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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, 2006
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)
66-0323724
(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 check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer [ ] Accelerated filer [X] Non- accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Act). Yes [ ] No [X]
The number of shares of the Registrant's Common Stock outstanding as of July
31, 2006, was 26,430,537.
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1
SCHAWK, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
June 30, 2006
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 28
PART II - OTHER INFORMATION
Item 1A. Risk Factors. 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits 30
Signatures 31
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Schawk, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
JUNE 30,
2006 DECEMBER 31,
(UNAUDITED) 2005
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 5,341 $ 7,519
Trade accounts receivable, less allowance for doubtful accounts
of $5,467 at June 30, 2006 and $5,940 at December 31, 2005 116,985 117,723
Inventories 26,119 24,868
Prepaid expenses and other current assets 12,017 9,701
Deferred income taxes 12,202 9,845
Assets of discontinued operations -- 29,253
----------- -----------
Total current assets 172,664 198,909
Property and equipment, less accumulated depreciation of
$82,737 at June 30, 2006 and $74,506 at December 31, 2005 75,589 77,291
Goodwill 240,888 233,838
Intangible assets, net 35,591 42,223
Other assets 5,040 6,557
----------- -----------
Total assets $ 529,772 $ 558,818
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 24,527 $ 27,776
Accrued expenses 52,392 61,967
Income taxes payable 17,988 6,367
Current portion of long-term debt and capital lease obligations 211 454
Liabilities of discontinued operations -- 8,208
----------- -----------
Total current liabilities 95,118 104,772
Long-term debt 133,501 169,528
Capital lease obligations 32 51
Other liabilities 25,338 27,383
Deferred income taxes 25,258 25,688
Stockholders' equity:
Common stock, $0.008 par value, 40,000,000 shares authorized,
28,865,130 and 28,441,689 shares issued at June 30, 2006 and
December 31, 2005, respectively; 26,430,527 and 26,070,747
shares outstanding at June 30, 2006 and December 31, 2005,
respectively 228 225
Additional paid-in capital 176,262 168,777
Retained earnings 100,470 88,424
Accumulated comprehensive income 2,750 1,933
----------- -----------
279,710 259,359
Treasury stock, at cost, 2,434,603 and 2,370,942 shares of common
stock at June 30, 2006 and December 31, 2005, respectively (29,185) (27,963)
----------- -----------
Total stockholders' equity 250,525 231,396
----------- -----------
Total liabilities and stockholders' equity $ 529,772 $ 558,818
=========== ===========
See accompanying notes.
3
Schawk, Inc.
Consolidated Statements of Operations
Three Months Ended June 30, 2006 and 2005
(Unaudited)
(In Thousands, Except Share Amounts)
2006 2005
--------- ---------
Net sales $ 140,095 $ 145,229
Cost of sales 90,339 94,047
Selling, general, and administrative expenses 34,665 34,342
Acquisition integration expenses 228 1,801
Reserve reversal from litigation settlement (2,120) --
--------- ---------
Operating income 16,983 15,039
Other income (expense)
Interest income 77 82
Interest expense (2,738) (2,090)
Other income (expense) -- 486
--------- ---------
(2,661) (1,522)
--------- ---------
Income from continuing operations before income taxes 14,322 13,517
Income tax provision 5,396 5,077
--------- ---------
Income from continuing operations 8,926 8,440
Income (loss) from discontinued operations, net of tax (benefit) expense
of $26 in 2006 and ($364) in 2005 (Note 12) 44 (588)
--------- ---------
Net Income $ 8,970 $ 7,852
========= =========
Earnings per share:
Basic:
Income from continuing operations $ 0.34 $ 0.33
Loss from discontinued operations 0.00 (0.02)
--------- ---------
Net income per common share $ 0.34 $ 0.31
========= =========
Diluted:
Income from continuing operations $ 0.32 $ 0.31
Loss from discontinued operations 0.00 (0.02)
--------- ---------
Net income per common share $ 0.32 $ 0.29
========= =========
Weighted average number of common and common
equivalent shares outstanding - diluted 27,798 27,243
Dividends per common share $ 0.0325 $ 0.0325
See accompanying notes
4
Schawk, Inc.
Consolidated Statements of Operations
Six Months Ended June 30, 2006 and 2005
(Unaudited)
(In Thousands, Except Share Amounts)
2006 2005
--------- ---------
Net sales $ 273,849 $ 264,409
Cost of sales 178,377 171,891
Selling, general, and administrative expenses 68,981 64,675
Acquisition integration expenses 758 1,801
Reserve reversal from litigation settlement (2,120) --
--------- ---------
Operating income 27,853 26,042
Other income (expense)
Interest income 196 151
Interest expense (5,319) (3,778)
Other income (expense) -- 486
--------- ---------
(5,123) (3,141)
--------- ---------
Income from continuing operations before income taxes 22,730 22,901
Income tax provision 8,589 8,662
--------- ---------
Income from continuing operations 14,141 14,239
Loss from discontinued operations, net of tax benefit of $240
in 2006 and $509 in 2005 (Note 12) (389) (823)
--------- ---------
Net Income $ 13,752 $ 13,416
========= =========
Earnings per share:
Basic:
Income from continuing operations $ 0.54 $ 0.57
Loss from discontinued operations (0.02) (0.03)
--------- ---------
Net income per common share $ 0.52 $ 0.54
========= =========
Diluted:
Income from continuing operations $ 0.51 $ 0.54
Loss from discontinued operations (0.01) (0.03)
--------- ---------
Net income per common share $ 0.50 $ 0.51
========= =========
Weighted average number of common and common
equivalent shares outstanding - diluted 27,777 26,413
Dividends per common share $ 0.065 $ 0.065
See accompanying notes
5
Schawk, Inc.
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2006 and 2005
(Unaudited)
(In Thousands)
2006 2005
---------- -----------
OPERATING ACTIVITIES
Net income $ 13,752 $ 13,416
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 12,539 13,046
Deferred income taxes (2,151) (124)
Reserve reversal from litigation settlement (2,120) --
Share-based compensation expense 574 --
Tax benefit from stock options exercised -- 595
Gain realized on sale of property and equipment (197) (58)
Changes in operating assets and liabilities, net of effects from
acquisitions and dispositions:
Trade accounts receivable 4,214 2,104
Inventories (591) (3,780)
Prepaid expenses and other current assets (116) (946)
Trade accounts payable and accrued expenses (18,842) (11,607)
Other liabilities (5,251) (2,384)
Income taxes refundable/payable 10,779 3,332
---------- -----------
Net cash provided by operating activities 12,590 13,594
INVESTING ACTIVITIES
Proceeds from sales of property and equipment 3,662 2,300
Proceeds from sale of business 26,279 --
Capital expenditures (12,814) (7,470)
Acquisitions, net of cash acquired (688) (204,273)
Contingent acquisition purchase price received from escrow account -- 890
Other 472 171
---------- -----------
Net cash provided by (used in) investing activities 16,911 (208,382)
FINANCING ACTIVITIES
Proceeds from debt -- 142,030
Net principal payments on revolving credit agreement (36,149) (9,131)
Principal payments on capital lease obligations (283) (371)
Tax benefit from stock options exercised 1,278 --
Payment of deferred loan fees -- (663)
Common stock dividends (1,706) (1,668)
Purchase of common stock (1,223) (726)
Issuance of common stock 5,637 73,274
---------- -----------
Net cash provided by (used in) financing activities (32,446) 202,745
---------- -----------
Effect of foreign currency rate changes 767 (584)
---------- -----------
Net increase (decrease) in cash and cash equivalents (2,178) 7,373
Cash and cash equivalents beginning of period 7,519 7,268
---------- -----------
Cash and cash equivalents end of period $ 5,341 $ 14,641
========== ===========
See accompanying notes.
6
Schawk, Inc.
Notes to Consolidated Interim Financial Statements
(Unaudited)
(In thousands of dollars, except per share data)
NOTE 1. BASIS OF PRESENTATION
The consolidated interim unaudited 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. Certain prior year amounts on the Consolidated Balance Sheet and the
Consolidated Statement of Operations have been reclassified to reflect the
discontinued operations presented in the current year financial statements. 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, 2005, as filed with its 2005 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 independent provider of digital imaging graphic
services to the global consumer products packaging, retail, point of sale,
advertising, entertainment and promotional markets. The Company provides
clients, at their option, access to a fully integrated or modular set of
products and services on a global or local basis. The Company has been in
operation since 1953 and is incorporated under the laws of the State of
Delaware. The Company presently has operations in North America (U.S., Canada
and Mexico), Asia (Singapore, China, Japan, Thailand and Malaysia), Europe
(United Kingdom, Belgium and Spain), India and Australia.
The Company's services include brand strategy, creative design, tactical design
and adaptive design. The Company's services also include both digital and analog
image database archival management as well as 3D imaging for package design,
large format printing, digital photography, workflow management consulting
services, and various related outsourcing and graphics arts consulting services.
The Company's facilities produce conventional, electronic and desktop color
separations, creative design, art production, electronic retouching,
conventional and digital plate making and digital press proofs. The Company has
particular expertise in preparing color images for high volume print production
runs of consumer products packaging. The Company functions as a vital interface
between its Fortune 1000 consumer products clients, their creative designers and
their converters or printers in assuring the production of consistent, high
quality packaging materials in increasingly shorter turnaround and delivery
times.
NOTE 4. INVENTORIES
Inventories consist of the following:
June 30, December 31,
2006 2005
--------- ------------
Raw materials $ 4,879 $ 4,662
Work in process 22,298 21,264
--------- ------------
27,177 25,926
Less: LIFO reserve (1,058) (1,058)
--------- ------------
$ 26,119 $ 24,868
========= ============
7
NOTE 5. EARNINGS PER SHARE
Basic earnings per share and diluted earnings per share are shown on the
Consolidated Statements 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,
---------------------------
2006 2005
--------- -----------
Net income from continuing operations $ 8,926 $ 8,440
Income (loss) from discontinued operations 44 (588)
--------- -----------
Net income $ 8,970 $ 7,852
========= ===========
Weighted average shares 26,441 25,651
Effect of dilutive stock options 1,357 1,592
--------- -----------
Adjusted weighted average shares and
assumed conversions 27,798 27,243
========= ===========
Earnings per share:
Basic:
Income from continuing operations $ 0.34 $ 0.33
Loss from discontinued operations 0.00 (0.02)
--------- -----------
Net income per common share $ 0.34 $ 0.31
========= ===========
Diluted:
Income from continuing operations $ 0.32 $ 0.31
Loss from discontinued operations 0.00 (0.02)
--------- -----------
Net income per common share $ 0.32 $ 0.29
========= ===========
Six months ended June 30,
---------------------------
2006 2005
--------- -----------
Net income from continuing operations $ 14,141 $ 14,239
Loss from discontinued operations (389) (823)
--------- -----------
Net income $ 13,752 $ 13,416
========= ===========
Weighted average shares 26,312 24,945
Effect of dilutive stock options 1,465 1,468
--------- -----------
Adjusted weighted average shares and
assumed conversions 27,777 26,413
========= ===========
Earnings per share:
Basic:
Income from continuing operations $ 0.54 $ 0.57
Loss from discontinued operations (0.02) (0.03)
--------- -----------
Net income per common share $ 0.52 $ 0.54
========= ===========
Diluted:
Income from continuing operations $ 0.51 $ 0.54
Loss from discontinued operations (0.01) (0.03)
--------- -----------
Net income per common share $ 0.50 $ 0.51
========= ===========
8
NOTE 6. SEGMENT REPORTING
The Company operates in a single business segment, Digital Imaging Graphic Arts.
The Company operates primarily in three geographic areas, the United States,
Europe and Canada. Summary financial information by geographic area is as
follows:
Three months ended June 30, 2006
---------------------------------------------------------
Other
United States Canada Europe Foreign Total
------------- -------- ---------- -------- ---------
Sales $ 102,599 $ 10,074 $ 20,922 $ 6,500 $ 140,095
Long-lived assets 293,293 16,293 41,360 6,162 357,108
Net assets 226,497 20,854 13,922 (10,748) 250,525
Three months ended June 30, 2005
---------------------------------------------------------
Other
United States Canada Europe Foreign Total
------------- -------- ---------- -------- ---------
Sales $ 107,526 $ 8,162 $ 23,855 $ 5,686 $ 145,229
Long-lived assets 290,554 18,830 23,319 6,790 339,493
Net assets 204,707 13,830 (1,723) (1,575) 215,239
Six months ended June 30, 2006
---------------------------------------------------------
Other
United States Canada Europe Foreign Total
------------- -------- ---------- -------- ---------
Sales $ 200,328 $ 18,861 $ 42,076 $ 12,584 $ 273,849
Long-lived assets 293,293 16,293 41,360 6,162 357,108
Net assets 226,497 20,854 13,922 (10,748) 250,525
Six months ended June 30, 2005
---------------------------------------------------------
Other
United States Canada Europe Foreign Total
------------- -------- ---------- -------- ---------
Sales $ 194,214 $ 16,932 $ 43,171 $ 10,092 $ 264,409
Long-lived assets 290,554 18,830 23,319 6,790 339,493
Net assets 204,707 13,830 (1,723) (1,575) 215,239
NOTE 7. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the three months
ended June 30, 2006 and 2005, respectively, are as follows:
Three months ended June 30,
------------------------------
2006 2005
----------- -----------
Net income $ 8,970 $ 7,852
Foreign currency translation adjustments 374 (731)
----------- -----------
Comprehensive income $ 9,344 $ 7,121
=========== ===========
Six months ended June 30,
------------------------------
2006 2005
----------- -----------
Net income $ 13,752 $ 13,416
Foreign currency translation adjustments 817 (1,092)
----------- -----------
Comprehensive income $ 14,569 $ 12,324
=========== ===========
9
NOTE 8. STOCK BASED COMPENSATION
Effective January 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123(R),"Share-Based Payments," ("SFAS 123R"),
which requires the measurement and recognition of compensation expense for all
share-based payment awards to employees and directors based on estimated fair
values. SFAS 123(R) supersedes the Company's previous accounting methodology
using the intrinsic value method under Accounting Principles Board Opinion No.
25,"Accounting for Stock Issued to Employees." ("APB 25") Under the intrinsic
value method, no share-based compensation expense related to stock option awards
granted to employees had been recognized in the Company's Consolidated
Statements of Operations, as all stock option awards granted under the plans had
an exercise price equal to the market value of the Common Stock on the date of
the grant.
The Company adopted SFAS 123(R) using the modified prospective transition
method. Under this transition method, compensation expense recognized during the
three and six month periods ended June, 2006 included compensation expense for
all share-based awards granted prior to, but not yet vested, as of December 31,
2005, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123 and using an accelerated expense attribution
method. There were no share-based awards granted during the three month or six
month periods ended June 30, 2006. Compensation expense for all share-based
awards to be granted subsequent to June 30, 2006 will be based on the grant date
fair value estimated in accordance with the provisions of SFAS 123(R) and will
be computed using the straight-line expense attribution method. In accordance
with the modified prospective transition method, the Company's Consolidated
Financial Statements for prior periods have not been restated to reflect the
impact of SFAS 123(R).
As a result of adopting Statement 123(R) on January 1, 2006, the Company's
income before income taxes and net income for the three month period ended June
30, 2006 are $151 and $94 lower, respectively, than if it had continued to
account for share-based compensation under APB 25. There was no significant
effect on basic or diluted earnings per share for the three month period ended
June 30, 2006 as a result of adopting Statement 123(R). For the six month period
ended June 30, 2006, the Company's income before income taxes and net income are
$574 and $357 lower, respectively, than if it had continued to account for
share-based compensation under APB 25. Basic and diluted earnings per share for
the six month period ended June 30, 2006 were both $0.01 lower than if the
Company had continued to account for share-based compensation under APB 25.
2006 LONG-TERM INCENTIVE PLAN
Effective May 17, 2006, the Company's stockholders approved the Schawk Inc 2006
Long-Term Incentive Plan. The 2006 Plan provides for the grant of stock options,
stock appreciation rights, restricted stock, restricted stock units,
performance-based awards and other cash and stock-based awards to officers,
other employees and directors of the Company. The total number of shares of
common stock available under the 2006 Plan is the number of shares available for
issuance under the Company's 2003 Equity Option Plan but not subject to awards
as of May 17, 2006. No additional shares have been reserved for issuance under
the 2006 Plan.
As of June 30, 2006, no stock options, stock appreciation rights or restricted
shares had been issued under the 2006 Plan. The information presented below
pertains to stock options granted prior to December 31, 2005 under the Company's
2003 Equity Option Plan. It is anticipated that stock option and restricted
share grants under the 2006 Plan will first occur during the third quarter of
2006.
OPTIONS
The Company's 2003 Equity Option Plan provided for the granting of options to
purchase up to 5,252 shares of Class A common stock to key employees. The
Company 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 recorded $151 and $574 of compensation expense relating to
outstanding options during the three and six month periods ended June 30, 2006,
respectively. No compensation expense was recorded related to outstanding
options during the three and six periods ended June 30, 2005.
10
The Company records compensation expense for employee stock options based on the
estimated fair value of the options on the date of grant using the Black-Scholes
option-pricing model with the assumptions included in the table below. The
Company uses historical data among other factors to estimate the expected price
volatility, the expected option life and the expected forfeiture rate. The
risk-free rate is based on the U.S. Treasury yield curve in effect at the time
of grant for the estimated life of the option. There were no options granted
during the three or six month periods ended June 30, 2006.
The following assumptions were used to estimate the fair value of options
granted during the six months ended June 30, 2005, using the Black-Scholes
option-pricing model:
Six Months ended June 30,
2006 2005
----- --------------
Expected dividend yield na 0.70%
Expected stock price volatility na 19.96% - 20.34%
Risk-free interest rate range na 4.0%
Weighted-average expected life of options na 7 years
The following table summarizes the Company's activities with respect to its
stock option plans for the first six months of 2006 as follows (in thousands,
except price per share and contractual term):
Weighted Average Weighted Average
Number of Exercise Price Remaining Aggregate
Shares Per Share Contractual Term Intrinsic Value
--------- ---------------- ----------------- ---------------
Outstanding January 1, 2006 3,333 $ 11.73
Granted --
Exercised (253) $ 10.44
Cancelled --
-----
Outstanding June 30, 2006 3,080 $ 11.84 5.54 $ 17,441
Vested at June 30, 2006 2,890 $ 11.38 5.33 $ 17,686
Exercisable at June 30, 2006 2,890 $ 11.38 5.33 $ 17,686
There were no options granted during the three and six month periods ended June
30, 2006. The weighted-average grant-date fair value of options granted during
the three and six month periods ended June 30, 2005 was $5.48 for both periods.
The total intrinsic value for options exercised during the three and six month
periods ended June 30, 2006 was $382 and $3,364, respectively. The total
intrinsic value for options exercised during the three and six month periods
ended June 30, 2005 was $2,745 and $3,266, respectively.
Cash received from option exercises under all plans for the three and six month
periods ended June 30, 2006 was approximately $603 and $2,599, respectively.
Cash received from option exercises under all plans for the three and six month
periods ended June 30, 2005 was approximately $1,698 and $2,086, respectively.
The actual tax benefit realized for the tax deductions from option exercises
under all plans totaled approximately $147 and $1,300, respectively, for the
three and six month periods ended June 30, 2006. The actual tax benefit realized
for the tax deductions from option exercises under all plans totaled
approximately $579 and $690, respectively, for the three and six month periods
ended June 30, 2005.
As of June 30, 2006, there was $390 of total unrecognized compensation cost
related to nonvested options outstanding. That cost is expected to be recognized
over a weighted average period of 1 year. A summary of the Company's nonvested
option activity for the six months ended June 30, 2006 is as follows (in
thousands, except price per share and contractual term):
11
Weighted Average
Number of Grant Date
Shares Per Share
--------- ----------------
Nonvested at January 1, 2006 570 $ 4.85
Granted --
Vested (380) $ 4.54
Forfeited --
---------
Nonvested at June 30, 2006 190 $ 5.48
=========
EMPLOYEE SHARE-BASED COMPENSATION EXPENSE
The table below shows the amounts recognized in the financial statements for the
three month and six month periods ended June 30, 2006 for share-based
compensation related to employees. The expense is included in selling, general
and administrative expenses in the Consolidated Statement of Operations.
Three Months Ended Six Months Ended
June 30, 2006 June 30, 2006
------------------ ----------------
Total cost of share-based compensation $ 151 $ 574
Income tax (57) (217)
------------------ ----------------
Amount charged against income $ 94 $ 357
================== ================
Impact on net income per common share:
Basic $ 0.00 $ 0.01
Diluted $ 0.00 $ 0.01
There were no amounts related to employee share-based compensation capitalized
as assets during the three months or six months ended June 30, 2006.
PRO FORMA EMPLOYEE SHARE-BASED COMPENSATION EXPENSE
Prior to December 31, 2005, the Company accounted for share-based employee
compensation arrangements in accordance with the provisions and related
interpretations of APB 25. Had compensation cost for share-based awards been
determined consistent with SFAS No. 123(R), the net income and earnings per
share would have been adjusted to the following pro forma amounts (in thousands,
except for per share data):
Three Months Ended Six Months Ended
June 30, 2005 June 30, 2005
------------------ ----------------
Net income, as reported $ 7,852 $ 13,416
Less: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (859) (989)
------------------ ----------------
Net income, pro forma $ 6,993 $ 12,427
================== ================
Earnings per share
Basic $ 0.31 $ 0.54
Diluted $ 0.29 $ 0.51
Pro forma earnings per share
Basic $ 0.27 $ 0.50
Diluted $ 0.26 $ 0.47
12
NOTE 9. ACQUISITIONS
SEVEN WORLDWIDE HOLDINGS, INC.
On January 31, 2005, the Company acquired 100% of the outstanding stock of Seven
Worldwide Holdings, Inc. (Seven WorldWide"), formerly known as KAGT Holdings,
Inc. Seven Worldwide was the parent of Seven Worldwide, Inc, a graphics services
company with operations in North America, Europe, and the Asia-Pacific region.
The purchase price of $210,568 consisted of $135,566 paid in cash at closing,
$4,482 of acquisition-related professional fees and the issuance of 4,000 shares
of the Company's Class A common stock with a value of $70,520. The results of
operations of Seven Worldwide, Inc since the date of acquisition are included in
the Consolidated Statement of Operations. The acquisition resulted in the
recognition of goodwill in the Company's financial statements because the
purchase price reflects the complimentary strategic fit that the acquired
business brings to the Company's existing operations. The acquisition was
recorded using the purchase method of accounting. The purchase price allocation
was finalized during the first quarter of 2006, based on a fair value appraisal
performed by an independent consulting firm.
During the 12 months ended January 31, 2006, management of the Company completed
its assessment of the combined operations and implemented its plan to exit
certain facilities of the acquired company. During 2005, the Company closed
seven facilities in the US and the UK and downsized several others. Two
additional facilities were closed in early 2006 in accordance with the Company's
exit plan. A total of 712 employees were terminated during 2005 and in early
2006. In addition, the Company's management decided to market the Book and
Publishing operations of the acquired company, since this business was outside
the core business of the Company. Effective as of February 28, 2006, the Company
sold substantially all of the operating assets of its Book and Publishing
operations. See Footnote 12 - Discontinued Operations.
The Company recorded an estimated exit reserve at January 31, 2005 in the amount
of $11,790. The major expenses included in the exit reserve are employee
severance and lease termination expenses. As management of the Company completed
its assessment of the acquired operations, additional amounts were added to the
initial reserve estimate. The initial reserve and subsequent reserve
modifications were recorded as adjustments to goodwill and current and
non-current liabilities. The majority of the June 30, 2006 reserve balance
related to employee severance will be paid during 2006. The reserve balance
related to facility closings will be paid over the term of the leases of the
closed facilities, with the longest lease expiring in 2015.
The following table summarizes the reserve recorded at January 31, 2005 and the
activity through June 30, 2006:
Balance Balance
January 31, December 31,
2005 Adjustments Payments 2005
----------- ----------- -------- ------------
Employee severance $ 7,075 $ 5,092 $ (6,721) $ 5,446
Facility closure cost 4,715 3,969 (1,114) 7,570
----------- ----------- -------- ------------
Total $ 11,790 $ 9,061 $ (7,835) $ 13,016
=========== =========== ======== ============
13
Balance Balance
December 31, March 31,
2005 Adjustments Payments 2006
------------ ----------- -------- ---------
Employee severance $ 5,446 $ 171 $ (2,946) $ 2,671
Facility closure cost 7,570 -- (860) 6,710
------------ ----------- -------- ---------
Total $ 13,016 $ 171 $ (3,806) $ 9,381
============ =========== ======== =========
Balance Balance
March 31, June 30,
2006 Adjustments Payments 2006
------------ ----------- -------- ---------
Employee severance $ 2,671 -- $ (1,702) $ 969
Facility closure cost 6,710 -- (1,056) 5,654
------------ ----------- -------- ---------
Total $ 9,381 -- $ (2,758) $ 6,623
============ =========== ======== =========
During the quarter ended June 30, 2006, the Company settled a lawsuit related to
pre-acquisition activities of Seven Worldwide, Inc., for which a pre-acquisition
contingent liability in the amount of $2,120 had been recorded. The reserve
reversal was recorded in the operating expense section of the Consolidated
Statement of Operations for the period ended June 30, 2006. See Footnote 13 -
Reserve Reversal from Litigation Settlement.
WEIR HOLDINGS LIMITED
On December 31, 2004, the Company acquired the operating assets and assumed
certain liabilities of Weir Holdings Limited, a company registered under the
laws of England, and its subsidiaries. Weir, which operates under the trade name
"Winnetts", is one of the leading providers of graphic services to consumer
products companies, retailers and major print groups in the United Kingdom and
European markets.
In connection with its acquisition of the assets of Winnetts, the Company
established an estimated facility exit reserve at December 31, 2004 in the
amount of $2,500, primarily for employee severance and lease abandonment
expenses. During 2005, the management of the Company completed its assessment of
the acquired operations and implemented its plan to exit certain of the
facilities of the acquired company. During 2005, the Company closed one facility
in the UK and downsized several others. A total of 39 employees were terminated.
The exit reserve balance related to employee severance will be paid during 2006.
The exit reserve related to the facility closure will be paid over the term of
the lease, which expires in 2014.
The following table summarizes the activity in the reserve during 2005 and the
first half of 2006:
14
Balance Balance
December 31, December 31,
2004 Adjustments Payments 2005
------------ ----------- -------- ------------
Employee severance $ 1,254 $ 65 $ (902) $ 417
Facility closure cost 1,246 718 (632) 1,332
------------ ----------- -------- ------------
Total $ 2,500 $ 783 $ (1,534) $ 1,749
============ =========== ======== ============
Balance Balance
December 31, March 31,
2005 Adjustments Payments 2006
------------ ----------- -------- ------------
Employee severance $ 417 -- $ (98) $ 319
Facility closure cost 1,332 -- (85) 1,247
------------ ----------- -------- ------------
Total $ 1,749 -- $ (183) $ 1,566
============ =========== ======== ============
Balance Balance
March 31, June 30,
2006 Adjustments Payments 2006
------------ ----------- -------- ------------
Employee severance $ 319 -- $ (319) $ --
Facility closure cost 1,247 -- (71) 1,176
------------ ----------- -------- ------------
Total $ 1,566 -- $ (390) $ 1,176
============ =========== ======== ============
Since the acquisitions of Seven Worldwide and Winnetts, one of the Company's
priorities has been the integration of the acquired businesses into the
Company's combined operations. This has involved planning and executing the
consolidation of duplicate facilities in locations served by separate facilities
of the pre-acquisition businesses as well as elimination of duplicate
administrative functions. During the three month and six month periods ended
June 30, 2006, the Company recorded acquisition integration expenses of $228 and
$758, respectively, which are shown on a separate line in the operating expense
section of the Consolidated Statement of Operations for the period ended June
30, 2006. The major items included in this expense are exit costs from the shut
down of the Company's existing Birmingham UK operating facility in February
2006, including retention pay for key employees whose services were necessary
during a transition period, travel expenses related to the planning and
execution of facility consolidations, and professional fees for accounting,
human resource, and integration planning advice.
OTHER ACQUISITIONS
During the three month and six month periods ended June, 2006 the Company paid
$19 and $688, respectively, of additional purchase price to the former owners of
certain companies acquired in 2003 and 2004. The additional purchase price was
paid pursuant to the contingency provisions of the purchase agreements.
15
NOTE 10. DEBT
The Company borrows under a credit agreement dated January 28, 2005 with
JPMorgan Chase Bank, N.A. The credit agreement provides for a five-year
unsecured revolving credit facility of $115,000, expandable to $125,000, with
interest at LIBOR plus a margin based on the Company's cash flow leverage ratio.
On June 30, 2006, $58,495 was outstanding under this agreement and is included
in Long-term debt on the Consolidated Balance Sheet.
The Company also borrows under private placement financing agreements. The
Company executed a Note Purchase and Private Shelf Agreement dated January 28,
2005, pursuant to which the Company sold $50,000 in a series of three Senior
Notes. The first note, in the amount of $10,000, will mature in 2010 and bears
interest at 4.81%. The second and third notes, each in the amount of $20,000,
mature in 2011 and 2012, respectively, and bear interest at the rate of 4.99%
and 5.17%, respectively. The total of these notes, $50,000, is included in
Long-term debt on the June 30, 2006 Consolidated Balance Sheet. The Company also
sold a series of notes under a Note Purchase Agreement dated December 23, 2003.
The first note under this agreement, in the amount of $15,000, bears interest at
4.90% and is payable in annual installments of $2,143 from 2007 to 2013. The
second note under this agreement, in the amount of $10,000, bears interest at
4.98% and is payable in annual installments of $1,429 from 2008 to 2014. The
total of these notes, $25,000, is included in Long-term debt on the June 30,
2006 Consolidated Balance Sheet. The notes issued under both these agreements
are unsecured.
The borrowings under both agreements are subject to certain restrictive
covenants. The Company is in compliance with these covenants as of June 30,
2006.
NOTE 11. GOODWILL AND INTANGIBLE ASSETS
The Company accounts for its goodwill assets using SFAS No. 142,"Goodwill and
Other Intangible Assets" ("SFAS 142.") Under SFAS No. 142, the Company's
goodwill assets are not amortized throughout the period, but are subject to an
annual impairment test.
The Company's intangible assets subject to amortization are as follows:
June 30, Dec 31, Weighted
2006 2005 Average Life
-------- -------- ------------
Customer relationships $ 38,891 $ 43,934 15.2 years
Digital Images 910 882 5.0 years
Developed technologies 712 762 3.0 years
Non-compete agreements 681 681 3.5 years
Patents 326 326 20.0 years
Trade Names 307 157 2.0 years
-------- --------
41,827 46,742 14.5 years
Accumulated amortization (6,236) (4,519)
-------- --------
$ 35,591 $ 42,223
Amortization expense related to intangible assets was $885 and $1,717 for the
three month and six month periods ended June 30, 2006, respectively, compared to
$948 and $2,113 for the three month and six month periods ended June 30, 2005,
respectively. Amortization expense for each of the next five fiscal years
beginning July 1, 2006 is expected to be approximately $3,200 for fiscal year
2007, approximately $2,900 for fiscal year 2008, approximately $2,700 for fiscal
years 2009 and 2010 and approximately $2,500 for fiscal year 2011.
NOTE 12. DISCONTINUED OPERATIONS
Effective February 28, 2006, the Company sold certain operations including
substantially all of the assets of its Book and Publishing operations, most of
which were acquired as part of the Seven Worldwide acquisition in 2005. The
operations were sold because they were considered to be outside of the Company's
core business. Proceeds from the sale were
16
$26,279, subject to an audited working capital adjustment, which the Company
estimates will result in an increase in selling price of $2,023. No gain or loss
was recorded as a result of the sale.
In accordance with SFAS No. 144, Accounting for the Impairment of Long-Lived
Assets, the Book and Publishing operations are being accounted for as
discontinued operations and, accordingly, its assets and liabilities are
segregated from continuing operations in the accompanying consolidated balance
sheet, and its operating results are segregated and reported as discontinued
operations in the accompanying consolidated statement of operations in all
periods presented. The results of operations of the Book and Publishing
operations for the three month and six month periods ended June 30, 2006 and
2005 are as follows:
Three Months Three Months
ended ended
June 30, June 30,
2006 2005
------------ ------------
Revenues $ -- $ 13,419
============ ============
Income (loss) from operations before income taxes $ 70 $ (952)
============ ============
Six Months Six Months
ended ended
June 30, June 30,
2006 2005
---------- ----------
Revenues $ 8,466 $ 24,990
========== ==========
Loss from operations before income taxes $ (629) $ (1,332)
========== ==========
The carrying amounts of the major classes of assets and liabilities sold were as
follows:
Current assets $ 16,310
Other non-current assets 2,300
Intangible assets 15,327
--------
Assets of discontinued operations $ 33,937
========
Current liabilities $ 5,635
--------
Liabilities of discontinued operations $ 5,635
========
NOTE 13. RESERVE REVERSAL FROM LITIGATION SETTLEMENT
Included in the operating expense section of the Consolidated Statement of
Operations for the three month and six month periods ended June 30, 2006, is
$2,120 representing a reserve reversal. During the quarter ended June 30, 2006,
the Company settled a lawsuit related to pre-acquisition activities of Seven
Worldwide, Inc. A pre-acquisition contingent liability reserve in the amount of
$2,120, previously recorded for this item, was no longer needed since the matter
was settled without further liability to the Company.
17
NOTE 14. NEW ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. (FIN) 48, "Accounting for Uncertainty in Income Taxes" (FIN
48), which clarifies the accounting for uncertainty in income taxes recognized
in financial statements in accordance with SFAS 109, "Accounting for Income
Taxes." FIN 48 prescribes a recognition threshold and measurement attributes for
the financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. This Interpretation will become effective
for the Company on January 1, 2007. The Company is evaluating the impact of this
Interpretation but does not expect it to have a material impact on its financial
statements or results of operations.
NOTE 15. SUBSEQUENT EVENTS
Effective July 1, 2006, the Company acquired the operating assets of WBK, Inc.,
a Cincinnati, Ohio-based design agency with approximately $4,500 in revenues
that provides services to retailers and consumer products companies. The
purchase price allocation of this acquisition has not been completed. The
Company will allocate the purchase price to the fair value of the net assets
acquired upon completion of a tangible and intangible asset appraisal now in
progress.
Also effective July 1, 2006, the Company increased its ownership of Schawk
India, LTD. to 90 percent. The Company acquired 50 percent of the company
currently known as Schawk India, Ltd. in February 2005 as part of its
acquisition of Seven Worldwide, Inc. Schawk India, Ltd. provides artwork
management, premedia and print management services.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 on such statements. Important
factors that could cause actual results to differ materially and adversely from
the Company's expectations and beliefs include, among other things, higher than
expected costs or unanticipated difficulties associated with integrating the
acquired operations of Winnetts and Seven Worldwide, higher than expected costs
associated with compliance with legal and regulatory requirements, 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 ability to implement
restructuring plans, the stability of political conditions in other countries in
which the Company has production service 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
Net sales decreased slightly to $140 million in the second quarter of 2006 from
$145 million in the second quarter of 2005. The earnings per share was $0.32 per
fully diluted earnings per share in the second quarter of 2006 as compared to
$0.29 earnings per fully diluted share in the second quarter of 2005.
Many of the issues raised in the first quarter of 2006 related to the delay in
the European consolidation between the former Seven Worldwide UK and the former
Winnetts locations. There was also an East Coast facility in the United States
that had negative comparisons to the prior year because of lower revenues
resulting from the first quarter sale of certain accounts along with the Book
and Publishing operations, as well as certain accounts from which the Company
resigned due to unprofitability. The Company made significant progress in
addressing these issues during the second quarter of 2006. The senior management
team of the European operations has been changed and the Company is addressing
operating issues with the help of experienced Schawk managers from Asia and the
North America. The Company also completed the transition of client accounts from
the Birmingham UK facility to the Newcastle UK and Leeds UK facilities early in
the second quarter of 2006. With respect to the East Coast facility in the
United States, the Company closed the facility effective June 30, 2006 and moved
the retained client accounts to other Schawk locations in the United States.
The activities in Europe and the closure of the East Coast facility in the
United States resulted in additional charges in the second quarter of 2006 and
lower operating income from continuing operations as compared to the prior year
second quarter. The other factor negatively impacting operating income in the
second quarter was lower sales with the Company's largest retail client, as
expected. A positive impact on operating income occurred with the reversal of a
reserve for the possible loss on a lawsuit settlement. The result of all of
these items was an increase in operating income from continuing operations to
$17 million in the second quarter of 2006 from $15 million in the prior year
second quarter.
A majority of our revenues are driven by marketing and advertising spending by
consumer products companies and retailers. The markets served are primarily
consumer products, pharmaceutical, entertainment and retail. Our business
involves producing graphic images for various applications. Generally, a graphic
image is created by us or a third party and then we manipulate that image to
enhance the color of the image and to prepare it for print. The applications
vary from consumer product packaging, including food and beverage packaging
images, to retail advertisements in newspapers, including free standing inserts
(FSI's) and magazine ads. The graphics process is generally the same regardless
of the application. The following steps in the graphics process must take place
to produce a final image:
- Planning and Messaging
- Strategic Design
19
- Content Creation
- File Building
- Retouching
- Art Production
- Pre-Media
Our involvement in a client project may involve many of the above steps or just
one of the steps, depending on the client's needs. Each client assignment, or
"job", is a custom job in that the image being produced is unique, even if it
only involves a small change from an existing image, such as adding a "low fat"
banner on a food package. Essentially, change equals revenue. We are paid for
our graphic imaging work regardless of the success or failure of the food
product, the promotion or the ad campaign.
Historically, a substantial majority of our revenues have been derived from
providing graphic services for consumer product packaging applications.
Packaging changes occur with such frequency and lack of notice, and customer
turn-around requirements are so tight, that there is little backlog. There are
regular promotions throughout the year that create revenue opportunities for us,
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, such as 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, such as "heart
healthy," "low in carbohydrates," "enriched with essential vitamins," "low in
saturated fat" and "caffeine free." All of these items require new product
packaging designs or changes in existing designs, in each case creating
additional opportunities for revenue. Graphic services for the consumer products
packaging industry generally involve higher margins due to the substantial
expertise necessary to meet consumer products companies' precise specifications
and to quickly, consistently and efficiently bring their products to market, as
well as due to the complexity and variety of packaging materials, shapes and
sizes, custom colors and storage conditions.
As a result of our recent acquisitions described below, we have increased the
percentage of our revenue derived from providing graphics services to our
advertising and retail clients and added to our service offering graphic
services to the entertainment market. These clients typically require high
volume, commodity-oriented prepress graphic services. Graphic services for these
clients typically yield relatively lower margins due to the lower degree of
complexity in providing such services, and the number and size of companies in
the industry capable of providing such services. As discussed more fully below
under "Acquisitions" and "Results of operations", the altered mix of services
following our acquisitions of Winnetts and Seven Worldwide impacted our results
of operations in 2005 and for the first half of 2006 and will continue to impact
our results of operations in the future. Since our acquisition of Seven
Worldwide in the first quarter of 2005 we have been evaluating all of the
operations acquired to determine if some of the operations should be sold.
Effective February 28, 2006, the Company sold certain operations, including
substantially all of the assets of its Book and Publishing operations, most of
which were acquired as part of the Seven Worldwide acquisition in 2005. These
operations represented approximately $62 million of revenues on an annual basis.
The operations were sold because they were not strategic to the Company's
future. Proceeds from the sale were $26,279, subject to an audited working
capital adjustment, which the Company estimates will result in an increase in
selling price of $2,023. No gain or loss was recorded as a result of the sale.
These operations are treated as discontinued operations in the comparative
consolidated statement of operations and therefore the revenues and expenses are
removed from the respective categories on the statement of operations and netted
on the line "Loss from discontinued operations" above the Net income line on the
statement. Similarly, amounts from the prior year have been restated as Loss
from discontinued operations in those periods. Therefore, all comparisons in
this management's discussion and analysis of results of operations refer to
amounts on the comparative consolidated statement of operations from continuing
operations only.
In the first half of 2006 as compared to the first half of 2005 approximately 8%
and 10%, respectively, of our total revenues came from our largest single client
in the respective period. Our single largest client for the first half of 2006
reduced its business with us by $7.6 million as compared to the first half of
2005, as we anticipated. We currently expect this trend to continue as a result
of the client's decision to substantially reduce its overall advertising budget.
On a full year basis we expect revenues with this client to decrease to $35
million in 2006 from $55 million in 2005. While we seek to build long-term
client relationships, revenues from any particular client can fluctuate from
period to period due to such client's purchasing patterns. Any termination of or
significant reduction in our business relationship with any of our principal
clients could have a material adverse effect on our business, financial
condition and results of operations.
20
ACQUISITIONS
We have grown our business through a combination of internal growth and
acquisitions. We have completed approximately 50 acquisitions since our business
was founded in 1953. Our two recent acquisitions have significantly expanded our
service offerings and our geographic presence, making us the only independent
prepress firm with operations in North America, Europe and Asia. As a result of
these acquisitions, we are able to offer a broader range of services to our
clients. Our expanded geographic presence also allows us to better serve our
multinational clients' demands for global brand consistency.
Winnetts. On December 31, 2004, we acquired certain assets and the business of
Weir Holdings, Ltd., known as "Winnetts", a UK based graphic services company
with operations in 6 locations in the UK, Belgium and Spain. The acquisition
price was $23.0 million.
Seven Worldwide. On January 31, 2005, we acquired Seven Worldwide (formerly
Applied Graphics Technologies, Inc.), a graphic services company with operations
in 40 locations in the United States, Europe, Asia and Australia. The purchase
price was $210.6 million. Seven Worldwide's results of operations have been
included in our results since January 31, 2005. In 2004 Seven Worldwide had
revenues of $369.9 million with gross margin and operating income percentages
lower than those of our company for that period.
The principal objective in acquiring Winnetts and Seven Worldwide was to expand
our geographic presence and our service offering. This expansion enables us to
provide a more comprehensive level of customer service, to build a broader
platform from which to grow our business and continue to pursue greater
operating efficiencies. We have realized significant synergies and reduced
operating expenses from the consolidation of duplicate facilities acquired in
the Seven Worldwide acquisition and currently anticipate achieving further
synergies and reduced operating expenses in the future. As part of the
integration of the acquired businesses, we have recorded estimated exit reserves
based on our consolidation plan. The major expenses included in the exit
reserves are severance pay for employees of acquired facilities that will be
merged with existing operations and lease termination expenses. In addition, we
recorded acquisition integration expenses, which are shown as a separate line in
the operating expense section of the Consolidated Statement of Operations, of
$0.2 million and $0.8 million for the three month and six month periods ended
June 30, 2006, respectively. The major items included in this expense are exit
costs from the shut down of our Birmingham UK operating facility in February
2006 including retention pay for key employees whose services were necessary
during a transition period, travel expenses related to the planning and
execution of facility consolidations, and professional fees for accounting,
human resource, and integration planning advice. In connection with the sale of
the book and publishing operations we received $26.3 million at closing on March
6, 2006 which we used to reduce the amount outstanding on our revolving credit
facility. As of June 30, 2006 there was $133.7 million of debt outstanding of
which $133.5 million was considered long-term.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions. Critical
accounting policies are defined as those that are reflective of significant
judgments and uncertainties, and potentially result in materially different
results under different assumptions and conditions. We believe that our critical
accounting policies are limited to those described below.
ACCOUNTS RECEIVABLE. Our clients are primarily consumer product manufacturers,
converters, mass merchant retailers and advertising agencies; none of which
individually represents more than 8% of total revenue. Accounts receivable
consist primarily of amounts due to us from our normal business activities. We
maintain an allowance for doubtful accounts to reflect the expected losses of
accounts receivable based on past collection history and specific risks
identified in the portfolio.
IMPAIRMENT OF LONG-LIVED ASSETS. We record impairment losses on long-lived
assets used in operations when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amount of those items. Our cash flow
estimates are based on historical results adjusted to reflect our best estimate
of future market and operating conditions. The net carrying value of assets not
21
recoverable is reduced to fair value. Our estimates of fair value represent our
best estimate based on industry trends and reference to market rates and
transactions.
GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS. We have made acquisitions in the
past that included a significant amount of goodwill and other intangible assets.
Effective in 2002, goodwill is no longer amortized but is subject to an annual
(or under certain circumstances more frequent) impairment test based on its
estimated fair value. Other intangible assets that meet certain criteria
continue to be amortized over their useful lives and are also subject to an
impairment test based on estimated undiscounted cash flows. There are many
assumptions and estimates underlying the determination of an impairment loss.
Another estimate using different, but still reasonable, assumptions could
produce a significantly different result. Therefore, impairment losses could be
recorded in the future. We perform the required impairment test of goodwill and
indefinite-lived intangible assets annually, or more frequently if conditions
warrant. We have determined it appropriate to consider the company to be one
reporting unit for purposes of this test.
CUSTOMER REBATES. We have rebate agreements with certain customers. The
agreements offer discount pricing based on volume over a multi-year period. We
accrue the estimated rebates over the term of the agreement, reducing revenue
and crediting a current liability account. At the end of the rebate accounting
period, typically annually, the rebate is settled in cash and the accrued
liability account is charged. We account for changes in the estimated rebate
amounts as soon as it has determined that the estimated sales for the rebate
period have changed.
INCOME TAXES. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using tax rates in effect for the year in which the differences are
expected to reverse. A valuation allowance is provided when it is more likely
than not that some portion of the deferred tax assets arising from temporary
differences and net operating losses will not be realized. We, like other
multi-national companies, are regularly audited by federal, state and foreign
tax authorities, and tax assessments may arise several years after tax returns
have been filed. Accordingly, tax reserves have been recorded when, in
management's judgment, it is not probable that our tax position will ultimately
be sustained. While predicting the outcome of the audits involves uncertainty
and requires estimates and informed judgments, we believe that the recorded tax
liabilities are adequate and appropriate. The judgments and estimates made at a
point in time may change based on the outcome of tax audits, as well as changes
to or further interpretation of regulations. Income tax expense is adjusted in
the period in which these events occur or when the statute of limitations for a
specific exposure item has expired.
EXIT RESERVES. We record reserves for the operational restructuring of acquired
companies and the resulting exit costs. The plans are approved by company
management prior to, or shortly after, the acquisition date and may be modified
during the twelve month period following the acquisition, as conditions change.
The plans provide for severance pay, lease abandonment costs and other exit
activities expenses.
STOCK OPTION EXPENSE. Effective January 1, 2006, the Company adopted the
provisions of SFAS 123(R), using the modified prospective method and therefore
has not restated results for the prior periods. Under this transition method,
stock-based compensation expense for all awards granted prior to, but not yet
vested as of January 1, 2006, are based on the grant date fair value estimated
in accordance with the original provisions of SFAS 123, "Accounting for
Stock-based Compensation" ("SFAS 123"). Stock-based compensation expense for any
grants after December 31, 2005 is based on the grant-date fair value estimated
in accordance with the provisions of SFAS 123(R). The Company recognizes stock
based compensation expense on a straight-line basis over the requisite service
period of the award, which is generally the option vesting term of three years.
Prior to the adoption of SFAS 123(R), the Company did not recognize stock-based
compensation expense in the Statement of Operations, rather the Company followed
APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations, and indicated in the notes to the financial statements what the
expense would have been had we elected to record stock-based compensation
expense during those periods. Since all options issued in prior periods were
granted at an exercise price equal to the market value of the underlying common
stock on the date of grant, no expense was required to be recorded in the
Statement of Operations.
As a result of adopting Statement 123(R) on January 1, 2006, the Company's
income before income taxes and net income for the three month period ended June
30, 2006 are $151 and $94 lower, respectively, than if it had continued to
account for share-based compensation under Opinion 25. There was no significant
effect on basic or diluted earnings per share for the three month period ended
June 30, 2006 as a result of adopting Statement 123(R). For the six month period
ended June 30, 2006, the Company's income before income taxes and net income are
$574 and $357 lower, respectively, than if it had continued to account for
share-based compensation under Opinion 25. Basic and diluted earnings per share
for the six month period ended June 30, 2006 were both $0.01 lower than if the
Company had continued to account for share-based compensation under Opinion 25.
Determining the appropriate fair value model and calculating the fair value of
share-based payment awards require the
22
input of highly subjective assumptions including the expected life of the
share-based payment awards and stock price volatility. The assumptions used in
calculating the fair value of share-based payment awards represent management's
best estimates, but these estimates involve inherent uncertainties and the
application of management judgment. As a result, if factors change and we use
different assumptions, our stock-based compensation expense could be materially
different in the future. In addition, we are required to estimate the expected
pre-vesting forfeiture rate and only recognize expense for those shares expected
to vest. If our actual pre-vesting forfeiture rate is materially different from
our estimate, the stock-based compensation expense could be significantly
different from our estimates. See Note 8 to the Consolidated Financial
Statements (Unaudited) for a further discussion of stock-based compensation.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of selected items in our consolidated income statement
for continuing operations
SCHAWK, INC.
COMPARATIVE CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2006 AND 2005
UNAUDITED
(IN THOUSANDS)
$ %
2006 2005 CHANGE CHANGE
--------- --------- --------- ------
Net sales $ 140,095 $ 145,229 $ (5,134) (3.5%)
Cost of sales 90,339 94,047 (3,708) (3.9%)
--------- --------- ---------
Gross profit 49,756 51,182 (1,426) (2.8%)
Gross margin percentage 35.5% 35.2%
Selling, general and administrative expenses 34,665 34,342 323 0.9%
Acquisition integration expenses 228 1,801 (1,573) (87.3%)
Reserve reversal from litigation settlement (2,120) -- (2,120) nm
--------- --------- ---------
Operating income 16,983 15,039 1,944 12.9%
Operating margin percentage 12.1% 10.4%
Other income (expense)
Interest income 77 82 (5) (6.1%)
Interest expense (2,738) (2,090) (648) 31.0%
Other income (expense) -- 486 (486) nm
--------- --------- ---------
(2,661) (1,522) (1,139) 74.8%
--------- --------- ---------
Income before income taxes 14,322 13,517 805 6.0%
Income tax provision 5,396 5,077 319 6.3%
Effective income tax rate 37.7% 37.6%
--------- --------- ---------
Income from continuing operations 8,926 8,440 486 5.8%
Income (loss) on discontinued operations,
net of tax (benefit) expense of $26 in 2006
and ($364) in 2005 (note 12) 44 (588) 632 nm
--------- --------- ---------
Net income $ 8,970 $ 7,852 $ 1,118 14.2%
========= ========= ========= =====
nm = not meaningful
23
THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THREE MONTHS ENDED JUNE 30, 2005
Net sales decreased $5.1 million or 3.5% in the second quarter of 2006 as
compared to the second quarter of the prior year. The lower sales were from
various operations including a $3.0 million decrease from the company's largest
retail account as anticipated and various ad agency and entertainment accounts
which had lower revenues of $6.7 million as compared to prior year. The lower
revenues were partially offset by increased revenues in consumer packaging
accounts of $4.6 million as compared to prior year.
Gross margin increased to 35.5 percent in the second quarter of 2006 from 35.2
percent in the prior year second quarter. The increase in gross margin was
primarily due to cost reduction efforts at the Company's operating units.
Operating income for the second quarter of 2006 increased 12.9% to $17.0 million
compared to $15.0 million in the second quarter of 2006. Operating income was
negatively impacted by lower than anticipated sales, operating losses at an East
Coast facility, lower results in Europe and stock option expenses of $0.2
million as compared to the prior year. The East Coast facility was closed June
30 and the client accounts were moved to other locations. The Company's overall
operating margin percentage increased to 12.1% in the second quarter of 2006
compared to 10.4% in the second quarter of 2005 primarily due to the reversal of
a litigation reserve.
The reserve reversal from litigation settlement referenced above resulted from
the reversal of an accrual which increased operating income by $2.1 million
pretax. The accrual related to a pre-acquisition contingency associated with a
lawsuit from 1997 involving a former Seven Worldwide business. In accordance
with accounting rules, the resolution of a pre-acquisition contingency is
recognized in the statement of operations.
Other income (expense) resulted in a net other expense of $2.7 million in the
second quarter of 2006 compared to a net other expense of $1.5 million in the
second quarter of 2005. Interest expense of $2.7 million for the second quarter
of 2006 increased $0.6 million compared to the same period in 2005. The increase
in interest expense was from a combination of higher short-term borrowing rates
and the amortization of the present value discount related to vacant property
reserves included in the Seven Worldwide acquisition. There was also a
non-recurring other income item of $0.5 million in the second quarter of 2005.
Income tax expense for the second quarter of 2006 was at an effective tax rate
of 37.7% compared to an effective tax rate in the second quarter of 2005 of
37.6%.
Income from continuing operations was higher in the second quarter of 2006 as
compared to the second quarter of 2005 for the reasons previously described.
Income (loss) from discontinued operations was $0.04 million and ($0.6) million
for the quarters ended June 30, 2006 and June 30, 2005, respectively.
Net income increased to $9.0 million in the second quarter of 2006 compared to
$7.9 million in the second quarter of 2005 for the reasons described above.
24
SCHAWK, INC.
COMPARATIVE CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
UNAUDITED
(IN THOUSANDS)
$ %
2006 2005 CHANGE CHANGE
--------- --------- --------- ------
Net sales $ 273,849 $ 264,409 $ 9,440 3.6%
Cost of sales 178,377 171,891 6,486 3.8%
--------- --------- ---------
Gross profit 95,472 92,518 2,954 3.2%
Gross margin percentage 34.9% 35.0%
Selling, general and administrative expenses 68,981 64,675 4,306 6.7%
Acquisition integration expenses 758 1,801 (1,043) (57.9%)
Reserve reversal from litigation settlement (2,120) -- (2,120) nm
--------- --------- ---------
Operating income 27,853 26,042 1,811 7.0%
Operating margin percentage 10.2% 9.8%
Other income (expense)
Interest income 196 151 45 29.8%
Interest expense (5,319) (3,778) (1,541) 40.8%
Other income (expense) -- 486 (486) nm
--------- --------- ---------
(5,123) (3,141) (1,982) 63.1%
--------- --------- ---------
Income before income taxes 22,730 22,901 (171) (0.7%)
Income tax provision 8,589 8,662 (73) (0.8%)
Effective income tax rate 37.8% 37.8%
--------- --------- ---------
Income from continuing operations 14,141 14,239 (98) (0.7%)
Loss on discontinued operations, net of tax
benefit of $240 in 2006 and $509 in 2005
(note 12) (389) (823) 434 (52.7%)
--------- --------- ---------
Net income $ 13,752 $ 13,416 $ 336 2.5%
========= ========= ========= ======
nm = not meaningful
SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005
Net sales increased $9.4 million or 3.6% in the first half of 2006 as compared
to the first half of the prior year. The increase is primarily due to $19.8
million of revenues attributable to Seven Worldwide in the month of January 2006
as the first half of 2005 did not include Seven's revenues until after the
acquisition of Seven on January 31, 2005. Excluding the January 2006 sales
attributable to Seven Worldwide, sales decreased approximately $10.4 million or
3.9%. The lower sales were from various operations including $7.6 million
decrease from the Company's largest account as anticipated, and sales from
various advertising and entertainment accounts declined $6.5 million as compared
to the first half of 2005. The lower sales in advertising and entertainment were
partially offset by sales increases in various packaging accounts of $3.7
million as compared to the first six months of 2005.
25
Gross margin for the first half of 2006 of 34.9% stayed approximately the same
as compared to 35.0% in the first half of 2005.
Operating income for the first half of 2006 increased 7.0% to $27.9 million
compared to $26.0 million in the first half of 2005. Operating income was
negatively impacted by lower than anticipated sales and higher expenses, such as
an additional month of selling, general and administrative expenses from the
Seven operations and stock option expense of $0.6 million as compared to the
prior year. The most significant items impacting operating income were an
operating loss on the European business primarily due to lower sales and higher
costs than anticipated and a loss from our acquired East Coast operation. The
Company's overall operating margin percentage increased to 10.2% in the first
half of 2006 compared to 9.8% in the first half of 2005 primarily due to the
reversal of a litigation reserve.
The reserve reversal from litigation settlement referenced above resulted from
the reversal of an accrual which increased operating income by $2.1 million
pretax. The accrual related to a pre-acquisition contingency associated with a
lawsuit from 1997 involving a former Seven Worldwide business. In accordance
with accounting rules, the resolution of a pre-acquisition contingency is
recognized in the statement of operations.
Other income (expense) for the first half of 2006 resulted in a net expense of
$5.1 million compared to $3.1 million of net expense in the first half of 2005.
Interest expense of $5.3 million for the first half of 2006 increased $1.5
million compared to the same period in 2005. The increase in interest expense
was from a combination of higher short-term borrowing rates and amortization of
the present value discount related to vacant property reserves included in the
Seven Worldwide acquisition. There was also a non-recurring other income item of
$0.5 million in the first half of 2005.
Income tax expense for the first half of 2006 and 2005 was at an effective tax
rate of 37.8% for both periods.
Income from continuing operations was lower in the first half of 2006 as
compared to the first half of 2005 for the reasons previously described.
Loss from discontinued operations was $0.4 million and $0.8 million for the six
months ended June 30, 2006 and June 30, 2005, respectively. There was no loss on
disposal of the discontinued operations as the $26.3 million proceeds from the
net assets sold equaled the book value of the net assets transferred to the
buyer. The operations sold included the book and publishing operations of the
former Seven Worldwide business that was acquired by the Company on January 31,
2005.
Net income increased to $13.8 million as compared to $13.4 million in the prior
year six month period partly as a result of lower losses from discontinued
operations in the current period as compared to the prior year.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2006, the Company had $5.3 million in consolidated cash and cash
equivalents, compared to $7.5 million at December 31, 2005. The Company finances
its business from available cash, a revolving credit facility and from cash
generated from operations.
CASH PROVIDED BY OPERATING ACTIVITIES. Cash provided from operations was $12.6
million in the first six months of 2006 compared to cash provided from
operations of $13.6 million in the first six months of 2005. Depreciation and
amortization expense in the first six months of 2006 was $12.5 million as
compared to $13.0 million in the first six months of the prior year. The
decrease in depreciation and amortization expense is primarily attributable to
the disposition of the book and publishing operations during the first quarter
of 2006.
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. Cash provided by investing
activities was $16.9 million in the first six months of 2006 compared to $208.4
million of cash used in investing activities during the first six months of
2005. The cash provided by investing activities in the first half of 2006
includes $26.3 million proceeds from the sale of the book and publishing
business during the first quarter. The cash used in investing activities in the
first half of 2005 reflects the acquisition of Seven Worldwide, net of cash
acquired, of $204.4 million. Capital expenditures were $12.8 million in the
first six months of 2006 compared to $7.5 million in the first six months of
2005. The increase in capital expenditures in 2006 is due in part to the
purchase of software and hardware for new accounting, costing and billing
systems and equipment for the Anthem design office in York, England, as well as
to the inclusion of capital expenditures of Seven Worldwide for an additional
month as compared to the prior year first half. Capital expenditures are
anticipated to be in a range of $22.0 million to $24.0 million for all of 2006.
26
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. Cash used in financing
activities in the first six months of 2006 was $32.4 million compared to $202.7
million of cash provided by financing activities during the first six months of
2005. The cash used in financing activities in the first half of 2006 reflects
the pay-down of the revolving credit facility with the $26.3 million proceeds
from the sale of the book and publishing operations in the first quarter of
2006. The cash provided by financing activities in the first half of 2005
includes $142.0 million of proceeds from new debt and $70.5 million of common
stock issued to finance the Seven Worldwide acquisition.
On February 3, 2006, certain stockholders of the Company sold 3,470,183 shares
of the Company's common stock in a public offering at $22.00 per share (before
discounts and commissions to underwriters), all of which shares were initially
issued to such stockholders in connection with the Company's acquisition of
Seven Worldwide in January 2005. On February 17, 2006, the Company sold 141,527
shares of common stock at $22.00 per share (before discounts and commissions to
underwriters) pursuant to a partial exercise of an underwriters' over-allotment
option granted by the Company in connection with the offering. The Company
received net proceeds of approximately $2.9 million from the sale of the
over-allotment shares. The Company used the net proceeds to repay indebtedness
under its revolving credit facility.
DIVIDENDS AND SHARE REPURCHASES. Dividend payments on common stock were $1.7
million for both the first six months of 2006 and 2005. It is anticipated that
the Company will continue to pay dividends at the current level for the
remainder of 2006. The Company repurchased $1.2 million of its shares during the
first six months of 2006, pursuant to a general authorization from its Board of
Directors.
REVOLVING CREDIT AGREEMENT AND OTHER INDEBTEDNESS. In January 2005, the Company
entered into a credit agreement with JPMorgan Chase Bank, N.A. The agreement
provides for a five year unsecured revolving credit facility of $100.0 million,
expandable to $125.0 million, with interest at LIBOR plus a margin based on the
Company's cash flow leverage ratio. This credit agreement replaced a $30.0
million unsecured credit agreement previously in place. On April 15, 2005, the
accordion feature of the credit agreement was utilized to increase the size of
the revolving credit commitment to $115.0 million from $100.0 million to provide
additional operating flexibility. $58.5 million was outstanding under the
agreement at June 30, 2006 and is included in Long-term debt on the June 30,
2006 Consolidated Balance Sheet. Also, in January 2005, the Company entered into
a Note Purchase and Private Shelf Agreement with Prudential Investment
Management Inc, pursuant to which the Company sold $50.0 million in a series of
three Senior Notes. The first note, in the amount of $10.0 million, will mature
in 2010 and bears interest at 4.81%. The second and third notes, each in the
amount of $20.0 million, mature in 2011 and 2012, respectively, and bear
interest at the rate of 4.99% and 5.17%, respectively. The total of these notes,
$50.0 million, is included in Long-term debt on the June 30, 2006 Consolidated
Balance Sheet.
In December of 2003, the Company entered into a private placement of debt to
provide long-term financing for acquisitions. The terms of the Note Purchase
Agreement relating to this transaction provided for the issuance and sale,
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
$15.0 million and bearing interest at 4.90%, which closed in December 2003; and,
2) Tranche B, due April 30, 2014, for $10.0 million and bearing interest at
4.98%, which closed in April 2004. The total debt of $25.0 million issued under
the private placement agreement is shown as Long Term Debt on the June 30, 2006
Consolidated Balance Sheet. Long-term debt decreased to $133.5 million at June
30, 2006 from $169.6 million at December 31, 2005 primarily as a result of
reducing the debt with the proceeds of the sale of the discontinued operations.
Management believes that the level of working capital is adequate for our
liquidity needs related to normal operations both currently and in the
foreseeable future, and that we have sufficient resources to support our growth,
either through currently available cash and cash generated from future
operations, or pursuant to our revolving credit facility.
SEASONALITY
With the acquisitions of Winnetts and Seven Worldwide, the seasonal fluctuations
in business on a combined basis generally result in lower revenues in the first
quarter as compared to the rest of the year ended December 31.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We do not have any material off-balance sheet arrangements that have, or are
reasonably likely to have, a current or future effect on our financial
condition, changes in financial condition, revenue or expenses, results of
operations, liquidity, capital expenditures or capital resources.
IMPACT OF INFLATION
We believe that over the past three years inflation has not had a significant
impact on our results of operations.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A discussion regarding market risk is disclosed in the Company's December 31,
2005 Form 10-K. There have been no material changes in information regarding
market risk relating to the Company's business on a consolidated basis since
December 31, 2005.
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.
CHANGE IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As disclosed in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2005, in January 2006, the Company implemented a new global
Enterprise Resource Planning ("ERP") system, PeopleSoft. This new PeopleSoft ERP
system, which replaced multiple legacy financial systems with a single,
standardized, integrated financial system, became the Company's primary
financial system beginning in January 2006. As a result of the implementation of
this new ERP system, several of the Company's internal controls over financial
reporting and related processes were modified and / or redesigned to conform
with and support the new ERP system. The Company also has plans to undertake
additional projects that will replace other Company financial systems around the
globe, and in particular in the Company's operations in the United Kingdom,
throughout the remainder of fiscal 2006 and extending into fiscal 2007.
Although management believes that the new PeopleSoft ERP system has maintained
or enhanced the Company's internal controls over financial reporting, management
has yet to complete documenting and testing the effectiveness of the new ERP
system's impact on the internal control environment for fiscal 2006. As such,
there is the risk that the new ERP system and / or new internal controls have
yet unidentified deficiencies that could constitute significant deficiencies,
material weaknesses or aggregate to material weaknesses in the Company's
internal control over financial reporting. Management anticipates testing the
new system and the new internal controls during fiscal 2006 as part of its
ongoing testing of the Company's internal controls.
28
PART II - OTHER INFORMATION
ITEMS 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 1A. RISK FACTORS
The Company has included in Part I, Item 1A of its Annual Report on Form 10-K
for the year ended December 31, 2005, a description of certain risks and
uncertainties that could affect the Company's business, future performance or
financial condition (the "Risk Factors".) The Risk Factors are hereby
incorporated in Part II, Item 1A of this Form 10-Q. Investors should consider
the Risk Factors prior to making an investment decision with respect to the
Company's stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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. As in prior years, the current general authorization allows
the Company to repurchase up to $2 million in shares of Company common stock in
the open market per year. As of June 30, 2006, the Company had purchased $1.2
million (62,500 shares) of its common stock pursuant to this general
authorization since the beginning of the year. In addition, shares of common
stock are occasionally tendered to the Company by certain employee and director
stockholders in payment of stock options exercised. The Company records the
receipt of common stock in payment for stock options exercised as a purchase of
treasury stock.
The following table summarizes the shares repurchased by the Company during the
first six months of 2006:
Total No. No. Shares Purchased
Shares Avg. Price as Part of Publicly
Period Purchased Paid Per Share Announced Program
- -------- --------- -------------- --------------------
January -- -- --
February -- -- --
March 1,781 $ 23.15 --
April -- -- --
May 62,500 $ 18.90 --
June -- -- --
------ -------------- ---
Total 64,281 $ 19.02 --
====== ============== ===
29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 17, 2006, the Company held its annual stockholders' meeting. There were
26,428,523 shares of Class A common stock outstanding entitled to vote, and a
total of 25,539,975 (96.6%) 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 WITHHELD
- ----------------------- ---------- ---------
Clarence W. Schawk 21,163,636 4,376,339
David A. Schawk 21,916,403 3,623,572
A. Alex Sarkisian, Esq. 21,881,033 3,658,942
Leonard S. Caronia 21,742,167 3,797,808
Judith W. McCue, Esq. 21,347,816 4,192,159
Hollis W. Rademacher 25,310,774 229,201
John T. McEnroe, Esq. 21,841,853 3,698,122
Christopher Lacovara 21,847,916 3,692,059
PROPOSAL 2: APPROVAL OF CERTAIN 2005 CASH-BASED LONG-TERM PERFORMANCE AWARDS:
For Against Abstain Non-votes
- ---------- ------- ------- ---------
20,673,974 145,990 55,385 4,664,626
PROPOSAL 3: APPROVAL OF SCHAWK INC 2006 LONG-TERM INCENTIVE PLAN:
For Against Abstain Non-votes
- ---------- ------- ------- ---------
19,923,482 897,864 54,003 4,664,626
PROPOSAL 4: RATIFICATION OF ERNST & YOUNG AS INDEPENDENT AUDITORS FOR FISCAL
YEAR 2006:
For Against Abstain Non-votes
- ---------- ------- ------- ---------
24,975,169 552,676 12,130 --
ITEM 6. EXHIBITS
A. EXHIBITS
EXHIBIT # DESCRIPTION
- --------- --------------------------------------------------------------
3.1 Certificate of Incorporation of Schawk, Inc., as amended.
Incorporated herein by reference to Exhibit 4.2 to
Registration Statement No. 333-39113.
3.3 By-Laws of Schawk, Inc., as amended. Incorporated herein by
reference to Exhibit 4.3 to Registration Statement No.
333-39113.
4.1 Specimen Class A Common Stock Certificate. Incorporated herein
by reference to Exhibit 4.1 to Registration Statement No.
33-85152.
10.1 Schawk Inc. 2006 Long-Term Incentive Plan. Incorporated herein
by reference to the Company's Proxy Statement for the 2006
Annual Meeting of Stockholders as filed with the SEC on April
21, 2006 (file no. 001-09335).
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the
30
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 *
- ----------
* Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 8th day of August 2006.
SCHAWK, INC.
- ------------
(Registrant)
/s/ David A. Schawk
- -----------------------------------------------
President, Chief Executive Officer and Director
/s/ James J. Patterson
- -------------------------------------------------
Senior Vice President and Chief Financial Officer
31