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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 September 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 October
31, 2006, was 26,470,860.
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SCHAWK, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
September 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 6. Exhibits 30
Signatures
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Schawk, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 7,284 $ 7,519
Trade accounts receivable, less allowance for doubtful accounts
of $5,166 at September 30, 2006 and $5,940 at December 31, 2005 125,200 117,723
Inventories 28,202 24,868
Prepaid expenses and other current assets 11,163 9,701
Deferred income taxes 15,452 9,845
Assets of discontinued operations -- 29,253
-------- --------
Total current assets 187,301 198,909
Property and equipment, less accumulated depreciation of $86,643 at
September 30, 2006 and $74,506 at December 31, 2005 75,487 77,291
Goodwill 247,671 233,838
Intangible assets, net 35,263 42,223
Other assets 5,325 6,557
-------- --------
Total assets $551,047 $558,818
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 20,238 $ 27,776
Accrued expenses 52,398 61,967
Income taxes payable 22,756 6,367
Current portion of long-term debt and capital lease obligations 58 454
Liabilities of discontinued operations -- 8,208
-------- --------
Total current liabilities 95,450 104,772
Long-term debt 151,414 169,528
Capital lease obligations 39 51
Other liabilities 19,939 27,383
Deferred income taxes 25,563 25,688
Stockholders' equity:
Common stock, $0.008 par value, 40,000,000 shares authorized,
28,905,094 and 28,441,689 shares issued at September 30, 2006
and December 31, 2005, respectively; 26,470,854 and 26,070,747
shares outstanding at September 30, 2006 and December 31, 2005,
respectively 229 225
Additional paid-in capital 176,716 168,777
Retained earnings 107,739 88,424
Accumulated comprehensive income 3,124 1,933
-------- --------
287,808 259,359
Treasury stock, at cost, 2,434,240 and 2,370,942 shares of common
stock at September 30, 2006 and December 31, 2005, respectively (29,166) (27,963)
-------- --------
Total stockholders' equity 258,642 231,396
-------- --------
Total liabilities and stockholders' equity $551,047 $558,818
======== ========
See accompanying notes.
3
Schawk, Inc.
Consolidated Statements of Operations
Three Months Ended September 30, 2006 and 2005
(Unaudited)
(In Thousands, Except Share Amounts)
2006 2005
-------- --------
Net sales $134,779 $151,644
Cost of sales 86,430 98,270
Selling, general, and administrative expenses 32,546 36,419
Acquisition integration expenses -- 1,971
-------- --------
Operating income 15,803 14,984
Other income (expense)
Interest income 84 103
Interest expense (2,720) (2,180)
Other income (expense) -- 12
-------- --------
(2,636) (2,065)
-------- --------
Income from continuing operations before income taxes 13,167 12,919
Income tax provision 4,961 4,763
-------- --------
Income from continuing operations 8,206 8,156
Income (loss) from discontinued operations, net of tax
(benefit) expense of ($1)
in 2006 and $374 in 2005 (Note 11) (57) 604
-------- --------
Net income $ 8,149 $ 8,760
======== ========
Earnings per share:
Basic:
Income from continuing operations $ 0.31 $ 0.31
Income (loss) from discontinued operations -- 0.03
-------- --------
Net income per common share $ 0.31 $ 0.34
======== ========
Diluted:
Income from continuing operations $ 0.30 $ 0.29
Income (loss) from discontinued operations -- 0.03
-------- --------
Net income per common share $ 0.30 $ 0.32
======== ========
Weighted average number of common and common equivalent
shares outstanding:
Basic 26,446 26,111
Diluted 27,496 27,705
Dividends per common share $ 0.0325 $ 0.0325
See accompanying notes
4
Schawk, Inc.
Consolidated Statements of Operations
Nine Months Ended September 30, 2006 and 2005
(Unaudited)
(In Thousands, Except Share Amounts)
2006 2005
-------- --------
Net sales $408,628 $416,053
Cost of sales 264,807 270,161
Selling, general, and administrative expenses 101,527 101,094
Acquisition integration expenses 758 3,772
Reserve reversal from litigation settlement (2,120) --
-------- --------
Operating income 43,656 41,026
Other income (expense)
Interest income 280 254
Interest expense (8,039) (5,958)
Other income (expense) -- 498
-------- --------
(7,759) (5,206)
-------- --------
Income from continuing operations before income taxes 35,897 35,820
Income tax provision 13,550 13,425
-------- --------
Income from continuing operations 22,347 22,395
Loss from discontinued operations, net of tax benefit
of $241 in 2006 and $135 in 2005 (Note 11) (446) (219)
-------- --------
Net income $ 21,901 $ 22,176
======== ========
Earnings per share:
Basic:
Income from continuing operations $ 0.85 $ 0.89
Loss from discontinued operations (0.02) (0.01)
-------- --------
Net income per common share $ 0.83 $ 0.88
======== ========
Diluted:
Income from continuing operations $ 0.81 $ 0.84
Loss from discontinued operations (0.02) (0.01)
-------- --------
Net income per common share $ 0.79 $ 0.83
======== ========
Weighted average number of common and common equivalent
shares outstanding:
Basic 26,357 25,334
Diluted 27,682 26,761
Dividends per common share $ 0.0975 $ 0.0975
See accompanying notes
5
Schawk, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2006 and 2005
(Unaudited)
(In Thousands)
2006 2005
-------- ---------
OPERATING ACTIVITIES
Net income $ 21,901 $ 22,176
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 18,387 20,100
Deferred income taxes (5,554) 151
Reserve reversal from litigation settlement (2,120) --
Share-based compensation expense 735 --
Tax benefit from stock options exercised (1,289) 1,524
Loss (gain) realized on sale of property and equipment (297) 187
Changes in operating assets and liabilities, net of
effects from acquisitions and dispositions:
Trade accounts receivable (2,625) (10,082)
Inventories (2,555) (2,625)
Prepaid expenses and other current assets 754 (777)
Trade accounts payable and accrued expenses (23,659) (18,666)
Other liabilities (11,071) (2,700)
Income taxes refundable/payable 18,476 4,890
-------- ---------
Net cash provided by operating activities 11,083 14,178
INVESTING ACTIVITIES
Proceeds from sales of property and equipment 4,125 2,523
Proceeds from sale of business 26,279 --
Capital expenditures (18,039) (14,554)
Acquisitions, net of cash acquired (7,758) (204,453)
Contingent acquisition purchase price received from
escrow account -- 890
Other (55) (280)
-------- ---------
Net cash provided by (used in) investing activities 4,552 (215,874)
FINANCING ACTIVITIES
Proceeds from debt -- 151,180
Net principal payments on revolving credit agreement (18,460) (15,730)
Principal payments on capital lease obligations (443) (577)
Tax benefit from stock options exercised 1,289 --
Payment of deferred loan fees -- (636)
Common stock dividends (2,567) (2,525)
Purchase of common stock (1,223) (726)
Issuance of common stock 5,921 74,438
-------- ---------
Net cash provided by (used in) financing activities (15,483) 205,424
-------- ---------
Effect of foreign currency rate changes (387) (932)
-------- ---------
Net increase (decrease) in cash and cash equivalents (235) 2,796
Cash and cash equivalents beginning of period 7,519 7,268
-------- ---------
Cash and cash equivalents end of period $ 7,284 $ 10,064
======== =========
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 management of 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 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:
September 30, December 31,
2006 2005
------------- ------------
Raw materials $ 4,492 $ 4,662
Work in process 24,768 21,264
------- -------
29,260 25,926
Less: LIFO reserve (1,058) (1,058)
------- -------
$28,202 $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 (stock
options) outstanding for the period. There were no reconciling items to net
income to arrive at income available to common stockholders.
The following table sets forth the number of common and common stock equivalent
shares used in the computation of basic and diluted earnings per share:
Three months ended September 30,
--------------------------------
2006 2005
------ ------
Weighted average shares-Basic 26,446 26,111
Effect of dilutive stock options 1,050 1,594
------ ------
Adjusted weighted average shares and
assumed conversions-Diluted 27,496 27,705
====== ======
Nine months ended September 30,
-------------------------------
2006 2005
------ ------
Weighted average shares-Basic 26,357 25,334
Effect of dilutive stock options 1,325 1,427
------ ------
Adjusted weighted average shares and
assumed conversions-Diluted 27,682 26,761
====== ======
NOTE 6. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the three and
nine months ended September 30, 2006 and 2005, respectively, are as follows:
Three months ended September 30,
--------------------------------
2006 2005
------ ------
Net income $8,149 $8,760
Foreign currency translation adjustments 374 115
------ ------
Comprehensive income $8,523 $8,875
====== ======
Nine months ended September 30,
-------------------------------
2006 2005
------- -------
Net income $21,901 $22,176
Foreign currency translation adjustments 1,191 (977)
------- -------
Comprehensive income $23,092 $21,199
======= =======
NOTE 7. 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
8
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 nine month periods ended September, 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. Compensation expense during the three and nine month periods ended
September 30, 2006 for share-based awards granted subsequent to January 1, 2006
is based on the grant date fair value estimated in accordance with the
provisions of SFAS 123(R) and is 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
September 30, 2006 are $182 and $113 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 September 30, 2006 as a result of adopting Statement 123(R). For
the nine month period ended September 30, 2006, the Company's income before
income taxes and net income are $756 and $470 lower, respectively, than if it
had continued to account for share-based compensation under APB 25. Basic and
diluted earnings per share for the nine month period ended September 30, 2006
were both $0.02 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.
During the three month period ended September 30, 2006, the Company issued 119
stock options and 25 restricted shares under the 2006 Plan. No share-based
awards had been issued under the 2006 Plan prior to the September quarter.
OPTIONS
The Company has granted stock options under several share-based compensation
plans. 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. As discussed above, the Company's 2006 Long-Term
Incentive Plan provides for the issuance of stock options, along with other
types of share-based awards. Options granted under all 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.
Options granted prior to December 31, 2005 vest over a two-year period; options
granted in 2006 vest over a three-year period.
The Company recorded $161 and $735 of compensation expense relating to
outstanding options during the three and nine month periods ended September 30,
2006, respectively. No compensation expense was recorded related to outstanding
options during the three and nine periods ended September 30, 2005.
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.
The following assumptions were used to estimate the fair value of options
granted during the nine month periods ended September 30, 2006 and September 30,
2005, using the Black-Scholes option-pricing model:
9
Nine Months ended September 30,
-------------------------------
2006 2005
--------- ---------------
Expected dividend yield 0.76% 0.70%
Expected stock price volatility 27.40% 19.78% - 20.34%
Risk-free interest rate range 4.83% 4.0%
Weighted-average expected life of options 6 years 7 years
Forfeiture rate 2.65% na
Total fair value of options granted $711 $3,057
The following table summarizes the Company's activities with respect to its
stock option plans for the first nine 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 119 $17.43
Exercised (254) $10.42
Cancelled --
-----
Outstanding September 30, 2006 3,198 $11.95 5.50 $20,037
Vested at September 30, 2006 2,889 $11.38 5.08 $19,754
Exercisable at September 30, 2006 2,889 $11.38 5.08 $19,754
The weighted-average grant-date fair value of options granted during the three
and nine month periods ended September 30, 2006 was $5.95 for both periods.
There were no options granted during the three month period ended September 30,
2005. The weighted-average grant-date fair value of options granted during the
nine month period ended September 30, 2005 was $5.48. The total intrinsic value
for options exercised during the three and nine month periods ended September
30, 2006 was $10 and $3,374, respectively. The total intrinsic value for options
exercised during the three and nine month periods ended September 30, 2005 was
$733 and $3,999, respectively.
Cash received from option exercises under all plans for the three and nine month
periods ended September 30, 2006 was approximately $9 and $2,608, respectively.
Cash received from option exercises under all plans for the three and nine month
periods ended September 30, 2005 was approximately $737 and $2,823,
respectively. The actual tax benefit realized for the tax deductions from option
exercises under all plans totaled approximately $11 and $1,289, respectively,
for the three and nine month periods ended September 30, 2006. The actual tax
benefit realized for the tax deductions from option exercises under all plans
totaled approximately $23 and $1,524, respectively, for the three and nine month
periods ended September 30, 2005.
As of September 30, 2006, there was $921 of total unrecognized compensation cost
related to nonvested options outstanding. That cost is expected to be recognized
over a weighted average period of 2 years. A summary of the Company's nonvested
option activity for the nine months ended September 30, 2006 is as follows (in
thousands, except price per share and contractual term):
Weighted
Average
Number of Grant Date
Shares Per Share
--------- ----------
Nonvested at January 1, 2006 570 $4.85
Granted 119 $5.95
Vested (380) $4.54
Forfeited --
----
Nonvested at September 30, 2006 309 $5.67
====
10
RESTRICTED STOCK
As discussed above, the Company's 2006 Long-Term Incentive Plan provides for the
grant of various types of share-based awards, including restricted stock. During
the three month period ended September 30, 2006, the Company granted 25 shares
of restricted stock pursuant to this plan. Restricted shares are valued at the
price of the common stock on the date of grant and vest at the end of a three
year period. During the vesting period the participant has the rights of a
shareholder in terms of voting and dividend rights but is restricted from
transferring the shares. The expense is recorded on a straight-line basis over
the vesting period.
The Company recorded $20 of compensation expense relating to restricted stock
during the three and nine month periods ended September 30, 2006. No
compensation expense was recorded related to restricted stock during the three
and nine month periods ended September 30, 2005.
A summary of the restricted share activity for the nine month period ended
September 30, 2006 is presented below:
Weighted
Average
Number of Grant Date
Shares Fair Value
--------- ----------
Outstanding at January 1, 2006 -- --
Granted 25 $17.43
Forfeited --
---
Outstanding at September 30, 2006 25 $17.43
===
As of September 30, 2006, there was $412 of total unrecognized compensation cost
related to the outstanding restricted shares that will be recognized over a
weighted average period of 3 years.
EMPLOYEE SHARE-BASED COMPENSATION EXPENSE
The table below shows the amounts recognized in the financial statements for the
three month and nine month periods ended September 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 Nine Months Ended
September 30, 2006 September 30, 2006
------------------ ------------------
Total cost of share-based compensation $ 182 $ 756
Income tax (69) (286)
----- -----
Amount charged against income $ 113 $ 470
===== =====
Impact on net income per common share:
Basic $0.00 $0.02
Diluted $0.00 $0.02
There were no amounts related to employee share-based compensation capitalized
as assets during the three months or nine months ended September 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):
11
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2005
------------------ ------------------
Net income, as reported $8,760 $22,176
Less: Total stock-based employee compensation
expense determined under fair
value based method for all awards,
net of related tax effects (259) (1,249)
------ -------
Net income, pro forma $8,501 $20,927
====== =======
Earnings per share
Basic $ 0.34 $ 0.88
Diluted $ 0.32 $ 0.83
Pro forma earnings per share
Basic $ 0.33 $ 0.83
Diluted $ 0.31 $ 0.78
NOTE 8. ACQUISITIONS
WBK, INC
On July 1, 2006, the Company acquired the operating assets of WBK, Inc., a
Cincinnati, Ohio-based design agency that provides services to retailers and
consumer products companies. The results of operations of WBK, Inc. are included
in the Consolidated Statement of Operations beginning July 1, 2006. 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
goodwill is expected to be deductible as an operating expense for tax purposes.
The purchase price of $4,850 consisted of $4,813 paid in cash to the seller and
$37 of acquisition-related professional fees. The Company has recorded a
preliminary purchase price allocation based upon a tangible and intangible asset
appraisal that is in progress and will adjust the allocation as needed upon
completion of the appraisal. A summary of the preliminary estimated fair values
assigned to the acquired assets is as follows:
Trade accounts receivable $ 747
Other current assets 10
Fixed assets 66
Customer relationship intangible asset 500
Goodwill 3,821
Accounts payable (168)
Other current liabilities (126)
------
Total purchase price $4,850
The weighted-average amortization period of the estimated customer relationship
intangible asset is expected to be five years. The intangible asset amortization
expense was $25 for the three month period ended September 30, 2006, and will be
approximately $100 annually for the twelve month periods ending September 30,
2007 through September 30, 2010 and $75 for the twelve month period ending
September 30, 2011.
The Company does not expect to incur any merger integration or exit costs in
connection with this acquisition. Supplemental pro-forma information is not
presented because the acquisition is considered to be immaterial to the
Company's consolidated results of operations.
SCHAWK INDIA, LTD.
The Company had previously acquired 50 percent of a company currently known as
Schawk India, Ltd. in February 2005
12
as part of its acquisition of Seven Worldwide, Inc. On July 1, 2006, the Company
increased its ownership of Schawk India, Ltd. to 90 percent. Schawk India, Ltd.
provides artwork management, premedia and print management services. The results
of operations of Schawk India, Ltd., net of minority interest, are included in
the Consolidated Statement of Operations beginning July 1, 2006. Prior to July
1, 2006, the Company included its 50 percent share of Schawk India, Ltd. net
income in its results of operations using the equity method of accounting. 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
goodwill is not expected to be deductible as an operating expense for tax
purposes.
The purchase price of the additional 40 percent of Schawk India, Ltd. acquired
on July 1, 2006 was $2,371, consisting of $2,345 paid at closing and $26 of
acquisition-related professional fees. The Company previously had recorded an
equity-method investment in the India joint venture of $71, bringing the total
investment to $2,442 as of July 1, 2006. The Company has completed a purchase
price allocation based upon an internal assessment of tangible and intangible
assets. A summary of the fair values assigned to the acquired assets is as
follows:
Cash $ 151
Trade accounts receivable 104
Other current assets 71
Fixed assets 136
Goodwill 2,340
Other assets 2
Accounts payable (14)
Other current liabilities (30)
Long-term debt (303)
Minority interest (15)
------
Total fair value of assets $2,442
Less equity method prior investment (71)
Less cash received (151)
------
Net cash purchase price $2,220
The Company does not expect to incur any merger integration or exit costs in
connection with this acquisition. Supplemental pro-forma information is not
presented because the acquisition is considered to be immaterial to the
Company's consolidated results of operations.
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 11 - Discontinued Operations.
13
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 September 30, 2006 reserve balance
related to employee severance will be paid during the next fiscal year. 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 September 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
======= ====== ======= =======
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
====== === ======= ======
14
Balance Balance
June 30, September 30,
2006 Adjustments Payments 2006
-------- ----------- -------- -------------
Employee severance $ 969 -- ($457) $ 512
Facility closure cost 5,654 -- (448) 5,206
------ --- ----- ------
Total $6,623 -- ($905) $5,718
====== === ===== ======
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. This adjustment
was recorded in the operating expense section of the Consolidated Statement of
Operations for the nine month period ended September 30, 2006. See Footnote 12.
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. The results of operations of Winnetts since the date of
acquisition are included in the Consolidated Statement of Operations.
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 nine months of 2006:
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
====== ==== ======= ======
15
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
====== === ===== ======
Balance Balance
June 30, September 30,
2006 Adjustments Payments 2006
-------- ----------- -------- -------------
Employee severance $ -- -- $ -- $ --
Facility closure cost 1,176 -- (60) 1,116
------ --- ----- ------
Total $1,176 -- ($60) $1,116
====== === ===== ======
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 nine month period ended September 30, 2006,
the Company recorded acquisition integration expenses of $758, which are shown
on a separate line in the operating expense section of the Consolidated
Statement of Operations for the period ended September 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 nine month period ended September 30, 2006 the Company paid $688 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.
16
NOTE 9. 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 September 30, 2006, $76,414 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 September 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
September 30, 2006 Consolidated Balance Sheet. The notes issued under both these
agreements are unsecured.
The borrowings under these agreements are subject to certain restrictive
covenants. The Company is in compliance with all covenants as of September 30,
2006.
NOTE 10. 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:
Sept 30, Dec 31, Weighted
2006 2005 Average Life
-------- ------- ------------
Customer relationships $39,434 $43,934 15.1 years
Digital Images 914 882 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 308 157 2.0 years
------- -------
42,375 46,742 14.4 years
Accumulated amortization (7,112) (4,519)
------- -------
$35,263 $42,223
Amortization expense related to intangible assets was $876 and $2,593 for the
three month and nine month periods ended September 30, 2006, respectively,
compared to $1,114 and $2,912 for the three month and nine month periods ended
September 30, 2005, respectively. Amortization expense for each of the next five
fiscal years beginning October 1, 2006 is expected to be approximately $3,300
for fiscal year 2007, $3,000 for fiscal year 2008, $2,800 for fiscal years 2009
and 2010 and $2,500 for fiscal year 2011.
NOTE 11. 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 $28,184. $26,279 was received at
closing and $1,905, representing a working capital adjustment, was received in
October 2006. No gain or loss was recorded as a result of the sale.
17
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 nine month periods ended September 30, 2006
and 2005 are as follows:
Three Months Three Months
Ended Ended
September September
30, 2006 30, 2005
------------ ------------
Revenues $ -- $13,699
==== =======
Income (loss) from operations
before income taxes $(58) $ 978
==== =======
Nine Months Nine Months
Ended Ended
September September
30, 2006 30, 2005
----------- -----------
Revenues $8,465 $38,689
====== =======
Loss from operations before income taxes $ (687) $ (354)
====== =======
The carrying amounts of the major classes of assets and liabilities sold were as
follows:
Current assets $16,189
Other non-current assets 2,303
Intangible assets 15,327
-------
Assets of discontinued operations $33,819
=======
Current liabilities $ 5,635
-------
Liabilities of discontinued operations $ 5,635
=======
NOTE 12. RESERVE REVERSAL FROM LITIGATION SETTLEMENT
Included in the operating expense section of the Consolidated Statement of
Operations for the nine month period ended September 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.
NOTE 13. 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 currently evaluating the
impact of FIN 48.
18
NOTE 14. SUBSEQUENT EVENTS
The integration of its two recent major acquisitions, Winnetts and Seven
Worldwide, continues to be a major focus of the Company. A restructuring charge,
estimated to be $1.3 million to $2.2 million, is anticipated for the fourth
quarter of 2006. The major component of the restructuring plan will be employee
severance payments at certain of the Company's European operations.
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 to $135 million in the third quarter of 2006 from $152
million in the third quarter of 2005. The earnings per share was $0.30 per fully
diluted earnings per share in the third quarter of 2006 as compared to $0.32
earnings per fully diluted share in the third quarter of 2005.
In the 2006 third quarter, entertainment account revenue was $4.1 million lower
than in the previous year's third quarter. Additionally, revenue from the
Company's largest retail account was $3.3 million lower in the 2006 third
quarter than in the previous year's third quarter, consistent with this client's
previously announced intention to reduce overall advertising spending in 2006.
The Company expects sales to this client will be lower by $3 to $4 million in
the fourth quarter compared to the prior-year fourth quarter unless the client
increases advertising spending.
Additionally, revenues from the East Coast facility that was closed in June 2006
were $2.4 million lower in the third quarter of 2006 compared to the prior
period, as these accounts were sold along with the discontinued operations on
February 28, 2006. The Company also experienced weakness in its European
operations, where sales were down $1.7 million in the quarter. The balance of
the decrease in sales from continuing operations in the third quarter of 2006
was due to softness in North American consumer products packaging accounts and
advertising accounts. Exacerbating the decline in sales in the third quarter was
the fact that certain new business wins from earlier in the year did not
contribute to the period's revenue as much as anticipated. The Company expects
to see more revenue from this new business in the fourth quarter of 2006.
Marketing and advertising spending by consumer products companies and retailers
drives a majority of our revenues. 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 freestanding 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:
19
- Planning and Messaging
- Strategic Design
- 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 $28,184. $26,279 was received at closing and
$1,905, representing a working capital adjustment, was received in October 2006.
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 nine months of 2006 as compared to the first nine months of 2005
approximately 8% and 9%, respectively, of our total revenues came from our
largest single client in the respective period. Our single largest client for
the first nine months of 2006 reduced its business with us by $7.5 million as
compared to the first nine months 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
20
our business relationship with any of our principal clients could have a
material adverse effect on our business, financial condition and results of
operations.
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 large 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
$0.8 million for the nine month period ended September 30, 2006. 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. We also anticipate a restructuring charge, estimated at $1.3 million to
$2.2 million, in the fourth quarter of 2006 related to employee severance at
certain of our European operations. In connection with the sale of the book and
publishing operations we received $26.3 million at closing on March 6, 2006 that
we used to reduce the amount outstanding on our revolving credit facility.
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
21
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
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. Federal, state and
foreign tax authorities regularly audit us, like other multi-national
companies,, 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
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. 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
September 30, 2006 are $182 and $113 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 September 30, 2006 as a result of adopting Statement 123(R). For
the nine month period ended September 30, 2006, the Company's income before
income taxes and net income are $756 and $470 lower, respectively, than if it
had continued to account for share-based compensation under Opinion 25. Basic
and diluted earnings per share for the nine month period ended September 30,
2006 were both $0.02 lower than if the Company had continued to account for
share-based compensation under Opinion 25.
22
Determining the appropriate fair value model and calculating the fair value of
share-based payment awards require the 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 7 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 SEPTEMBER 30, 2006 AND 2005
UNAUDITED
(IN THOUSANDS)
2006 2005 $ CHANGE % CHANGE
-------- -------- -------- --------
Net sales $134,779 $151,644 ($16,865) (11.1%)
Cost of sales 86,430 98,270 (11,840) (12.0%)
-------- -------- --------
Gross profit 48,349 53,374 (5,025) (9.4%)
Gross margin percentage 35.9% 35.2%
Selling, general and administrative expenses 32,546 36,419 (3,873) (10.6%)
Acquisition integration expenses -- 1,971 (1,971) nm
-------- -------- --------
Operating income 15,803 14,984 819 5.5%
Operating margin percentage 11.7% 9.9%
Other income (expense)
Interest income 84 103 (19) (18.4%)
Interest expense (2,720) (2,180) 540 24.8%
Other income (expense) -- 12 (12) nm
-------- -------- --------
(2,636) (2,065) 571 27.7%
-------- -------- --------
Income from continuing operations before income taxes 13,167 12,919 248 1.9%
Income tax provision 4,961 4,763 198 4.2%
Effective income tax rate 37.7% 36.9%
-------- -------- --------
Income from continuing operations 8,206 8,156 50 0.6%
Income (loss) on discontinued operations, net of tax
(benefit) expense of ($1) in 2006 and $374 in 2005
(note 11) (57) 604 (661) nm
-------- -------- --------
Net income $ 8,149 $ 8,760 ($611) (7.0%)
======== ======== ======== =====
23
nm = not meaningful
THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2005
Net sales decreased $16.9 million or 11.1% in the third quarter of 2006 as
compared to the third quarter of the prior year. Entertainment account revenue
was $4.1 million lower than in the previous year's third quarter. Additionally,
revenue from the Company's largest retail account was $3.3 million lower in the
2006 third quarter than in the previous year's third quarter, consistent with
this client's previously announced intention to reduce overall advertising
spending in 2006. The Company expects sales to this client will be lower by $3
to $4 million in the fourth quarter compared to the prior-year fourth quarter
unless the client increases advertising spending. Additionally, revenues from
the East Coast facility that was closed in June 2006 were $2.4 million lower in
the third quarter of 2006, as these accounts were sold along with the
discontinued operations on February 28, 2006. The Company also experienced
weakness in its European operations, where sales were down $1.7 million in the
quarter. The balance of the decrease in sales from continuing operations in the
third quarter of 2006 was due to softness in North American consumer products
packaging accounts and advertising accounts. Exacerbating the decline in sales
in the third quarter was the fact that certain new business wins from earlier in
the year did not contribute to the period's revenue as much as anticipated. The
Company expects to see more revenue from this new business in the fourth quarter
of 2006.
Gross margin increased to 35.9 percent in the third quarter of 2006 from 35.2
percent in the prior year third quarter. The increase in gross margin was
primarily due to cost reduction efforts at certain operating locations.
Operating income for the third quarter of 2006 increased 5.5% to $15.8 million
compared to $15.0 million in the third quarter of 2006. The Company's overall
operating margin percentage increased to 11.7% in the third quarter of 2006
compared to 9.9% in the third quarter of 2005 primarily due to a reduction in
selling, general and administrative expenses and acquisition integration
expenses recorded in 2005, partially offset by lower net sales. Selling, general
and administrative expenses were lower primarily as a result of realizing
synergies from the consolidation of duplicate facilities arising from the
acquisitions of Seven Worldwide and Winnetts. Operating income was negatively
impacted by lower than anticipated sales, operating losses of approximately $0.4
million at the East Coast facility and stock option expenses of $0.2 million as
compared to the prior year. The East Coast facility was closed June 30 and
certain client accounts were moved to other locations.
Other income (expense) resulted in a net other expense of $2.6 million in the
third quarter of 2006 compared to a net other expense of $2.1 million in the
third quarter of 2005. Interest expense of $2.7 million for the third quarter of
2006 increased $0.5 million compared to the same period in 2005. The increase in
interest expense was from a combination of higher short-term borrowing rates and
the amortization of the present value discount related to vacant property
reserves included in the Seven Worldwide acquisition.
Income tax expense for the third quarter of 2006 was at an effective tax rate of
37.7% compared to an effective tax rate in the third quarter of 2005 of 36.9%.
The increase in the effective tax rate was due to higher profits in higher tax
jurisdictions than in the prior-year third quarter.
Income from continuing operations was higher in the third quarter of 2006 as
compared to the third quarter of 2005 for the reasons previously described.
Income (loss) from discontinued operations was ($0.06) million and $0.6 million
for the quarters ended September 30, 2006 and 2005, respectively.
Net income decreased to $8.1 million in the third quarter of 2006 compared to
$8.8 million in the third quarter of 2005 for the reasons described above.
24
SCHAWK, INC.
COMPARATIVE CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
UNAUDITED
(IN THOUSANDS)
$ %
2006 2005 CHANGE CHANGE
-------- -------- ------- ------
Net sales $408,628 $416,053 ($7,425) (1.8%)
Cost of sales 264,807 270,161 (5,354) (2.0%)
-------- -------- -------
Gross profit 143,821 145,892 (2,071) (1.4%)
Gross margin percentage 35.2% 35.1%
Selling, general and administrative expenses 101,527 101,094 433 0.4%
Acquisition integration expenses 758 3,772 (3,014) (79.9%)
Reserve reversal from litigation settlement (2,120) -- (2,120) nm
-------- -------- -------
Operating income 43,656 41,026 2,630 6.4%
Operating margin percentage 10.7% 9.9%
Other income (expense)
Interest income 280 254 26 10.2%
Interest expense (8,039) (5,958) 2,081 34.9%
Other income (expense) -- 498 (498) nm
-------- -------- -------
(7,759) (5,206) 2,553 49.0%
-------- -------- -------
Income from continuing operations before income taxes 35,897 35,820 77 0.2%
Income tax provision 13,550 13,425 125 0.9%
Effective income tax rate 37.7% 37.5%
-------- -------- -------
Income from continuing operations 22,347 22,395 (48) (0.2%)
Loss on discontinued operations, net of tax benefit
of $241 in 2006 and $135 in 2005 (note 11) (446) (219) 227 nm
-------- -------- -------
Net income $ 21,901 $ 22,176 ($ 275) (1.2%)
======== ======== ======= ====
nm = not meaningful
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2005
Net sales decreased 1.8% to $408.6 million compared to $416.1 million for the
same period of the prior year, primarily due to a decline in sales to the
Company's advertising and entertainment accounts, the reduction in overall
advertising spending by the Company's largest retail client, lost revenue from
resigned accounts at closed or sold facilities, and lower advertising account
revenues due to lower spending levels on promotions compared to the nine months
of 2005. Additionally, the acquisition of Seven Worldwide occurred at the end of
January 2005. Therefore first-nine months 2005 results did not include Seven's
month of January 2005 revenues and expenses. Seven contributed approximately
$19.8 million of acquisition revenues from continuing operations in January
2006, increasing revenues for the first nine months of 2006. Excluding the $19.8
million of revenue in the month of January 2006 to make the periods comparable
on a pro forma basis, sales from continuing operations decreased 6.6% from
$416.1 million in 2005 to $388.8 million in 2006.
25
Gross margin for the first nine months of 2006 of 35.2% stayed approximately the
same as compared to 35.1% in the first nine months of 2005.
Operating income for the nine months ended September 30, 2006 increased 6.4% to
$43.7 million compared to $41.0 million for the nine months ended September 30,
2005. The Company's overall operating margin percentage increased to 10.7% for
the first nine months of 2006 compared to 9.9% in comparable 2005 period
primarily due to the reversal of a litigation reserve and lower acquisition
integration expenses recorded in 2006. The increase in operating income was
primarily due to the reversal of a litigation reserve (discussed below) and
lower acquisition integration expenses. 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 $0.8 million as compared to the prior year. The most
significant items impacting operating income was lower overall sales as
discussed above and a loss from our East Coast operation acquired in the
acquisition of Seven Worldwide. This operation was closed in June of 2006.
The reserve reversal from litigation settlement referenced above resulted from
the reversal of an accrual that 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 nine months ended September 30, 2006 resulted in
a net expense of $7.8 million compared to $5.2 million of net expense in the
comparable 2005 period. Interest expense of $8.0 million for the first nine
months of 2006 increased $2.1 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 approximately $0.5 million in the nine months
ended September 30, 2005.
Income tax expense for the nine months ended September 30, 2006 was at an
effective tax rate of 37.7% compared to an effective tax rate of 37.5% the 2005
comparable period. The Company currently anticipates that the effective tax rate
from continuing operations will be in the range of 37.7 percent to 38.7 percent
for the full year of 2006.
Income from continuing operations was lower in the first nine months of 2006 as
compared to the first nine months of 2005 for the reasons previously described.
Loss from discontinued operations was $0.4 million and $0.2 million for the nine
months ended September 30, 2006 and 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 decreased to $21.9 million for the nine months ended September 30,
2006 as compared to $22.2 million in the prior year comparable period for the
reasons previously described.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2006, the Company had $7.3 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 $11.1
million in the first nine months of 2006 compared to cash provided from
operations of $14.2 million in the first nine months of 2005. Net cash provided
by operating activities decreased primarily due to payments made during the
period for severance and lease costs of facilities exited as a result of the
Seven Worldwide and Winnetts acquisitions, payments of lease costs associated
with vacant properties and the timing of payments to vendors, partially offset
by tax refunds received. Depreciation and amortization expense in the first nine
months of 2006 was $18.4 million as compared to $20.1 million in the first nine
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.
26
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. Cash provided by investing
activities was $4.6 million for the nine months ended September 30, 2006
compared to $215.9 million of cash used in investing activities during the
comparable 2005 period. The cash provided by investing activities in the first
nine months 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 nine months of 2005 reflects the acquisition of Seven
Worldwide, net of cash acquired, of $204.5 million. Capital expenditures were
$18.0 million in the first nine months of 2006 compared to $14.6 million in the
first nine 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 in 2006 as compared to the prior year comparable period.
Capital expenditures are anticipated to be in a range of $22.0 million to $24.0
million for all of 2006.
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. Cash used in financing
activities in the first nine months of 2006 was $15.5 million compared to $205.4
million of cash provided by financing activities during the first nine months of
2005. The cash used in financing activities in the first nine months 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 nine
months of 2005 includes $151.2 million of proceeds from new debt and $74.4
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 $2.6
million and $2.5 million for the nine month periods ended September 30, 2006 and
2005, respectively. It is anticipated that the Company will continue to pay
dividends at the current level for the remainder of 2006. The Company
repurchased 62,500 shares of its shares for $1.2 million during the first nine
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. $76.4 million was outstanding under the
agreement at September 30, 2006 and is included in Long-term debt on the
September 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 September 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 September 30,
2006 Consolidated Balance Sheet. Long-term debt decreased to $151.4 million at
September 30, 2006 from $169.5 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.
27
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.
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 1, 3, 4 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 September 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 nine months of 2006:
Total No. Avg. Price No. Shares Purchased
Shares Paid Per as Part of Publicly
Period Purchased Share Announced Program
- ------ --------- ---------- --------------------
January -- -- --
February -- -- --
March 1,781 $23.15 --
April -- -- --
May 62,500 $18.90 --
June -- -- --
July -- -- --
August -- -- --
September -- -- --
------ ------ ---
Total 64,281 $19.02 --
====== ====== ===
29
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 Form of agreement for restricted stock awards under the 2006
Long-term Incentive Plan *
10.2 Form of agreement for stock option awards under the 2006 Long-term
Incentive Plan *
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 *
* 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 November 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
30