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SGK > SEC Filings for SGK > Form 10-Q on 31-Jul-2013All Recent SEC Filings

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Form 10-Q for SCHAWK INC


31-Jul-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Information

Certain statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report that relate to the Company's beliefs or expectations as to future events are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Company intends any such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 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 Company's expectations and beliefs include, among other things, the strength of the United States economy in general and specifically market conditions for the consumer products industry; the level of demand for the Company's services; 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 cost reduction plans and to realize anticipated cost savings; 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 anticipated costs or lower than anticipated benefits associated with the Company's ongoing information technology and business process improvement initiative; unanticipated costs or difficulties associated with integrating acquired operations; any impairment charges due to declines in the value of the Company's fixed and intangible assets, including goodwill; 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 Company's filings with the Securities and Exchange Commission. The Company assumes no obligation to update publicly any of these statements in light of future events.

Business Overview

Schawk, Inc. and its subsidiaries ("Schawk" or the "Company") provide comprehensive brand development and brand deployment services to clients primarily in the consumer packaged goods, retail and life sciences markets. The Company creates and sells it clients' brands, produces brand assets and protects brand equities. The Company currently delivers its services through more than 155 locations in over 20 countries across North and South America, Europe, Asia and Australia. 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 believes that it is uniquely positioned to deliver these services to the marketplace. Aligned with this, the Company recently modified its market facing naming convention to that of its ticker symbol, SGK. The Company's Brand Development group that includes Brandimage and Anthem creates brand desirability to help clients build their topline growth. The Brand Deployment group that delivers Schawk's legacy premedia expertise and efficiency to help clients improve their bottom line is now marketed under the Schawk! brand. By offering both brand development and brand deployment services to the marketplace, the Company can help its clients drive better overall brand performance.

Brandimage is a global consultancy comprised of brand equity architects and designers that creates brands that drive brand performance. Brandimage creates brand meaning and brings brands into contact with the consumer. Creating brand meaning refers to the creation of a brand's story, which is built on a fundamental emotional consumer truth and expressed strategically, visually, verbally and structurally in the form of a singularly distinctive identity system. This service encapsulates the development of the intellectual properties that define a brand as unique, such as its logo, colors, font, and graphics. The services offered by Brandimage also include semiotic analysis, design and trend auditing ethnography, equity definition research, meaning perception research, brand positioning, brand meaning/purpose definition, brand architecture, design strategy, innovation strategy and visual positioning.


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Anthem is a global creative agency that actively connects brands with consumers by amplifying desirability from package design to brand campaign. Anthem's services help drive brand performance by creating consumer desire and making emotional connections that inspire action. Anthem activates brands by expressing the brand's meaning and its visual and verbal identity strategically and consistently across media channels such as packaging, advertising, web, social, mobile and print. The services offered by Anthem also include brand strategy, brand architecture, brand portfolio, design strategy, package design, and research and insights.

Schawk! is a global cross-media production services provider that deploys brand assets and protects brand equities to help make brands more profitable. Leveraging its more than 60 years of industry experience, Schawk! identifies and deploys scalable solutions to address a brand's complex production and delivery needs through proven expertise in workflow, resourcing, color management and imaging. The services offered by Schawk! are focused on packaging, point of purchase/point of sale , digital, catalog, photography, advertising, circulars, direct mail, video, marketing collateral and outsourcing. The Company also owns and markets BLUE, a cloud-based software platform that delivers a set of global capabilities to help brand-driven organizations control and manage brand development and brand deployment assets and activities to drive brand performance.

Organization

The Company is organized on a geographic basis, in three operating and reportable segments: Americas, Europe and Asia Pacific. The Company's Americas segment includes all of the Company's operations located in North and South America, including its operations in the United States, Canada, Mexico and Brazil. The Company's Europe segment includes all operations located in Europe. The Company's Asia Pacific segment includes all operations in Asia and Australia.

Discontinued Operations

During the second quarter of 2013, the Company made a decision to sell various assets comprising its large-format printing operations located in Los Angeles, California, which was contained in the Company's America segment and comprised the Company's entertainment account sales. The large format printing business is considered to be outside of the Company's core business. The Company completed the sale on July 3, 2013 for an aggregate purchase price of $10.3 million, comprised of $8.3 million in cash and a $2.0 million secured subordinated note, subject to certain post-closing adjustments, plus the assumption of certain liabilities. The Company has classified the business held for sale as discontinued operations as of June 30, 2013. Accordingly, the results of operations of the business to be sold are reported as discontinued operations for all periods presented in this quarterly report and the assets and liabilities of the discontinued operation have been segregated in the Consolidated Balance Sheets.

The Company recorded an anticipated loss of $6.1 million on the pending sale of the business during the second quarter of 2013, which is included in Income
(loss) from discontinued operations on the Company's Consolidated Statements of Comprehensive Income (Loss). Included in the loss from assets held for sale is a goodwill allocation of $7.0 million, representing a portion of the Company's Americas reporting segment goodwill which was allocated to the large format printing business.

Financial Overview

Net revenues in the second quarter of 2013 were $110.5 million compared to $110.8 million in the second quarter of 2012, a decrease of $0.3 million, or 0.2 percent. The minor revenue decrease in the second quarter of 2013 compared to the prior year's quarter reflects a decrease in promotional activity from the Company's advertising and retail accounts, offset by an increase in revenues from the Company's consumer products packaging accounts. Revenues in the current quarter compared to the prior year's quarter were negatively impacted by changes in foreign currency translation rates of approximately $0.4 million, as the U.S. dollar increased in value relative to the local currencies of certain of the Company's non-U.S. subsidiaries. Net revenues decreased in the Americas and Europe segments in the second quarter of 2013 compared to the prior year's quarter, but were offset by an increase in revenues in the Asia Pacific segment. The Americas segment decreased by $0.6 million, or 0.7 percent and the Europe segment decreased by $1.2 million, or 5.8 percent. The Asia pacific segment increased by $1.0 million, or 10.0 percent.


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Consumer products packaging accounts revenues in the second quarter of 2013 were $96.1 million, or 87.0 percent of total revenues, as compared to $94.2 million, or 85.1 percent of total revenues, in the same period of the prior year, representing an increase of 2.0 percent. Retail and advertising accounts revenues of $14.4 million in the second quarter of 2013, or 13.0 percent of total revenues, decreased 13.1 percent from $16.5 million in the second quarter of 2012. During the second quarter of 2013, the Company continued to see measured progress in its largest client channel, consumer packaged goods accounts, with their continued product and brand innovation activity in the areas of strategy and design. However, new product introductions and packaging changes were slower than anticipated for the quarter as consumer packaged goods clients continue to exercise caution based on economic uncertainties and higher commodity prices.

Cost of services (excluding depreciation and amortization) was $66.6 million, or 60.2 percent of revenues, in the second quarter of 2013, a decrease of $3.6 million, or 5.1 percent, from $70.2 million, or 63.3 percent of revenues, in the second quarter of 2012. The decrease in cost of services during the second quarter of 2013 compared to 2012 was mainly due to a decrease in labor related expenses.

The Company recorded an operating profit of $5.8 million in the second quarter of 2013 compared to an operating loss of $1.2 million in the second quarter of 2012, an increase of $7.0 million. The operating income percentage was 5.3 percent for the second quarter of 2013, compared to a 1.1 percent operating loss percentage in the second quarter of 2012. The operating income in the current quarter compared to the operating loss in the prior year's quarter is due primarily to the lower cost of services in the second quarter of 2013 compared to the second quarter of 2012, as well as to reduced business and systems integration expenses and acquisition integration and restructuring expenses.

Selling, general and administrative expenses (excluding depreciation and amortization) decreased $0.3 million, or 1.0 percent, in the second quarter of 2013 to $30.2 million from $30.5 million in the second quarter of 2012. Business and systems integration expenses related to the Company's information technology and business process improvement initiative decreased $2.6 million to $1.7 million in the second quarter of 2013 from $4.3 million in the second quarter of 2012, as the Company's investment in system designs matured. Acquisition integration and restructuring expenses, related to the Company's cost reduction and capacity utilization initiatives, decreased by $2.1 million, from $2.4 million in the second quarter of 2012 to $0.3 million in the second quarter of 2013, due to a reduced level of restructuring activities. The Company recorded a net loss of $0.7 million on foreign exchange exposures in the second quarter of 2013 compared to a net loss of less than $0.1 million on foreign exchange exposures in the second quarter of 2012. In addition, the Company recorded a charge of $0.5 million for impairment of long-lived assets in the second quarter of 2013 for a customer relationship asset in the Americas segment for which projected cash flows did not support the carrying value. There was no impairment of long-lived assets in the second quarter of 2012.

Interest expense in the second quarter of 2013 was $1.1 million compared to $0.9 million in the second quarter of 2012, an increase of $0.2 million, or 23.8 percent. The increase in interest expense in the second quarter of 2013 compared to the second quarter of 2012 includes $0.2 million of interest related to accretion of the present value discount recorded at year-end 2012 in conjunction with the Company's estimated multiemployer pension withdrawal liability.

The Company recorded an income tax provision of $2.1 million in the second quarter of 2013 compared to an income tax benefit of $0.5 million in the second quarter of 2012. The effective tax rate was 44.7 percent for the second quarter of 2013 compared to an effective tax rate of 24.5 percent in the second quarter of 2012.

In the second quarter of 2013, the Company recorded income from continuing operations of $2.6 million, or $0.10 per diluted share compared to a loss from continuing operations of $1.6 million, or $0.06 per diluted share in the second quarter of 2012. The increase in profitability, period-over-period, is principally due to the lower cost of services, as well as decreases in business systems and integration expenses and acquisition integration and restructuring expenses, partially offset by an increase in foreign currency translation expense.

In the second quarter of 2013, the Company recorded a $6.7 million loss, net of tax, from discontinued operations, or $0.26 per diluted share, compared to $0.1 million of income, net of tax, from discontinued operations in the second quarter of 2012. The loss from discontinued operations in the second quarter of 2013 includes a $6.1 million loss from assets held for sale related to the pending sale of the Company's large format printing operation.


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Cost Reduction and Capacity Utilization Actions

Beginning in 2008, and continuing to-date, 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 six-month periods ended June 30, 2013 and June 30, 2012 was $0.6 million and $3.5 million, respectively, and is presented as Acquisition integration and restructuring expense in the Consolidated Statements of Comprehensive Income (Loss). See Note
12 - Acquisition Integration and Restructuring in Part I, Item 1 for additional information.

The expense for each of the years 2008 through 2012 and for the first six months of 2013, and the cumulative expense since the cost reduction program's inception, was recorded in the following operating segments:

                                                                      Asia
(in millions)                         Americas        Europe        Pacific        Corporate        Total

Six months ended June 30, 2013       $      0.5     $      0.1     $       --     $        --     $     0.6
Year ended December 31, 2012                4.3            0.9            0.1              --           5.3
Year ended December 31, 2011                0.7            0.6             --             0.1           1.4
Year ended December 31, 2010                1.1            0.5             --             0.5           2.1
Year ended December 31, 2009                3.4            1.4            1.0             0.4           6.2
Year ended December 31, 2008                5.5            3.6            0.2             0.9          10.2

Cumulative since program inception   $     15.5     $      7.1     $      1.3     $       1.9     $    25.8

The Company is exploring various additional cost reduction actions that could be taken, particularly in the Americas segment, if revenue does not improve.

Multiemployer pension withdrawal expense

The Company has eight bargaining units in the United States that participate in the GCC/IBT National Pension Plan pursuant to a number of collective bargaining agreements. In December 2012, the Schawk Board of Directors authorized management to enter into good faith negotiations with the local bargaining units to effect a complete withdrawal from the pension plan. The negotiations with the local bargaining units continued during the first quarter of 2013. The decision to exit the plan was made in order to mitigate potentially greater financial exposure to the Company in the future under the plan, which is significantly underfunded, and to facilitate the consideration of future changes to the Company's operations in the United States. Based on an analysis prepared by an independent actuary, the Company recorded an estimated liability in the fourth quarter of 2012 for its withdrawal from the pension plan of $31.7 million, which is the present value of the estimated future payments required for withdrawal. The payments are expected to total approximately $41.2 million, payable $2.1 million per year over a 20 year period, with the annual cash payments expected to commence on or about May 1, 2014. These payments were discounted at a risk free rate of 2.54 percent. During the second quarter of 2013, the Company accreted $0.2 million of the present value discount, resulting in an estimated liability balance of $32.1 million at June 30, 2013, of which $1.2 million is included in Accrued expenses and $30.9 million is included in Other long-term liabilities on the Consolidated Balance Sheets as of June 30, 2013. The expense associated with the accretion of the present value discount is reflected in Interest expense on the Consolidated Statements of Comprehensive Income (Loss).


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Results of Operations

Consolidated

The following table sets forth certain amounts, ratios and relationships
calculated from the Consolidated Statements of Comprehensive Income (Loss) for
the three-month periods ended:

                                      Three Months Ended             2013 vs. 2012
                                           June 30,               Increase (Decrease)
                                                                      $            %
                                      2013          2012           Change       Change

Net revenues                        $ 110,510     $ 110,760     $       (250 )     (0.2 ) %

Operating expenses:
Cost of services (excluding
depreciation and
amortization)                          66,569        70,151           (3,582 )     (5.1 ) %
Selling, general and
administrative expenses
(excluding
depreciation and amortization)         30,245        30,548             (303 )     (1.0 ) %
Depreciation and amortization           4,680         4,451              229        5.1   %
Business and systems integration
expenses                                1,683         4,292           (2,609 )    (60.8 ) %
Foreign exchange loss                     734            90              644         nm
Impairment of long-lived assets           466            --              466         nm
Acquisition integration and
restructuring expenses                    311         2,416           (2,105 )    (87.1 ) %
Operating income (loss)                 5,822        (1,188 )          7,010         nm
Operating margin percentage               5.3   %      (1.1 ) %

Other income (expense):
Interest income                            21             9               12         nm
Interest expense                       (1,135 )        (917 )           (218 )     23.8   %

Income (loss) from continuing
operations before
 income taxes                           4,708        (2,096 )          6,804         nm
Income tax provision (benefit)          2,104          (513 )          2,617         nm

Effective income tax rate                44.7   %      24.5   %

Income (loss) from continuing
operations                              2,604        (1,583 )          4,187         nm
Income (loss) from discontinued
operations, net of tax                 (6,738 )          87           (6,825 )       nm

Net loss                            $  (4,134 )   $  (1,496 )   $     (2,638 )       nm

Expressed as a percentage of net
revenues:
Cost of services                         60.2   %      63.3   %         (310 )       bp
Selling, general and
administrative expenses                  27.4   %      27.6   %          (20 )       bp
Depreciation and amortization             4.2   %       4.0   %           20         bp
Business and systems integration
expenses                                  1.5   %       3.9   %         (240 )       bp
Foreign exchange loss                     0.7   %       0.1   %           60         bp
Impairment of long-lived assets           0.4   %       0.0   %           40         bp
Acquisition integration and
restructuring expenses                    0.3   %       2.2   %         (190 )       bp
Operating margin                          5.3   %      (1.1 ) %          640         bp

bp = basis points
nm = not meaningful

Net revenues in the second quarter of 2013 were $110.5 million compared to $110.8 million in the second quarter of 2012, a decrease of $0.3 million, or 0.2 percent. The minor revenue decrease in the second quarter of 2013 compared to the prior year's quarter reflects a decrease in promotional activity from the Company's advertising and retail accounts, offset by an increase in revenues from the Company's consumer products packaging accounts. Revenues in the current quarter compared to the prior year's quarter were negatively impacted by changes in foreign currency translation rates of approximately $0.4 million, as the U.S. dollar increased in value relative to the local currencies of certain of the Company's non-U.S. subsidiaries. Net revenues decreased in the Americas and Europe segments in the second quarter of 2013 compared to the prior year's quarter, but were offset by an increase in revenues in the Asia Pacific segment. The Americas segment decreased by $0.6 million, or 0.7 percent and the Europe segment decreased by $1.2 million, or 5.8 percent. The Asia pacific segment increased by $1.0 million, or 10.0 percent.


Table of Contents

Consumer products packaging accounts revenues in the second quarter of 2013 were $96.1 million, or 87.0 percent of total revenues, as compared to $94.2 million, or 85.1 percent of total revenues, in the same period of the prior year, representing an increase of 2.0 percent. Retail and advertising accounts revenues of $14.4 million in the second quarter of 2013, or 13.0 percent of total revenues, decreased 13.1 percent from $16.5 million in the second quarter of 2012. During the second quarter of 2013, the Company continued to see measured progress in its largest client channel, consumer packaged goods accounts, with their continued product and brand innovation activity in the areas of strategy and design. However, new product introductions and packaging changes were slower than anticipated for the quarter as consumer packaged goods clients continue to exercise caution based on economic uncertainties and higher commodity prices.

Cost of services (excluding depreciation and amortization) was $66.6 million, or 60.2 percent of revenues, in the second quarter of 2013, a decrease of $3.6 million, or 5.1 percent, from $70.2 million, or 63.3 percent of revenues, in the second quarter of 2012. The decrease in cost of services during the second quarter of 2013 compared to 2012 was mainly due to a decrease in labor related expenses.

The Company recorded an operating profit of $5.8 million in the second quarter of 2013 compared to an operating loss of $1.2 million in the second quarter of 2012, an increase of $7.0 million. The operating income percentage was 5.3 percent for the second quarter of 2013, compared to a 1.1 percent operating loss percentage in the second quarter of 2012. The operating income in the current quarter compared to the operating loss in the prior year's quarter is due primarily to the lower cost of services in the second quarter of 2013 compared to the second quarter of 2012, as well as to reduced business and systems integration expenses and acquisition integration and restructuring expenses.

Selling, general and administrative expenses (excluding depreciation and amortization) decreased $0.3 million, or 1.0 percent, in the second quarter of 2013 to $30.2 million from $30.5 million in the second quarter of 2012. Business and systems integration expenses related to the Company's information technology and business process improvement initiative decreased $2.6 million to $1.7 million in the second quarter of 2013 from $4.3 million in the second quarter of 2012, as the Company's investment in system designs matured. Acquisition integration and restructuring expenses, related to the Company's cost reduction and capacity utilization initiatives, decreased by $2.1 million, from $2.4 million in the second quarter of 2012 to $0.3 million in the second quarter of 2013, due to a reduced level of restructuring activities. The Company recorded a net loss of $0.7 million on foreign exchange exposures in the second quarter of 2013 compared to a net loss of less than $0.1 million on foreign exchange exposures in the second quarter of 2012. In addition, the Company recorded a charge of $0.5 million for impairment of long-lived assets in the second quarter of 2013 for a customer relationship asset in the Americas segment for which projected cash flows did not support the carrying value. There was no impairment of long-lived assets in the second quarter of 2012.

Interest expense in the second quarter of 2013 was $1.1 million compared to $0.9 million in the second quarter of 2012, an increase of $0.2 million, or 23.8 percent. The increase in interest expense in the second quarter of 2013 compared to the second quarter of 2012 includes $0.2 million of interest related to accretion of the present value discount recorded at year-end 2012 in conjunction with the Company's estimated multiemployer pension withdrawal liability.

The Company recorded an income tax provision of $2.1 million in the second quarter of 2013 compared to an income tax benefit of $0.5 million in the second quarter of 2012. The effective tax rate was 44.7 percent for the second quarter of 2013 compared to an effective tax rate of 24.5 percent in the second quarter of 2012.

In the second quarter of 2013, the Company recorded income from continuing operations of $2.6 million, or $0.10 per diluted share compared to a loss from . . .

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