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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 quarterly period ended June 30, 2004
--------
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)
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 [X] No[ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act.)
Yes [ ] No [X]
The number of shares outstanding of each of the issuer's classes of common stock
as of July 31, 2004 is:
21,650,879 Shares of Class A Common Stock, $.008 par value
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1
SCHAWK, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
June 30, 2004
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 17
Item 4. Controls and Procedures 17
PART II - OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Schawk, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
JUNE 30, DECEMBER 31,
2004 2003
(UNAUDITED)
--------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,064 $ 5,227
Trade accounts receivable, less allowance for doubtful accounts
of $1,750 at June 30, 2004 and $1,595 at December 31, 2003 51,514 35,642
Inventories 9,294 8,085
Prepaid expenses and other 3,341 3,902
Refundable income taxes 1,858 1,204
Deferred income taxes 2,581 2,086
--------- ---------
Total current assets 75,652 56,146
Property and equipment, less accumulated depreciation of $71,184 at June 30,
2004 and $67,423 at December 31, 2003 34,453 36,372
Goodwill 64,379 62,936
Intangible assets, net 4,101 1,912
Other assets 4,041 2,325
--------- ---------
Total assets $ 182,626 $ 159,691
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 5,123 $ 5,108
Accrued expenses 15,688 14,004
Income taxes payable 1,103 446
Notes payable to banks 150 --
Current portion of long-term debt and capital lease obligations 6,043 6,062
--------- ---------
Total current liabilities 28,107 25,620
Long-term debt 31,000 21,000
Capital lease obligations 6 21
Other 939 970
Deferred income taxes 6,398 5,708
Stockholders' Equity:
Common stock, $0.008 par value, 40,000,000 shares authorized, 23,836,121 and
23,602,330 shares issued at June 30, 2004 and December 31, 2003,
respectively; 21,626,379 and 21,435,887 shares outstanding at June 30,
2004 and December 31, 2003,
respectively 189 187
Additional paid-in capital 90,164 87,928
Retained earnings 50,310 41,461
Accumulated comprehensive income 397 1,087
--------- ---------
141,060 130,663
Treasury stock, at cost, 2,209,742 and 2,166,443 shares of common
stock at June 30, 2004 and December 31, 2003, respectively (24,884) (24,291)
--------- ---------
Total stockholders' equity 116,176 106,372
--------- ---------
Total liabilities and stockholders' equity $ 182,626 $ 159,691
========= =========
See accompanying notes
3
Schawk, Inc.
Consolidated Statements of Operations
Three Months Ended June 30, 2004 and 2003
(Unaudited)
(In Thousands, Except Per Share Amounts)
2004 2003
---- ----
Net sales $ 64,456 $ 51,635
Cost of sales 37,025 30,947
Selling, general, and administrative expenses 16,412 13,640
-------- --------
Operating income 11,019 7,048
Other income (expense)
Interest income 1 51
Interest expense (513) (528)
Other income -- 749
-------- --------
(512) 272
-------- --------
Income before income taxes 10,507 7,320
Income tax provision 3,886 2,742
-------- --------
Net income $ 6,621 $ 4,578
======== ========
Earnings per share:
Basic $ 0.31 $ 0.21
Diluted $ 0.30 $ 0.21
Weighted average number of common and common
equivalent shares outstanding 22,323 21,635
Dividends per common share $ 0.0325 $ 0.0325
See accompanying notes.
4
Schawk, Inc.
Consolidated Statements of Operations
Six Months Ended June 30, 2004 and 2003
(Unaudited)
(In Thousands, Except Per Share Amounts)
2004 2003
---- ----
Net sales $ 116,533 $ 100,340
Cost of sales 68,335 58,795
Selling, general, and administrative expenses 30,954 27,026
--------- ---------
Operating income 17,244 14,519
Other income (expense)
Interest income 1 51
Interest expense (978) (1,056)
Other income -- 749
--------- ---------
(977) (256)
--------- ---------
Income before income taxes 16,267 14,263
Income tax provision 6,019 5,484
--------- ---------
Net income $ 10,248 $ 8,779
========= =========
Earnings per share:
Basic $ 0.48 $ 0.41
Diluted $ 0.46 $ 0.41
Weighted average number of common and common
equivalent shares outstanding 22,320 21,594
Dividends per common share $ 0.065 $ 0.065
See accompanying notes.
5
Schawk, Inc.
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2004 and 2003
(Unaudited)
(In Thousands)
2004 2003
---- ----
OPERATING ACTIVITIES
Net income $ 10,248 $ 8,779
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 6,805 5,877
Deferred income taxes 195 34
Loss (gain) realized on sale of property and equipment 44 (571)
Changes in operating assets and liabilities, net of effects from acquisitions:
Trade accounts receivable (15,872) 346
Inventories (526) (775)
Prepaid expenses and other 561 (241)
Trade accounts payable and accrued expenses 1,578 1,561
Income taxes refundable/payable 3 91
-------- --------
Net cash provided by operating activities 3,036 15,101
INVESTING ACTIVITIES
Proceeds from sales of property and equipment 186 1,444
Capital expenditures (4,435) (4,146)
Acquisitions, net of cash acquired (5,243) --
Contingent acquisition purchase price paid to escrow account (1,600) --
Other (99) (96)
-------- --------
Net cash used in investing activities (11,191) (2,798)
FINANCING ACTIVITIES
Proceeds from debt 18,700 2,562
Principal payments on debt (8,550) (12,744)
Principal payments on capital lease obligations (34) (176)
Common stock dividends (1,389) (1,386)
Purchase of common stock (603) (2,278)
Issuance of common stock 2,238 793
-------- --------
Net cash provided by (used in) financing activities 10,362 (13,229)
-------- --------
Effect of foreign currency rate changes (370) 966
-------- --------
Net increase (decrease) in cash and cash equivalents 1,837 40
Cash and cash equivalents beginning of period 5,227 2,051
-------- --------
Cash and cash equivalents end of period $ 7,064 $ 2,091
======== ========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 872 $ 1,024
Cash paid for income taxes 5,782 5,467
See accompanying notes.
6
Schawk, Inc.
Notes to Consolidated Interim Financial Statements
(Unaudited)
(Thousands of dollars, except per share data)
NOTE 1. BASIS OF PRESENTATION
The consolidated interim financial statements have been prepared pursuant to the
rules and regulations of the 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 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, 2003, as filed with its
2003 annual report on Form 10-K.
NOTE 2. INTERIM RESULTS
Results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
NOTE 3. DESCRIPTION OF BUSINESS
The Company is a leading provider of digital imaging graphic 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 4. INVENTORIES
Inventories consist of the following:
June 30, December 31,
2004 2003
---- ----
Raw materials $ 2,282 $ 2,129
Work in process 8,089 7,033
-------- --------
10,371 9,162
Less: LIFO reserve (1,077) (1,077)
-------- --------
$ 9,294 $ 8,085
======== ========
7
NOTE 5. EARNINGS PER SHARE
Basic earnings per share and diluted earnings per share are shown on the
Consolidated Statement of Operations. Basic earnings per share are computed by
dividing net income by the weighted average shares outstanding for the period.
Diluted earnings per share are 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,
---------------------------
2004 2003
---- ----
Net income $ 6,621 $ 4,578
======= =======
Weighted average shares 21,522 21,324
Effect of dilutive stock options 801 311
------- -------
Adjusted weighted average shares and
assumed conversions 22,323 21,635
======= =======
Basic earnings per share $ 0.31 $ 0.21
======= =======
Diluted earnings per share $ 0.30 $ 0.21
======= =======
Six months ended June 30,
-------------------------
2004 2003
---- ----
Net income $10,248 $ 8,779
======= =======
Weighted average shares 21,493 21,381
Effect of dilutive stock options 827 213
------- -------
Adjusted weighted average shares and
assumed conversions 22,320 21,594
======= =======
Basic earnings per share $ 0.48 $ 0.41
======= =======
Diluted earnings per share $ 0.46 $ 0.41
======= =======
NOTE 6. SEGMENT REPORTING
The Company operates in a single business segment, Digital Imaging Graphic Arts.
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, 2004
--------------------------------
United States Canada Other Foreign Total
------------- ------ ------------- -----
Sales $ 52,735 $ 8,113 $ 3,608 $ 64,456
Long-lived assets 83,143 16,427 7,404 106,974
Net Assets 107,925 10,541 (2,290) 116,176
Three months ended June 30, 2003
--------------------------------
United States Canada Other Foreign Total
------------- ------ ------------- -----
Sales $ 41,102 $ 8,009 $ 2,524 $ 51,635
Long-lived assets 79,129 17,284 8,158 104,571
Net Assets 90,358 9,370 (1,832) 97,896
8
NOTE 6 SEGMENT REPORTING (CONTINUED)
Six months ended June 30, 2004
------------------------------
United States Canada Other Foreign Total
------------- ------ ------------- -----
Sales $ 94,640 $ 15,557 $ 6,336 $116,533
Long-lived assets 83,143 16,427 7,404 106,974
Net Assets 107,925 10,541 (2,290) 116,176
Six months ended June 30, 2003
------------------------------
United States Canada Other Foreign Total
------------- ------ ------------- -----
Sales $ 80,591 $ 15,179 $ 4,570 $100,340
Long-lived assets 79,129 17,284 8,158 104,571
Net Assets 90,358 9,370 (1,832) 97,896
NOTE 7. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the quarter and
six months ended June 30, 2004 and 2003, respectively, are as follows:
Three months ended June 30,
---------------------------
2004 2003
---- ----
Net income $ 6,621 $ 4,578
Foreign currency translation adjustments (423) 1,419
------- -------
Comprehensive income $ 6,198 $ 5,997
======= =======
Six months ended June 30,
-------------------------
2004 2003
---- ----
Net income $ 10,248 $ 8,779
Foreign currency translation adjustments (690) 2,221
------- --------
Comprehensive income $ 9,558 $ 11,000
======== ========
NOTE 8. STOCK BASED COMPENSATION
The Company has an Equity Option Plan that provides for the granting of options
to purchase up to 5,252 shares of Class A common stock to key employees. The
Company has also adopted an Outside Directors' Formula Stock Option Plan
authorizing unlimited grants of options to purchase shares of Class A common
stock to outside directors. Options granted under these plans have an exercise
price equal to the market price of the underlying stock at the date of grant and
are exercisable for a period of ten years from the date of grant and vest over a
three-year period.
The Company accounts for these plans under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. No stock-based employee
compensation cost is reflected in the net income, as all options granted under
these plans have an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect on
net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation.
9
NOTE 8. STOCK BASED COMPENSATION (CONTINUED)
Three Months Ended June 30,
---------------------------
2004 2003
---- ----
Net income, as reported $ 6,621 $ 4,578
Less: Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects (184) (131)
--------- ---------
Net income, pro forma $ 6,437 $ 4,447
========= =========
Earnings per share
Basic $ 0.31 $ 0.21
Diluted $ 0.30 $ 0.21
Pro forma earnings per share
Basic $ 0.30 $ 0.21
Diluted $ 0.29 $ 0.21
Six Months Ended June 30,
-------------------------
2004 2003
---- ----
Net income, as reported $ 10,248 $ 8,779
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (733) (474)
---------- ---------
Net income, pro forma $ 9,515 $ 8,305
========== =========
Earnings per share
Basic $ 0.48 $ 0.41
Diluted $ 0.46 $ 0.41
Pro forma earnings per share
Basic $ 0.44 $ 0.39
Diluted $ 0.43 $ 0.38
NOTE 9. ACQUISITIONS
The Company acquired certain assets and assumed certain liabilities of the
Virtualcolor division of Fort Dearborn Company, located in Elk Grove Village,
Illinois, effective as of January 1, 2004. Virtualcolor is a provider of digital
imaging graphic services and has been merged with an existing Company facility.
The acquisition has resulted in the recognition of goodwill in the Company's
financial statements; this goodwill arises because the purchase price reflects
the complimentary strategic fit and resulting synergy that the acquired business
brings to the Company's existing operations.
The results of operations of Virtualcolor from acquisition date are included in
the Consolidated Statement of Operations for the three-month and six-month
period ended June 30, 2004. Pro forma results of operations for the three month
and six month period ended June 30, 2003 are not presented due to the lack of
financial information specific to the acquired operation in prior periods.
10
NOTE 9. ACQUISITIONS (CONTINUED)
The purchase price of $4,929 consisted of $4,859 paid in cash to the seller at
closing and $70 in acquisition-related legal fees. In addition, there is
contingent additional purchase price of $1,600, which was paid to an escrow
account pending settlement of the purchase price adjustments specified in the
acquisition agreement. The amount paid to escrow is included in Other Assets in
the Consolidated Balance Sheet at June 30, 2004.
The Company recorded the purchase price allocation based upon a tangible and
intangible asset appraisal that was completed during the quarter ended June 30,
2004. A summary of the estimated fair values assigned to the acquired assets is
as follows:
Inventory $ 683
Machinery and equipment 150
Employee liabilities assumed (121)
Customer relationship intangible asset 2,300
Non-compete intangible asset 100
Goodwill 1,817
-------
Net cash consideration $ 4,929
The weighted-average amortization period of the customer relationship intangible
asset is 19 years. The amortization period of the non-compete intangible asset
is five years. The intangible asset amortization expense was $39 and $79 for the
three month and six month period ended June 30, 2004, respectively, and will be
$154 annually for each of the five fiscal years beginning with 2004.
The contingent purchase price of $1,600, which was paid to an escrow account, is
conditional upon the performance of the acquired business over a two-year
period. The purchase price allocation will be adjusted to include the additional
purchase price when the conditions have been satisfied.
The Company also completed two acquisitions during the fourth quarter of 2003.
The purchase price of the 2003 acquisitions was $2,515, with up to $3,300 in
additional payments contingent upon the performance of the acquired businesses
over a three-year period. At year-end 2003, the Company allocated the purchase
price to the estimated fair value of the net assets acquired, pending the
results of a tangible and intangible asset appraisal that was in process. The
preliminary purchase price allocation resulted in the recording of $1,460 of
goodwill.
During the second quarter of 2004, the Company completed the tangible and
intangible asset appraisal of the 2003 acquisitions and adjusted the preliminary
purchase price allocation recorded at the end of 2003. A summary of the adjusted
fair values assigned to the acquired assets is as follows:
Fair value of assets acquired, net of cash received $ 683
Customer relationship intangible asset 500
Non-compete intangible asset 60
Goodwill 1,214
------
Net cash consideration $2,457
The amortization periods of the customer relationship intangible asset and the
non-compete intangible asset are seven years and five years, respectively. The
intangible asset amortization expense was $21 and $42 for the three month and
six month period ended June 30, 2004, respectively, and will be $83 annually for
each of the five fiscal years beginning with 2004.
The purchase price allocation will be adjusted to include additional amounts due
pursuant to the contingent purchase price provisions of the acquisition
agreements when the conditions are met.
11
NOTE 10. DEBT
In April 2004, the Company issued $10,000 of Tranche B notes pursuant to its
Note Purchase Agreement dated December 23, 2003. The notes bear interest at
4.98% and are payable in annual installments from 2008 to 2013. $15,000 of
Tranche A notes were issued when the agreement was executed in December 2003.
The note offering was a private offering exempt from registration pursuant to
Rule 506 of Regulation D of the Securities Act.
In addition, the Company executed a $30,000 five-year unsecured credit agreement
dated June 11, 2004 with its primary US bank, replacing a $65,000 credit
agreement that had expired. Borrowings on the credit agreement will bear
interest at a floating rate, based on LIBOR, and may be prepaid at any time
prior to the termination date of the agreement, June 11, 2009. There were no
borrowings under this agreement as of June 30, 2004. A copy of the Credit
Agreement dated June 11, 2004 was filed with the SEC on Form 8-K on June 16,
2004.
The borrowings under both of these agreements are subject to certain restrictive
covenants. The Company is in compliance with these covenants as of June 30, 2004
and does not anticipate a problem with compliance in future periods.
12
ITEM 2. 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 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 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 and undue reliance should not be placed as 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,
loss 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, the stability of
political conditions in other countries in which the Company has production
capabilities, terrorist attacks, wars, diseases and other geo-political events
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.
EXECUTIVE-LEVEL OVERVIEW
The Company's revenues are driven by changes to consumer product packaging
designs and promotions and marketing spending. 90% of the Company's business is
graphic services for consumer product packaging applications. Generally, a
package design changes every three or four years. Between changes, there are
line extensions and promotions that take advantage of popular brand images in a
variety of products. However, the Company cannot predict when a design will
change or when a promotion will occur, therefore backlog does not exist. There
are regular promotions throughout the year that create revenue opportunities for
the company, for example, Valentine's Day, Easter, Fourth of July, Back To
School, Halloween, Thanksgiving and Christmas. In addition, there are event
driven promotions that occur regularly like the Super Bowl, Grammy Awards, World
Series, Indianapolis 500 and the Olympics. Lastly, there are a number of health
related "banners" that are added to food and beverage packaging, like "heart
healthy", "low in carbohydrates", "enriched with essential vitamins", "low in
saturated fat" and "caffeine free". All of these items create revenue for the
Company. In simple terms, change equals revenue.
For the quarter ended June 30, 2004, the Company increased sales by 24.8% over
the second quarter of 2003. The revenue growth was attributable to the Company's
sales of graphic and design services to its consumer packaged goods clients.
Sales to the Company's advertising agency accounts remained weak. 19.0% of the
sales increase was internally generated and 5.8% of the increase was due to the
acquisitions completed at the end of 2003 and beginning of 2004. The Company was
the beneficiary of the recent trend in the food industry for recipe and
ingredient changes based on awareness of the need for a healthy diet. As
described above, package changes resulting from food industry trends such as the
low-carb diet create revenue for Schawk. As a result of the strong sales and
increased efficiencies from new workflows, the Company's gross margin and
operating margin improved in the second quarter of 2004 relative to the second
quarter of 2003. Net income increased from $4,578 to $6,621 quarter over
quarter. Second quarter earnings per share were 30 cents, fully diluted,
compared to the prior year second quarter EPS of 21 cents.
The Company's sales for the six-month period ended June 30, 2004 were 16.1
percent higher than the first half of 2003. Although 2004 started slow, with
weak sales in January and February, the strong surge of business that began in
March and continued through June has enabled the Company to exceed its sales
projections for the first half of the year. As a result, the Company showed
improvement in gross margin, operating margin and net income for the first half,
year-over-year. Earnings per share for the six-month period ended June 30, 2004
were 46 cents, fully diluted, compared to 41 cents in the first half of 2003.
The Company finished the first half of 2004 with strong financial ratios in
every category. At June 30, 2004, the Company had a current ratio of 2.7 to 1
and debt to equity of 32.0% (with $37,199 of debt and $116,176 of equity).
During the second quarter of 2004, the Company sold $10,000 of its Tranche B
notes pursuant to a private placement financing agreement executed in December
2003. The Tranche B notes bear interest at an annual rate of 4.98% and mature in
2014. The cash received from the Tranche B note sale was used primarily to repay
$8,700 of short-term
13
borrowings from the first quarter, which had been used to finance the
Virtualcolor acquisition. The Company also executed a $30,000 five year
unsecured credit agreement with its primary bank, replacing the $65,000 credit
agreement which expired in the second quarter. The Company's strong cash flow
and the private placement financing entered into in December 2003 reduced the
amount of floating-rate financing capacity needed. The Company had no borrowings
outside of the United States as of June 30, 2004.
The Company generates significant cash flow from operating activities on an
annual basis: $32,216 in 2003, $27,859 in 2002, and $23,186 in 2001. The cash
flow from operating activities for the first half of 2004 was temporarily lower
than normal because of the timing of the large volume of business that was
completed and billed in the second quarter and was in trade accounts receivable
at June 30, 2004. The increase in trade accounts receivable caused a decrease in
cash generated by operating activities for the first half. These accounts will
be collected and converted to positive cash flow in the third quarter and will
enhance cash flow from operating activities for the balance of 2004.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
Schawk, Inc.
Comparative Consolidated Statements of Operations
Quarters Ended June 30, 2004 and 2003
(in thousands)
$ %
2004 2003 CHANGE CHANGE
---- ---- ---- ------
Net sales $ 64,456 $ 51,635 $ 12,821 24.8%
Cost of sales 37,025 30,947 6,078 19.6%
-------- -------- --------
Gross profit 27,431 20,688 6,743 32.6%
Gross margin percentage 42.6% 40.1%
Selling, general and administrative expenses 16,412 13,640 2,772 20.3%
-------- -------- --------
Operating income 11,019 7,048 3,971 56.3%
Operating margin percentage 17.1% 13.6%
Other income (expense)
Interest income 1 51 (50) nm
Interest expense (513) (528) 15 2.8%
Other income -- 749 (749) nm
-------- -------- --------
(512) 272 (784)
-------- -------- --------
Income before income taxes 10,507 7,320 3,187 43.5%
Income tax provision 3,886 2,742 1,144 41.7%
-------- -------- --------
Effective income tax rate 37.0% 37.5%
Net income $ 6,621 $ 4,578 $ 2,043 44.6%
======== ======== ========
nm - Percentage not meaningful
Net sales increased 24.8% as compared to the prior year second quarter. As
described above, a surge of graphic services business from consumer packaging
clients, primarily food companies, which began in March and continued through
the end of the quarter, provided a record sales quarter for the Company.
Packaging and design account revenues (90% of the Company's business) increased
$14,483, or 32.8%, and advertising agency account revenues (9% of the Company's
business) decreased $1,921, or 27.2%, in the second quarter of 2004. Also
included in the packaging and design revenue total for the quarter is $3,015 of
sales from the Company's recent acquisitions.
Gross margin for the second quarter of 2004 increased to 42.6 % from 40.1 % for
the second quarter of 2003, primarily due to higher revenue and increased
productivity resulting from increased volume and newly crafted workflows.
14
Operating income for the second quarter of 2004 increased 56.3% from the prior
year second quarter. The operating margin percentage was also higher than the
prior year second quarter, increasing to 17.1% compared to 13.6%. The increase
in operating income and operating margin was primarily due to increased sales to
consumer products packaging clients and increased productivity in the quarter.
Interest expense for the second quarter was approximately the same as the prior
year second quarter.
There were no other income items during the second quarter of 2004; however,
during the second quarter of 2003, non-recurring gains totaling $749, related to
proceeds from an insurance policy and a favorable litigation settlement, were
recorded.
Income tax expense for the second quarter of 2004 was at an effective tax rate
of 37.0% compared to a rate of 37.5% in the second quarter of 2003. It is
anticipated that the effective tax rate for 2004 will be in the range of 37.0%
to 38.0%.
Net income and earnings per share were higher in the second quarter of 2004 as
compared to the second quarter of 2003 for the reasons previously described.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Schawk, Inc.
Comparative Consolidated Statements of Operations
Six Months Ended June 30, 2004 and 2003
(in thousands)
$ %
2004 2003 CHANGE CHANGE
---- ---- ------ ------
Net sales $ 116,533 $ 100,340 $ 16,193 16.1%
Cost of sales 68,335 58,795 9,540 16.2%
--------- --------- ---------
Gross profit 48,198 41,545 6,653 16.0%
Gross margin percentage 41.4% 41.4%
Selling, general and administrative expenses 30,954 27,026 3,928 14.5%
--------- --------- ---------
Operating income 17,244 14,519 2,725 18.8%
Operating margin percentage 14.8% 14.5%
Other income (expense)
Interest income 1 51 (50) nm
Interest expense (978) (1,056) 78 7.4%
Other income -- 749 (749) nm
--------- --------- ---------
(977) (256) (721)
--------- --------- ---------
Income before income taxes 16,267 14,263 2,004 14.1%
Income tax provision 6,019 5,484 535 9.8%
--------- --------- ---------
Effective income tax rate 37.0% 38.4%
Net income $ 10,248 $ 8,779 $ 1,469 16.7%
========= ========= =========
nm - Percentage not meaningful
Net sales increased 16.1% in the first half of 2004 as compared to the first
half of 2003. 9.6% of the increase is attributable to internal growth from
consumer packaged goods clients and 6.5% is attributable to revenues from the
Company's recent acquisitions. The high volume of business that began in March
and continued through the end of the second quarter allowed the Company to
overcome a slow start to the year, with low sales in January and February, and
to exceed sales projections at the year's mid-point.
15
Gross margin for the first of 2004 stayed constant at 41.4% compared to the
first half of 2003. However, the gross margin for the first half of 2003
included a gain on the sale of a building which increased the gross margin by
0.6%.
Operating income for the first half of 2004 increased 18.8% from the prior year
first half. The operating margin percentage was also higher than the prior year
first half, increasing to 14.8% compared to 14.5%. The increase in operating
income and operating margin was primarily due to the higher revenue and
efficiencies resulting from newly crafted workflows in 2004.
Interest expense for the first half of 2004 decreased 7.4% compared to the first
half of 2003. The decrease is due to lower average debt outstanding in the first
half of 2004.
There were no other income items during the first half of 2004; however, during
the first half of 2003, non-recurring gains totaling $749 were recorded, as
previously discussed.
Income tax expense for the first six months of 2004 was at an effective tax rate
of 37.0% compared to a rate of 38.4% in the first six months of 2003. The
decrease in the effective tax rate was primarily due to tax credits realized in
2004. It is anticipated that the effective tax rate for 2004 will be in the
range of 37.0% to 38.0%.
Net income and earnings per share were higher in the first six months of 2004 as
compared to the first six months of 2003 for the reasons previously described.
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED FROM OPERATIONS
Cash provided from operations was $3,036 in the first six months of 2004
compared to $15,101 in the first six months of 2003. The decrease in cash
provided from operations was primarily a result of an increase in accounts
receivable caused by the unusually high volume of business recorded in the
second quarter, of which a substantial portion remained in accounts receivable
at June 30, 2004. The Company considers this increase in accounts receivable to
be a timing issue and anticipates that accounts receivable will return to a
normal level in the third quarter as the jobs invoiced in the second quarter are
collected.
Depreciation and amortization expense in the first half of 2004 was $6,805 as
compared to $5,877 in the prior year first half. The increase in depreciation
and amortization expense is attributable to an increase in intangible asset
amortization related to the Company's recent acquisitions.
CASH USED IN INVESTING ACTIVITIES
Cash used in investing activities was $11,191 in the first half of 2004 compared
to $2,798 in the first half of 2003. The increase in cash used in the first half
of 2004 reflects the acquisition of Virtualcolor for $4,929, $1,600 of
contingent purchase price related to the Virtualcolor acquisition paid to an
escrow account, and minor adjustments to the purchase price of fourth quarter
2003 acquisitions. In addition, the cash used in investing activities in the
first half of 2003 was partially offset by the receipt of $1,251 related to the
sale of a building.
Capital expenditures, mainly for computer equipment and software, were $4,435 in
the first half of 2004 compared to $4,146 in the first half of 2003. Capital
expenditures are anticipated to be in a range of $8,000 to $10,000 for all of
2004.
CASH PROVIDED FROM FINANCING ACTIVITIES
Cash provided from financing activities was $10,362 for the first half of 2004
compared to cash used in financing activities of $13,229 in the first half of
2003. The cash provided from financing activities in the first half of 2004
includes $10,000 from the second quarter sale of Tranche B notes pursuant to the
private placement financing agreement executed in December 2003. The cash
received from the Tranche B note sale was used primarily to repay $8,700 of
short-term borrowings from the first quarter, which had been used to finance the
Virtualcolor acquisition. The cash used in financing activities in the first
half of 2003 primarily reflects $12,744 of principal payments made on the
Company's credit facilities during that quarter.
Dividend payments on common stock were $1,389 and $1,386 in the first half of
2004 and 2003, respectively. It is anticipated that the Company will continue to
pay dividends at the current level for the remainder of 2004.
16
The Company presently finances its business from available cash and from cash
generated from operations. In June 2004, the Company executed a $30,000 five
year unsecured credit agreement with its primary US bank, replacing a $65,000
unsecured credit agreement which expired in May 2004. The Company's strong cash
flow and the private placement financing entered into in December 2003 reduced
the amount of floating-rate financing capacity needed. The Company also
maintains a $15,000 unsecured demand line of credit with another US bank, which
will expire in October 2004, as well as lines of credit in Canada (US $3,800),
China (US $1,500), and Malaysia (US $1,300). At June 30, 2004, the Company had
borrowings of $150 on its US unsecured demand line of credit. There were no
borrowings on its $30,000 unsecured credit facility or any of the non-US credit
lines.
The Company's long-term debt of $31,000 consists of two private-placement
financing agreements. $12,000 remains outstanding on its Note Purchase Agreement
dated August 18, 1995, of which $6,000 due in August 2004 is classified as a
current liability. In December of 2003, the Company entered into a new private
placement of debt to provide long-term financing. The terms of the Note Purchase
Agreement relating to this transaction provided for the issuance and sale by the
Company, pursuant to an exception from the registration requirements of the
Securities Act of 1933, of two series of notes: 1) Tranche A, due December 31,
2013, for $15,000, which closed in December 2003; and, 2) Tranche B, due April
30, 2014, for $10,000, which closed in April 2004.
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 and cash generated from future
operations, or pursuant to the Note Purchase Agreement dated December 23, 2003
and short-term credit facilities.
SEASONALITY
With respect to consumer products packaging, the graphic services market is not
currently seasonal. On the other hand, there have historically been cycles of
design changes for brand images that affect most consumer products. These
historic cycles differ from brand to brand as to when design changes have
occurred and thus the Company's sales volume levels are unpredictable.
With respect to the advertising and promotional markets, some seasonality exists
in that the months of December and January are historically the slowest of the
year because advertising agencies and their clients typically finish their work
by mid-December and do not 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.
The decline in business with the Company's clients in the advertising agency
market, which began in the second half of 2001, continued into the second
quarter of 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A discussion regarding market risk is disclosed in the Company's December 31,
2003 Form 10-K. There have been no material changes in information regarding
market risk relating to the Company since December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that
it is able to collect the information it is required to disclose in the reports
it files with the Securities and Exchange Commission (SEC), and to process,
summarize and disclose this information within the time periods specified in the
rules of the SEC. Based on an evaluation of the Company's disclosure controls
and procedures as of the end of the period covered by this report conducted by
the Company's management, with the participation of the Chief Executive and
Chief Financial Officers, the Chief Executive and Chief Financial Officers
believe that these controls and procedures are effective to ensure that the
Company is able to collect, process and disclose the information it is required
to disclose in the reports it files with the SEC within the required time
periods.
17
INTERNAL CONTROL OVER FINANCIAL REPORTING
During the period covered by this report, there have been no changes in the
Company's internal control over financial reporting that have materially
affected or are reasonably likely to materially affect the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEMS 1, 3, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
On, April 30, 2004, the Company issued and sold $10 million of its 4.98% Series
2003-A Notes due 2014 to Massachusetts Mutual Life Insurance Company in a
transaction exempt from the registration requirements of the Securities Act of
1933, as amended. The proceeds of this offering were used to provide funds for
acquisitions.
PURCHASES OF EQUITY SECURITIES BY THE COMPANY
As previously disclosed, the Company occasionally repurchases its common shares,
pursuant to a general authorization from the Board of Directors, which is
renewed annually. There have been no repurchases of common stock by the Company
under this program during the first six months of 2004. However, during the
second quarter of 2004, 44,000 shares of common stock with a market value of
$603,000 were tendered to the Company by certain stockholders in payment of
stock options exercised. The Company has recorded the receipt of common stock in
payment for stock options exercised as a purchase of treasury stock.
The following table summarizes the shares recorded by the Company as repurchases
in connection with stock option exercises during the first six months of 2004
(in thousands, except per share amounts):
Total No. Share Avg. Price Paid Per No. Shares Purchased as Part of
Period Purchased Share Publicly Announced Program
------ --------- ----- --------------------------
January -- -- --
February -- -- --
March -- -- --
==== ====== ===
1st Qtr 2004 Total -- -- --
==== ====== ===
April 22 $13.90 --
May 22 $13.48 --
June -- -- --
==== ====== ===
2nd Qtr 2004 Total 44 $13.69 --
==== ====== ===
YTD 2004 Total 44 $13.69 --
==== ====== ===
18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 18, 2004, the Company held its annual stockholders' meeting. There were
21,501,511 shares of Class A common stock outstanding entitled to vote, and a
total of 20,753,578 (96.5%) were represented at the meeting in person or by
proxy. The following summarizes vote results of proposals submitted to the
stockholders:
PROPOSAL 1: ELECTION OF DIRECTORS:
NAME FOR AGAINST WITHHELD
---- --- ------- --------
Clarence W. Schawk 20,338,382 0 415,196
David A. Schawk 20,342,358 0 411,220
A. Alex Sarkisian, Esq. 20,340,916 0 412,662
Judith W. McCue, Esq. 20,648,181 0 105,397
John T. McEnroe, Esq. 20,346,103 0 407,475
Hollis W. Rademacher 20,666,972 0 86,606
Leonard S. Caronia 20,667,064 0 86,514
PROPOSAL 2: RATIFICATION OF ERNST & YOUNG AS INDEPENDENT AUDITORS FOR FISCAL
YEAR 2004:
FOR AGAINST ABSTAIN
--- ------- -------
20,675,835 77,543 200
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
EXHIBIT # DESCRIPTION
- --------- -----------
3.1 Certificate of Incorporation of Schawk, Inc., as amended.
Incorporated herein by reference to Registration Statement No.
33-85152.
3.3 By-Laws of Schawk, Inc., as amended. Incorporated herein by
Reference to Registration Statement No. 333-39113.
4.1 Specimen Class A Common Stock Certificate. Incorporated herein by
Reference to Registration Statement No. 33-85152
10.1 Credit Agreement dated June 11, 2004 by and between Schawk Inc. and
Bank One, N.A. - Incorporated herein by reference to Form 8-K dated
June 16, 2004.
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.
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.
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
19
B. Reports on Form 8-K
Form 8-K dated April 20, 2004 reporting under Item 9, a press release
announcing the planned release of second quarter 2004 financial results on
April 27, 2004.
Form 8-K dated April 27, 2004 reporting under Item 12, a press release
announcing financial results for the quarter ended June 30, 2004.
Form 8-K dated May 24, 2004 reporting under Item 9, a press release
announcing the declaration of the regular quarterly dividend.
Form 8-K dated June 16, 2004 reporting under Item 5, filing the
$30,000,000 Credit Agreement dated June 11, 2004 between Schawk Inc and
Bank One.
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 6th day of August 2004.
SCHAWK, INC.
(Registrant)
/s/ David A. Schawk
- -------------------------------
President, Chief Executive Officer and Director
/s/ James J. Patterson
- ------------------------------
Senior Vice President and Chief Financial Officer
20