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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
--------
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 October 31, 2004 is: 21,765,353 Shares of Class A Common Stock, $.008 par
value
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SCHAWK, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
September 30, 2004
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 17
PART II - OTHER INFORMATION
- ---------------------------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 6. Exhibits 19
Signatures 19
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Schawk, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
SEPTEMBER 30, DECEMBER 31,
2004 2003
(UNAUDITED)
-------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,956 $ 5,227
Trade accounts receivable, less allowance for doubtful accounts
of $1,761 at September 30, 2004 and $1,595 at December 31, 2003 50,040 35,642
Inventories 8,876 8,085
Prepaid expenses and other 5,213 3,902
Refundable income taxes 734 1,204
Deferred income taxes 1,958 2,086
---------------------------
Total current assets 76,777 56,146
Property and equipment, less accumulated depreciation of $69,915
at September 30, 2004 and $67,423 at December 31, 2003 35,948 36,372
Goodwill 64,631 62,936
Intangible assets, net 4,069 1,912
Other assets 4,220 2,325
---------------------------
Total assets $ 185,645 $ 159,691
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 6,300 $ 5,108
Accrued expenses 16,175 14,004
Income taxes payable 1,731 446
Current portion of long-term debt and capital lease obligations 6,038 6,062
---------------------------
Total current liabilities 30,244 25,620
Long-term debt 25,000 21,000
Capital lease obligations -- 21
Other 931 970
Deferred income taxes 4,784 5,708
Stockholders' Equity:
Common stock, $0.008 par value, 40,000,000 shares authorized,
23,923,993 and 23,602,330 shares issued at September 30, 2004 and
December 31, 2003, respectively; 21,714,630 and 21,435,887 shares
outstanding at September 30, 2004 and December 31, 2003,
respectively 190 187
Additional paid-in capital 91,011 87,928
Retained earnings 56,924 41,461
Accumulated comprehensive income 1,439 1,087
---------------------------
149,564 130,663
Treasury stock, at cost, 2,209,363 and 2,166,443 shares of common
stock at September 30, 2004 and December 31, 2003, respectively (24,878) (24,291)
---------------------------
Total stockholders' equity 124,686 106,372
---------------------------
Total liabilities and stockholders' equity $ 185,645 $ 159,691
===========================
See accompanying notes.
3
Schawk, Inc.
Consolidated Statements of Operations
Three Months Ended September 30, 2004 and 2003
(Unaudited)
(In Thousands, Except Per Share Amounts)
2004 2003
-------------------------
Net sales $ 62,245 $ 50,500
Cost of sales 34,027 29,864
Selling, general, and administrative expenses 16,562 13,581
-------------------------
Operating income 11,656 7,055
Other income (expense)
Interest income 126 --
Interest expense (519) (415)
Other income -- 297
-------------------------
(393) (118)
-------------------------
Income before income taxes 11,263 6,937
Income tax provision 3,946 2,628
-------------------------
Net income $ 7,317 $ 4,309
=========================
Earnings per share:
Basic $ 0.34 $ 0.20
Diluted $ 0.33 $ 0.20
Weighted average number of common and common
equivalent shares outstanding 22,511 21,952
Dividends per common share $ 0.0325 $ 0.0325
See accompanying notes.
4
Schawk, Inc.
Consolidated Statements of Operations
Nine Months Ended September 30, 2004 and 2003
(Unaudited)
(In Thousands, Except Per Share Amounts)
2004 2003
-------------------------
Net sales $ 178,778 $ 150,840
Cost of sales 102,362 88,659
Selling, general, and administrative expenses 47,516 40,607
-------------------------
Operating income 28,900 21,574
Other income (expense)
Interest income 127 51
Interest expense (1,497) (1,471)
Other income -- 1,046
-------------------------
(1,370) (374)
-------------------------
Income before income taxes 27,530 21,200
Income tax provision 9,965 8,112
-------------------------
Net income $ 17,565 $ 13,088
=========================
Earnings per share:
Basic $ 0.82 $ 0.61
Diluted $ 0.79 $ 0.60
Weighted average number of common and common
equivalent shares outstanding 22,370 21,718
Dividends per common share $ 0.0975 $ 0.0975
See accompanying notes.
5
Schawk, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2004 and 2003
(Unaudited)
(In Thousands)
2004 2003
-------------------------
OPERATING ACTIVITIES
Net income $ 17,565 $ 13,088
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 9,450 8,614
Deferred income taxes (796) 265
Loss (gain) realized on sale of property and equipment 45 (588)
Changes in operating assets and liabilities, net of effects from acquisitions:
Trade accounts receivable (14,398) (455)
Inventories (108) (479)
Prepaid expenses and other (1,311) 161
Trade accounts payable and accrued expenses 3,242 1,666
Income taxes refundable/payable 1,755 976
-------------------------
Net cash provided by operating activities 15,444 23,248
INVESTING ACTIVITIES
Proceeds from sales of property and equipment 192 1,515
Capital expenditures (8,256) (5,329)
Acquisitions, net of cash acquired (5,243) --
Contingent acquisition purchase price paid to escrow account (1,600) --
Other (290) (22)
-------------------------
Net cash used in investing activities (15,197) (3,836)
FINANCING ACTIVITIES
Proceeds from debt 18,700 4,562
Principal payments on debt (14,700) (20,842)
Principal payments on capital lease obligations (45) (236)
Common stock dividends (2,086) (2,080)
Purchase of common stock (603) (2,278)
Issuance of common stock 3,086 1,528
-------------------------
Net cash provided by (used in) financing activities 4,352 (19,346)
-------------------------
Effect of foreign currency rate changes 130 868
-------------------------
Net increase in cash and cash equivalents 4,729 934
Cash and cash equivalents beginning of period 5,227 2,051
-------------------------
Cash and cash equivalents end of period $ 9,956 $ 2,985
=========================
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 1,144 $ 1,476
Cash paid for income taxes 8,987 6,895
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 interim 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, 2003, as filed with its
2003 annual report on Form 10-K.
NOTE 2. INTERIM RESULTS
Results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
NOTE 3. DESCRIPTION OF BUSINESS
The Company is a leading 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 4. INVENTORIES
Inventories consist of the following:
September 30, December 31,
2004 2003
---- ----
Raw materials $ 2,330 $ 2,129
Work in process 7,623 7,033
------- -------
9,953 9,162
Less: LIFO reserve (1,077) (1,077)
------- -------
$ 8,876 $ 8,085
======= =======
7
NOTE 5. 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,
--------------------------------
2004 2003
----------------- -----------------
Net income $ 7,317 $ 4,309
================= =================
Weighted average shares 21,657 21,344
Effect of dilutive stock options 854 608
----------------- -----------------
Adjusted weighted average shares and
assumed conversions 22,511 21,952
================= =================
Basic earnings per share $ 0.34 $ 0.20
================= =================
Diluted earnings per share $ 0.33 $ 0.20
================= =================
Nine months ended September 30,
-------------------------------
2004 2003
----------------- -----------------
Net income $ 17,565 $ 13,088
================= =================
Weighted average shares 21,548 21,368
Effect of dilutive stock options 822 350
----------------- -----------------
Adjusted weighted average shares and
assumed conversions 22,370 21,718
================= =================
Basic earnings per share $ 0.82 $ 0.61
================= =================
Diluted earnings per share $ 0.79 $ 0.60
================= =================
NOTE 6. 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, 2004
-------------------------------------
United States Canada Other Foreign Total
------------- ------ ------------- -----
Sales $ 50,617 $ 7,635 $ 3,993 $ 62,245
Long-lived assets 84,076 17,490 7,302 108,868
Net Assets 115,956 11,072 (2,342) 124,686
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
8
NOTE 6. SEGMENT REPORTING (CONTINUED)
Nine months ended September 30, 2004
------------------------------------
United States Canada Other Foreign Total
------------- ------ ------------- -----
Sales $ 145,257 $ 23,192 $ 10,329 $ 178,778
Long-lived assets 84,076 17,490 7,302 108,868
Net Assets 115,956 11,072 (2,342) 124,686
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
NOTE 7. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the quarter and
nine months ended September 30, 2004 and 2003, respectively, are as follows:
Three months ended September 30,
----------------------------------------------------
2004 2003
----------------- -----------------
Net income $ 7,317 $ 4,309
Foreign currency translation adjustments 1,042 (203)
----------------- -----------------
Comprehensive income $ 8,359 $ 4,106
================= =================
Nine months ended September 30,
----------------------------------------------------
2004 2003
----------------- -----------------
Net income $17,565 $13,088
Foreign currency translation adjustments 352 2,018
----------------- -----------------
Comprehensive income $17,917 $15,106
================= =================
NOTE 8. 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 unlimited grants of options to purchase shares of Class A common
stock to outside directors. Options granted under these plans have an exercise
price equal to the market price of the underlying stock at the date of grant and
are exercisable for a period of ten years from the date of grant and vest over a
three-year period.
The Company 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.
9
NOTE 8. STOCK BASED COMPENSATION (CONTINUED)
Three Months Ended Sept. 30,
----------------------------
2004 2003
---- ----
Net income, as reported $ 7,317 $ 4,309
Less: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (178) (118)
-----------------------------
Net income, pro forma $ 7,139 $ 4,191
=============================
Earnings per share
Basic $ 0.34 $ 0.20
Diluted $ 0.33 $ 0.20
Pro forma earnings per share
Basic $ 0.33 $ 0.20
Diluted $ 0.32 $ 0.19
Nine Months Ended Sept. 30,
---------------------------
2004 2003
---- ----
Net income, as reported $ 17,565 $ 13,088
Less: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (917) (592)
-----------------------------
Net income, pro forma $ 16,648 $ 12,496
=============================
Earnings per share
Basic $ 0.82 $ 0.61
Diluted $ 0.79 $ 0.60
Pro forma earnings per share
Basic $ 0.77 $ 0.58
Diluted $ 0.74 $ 0.58
NOTE 9. ACQUISITIONS
The Company acquired certain assets and assumed certain liabilities of the
Virtualcolor division of Fort Dearborn Company, located in Elk Grove Village,
Illinois, effective as of January 1, 2004. Virtualcolor is a provider of digital
imaging graphic services and has been merged with an existing Company facility.
The acquisition has resulted in the recognition of goodwill in the Company's
financial statements; this goodwill arises because the purchase price reflects
the complimentary strategic fit and resulting synergy that the acquired business
brings to the Company's existing operations.
The results of operations of Virtualcolor from acquisition date are included in
the Consolidated Statement of Operations for the three-month and nine-month
period ended September 30, 2004. Pro forma results of operations for the three
month and nine month period ended September 30, 2003 are not presented due to
the lack of financial information specific to the acquired operation in prior
periods.
10
NOTE 9. ACQUISITIONS (CONTINUED)
The purchase price of $4,929 consisted of $4,859 paid in cash to the seller at
closing and $70 in acquisition-related legal fees. In addition, there is
contingent additional purchase price of $1,600, which was paid to an escrow
account pending settlement of the purchase price adjustments specified in the
acquisition agreement. The amount paid to escrow is included in Other Assets in
the Consolidated Balance Sheet at September 30, 2004.
The Company recorded the purchase price allocation based upon a tangible and
intangible asset appraisal that was completed during the second quarter of 2004.
A summary of the estimated fair values assigned to the acquired assets is as
follows:
Inventory $ 683
Machinery and equipment 150
Employee liabilities assumed (121)
Customer relationship intangible asset 2,300
Non-compete intangible asset 100
Goodwill 1,817
------
Net cash consideration $4,929
The weighted-average amortization period of the customer relationship intangible
asset is 19 years. The amortization period of the non-compete intangible asset
is five years. The intangible asset amortization expense was $38 and $115 for
the three month and nine month period ended September 30, 2004, respectively,
and will be $154 annually for each of the five fiscal years beginning with 2004.
The contingent purchase price of $1,600, which was paid to an escrow account, is
conditional upon the performance of the acquired business over a two-year
period. The purchase price allocation will be adjusted to include the additional
purchase price if the conditions have been satisfied.
The Company also completed two acquisitions during the fourth quarter of 2003.
The purchase price of the 2003 acquisitions was $2,515, with up to $3,300 in
additional payments contingent upon the performance of the acquired businesses
over a three-year period. At year-end 2003, the Company allocated the purchase
price to the estimated fair value of the net assets acquired, pending the
results of a tangible and intangible asset appraisal that was in process. The
preliminary purchase price allocation resulted in the recording of $1,460 of
goodwill.
During the second quarter of 2004, the Company completed the tangible and
intangible asset appraisal of the 2003 acquisitions and adjusted the preliminary
purchase price allocation recorded at the end of 2003. A summary of the adjusted
fair values assigned to the acquired assets is as follows:
Fair value of assets acquired, net of cash received $ 683
Customer relationship intangible asset 500
Non-compete intangible asset 60
Goodwill 1,214
-------
Net cash consideration $ 2,457
The amortization periods of the customer relationship intangible asset and the
non-compete intangible asset are seven years and five years, respectively. The
intangible asset amortization expense was $21 and $63 for the three month and
nine month period ended September 30, 2004, respectively, and will be $83
annually for each of the five fiscal years beginning with 2004.
The purchase price allocation will be adjusted to include additional amounts due
pursuant to the contingent purchase price provisions of the acquisition
agreements if the conditions are met.
11
NOTE 10. DEBT
In April 2004, the Company issued $10,000 of Tranche B notes pursuant to its
Note Purchase Agreement dated December 23, 2003. The notes bear interest at
4.98% and are payable in annual installments from 2008 to 2013. $15,000 of
Tranche A notes, at a 4.90% interest rate, were issued when the agreement was
executed in December 2003. The note offering was a private offering exempt from
registration pursuant to Rule 506 of Regulation D of the Securities Act.
In addition, the Company executed a $30,000 five-year unsecured credit agreement
dated June 11, 2004 with its primary US bank, replacing a $65,000 credit
agreement that had expired. Borrowings on the credit agreement will bear
interest at a floating rate, based on LIBOR, and may be prepaid at any time
prior to the termination date of the agreement, June 11, 2009. There were no
borrowings under this agreement as of September 30, 2004. A copy of the Credit
Agreement dated June 11, 2004 was filed with the SEC on Form 8-K on June 16,
2004.
The borrowings under both of these agreements are subject to certain restrictive
covenants. The Company is in compliance with these covenants as of September 30,
2004 and does not anticipate a problem with compliance in future periods.
NOTE 11. CONTRACT TERMINATION
In July, 2004, the Company was notified by one of its top ten customers that it
was terminating its graphic services agreement with the Company. The agreement,
which designated the Company as the customer's exclusive graphic services
provider, covered the period January 1, 2003 through December 31, 2005 and
provided for compensation in the event of early termination. The Company and the
customer agreed upon a termination settlement in the amount of $1,350, to be
paid by December 31, 2004. The $1,350 termination settlement is included in Net
sales in the Consolidated Statement of Operations for the period ended September
30, 2004 and is included in Prepaid expenses and other current assets in the
Consolidated Balance Sheet at September 30, 2004.
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 as 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
EXECUTIVE-LEVEL OVERVIEW
The Company's revenues are driven by changes to consumer product packaging
designs and promotions and marketing spending. 90% of the Company's business is
graphic services for consumer product packaging applications. Generally, a
package design changes every three or four years. Between changes, there are
line extensions and promotions that take advantage of popular brand images in a
variety of products. However, the Company cannot predict when a design will
change or when a promotion will occur, therefore backlog does not exist. There
are regular promotions throughout the year that create revenue opportunities for
the company, for example, Valentine's Day, Easter, Fourth of July, Back To
School, Halloween, Thanksgiving and Christmas. In addition, there are event
driven promotions that occur regularly like the Super Bowl, Grammy Awards, World
Series, Indianapolis 500 and the Olympics. Lastly, there are a number of health
related "banners" that are added to food and beverage packaging, like "heart
healthy", "low in carbohydrates", "enriched with essential vitamins", "low in
saturated fat" and "caffeine free". All of these items create revenue for the
Company. In simple terms, change equals revenue.
For the quarter ended September 30, 2004, the Company increased sales by 23.3%
over the third quarter of 2003. The revenue growth was attributable to the
Company's sales of graphic and design services to its consumer packaged goods
clients. 15.7% of the sales increase was internally generated and 7.6% of the
increase was due to the acquisitions completed at the end of 2003 and beginning
of 2004. The Company was the beneficiary of the recent trend in the food
industry for recipe and ingredient changes based on awareness of the need for a
healthy diet. As described above, package changes resulting from food industry
trends such as the low-carb diet create revenue for Schawk. As a result of the
strong sales and increased efficiencies from new workflows, the Company's gross
margin and operating margin improved in the third quarter of 2004 relative to
the third quarter of 2003. Net income increased to $7,317 from $4,309 quarter
over quarter. Third quarter earnings per share were 33 cents, fully diluted,
compared to the prior year third quarter EPS of 20 cents.
The Company's sales for the nine-month period ended September 30, 2004 were
18.5% higher than the first nine months of 2003. Although 2004 started slow,
with weak sales in January and February, the strong surge of business that began
in March and continued through September has enabled the Company to exceed its
sales projections for the first nine months of the year. As a result, the
Company showed improvement in gross margin, operating margin and net income for
the first nine months, year-over-year. Earnings per share for the nine-month
period ended September 30, 2004 were 79 cents, fully diluted, compared to 60
cents in the first nine months of 2003.
Also included in revenue for the 3rd quarter 2004 is a $1,350 contract
termination fee. In July, 2004, the Company was notified by one of its top ten
customers that it was terminating its graphic services agreement with the
Company. The agreement, which designated the Company as the customer's exclusive
graphic services provider, covered the period January 1, 2003 through December
31, 2005 and provided for compensation in the event of early termination. The
Company and the customer agreed upon a termination settlement in the amount of
$1,350.
The Company finished the first nine months of 2004 with strong financial ratios
in every category. At September 30, 2004, the Company had a current ratio of 2.5
to 1 and a debt to equity ratio of 24.9% (with $31,038 of debt and $124,686 of
equity). At September 30, 2004, the Company's debt included $25,000 of notes
sold pursuant to a private placement financing agreement executed in December
2003, and $6,000, classified as a current liability, from a prior private
placement financing agreement. The Company also had a $30,000 five year
unsecured credit agreement with its primary US bank and various credit lines for
its foreign subsidiaries. Due to the Company's strong cash flow and the private
placement financing, the Company had no borrowings on any of its credit line
facilities at September 30, 2004.
The Company generates significant cash flow from operating activities on an
annual basis: $32,216 in 2003, $27,859 in 2002, and $23,186 in 2001. The cash
flow from operating activities for the first nine months of 2004 was temporarily
lower than normal because of an increase in trade accounts receivable, resulting
from the large volume of business that was completed and billed in the third
quarter and was in trade accounts receivable at September 30, 2004. The Company
expects to collect these accounts in the fourth quarter, which will enhance cash
flow from operating activities for the balance of 2004.
13
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Schawk, Inc.
Comparative Consolidated Statements of Operations
Three Months Ended September 30, 2004 and 2003
(in thousands)
$ %
2004 2003 CHANGE CHANGE
---- ---- ------ ------
Net sales $ 62,245 $ 50,500 $ 11,745 23.3%
Cost of sales 34,027 29,864 4,163 13.9%
-------- -------- --------
Gross profit 28,218 20,636 7,582 36.7%
Gross margin percentage 45.3% 40.9%
Selling, general and administrative expenses 16,562 13,581 2,981 21.9%
-------- -------- --------
Operating income 11,656 7,055 4,601 65.2%
Operating margin percentage 18.7% 14.0%
Other income (expense)
Interest income 126 -- 126 nm
Interest expense (519) (415) (104) 25.1%
Other income -- 297 (297) nm
-------- -------- --------
(393) (118) (275)
-------- -------- --------
Income before income taxes 11,263 6,937 4,326 62.4%
Income tax provision 3,946 2,628 1,318 50.2%
-------- -------- --------
Effective income tax rate 35.0% 37.9%
Net income $ 7,317 $ 4,309 $ 3,008 69.8%
======== ======== ========
nm - Percentage not meaningful
Net sales increased 23.3% as compared to the prior year third quarter. As
described above, an increased volume of graphic services business from consumer
packaging clients, primarily food companies, provided a record sales quarter for
the Company. Packaging and design account revenues (90% of the Company's
business) increased $11,309, or 25.7%, including $3,814 of sales from the
Company's recent acquisitions, and advertising agency account revenues (9% of
the Company's business) increased $122, or 2.0%, in the third quarter of 2004.
Also included in 3rd quarter 2004 revenue is a $1,350 contract termination fee
from a major customer which terminated its graphic services contract with the
Company during the quarter.
Gross margin for the third quarter of 2004 increased to 45.3 % from 40.9 % for
the third quarter of 2003, primarily due to higher revenue and increased
productivity resulting from increased volume and newly crafted workflows.
Operating income for the third quarter of 2004 increased 65.2% from the prior
year third quarter. The operating margin percentage was also higher than the
prior year third quarter, increasing to 18.7% compared to 14.0%. The increase in
operating income and operating margin was primarily due to increased sales to
consumer products packaging clients and increased productivity in the quarter.
Interest expense for the third quarter was higher than the prior year third
quarter due to higher rates on the Company's outstanding fixed-rate debt at
September 30, 2004, as compared to the short-term rates on the credit line debt
that comprised the majority of the Company's debt at September 30, 2003.
14
There were no other income items during the third quarter of 2004; however,
during the third quarter of 2003, a non-recurring gain of $297 from the sale of
a mutual insurance company, of which the Company was a policyholder, was
recorded.
Income tax expense for the third quarter of 2004 was at an effective tax rate of
35.0% compared to a rate of 37.9% in the third quarter of 2003. The lower
effective tax rate is the result of various tax refunds and credits recorded in
the third quarter of 2004. It is anticipated that the effective tax rate for
2004 will be in the range of 36.0% to 37.0%.
Net income and earnings per share were higher in the third quarter of 2004 as
compared to the third quarter of 2003 for the reasons previously described.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Schawk, Inc.
Comparative Consolidated Statements of Operations
Nine Months Ended September 30, 2004 and 2003
(in thousands)
$ %
2004 2003 CHANGE CHANGE
---- ---- ------ ------
Net sales $ 178,778 $ 150,840 $ 27,938 18.5%
Cost of sales 102,362 88,659 13,703 15.5%
--------- --------- ---------
Gross profit 76,416 62,181 14,235 22.9%
Gross margin percentage 42.7% 41.2%
Selling, general and administrative expenses 47,516 40,607 6,909 17.0%
--------- --------- ---------
Operating income 28,900 21,574 7,326 34.0%
Operating margin percentage 16.2% 14.3%
Other income (expense)
Interest income 127 51 76 nm
Interest expense (1,497) (1,471) (26) 1.8%
Other income -- 1,046 (1,046) nm
--------- --------- ---------
(1,370) (374) (996)
--------- --------- ---------
Income before income taxes 27,530 21,200 6,330 29.9%
Income tax provision 9,965 8,112 1,853 22.8%
--------- --------- ---------
Effective income tax rate 36.2% 38.3%
Net income $ 17,565 $ 13,088 $ 4,477 34.2%
========= ========= ========= =====
nm - Percentage not meaningful
Net sales increased 18.5% in the first nine months of 2004 as compared to the
first nine months of 2003. 11.6% of the increase is attributable to internal
growth from consumer packaged goods clients and 6.9% is attributable to revenues
from the Company's recent acquisitions. The high volume of business that began
in March and continued through the end of the third quarter allowed the Company
to overcome a slow start to the year, with low sales in January and February,
and to exceed sales projections for the first nine months of the year. As
previously discussed, $1,350 representing a contract termination fee from a
major customer is included in revenue for the first nine months of 2004.
Gross margin for the first nine months of 2004 increased to 42.7% compared to
41.2 % for the first nine months of 2003, primarily due the higher volume in
2004.
15
Operating income for the first nine months of 2004 increased 34.0% from the
first nine months of 2003. The operating margin percentage was also higher than
the prior year first half, increasing to 16.2% compared to 14.3%. The increase
in operating income and operating margin was primarily due to the higher revenue
and higher productivity in 2004.
Interest expense for the first nine months of 2004 was approximately equal to
interest expense for the first nine months of 2003.
There were no other income items during the first nine months of 2004; however,
during the first nine months of 2003, non-recurring gains totaling $1,046 were
recorded. The non-recurring gains recorded in the first nine months of 2003
related to the Company's share of a gain from the sale of a mutual insurance
company, a favorable litigation settlement, and the proceeds of an insurance
policy on a former employee.
Income tax expense for the first nine months of 2004 was at an effective tax
rate of 36.2% compared to a rate of 38.3% in the first nine months of 2003. The
decrease in the effective tax rate was primarily due to tax refunds and credits
realized in 2004. It is anticipated that the effective tax rate for 2004 will be
in the range of 36.0% to 37.0%.
Net income and earnings per share were higher in the first nine months of 2004
as compared to the first nine months of 2003 for the reasons previously
described.
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED BY OPERATING ACTIVITIES
Cash provided from operations was $15,444 in the first nine months of 2004
compared to $23,248 in the first nine months of 2003. The decrease in cash
provided from operations was primarily a result of an increase in accounts
receivable caused by the high volume of business recorded in the second and
third quarter of 2004; a significant portion of the business invoiced in the
third quarter remained in accounts receivable at September 30, 2004. The Company
considers this increase in accounts receivable to be a timing issue and
anticipates improved cash flow from operations as the jobs invoiced in the third
quarter are collected.
Depreciation and amortization expense in the first nine months of 2004 was
$9,450 as compared to $8,614 in the first nine months of the prior year. The
increase in depreciation and amortization expense is attributable to an increase
in intangible asset amortization related to the Company's recent acquisitions.
CASH USED IN INVESTING ACTIVITIES
Cash used in investing activities was $15,197 in the first nine months of 2004
compared to $3,836 in the first nine months of 2003. The increase in cash used
in the first nine months of 2004 reflects the acquisition of Virtualcolor for
$4,929, $1,600 of contingent purchase price related to the Virtualcolor
acquisition paid to an escrow account, and minor adjustments to the purchase
price of fourth quarter 2003 acquisitions. In addition, the cash used in
investing activities in the first nine months of 2003 was partially offset by
the receipt of $1,251 related to the sale of a building.
Capital expenditures, mainly for computer equipment and software as well as for
improvements to a new leased facility for one of the Company's divisions were
$8,256 in the first nine months of 2004 compared to $5,329 in the first nine
months of 2003. Capital expenditures are anticipated to be in a range of $10,000
to $12,000 for all of 2004.
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Cash provided from financing activities was $4,352 for the first nine months of
2004 compared to cash used in financing activities of $19,346 in the first nine
months of 2003. The cash provided from financing activities in the first nine
months of 2004 includes $10,000 from the second quarter sale of Tranche B notes
pursuant to the private placement financing agreement executed in December 2003.
The cash received from the Tranche B note sale was used primarily to repay
$8,700 of short-term borrowings from the first quarter, which had been used to
finance the Virtualcolor acquisition. The cash used in financing activities in
the first nine months of 2003 primarily reflects $20,842 of principal payments
made on the Company's credit facilities during that period.
Dividend payments on common stock were $2,086 and $2,080 in the first nine
months of 2004 and 2003, respectively. It is anticipated that the Company will
continue to pay dividends at the current level for the remainder of 2004.
16
The Company presently finances its business from available cash and from cash
generated from operations. In June 2004, the Company executed a $30,000 five
year unsecured credit agreement with its primary US bank, replacing a $65,000
unsecured credit agreement which expired in May 2004. The Company's strong cash
flow and the private placement financing entered into in December 2003 reduced
the amount of floating-rate financing capacity needed. The Company also
maintains a $15,000 unsecured demand line of credit with another US bank, which
will expire in October 2004, as well as lines of credit in Canada (US $4,000),
China (US $1,500), and Malaysia (US $1,300). At September 30, 2004, the Company
had no borrowings on any of its credit lines.
In December of 2003, the Company entered into a private placement of debt to
provide long-term financing. The terms of the Note Purchase Agreement relating
to this transaction provided for the issuance and sale by the Company, pursuant
to an exception from the registration requirements of the Securities Act of
1933, of two series of notes: 1) Tranche A, due December 31, 2013, for $15,000,
which closed in December 2003; and, 2) Tranche B, due April 30, 2014, for
$10,000, which closed in April 2004. The total debt of $25,000 issued under the
private placement agreement is shown as Long Term Debt on the Company's
September 30, 2004 balance sheet.
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 and cash generated from future
operations, or pursuant to the Note Purchase Agreement dated December 23, 2003
and short-term credit facilities.
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 affect most consumer products. These
historic cycles differ from brand to brand as to when design changes have
occurred 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 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 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.
The decline in business with the Company's clients in the advertising agency
market, which began in the second half of 2001, continued into the third quarter
of 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A discussion regarding market risk is disclosed in the Company's December 31,
2003 Form 10-K. There have been no material changes in information regarding
market risk relating to the Company since December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that
it is able to collect the information it is required to disclose in the reports
it files with the Securities and Exchange Commission (SEC), and to process,
summarize and disclose this information within the time periods specified in the
rules of the SEC. Based on an evaluation of the Company's disclosure controls
and procedures as of the end of the period covered by this report conducted by
the Company's management, with the participation of the Chief Executive and
Chief Financial Officers, the Chief Executive and Chief Financial Officers
believe that these controls and procedures are effective to ensure that the
Company is able to collect, process and disclose the information it is required
to disclose in the reports it files with the SEC within the required time
periods.
INTERNAL CONTROL OVER FINANCIAL REPORTING
During the period covered by this report, there have been no changes in the
Company's internal control over financial reporting that have materially
affected or are reasonably likely to materially affect the Company's internal
control over financial reporting.
17
PART II - OTHER INFORMATION
ITEMS 1, 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
PURCHASES OF EQUITY SECURITIES BY THE COMPANY
As previously disclosed, the Company occasionally repurchases its common shares,
pursuant to a general authorization from the Board of Directors, which is
renewed annually. There were no repurchases of common stock by the Company under
this program during the first nine months of 2004. However, during the second
quarter of 2004, 44,000 shares of common stock with a market value of $603,000
were tendered to the Company by certain employee stockholders in payment of
stock options exercised. There were no additional tenders of common stock
related to stock option exercises during the third quarter of 2004. The Company
has recorded the receipt of common stock in payment for stock options exercised
as a purchase of treasury stock.
The following table summarizes the shares recorded by the Company as repurchases
in connection with stock option exercises during the first nine months of 2004
(in thousands, except per share amounts):
Total No. Avg. Price No. Shares Purchased
Share Paid Per as Part of Publicly
Period Purchased Share Announced Program
- -------------------------------------------------------------------------------
January -- -- --
February -- -- --
March -- -- --
--------------------------------------------------------
1st Qtr 2004 Total -- -- --
========================================================
April 22 $13.90 --
May 22 $13.48 --
June -- -- --
--------------------------------------------------------
2nd Qtr 2004 Total 44 $13.69 --
========================================================
July -- -- --
August -- -- --
September -- -- --
--------------------------------------------------------
3rd Qtr 2004 Total -- -- --
========================================================
YTD 2004 Total 44 $13.69 --
========================================================
18
ITEM 6. EXHIBITS
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 Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act
of 1934, as amended *
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act
of 1934, as amended *
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
* Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 5th day of November 2004.
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