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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 June 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 July 31, 2003 is:
21,328,103 Class A Common Stock, $.008 par value
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1
SCHAWK, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
June 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 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
Certificates Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 19
Certificates Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 21
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Schawk, Inc.
Consolidated Balance Sheets
(In Thousands)
JUNE 30 DECEMBER 31,
2003 2002
(UNAUDITED)
----------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,091 $ 2,051
Trade accounts receivable, less allowance for doubtful accounts
of $1,479 at June 30, 2003 and $1,269 at December 31, 2002 37,600 37,946
Inventories 9,315 8,540
Prepaid expenses and other 3,780 3,539
Refundable income taxes 1,194 889
Deferred income taxes 1,707 1,713
----------------------------------------
Total current assets 55,687 54,678
Property and equipment, less accumulated depreciation of
$65,123 at June 30, 2003 and $63,457 at December 31, 2002 39,196 40,652
Goodwill 61,275 60,476
Other assets 4,100 4,664
----------------------------------------
Total assets $ 160,258 $160,470
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 5,233 $ 4,696
Accrued expenses 14,811 13,787
Income taxes payable 396 --
Notes payable to banks 4,117 3,281
Current portion of long-term debt and capital lease obligations 6,139 6,260
Short-term debt expected to be refinanced 14,000 --
----------------------------------------
Total current liabilities 44,696 28,024
Long-term debt 12,168 37,186
Capital lease obligations 57 46
Other 995 1,029
Deferred income taxes 4,446 4,418
Stockholders' Equity:
Common stock, $0.008 par value, 40,000,000 shares authorized,
23,481,343 and 23,381,763 shares issued at June 30, 2003 and
December 31, 2002, respectively; 21,314,038 and 21,436,487
shares outstanding at June 30, 2003 and December 31, 2002, 186 186
respectively
Additional paid-in capital 86,703 85,922
Retained earnings 34,646 27,253
Accumulated comprehensive income (loss), net 663 (1,558)
----------------------------------------
122,198 111,803
Treasury stock, at cost, 2,167,305 and 1,945,276 shares of common
stock at June 30, 2003 and December 31, 2002, respectively (24,302) (22,036)
----------------------------------------
Total stockholders' equity 97,896 89,767
----------------------------------------
Total liabilities and stockholders' equity $ 160,258 $ 160,470
========================================
See accompanying notes.
3
Schawk, Inc.
Consolidated Statements of Operations
Three Months Ended June 30, 2003 and 2002
(Unaudited)
(In Thousands, Except Per Share Amounts)
2003 2002
----------------------------------------
Net sales $ 51,635 $ 47,011
Cost of sales 30,716 27,418
Selling, general, and administrative expenses 13,871 12,921
Restructuring and other charges -- 2,121
----------------------------------------
Operating income 7,048 4,551
Other income (expense)
Interest income 51 223
Interest expense (528) (721)
Other income 749 --
----------------------------------------
272 (498)
----------------------------------------
Income before income taxes and minority interest 7,320 4,053
Income tax provision 2,742 34
----------------------------------------
Income before minority interest 4,578 4,019
Minority interest in net income of subsidiary -- (17)
----------------------------------------
Net income $ 4,578 $ 4,002
========================================
Earnings per share:
Basic $ 0.21 $ 0.19
Diluted $ 0.21 $ 0.18
Weighted average number of common and common
equivalent shares outstanding 21,635 21,715
Dividends per common share $ 0.0325 $ 0.0325
See accompanying notes.
4
Schawk, Inc.
Consolidated Statements of Operations
Six Months Ended June 30, 2003 and 2002
(Unaudited)
(In Thousands, Except Per Share Amounts)
2003 2002
----------------------------------------
Net sales $ 100,340 $ 90,629
Cost of sales 58,395 53,434
Selling, general, and administrative expenses 27,426 25,425
Restructuring and other charges -- 2,121
----------------------------------------
Operating income 14,519 9,649
Other income (expense)
Interest income 51 228
Interest expense (1,056) (1,468)
Other income 749 --
----------------------------------------
(256) (1,240)
----------------------------------------
Income before income taxes and minority interest 14,263 8,409
Income tax provision 5,484 1,704
----------------------------------------
Income before minority interest 8,779 6,705
Minority interest in net loss of subsidiary -- 21
----------------------------------------
Net income $ 8,779 $ 6,726
========================================
Earnings per share:
Basic $ 0.41 $ 0.31
Diluted $ 0.41 $ 0.31
Weighted average number of common and common
equivalent shares outstanding 21,594 21,684
Dividends per common share $0.065 $ 0.065
See accompanying notes.
5
Schawk, Inc.
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2003 and 2002
(Unaudited)
(In Thousands)
2003 2002
----------------------------------------
OPERATING ACTIVITIES
Net income $ 8,779 $ 6,726
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 5,877 6,293
Deferred income taxes 34 (1,782)
Asset impairment charge -- 2,121
Gain realized on sale of property and equipment (571) (153)
Minority interest -- (21)
Changes in operating assets and liabilities, net of effects from
acquisitions:
Trade accounts receivable 346 588
Inventories (775) (2,212)
Prepaid expenses and other (241) 428
Trade accounts payable and accrued expenses 1,561 1,248
Income taxes refundable/payable 91 (430)
----------------------------------------
Net cash provided by operating activities 15,101 12,806
INVESTING ACTIVITIES
Proceeds from sales of property and equipment 1,444 1,014
Capital expenditures (4,146) (3,492)
Acquisitions -- (1,200)
Other (96) (159)
----------------------------------------
Net cash used in investing activities (2,798) (3,837)
FINANCING ACTIVITIES
Proceeds from debt 2,562 6,192
Principal payments on debt (12,744) (13,785)
Principal payments on capital lease obligations (176) (134)
Common stock dividends (1,386) (1,393)
Purchase of common stock (2,278) --
Issuance of common stock 793 402
----------------------------------------
Net cash used in financing activities (13,229) (8,718)
----------------------------------------
Effect of foreign currency rate changes 966 251
----------------------------------------
Net increase (decrease) in cash and cash equivalents 40 502
Cash and cash equivalents beginning of period 2,051 1,112
----------------------------------------
Cash and cash equivalents end of period $ 2,091 $ 1,614
========================================
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 1,024 $ 1,792
Cash paid for income taxes 5,467 3,340
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 11 -- 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.
7
NOTE 6. INVENTORIES
Inventories consist of the following:
June 30, December 31,
2003 2002
---- ----
Raw materials $1,824 $2,230
Work in process 8,605 7,424
------ ------
10,429 9,654
Less: LIFO reserve (1,114) (1,114)
------- -------
$ 9,315 $8,540
======= ======
NOTE 7. 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 $14,000 as of June 30, 2003 and is
classified as "Short-term debt expected to be refinanced" in the current
liability section of the June 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 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 June 30,
----------------------------------------------------
2003 2002
----------------- -----------------
Net income $ 4,578 $ 4,002
================= =================
Weighted average shares 21,324 21,487
Effect of dilutive stock options 311 228
----------------- -----------------
Adjusted weighted average shares and
assumed conversions 21,635 21,715
================= =================
Basic earnings per share $ 0.21 $ 0.19
================= =================
Diluted earnings per share $ 0.21 $ 0.18
================= =================
Six months ended June 30,
-----------------------------------------------------
2003 2002
----------------- -----------------
Net income $ 8,779 $ 6,726
================= =================
Weighted average shares 21,381 21,477
Effect of dilutive stock options 213 207
----------------- -----------------
Adjusted weighted average shares and
assumed conversions 21,594 21,684
================= =================
Basic earnings per share $ 0.41 $ 0.31
================= =================
Diluted earnings per share $ 0.41 $ 0.31
================= =================
8
NOTE 9. SEGMENT REPORTING
The Company operates in a single business segment, Digital Imaging Graphic Arts.
The Company operates primarily in two geographic areas, the United States and
Canada. Summary financial information by geographic area is as follows:
Three months ended June 30, 2003
--------------------------------
United States Canada Other Foreign Total
------------- ------ ------------- -----
Sales $41,102 $ 8,009 $ 2,524 $ 51,635
Long-lived assets 79,129 17,284 8,158 104,571
Net Assets 90,358 9,370 (1,832) 97,896
Three months ended June 30, 2002
--------------------------------
United States Canada Other Foreign Total
------------- ------ ------------- -----
Sales $38,815 $ 6,291 $ 1,905 $ 47,011
Long-lived assets 82,955 15,576 8,281 106,812
Net Assets 79,528 7,011 (901) 85,638
Six months ended June 30, 2003
--------------------------------
United States Canada Other Foreign Total
------------- ------ ------------- -----
Sales $80,591 $15,179 $ 4,570 $ 100,340
Long-lived assets 79,129 17,284 8,158 104,571
Net Assets 90,358 9,370 (1,832) 97,896
Six months ended June 30, 2002
--------------------------------
United States Canada Other Foreign Total
------------- ------ ------------- -----
Sales $74,777 $12,093 $ 3,759 $ 90,629
Long-lived assets 82,955 15,576 8,281 106,812
Net Assets 79,528 7,011 (901) 85,638
NOTE 10. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the quarter and
six months ended June 30, 2003 and 2002, respectively, are as follows:
Three months ended June 30,
----------------------------------------------------
2003 2002
----------------- -----------------
Net income $4,578 $4,002
Foreign currency translation adjustments 1,419 389
----------------- -----------------
Comprehensive income $5,997 $4,391
================= =================
Six months ended June 30,
----------------------------------------------------
2003 2002
----------------- -----------------
Net income $8,779 $6,726
Foreign currency translation adjustments 2,221 366
----------------- -----------------
Comprehensive income $11,000 $7,092
================= =================
9
NOTE 11. 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 June 30
---------------------------
2003 2002
---- ----
Net income, as reported $ 4,578 $ 4,002
Less: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (131) (216)
---------------------------
Net income, pro forma $ 4,447 $ 3,786
Earnings per share
Basic $ 0.21 $ 0.19
Diluted $ 0.21 $ 0.18
Pro forma earnings per share
Basic $ 0.21 $ 0.18
Diluted $ 0.21 $ 0.17
Six Months Ended June 30
---------------------------
2003 2002
---- ----
Net income, as reported $ 8,779 $ 6,726
Less: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
(474) (653)
---------------------------
Net income, pro forma $ 8,305 $ 6,073
Earnings per share
Basic $ 0.41 $ 0.31
Diluted $ 0.41 $ 0.31
Pro forma earnings per share
Basic $ 0.39 $ 0.28
Diluted $ 0.38 $ 0.28
10
NOTE 12. 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 six months ended June 30, 2003 the Company repurchased 226 shares for
total consideration of $2,278. 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 six months of
2003:
Total No. Avg. Price No. Shares Purchased
Share Purchased Paid Per Share as Part of Publicly Dollar Value of Shares that May
Period 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
==========================================================
YTD 2003 Total 226 $10.09 226
==========================================================
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
quarter and six-month period ended June 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.
NOTE 14. OTHER INCOME
A favorable litigation settlement in the amount of $350 and proceeds of life
insurance policies on a former employee in the amount of $399 were recorded in
the second quarter of 2003 and are included in Other income on the Consolidated
Statements of Operations for the quarter and six-month period ended June 30,
2003.
11
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.
RESULTS OF OPERATIONS
QUARTERS ENDED JUNE 30, 2003 AND 2002
Schawk, Inc.
Comparative Consolidated Statements of Operations
Quarters Ended June 30, 2003 and 2002
(in thousands)
$ %
2003 2002 CHANGE CHANGE
---- ---- ------ ------
Net sales $51,635 $47,011 $4,624 9.8%
Cost of sales 30,716 27,418 3,298 12.0%
-------------------------------------------
Gross profit 20,919 19,593 1,326 6.8%
Gross margin percentage 40.5% 41.7%
Selling, general and administrative expenses 13,871 12,921 950 7.4%
Restructuring and other charges -- 2,121 (2,121) nm(1)
-------------------------------------------
Operating income 7,048 4,551 2,497 54.9%
Operating margin percentage 13.6% 9.7%
Other income (expense)
Interest and dividend income 51 223 (172) nm
Interest expense (528) (721) 193 (29.3%)
Other income 749 -- 749 nm
-------------------------------------------
272 (498) 770 nm
-------------------------------------------
7,320 4,053 3,267 80.6%
Income before income taxes and minority interest
Income tax provision 2,742 34 2,708 nm
-------------- --------- ---------
Effective income tax rate 37.5% 0.8%
Income before minority interest 4,578 4,019 559 13.9%
Minority interest in net income of subsidiary - (17) 17 nm
-------------- --------- ---------
Net income $ 4,578 $ 4,002 $ 576 14.4%
============== ========= =========
(1) nm -- Percentage not meaningful
12
Net sales for the second quarter of 2003 increased 9.8% versus 2002.
The increase was all from the consumer products packaging side of the business,
which represents approximately 85% of the Company's overall business. The
increase was from new accounts as well as increased business with existing
accounts. Conversely, the advertising agency portion of the business declined
slightly in the quarter as compared to the prior year first quarter. 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 second quarter of
2003 decreased to 40.5% from 41.7% for the prior year second quarter. The
decrease in gross margin as a percentage of sales is reflective of the impact of
higher costs related to integrating new business into workflow.
Operating income in the second quarter of 2003 was 54.9% higher than
the previous year second quarter. The increase in operating income was
attributable to the increase in sales and the absence of $2.1 million of
impairment charges classified as Restructuring and other charges in the
statement of operations from the prior year second quarter. Selling, General and
Administrative expenses in the second quarter of 2003 were higher in absolute
dollars but lower as a percentage of sales than in the prior year second
quarter, 26.9% as compared to 27.5%, respectively.
Other income (expense) -- net increased in the second quarter of 2003
as compared to the prior year second quarter as 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 second quarter
included interest income from tax refunds ($0.2 million)
Lower interest expense due to lower outstanding
debt and lower interest rates $0.2 million
-------------
Net change in other income (expense) $0.8 million
Income tax provision for the second quarter of 2003 was at an effective
tax rate of 37.5 percent compared to an unusually low rate of 1.0 percent in the
prior year second quarter, which was a result of state tax refunds and the
settlement of an outstanding tax obligation.
Net income for the quarter ended June 30, 2003 increased significantly
versus the prior year quarter for the reasons previously discussed.
Basic and diluted earnings per share were $0.21 and $0.21,
respectively, for the quarter ended June 30, 2003 compared with $0.19 and $0.18
for the second quarter of 2002.
13
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Schawk, Inc.
Comparative Consolidated Statements of Operations
Six Months Ended June 30, 2003 and 2002
(in thousands)
$ %
2003 2002 CHANGE CHANGE
---- ---- ------ ------
Net sales $100,340 $90,629 $9,711 10.7%
Cost of sales 58,395 53,434 4,961 9.3%
-------------------------------------------
Gross profit 41,945 37,195 4,750 12.8%
Gross margin percentage 41.8% 41.0%
Selling, general and administrative expenses 27,426 25,425 2,001 0.8%
Restructuring and other charges -- 2,121 (2,121) nm(2)
-------------------------------------------
Operating income 14,519 9,649 4,870 50.5%
Operating margin percentage 14.5% 10.6%
Other income (expense)
Interest and dividend income 51 228 (177) nm
Interest expense (1,056) (1,468) 412 (28.1%)
Other income 749 -- 749 nm
-------------------------------------------
(256) (1,240) 984 nm
-------------------------------------------
14,263 8,409 5,854 69.6%
Income before income taxes and minority interest
Income tax provision 5,484 1,704 3,780 nm
-------------- --------- ---------
Effective income tax rate 38.4% 20.3%
Income before minority interest 8,779 6,705 2,074 30.9%
Minority interest in net loss of subsidiary - 21 (21) nm
-------------- --------- ---------
Net income $ 8,779 $ 6,726 $ 2,053 30.5%
============== ========= =========
(2) nm -- Percentage not meaningful
Net sales for the six-month period ended June 30, 2003 increased 10.7%
versus 2002. The increase was all from the consumer products packaging side of
the business, which represents approximately 85% of the Company's overall
business. The increase was from new accounts as well as increased business with
existing accounts. Conversely, the advertising agency portion of the business
declined slightly in the current year six-month period as compared to the prior
year period. 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 first six months of
2003 increased to 41.8% from 41.0% for the prior year six-month period. 0.5% of
the gross margin percentage increase was due to the inclusion of a gain on the
sale of a building in cost of sales in the first quarter of 2003.
Operating income for the first six months of 2003 was 50.5% higher than
the previous year period. The increase in operating income was attributable to
the increase in sales and the absence of $2.1 million of impairment charges
classified as Restructuring and other charges in the statement of operations
from the prior year period. Selling, General and Administrative expenses in the
first six months of 2003 were higher in absolute dollars but lower as a
percentage of sales than in the prior year second quarter, 27.3% as compared to
28.1%, respectively.
Other income (expense) -- net in the first six months of 2003 resulted
in net other expense of $0.2 million, a $1.0 million decrease, compared to $1.2
million in the comparable prior year period. The decrease in other expense was
primarily a result of the items described above in the discussion of second
quarter results, and lower interest expense due to repayment of bank debt from
available operating cash flow and lower interest rates.
14
Income tax provision for the six-month period ended June 30, 2003 was
at an effective tax rate of 38.4 percent compared to an unusually low rate of
20.3 percent 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 percent to 39 percent for the
full year of 2003.
Net income for the six months ended June 30, 2003 increased
significantly versus the prior year period for the reasons previously discussed.
Basic and diluted earnings per share were $0.41 and $0.41,
respectively, for the six-months ended June 30, 2003 compared with $0.31 and
$0.31 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 $51,000 was available
for borrowings at June 30, 2003. The Company also maintains a $15,000 unsecured
demand line of credit to provide financing and working capital flexibility. At
June 30, 2003, approximately $11,300 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 $10,300 in the first half of 2003
as follows: Long-term debt and capital lease obligations decreased to $12,200 at
June 30, 2003 from $37,200 at December 31, 2002. $11,000 of this reduction was
the result of payments on its unsecured credit facility; the balance of the
reduction was the result of a reclassification of the $14,000 balance
outstanding on the unsecured credit facility from Long-term debt to Short-term
debt expected to be refinanced. This reclassification was necessitated by the
fact that the unsecured credit agreement expires in May 2004, less than twelve
months from the June 30, 2003 balance sheet date. The outstanding amount on the
demand lines of credit, included in current liabilities, increased by $800, from
$3,300 at December 31, 2002 to $4,100 at June 30, 2003.
At June 30, 2003, 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 annual repayments required from 2003 through 2005 at an
interest rate of 6.98%. The next payment under the Note Purchase Agreement of
$6,000 due in August 2003 is to be paid from available cash and by drawing on
the Company's credit facility; (ii) $14,000 of borrowings under the Company's
unsecured credit facility; (iii) $3,700 of borrowings under its unsecured demand
credit line; (iv) $200 under a Malaysian term loan; (v) $200 under its Chinese
credit facility; (vi) $200 under its Malaysian credit facility and (vii) $200 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 $2,490 and $4,146 in the
quarter and six months ended June 30, 2003, respectively. Depreciation expense
was $3,105 and $5,877 for the quarter and six months ended June 30, 2003,
respectively.
The Company purchased $2,178 and $2,278 of its Class A Common
Stock in the quarter and six months ended June 30, 2003, respectively, under a
share repurchase program approved by the Board of Directors.
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.
15
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
second 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, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 21, 2003, we held our annual stockholders' meeting. There were 21,430,930
shares of Class A common stock outstanding entitled to vote, and a total of
20,960,323 (97.8%) were represented at the meeting in person or by proxy. The
following summarizes vote results of proposals submitted to our stockholders:
b) Proposal to elect directors for terms expiring in 2004:
NAME FOR AGAINST / WITHHELD ABSTENTIONS BROKER NON-VOTES
- ---- --- ------------------ ----------- ----------------
Clarence W. Schawk 20,803,688 0 156,635 0
David A. Schawk 20,805,474 0 154,849 0
A. Alex Sarkisian, Esq. 20,806,419 0 153,904 0
Judith W. McCue, Esq. 20,909,049 0 51,274 0
John T. McEnroe, Esq. 20,821,972 0 138,351 0
Hollis W. Rademacher 20,909,878 0 50,445 0
Leonard S. Caronia 20,910,510 0 49,813 0
c) Proposal to approve amendment and restatement of the 2001 equity option
plan:
FOR AGAINST / WITHHELD ABSTENTIONS BROKER NON-VOTES
- --- ------------------ ----------- ----------------
19,847,716 451,185 25,170 0
d) Proposal to ratify the appointment of Ernst & Young LLP as independent
auditors for the fiscal year ending December 31, 2003:
FOR AGAINST / WITHHELD ABSTENTIONS BROKER NON-VOTES
- --- ------------------ ----------- ----------------
20,912,349 43,415 4,559 0
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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 Sarbanes-Oxley Act of
2002.
B. Reports on Form 8-K
The following reports on form 8-K were filed:
DATE FILED REGARDING
April 22, 2003 2003 First Quarter Results
May 1, 2003 Schawk, Inc. Strategic Growth Plan
June 16, 2003 Schawk, Inc Investor Profile
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 August 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
18