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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2003
--------
COMMISSION FILE NUMBER 1-9335
SCHAWK, INC.
(Exact name of Registrant
as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
36-2545354
(I.R.S. Employer Identification No.)
1695 RIVER ROAD
DES PLAINES, ILLINOIS
(Address of principal executive office)
60018
(Zip Code)
847-827-9494
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act.)
Yes No X
--- ---
The number of shares outstanding of each of the issuer's classes of common stock
as of November 5, 2003 is:
21,406,928 Class A Common Stock, $.008 par value
------------------------------------------------
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SCHAWK, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
September 30, 2003
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 17
Certificates Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 18
Certificates Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 20
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Schawk, Inc.
Consolidated Balance Sheets
(In Thousands)
SEPTEMBER 30
2003 DECEMBER 31,
(UNAUDITED) 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,985 $ 2,051
Trade accounts receivable, less allowance for doubtful accounts
of $1,605 at September 30, 2003 and $1,269 at December 31, 2002 38,401 37,946
Inventories 9,019 8,540
Prepaid expenses and other 3,378 3,539
Refundable income taxes 487 889
Deferred income taxes 1,722 1,713
--------- ---------
Total current assets 55,992 54,678
Property and equipment, less accumulated depreciation of
$67,645 at September 30, 2003
and $63,457 at December 31, 2002 37,490 41,113
Goodwill 61,268 60,476
Other assets 4,011 4,203
--------- ---------
Total assets $ 158,761 $ 160,470
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 4,505 $ 4,696
Accrued expenses 15,644 13,787
Income taxes payable 574 --
Notes payable to banks 2,220 3,281
Current portion of long-term debt and capital lease obligations 6,063 6,260
Short-term debt expected to be refinanced 16,000 --
--------- ---------
Total current liabilities 45,006 28,024
Long-term debt 6,000 37,186
Capital lease obligations 40 46
Other 980 1,029
Deferred income taxes 4,692 4,418
Stockholders' Equity:
Common stock, $0.008 par value, 40,000,000 shares
authorized, 23,564,810 and 23,381,763 shares issued at
September 30, 2003 and December 31, 2002,
respectively; 21,398,006 and 21,436,487 shares
outstanding at September 30,
2003 and December 31, 2002, respectively 187 186
Additional paid-in capital 87,431 85,922
Retained earnings 38,261 27,253
Accumulated comprehensive income (loss), net 460 (1,558)
--------- ---------
126,339 111,803
Treasury stock, at cost, 2,166,804 and 1,945,276 shares of common
stock at September 30, 2003 and December 31, 2002, respectively (24,296) (22,036)
--------- ---------
Total stockholders' equity 102,043 89,767
--------- ---------
Total liabilities and stockholders' equity $ 158,761 $ 160,470
========= =========
See accompanying notes.
3
Schawk, Inc.
Consolidated Statements of Operations
Three Months Ended September 30, 2003 and 2002
(Unaudited)
(In Thousands, Except Per Share Amounts)
2003 2002
-------- --------
Net sales $ 50,500 $ 46,556
Cost of sales 29,633 28,126
Selling, general, and administrative expenses 13,812 12,263
Restructuring and other charges -- 421
-------- --------
Operating income 7,055 5,746
Other income (expense)
Interest income -- 1
Interest expense (415) (707)
Other income 297 --
-------- --------
(118) (706)
-------- --------
Income before income taxes 6,937 5,040
Income tax provision 2,628 1,915
-------- --------
Net income $ 4,309 $ 3,125
======== ========
Earnings per share:
Basic $ 0.20 $ 0.15
Diluted $ 0.20 $ 0.14
Weighted average number of common and common
equivalent shares outstanding 21,952 21,721
Dividends per common share $ 0.0325 $ 0.0325
See accompanying notes.
4
Schawk, Inc.
Consolidated Statements of Operations
Nine Months Ended September 30, 2003 and 2002
(Unaudited)
(In Thousands, Except Per Share Amounts)
2003 2002
--------- ---------
Net sales $ 150,840 $ 137,185
Cost of sales 88,028 81,560
Selling, general, and administrative expenses 41,238 37,688
Restructuring and other charges -- 2,542
--------- ---------
Operating income 21,574 15,395
Other income (expense)
Interest income 51 229
Interest expense (1,471) (2,175)
Other income 1,046 --
--------- ---------
(374) (1,946)
--------- ---------
Income before income taxes and minority interest 21,200 13,449
Income tax provision 8,112 3,619
--------- ---------
Income before minority interest 13,088 9,830
Minority interest in net loss of subsidiary -- 21
--------- ---------
Net income $ 13,088 $ 9,851
========= =========
Earnings per share:
Basic $ 0.61 $ 0.46
Diluted $ 0.60 $ 0.45
Weighted average number of common and common
equivalent shares outstanding 21,718 21,696
Dividends per common share $ 0.0975 $ 0.0975
See accompanying notes.
5
Schawk, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2003 and 2002
(Unaudited)
(In Thousands)
2003 2002
-------- --------
OPERATING ACTIVITIES
Net income $ 13,088 $ 9,851
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 8,614 8,958
Deferred income taxes 265 (2,218)
Asset impairment charge -- 2,121
Gain realized on sale of property and equipment (588) (130)
Minority interest -- (21)
Changes in operating assets and liabilities, net of effects from
acquisitions:
Trade accounts receivable (455) 131
Inventories (479) (2,667)
Prepaid expenses and other 161 1,064
Trade accounts payable and accrued expenses 1,666 1,437
Income taxes refundable/payable 976 (1,013)
-------- --------
Net cash provided by operating activities 23,248 17,513
INVESTING ACTIVITIES
Proceeds from sales of property and equipment 1,515 1,074
Capital expenditures (5,329) (5,667)
Acquisitions -- (1,612)
Other (22) (89)
-------- --------
Net cash used in investing activities (3,836) (6,294)
FINANCING ACTIVITIES
Proceeds from debt 4,562 13,967
Principal payments on debt (20,842) (22,354)
Principal payments on capital lease obligations (236) (228)
Common stock dividends (2,080) (2,092)
Purchase of common stock (2,278) (987)
Issuance of common stock 1,528 515
-------- --------
Net cash used in financing activities (19,346) (11,179)
-------- --------
Effect of foreign currency rate changes 868 (76)
-------- --------
Net increase (decrease) in cash and cash equivalents 934 (36)
Cash and cash equivalents beginning of period 2,051 1,112
-------- --------
Cash and cash equivalents end of period $ 2,985 $ 1,076
======== ========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 1,476 $ 2,469
Cash paid for income taxes 6,895 6,240
See accompanying notes.
6
Schawk, Inc.
Notes to Consolidated Interim Financial Statements
(Unaudited)
(Thousands of dollars, except per share data)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such rules and
regulations, although Schawk, Inc. (the Company) believes the disclosures
included are adequate to make the information presented not misleading. In
addition, certain prior year amounts have been reclassified to conform to the
current year presentation. In the opinion of management, all adjustments
necessary for a fair presentation for the periods presented have been reflected
and are of a normal recurring nature. These financial statements should be read
in conjunction with the Company's consolidated financial statements and the
notes thereto for the three years ended December 31, 2002, as filed with its
2002 Annual Report on Form 10-K.
NOTE 2. NEW ACCOUNTING PRINCIPLES
In December 2002, the Financial Accounting Standards Boards issued Statement of
Financial Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, which (i) amends SFAS No. 123,
Accounting for Stock-Based Compensation to add two new transitional approaches
when changing from the Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees intrinsic value method of accounting
for stock-based employee compensation to the SFAS No. 123 fair value method and
(ii) amends APB Opinion No. 28 Interim Financial Reporting to call for
disclosure of SFAS No. 123 pro forma information on a quarterly basis. The
Company has elected to adopt the disclosure only provisions of SFAS No. 148 and
will continue to follow APB Opinion 25 and related interpretations in accounting
for the stock options granted to its employees and directors. Accordingly,
employee and director compensation expense is recognized only for those options
whose price is less than fair market value at the measurement date. For
disclosures regarding stock options had compensation cost been determined in
accordance with SFAS No. 123 see Note 12 - Stock-Based Compensation.
NOTE 3. INTERIM RESULTS
Results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
NOTE 4. DESCRIPTION OF BUSINESS
The Company is a leading provider of digital imaging graphic services for the
consumer products industry. The Company focuses on providing these services to
multi-national clients in three primary markets: consumer products packaging,
advertising agencies and promotion.
NOTE 5. IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets, the Company continues to review all
of its long-lived assets on an ongoing basis. As a result of the review
performed during the second quarter of 2002, certain assets were identified to
be either no longer in use and/or their future cash flows were not sufficient to
support the book value of the asset and an asset impairment charge of $2,121 was
recorded and included in "Restructuring and Other Charges" on the Statement of
Operations.
NOTE 6. RESTRUCTURING
During the third quarter of 2002, a total of 16 positions were eliminated at an
east coast facility due to a decline in the advertising business. A provision
for severance pay and other employee benefits in the amount of $421 was
recorded. Although this staff reduction was not part of a formal restructuring
plan, the charge for severance and other employee benefits was included in
"Restructuring and other charges" on the Consolidated Statement of Operations.
7
NOTE 7. INVENTORIES
Inventories consist of the following:
September 30, December 31,
2003 2002
-------- --------
Raw materials $ 1,696 $ 2,230
Work in process 8,437 7,424
-------- --------
10,133 9,654
Less: LIFO reserve (1,114) (1,114)
-------- --------
$ 9,019 $ 8,540
======== ========
NOTE 8. SHORT-TERM DEBT EXPECTED TO BE REFINANCED
The Company maintains a $65,000 unsecured credit facility with its principal U S
bank. The credit agreement has a five-year term, expiring in May 2004. The
balance outstanding on this facility is $16,000 as of September 30, 2003 and is
classified as "Short-term debt expected to be refinanced" in the current
liability section of the September 30, 2003 Consolidated Balance Sheet since the
agreement expires in less than twelve months. At December 31, 2002, the
outstanding balance on this facility was $25,000 and was classified as long-term
debt on the December 31, 2002 Consolidated Balance Sheet. The Company intends to
renew or replace this credit agreement prior to its expiration in May 2004.
NOTE 9. EARNINGS PER SHARE
Basic earnings per share and diluted earnings per share are shown on the
Consolidated Statement of Operations. Basic earnings per share are computed by
dividing net income by the weighted average shares outstanding for the period.
Diluted earnings per share are computed by dividing net income by the weighted
average number of common shares and common stock equivalent shares outstanding
(stock options) for the period.
The following table sets forth the computation of basic and diluted earnings per
share:
Three months ended September 30,
--------------------------------
2003 2002
------- -------
Net income $ 4,309 $ 3,125
======= =======
Weighted average shares 21,344 21,499
Effect of dilutive stock options 608 222
------- -------
Adjusted weighted average shares and
assumed conversions 21,952 21,721
======= =======
Basic earnings per share $ 0.20 $ 0.15
======= =======
Diluted earnings per share $ 0.20 $ 0.14
======= =======
Nine months ended September 30,
-------------------------------
2003 2002
------- -------
Net income $13,088 $ 9,851
======= =======
Weighted average shares 21,368 21,484
Effect of dilutive stock options 350 212
------- -------
Adjusted weighted average shares and
assumed conversions 21,718 21,696
======= =======
Basic earnings per share $ 0.61 $ 0.46
======= =======
Diluted earnings per share $ 0.60 $ 0.45
======= =======
8
NOTE 10. SEGMENT REPORTING
The Company operates in a single business segment, Digital Imaging Graphic Arts.
The Company operates primarily in two geographic areas, the United States and
Canada. Summary financial information by geographic area is as follows:
Three months ended September 30, 2003
-------------------------------------
United States Canada Other Foreign Total
------------- ------ ------------- -----
Sales $39,354 $ 8,039 $3,107 $ 50,500
Long-lived assets 77,865 17,003 7,901 102,769
Net Assets 94,392 9,725 (2,074) 102,043
Three months ended September 30, 2002
-------------------------------------
United States Canada Other Foreign Total
------------- ------ ------------- -----
Sales $38,629 $ 5,943 $1,984 $ 46,556
Long-lived assets 81,865 15,906 8,504 106,275
Net Assets 80,925 6,771 (1,195) 86,501
Nine months ended September 30, 2003
------------------------------------
United States Canada Other Foreign Total
------------- ------ ------------- -----
Sales $119,945 $ 23,218 $7,677 $ 150,840
Long-lived assets 77,865 17,003 7,901 102,769
Net Assets 94,392 9,725 (2,074) 102,043
Nine months ended September 30, 2002
------------------------------------
United States Canada Other Foreign Total
------------- ------ ------------- -----
Sales $113,406 $ 18,036 $5,743 $ 137,185
Long-lived assets 81,865 15,906 8,504 106,275
Net Assets 80,925 6,771 (1,195) 86,501
NOTE 11. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the quarter and
nine months ended September 30, 2003 and 2002, respectively, are as follows:
Three months ended September 30,
--------------------------------
2003 2002
------- -------
Net income $ 4,309 $ 3,125
Foreign currency translation adjustments (203) (689)
------- -------
Comprehensive income $ 4,106 $ 2,436
======= =======
Nine months ended September 30,
--------------------------------
2003 2002
------- -------
Net income $13,088 $ 9,851
Foreign currency translation adjustments 2,018 (323)
------- -------
Comprehensive income $15,106 $ 9,528
======= =======
9
NOTE 12. STOCK BASED COMPENSATION
The Company has an Equity Option Plan that provides for the granting of options
to purchase up to 5,252 shares of Class A common stock to key employees. The
Company has also adopted an Outside Directors' Formula Stock Option Plan
authorizing annual grants of options to purchase shares of Class A common stock
to outside directors. Options granted under these plans have an exercise price
equal to the market price of the underlying stock at the date of grant and are
exercisable for a period of ten years from the date of grant and vest over a
three-year period.
The Company accounts for these plans under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. No stock-based employee
compensation cost is reflected in the net income, as all options granted under
these plans have an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect on
net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation.
Three Months Ended September 30
-------------------------------
2003 2002
---- ----
Net income, as reported $ 4,309 $ 3,125
Less: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (118) (125)
--------- ---------
Net income, pro forma $ 4,191 $ 3,000
Earnings per share
Basic $ 0.20 $ 0.15
Diluted $ 0.20 $ 0.14
Pro forma earnings per share
Basic $ 0.20 $ 0.14
Diluted $ 0.19 $ 0.14
Nine Months Ended September 30
------------------------------
2003 2002
---- ----
Net income, as reported $ 13,088 $ 9,851
Less: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (592) (746)
---------- ----------
Net income, pro forma $ 12,496 $ 9,105
Earnings per share
Basic $ 0.61 $ 0.46
Diluted $ 0.60 $ 0.45
Pro forma earnings per share
Basic $ 0.58 $ 0.42
Diluted $ 0.58 $ 0.42
10
NOTE 13. COMMON STOCK REPURCHASES
In December 2002, the U.S. Securities and Exchange Commission issued a release
proposing amendments to Rule 10b-18 under the Securities Exchange Act of 1934,
which provides issuers with a "safe harbor" from liability for manipulation when
they repurchase their common stock in the market. The SEC also proposed
amendments to a number of regulations and forms, including form 10K and 10Q,
that would require disclosure of all issuer repurchases of equity securities,
regardless of whether the repurchases are effected in accordance with the safe
harbor.
As previously disclosed, the Company occasionally repurchases its common shares,
pursuant to a general authorization from the Board of Directors. The Board of
Directors reviews the authorization for management to repurchase shares on an
annual basis. At a February 2003 meeting, the Board renewed its annual
authorization to repurchase shares in accordance with applicable SEC rules.
During the nine months ended September 30, 2003, the Company repurchased 226
shares for total consideration of $2,278. There were no repurchases of the
Company's shares during the quarter ended September 30, 2003. The total shares
purchased exceeded the general authorization of $2,000 per year by $278 due to a
clerical error at the broker. The Board has ratified the additional purchases.
The following table summarizes the Company's repurchase of its equity securities
in the first nine months of 2003:
Total No. Avg. Price No. Shares Purchased
Share Paid Per as Part of Publicly Dollar Value of Shares that May
Period Purchased Share Announced Program be Purchased Under Program
- ---------------------- ---------------- --------------- ------------------------- -----------------------------------
January -- -- -- --
February -- -- -- --
March 10 $9.65 10 Not to exceed $2,000 per year
----------------------------------------------------------
1st Qtr 2003 Total 10 $9.65 10
==========================================================
April 77 $9.76 77 Not to exceed $2,000 per year
May 121 $10.27 121 Not to exceed $2,000 per year
June 18 $10.58 18 Not to exceed $2,000 per year
----------------------------------------------------------
2nd Qtr 2003 Total 216 $10.11 216
==========================================================
July - - -
August - - -
September - - -
----------------------------------------------------------
3rd Qtr 2003 Total - - -
==========================================================
YTD 2003 Total 226 $10.09 226
==========================================================
NOTE 14. INCOME TAXES
State income tax refunds received and the settlement of an outstanding tax
obligation reduced income tax expense for the nine-month period ended September
30, 2002. The state tax refunds, in the amount of $824, were recorded as a
credit to income tax expense net of federal income tax of $288. The outstanding
tax obligation, for which $2,108 was accrued as of year-end, was settled for
$1,145, resulting in $963 being recorded as a tax benefit in the nine-month
period ended September 30, 2002. The reduction of the estimated tax liabilities
was recorded as a credit to income tax expense.
11
NOTE 15. OTHER INCOME
During the third quarter of 2003, the Company received a distribution in the
amount of $303 representing its share of a gain from the sale of a mutual
insurance company, of which the Company was a policyholder in 2000, to another
insurance company. This distribution is included in Other income on the
Consolidated Statement of Operations for the quarter ended September 30, 2003.
For the nine-month period ended September 30, 2003, the items included in Other
income on the Consolidated Statement of Operations are the insurance company
distribution of $303, a favorable litigation settlement of $361 and proceeds of
a life insurance policy on a former employee in the amount of $382.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Thousands of dollars, except per share amounts)
Certain statements contained herein that relate to the Company's beliefs or
expectations as to future events are not statements of historical fact and are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. The Company intends any such statements
to be covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1999. Although the
Company believes that the assumptions upon which such forward-looking statements
are based are reasonable within the bounds of its knowledge of its business and
operations, it can give no assurance the assumptions will prove to have been
correct and undue reliance should not be placed 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, the strength
of the United States economy in general and specifically market conditions for
the consumer products industry, the level of demand for the Company's services,
loss of key management and operational personnel, the ability of the Company to
implement its growth strategy, the stability of state, federal and foreign tax
laws, the ability of the Company to identify and exploit industry trends and to
exploit technological advances in the imaging industry, the stability of
political conditions in other countries in which the Company has production
capabilities, terrorist attacks, wars, diseases and other geo-political events
as well as other factors detailed in the Company's filings with the Securities
and Exchange Commission. The Company assumes no obligation to update publicly
any of these statements in light of future events.
12
RESULTS OF OPERATIONS
QUARTERS ENDED SEPTEMBER 30, 2003 AND 2002
Schawk, Inc.
Comparative Consolidated Statements of Operations
Quarters Ended September 30, 2003 and 2002
(in thousands)
$ %
2003 2002 CHANGE CHANGE
---- ---- ------ ------
Net sales $ 50,500 $ 46,556 $ 3,944 8.5%
Cost of sales 29,633 28,126 1,507 5.4%
-------- -------- --------
Gross profit 20,867 18,430 2,437 13.2%
Gross margin percentage 41.3% 39.6%
Selling, general and administrative expenses 13,812 12,263 1,549 12.6%
Restructuring and other charges -- 421 (421) nm(1)
-------- -------- --------
Operating income 7,055 5,746 1,309 22.8%
Operating margin percentage 14.0% 12.3%
Other income (expense)
Interest and dividend income -- 1 (1) nm
Interest expense (415) (707) 292 (41.3%)
Other income 297 -- 297 nm
-------- -------- --------
(118) (706) 588 nm
-------- -------- --------
Income before income taxes and minority interest 6,937 5,040 1,897 37.6%
Income tax provision 2,628 1,915 713 37.2%
-------- -------- --------
Effective income tax rate 37.9% 38.0%
Income before minority interest 4,309 3,125 1,184 37.9%
Minority interest in net income of subsidiary - -- -- --
-------- -------- --------
Net income $ 4,309 $ 3,125 $ 1,184 37.9%
======== ======== ========
(1) nm - Percentage not meaningful
Net sales for the third quarter of 2003 increased 8.5% versus 2002.
Strong sales of graphics services to consumer products packaging clients, which
increased 9.5%, were accompanied by slight growth in sales of graphics services
to advertising agency clients compared to the same quarter of 2002. The increase
in sales to consumer product packaging clients in the quarter was primarily the
result of growth in sales of package design services and prepress services to
existing accounts that increased the number of product line extensions, new
designs and promotions to increase market share in 2003.
Gross margin as a percentage of net sales for the third quarter of 2003
increased to 41.3% from 39.6% for the prior year third quarter. The increase in
gross margin was primarily due to higher sales and as a result of keeping
production costs close to their prior year levels.
Operating income for the third quarter of 2003 was 22.8% higher than
the previous year third quarter. The increase was primarily due to strength in
sales to consumer products packaging clients. $0.4 million in severance costs
classified as other charges negatively impacted operating income in the third
quarter of 2002. Operating margin increased 1.7 points due to higher sales and
gross profit in the 2003 period.
13
Other income (expense) for the third quarter of 2003 was $0.1 million
of net other expense, a $0.6 million decrease from the third quarter of 2002.
The change in results was due to the following items:
Gain related to the distribution of proceeds from the sale of mutual insurance $0.3 million
company of which Schawk was a policy holder
Lower interest expense due to lower outstanding debt and lower interest rates $0.3 million
------------
Net decrease in other expenses $0.6 million
Income tax provision for the third quarter of 2003 was at an effective
tax rate of 37.9% approximately the same as the 38.0% effective tax rate in the
prior year third quarter.
Net income for the third quarter ended September 30, 2003 increased
37.9% versus the prior year third quarter for the reasons previously discussed.
Basic and diluted earnings per share were $0.20 and $0.20,
respectively, for the third quarter ended September 30, 2003 compared with $0.15
and $0.14 for the third quarter of 2002.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Schawk, Inc.
Comparative Consolidated Statements of Operations
Nine Months Ended September 30, 2003 and 2002
(in thousands)
$ %
2003 2002 CHANGE CHANGE
---- ---- ------ ------
Net sales $ 150,840 $ 137,185 $ 13,655 10.0%
Cost of sales 88,028 81,560 6,468 7.9%
--------- --------- ---------
Gross profit 62,812 55,625 7,187 12.9%
Gross margin percentage 41.6% 40.5%
Selling, general and administrative expenses 41,238 37,688 3,550 9.4%
Restructuring and other charges -- 2,542 (2,542) nm(2)
--------- --------- ---------
Operating income 21,574 15,395 6,179 40.1%
Operating margin percentage 14.3% 11.2%
Other income (expense)
Interest and dividend income 51 229 (178) nm
Interest expense (1,471) (2,175) 704 (32.4%)
Other income 1,046 -- 1,046 nm
--------- --------- ---------
(374) (1,946) 1,572 nm
--------- --------- ---------
Income before income taxes and minority interest 21,200 13,449 7,751 57.6%
Income tax provision 8,112 3,619 4,493 nm
--------- --------- ---------
Effective income tax rate 38.3% 26.9%
Income before minority interest 13,088 9,830 3,258 33.1%
Minority interest in net loss of subsidiary - 21 (21) nm
--------- --------- ---------
Net income $ 13,088 $ 9,851 $ 3,237 32.9%
========= ========= =========
(2) nm - Percentage not meaningful
14
Net sales for the nine-month period ended September 30, 2003 increased
10.0% versus 2002. This increase is primarily the result of the strengthening
market for graphics services for consumer products packaging clients in 2003,
which led to increased sales of 11.6% during the period, as compared to sales of
graphics services to advertising agency clients, which were approximately equal
to the prior year period. As noted above, the increase in sales to consumer
product packaging clients in the first nine months of 2003 was primarily the
result of growth in sales of package design services and prepress services to
existing accounts that increased the number of product line extensions, new
designs and promotions to increase market share in 2003.
Gross margin as a percentage of net sales for the first nine months of
2003 increased to 41.6% from 40.5% for the prior year nine-month period. Gross
margin increased in the 2003 period primarily as a result of higher sales and a
$0.5 million gain on the sale of a building in the first quarter of 2003.
Operating income for the first nine months of 2003 was 40.1% higher
than the previous year period. The increase in operating income was attributable
to the increase in sales. In addition, results for the nine-month period of 2003
included a gain on the sale of a building of $0.5 million. Conversely, $2.5
million in impairment and other charges negatively impacted operating income
from 2002. Operating margin increased to 14.3% for the nine-month period of 2003
as compared to 11.2% in 2002 for the same reasons that operating income
increased.
Other income (expense) - net, in the nine-month period ended September
30, 2003, resulted in net other expense of $0.4 million, a $1.6 million
decrease, compared to $2.0 million in the comparable prior year period. The
decrease in other expense was primarily a result of the following items:
Proceeds from life insurance policy $0.4 million
Litigation settlement in Schawk's favor $0.4 million
Lower interest income - prior year period included interest income from tax refunds ($0.2 million)
Gain related to the distribution of proceeds from the sale of mutual insurance company of $0.3 million
which Schawk was a policy holder
Lower interest expense due to lower outstanding debt and lower interest rates $0.7 million
------------
Net decrease in other expense $1.6 million
Income tax provision for the nine-month period ended September 30, 2003
was at an effective tax rate of 38.3% compared to an unusually low rate of 26.9%
in the prior year period. The lower rate in the 2002 period was as a result of
state tax refunds and the settlement of an outstanding tax obligation in the
second quarter of that year. It is currently anticipated that the effective tax
rate will be in the range of 38% to 39% for the full year of 2003.
Net income for the nine months ended September 30, 2003 increased 32.9%
versus the prior year period for the reasons previously discussed.
Basic and diluted earnings per share were $0.61 and $0.60,
respectively, for the nine-months ended September 30, 2003 compared with $0.46
and $0.45 for the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
The Company presently finances its business from available cash and
from cash generated from operations. The Company maintains a $65,000 unsecured
credit facility, expiring May 2004, of which approximately $49,000 was available
for borrowings at September 30, 2003. The Company also maintains a $15,000
unsecured demand line of credit to provide financing and working capital
flexibility. At September 30, 2003, approximately $13,050 was available for
borrowings under the demand line of credit. The Company also maintains working
capital demand lines of credit in Canada (US $3,700), China (US $1,500), and
Malaysia (US $1,300).
The Company reduced its total debt by $16,450 in the first nine months
of 2003 as follows: Long-term debt decreased to $6,000 at September 30, 2003
from $37,000 at December 31, 2002. $15,000 of this reduction was the result of
payments on the unsecured credit facility and the Note Purchase Agreement in the
amounts of $9,000 and $6,000, respectively; the balance of the reduction in
long-term debt was the result of a reclassification of the $16,000 balance
outstanding on the unsecured credit facility from long-term debt to short-term
debt expected to be refinanced, included in current liabilities. This
reclassification was necessitated by the fact that the unsecured credit
agreement expires in May 2004, less than twelve months from the September 30,
2003 balance sheet date. The outstanding amount on the demand lines of credit,
included in current liabilities, decreased by $1,100, from $3,300 at December
31, 2002 to $2,200 at September 30, 2003.
15
At September 30, 2003, outstanding debt of the Company consisted of:
(i) unsecured notes issued pursuant to a Note Purchase Agreement dated August
18, 1995, for $12,000 with annual repayments required in 2004 and 2005 at an
interest rate of 6.98%; (ii) $16,000 of borrowings under the Company's unsecured
credit facility; (iii) $1,950 of borrowings under its unsecured demand credit
line; (iv) $270 under its Malaysian credit line; and (v) $103 of capital lease
obligations.
Management believes that the level of working capital is adequate for
the Company's liquidity needs related to normal operations both currently and in
the foreseeable future, and that the Company has sufficient resources to support
its growth, either through currently available cash, through cash generated from
future operations or through short-term financing. The Company intends to renew
or replace its unsecured credit facility prior to its expiration in May 2004.
The Company had capital expenditures of $1,183 and $5,329 in the
quarter and nine months ended September 30, 2003, respectively. Depreciation
expense was $2,737 and $8,614 for the quarter and nine months ended September
30, 2003, respectively.
The Company purchased $2,278 of its Class A Common Stock in the nine
months ended September 30, 2003, respectively, under a share repurchase program
approved by the Board of Directors. There were no stock purchases in the quarter
ended September 30, 2003.
SEASONALITY
With respect to consumer products packaging, the graphic services
market is not currently seasonal. On the other hand, there have historically
been cycles of design changes for brand images that most consumer products
brands are subject to. These historic cycles differ from brand to brand as to
when design changes have occurred and thus the Company's sales volume levels are
less predictable.
With respect to the advertising market, some seasonality exists in that
the months of December and January are historically the slowest of the year
because advertising agencies and their clients typically finish their work by
mid-December and do not start up again until mid-January. In addition,
advertising is generally cyclical as the consumer economy is cyclical. When
consumer spending and GDP decrease, ad pages decline. Generally, when ad pages
decline the Company's advertising business declines. The decline in the
advertising market, which began in the second half of 2001, continued into the
third quarter of 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A discussion regarding market risk is disclosed in the Company's
December 31, 2002 Form 10-K. There have been no material changes in information
regarding market risk relating to the Company since December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b), Schawk Inc. management, including the
Chief Executive Officer and Chief Financial Officer, conducted an evaluation as
of the end of the period covered by this report, of the effectiveness of the
company's disclosure controls and procedures as defined in Exchange Act Rule
13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the company's disclosure controls and
procedures were effective as of the end of the period covered by this report. As
required by Rule 13a-15(d), Schawk Inc. management, including the Chief
Executive Officer and Chief Financial Officer, also conducted an evaluation of
the company's internal control over financial reporting to determine whether any
changes occurred during the quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, the company's internal
control over financial reporting. Based on that evaluation, there has been no
such change during the quarter covered by this report.
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PART II - OTHER INFORMATION
ITEMS 1, 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
EXHIBIT # DESCRIPTION
--------- -----------
3.1 Certificate of Incorporation of Schawk, Inc., as amended.
Incorporated herein by reference to Registration Statement No.
33-85152.
3.3 By-Laws of Schawk, Inc., as amended. Incorporated herein by
Reference to Registration Statement No. 333-39113.
4.1 Specimen Class A Common Stock Certificate. Incorporated herein
by Reference to Registration Statement No. 33-85152.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanse-Oxley Act of
2002.
B. Reports on Form 8-K
The following reports on form 8-K were filed:
DATE FILED REGARDING
- ---------- ---------
July 24, 2003 2003 Second Quarter Results
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 7th day of November 2003.
SCHAWK, INC.
- ------------
(Registrant)
/s/ David A. Schawk
- ------------------------------------
President, Chief Executive Officer and Director
/s/ James J. Patterson
- ------------------------------------
Senior Vice President and Chief Financial Officer
17