------- -------
Adjusted net income $0.11 $0.20
Diluted earnings per share:
Reported net income $0.10 $0.16
Add back: Goodwill amortization $0.02 $0.05
Subtract: tax effect of goodwill amortization ($0.01) ($0.01)
-------- -------
Adjusted net income $0.11 $0.20
13
SECOND QUARTER ENDED JUNE 30, 2002
NET SALES of $46,195 for the second quarter of 2002 decreased 2.7% from net
sales of $47,454 for the same period in 2001. 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 8.2% in the
second quarter of 2002 versus the prior year second quarter. However, lower
sales in the prepress for advertising agency business more than offset the gains
from the consumer products packaging business. The lower sales level in the
advertising agency business is due to the continuing weakness in the advertising
market.
COST OF SALES as a percentage of net sales for the second quarter of 2002
decreased to 57.8% from 59.2% for the comparable period in the prior year. Given
the fact that net sales were lower than the prior period, 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 are having a positive effect.
OPERATING INCOME in the second quarter of 2002 of $4,440 was slightly higher
than the previous year second quarter total of $4,369. A $2,121 asset impairment
charge classified as "Restructuring and other charges" on the Consolidated
Statements of Operations was recorded in the second quarter of 2002 reducing
operating income, as compared to a $420 restructuring charge recorded in the
second quarter of the previous year.
RESTRUCTURING AND OTHER CHARGES of $2,121 in the second quarter of 2002 resulted
from a charge for asset impairment recorded in accordance with the new
accounting standard for asset impairments, SFAS No. 144. The new standard
requires a regular periodic review of all long-lived assets including property,
plant and equipment as well as any other long-term assets. As part of the
Company's ongoing review, during the second quarter $2,121 of assets, primarily
software and software development assets, were identified to have little or no
value based on obsolescence or limited use. The Company does not anticipate any
significant additional asset impairment charges for the remainder of 2002. In
the second quarter of 2001, a restructuring charge of $420 was recorded related
to severance costs and the cost to terminate a lease.
OPERATING INCOME BEFORE RESTRUCTURING AND OTHER CHARGES in the second quarter of
2002 increased 37% to $6,561 from $4,789 for the same period in 2001. The
increase was primarily the result of lower cost of sales and 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 second quarter of 2002 as
compared to the prior year second quarter. The Company's operating margin before
"Restructuring and other charges" increased to 14.2% in the second quarter of
2002 from 10.1% in the prior year second quarter. This increase is significant
given the fact that it was achieved on lower sales than in the previous year's
second quarter.
OTHER INCOME (EXPENSE) - NET decreased to $(387) of net expense for the second
quarter of 2002 compared with $(824) of net expense for the same period of 2001.
The lower net expense was substantially all as a result of lower interest
expense. Interest expense for the second quarter of 2001 decreased to $721
versus $1,131 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 second 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 six
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 56% of the
Company's debt was at floating rates during the second quarter of 2002.
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST increased to $4,053 for the
second quarter of 2002 from $3,545 for the same period of 2001 for the reasons
previously discussed.
INCOME TAX PROVISION was $34 for the second quarter of 2002 as compared to
$1,464 in the second quarter of the previous year. The low tax expense in the
2002 period resulted from offsetting the regular tax provision with tax benefits
from refunds received in the second quarter and tax benefits from the reduction
in tax liabilities in connection with the settlement an outstanding liability
for lower amount than the amount that had been accrued. A normal effective tax
rate is 38% of income before income taxes and minority interest and it is
anticipated that the third and fourth quarter tax rates will be approximately
38%.
14
NET INCOME increased significantly to $4,002 for the second quarter of 2002 from
$2,060 for the same period of 2001 for the reasons previously discussed.
BASIC AND DILUTED EARNINGS PER SHARE were $0.19 and $0.18, respectively, for the
second quarter of 2002 compared with $0.10 each for the same period in 2001.
SIX MONTHS ENDED JUNE 30, 2002
NET SALES of $89,044 for the six months ended June 30, 2002 decreased 4.9% from
net sales of $93,424 for the same period in 2001. 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 7.6%
in the current year six month period versus the comparable period in the prior
year. However, lower sales in the prepress for advertising agency business more
than offset the gains from the consumer products packaging business. The lower
sales level in the advertising agency business is due to the continuing weakness
in the advertising market.
COST OF SALES as a percentage of net sales for the six-month period of 2002
decreased to 58.4% from 59.5% for the comparable period in the prior year. Given
the fact that net sales were lower than the prior period, 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 is having a positive effect.
OPERATING INCOME in the six-month period of 2002 of $9,496 was higher than the
previous year six-month period total of $7,865. A $2,121 asset impairment charge
classified as "Restructuring and other charges" on the Consolidated Statements
of Operations was recorded in the six-month period of 2002 reducing operating
income, as compared to a $685 restructuring charge recorded in the comparable
period of the previous year.
RESTRUCTURING AND OTHER CHARGES of $2,121 in the six-month period of 2002
resulted from a charge for asset impairment recorded in accordance with the new
accounting standard for asset impairments, Statement of Financial Accounting
Standard No. 144, as described in the second quarter discussion above. In the
six-month period of 2001 a restructuring charge of $685 was recorded related to
severance costs and the cost to terminate a lease.
OPERATING INCOME BEFORE RESTRUCTURING AND OTHER CHARGES in the six-month period
of 2002 increased 36% to $11,617 from $8,550 for the same period in 2001. The
increase was primarily the result of lower cost of sales and 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 half of 2002 as
compared to the prior year period. The Company's operating margin before
"Restructuring and other charges" increased to 13.0% in the first six months of
2002 from 9.2% in the comparable period of the prior year. This increase is
significant given the fact that it was achieved on lower sales than in the
previous year's six-month period.
OTHER INCOME (EXPENSE) - NET decreased to $(1,087) of net expense for the
six-month period of 2002 compared with $(2,031) of net expense for the same
period of 2001. The lower net expense was substantially all as a result of lower
interest expense. Interest expense for the 2002 period decreased to $1,468
versus $2,364 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 six months 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 six 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 57%
of the Company's debt was at floating rates during the first half of 2002.
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST increased to $8,409 for the
first six months of 2002 from $5,834 for the same period of 2001 for the reasons
previously discussed.
INCOME TAX PROVISION was $1,704 for the six-month period of 2002 as compared to
$2,402 in the comparable period of the previous year. The low tax expense in the
2002 period resulted from offsetting the regular tax provision with tax benefits
from refunds received in the second quarter and tax benefits from the reduction
in tax liabilities in connection with the settlement an outstanding liability
for lower amount than the amount that had been accrued. A normal effective tax
rate is 38% of income before income taxes and minority interest and it is
anticipated that the second half of the year tax rate will be approximately 38%.
15
NET INCOME increased significantly to $6,726 for the six-month period of 2002
from $3,463 for the same period of 2001 for the reasons previously discussed.
BASIC AND DILUTED EARNINGS PER SHARE were $0.31 each, for the six-month period
of 2002 compared with $0.16 each, 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 $65,000 unsecured credit
facility, which expires in May 2004, of which approximately $38,000 was
available for borrowings at June 30, 2002. The Company also maintains a $15,000
unsecured line of credit to provide financing and working capital flexibility.
At June 30, 2002, approximately $14,100 was available for borrowing under the
demand line of credit. The company also maintains working capital demand lines
of credit in Canada (US $3,500) and Malaysia (US $1,500).
Long-term debt and capital lease obligations decreased to $45,300 at June 30,
2002 from $52,100 at December 31, 2001. The Company decreased long-term debt by
payment of $7,000 on its unsecured credit facility and also reduced the amount
outstanding on its demand line of credit, included in current liabilities, by
$800.
At June 30, 2002, outstanding debt of the Company consisted of: (i) unsecured
notes issued pursuant to a Note Purchase Agreement dated August 18, 1995, for
$24,000 with terms ranging from 2001 through 2005 at an interest rate of 6.98%;
(ii) $27,000 of borrowings under the Company's unsecured credit facility; (iii)
$900 of borrowings under its unsecured demand credit line; and (iv) $1,500 of
borrowings under its Malaysian line of credit.
Because of the Company's strong cash flow and earnings in 2002 and the reduction
in outstanding debt, effective July 1, 2002, the Company's leverage ratio had
improved such that its borrowing cost was reduced by twelve basis points and is
at the lowest borrowing rate allowed in the $65,000 agreement. In addition, the
charge for the unused portion of this credit facility was reduced by five basis
points.
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 debt and/or equity financing.
Capital expenditures of $1,871 and $3,492 were made during the quarter and six
months ended June 30, 2002, respectively. Depreciation expense was $3,126 and
$6,293 for the quarter and six months ended June 30, 2002, respectively.
SEASONALITY
With respect to consumer products packaging, the prepress market is not
currently seasonal. On the other hand, there is generally a three to four year
cycle for major design changes that the Company has experienced in the last
eight 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.
In the second half of 2001 and in the first half of 2002 the advertising agency
market was very depressed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A discussion regarding market risk is disclosed in the Company's December 31,
2001 Form 10-K. There have been no material changes in information regarding
market risk relating to the Company since December 31, 2001.
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PART II - OTHER INFORMATION
ITEMS 1, 2, 3, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 15, 2002, we held our annual stockholders' meeting. There were 21,432,840
shares of Class A common stock outstanding entitled to vote, and a total of
20,850,375 (97.28%) were represented at the meeting in person or by proxy. The
following summarizes vote results of proposals submitted to our stockholders:
1. Proposal to elect directors for terms expiring in 2003:
NAME FOR AGAINST / WITHHELD ABSTENTIONS BROKER NON-VOTES
- ---- --- ------------------ ----------- ----------------
Clarence W. Schawk 20,691,520 0 158,855 0
David A. Schawk 20,691,827 0 158,548 0
A. Alex Sarkisian, Esq. 20,691,827 0 158,548 0
Judith W. McCue, Esq. 20,826,237 0 24,138 0
John T. McEnroe, Esq. 20,825,996 0 24,379 0
Hollis W. Rademacher 20,825,796 0 24,579 0
Leonard S. Caronia 20,825,996 0 24,379 0
2. Proposal to ratify the appointment of Ernst & Young LLP as independent
auditors for the fiscal year ending December 31, 2002:
FOR AGAINST / WITHHELD ABSTENTIONS BROKER NON-VOTES
--- ------------------ ----------- ----------------
20,846,971 1,942 1,462 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT # DESCRIPTION
99.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
17
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
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