Attached files
file | filename |
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EX-31.1 - EX-31.1 - SCHAWK INC | c59339exv31w1.htm |
EX-10.1 - EX-10.1 - SCHAWK INC | c59339exv10w1.htm |
EX-32 - EX-32 - SCHAWK INC | c59339exv32.htm |
EX-31.2 - EX-31.2 - SCHAWK INC | c59339exv31w2.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-09335
SCHAWK, INC.
(Exact name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
66-0323724 (I.R.S. Employer Identification No.) |
|
1695 South River Road Des Plaines, Illinois (Address of principal executive office) |
60018 (Zip Code) |
847-827-9494
(Registrants telephone number, including area code)
(Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Securities Act).
Yes o No þ
The number of shares of the Registrants Common Stock outstanding as of July 30, 2010 was
25,549,047.
SCHAWK, INC.
INDEX TO QUARTERLY REPORT ON FORM 10 -Q
June 30, 2010
INDEX TO QUARTERLY REPORT ON FORM 10 -Q
June 30, 2010
TABLE OF CONTENTS
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Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Schawk, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
(In thousands, except share amounts)
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 18,483 | $ | 12,167 | ||||
Trade accounts receivable, less allowance for doubtful accounts
of $1,033 at June 30, 2010 and $1,619 at December 31, 2009 |
92,353 | 88,822 | ||||||
Inventories |
21,263 | 20,536 | ||||||
Prepaid expenses and other current assets |
9,699 | 8,192 | ||||||
Income tax receivable |
2,565 | 2,565 | ||||||
Deferred income taxes |
3,275 | 992 | ||||||
Total current assets |
147,638 | 133,274 | ||||||
Property and equipment, less accumulated depreciation of $101,850
at June 30, 2010 and $96,440
at December 31, 2009 |
47,385 | 50,247 | ||||||
Goodwill |
186,931 | 187,664 | ||||||
Other intangible assets, net |
34,228 | 37,605 | ||||||
Deferred income taxes |
1,204 | 1,424 | ||||||
Other assets |
6,158 | 6,005 | ||||||
Total assets |
$ | 423,544 | $ | 416,219 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities: |
||||||||
Trade accounts payable |
$ | 18,155 | $ | 16,957 | ||||
Accrued expenses |
57,745 | 64,079 | ||||||
Deferred income taxes |
5,493 | 205 | ||||||
Income taxes payable |
5,641 | 14,600 | ||||||
Current portion of long-term debt |
20,278 | 12,858 | ||||||
Total current liabilities |
107,312 | 108,699 | ||||||
Long-term liabilities: |
||||||||
Long-term debt |
53,123 | 64,707 | ||||||
Other liabilities |
14,903 | 15,920 | ||||||
Deferred income taxes |
4,309 | 2,059 | ||||||
Total long-term liabilities |
72,335 | 82,686 | ||||||
Stockholders equity: |
||||||||
Common stock, $0.008 par value, 40,000,000 shares authorized,
30,281,763 and 29,855,796 shares issued at June 30, 2010 and
December 31, 2009, respectively; 25,535,805 and 25,108,894
shares outstanding at June 30, 2010 and December 31, 2009,
respectively |
222 | 220 | ||||||
Additional paid-in capital |
195,901 | 191,701 | ||||||
Retained earnings |
102,246 | 85,953 | ||||||
Accumulated comprehensive income, net |
6,356 | 7,804 | ||||||
304,725 | 285,678 | |||||||
Treasury stock, at cost, 4,745,958 and 4,746,902 shares of common
stock at June 30, 2010 and December 31, 2009, respectively |
(60,828 | ) | (60,844 | ) | ||||
Total stockholders equity |
243,897 | 224,834 | ||||||
Total liabilities and stockholders equity |
$ | 423,544 | $ | 416,219 | ||||
The Notes to Consolidated Financial Statements are an integral part of these consolidated
statements.
3
Table of Contents
Schawk, Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales |
$ | 117,840 | $ | 111,989 | $ | 229,548 | $ | 217,077 | ||||||||
Cost of sales |
71,016 | 69,055 | 140,849 | 141,049 | ||||||||||||
Gross profit |
46,824 | 42,934 | 88,699 | 76,028 | ||||||||||||
Selling, general and administrative expenses |
30,420 | 32,151 | 62,944 | 66,120 | ||||||||||||
Foreign exchange (gain) loss |
(267 | ) | (319 | ) | 1,550 | (445 | ) | |||||||||
Acquisition integration and restructuring expenses |
686 | 1,501 | 1,015 | 2,318 | ||||||||||||
Impairment of long-lived assets |
| 78 | 680 | 136 | ||||||||||||
Operating income |
15,985 | 9,523 | 22,510 | 7,899 | ||||||||||||
Other income (expense) |
||||||||||||||||
Interest income |
8 | 30 | 16 | 100 | ||||||||||||
Interest expense |
(1,771 | ) | (2,468 | ) | (3,759 | ) | (3,917 | ) | ||||||||
(1,763 | ) | (2,438 | ) | (3,743 | ) | (3,817 | ) | |||||||||
Income before income taxes |
14,222 | 7,085 | 18,767 | 4,082 | ||||||||||||
Income tax provision (benefit) |
(1,583 | ) | 2,317 | 442 | 1,610 | |||||||||||
Net income |
$ | 15,805 | $ | 4,768 | $ | 18,325 | $ | 2,472 | ||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.62 | $ | 0.19 | $ | 0.72 | $ | 0.10 | ||||||||
Diluted |
$ | 0.61 | $ | 0.19 | $ | 0.71 | $ | 0.10 | ||||||||
Weighted average number of common and common
equivalent shares outstanding: |
||||||||||||||||
Basic |
25,400 | 24,921 | 25,292 | 24,928 | ||||||||||||
Diluted |
25,884 | 24,921 | 25,731 | 24,929 | ||||||||||||
Dividends per Class A common share |
$ | 0.0400 | $ | 0.0100 | $ | 0.0800 | $ | 0.0425 |
The Notes to Consolidated Financial Statements are an integral part of these consolidated
statements.
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Table of Contents
Schawk, Inc.
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2010 and 2009
(Unaudited)
(In thousands)
Six Months Ended June 30, 2010 and 2009
(Unaudited)
(In thousands)
2010 | 2009 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 18,325 | $ | 2,472 | ||||
Adjustments to reconcile net income to cash provided by operating activities: |
||||||||
Depreciation |
6,627 | 7,250 | ||||||
Amortization |
2,273 | 2,258 | ||||||
Impairment of long-lived assets |
680 | 136 | ||||||
Insurance settlement |
(520 | ) | | |||||
Non-cash restructuring charge |
| 77 | ||||||
Amortization of deferred financing fees |
386 | 226 | ||||||
Share-based compensation expense |
1,041 | 879 | ||||||
Loss realized on sale of property and equipment |
3 | 44 | ||||||
Changes in operating assets and liabilities, net of effects from acquisitions: |
||||||||
Trade accounts receivable |
(4,193 | ) | 1,091 | |||||
Inventories |
(838 | ) | 3,466 | |||||
Prepaid expenses and other current assets |
(1,094 | ) | (1,362 | ) | ||||
Trade accounts payable, accrued expenses and other liabilities |
(5,432 | ) | 3,619 | |||||
Income taxes refundable (payable) |
(3,101 | ) | 4,915 | |||||
Net cash provided by operating activities |
14,157 | 25,071 | ||||||
Cash flows from investing activities |
||||||||
Proceeds from sales of property and equipment |
26 | 4,395 | ||||||
Proceeds from insurance settlement |
520 | | ||||||
Purchases of property and equipment |
(4,896 | ) | (2,355 | ) | ||||
Acquisitions, net of cash acquired |
(35 | ) | (383 | ) | ||||
Other |
4 | (288 | ) | |||||
Net cash provided by (used in) investing activities |
(4,381 | ) | 1,369 | |||||
Cash flows from financing activities |
||||||||
Proceeds from issuance of long-term debt |
78,250 | 32,660 | ||||||
Payments of long-term debt, including current maturities |
(82,414 | ) | (55,455 | ) | ||||
Payment of deferred financing fees |
(1,017 | ) | (1,170 | ) | ||||
Cash dividends |
(2,016 | ) | (1,048 | ) | ||||
Purchase of common stock |
| (4,277 | ) | |||||
Issuance of common stock |
3,162 | 465 | ||||||
Net cash used in financing activities |
(4,035 | ) | (28,825 | ) | ||||
Effect of foreign currency rate changes |
575 | (702 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
6,316 | (3,087 | ) | |||||
Cash and cash equivalents at beginning of period |
12,167 | 20,205 | ||||||
Cash and cash equivalents at end of period |
$ | 18,483 | $ | 17,118 | ||||
The Notes to Consolidated Financial Statements are an integral part of these consolidated
statements.
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Table of Contents
Schawk, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data)
(In thousands, except per share data)
Note 1 Significant Accounting Policies
The Companys significant accounting policies are included in Note 1 to the consolidated financial
statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2009 (2009
Form 10-K). There have been no material changes in the Companys significant accounting policies
since December 31, 2009, except as follows:
Derivative Financial Instruments. In May 2010, the Company executed two variable to fixed
interest rate swaps, designated as cash flow hedges, for the total notional amount of $15,000. The
Company assesses hedge effectiveness quarterly by comparing the current terms of the swaps and the
debt. The effective portion of the derivative fair value gains or losses from these cash flow
hedges is deferred in Accumulated comprehensive income, net. The derivatives are recorded on the
Consolidated Balance Sheets at fair value. See Note 14 Derivative Financial Instruments for
further discussion.
Interim Financial Statements
The unaudited consolidated interim financial statements of Schawk, Inc. (Schawk or the Company)
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 of America have been condensed or omitted pursuant to such rules and regulations. Certain
previously reported immaterial amounts have been reclassified to conform to the current-period
presentation. In the opinion of management, all adjustments necessary for a fair presentation for
the periods presented have been recorded.
These financial statements should be read in conjunction with, and have been prepared in conformity
with, the accounting principles reflected in the Companys consolidated financial statements and
the notes thereto for the three years ended December 31, 2009, as filed with its 2009 Form 10-K.
The results of operations for the three and six months ended June 30, 2010 are not necessarily
indicative of the results to be expected for the full fiscal year ending December 31, 2010.
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (FASB) amended the Accounting Standards
Codification (ASC or Codification) as summarized in Accounting Standards Update (ASU) No.
2009-13, Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements, and ASU
2009-14, Software (Topic 985) Certain Revenue Arrangements That Include Software Elements. As
summarized in ASU 2009-13, ASC Topic 605 has been amended (1) to provide updated guidance on
whether multiple deliverables exist, how the deliverables in an arrangement should be separated,
and the consideration allocated; (2) to require an entity to allocate revenue in an arrangement
using estimated selling prices of deliverables if a vendor does not have vendor-specific objective
evidence (VSOE) or third-party evidence of selling price; and (3) to eliminate the use of the
residual method and require an entity to allocate revenue using the relative selling price method.
As summarized in ASU 2009-14, ASC Topic 985 has been amended to remove from the scope of industry
specific revenue accounting guidance for software and software related transactions, tangible
products containing software components and non-software components that function together to
deliver the products essential functionality. The accounting changes summarized in ASU 2009-14 and
ASU 2009-13 are both effective for fiscal years beginning on or after June 15, 2010, with early
adoption permitted. The Company is currently evaluating the impact that the adoption of
ASU 2009-13 and ASU 2009-14 may have on the Companys consolidated financial statements.
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Table of Contents
Note 2 Inventories
The Companys inventories consist primarily of raw materials and work in process inventories, as
well as finished goods inventory related to the Companys Los Angeles print operation.
Raw materials are stated at the lower of cost or market. Work-in-process consists of
primarily deferred labor and overhead costs.
The majority of the Companys inventories are valued on the first-in, first-out (FIFO) basis. The
remaining inventories are valued using the last-in, first-out (LIFO) method. The Company
periodically evaluates the realizability of inventories and adjusts the carrying value as
necessary.
Inventories consist of the following:
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Raw materials |
$ | 2,447 | $ | 2,736 | ||||
Work in process |
19,279 | 16,969 | ||||||
Finished Goods |
477 | 1,771 | ||||||
22,203 | 21,476 | |||||||
Less: LIFO reserve |
(940 | ) | (940 | ) | ||||
$ | 21,263 | $ | 20,536 | |||||
Note 3 Earnings Per Share
Basic earnings per share and diluted earnings per share are shown on the Consolidated Statements of
Operations. Basic earnings per share are computed by dividing net income by the weighted average
shares outstanding for the period. Diluted earnings per share are computed by dividing net income
by the weighted average number of common shares, including common stock equivalent shares (stock
options) outstanding for the period. There were no reconciling items to net income to arrive at
income available to common stockholders.
The following table sets forth the number of common and common stock equivalent shares used in the
computation of basic and diluted earnings per share:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Weighted average shares Basic |
25,400 | 24,921 | 25,292 | 24,928 | ||||||||||||
Effect of dilutive stock options |
484 | | 439 | 1 | ||||||||||||
Adjusted weighted average
shares and assumed conversions
- Diluted |
25,884 | 24,921 | 25,731 | 24,929 | ||||||||||||
The following table presents the potentially dilutive outstanding stock options excluded from the
computation of diluted earnings per share for each period because they would be anti-dilutive:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Anti-dilutive options |
691 | 2,881 | 951 | 2,818 | ||||||||||||
Exercise price range |
$ | 12.87 - $21.08 | $ | 6.94 - $21.08 | $ | 12.87 - $21.08 | $ | 6.94 - $21.08 |
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Table of Contents
Note 4 Comprehensive Income
The Company reports certain changes in equity during a period in accordance with the Comprehensive
Income Topic of the Codification, ASC 220. Accumulated comprehensive income, net includes
cumulative translation adjustments and changes in gains and losses on hedged transactions, net of
tax. The components of comprehensive income (loss) for the three and six month periods ended June
30, 2010 and 2009 are as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 15,805 | $ | 4,768 | $ | 18,325 | $ | 2,472 | ||||||||
Foreign currency translation adjustments |
(2,737 | ) | 6,105 | (1,357 | ) | 3,575 | ||||||||||
Changes in unrealized loss on hedges
(net of tax) |
(91 | ) | | (91 | ) | | ||||||||||
Comprehensive income |
$ | 12,977 | $ | 10,873 | $ | 16,877 | $ | 6,047 | ||||||||
Note 5 Stock Based Compensation
The Company accounts for share-based payments in accordance with the provisions of the Stock
Compensation Topic of the Codification, ASC 718, based on the grant date fair value estimated in
accordance with the provisions of ASC 718 and using the straight-line expense attribution method.
The Company records compensation expense for employee stock options based on the estimated fair
value of the options on the date of grant using the Black-Scholes option-pricing model with the
assumptions included in the table below. The Company uses historical data among other factors to
estimate the expected price volatility, the expected term and the expected forfeiture rate. The
risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the
estimated life of the option. The following assumptions were used to estimate the fair value of
options granted during the six-month periods ended June 30, 2010 and June 30, 2009, using the
Black-Scholes option-pricing model.
Six Months Ended | Six Months Ended | |||||||
June 30, 2010 | June 30, 2009 | |||||||
Expected dividend yield |
0.88%-1.24% | 1.34% | ||||||
Expected stock price volatility |
47.75%-48.97% | 43.75% | ||||||
Risk-free interest rate |
2.87%-3.26% | 2.79% | ||||||
Weighted-average expected life of options |
6.53-7.40 years | 6.8 years | ||||||
Forfeiture rate |
1.0%-3.0% | 0.85% |
The total fair value of options and restricted stock granted during the three and six month periods
ended June 30, 2010, was $134 and $1,688, respectively. The total fair value of options and
restricted stock granted during both the three and six month periods ended June 30, 2009, was
$1,695. As of June 30, 2010, there was $2,814 of total unrecognized compensation cost related to
nonvested options and restricted shares outstanding. That cost is expected to be recognized over a
weighted average period of approximately two years. Expense recognized under ASC 718 for the three
and six month periods ended June 30, 2010 was $584 and $1,041, respectively. Expense recognized
under ASC 718 for the three and six month periods ended June 30, 2009, was $501 and $879,
respectively.
Note 6 Impairment of Long-lived Assets
During the first quarter of 2010, certain newly purchased and installed production equipment
sustained water damage and became no longer operable. The Company recorded an impairment charge in
the amount of $680, the net book value of the damaged equipment, which is included in Impairment of
long-lived assets in the Consolidated Statements of Operations for the six-month period ended June
30, 2010, and filed a claim with its insurance carrier for the loss incurred. The expense was
recorded in the North America operating segment. In the three and six month periods ended June 30,
2009, the Company recorded asset impairment charges of $78 and $136, respectively.
The Company maintains insurance coverage for property loss, extra expense, and business
interruption and records
8
Table of Contents
insurance recoveries in the period in which the insurance carrier validates the claim and confirms
the amount of reimbursement to be paid. During the second quarter of 2010, the Company received an
insurance settlement of $520 related to the damaged equipment for which impairment was recorded in
the first quarter of 2010. In addition, during the second quarter of 2010, the Company received
confirmation of a pending insurance settlement in the amount of $860 related to a flood loss at one
of the Companys North American operations during 2009. The Company recorded a receivable in the
amount of $860 at June 30, 2010 for this pending settlement, which was received in July, 2010. The
combined insurance recovery of $1,380 was recorded as a reduction of Selling, general and
administrative expenses in the Consolidated Statements of Operations for the three and six-month
periods ended June 30, 2010.
Note 7 Acquisitions
Brandmark International Holding B.V.
Effective December 31, 2008, the Company acquired 100 percent of the outstanding stock of Brandmark
International Holding B.V. (Brandmark), a Netherlands-based brand identity and creative design
firm. Brandmark provides services to consumer products companies through its locations in
Hilversum, The Netherlands and London, United Kingdom. The net assets and results of operations of
Brandmark are included in the Consolidated Financial Statements in the Europe operating segment.
This business was acquired to expand the Companys creative design business in Europe, enhancing
the Companys ability to provide services for its multinational clients.
The purchase price of $10,456 consisted of $8,102 paid in cash to the seller at closing, $2,026
retained in an escrow account, less $245 received from the sellers for a Net Working Capital and
Tangible Net Equity adjustment plus $573 paid for acquisition-related professional fees.
The Share Purchase Agreement provides that the purchase price may be increased by up to $703 if a
specified target of earnings before interest and taxes was achieved for the fiscal year ended March
31, 2009. At December 31, 2009, $3 was recorded for an estimated purchase price adjustment based on
the sellers preliminary financial statements for the fiscal year ended March 31, 2009 and the
additional purchase price was allocated to goodwill. During the first quarter of 2010, a final
agreement was reached with the former owners to pay a total of $38 in additional purchase price.
The incremental purchase price adjustment of $35 was recorded in the first quarter of 2010 and
allocated to goodwill. The $38 total additional purchase price was paid to the former owners in
April, 2010.
Exit Reserves from Prior Acquisitions
The Company recorded exit reserves related to its acquisitions of Weir Holdings Limited and Seven
Worldwide Holdings, Inc., which occurred in 2004 and 2005, respectively. The major expenses
included in the exit reserves were employee severance and lease termination expenses. The exit
reserve balances related to employee severance were paid in prior years. The exit reserves related
to the facility closures are being paid over the term of the leases, with the longest lease
expiring in 2015. The adjustment recorded in the second quarter of 2010 is principally due to a
reduction in the reserve for a certain vacant facility which the Company expects to re-occupy in
September 2010. The remaining reserve balance of $1,168 is included in Accrued expenses and Other
long-term liabilities on the Consolidated Balance Sheets as of June 30, 2010.
The following table summarizes the reserve activity from December 31, 2009 through June 30, 2010:
Balance | Balance | |||||||||||||||
December 31, | March 31, | |||||||||||||||
2009 | Adjustments | Payments | 2010 | |||||||||||||
Facility closure cost |
$ | 2,431 | $ | (8 | ) | $ | (263 | ) | $ | 2,160 | ||||||
Balance | Balance | |||||||||||||||
March 31, | June 30, | |||||||||||||||
2010 | Adjustments | Payments | 2010 | |||||||||||||
Facility closure cost |
$ | 2,160 | $ | (754 | ) | $ | (238 | ) | $ | 1,168 | ||||||
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Note 8 Debt
In December, 2003, the Company entered into a private placement of debt (the 2003 Private
Placement) to provide long-term financing. The terms of the Note Purchase Agreement relating to
this transaction, as amended, provided for the issuance and sale by the Company of two series of
notes: Tranche A, for $15,000, payable in annual installments of $2,143 from 2007 through 2013, and
Tranche B, for $10,000, payable in annual installments of $1,429 from 2008 through 2014. The
remaining aggregate balance of the Tranche A and Tranche B notes, $12,289, is included on the June
30, 2010 Consolidated Balance Sheets as follows: $3,072 is included in Current maturities of
long-term debt and $9,217 is included in Long-term debt.
In January, 2005, the Company entered into a Note Purchase and Private Shelf Agreement (the 2005
Private Placement) with Prudential Investment Management Inc., pursuant to which the Company sold
$50,000 in a series of three Senior Notes, maturing in January 2010, January 2011, and January
2012, respectively. The remaining aggregate outstanding balance of the two remaining notes,
$34,412, is included on the June 30, 2010 Consolidated Balance Sheets as follows: $17,206 is
included in Current maturities of long-term debt and $17,206 is included in Long-term debt.
In December, 2007, the Companys Canadian subsidiary entered into a revolving demand credit
facility with a Canadian bank to provide working capital needs up to $1,000 Canadian dollars. The
credit line is guaranteed by the Company. There was no balance outstanding on this credit facility
at June 30, 2010.
Effective January 12, 2010, the Company and certain subsidiary borrowers of the Company entered
into an amended and restated credit agreement (the Credit Agreement) in order to refinance its
prior revolving credit facility that was set to terminate in January 2010. The Credit Agreement
provides for a two and one-half year secured, multicurrency revolving credit facility in the
principal amount of $90,000, including a $10,000 swing-line loan subfacility and a $10,000
subfacility for letters of credit. The Company may, at its option and subject to certain
conditions, increase the amount of the facility by up to $10,000 by obtaining one or more new
commitments from new or existing lenders to fund such increase. Immediately following the closing
of the facility, there was approximately $15,000 in outstanding borrowings. Loans under the
facility generally bear interest at a rate of LIBOR plus a margin that varies with the Companys
cash flow leverage ratio, in addition to applicable commitment fees, with a maximum rate of LIBOR
plus 350 basis points. Loans under the facility are not subject to a minimum LIBOR floor. At June
30, 2010, the applicable margin was 250 basis points, resulting in an interest rate of 2.85 percent
on LIBOR-based borrowings under the revolving credit facility. In order to manage the risk of
rising interest rates on the Companys variable rate revolving debt, the Company executed two
variable to fixed interest rate swaps for the total notional amount of $15,000 in May of 2010.
See Note 14 Derivative Financial Instruments for further discussion.
Borrowings under the facility will be used for general corporate purposes, such as working capital
and capital expenditures. Additionally, together with anticipated cash generated from operations,
the unutilized portion of the credit facility is expected to be available to provide financing
flexibility and support in the funding of principal payments due in 2010 and succeeding years on
the Companys other long-term debt obligations. The total balance outstanding under the Companys
credit facility at June 30, 2010 was $26,700 and is included in Long-term debt on the June 30, 2010
Consolidated Balance Sheets.
Outstanding obligations due under the facility continue to be secured through security interests in
and liens on substantially all of the Companys and its domestic subsidiaries current and future
personal property and on 100 percent of the capital stock of the Companys existing and future
domestic subsidiaries and 65 percent of the capital stock of certain foreign subsidiaries.
The Credit Agreement contains certain customary affirmative and negative covenants and events of
default. Under the terms of the Credit Agreement, permitted capital expenditures excluding
acquisitions are restricted to not more than $18,500 per fiscal year, or $40,000 over the term of
the credit facility, and dividends, stock repurchases and other restricted payments are limited to
$5,000 per fiscal year. Other covenants include, among other things, restrictions on the Companys
and in certain cases its subsidiaries ability to incur additional indebtedness; dispose of assets;
create or permit liens on assets; make loans, advances or other investments; incur certain
guarantee obligations; engage in mergers, consolidations or acquisitions, other than those meeting
the requirements of the Credit Agreement; engage in certain transactions with affiliates; engage in
sale/leaseback transactions; and engage in certain hedging arrangements. The Credit Agreement also
requires compliance with specified financial ratios and tests, including a minimum fixed charge
coverage ratio, a maximum cash flow ratio and a minimum consolidated net worth requirement. The
Company
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was in compliance with all covenants at June 30, 2010.
Concurrently with its entry into the Credit Agreement, the Company also amended the note purchase
agreements underlying its outstanding senior notes in order to conform the financial and other
covenants contained in the note purchase agreements to the covenants contained in the Credit
Agreement described above.
Deferred Financing Fees
In connection with the 2010 refinancing of the revolving credit facility, the Company capitalized
$1,090 of legal fees as deferred financing fees and began amortizing them based on the term of the
new credit agreement, which expires July 12, 2012. During the three and six months ended June 30,
2010, $112 and $200 of these deferred financing fees were amortized, respectively. In addition, the
Company amortized $31 and $186 of deferred financing fees during the three and six months ended
June 30, 2010, respectively, related to its former revolving credit agreement and its note purchase
agreements. The total amortization during the three and six months ended June 30, 2010 was $143 and
$386, respectively, which is included in Interest expense on the June 30, 2010 Consolidated
Statements of Operations. At June 30, 2010, the Company had $1,095 of unamortized deferred
financing fees.
Note 9 Goodwill and Intangible Assets
The Companys intangible assets not subject to amortization consist entirely of goodwill. The
Company accounts for goodwill in accordance with the Intangibles Goodwill and Other Topic of the
Codification, ASC 350. Under ASC 350, the Companys goodwill is not amortized throughout the
period, but is subject to an annual impairment test. The Company performs an impairment test
annually on October 1, or more frequently if events or changes in business circumstances indicate
that the carrying value may not be recoverable.
The changes in the carrying amount of goodwill by reportable segment during the three and six
month periods ended June 30, 2010, were as follows:
North | Asia | |||||||||||||||
America | Europe | Pacific | Total | |||||||||||||
Balance at January 1, 2010 |
$ | 172,484 | $ | 7,853 | $ | 7,327 | $ | 187,664 | ||||||||
Additional purchase accounting adjustments |
| 35 | | 35 | ||||||||||||
Foreign currency translation |
481 | (449 | ) | 278 | 310 | |||||||||||
Balance at March 31, 2010 |
172,965 | 7,439 | 7,605 | 188,009 | ||||||||||||
Foreign currency translation |
(464 | ) | (356 | ) | (258 | ) | (1,078 | ) | ||||||||
Balance at June 30, 2010 |
$ | 172,501 | $ | 7,083 | $ | 7,347 | $ | 186,931 | ||||||||
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The Companys other intangible assets subject to amortization are as follows:
June 30, 2010 | ||||||||||||||||
Weighted | Accumulated | |||||||||||||||
Average Life | Cost | Amortization | Net | |||||||||||||
Customer relationships |
14.4 years | $ | 50,168 | $ | (16,874 | ) | $ | 33,294 | ||||||||
Digital images |
5.0 years | 450 | (450 | ) | | |||||||||||
Developed technologies |
3.0 years | 712 | (712 | ) | | |||||||||||
Non-compete agreements |
3.6 years | 739 | (678 | ) | 61 | |||||||||||
Trade names |
2.7 years | 721 | (691 | ) | 30 | |||||||||||
Contract acquisition cost |
3.0 years | 1,220 | (377 | ) | 843 | |||||||||||
13.6 years | $ | 54,010 | $ | (19,782 | ) | $ | 34,228 | |||||||||
December 31, 2009 | ||||||||||||||||
Weighted | Accumulated | |||||||||||||||
Average Life | Cost | Amortization | Net | |||||||||||||
Customer relationships |
14.3 years | $ | 51,647 | $ | (15,326 | ) | $ | 36,321 | ||||||||
Digital images |
5.0 years | 450 | (420 | ) | 30 | |||||||||||
Developed technologies |
3.0 years | 712 | (712 | ) | | |||||||||||
Non-compete agreements |
3.6 years | 744 | (588 | ) | 156 | |||||||||||
Trade names |
2.7 years | 732 | (681 | ) | 51 | |||||||||||
Contract acquisition cost |
3.0 years | 1,220 | (173 | ) | 1,047 | |||||||||||
13.3 years | $ | 55,505 | $ | (17,900 | ) | $ | 37,605 | |||||||||
Other intangible assets were recorded at fair market value as of the dates of the acquisitions
based upon independent third party appraisals. The fair values and useful lives assigned to
customer relationship assets are based on the period over which these relationships are expected to
contribute directly or indirectly to the future cash flows of the Company. The acquired companies
typically have had key long-term relationships with Fortune 500 companies lasting 15 years or more.
Because of the custom nature of the work that the Company does, it has been the Companys
experience that clients are reluctant to change suppliers. Amortization expense related to the
other intangible assets totaled $1,112 and $2,273 for the three and six month periods ended June
30, 2010, respectively. Amortization expense related to the other intangible assets totaled $1,144
and $2,258 for the three and six month periods ended June 30, 2009, respectively. Amortization
expense for each of the next five twelve month periods beginning July 1, 2010, is expected to be
approximately $4,167 for 2011, $4,053 for 2012, $3,673 for 2013, $3,631 for 2014, and $3,258 for
2015.
Note 10 Income Taxes
The Companys interim period income tax provision is determined as follows:
| At the end of each fiscal quarter, the Company estimates the income tax that will be provided for the fiscal year. | ||
| The forecasted annual effective tax rate is applied to the year-to-date ordinary income at the end of each quarter to compute the year-to-date tax applicable to ordinary income. The term ordinary income refers to income from continuing operations before income taxes, excluding significant, unusual or infrequently occurring items. The tax expense or benefit related to ordinary income in each quarter is the difference between the most recent year-to-date and the prior quarter-to-date computations. | ||
| The tax effects of significant or infrequently occurring items are recognized as discrete items in the interim periods in which the events occur. The impact of changes in tax laws or rates on deferred tax amounts, the effects of changes in judgment about valuation allowances established in prior years, and changes in tax reserves resulting from the finalization of tax audits or reviews are examples of significant, unusual or infrequently occurring items which are recognized as discrete items in the interim period in which the event occurs. |
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The determination of the forecasted annual effective tax rate is based upon a number of significant
estimates and judgments, including the forecasted annual pretax income of the corporation in each
tax jurisdiction in which it operates and the development of tax planning strategies during the
year. In addition, the Companys tax expense can be impacted by changes in tax rates or laws, the
finalization of tax audits and reviews, as well as other factors that cannot be predicted with
certainty. As such, there can be significant volatility in interim tax provisions.
The Companys forecasted annual effective tax rate for the second quarter of 2010 was approximately
28 percent, reflecting a reduction from the first quarter 2010 forecasted annual effective tax rate
of approximately 34 percent. The decrease in the forecasted annual effective tax rate is
principally due to changes in forecasted income levels in the United States and foreign
jurisdictions and permanent items in the second quarter.
The following table sets out the tax expense and the effective tax rates of the Company:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Pretax income |
$ | 14,222 | $ | 7,085 | $ | 18,767 | $ | 4,082 | ||||||||
Income tax expense (benefit) |
$ | (1,583 | ) | $ | 2,317 | $ | 442 | $ | 1,610 | |||||||
Effective tax rate |
(11.1 | )% | 32.7 | % | 2.4 | % | 39.4 | % |
In the second quarter of 2010, the Company recognized a tax benefit of $1,583 on pretax income of
$14,222 or an effective tax rate of (11.1) percent as compared to an effective tax rate of 32.7
percent in the second quarter of 2009. The decrease in the effective tax rate for the second
quarter is principally due to a discrete period tax benefit related to the release of uncertain tax
positions, net of federal and state benefits, of $6,346, of which $5,630 resulted from the receipt
of approval from the Joint Committee on Taxation related to a U. S. federal audit and $716 resulted
from other favorable state and international tax settlements and statute closures.
In the second quarter of 2009, the Company recognized a tax expense of $2,317 on a pretax income of
$7,085, or an effective tax rate of 32.7 percent. Upon filing the income tax returns in the second
quarter of 2009, the Company received a $7,517 refund from tax authorities. The income tax
receivable and current and deferred taxes were adjusted accordingly on the Consolidated Balance
Sheets at June 30, 2009.
For the first six months of 2010, the Company recognized tax expense of $442 on pretax income of
$18,767, or an effective tax rate of 2.4 percent as compared to an effective tax rate of 39.4
percent for the first six months of 2009. The decrease in the effective tax rate for the first six
months of 2010 compared to the comparable 2009 period is primarily due to the discrete period tax
benefit in the second quarter of 2010 discussed above, related to the release of uncertain tax
positions, net of federal and state benefits, of $6,346. For the first six months of 2009, the
Company recognized tax expense of $1,610 on pretax income of $4,082, or an effective tax rate of
39.4 percent. In the first six months of 2009, the Company filed income tax returns and received a
$7,517 refund from the tax authorities. The income tax receivable and current and deferred taxes
were adjusted accordingly on the Consolidated Balance Sheets at June 30, 2009.
The Company had unrecognized tax benefits, exclusive of interest and penalties, of $4,192 and
$16,259 at June 30, 2010 and December 31, 2009, respectively. The reserve for uncertain tax
positions decreased by $6,462 in the second quarter of 2010. The decrease was primarily the result
of the following: $5,775 due to the Joint Committee on Taxation approval of the U. S. federal audit
and other favorable state and international tax settlements, and $687 from statute of limitation
closures, which was recorded as an increase in deferred tax liabilities. The significant decrease
in the reserve for uncertain tax positions during the first quarter of 2010 was primarily due to
the receipt of approval of a change in tax accounting method and was recorded primarily as an
increase in deferred tax liabilities of $5,368 at June 30, 2010.
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Note 11 Segment Reporting
The Company organizes and manages its operations primarily by geographic area and measures profit
and loss of its segments based on operating income (loss). The accounting policies used to measure
operating income of the segments are the same as those used to prepare the consolidated financial
statements.
Segment Reporting Topic of the Codification, ASC 280, requires that a public business enterprise
report financial information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker (CODM) in deciding how to allocate
resources and in assessing performance.
The Companys North America reportable segment includes all of the Companys operations located in
North America, including its Canadian and Mexican operations, its U.S. branding and design
capabilities and its U.S. digital solutions business. The Companys Europe reportable segment
includes all operations located in Europe, including its European branding and design capabilities
and its digital solutions business. The Companys Asia Pacific reportable segment includes all
operations in Asia and Australia, including its Asia Pacific branding and design capabilities.
These reporting segments meet the quantitative thresholds for separate disclosure in accordance
with the relevant provisions of ASC 280. The segment information for the three and six month
periods ended June 30, 2009 have been restated to conform to the new reportable segment
presentation.
Corporate consists of unallocated general and administrative activities and associated expenses,
including executive, legal, finance, information technology, human resources and certain facility
costs. In addition, certain costs and employee benefit plans are included in corporate and not
allocated to operating segments.
The Company has disclosed operating income (loss) as the primary measure of segment earnings
(loss). This is the measure of profitability used by the Companys CODM and is most consistent with
the presentation of profitability reported within the consolidated financial statements.
Segment information relating to results of operations is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Sales to external clients: |
||||||||||||||||
North America |
$ | 104,318 | $ | 96,059 | $ | 200,636 | $ | 187,229 | ||||||||
Europe |
15,001 | 16,311 | 32,375 | 31,894 | ||||||||||||
Asia Pacific |
8,240 | 7,113 | 15,062 | 13,022 | ||||||||||||
Intercompany sales elimination |
(9,719 | ) | (7,494 | ) | (18,525 | ) | (15,068 | ) | ||||||||
Total |
$ | 117,840 | $ | 111,989 | $ | 229,548 | $ | 217,077 | ||||||||
Operating segment income (loss): |
||||||||||||||||
North America |
$ | 19,255 | $ | 14,910 | $ | 33,279 | $ | 20,601 | ||||||||
Europe |
815 | 531 | 1,363 | 1,158 | ||||||||||||
Asia Pacific |
1,776 | 2,292 | 2,655 | 3,095 | ||||||||||||
Corporate |
(5,861 | ) | (8,210 | ) | (14,787 | ) | (16,955 | ) | ||||||||
Operating income |
15,985 | 9,523 | 22,510 | 7,899 | ||||||||||||
Interest expense, net |
(1,763 | ) | (2,438 | ) | (3,743 | ) | (3,817 | ) | ||||||||
Income before income taxes |
$ | 14,222 | $ | 7,085 | $ | 18,767 | $ | 4,082 | ||||||||
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Note 12 Contingencies
United States Securities and Exchange Commission
The United States Securities and Exchange Commission (SEC) has been conducting a fact-finding
investigation to determine whether there have been violations of certain provisions of the federal
securities laws in connection with the Companys restatement of its financial results for the years
ended December 31, 2005 and 2006 and for the first three quarters of 2007. On March 5, 2009, the
SEC notified the Company that it had issued a Formal Order of Investigation. The Company has been
cooperating fully with the SEC and is committed to continue to cooperate fully until the SEC
completes its investigation. The Company has incurred professional fees and other costs in
responding to the SECs previously informal inquiry and expects to continue to incur professional
fees and other costs in responding to the SECs ongoing formal investigation, which may be
significant, until resolved.
Note 13 Acquisition Integration and Restructuring
Actions Initiated in 2008
In 2008, the Company initiated a cost reduction and restructuring plan involving a consolidation
and realignment of its workforce and incurred costs for employee terminations, obligations for
future lease payments, fixed asset impairments, and other associated costs. The costs associated
with these actions are covered under the Exit or Disposal Cost Obligations Topic of the
Codification, ASC 420, and the Compensation Nonretirement Postemployment Benefits Topic, ASC
712.
The following table summarizes the accruals recorded, adjustments, and the cash payments during the
six-month period ended June 30, 2010, related to cost reduction and restructuring actions initiated
during 2008. The adjustments are comprised of reversals of previously recorded expense accruals and
foreign currency translation adjustments. The remaining reserve balance of $3,532 is included in
Accrued expenses and Other long-term liabilities on the Consolidated Balance Sheets at June 30,
2010.
Employee | Lease | |||||||||||
Terminations | Obligations | Total | ||||||||||
Liability balance at December 31, 2009 |
$ | 288 | $ | 3,924 | $ | 4,212 | ||||||
New accruals |
1 | 66 | 67 | |||||||||
Adjustments |
(31 | ) | (7 | ) | (38 | ) | ||||||
Cash payments |
(21 | ) | (612 | ) | (633 | ) | ||||||
Liability balance at March 31, 2010 |
237 | 3,371 | 3,608 | |||||||||
New accruals |
| 58 | 58 | |||||||||
Adjustments |
(2 | ) | (7 | ) | (9 | ) | ||||||
Cash payments |
(1 | ) | (124 | ) | (125 | ) | ||||||
Liability balance at June 30, 2010 |
$ | 234 | $ | 3,298 | $ | 3,532 | ||||||
Actions Initiated in 2009
During 2009, the Company continued its cost reduction efforts and incurred additional costs for
facility closings and employee termination expenses.
The following table summarizes the accruals recorded, adjustments, and the cash payments during the
six month period ended June 30, 2010, related to cost reduction and restructuring actions initiated
during 2009. The remaining reserve balance of $337 is included in Accrued expenses and Other
long-term liabilities on the Consolidated Balance Sheets at June 30, 2010.
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Employee | Lease | |||||||||||
Terminations | Obligations | Total | ||||||||||
Liability balance at December 31, 2009 |
$ | 925 | $ | 108 | $ | 1,033 | ||||||
New accruals |
3 | 2 | 5 | |||||||||
Adjustments |
(79 | ) | (27 | ) | (106 | ) | ||||||
Cash payments |
(493 | ) | | (493 | ) | |||||||
Liability balance at March 31, 2010 |
356 | 83 | 439 | |||||||||
New accruals |
| 28 | 28 | |||||||||
Adjustments |
(2 | ) | (28 | ) | (30 | ) | ||||||
Cash payments |
(100 | ) | | (100 | ) | |||||||
Liability balance at June 30, 2010 |
$ | 254 | $ | 83 | $ | 337 | ||||||
Actions Initiated in 2010
The following table summarizes the accruals recorded, adjustments, and the cash payments during the
six-month period ended June 30, 2010, related to cost reduction and restructuring actions initiated
during 2010. The remaining reserve balance of $253 is included in Accrued expenses and Other
long-term liabilities on the Consolidated Balance Sheets at June 30, 2010.
Employee | Lease | |||||||||||
Terminations | Obligations | Total | ||||||||||
Liability balance at December 31, 2009 |
$ | | $ | | $ | | ||||||
New accruals |
294 | 294 | ||||||||||
Adjustments |
(3 | ) | | (3 | ) | |||||||
Cash payments |
(67 | ) | | (67 | ) | |||||||
Liability balance at March 31, 2010 |
224 | | 224 | |||||||||
New accruals |
456 | | 456 | |||||||||
Adjustments |
(1 | ) | | (1 | ) | |||||||
Cash payments |
(426 | ) | | (426 | ) | |||||||
Liability balance at June 30, 2010 |
$ | 253 | $ | | $ | 253 | ||||||
The combined expenses for the cost reduction and restructuring actions initiated in 2008, 2009, and
2010, shown above, were $502 and $721 for the three and six months ended June 30, 2010,
respectively. In addition, the Company recorded $184 and $294 for consulting fees related to the
Companys restructuring during the three and six months ended June 30, 2010, respectively. The
total expenses for the three and six months ended June 30, 2010 were $686 and $1,015, respectively,
and are presented as Acquisition integration and restructuring expense in the Consolidated
Statements of Operations.
The expenses for the six-month periods ended June 30, 2010 and June 30, 2009 and the cumulative
expense since the cost reduction programs inception were recorded in the following segments:
North | Asia | |||||||||||||||||||
America | Europe | Pacific | Corporate | Total | ||||||||||||||||
Six months ended June 30, 2010 |
$ | 544 | $ | 171 | $ | (4 | ) | $ | 304 | $ | 1,015 | |||||||||
Six months ended June 30, 2009 |
$ | 1,002 | $ | 1,007 | $ | 340 | $ | (31 | ) | $ | 2,318 | |||||||||
Cumulative since program inception |
$ | 9,859 | $ | 5,123 | $ | 1,236 | $ | 1,646 | $ | 17,864 |
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Note 14 Derivative Financial Instruments
Interest Rate Swaps
In order to manage the risk of rising interest rates on a portion of the Companys variable rate
revolving debt, the Company entered into two variable to fixed interest rate swaps with financial
institution counterparties for the total notional amount of $15,000 in May of 2010. The swaps,
which expire in June 2012, have been designated as cash flow hedges. Under the Derivatives and
Hedging Topic of the FASB Codification, ASC 815, the effective portion of the derivative fair value
gains or losses from these cash flow hedges is deferred in Accumulated comprehensive income, net.
The company assesses hedge effectiveness quarterly by comparing the critical terms of the swaps and
the debt. Since the Company assessed the hedge to be fully effective, the derivative fair value
gains or losses have been deferred in Accumulated comprehensive income, net on the Consolidated
Balance Sheets at June 30, 2010.
The interest rate swaps are measured at fair value on a recurring basis. Monthly LIBOR rates,
observable at commonly quoted intervals for the full term of the swaps and classified as Level 2
input (see Note 15 Fair Value Measurements), provide basis for valuation of these swaps.
An income approach, using the present value of projected future cash payments based on monthly
LIBOR rates, is the valuation technique used in assessing the swaps fair value.
As of June 30, 2010, the fair value of the derivative instruments was:
Derivative Assets | Derivative Liabilities | |||||||||||||||
Instrument | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||||||
Interest rate swaps |
Other assets | $ | | Other long-term liabilities | $ | 150 | ||||||||||
The effect of derivative instruments on the Consolidated Statements of Operations for the three and
six month periods ended June 30, 2010, was:
Amount of gain/(loss) | Amount of gain/(loss) | ||||||||
recognized on | reclassified from | ||||||||
derivatives in | Accumulated | ||||||||
Accumulated | comprehensive income, | ||||||||
Instrument | comprehensive income, net | net into earnings* | |||||||
Interest rate swaps |
$ | (91 | ) | $ | |
* | ASC 815 does not require that the amount in Accumulated comprehensive income, net be amortized to earnings unless the swaps are terminated. At the maturity of the swaps, their fair value will be zero just as it was at inception and each of the swap market value changes over its term will have been recorded as adjustments to both the swap asset or liability and Accumulated comprehensive income, net. |
Note 15 Fair Value Measurements
Fair value is defined under the Fair Value Measurements and Disclosures Topic of the Codification,
ASC 820, as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. Valuation techniques used
to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use
of unobservable inputs. The standard established a fair value hierarchy based on three levels of
inputs, of which the first two are considered observable and the last unobservable.
| Level 1 Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets. | ||
| Level 2 Inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. These are typically obtained from readily-available pricing sources for comparable instruments. |
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| Level 3 Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entitys own assumptions of the data that market participants would use in pricing the asset or liability, based on the best information available in the circumstances. |
For purposes of financial reporting, the Company has determined that the fair value of such
financial instruments as cash and cash equivalents, accounts receivable, accounts payable and
long-term debt approximates carrying value at June 30, 2010. Interest rate swaps are measured at
fair value on a recurring basis and the following table summarizes the derivative financial
instruments measured at fair value as of June 30, 2010:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Other long-term liabilities: |
||||||||||||||||
Interest rate swaps |
$ | | $ | 150 | $ | | $ | 150 |
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Information
Certain statements contained in Managements Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this report that relate to the Companys 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 1995.
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 industry, 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 Companys 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 Companys services; unfavorable foreign
exchange fluctuations; changes in or weak consumer confidence and consumer spending; loss of key
management and operational personnel; the ability of the Company to implement its business strategy
and plans; the ability of the Company to comply with the financial covenants contained in its debt
agreements and obtain waivers or amendments in the event of non-compliance; the ability of the
Company to maintain an effective system of disclosure and internal controls and the discovery of
any future control deficiencies or weaknesses, which may require substantial costs and resources to
rectify; the stability of state, federal and foreign tax laws; the ability of the Company to
identify and capitalize on industry trends and technological advances in the imaging industry;
higher than expected costs associated with compliance with legal and regulatory requirements;
higher than expected costs or unanticipated difficulties associated with integrating acquired
operations; the stability of political conditions in 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 Companys filings with the Securities and Exchange Commission. The Company
assumes no obligation to update publicly any of these statements in light of future events.
Business Overview
Schawk, Inc. and its subsidiaries (Schawk or the Company) provide strategic, creative and
executional graphic services and solutions to clients in the consumer products packaging, retail,
pharmaceutical and advertising markets. The Company, headquartered in Des Plaines, Illinois, has
been in operation since 1953 and is incorporated under the laws of the State of Delaware.
The Company is one of the worlds largest independent business service providers in the graphics
industry. The Company currently delivers these services through more than 150 locations in 14
countries across North America, Europe, Asia and Australia. By leveraging its global comprehensive
portfolio of strategic, creative and executional capabilities, the Company believes it helps
companies of all sizes create compelling and consistent brand experiences that strengthen
consumers affinity for these brands. The Company does this by helping its clients activate their
brands worldwide.
The Company believes that it is positioned to deliver its offering in a category that is
unique to its competition. This category, brand point management, reflects Schawks ability to
provide integrated strategic, creative and executional
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services globally across the four primary points in which its clients brands touch consumers: at
home, on the go, at the store and on the shelf. At Home includes brand touchpoints such as
direct mail, catalogs, advertising, circulars, and the internet. On the Go includes brand
touchpoints such as outdoor advertising, mobile/cellular and the internet. In the Store includes
brand touchpoints such as point-of-sale displays, in-store merchandising and interactive displays.
On the Shelf focuses on packaging as a key brand touchpoint.
The Companys strategic services are delivered primarily through its branding and design
capabilities, performed under its Anthem Worldwide (Anthem) brand. These services include brand
analysis and articulation, design strategy and design. These services help clients revitalize
existing brands and bring new products to market that respond to changing consumer desires and
trends. Anthems services also help retailers optimize their brand portfolios, helping them create
fewer, smarter and potentially more profitable brands. The impact of changes to design and brand
strategy can potentially exert a significant impact on a companys brand, category, market share,
equity and sales. Strategic services also represent some of Schawks highest value, highest margin
services.
The Companys creative services are delivered through Anthem and through various sub-specialty
capabilities whose services include digital photography, 3D imaging, creative retouching, CGI
(Computer Generated Images), packaging mock-ups/sales samples, brand compliance, retail marketing
(catalogs, circulars, point-of-sale displays), interactive media, and large-format printing. These
services support the creation, adaptation and maintenance of brand imagery used across brand
touchpoints including packaging, advertising, marketing and sales promotion materials offline
in printed materials and online in visual media such as the internet, mobile/cellular, interactive
displays and television. The Company believes that creative services, since they often represent
the creation of clients original intellectual property, present a high-margin growth opportunity
for Schawk.
The Companys executional services are delivered primarily through its legacy premedia business,
which at this time continues to account for the most significant portion of its revenues. Premedia
products such as color proofs, production artwork, digital files and flexographic, lithographic and
gravure image carriers are supported by color management and print management services that the
Company believes provides a vital interface between the creative design and production processes.
The Company believes this ensures the production of consistent, high quality brand/graphic images
on a global scale at the speed required by clients to remain competitive in todays markets on
global, regional and local scales. Increasingly, the Company has been offering executional services
in the growing digital space, in order to meet growing client demand to market their brands on the
internet and via mobile and interactive technologies. Additionally, the Companys graphic lifecycle
content management software and services facilitates the organization, management, application and
re-use of proprietary brand assets. The Company believes that products such as BLUE confer the
benefits of brand consistency, accuracy and speed to market for its clients.
As a global supplier of integrated strategic, creative and executional graphics capabilities,
Schawk helps clients meet their growing need for consistency across brand touchpoints from a single
coordinated contact. A high level of consistency can impact clients businesses in potentially
significant ways such as the retention and growth of the equity in their brands and improved
consumer recognition, familiarity and affinity. The latter has the potential to help clients
improve sales and market share of their brands. Additionally, through its global systems, the
Company provides processes that reduce opportunities for third parties to counterfeit its clients
brands, which is an issue in both mature and developing regions. The Company also believes that its
integrated and comprehensive capabilities provide clients with the potential for long-term
cost-reductions across their graphic workflows.
Organization
During 2009, the Company restructured its operations to report its operations on a geographic
basis, in three reportable segments: North America, Europe and Asia Pacific. This organization
reflects the current management reporting structure.
The Companys North America segment includes all of the Companys operations located in North
America, including its Canadian and Mexican operations, its U.S. branding and design capabilities
and its U.S. digital solutions business. The Companys Europe segment includes all operations
located in Europe, including its European branding and design capabilities and its digital
solutions business in London. The Companys Asia Pacific segment includes all operations in Asia
and Australia, including its Asia Pacific branding and design capabilities.
19
Table of Contents
Financial Overview
Net sales increased $5.9 million or 5.2 percent in the second quarter of 2010 to $117.9 million
from $112.0 million in the second quarter of 2009. For the second quarter of 2010, net income was
$15.8 million or $0.61 per fully diluted share, as compared to net income of $4.8 million or $0.19
per fully diluted share for the second quarter of 2009. In the second quarter of 2010 compared to
the second quarter of 2009, sales increased in the North America operating segment and in the Asia
Pacific operating segment by 8.6 percent and 15.8 percent, respectively, partially offset by a
sales decrease of 8.0 percent in the Europe operating segment.
Gross profit increased by $3.9 million or 9.1 percent in the second quarter of 2010 to $46.8
million from $42.9 million in the second quarter of 2009. The increase in gross profit occurred in
all reportable segments as follows: North America increased by $2.5 million or 7.1 percent, Europe
increased by $0.3 million or 6.1 percent and Asia Pacific increased by $0.3 million or 7.3 percent.
The improvement in gross profit in the second quarter of 2010 over the comparable period of the
prior year is principally due to the increase in revenue quarter-over-quarter and the Companys
cost reduction and capacity utilization efforts.
Selling, general and administrative expenses decreased $1.7 million, or 5.4 percent, in the second
quarter of 2010 to $30.4 million from $32.2 million in the second quarter of 2009. During the
second quarter of 2010, the Company recorded two insurance recoveries, totaling $1.4 million, as a
reduction of selling, general and administrative expense. The first recovery, in the amount of
$0.5 million, related to production equipment damaged during the first quarter of 2010 at one of
the Companys North American facilities, for which a $0.7 million asset impairment charge was
recorded in the first quarter of 2010. The second recovery, in the amount of $0.9 million,
resulted from an insurance settlement for a flood loss incurred during 2009 at one of the Companys
North American facilities. The Company also had reduced restructuring expenses associated with the
Companys cost reduction activities of $0.7 million in the second quarter of 2010 compared to $1.5
million in the second quarter of 2009. The Company recorded no asset impairment charges in the
second quarter of 2010 compared to an asset impairment charge of $0.1 million in the second quarter
of 2009. The Company recorded a net gain on foreign exchange exposures of $0.3 million in both the
second quarter of 2010 and the second quarter of 2009. The net gains included unrealized gains of
$0.4 million and $0.7 million for the second quarter of 2010 and 2009, respectively, related
primarily to unhedged currency exposure from intercompany debt obligations of the Companys foreign
subsidiaries. Operating income increased to $16.0 million in the second quarter of 2010 compared to
$9.5 million in the second quarter of 2009.
Cost Reduction and Capacity Utilization Actions
Beginning in 2008, continuing in 2009 and in the first half of 2010, the Company incurred
restructuring costs for employee terminations, obligations for future lease payments, fixed asset
impairments, and other associated costs as part of its previously announced plan to reduce costs
through a consolidation and realignment of its work force and facilities. The total expense
recorded for the three and six month periods of 2010 was $0.7 million and $1.0 million,
respectively, and is presented as Acquisition integration and restructuring expense in the
Consolidated Statements of Operations. See Note 13 Acquisition Integration and Restructuring in
Part I, Item 1 for additional information.
The expense for each of the years 2008 and 2009 and for the first half of 2010, and the cumulative
expense since the cost reduction programs inception, was recorded in the following operating
segments:
North | Asia | |||||||||||||||||||
(in millions) | America | Europe | Pacific | Corporate | Total | |||||||||||||||
Six months ended June 30, 2010 |
$ | 0.6 | $ | 0.1 | $ | | $ | 0.3 | $ | 1.0 | ||||||||||
Year ended December 31, 2009 |
3.6 | 1.4 | 1.0 | 0.5 | 6.5 | |||||||||||||||
Year ended December 31, 2008 |
5.7 | 3.6 | 0.2 | 0.9 | 10.4 | |||||||||||||||
Cumulative since program inception |
$ | 9.9 | $ | 5.1 | $ | 1.2 | $ | 1.7 | $ | 17.9 | ||||||||||
It is estimated that cost savings resulting from cost reduction actions initiated in the first half
of 2010 will be approximately $4.1 million for 2010 and recurring pre-tax savings are expected to
increase over the subsequent two-year period to approximately $7 million annually. It is estimated
that cost savings resulting from the 2009 cost reduction actions was approximately $8.9 million for
2009 and recurring pre-tax savings are expected to increase over the
20
Table of Contents
subsequent two-year period to approximately $16 million annually. Cost savings resulting from the
2008 cost reduction actions is estimated to have been approximately $7.4 million during 2008 and
recurring pre-tax savings are estimated to have increased over the subsequent two-year period to
approximately $22 million annually.
Critical Accounting Policies
As discussed in the 2009 Form 10-K, the preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the United States requires management
to make certain estimates and assumptions that affect the amount of reported assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and revenues and expenses during the periods reported. Actual results may differ from
those estimates. There were no material changes in the Companys critical accounting policies since
the filing of its 2009 Form 10-K.
Results of Operations
Consolidated
The following table sets forth certain amounts, ratios and relationships calculated from the
Consolidated Statements of Operations for the three months ended:
Three Months Ended | 2010 vs. 2009 | |||||||||||||||
June 30, | Increase (Decrease) | |||||||||||||||
(in thousands) | 2010 | 2009 | $ | % | ||||||||||||
Net sales |
$ | 117,840 | $ | 111,989 | $ | 5,851 | 5.2 | % | ||||||||
Cost of sales |
71,016 | 69,055 | 1,961 | 2.8 | % | |||||||||||
Gross profit |
46,824 | 42,934 | 3,890 | 9.1 | % | |||||||||||
Selling, general and administrative expenses |
30,420 | 32,151 | (1,731 | ) | (5.4 | )% | ||||||||||
Foreign exchange (gain) loss |
(267 | ) | (319 | ) | 52 | (16.3 | )% | |||||||||
Acquisition integration and restructuring expenses |
686 | 1,501 | (815 | ) | (54.3 | )% | ||||||||||
Impairment of long-lived assets |
| 78 | (78 | ) | nm | |||||||||||
Operating income |
15,985 | 9,523 | 6,462 | 67.9 | % | |||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
8 | 30 | (22 | ) | (73.3 | )% | ||||||||||
Interest expense |
(1,771 | ) | (2,468 | ) | 697 | (28.2 | )% | |||||||||
(1,763 | ) | (2,438 | ) | 675 | (27.7 | )% | ||||||||||
Income before income taxes |
14,222 | 7,085 | 7,137 | nm | ||||||||||||
Income tax provision (benefit) |
(1,583 | ) | 2,317 | (3,900 | ) | nm | ||||||||||
Net income |
$ | 15,805 | $ | 4,768 | $ | 11,037 | nm | |||||||||
Effective income tax rate |
(11.1 | )% | 32.7 | % | ||||||||||||
Expressed as a percentage of Net Sales: |
||||||||||||||||
Gross margin |
39.7 | % | 38.3 | % | 140 bpts | |||||||||||
Selling, general and administrative expense |
25.8 | % | 28.7 | % | (290) bpts | |||||||||||
Foreign exchange (gain) loss |
(0.2 | )% | (0.3 | )% | 10 bpts | |||||||||||
Acquisition integration and restructuring expenses |
0.6 | % | 1.3 | % | (70) bpts | |||||||||||
Impairment of long-lived assets |
| 0.1 | % | (10) bpts | ||||||||||||
Operating margin |
13.6 | % | 8.5 | % | 510 bpts |
21
Table of Contents
bpts= basis points
nm = not neaningful
nm = not neaningful
Net sales in the second quarter of 2010 were $117.8 million compared to $112.0 million in the same
period of the prior year, an increase of $5.9 million, or 5.2 percent. Net sales increased,
quarter-over-quarter, in the North America segment by $8.3 million, or 8.6 percent, and in the Asia
Pacific segment by $1.1 million, or 15.8 percent. Net sales decreased in the Europe segment by 1.3
million or 8.0 percent. Approximately $1.0 million of the sales increase, quarter-over-quarter, was
the result of changes in foreign currency translation rates, as the U.S. dollar decreased in value
relative to certain of the local currencies of the Companys foreign subsidiaries. The
quarter-over-quarter increase in sales primarily reflects an overall improvement in the global
economy, which started in the latter half of 2009 and continued into 2010, partially offset by
continued weakness in the European economy. Many of the Companys clients have increased brand
innovation and introduction activities, including the frequency of packaging redesigns and sales
promotion projects, resulting in higher revenue for the Company.
Consumer products packaging accounts sales in the second quarter of 2010 were $82.9 million, or
70.4 percent of total sales, as compared to $79.9 million, or 71.4 percent, in the same period of
last year, representing an increase of 3.7 percent. Advertising and retail accounts sales of $23.4
million in the second quarter of 2010, or 19.9 percent of total sales, increased 12.0 percent from
$20.9 million in the second quarter of 2009. Entertainment account sales of $8.0 million in the
second quarter of 2010, or 6.8 percent of total sales, decreased 3.1 percent from $8.3 million in
the second quarter of 2009. As market and economic conditions improve, many of the Companys
consumer products packaging clients have increased their frequency of package redesigns, sales
promotions and new product introductions, as compared to the comparable prior year period.
Gross profit was $46.8 million, or 39.7 percent, of sales in the second quarter of 2010, an
increase of $3.9 million, or 9.1 percent, from $42.9 million, or 38.3 percent of sales, in the
second quarter of 2009. The increase in gross profit is largely attributable to the increase in
revenue quarter-over-quarter and cost savings related to the Companys restructuring efforts.
Operating income increased by $6.5 million, to $16.0 million in the second quarter of 2010 from
$9.5 million in the second quarter of 2009. The operating income percentage was 13.6 percent for
the second quarter of 2010, compared to 8.5 percent in the second quarter of 2009. The increase in
operating income in the second quarter of 2010 compared to the second quarter of 2009 is
principally due to the increase in revenue quarter-over-quarter and lower operating expenses
resulting from the Companys cost reduction initiatives. The decrease in selling, general and
administrative expenses over the prior period reflects a $1.3 million decrease in professional and
consulting fees related to the Companys internal control remediation and related matters,
partially offset by restoration of certain temporary cost reduction actions that the Company
implemented for 2009. In addition, during the second quarter of 2010, the Company recorded two
insurance recoveries, totaling $1.4 million, as a reduction of selling, general and administrative
expense. The first recovery, in the amount of $0.5 million, related to production equipment
damaged during the first quarter of 2010 at one of the Companys North American facilities, for
which a $0.7 million asset impairment charge was recorded in the first quarter of 2010. The second
recovery, in the amount of $0.9 million, resulted from an insurance settlement for a flood loss
incurred during 2009 at one of the Companys North American facilities.
In the second quarter of 2010, the Company recorded $0.7 million of acquisition integration
and restructuring expenses compared to $1.5 million in the second quarter of 2009. These expenses
were recorded in connection with previously announced plans to consolidate, reduce and re-align the
Companys work force and operations and represent costs for employee terminations, obligations for
future lease payments, and other associated costs. The Company recorded a net gain on foreign
exchange exposures of $0.3 million in both the second quarter of 2010 and the second quarter of
2009. The net gain includes unrealized gains of $0.4 million and $0.7 million for the second
quarter of 2010 and 2009, respectively, related primarily to unhedged currency exposure from
intercompany debt obligations of the Companys foreign subsidiaries.
Interest expense in the second quarter of 2010 was $1.8 million compared to $2.5 million in the
second quarter of 2009, a decrease of $0.7 million, or 28.2 percent. The lower interest expense in
the second quarter of 2010 reflects lower average debt outstanding during the 2010 period compared
to the comparable 2009 period. In order to manage the risk of rising interest rates on a portion
of its variable rate revolving debt, the Company executed two variable to fixed interest rate
swaps for the total notional amount of $15.0 million in May of 2010. See Note 14 Derivative
Financial Instruments in Part I, Item 1, and Item 3, Quantitative and Qualitative Disclosures About
Market Risk for further discussion.
22
Table of Contents
The Company recorded an income tax benefit of $1.6 million for the second quarter of 2010 compared
to an income tax expense of $2.3 million in the second quarter of 2009. Income tax expense was at
an effective tax rate of (11.1) percent and 32.7 percent for the second quarters of 2010 and 2009,
respectively. The decrease in the effective rate for the second quarter of 2010 compared to the
second quarter of 2009 is primarily due to discrete period tax benefits from the release of
uncertain tax positions in the second quarter of 2010.
In the second quarter of 2010, the Company recorded net income of $15.8 million, as compared to
$4.8 million for the same period of 2009.
Other Information
Depreciation and amortization expense was $4.4 million for the second quarter of 2010 as compared
to $4.7 million in the second quarter of 2009.
Capital expenditures in the second quarter of 2010 were $2.8 million compared to $1.1 million in
the same period of 2009.
The following table sets forth certain amounts, ratios and relationships calculated from the
Consolidated Statements of Operations for the six months ended:
Six Months ended | 2010 vs. 2009 | |||||||||||||||
June 30, | Increase (Decrease) | |||||||||||||||
(in thousands) | 2010 | 2009 | $ | % | ||||||||||||
Net sales |
$ | 229,548 | $ | 217,077 | $ | 12,471 | 5.7 | % | ||||||||
Cost of sales |
140,849 | 141,049 | (200 | ) | (0.1 | )% | ||||||||||
Gross profit |
88,699 | 76,028 | 12,671 | 16.7 | % | |||||||||||
Selling, general and administrative expenses |
62,944 | 66,120 | (3,176 | ) | (4.8 | )% | ||||||||||
Foreign exchange (gain) loss |
1,550 | (445 | ) | 1,995 | nm | |||||||||||
Acquisition integration and restructuring
expenses |
1,015 | 2,318 | (1,303 | ) | (56.2 | )% | ||||||||||
Impairment of long-lived assets |
680 | 136 | 544 | nm | ||||||||||||
Operating income |
22,510 | 7,899 | 14,611 | nm | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
16 | 100 | (84 | ) | (84.0 | )% | ||||||||||
Interest expense |
(3,759 | ) | (3,917 | ) | 158 | (4.0 | )% | |||||||||
(3,743 | ) | (3,817 | ) | 74 | (1.9 | )% | ||||||||||
Income before income taxes |
18,767 | 4,082 | 14,685 | nm | ||||||||||||
Income tax provision |
442 | 1,610 | (1,168 | ) | (72.5 | )% | ||||||||||
Net income |
$ | 18,325 | $ | 2,472 | $ | 15,583 | nm | |||||||||
Effective income tax rate |
2.4 | % | 39.4 | % | ||||||||||||
Expressed as a percentage of Net Sales: |
||||||||||||||||
Gross margin |
38.6 | % | 35.0 | % | 360 bpts | |||||||||||
Selling, general and administrative expense |
27.4 | % | 30.5 | % | (310) bpts | |||||||||||
Foreign exchange (gain) loss |
0.7 | % | (0.2 | )% | 90 bpts | |||||||||||
Acquisition integration and restructuring
expenses |
0.4 | % | 1.1 | % | (70) bpts | |||||||||||
Impairment of long-lived assets |
0.3 | % | 0.1 | % | 20 bpts | |||||||||||
Operating margin |
9.8 | % | 3.6 | % | 620 bpts |
23
Table of Contents
bpts= basis points
nm = not meaningful
nm = not meaningful
Net sales in the first six months of 2010 were $229.5 million compared to $217.1 million in the
same period of the prior year, an increase of $12.5 million, or 5.7 percent. Net sales increased,
period-over-period, in all operating segments: the North America segment increased by $13.4
million, or 7.2 percent; the Europe segment increased by $0.5 million, or 1.5 percent; and the Asia
Pacific segment increased by $2.0 million, or 15.7 percent. Approximately $4.4 million of the sales
increase, period-over-period, was the result of changes in foreign currency translation rates, as
the U.S. dollar decreased in value relative to certain of the local currencies of the Companys
foreign subsidiaries. The period-over-period increase in sales primarily reflects an overall
improvement in the global economy, which started in the latter half of 2009 and continued into
2010, partially offset by continued weakness in the European economy. Many of the Companys
clients have increased brand innovation and introduction activities, including the frequency of
packaging redesigns and sales promotion projects, resulting in higher revenue for the Company.
Consumer products packaging accounts sales in the first six months of 2010 were $163.3 million, or
71.1 percent of total sales, as compared to $153.0 million, or 70.5 percent, in the same period of
last year, representing an increase of 6.7 percent. Advertising and retail accounts sales of $44.3
million in the first six months of 2010, or 19.3 percent of total sales, increased 4.8 percent from
$42.2 million in the first six months of 2009. Entertainment account sales of $14.5 million in the
first six months of 2010, or 6.3 percent of total sales, declined 9.7 percent from $16.0 million in
the first six months of 2009. As market and economic conditions begin to improve, many of the
Companys consumer products packaging clients have increased their frequency of package redesigns,
sales promotions and new product introductions, as compared to the comparable prior year period.
Gross profit was $88.7 million, or 38.6 percent, of sales in the first six months of 2010, an
increase of $12.7 million, or 16.7 percent, from $76.0 million, or 35.0 percent of sales, in the
first six months of 2009. The increase in gross profit is largely attributable to the increase in
revenue period-over-period and cost savings related to the Companys restructuring efforts.
Operating income increased by $14.6 million, to $22.5 million in the first six months of 2010 from
$7.9 million in the first six months of 2009. The operating income percentage for the first six
months of 2010 was 9.8 percent, compared to an operating income percentage of 3.6 percent in the
first six months of 2009. The increase in operating income in the first six months of 2010 compared
to the first six months of 2009 is principally due to the increase in revenue period-over-period
and lower operating expenses resulting from the Companys cost reduction initiatives. The decrease
in selling, general and administrative expenses over the prior period reflects a $3.3 million
decrease in professional and consulting fees related to the Companys internal control remediation
and related matters, partially offset by restoration of certain temporary cost reduction actions
that the Company implemented for 2009. In addition, as previously discussed, during the second
quarter of 2010, the Company recorded two insurance recoveries, totaling $1.4 million, as a
reduction of selling, general and administrative expense.
In the first six months of 2010, the Company recorded $1.0 million of acquisition integration
and restructuring expenses compared to $2.3 million in the first six months of 2009. These expenses
were recorded in connection with previously announced plans to consolidate, reduce and re-align the
Companys work force and operations and represent costs for employee terminations, obligations for
future lease payments, and other associated costs. These period-over-period expense reductions were
offset by certain expense increases, as follows: The Company recorded a $1.6 million loss on
foreign exchange exposures in the first six months of 2010, of which $1.2 million related to
unrealized currency remeasurements, compared to a gain on foreign exchange exposures of $0.4
million in the comparable 2009 period. The unrealized currency losses in the first six months of
2010 were principally due to the deterioration of the value of the Euro during the period. The
Companys foreign exchange gains or losses relate primarily to unhedged currency exposure from
intercompany debt obligations of the Companys foreign subsidiaries. In addition, the Company
recorded a $0.7 million asset impairment charge in the first six months of 2010 for equipment
damaged at one of its North American facilities, compared to a $0.1 million asset impairment charge
recorded in the first six months of 2009.
Interest expense in the first six months of 2010 was $3.8 million compared to $3.9 million in the
first six months of 2009 an decrease of $0.2 million, or 4.0 percent. As previously discussed, in
order to manage the risk of rising interest rates on a portion of its variable rate revolving debt,
the Company executed two variable to fixed interest rate swaps for the total notional amount of
$15.0 million in May of 2010.
24
Table of Contents
The Company recorded an income tax expense of $0.4 million for the first six months of 2010,
compared to income tax expense of $1.6 million in the first six months of 2009. Income tax expense
was at an effective tax rate of 2.4 percent and 39.4 percent for the first six months of 2010 and
2009, respectively. The decrease in the effective rate for the 2010 period compared to the prior
year is primarily due to discrete period tax benefits from the release of uncertain tax positions
during the first six months of 2010.
In the first six months of 2010, the Company recorded net income of $18.3 million, as compared to a
net income of $2.5 million for the same period of 2009.
Other Information
Depreciation and amortization expense was $8.9 million for the second quarter of 2010 as compared
to $9.5 million in the first six months of 2009.
Capital expenditures in the first six months of 2010 were $4.9 million compared to $2.4 million in
the same period of 2009.
Segment Information
North America
Three Months Ended | 2010 vs. 2009 | |||||||||||||||
June 30, | Increase (Decrease) | |||||||||||||||
(in thousands) | 2010 | 2009 | $ | % | ||||||||||||
Net sales |
$ | 104,318 | $ | 96,059 | $ | 8,259 | 8.6 | % | ||||||||
Acquisition integration and
restructuring expenses |
$ | 343 | $ | 419 | $ | (76 | ) | (18.1 | )% | |||||||
Foreign exchange (gain) loss |
$ | 5 | $ | 59 | $ | (54 | ) | (91.5 | )% | |||||||
Depreciation and amortization |
$ | 2,669 | $ | 2,995 | $ | (326 | ) | (10.9 | )% | |||||||
Operating income |
$ | 19,255 | $ | 14,910 | $ | 4,345 | 29.1 | % | ||||||||
Operating margin |
18.5 | % | 15.5 | % | 300 bpts | |||||||||||
Capital expenditures |
$ | 1,888 | $ | 711 | $ | 1,117 | nm | |||||||||
Total assets |
$ | 349,110 | $ | 315,874 | $ | 33,236 | 10.5 | % |
nm = not meaningful
bpts = basis points
Net sales in the second quarter of 2010 for the North America segment were $104.3 million compared
to $96.1 million in the same period of the prior year, an increase of $8.3 million or 8.6 percent.
Approximately $1.3 million of the quarter-over-quarter sales increase was the result of changes in
foreign currency translation rates, as the U.S. dollar decreased in value relative to the local
currencies of certain of the Companys foreign subsidiaries. The quarter-over-quarter increase in
sales reflects an improvement in the North American economy, which started in the latter half of
2009 and continued into the first half of 2010. In response to improving economic conditions, many
of the Companys consumer products clients have increased their levels of marketing and new product
introductions and have increased the frequency of packaging redesigns and sales promotion projects,
resulting in higher revenue for the Company.
Operating income was $19.3 million or 18.5 percent of sales, in the second quarter of 2010 compared
to $14.9 million, or 15.5 percent of sales, in the second quarter of 2009, an increase of $4.3
million. The increase in operating income is principally due to the increase in revenue
quarter-over-quarter and the Companys cost reduction initiatives, which began in the second half
of 2008 and continued into the second quarter of 2010.
25
Table of Contents
Six Months Ended | 2010 vs. 2009 | |||||||||||||||
June 30, | Increase (Decrease) | |||||||||||||||
(in thousands) | 2010 | 2009 | $ | % | ||||||||||||
Net sales |
$ | 200,636 | $ | 187,229 | $ | 13,407 | 7.2 | % | ||||||||
Acquisition integration and
restructuring expenses |
$ | 544 | $ | 1,002 | $ | (458 | ) | (45.7 | )% | |||||||
Foreign exchange (gain) loss |
$ | (35 | ) | $ | 33 | $ | (68 | ) | nm | |||||||
Impairment of long-lived assets |
$ | 680 | $ | 58 | $ | 622 | nm | |||||||||
Depreciation and amortization |
$ | 5,539 | $ | 6,026 | $ | (487 | ) | (8.1 | )% | |||||||
Operating income |
$ | 33,279 | $ | 20,601 | $ | 12,678 | 61.5 | % | ||||||||
Operating margin |
16.6 | % | 11.0 | % | 560 bpts | |||||||||||
Capital expenditures |
$ | 3,556 | $ | 1,761 | $ | 1,795 | nm | |||||||||
Total assets |
$ | 349,110 | $ | 315,874 | $ | 33,236 | 10.5 | % |
nm | = | not meaningful |
bpts | = | basis points |
Net sales in the first six months of 2010 for the North America segment were $200.6 million
compared to $187.2 million in the same period of the prior year, an increase of $13.4 million or
7.2 percent. Approximately $2.9 million of the quarter-over-quarter sales increase was the result
of changes in foreign currency translation rates, as the U.S. dollar decreased in value relative to
the local currencies of certain of the Companys foreign subsidiaries. The period-over-period
increase in sales reflects an improvement in the North American economy, which started in the
latter half of 2009 and continued into the first half of 2010. In response to improving economic
conditions, many of the Companys consumer products clients have increased their levels of
marketing and new product introductions and have increased the frequency of packaging redesigns and
sales promotion projects, resulting in higher revenue for the Company.
Operating income was $33.3 million or 16.6 percent of sales, in the first six months of 2010
compared to $20.6 million, or 11.0 percent of sales, in the first six months of 2009, an increase
of $12.7 million. The increase in operating income is principally due to the increase in revenue
period-over-period and the Companys cost reduction initiatives, which began in the second half of
2008 and continued into the first half of 2010.
Europe
Three Months Ended | 2010 vs. 2009 | |||||||||||||||
June 30, | Increase (Decrease) | |||||||||||||||
(in thousands) | 2010 | 2009 | $ | % | ||||||||||||
Net sales |
$ | 15,001 | $ | 16,311 | $ | (1,310 | ) | (8.0 | )% | |||||||
Acquisition integration and
restructuring expenses |
$ | 94 | $ | 882 | $ | (788 | ) | (89.3 | )% | |||||||
Foreign exchange (gain) loss |
$ | 196 | $ | 333 | $ | (137 | ) | (41.1 | )% | |||||||
Depreciation and amortization |
$ | 798 | $ | 722 | $ | 76 | 10.5 | % | ||||||||
Operating income |
$ | 815 | $ | 531 | $ | 284 | 53.5 | % | ||||||||
Operating margin |
5.4 | % | 3.3 | % | 210 bpts | |||||||||||
Capital expenditures |
$ | 311 | $ | 204 | $ | 107 | 52.5 | % | ||||||||
Total assets |
$ | 40,812 | $ | 46,428 | $ | (5,616 | ) | (12.1 | )% |
nm | = | not meaningful |
bpts | = | basis points |
Net sales in the Europe segment in the second quarter of 2010 were $15.0 million compared to $16.3
million in the same period of the prior year, a decrease of $1.3 million or 8.0 percent. The
quarter-over-quarter sales decrease was partially due to continued weakness in the European
economy. Approximately $0.7 million of the sales decrease was the result of changes in foreign
currency translation rates, as the U.S. dollar increased in value relative to the local currencies
of certain of the Companys foreign subsidiaries.
Operating income was $0.8 million, or 5.4 percent of sales, in the second quarter of 2010 compared
to $0.5 million or 3.3 percent of sales in the second quarter of 2009, a increase of $0.3 million.
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Six Months Ended | 2010 vs. 2009 | |||||||||||||||
June 30, | Increase (Decrease) | |||||||||||||||
(in thousands) | 2010 | 2009 | $ | % | ||||||||||||
Net sales |
$ | 32,375 | $ | 31,894 | $ | 481 | 1.5 | % | ||||||||
Acquisition integration and
restructuring expenses |
$ | 171 | $ | 1,007 | $ | (836 | ) | (83.0 | )% | |||||||
Foreign exchange (gain) loss |
$ | 284 | $ | 504 | $ | (220 | ) | (43.7 | )% | |||||||
Depreciation and amortization |
$ | 1,453 | $ | 1,416 | $ | 37 | 2.6 | % | ||||||||
Operating income |
$ | 1,363 | $ | 1,158 | $ | 205 | 17.7 | % | ||||||||
Operating margin |
4.2 | % | 3.6 | % | 60 bpts | |||||||||||
Capital expenditures |
$ | 383 | $ | 314 | $ | 69 | 22.0 | % | ||||||||
Total assets |
$ | 40,812 | $ | 46,428 | $ | (5,616 | ) | (12.1 | )% |
nm | = | not meaningful |
bpts | = | basis points |
Net sales in the Europe segment in the first six months of 2010 were $32.4 million compared to
$31.9 million in the same period of the prior year, an increase of $0.5 million or 1.5 percent.
Approximately $0.5 million of the quarter-over-quarter sales increase was the result of changes in
foreign currency translation rates, as the U.S. dollar decreased in value relative to the local
currencies of certain of the Companys foreign subsidiaries.
Operating income was $1.4 million, or 4.2 percent of sales, in the first six months of 2010
compared to $1.2 million or 3.6 percent of sales in the first six months of 2009, a increase of
$0.2 million or 17.7 percent.
Asia Pacific
Three Months Ended | 2010 vs. 2009 | |||||||||||||||
June 30, | Increase (Decrease) | |||||||||||||||
(in thousands) | 2010 | 2009 | $ | % | ||||||||||||
Net sales |
$ | 8,240 | $ | 7,113 | $ | 1,127 | 15.8 | % | ||||||||
Acquisition integration and
restructuring expenses |
$ | 61 | $ | 231 | $ | (170 | ) | (73.6 | )% | |||||||
Foreign exchange (gain) loss |
$ | (7 | ) | $ | (710 | ) | $ | 703 | 99.0 | % | ||||||
Impairment of long-lived assets |
| $ | 78 | $ | (78 | ) | nm | |||||||||
Depreciation and amortization |
$ | 313 | $ | 235 | $ | 78 | 33.2 | % | ||||||||
Operating income |
$ | 1,776 | $ | 2,292 | $ | (516 | ) | (22.5 | )% | |||||||
Operating margin |
21.6 | % | 32.2 | % | (1,060) bpts | |||||||||||
Capital expenditures |
$ | 260 | $ | 188 | $ | 72 | 38.3 | % | ||||||||
Total assets |
$ | 23,254 | $ | 20,301 | $ | 2,953 | 14.5 | % |
nm | = | not meaningful |
bpts | = | basis points |
Net sales in the Asia Pacific segment in the second quarter of 2010 were $8.2 million compared to
$7.1 million in the same period of the prior year, an increase of $1.1 million or 15.8 percent.
Approximately $0.4 million of the quarter-over-quarter sales increase was the result of changes in
foreign currency translation rates, as the U.S. dollar decreased in value relative to the local
currencies of certain of the Companys foreign subsidiaries.
Operating income was $1.8 million in the second quarter of 2010, or 21.6 percent of sales, as
compared to $2.3 million, or 32.2 percent of sales, in the second quarter of 2009, a decrease of
$0.5 million, or 22.5 percent.
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Table of Contents
Six Months Ended | 2010 vs. 2009 | |||||||||||||||
June 30, | Increase (Decrease) | |||||||||||||||
(in thousands) | 2010 | 2009 | $ | % | ||||||||||||
Net sales |
$ | 15,062 | $ | 13,022 | $ | 2,040 | 15.7 | % | ||||||||
Acquisition integration and
restructuring expenses |
$ | (4 | ) | $ | 340 | $ | (344 | ) | nm | |||||||
Foreign exchange (gain) loss |
$ | 161 | $ | (980 | ) | $ | 1,141 | nm | ||||||||
Impairment of long-lived assets |
| $ | 78 | $ | (78 | ) | nm | |||||||||
Depreciation and amortization |
$ | 610 | $ | 483 | $ | 127 | 26.3 | % | ||||||||
Operating income |
$ | 2,655 | $ | 3,095 | $ | (440 | ) | (14.2 | )% | |||||||
Operating margin |
17.6 | % | 23.8 | % | (620) bpts | |||||||||||
Capital expenditures |
$ | 647 | $ | 258 | $ | 389 | nm | |||||||||
Total assets |
$ | 23,254 | $ | 20,301 | $ | 2,953 | 14.5 | % |
nm | = | not meaningful |
bpts | = | basis points |
Net sales in the Asia Pacific segment in the first six months of 2010 were $15.1 million compared
to $13.0 million in the same period of the prior year, an increase of $2.0 million or 15.7 percent.
Approximately $1.0 million of the period-over-quarter sales increase was the result of changes in
foreign currency translation rates, as the U.S. dollar decreased in value relative to the local
currencies of certain of the Companys foreign subsidiaries.
Operating income was $2.7 million in the first six months of 2010, or 17.6 percent of sales, as
compared to $3.1 million, or 23.8 percent of sales, in the first six months of 2009, a decrease of
14.2 percent. The decrease in operating income was due in part to foreign exchange gains in the
2009 period which did not recur in the 2010 period.
Liquidity and Capital Resources
The Companys primary liquidity needs are to fund capital expenditures, support working capital
requirements and service indebtedness. The Companys principal sources of liquidity are cash
generated from its operating activities and borrowings under its credit agreement. The Companys
total debt outstanding at June 30, 2010 was $73.4 million. As noted below, the Company entered into
an amended and restated credit agreement in January 2010.
As of June 30, 2010, the Company had $18.5 million in consolidated cash and cash equivalents,
compared to $12.2 million at December 31, 2009.
Cash provided by operating activities. Cash provided by operating activities was $14.2 million in
the first six months of 2010 compared to $25.1 million in the first six months of 2009. The
decrease in cash provided by operating activities period-over-period reflects changes in non-cash
current assets and current liabilities in the 2010 period as compared to the 2009 period. The
changes in the working capital accounts in the first six months of 2010 include the payment of
bonuses and other liabilities accrued at year-end 2009 and an increase in accounts receivable and
work-in-process inventory, reflecting an increase in business activity in the 2010 period. In
addition, the change in working capital accounts in the 2009 period reflects a $7.5 million income
tax refund received in the second quarter of 2009. The period-over-period increase in working
capital accounts was partially offset by the improvement in net income to $18.3 million for the
first six months of 2010 compared to a net income of $2.5 million for the first six months of 2009.
Depreciation and intangible asset amortization expense in the first six months of 2010 was $6.6
million and $2.3 million, respectively, as compared to $7.3 million and $2.3 million, respectively,
in the first six months of the prior year.
Cash provided by (used in) investing activities. Cash used in investing activities was $4.4 million
in the first six months of 2010 compared to $1.4 million of cash provided by investing activities
during the comparable 2009 period. The cash provided by investing activities in the 2010 period
reflects proceeds of $0.5 million from a property loss insurance settlement. The cash provided by
investing activities in the 2009 period reflects proceeds of $4.4 million from the sale of property
and equipment, mainly from the sale of land and buildings that had been classified as held for
sale at year-end 2008. Capital expenditures were $4.9 million in the first six months of 2010
compared to $2.4 million in the first six
months of 2009. Over the next five years, assuming no significant business acquisitions, capital
expenditures are expected to be in the range of $10.0 to $18.5 million annually. During the next
three years, the Company expects to incur capital investment and related costs in information
technology systems to improve customer service, business
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effectiveness and internal controls, as well as to reduce operating costs.
Cash used in financing activities. Cash used in financing activities in the first six months of
2010 was $4.0 million compared to cash used in financing activities of $28.8 million during the
first six months of 2009. The cash used in financing activities in the first six months of 2010
reflects $4.2 million of net payments of debt compared to $22.8 million of net payments of debt
during the first six months of 2009. The debt payments in the 2009 period include $20.0 million of
prepayments made by the Company to its lenders in June 2009 pursuant to its June 11, 2009 debt
amendments. The Company used $4.3 million to purchase shares of its common stock during the first
six months of 2009. No shares were repurchased by the Company during the first six months of 2010.
In addition, the Company received proceeds of $3.2 million from the issuance of common stock during
the first six months of 2010 compared to $0.5 million in the first six months of 2009. The issuance
of common stock in both periods is attributable to stock option exercises and issuance of shares
pursuant to the Companys employee stock purchase plan. Dividend payments on common stock were $2.0
million and $1.0 million for the first six months ended June 30, 2010 and 2009, respectively. The
dividends paid during the first six months of 2010 reflect an increase to $0.04 per share, or
approximately $1.0 million per quarter, and, subject to declarations at the discretion of the Board
of Directors, the Company expects quarterly dividends at this rate to continue throughout 2010.
Revolving Credit Facility, Note Purchase Agreements and Other Debt Arrangements.
In December, 2003, the Company entered into a private placement of debt (the 2003 Private
Placement) to provide long-term financing. The terms of the Note Purchase Agreement relating to
this transaction, as amended, provided for the issuance and sale by the Company of two series of
notes: Tranche A, for $15.0 million, payable in annual installments of $2.1 million from 2007
through 2013, and Tranche B, for $10.0 million, payable in annual installments of $1.4 million from
2008 through 2014. The remaining aggregate balance of the Tranche A and Tranche B notes, $12.3
million, is included on the June 30, 2010 Consolidated Balance Sheets as follows: $3.1 million is
included in Current maturities of long-term debt and $9.2 million is included in Long-term debt.
In January, 2005, the Company entered into a Note Purchase and Private Shelf Agreement (the 2005
Private Placement) with Prudential Investment Management Inc, pursuant to which the Company sold
$50.0 million in a series of three Senior Notes, maturing in January 2010, January 2011, and
January 2012, respectively. The remaining aggregate outstanding balance of the two remaining notes,
$34.4 million, is included on the June 30, 2010 Consolidated Balance Sheets as follows: $17.2
million is included in Current maturities of long-term debt and $17.2 million is included in
Long-term debt.
In December, 2007, the Companys Canadian subsidiary entered into a revolving demand credit
facility with a Canadian bank to provide working capital needs up to $1.0 million Canadian dollars.
The credit line is guaranteed by the Company. There was no balance outstanding on this credit
facility at June 30, 2010.
Effective January 12, 2010, the Company and certain subsidiary borrowers of the Company entered
into an amended and restated credit agreement (the Credit Agreement) in order to refinance its
prior revolving credit facility that was set to terminate in January 2010. The Credit Agreement
provides for a two and one-half year secured, multicurrency revolving credit facility in the
principal amount of $90.0 million, including a $10.0 million swing-line loan subfacility and a
$10.0 million subfacility for letters of credit. The Company may, at its option and subject to
certain conditions, increase the amount of the facility by up to $10.0 million by obtaining one or
more new commitments from new or existing lenders to fund such increase. Immediately following the
closing of the facility, there was approximately $15.0 million in outstanding borrowings. Loans
under the facility generally bear interest at a rate of LIBOR plus a margin that varies with the
Companys cash flow leverage ratio, in addition to applicable commitment fees, with a maximum rate
of LIBOR plus 350 basis points. Loans under the facility are not subject to a minimum LIBOR floor.
At June 30, 2010, the applicable margin was 250 basis points, resulting in an interest rate of 2.85
percent on LIBOR-based borrowings under the revolving credit facility. In order to manage the risk
of rising interest rates on the Companys variable rate revolving debt, the Company executed two
variable to fixed interest rate swaps for the total notional amount of $15.0 million in May of
2010. See Note 14 Derivative Financial Instruments in Part I, Item 1, and Item 3, Quantitative
and Qualitative Disclosures About Market Risk, for further discussion.
Borrowings under the facility will be used for general corporate purposes, such as working capital
and capital
expenditures. Additionally, together with anticipated cash generated from operations, the
unutilized portion of the credit facility is expected to be available to provide financing
flexibility and support in the funding of principal payments due in 2010 and succeeding years on
the Companys other long-term debt obligations. The total balance outstanding under
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the Companys
credit facility at June 30, 2010 was $26.7 million and is included in Long-term debt on the June
30, 2010 Consolidated Balance Sheets.
Outstanding obligations due under the facility continue to be secured through security interests in
and liens on substantially all of the Companys and its domestic subsidiaries current and future
personal property and on 100 percent of the capital stock of the Companys existing and future
domestic subsidiaries and 65 percent of the capital stock of certain foreign subsidiaries.
The Credit Agreement contains certain customary affirmative and negative covenants and events of
default. Under the terms of the Credit Agreement, permitted capital expenditures excluding
acquisitions are restricted to not more than $18.5 million per fiscal year, or $40.0 million over
the term of the credit facility, and dividends, stock repurchases and other restricted payments are
limited to $5.0 million per fiscal year. Other covenants include, among other things, restrictions
on the Companys and in certain cases its subsidiaries ability to incur additional indebtedness;
dispose of assets; create or permit liens on assets; make loans, advances or other investments;
incur certain guarantee obligations; engage in mergers, consolidations or acquisitions, other than
those meeting the requirements of the Credit Agreement; engage in certain transactions with
affiliates; engage in sale/leaseback transactions; and engage in certain hedging arrangements. The
Credit Agreement also requires compliance with specified financial ratios and tests, including a
minimum fixed charge coverage ratio, a maximum cash flow ratio and a minimum consolidated net worth
requirement. The Company was in compliance with all covenants at June 30, 2010.
Concurrently with its entry into the Credit Agreement, the Company also amended the note purchase
agreements underlying its outstanding senior notes in order to conform the financial and other
covenants contained in the note purchase agreements to the covenants contained in the Credit
Agreement described above.
Off-balance sheet arrangements and contractual obligations
The Company does not have any material off-balance sheet arrangements that have, or are reasonably
likely to have, a current or future effect on its financial condition, changes in financial
condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital
resources.
There have been no material changes in the Companys minimum debt, lease and other material
noncancelable commitments from those reported in the Companys Form 10-K for the year ended
December 31, 2009, except as follows:
As of June 30, 2010, the Companys total liability for uncertain tax positions was $4.7 million,
including $0.5 million of accrued interest and penalties. Of this total, it is estimated that $3.4
million will be settled in one year or less and $1.3 million will be settled in one to three years.
The decrease in the Companys liability for uncertain tax positions during the second quarter of
2010 was due primarily to the release of $5.8 million of reserves through the tax provision and
$0.7 million as an increase in deferred tax liabilities, mainly as a result of the completion of
income tax audits and statute closures during the quarter.
As of December 31, 2009, the Companys total liability for uncertain tax positions was $18.1
million, including $1.9 million of accrued interest and penalties. Due to the high degree of
uncertainty regarding the timing of potential future cash flows associated with these liabilities,
the Company was unable to make a reasonably reliable estimate of the amount and period in which
these liabilities might be paid.
Recent Accounting Pronouncements
See Note 1 Significant Accounting Policies to the Consolidated Financial Statements, included in
Part I, Item 1, for information on recent accounting pronouncements.
Critical accounting policies and estimates
The discussion and analysis of the Companys financial condition and results of operations are
based upon its
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of
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contingent assets and liabilities at
the date of its financial statements. Actual results may differ from these estimates under
different assumptions or conditions. Critical accounting estimates are defined as those that are
reflective of significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. See Managements Discussion and
Analysis of Financial Condition and Results of OperationsCritical Accounting Policies in the
Companys Form 10-K for the year ended December 31, 2009 for further discussion of the Companys
critical accounting estimates and policies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A discussion regarding market risk is included in the Companys Form 10-K for the year ended
December 31, 2009. Other than as described below, there have been no material changes in
information regarding market risk relating to the Companys business on a consolidated basis since
December 31, 2009.
The Company had $26.7 million of variable rate debt outstanding at June 30, 2010 and expects to use
its variable rate revolving credit facility during 2010 and beyond to fund cash flow needs and, to
the extent opportunities arise, acquisitions. Under this debt, the Company is exposed to
interest-rate volatility, primarily changes in the LIBOR rate. As discussed in Note 14 -Derivative
Financial Instruments to its unaudited consolidated financials statements included in this report,
in May 2010 the Company entered into two variable to fixed interest rate swaps for a total
notional amount of $15.0 million. Prior to that time, the Company historically had not actively
managed interest rate exposure on variable rate debt or hedged its interest rate exposures. The
swaps expire in June 2012 and the Companys revolving credit facility terminates in July 2012.
The Company entered into the interest rate swaps in order to hedge its exposure to interest rate
changes and reduce the volatility of its financing costs on a portion of its revolving variable
rate debt through its maturity date. The Company does not use swaps or other derivative
instruments for trading or speculative purposes. However, disruptions in the credit markets could
impact the effectiveness of its hedging strategies and increase credit risks. Our credit risk on
our swaps relates to our exposure to potential nonperformance of the swap counterparty upon
settlement of the swaps. We mitigate this credit risk by dealing with highly rated bank
counterparties.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that the information required to
be disclosed by the Company in the reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time periods specified in
SEC rules and forms and that such information is accumulated and made known to the officers who
certify the Companys financial reports and to other members of senior management and the Board of
Directors as appropriate to allow timely decisions regarding required disclosure.
Based on their evaluation as of June 30, 2010, the principal executive officer and principal
financial officer of the Company have concluded that the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)
were effective.
(b) Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting during the second
quarter of fiscal 2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1A. Risk Factors
The Company has included in Part I, Item 1A of its Annual Report on Form 10-K for the year ended
December 31, 2009 descriptions of certain risks and uncertainties that could affect the Companys
business, future performance or financial condition. The risk factors described in the Annual
Report (collectively, the Risk Factors) could materially adversely
affect our business, financial condition, future results or trading price of the Companys common
stock. In addition to the other information contained in the reports the Company files with the
SEC, investors should consider these Risk Factors prior to making an investment decision with
respect to the Companys stock. The risks described in the Risk
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Factors, however, are not the only
risks facing the Company. Additional risks and uncertainties not currently known to the Company or
those that are currently considered to be immaterial also may materially adversely affect the
Companys business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Company
The Company did not repurchase any shares of its common stock during the six-month period ended
June 30, 2010. During the first six months of 2009, the Company repurchased 488,700 shares of its
common stock, pursuant to an authorization from its Board of Directors in December 2008. The share
repurchase program was discontinued in March, 2009. In addition, shares of common stock are
occasionally tendered to the Company by certain employee and director stockholders in payment of
stock options exercised. During the six-month period ended June 30, 2010, 2,415 shares of Schawk,
Inc. common stock had been tendered to the Company in connection with stock option exercises. No
shares were tendered during the six-month period ended June 30, 2009. The Company records the
receipt of common stock in payment for stock options exercised as a reduction of common stock
issued and outstanding.
Item 6. Exhibits
3.1
|
Certificate of Incorporation of Schawk, Inc., as amended. Incorporated herein by reference to Exhibit 4.2 to Registration Statement No. 333-39113. | |
3.3
|
By-Laws of Schawk, Inc., as amended. Incoporated herein by reference to Exhibit 3.2 to Form 8-K filed with the SEC on December 18, 2007. | |
4.1
|
Specimen Class A Common Stock Certificate. Incorporated herein by reference to Exhibit 4.1 to Registration Statement No. 33-85152. | |
10.1
|
Outside Directors Formula Stock Option Plan, as amended and restated.* | |
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. * | |
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. * | |
32
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * |
* | Filed herewith |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 4th
day of August, 2010.
Schawk, Inc.
(Registrant)
(Registrant)
By: | /s/ John B. Toher | |||
John B. Toher | ||||
Vice President and Corporate Controller |
32