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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, 2002 Commission File Number 1-9335
-------------
SCHAWK, INC.
(Exact name of Registrant
as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
36-2545354
(I.R.S. Employer Identification No.)
1695 RIVER ROAD
DES PLAINES, ILLINOIS
(Address of principal executive office)
60018
(Zip Code)
847-827-9494
(Registrant's telephone number, including area code)
Indicated by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
The number of shares outstanding of each of the issuer's classes of common stock
as of November 1, 2002 is: 21,416,942 Class A Common Stock, $.008 par value
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1
SCHAWK, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
September 30, 2002
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 17
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Certificates Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 20
Certificates Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Schawk, Inc.
Consolidated Balance Sheets
(In Thousands)
SEPTEMBER 30, DECEMBER 31,
2002 2001
(UNAUDITED)
--------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,076 $ 1,112
Trade accounts receivable, less allowance for doubtful accounts
of $1,141 at September 30, 2002 and $813 at December 31, 2001 38,171 38,302
Inventories 10,592 7,925
Prepaid expenses and other 3,382 5,091
Refundable income taxes 643 875
Deferred income taxes 1,181 1,241
-------------------------
Total current assets 55,045 54,546
Property and equipment, less accumulated depreciation of $69,692
at September 30, 2002 and $73,736 at December 31, 2001 41,745 47,606
Goodwill, less accumulated amortization of $11,496 at September 30, 2002
and December 31, 2001 60,447 60,023
Other assets 4,083 3,950
-------------------------
Total assets $ 161,320 $ 166,125
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 4,288 $ 3,580
Accrued expenses 13,583 12,854
Income taxes payable 835 2,080
Notes payable to banks 9,349 2,963
Current portion of long-term debt and capital lease obligations 6,333 6,273
-------------------------
Total current liabilities 34,388 27,750
Long-term debt 37,194 52,000
Capital lease obligations 61 131
Other 1,011 1,342
Deferred income taxes 2,165 4,443
Minority interest in consolidated subsidiary -- 922
Stockholders' Equity:
Common stock, $0.008 par value, 40,000,000 shares authorized,
23,362,639 and 23,301,084 shares issued at September 30, 2002
and December 31, 2001, respectively; 21,416,942 and 21,453,725
shares outstanding at September 30, 2002 and December 31, 2001, 185 185
respectively
Additional paid-in capital 85,659 85,157
Retained earnings 24,271 16,512
Accumulated comprehensive loss, net (1,570) (1,247)
-------------------------
108,545 100,607
Treasury stock, at cost, 1,945,697 and 1,847,359 shares of common
stock at September 30, 2002 and December 31, 2001, respectively (22,044) (21,070)
-------------------------
Total stockholders' equity 86,501 79,537
-------------------------
Total liabilities and stockholders' equity $ 161,320 $ 166,125
=========================
See accompanying notes.
3
Schawk, Inc.
Consolidated Statements of Operations
Three Months Ended September 30, 2002 and 2001
(Unaudited)
(In Thousands, Except Per Share Amounts)
2002 2001
-----------------------
Net sales $ 45,706 $ 47,182
Cost of sales 27,253 28,339
Selling, general, and administrative expenses 12,263 13,507
Goodwill amortization -- 538
Restructuring and other charges 421 332
-----------------------
Operating income 5,769 4,466
Other income (expense)
Interest and dividend income 1 1
Interest expense (707) (1,033)
Other income (expense) (23) 37
-----------------------
(729) (995)
-----------------------
Income before income taxes and minority interest 5,040 3,471
Income tax provision 1,915 1,446
-----------------------
Income before minority interest 3,125 2,025
Minority interest in net income of subsidiary -- 86
-----------------------
Net income $ 3,125 $ 2,111
=======================
Earnings per share:
Basic $ 0.15 $ 0.10
Diluted $ 0.14 $ 0.10
Weighted average number of common and common
equivalent shares outstanding 21,721 21,698
Dividends per common share $ 0.0325 $ 0.0325
See accompanying notes.
4
Schawk, Inc.
Consolidated Statements of Operations
Nine Months Ended September 30, 2002 and 2001
(Unaudited)
(In Thousands, Except Per Share Amounts)
2002 2001
-------------------------
Net sales $ 134,750 $ 140,606
Cost of sales 79,255 83,922
Selling, general, and administrative expenses 37,688 41,720
Goodwill amortization -- 1,616
Restructuring and other charges 2,542 1,017
-------------------------
Operating income 15,265 12,331
Other income (expense)
Interest and dividend income 229 20
Interest expense (2,175) (3,397)
Other income 130 351
-------------------------
(1,816) (3,026)
-------------------------
Income before income taxes and minority interest 13,449 9,305
Income tax provision 3,619 3,848
-------------------------
Income before minority interest 9,830 5,457
Minority interest in net loss of subsidiary 21 117
-------------------------
Net income $ 9,851 $ 5,574
=========================
Earnings per share:
Basic $ 0.46 $ 0.26
Diluted $ 0.45 $ 0.26
Weighted average number of common and common
equivalent shares outstanding 21,696 21,556
Dividends per common share $ 0.0975 $ 0.0975
See accompanying notes.
5
Schawk, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001
(Unaudited)
(In Thousands)
2002 2001
-----------------------
OPERATING ACTIVITIES
Net income $ 9,851 $ 5,574
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization 8,958 10,734
Deferred income taxes (2,218) (19)
Asset impairment charge 2,121 --
Gain realized on sale of equipment (130) (491)
Minority interest (21) (117)
Changes in operating assets and liabilities, net of effects from
acquisitions:
Trade accounts receivable 131 (1,012)
Inventories (2,667) (791)
Prepaid expenses and other 1,064 (330)
Trade accounts payable and accrued expenses 1,437 (2,864)
Income taxes refundable/payable (1,013) 2,798
-----------------------
Net cash provided by operating activities 17,513 13,482
INVESTING ACTIVITIES
Proceeds from sales of fixed assets 1,074 491
Capital expenditures (5,667) (11,508)
Acquisitions (1,612) (124)
Other (89) 401
-----------------------
Net cash used in investing activities (6,294) (10,740)
FINANCING ACTIVITIES
Proceeds from debt 13,967 5,212
Principal payments on debt (22,354) (6,000)
Principal payments on capital lease obligations (228) (20)
Common stock dividends (2,092) (2,081)
Purchase of common stock (987) (1,419)
Issuance of common stock 515 1,674
-----------------------
Net cash provided by (used in) financing activities (11,179) (2,634)
-----------------------
Effect of foreign currency rate changes (76) (230)
-----------------------
Net increase in cash and cash equivalents (36) (122)
Cash and cash equivalents beginning of period 1,112 357
-----------------------
Cash and cash equivalents end of period $ 1,076 $ 235
=======================
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 2,469 $ 3,561
Cash paid for income taxes 6,240 1,381
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. Certain information
and footnote disclosures normally included in annual financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations, although Schawk, Inc. (the Company) believes the disclosures
included are adequate to make the information presented not misleading. In
addition, certain prior year amounts have been reclassified to conform to the
current year presentation. In the opinion of management, all adjustments
necessary for a fair presentation for the periods presented have been reflected
and are of a normal recurring nature. These financial statements should be read
in conjunction with the Company's consolidated financial statements and the
notes thereto for the three years ended December 31, 2001, as filed with our
2001 annual report on Form 10-K.
NOTE 2. NEW ACCOUNTING PRINCIPLES
Effective January 1, 2002, the Company adopted SFAS 141, Business Combinations,
SFAS 142, Goodwill and Other Intangible Assets, (see note 11) and SFAS 144,
Accounting for the Impairment or Disposal of Long-lived Assets, (see Note 5),
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, and eliminates the
pooling-of-interests method of accounting for future acquisitions. SFAS 141 also
includes guidance on the initial recognition and measurement of goodwill and
other intangible assets. SFAS 142 requires that these assets be reviewed for
impairment at least annually. Intangible assets with finite lives will continue
to be amortized over their estimated useful lives. SFAS No. 144 requires that
long-lived assets be reviewed for impairment.
NOTE 3. INTERIM RESULTS
Results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
NOTE 4. DESCRIPTION OF BUSINESS
The Company is a leading provider of digital imaging prepress services for the
consumer products industry. The Company focuses on providing these services to
multi-national clients in three primary markets: consumer products packaging,
advertising agencies and promotion.
NOTE 5. IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Standards No. 144 (see Note 2, New
Accounting Principles), the Company continues to review all of its long-lived
assets on an ongoing basis. As a result of the review performed during the
second quarter, certain assets were identified to be either no longer in use
and/or their future cash flows were not sufficient to support the book value of
the asset and an asset impairment charge of $2,121 was recorded and included in
"Restructuring and Other Charges" on the Consolidated Statement of Operations.
7
NOTE 6. RESTRUCTURING AND OTHER CHARGES
During 2001, the Company eliminated 140 positions at several company facilities.
In addition, lease termination expenses and asset write-offs related to an east
coast facility closed in 2000 were incurred. As a result of these actions,
restructuring charges of $332 and $1,017 were recorded for the quarter and nine
months ended September 30, 2001, respectively, and are included in
"Restructuring and Other Charges" on the Consolidated Statement of Operations.
Below is an analysis of the activity related to the Company's 2001 restructuring
programs and their status as of September 30, 2002:
Balance at Balance at Balance at Balance at
Description of Reserve 12/31/01 Payments 3/31/02 Payments 6/30/02 Payments 9/30/02
- ---------------------- ---------- -------- ---------- -------- ---------- -------- ----------
Severance and other
employee benefits $310 $(35) $275 $(39) $236 $(21) $215
Other 20 -- 20 -- 20 -- 20
-----------------------------------------------------------------------------------
$330 $(35) $295 $(39) $256 $(21) $235
The majority of the remaining severance and other employee benefits will be paid
in accordance with the termination agreements.
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.
NOTE 7. INVENTORIES
Inventories consist of the following:
September 30, December 31,
2002 2001
---- ----
Raw materials $ 2,166 $2,315
Work in process 9,468 6,652
------- ------
11,634 8,967
Less: LIFO reserve (1,042) (1,042)
------- ------
$10,592 $7,925
======= ======
8
NOTE 8. EARNINGS PER SHARE
Basic earnings per share and diluted earnings per share are shown on the
Consolidated Statement of Operations. Basic earnings per share 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,
--------------------------------
2002 2001
------- -------
Net income $ 3,125 $ 2,111
======= =======
Weighted average shares 21,499 21,405
Effect of dilutive stock options 222 293
------- -------
Adjusted weighted average shares and
assumed conversions 21,721 21,698
======= =======
Basic earnings per share $ 0.15 $ 0.10
======= =======
Diluted earnings per share $ 0.14 $ 0.10
======= =======
Nine Months ended September 30,
-------------------------------
2002 2001
------- -------
Net income $ 9,851 $ 5,574
======= =======
Weighted average shares 21,484 21,381
Effect of dilutive stock options 212 175
------- -------
Adjusted weighted average shares and
assumed conversions 21,696 21,556
======= =======
Basic earnings per share $ 0.46 $ 0.26
======= =======
Diluted earnings per share $ 0.45 $ 0.26
======= =======
9
NOTE 9. SEGMENT REPORTING
The Company operates in a single business segment, Imaging and Information
Technologies. The Company operates primarily in two geographic areas, the United
States and Canada. Summary financial information by geographic area is as
follows:
Three months ended September 30, 2002
-------------------------------------
United States Canada Other Foreign Total
------------- ------ ------------- -----
Sales $37,895 $5,827 $1,984 $45,706
Long-lived assets 81,865 15,906 8,504 106,275
Three months ended September 30, 2001
-------------------------------------
United States Canada Other Foreign Total
------------- ------ ------------- -----
Sales $38,887 $6,190 $2,105 $47,182
Long-lived assets 87,570 16,213 8,194 111,977
Nine months ended September 30, 2002
------------------------------------
United States Canada Other Foreign Total
------------- ------ ------------- -----
Sales $111,336 $17,671 $5,743 $134,750
Long-lived assets 81,865 15,906 8,504 106,275
Nine months ended September 30, 2001
------------------------------------
United States Canada Other Foreign Total
------------- ------ ------------- -----
Sales $112,534 $21,188 $6,884 $140,606
Long-lived assets 87,570 16,213 8,194 111,977
NOTE 10. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the quarter and
nine months ended September 30, 2002 and 2001, respectively, are as follows:
Three months ended September 30
-------------------------------
2002 2001
------- -------
Net income $ 3,125 $ 2,111
Foreign currency translation adjustments (689) (803)
------- -------
Comprehensive income $ 2,436 $ 1,308
======= =======
Nine months ended September 30
-------------------------------
2002 2001
------- -------
Net income $ 9,851 $ 5,574
Foreign currency translation adjustments (323) (786)
------- -------
Comprehensive income $ 9,528 $ 4,788
======= =======
10
NOTE 11. GOODWILL AND OTHER INTANGIBLE ASSETS
In its initial application of SFAS 142, the Company determined that it operated
in one reporting unit for purposes of completing the impairment review of
goodwill. Therefore, the Company tested for impairment at the consolidated
entity level and determined that a potential impairment did not exist. As a
result, no further actions were required. The Company plans to perform its
annual impairment review in the fourth quarter of each year.
Below is a comparison of the results of operations for the quarter and nine
months ended September 30, 2002, with the proforma results of operations for the
quarter and nine months ended September 30, 2001, adjusted to exclude goodwill
amortization.
Three months ended September 30
-------------------------------
2002 2001
---------- ----------
NET INCOME
Reported net income $ 3,125 $ 2,111
Goodwill amortization (net of tax) -- 392
---------- ----------
Adjusted net income $ 3,125 $ 2,503
========== ==========
BASIC EARNINGS PER SHARE
Reported net income $ 0.15 $ 0.10
Goodwill amortization (net of tax) -- .02
---------- ----------
Adjusted net income $ 0.15 $ 0.12
========== ==========
DILUTED EARNINGS PER SHARE
Reported net income $ 0.14 $ 0.10
Goodwill amortization (net of tax) -- .02
---------- ----------
Adjusted net income $ 0.14 $ 0.12
========== ==========
Average number of common shares outstanding 21,499 21,405
Average number of common shares outstanding
Assuming dilution 21,721 21,698
Nine months ended September 30
------------------------------
2002 2001
---------- ----------
NET INCOME
Reported net income $ 9,851 $ 5,574
Goodwill amortization (net of tax) -- 1,177
---------- ----------
Adjusted net income $ 9,851 $ 6,751
========== ==========
BASIC EARNINGS PER SHARE
Reported net income $ 0.46 $ 0.26
Goodwill amortization (net of tax) -- .06
---------- ----------
Adjusted net income $ 0.46 $ 0.32
========== ==========
DILUTED EARNINGS PER SHARE
Reported net income $ 0.45 $ 0.26
Goodwill amortization (net of tax) -- .05
---------- ----------
Adjusted net income $ 0.45 $ 0.31
========== ==========
Average number of common shares outstanding 21,484 21,381
Average number of common shares outstanding
Assuming dilution 21,696 21,556
11
NOTE 12. RELATED PARTY TRANSACTIONS
During the second quarter of 2002, the Company sold a building used for storage
to the Chairman of the Board, the majority stockholder of the Company. The
building was sold for $750, which resulted in a gain of $145, included in "Other
Income" on the Consolidated Statements of Operations. An independent appraisal
was obtained and the building was sold for more than the appraised value. The
independent members of the Board of Directors approved this transaction.
NOTE 13. INCOME TAXES
State income tax refunds received and the settlement of an outstanding tax
obligation during the second quarter of 2002 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 period. The reduction of the estimated tax liabilities was
recorded as a credit to income tax expense.
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 and the Company intends any such
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1999.
Although the Company believes that the assumptions upon which such
forward-looking statements are based are reasonable within the bounds of its
knowledge of its business and operations, it can give no assurance the
assumptions will prove to have been correct. Important factors that could cause
actual results to differ materially and adversely from the Company's
expectations and beliefs include, among other things, 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 Asia and other foreign countries in which the Company has
production capabilities, terrorist attacks and the U.S. response to such
attacks, as well as other factors detailed in the Company's filings with the
Securities and Exchange Commission.
NEW GOODWILL ACCOUNTING RULES
On January 1, 2002, the Company adopted SFAS 142, the new accounting
pronouncement on goodwill accounting. Previously, the Company recorded monthly
amortization of goodwill, generally over a 40-year period. The new rules that
became effective January 1, 2002 prohibit the amortization of goodwill. Rather,
goodwill is to be reviewed on a periodic basis, and if a write-down is required,
the write-down must be taken at that time, similar to an impairment charge on
other long-lived assets. The goodwill amortization was $538 and $1,616 for the
quarter and nine months ended September 30, 2001, respectively. The Company's
results with the pro-forma effect of the new accounting rules on the quarter and
nine months ended September 30, 2001 are as follows:
12
Proforma results excluding goodwill amortization
Quarter and nine months ended September 30, 2001
(In thousands, Except Per Share Amounts)
Period Ended September 30, 2001
-------------------------------
Quarter Nine Months
--------- -----------
Reported net income $ 2,111 $ 5,574
Add back: Goodwill amortization 538 1,616
Subtract: tax effect of goodwill amortization (146) (439)
--------- ---------
Adjusted net income $ 2,503 $ 6,751
Basic earnings per share:
Reported net income $ 0.10 $ 0.26
Add back: Goodwill amortization $ 0.03 $ 0.08
Subtract: tax effect of goodwill amortization $ (0.01) $ (0.02)
--------- ---------
Adjusted net income $ 0.12 $ 0.32
Diluted earnings per share:
Reported net income $ 0.10 $ 0.26
Add back: Goodwill amortization $ 0.03 $ 0.07
Subtract: tax effect of goodwill amortization $ (0.01) $ (0.02)
--------- ---------
Adjusted net income $ 0.12 $ 0.31
13
THIRD QUARTER ENDED SEPTEMBER 30, 2002
Schawk, Inc.
Comparative Consolidated Statements of Operations
Quarter Ended September 30, 2002 and 2001
$ %
2002 2001 CHANGE CHANGE
---- ---- ------ ------
Net sales $ 45,706 $ 47,182 $ (1,476) -3.1%
Cost of sales 27,253 28,339 (1,086) -3.8%
-------- --------
Gross profit 18,453 18,843 (390) -2.1%
Gross margin percentage 40.3% 40.0%
Selling, general and administrative expenses 12,263 13,507 (1,244) -9.2%
Amortization of intangibles -- 538 (538) nm (1)
Restructuring and other charges 421 332 89 nm
-------- -------- --------
Operating income 5,769 4,466 1,303 29.2%
Operating margin percentage 12.6% 9.5%
Other income (expense)
Interest and dividend income 1 1 0 nm
Interest expense (707) (1,033) 326 -31.6%
Other income (expense) (23) 37 (60) nm
-------- -------- --------
(729) (995) 266 -26.7%
Income before income taxes and minority interest 5,040 3,471 1,569 45.2%
Income tax provision 1,915 1,446 469 32.4%
-------- -------- --------
Effective income tax rate 38.0% 41.7%
Income before minority interest 3,125 2,025 1,100 54.3%
Minority interest in net loss of subsidiary -- 86 (86) nm
-------- -------- --------
Net income $ 3,125 $ 2,111 $ 1,014 48.0%
======== ======== ========
(1) nm - percentage not meaningful
NET SALES decreased 3.1% as a result of the continuing weakness in business at
the Company's advertising agency accounts. However, in the consumer products
packaging side of the business, which currently represents approximately 85% of
the Company's overall business, revenues increased 7.0% in the third quarter of
2002 versus the prior year third quarter. The Company expects the level of
business with advertising agency accounts to remain weak for the remainder of
2002. The lower sales are mitigated by the fact that ad agencies now represent
less than 15% of the Company's business and the Company's packaging prepress
client revenue has increased.
GROSS MARGIN as a percentage of net sales for the third quarter of 2002
increased to 40.3% from 40.0% for the comparable period in the prior year. Given
the fact that net sales were lower than the prior period, an increase in gross
margin as a percentage of sales is a very positive result. The increase in the
gross margin percentage indicates that the cost cutting moves the Company
initiated through its restructurings is having a positive effect.
OPERATING INCOME was 29.2% higher than the previous year third quarter. The
increase in operating income and in operating margin was due to lower SG&A
expense in the third quarter of 2002 as a result of the Company's cost cutting
measures and restructurings in prior years.
14
RESTRUCTURING AND OTHER CHARGES in the third quarter of 2002 consists of a
charge for $421 of severance costs. The severance was as a result of layoffs due
to lower revenues from advertising agency clients. The layoffs were considered
"other charges" as they did not arise from a formal restructuring plan. In the
prior year third quarter the $332 charge was also for severance costs.
OTHER INCOME (EXPENSE) - NET - The lower net expense was substantially all as a
result of lower interest expense. The decrease in interest expense was from a
combination of lower interest rates and lower borrowing levels in the third
quarter of 2002 as compared to the same period in the prior year. The lower
borrowing levels were due to strong cash flows in the first nine months of 2002
that were utilized, in part, to pay down debt. Interest expense also benefited
from lower rates in 2002 versus 2001 as approximately 60% of the Company's debt
was at floating rates averaging 3.0% during the third quarter of 2002.
INCOME TAX PROVISION was $1,915, or 38% effective rate, for the third quarter of
2002 as compared to $1,446, or 41.7% effective rate in the third quarter of the
previous year. An effective tax rate in the range of 38% to 41% is anticipated
in the fourth quarter of 2002.
NET INCOME for the third quarter of 2002 increased significantly versus the same
period of 2001 for the reasons previously discussed.
BASIC AND DILUTED EARNINGS PER SHARE was $0.15 and $0.14, respectively, for the
third quarter of 2002 compared with $0.10 and $0.10 for the same period in 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002
Schawk, Inc.
Comparative Consolidated Statements of Operations
Nine Months Ended September 30, 2002 and 2001
$ %
2002 2001 CHANGE CHANGE
---- ---- ------ ------
Net sales $ 134,750 $ 140,606 $ (5,856) -4.2%
Cost of sales 79,255 83,922 (4,667) -5.6%
--------- --------- ---------
Gross profit 55,495 56,684 (1,189) -2.1%
Gross margin percentage 41.2% 40.3%
Selling, general and administrative expenses 37,688 41,720 (4,032) -9.7%
Amortization of intangibles -- 1,616 (1,616) nm (1)
Restructuring and other charges 2,542 1,017 1,525 nm
--------- --------- ---------
Operating income 15,265 12,331 2,934 23.8%
Operating margin percentage 11.3% 8.8%
Other income (expense)
Interest and dividend income 229 20 209 nm
Interest expense (2,175) (3,397) 1,222 -36.0%
Other income (expense) 130 351 (221) nm
--------- --------- ---------
(1,816) (3,026) 1,210 -40.0%
Income before income taxes and minority interest 13,449 9,305 4,144 44.5%
Income tax provision 3,619 3,848 (229) -6.0%
Effective income tax rate 26.9% 41.4%
--------- --------- ---------
Income before minority interest 9,830 5,457 4,373 80.1%
Minority interest in net loss of subsidiary 21 117 (96) nm
--------- --------- ---------
Net income $ 9,851 $ 5,574 $ 4,277 76.7%
========= ========= =========
(1) nm - Percentage not meaningful
15
NET SALES decreased 4.2% versus the same period in 2001. On the consumer
products packaging side of the business, which represents approximately 85% of
the Company's overall business, revenues with the Company's consumer products
packaging accounts increased 5.4% in the current year nine-month period versus
the comparable period in the prior year. However, lower sales in the prepress
for advertising agency business more than offset the gains from the consumer
products packaging business. The lower sales level in the advertising agency
business is due to the continuing weakness in the advertising market.
GROSS MARGIN as a percentage of net sales for the nine-month period ended
September 30, 2002 increased to 41.2% from 40.3% for the comparable period in
the prior year. Given the fact that net sales were lower than the prior period,
an increase in gross margin as a percentage of sales is a very positive result.
The increase in gross margin as a percentage of sales indicates that the cost
cutting moves the Company initiated through its restructurings is having a
positive effect.
OPERATING INCOME in the nine-month period was higher than the previous year
nine-month period despite a $2,121 asset impairment charge classified as
Restructuring and Other Charges on the Consolidated Statement of Operations was
recorded in the nine-month period of 2002 reducing operating income as compared
to a $1,017 restructuring charge in the comparable period of the previous year.
RESTRUCTURING AND OTHER CHARGES of $2,542 in the nine-month period of 2002
resulted from a $2,121 charge for asset impairment recorded in accordance with
the new accounting standard for asset impairments, Statement of Financial
Accounting Standard No. 144 and $421 from severance costs in the third quarter
of 2002. The new accounting standard requires a regular periodic review of all
long-lived assets including property, plant and equipment as well as any other
long-term assets. The Company performed a review as of June 30, 2002 and
determined that $2.1 million of assets, primarily software and software
development assets, had little or no value based on obsolescence or limited use.
The Company had no asset impairment charge for the quarter ended September 30,
2002. Additionally, the Company reviewed its long-lived assets for impairment in
1999, 2000 and 2001 in connection with the 1999 restructuring, the 2000
restructuring and the 2001 restructuring and recorded impairment charges of 869,
799, and zero, respectively. In the nine-month period ended September 30, 2001,
a restructuring charge of $1,017 was recorded related to severance costs and the
cost to terminate a lease.
OTHER INCOME (EXPENSE) - NET decreased for the nine-month period of 2002
compared with same period of 2001. The lower net expense was primarily as a
result of lower interest expense. The decrease in interest expense was from a
combination of lower interest rates and lower borrowing levels in the first nine
months of 2002 as compared to the same period in the prior year. The lower
borrowing levels were due to strong cash flows in the first nine months of 2002
that were utilized, in part, to pay down debt. Interest expense also benefited
from lower rates in 2002 versus 2001 as approximately 57% of the Company's debt
was at floating rates during the nine-month period of 2002.
INCOME TAX PROVISION was lower than the comparable period of the previous year
as a result of offsetting the regular tax provision with tax benefits from
refunds received in the second quarter of 2002 and tax benefits from the
reduction in tax liabilities in connection with the settlement an outstanding
liability for lower amount than the amount that had been accrued in the second
quarter. As a result the effective tax rate for the nine-month period ended
September 30, 2002 was 26.9% as compared to 41.4% in the comparable period of
the prior year.
NET INCOME for the nine-month period ended September 30, 2002 increased
significantly versus the same period of 2001 for the reasons previously
discussed.
BASIC AND DILUTED EARNINGS PER SHARE was $0.46 and $0.45, respectively, for the
nine months ended September 30, 2002 compared with $0.26 and $0.26 for the same
period in 2001.
16
LIQUIDITY AND CAPITAL RESOURCES
The Company presently finances its business from available cash and from cash
generated from operations. The Company maintains a $65,000 unsecured credit
facility, which expires in May 2004, of which approximately $40,000 was
available for borrowings at September 30, 2002. The Company also maintains a
$15,000 demand line of credit to provide financing and working capital
flexibility. At September 30, 2002, approximately $6,400 was available for
borrowing under the demand line of credit. The Company also maintains working
capital demand lines of credit in Canada (US $3,500), China (US $1,500) and
Malaysia (US $1,250).
Long-term debt and capital lease obligations decreased to $37,300 at September
30, 2002 from $52,100 at December 31, 2001. The Company reduced long-term debt
by payment of $9,000 on its unsecured credit facility and $6,000 on its Note
Purchase Agreement dated August 18, 1995. The amount outstanding on the demand
line of credit, included in current liabilities, has increased by $6,900.
At September 30, 2002, outstanding debt of the Company consisted of: (i)
unsecured notes issued pursuant to a Note Purchase Agreement dated August 18,
1995, for $18,000 with terms ranging from 2001 through 2005 at an interest rate
of 6.98%; (ii) $25,000 of borrowings under the Company's unsecured credit
facility; (iii) $8,600 of borrowings under its unsecured demand credit line;
(iv) $547 of borrowings under its Chinese credit line; and (v) $404 of
borrowings under its Malaysian credit facility.
Because of the Company's strong cash flow and earnings in 2002 and the reduction
in outstanding debt, effective July 1, 2002, the Company's leverage ratio had
improved such that its borrowing cost was reduced by twelve basis points and is
at the lowest borrowing rate allowed in the agreement. In addition, the charge
for the unused portion of the $65,000 credit facility was reduced by five basis
points.
Management believes that the level of working capital is adequate for the
Company's liquidity needs related to normal operations both currently and in the
foreseeable future, and that the Company has sufficient resources to support its
growth, either through currently available cash, through cash generated from
future operations or through short-term financing.
Capital expenditures of $2,175 and $5,667 were made during the quarter and nine
months ended September 30, 2002, respectively. Depreciation expense was $2,665
and $8,958 for the quarter and nine months ended September 30, 2002,
respectively.
SEASONALITY
With respect to consumer products packaging, the prepress market is not
currently seasonal. On the other hand, there are cycles of design changes for
brand images that most consumer products brands are subject to. These cycles
differ from brand to brand as to when design changes occur and thus the
Company's sales volume levels are unpredictable.
With respect to the advertising and promotional markets, some seasonality exists
in that the months of December and January are typically the slowest of the year
because advertising agencies and their clients typically finish their work by
mid-December and don't start up again until mid-January. In addition,
advertising and promotion is generally cyclical as the consumer economy is
cyclical. When consumer spending and GDP decrease, ad pages decline. Generally,
when ad pages decline the Company's advertising and promotion business declines.
In the second half of 2001 and in the first nine months of 2002 the advertising
agency market was very depressed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A discussion regarding market risk is disclosed in the Company's December 31,
2001 Form 10-K. There have been no material changes in information regarding
market risk relating to the Company since December 31, 2001.
17
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2002, an evaluation was performed under the supervision and
with the participation of the Company's management, including the CEO and CFO,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure controls and
procedures were effective as of September 30, 2002. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to September 30, 2002.
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
- --------- -----------
99.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
B. Reports on Form 8-K
None.
18
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 8th day of November 2002.
SCHAWK, INC.
- ------------
(Registrant)
/s/ David A. Schawk
- ------------------------------------
President, Chief Executive Officer and Director
/s/ James J. Patterson
- ------------------------------------
Senior Vice President and Chief Financial Officer
19
CERTIFICATIONS
I, David A. Schawk, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Schawk, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 8, 2002 /s/ David A. Schawk
----------------------- --------------------------
President & CEO
20
CERTIFICATIONS
I, James J. Patterson, certify that:
7. I have reviewed this quarterly report on Form 10-Q of Schawk, Inc.;
8. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
9. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
10. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
11. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
12. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 8, 2002 /s/ James J. Patterson
----------------------- ---------------------------
Sr. Vice President & CFO
21