Log In | Become a Member | Contact Us


Leading printing executives into the future

Connect on Twitter | Facebook | LinkedIn

Featured:     European Coverage     Production Inkjet Analysis

Schawk Reports $.8M Profit for Second Quarter

Tuesday, August 19, 2008

Press release from the issuing company

DES PLAINES, IL, Aug 18, 2008 -- Schawk, Inc., a leading provider of brand point management services, enabling companies of all sizes to connect their brands with consumers to create deeper brand affinity, reported second-quarter and first six-months 2008 results.

Net income in the second quarter of 2008 was $0.8 million, or $0.03 per fully diluted share, versus $9.9 million, or $0.36 per fully diluted share, in the second quarter of 2007 as restated. Earnings during the second quarter of 2008 included acquisition integration and restructuring expenses of $3.2 million and an impairment charge of long-lived assets of $2.2 million, while earnings during the second quarter of 2007 included a gain of $1.1 million on the sale of property. Additionally, the income tax rate for the second quarter of 2008 was at an effective rate of 79.0 percent compared to an effective rate of 38.3 percent in the second quarter of 2007, with the increase in the effective tax rate in the current period being primarily driven by the recording of a United Kingdom valuation allowance of $1.5 million. Excluding the aforementioned items, second quarter 2008 net income was $5.5 million, or $0.20 per fully diluted share, while net income in the 2007 second quarter was $9.3 million, or $0.33 per fully diluted share. Please refer to the table at the end of this press release for a reconciliation of Non-GAAP measures.

Restated financial information

As reported in its Form 10-K for the year ended December 31, 2007, the Company has restated its consolidated financial statements for the years ended 2005 and 2006 and for the previously released 2007 interim periods. Additionally, as reported in the Company's Form 8-K filed with the Securities and Exchange Commission on June 26, 2008, the Company will reflect unaudited, restated consolidated balance sheet information as of December 31, 2007. Accordingly, the financial results for the three-and six-month periods ended June 30, 2007, and balance sheet data at December 31, 2007, in this release are as restated.

Consolidated Results for the Three Months Ended June 30, 2008

Net sales in the second quarter of 2008 were $133.4 million compared to $142.7 million in the same period of the prior year, a reduction of $9.3 million, or 6.5 percent. The quarter-over-quarter decline in sales was the result of lower sales in North America and Europe, which declined $10.8 million, or 8.6 percent. Partially offsetting this sales decline was increased sales of $1.5 million, or 8.6 percent, in Schawk's Other reportable segment. This increase was driven by Anthem, the Company's creative design group.

Consumer products packaging accounts sales in the second quarter of 2008 were $85.3 million, or 63.9 percent of total sales, compared to $87.6 million in the same period of last year, representing a decline of 2.7 percent. Advertising and retail accounts sales of $36.8 million in the second quarter of 2008, or 27.6 percent of total sales, declined 7.7 percent compared to the same period last year. Results during the second quarter compared with the year-ago period mirror the slowdown in the U.S. economy, as a number of customers have delayed projects, translating into lower revenue for the Company. Additionally, lower consumer products packaging sales in the current quarter reflect this group's continued struggles with higher raw material and transportation costs and private label competition.

Gross profit was $46.8 million, or 35.1 percent of sales, in the second quarter of 2008, a decline of $4.6 million from $51.4 million, or 36.0 percent of sales, in the second quarter of 2007. The decrease in gross profit is largely attributable to the decrease in sales volume.

Operating income decreased $13.2 million to $5.3 million in the second quarter of 2008 from $18.5 million in the second quarter of 2007. The second-quarter 2008 operating income percentage was 4.0 percent compared to 13.0 percent in the 2007 second quarter. The decrease in operating income in the second quarter of 2008 compared to the second quarter of 2007 is the result of lower sales volume as discussed above, acquisition, integration and restructuring expenses of $3.2 million, an impairment charge of $2.2 million of long-lived assets and an increase of $1.5 million in professional fees attributable to audit fees and other costs related to Schawk's restatement, internal control remediation and related matters and consulting fees related to the Company's re-branding initiative. Excluding acquisition integration and restructuring expenses of $3.2 million and an impairment charge of long-lived assets of $2.2 million, operating income in the second quarter of 2008 was $10.7 million, while operating income percentage was 8.0 percent compared to operating income of $17.4 million and operating income percentage of 12.2 percent in the second quarter of 2007, excluding a $1.1 million gain on the sale of property in that period.

The acquisition, integration and restructuring charge in the second quarter of 2008 arose from the Company's implementation of previously announced plans to consolidate, reduce and re-align the Company's work force and operations. As a result of these actions, the Company incurred costs of $3.2 million for employee terminations, obligations for future lease payments, fixed asset impairments, and other associated costs.

The $2.2 million long-lived asset impairment charge arose in the second quarter due to changes in circumstances with respect to the service potential of certain software capitalized for internal use. As a result of these circumstances, the Company has written down the capitalized costs to fair value in the quarter ended June 30, 2008.

Interest expense in the second quarter of 2008 was $1.7 million compared to $2.4 million in the second quarter of 2007, a result of a decrease in average outstanding debt and a reduction in average interest rates. Outstanding debt fell $9.2 million at quarter end, compared to outstanding debt at March 31, 2008, as a result of the Company's generation of $15.4 million in operating cash flow in the current quarter.

Income tax expense for the second quarter of 2008 was at an effective rate of 79.0 percent compared to an effective tax rate of 38.3 percent in the second quarter of 2007. The increase in the effective tax rate is primarily driven by the recording of the U.K. valuation allowance of $1.5 million.

Other Information

Depreciation and amortization expense was $5.4 million for the second quarter of 2008 compared to $5.3 million in the prior-year second quarter.

Capital expenditures in the second quarter of 2008 were $3.0 million compared to $3.4 million in the same period of 2007.

Consolidated Results for Six Months Ended June 30, 2008

Year-to-date sales through June 30, 2008, were $259.8 million compared to $272.4 million in the same period of the prior year, a reduction of $12.6 million, or 4.6 percent. Acquisitions contributed $5.8 million, or 2.2 percent. Excluding acquisitions, total revenues declined 6.8 percent versus the year-ago period. Year-to-date sales declined $16.1 million, or 6.7 percent, in the North America and Europe segment. Partially offsetting this sales decline was increased sales of $3.6 million, or 11.5 percent, in Schawk's Other reportable segment.

Through June 30, 2008, consumer products packaging accounts sales were $165.1 million, or 63.5 percent of total sales, compared to $167.0 million in the same period of last year, representing a decline of 1.1 percent. Advertising and retail accounts sales of $73.2 million, or 28.2 percent of total sales, declined 7.0 percent compared to the same period last year.

Gross profit was 34.5 percent of sales in the first half of 2008 compared to 35.4 percent of sales in the same period of 2007. The decrease in gross profit of $6.7 million from the prior-year period is largely attributable to the decrease in sales volume.

Operating income decreased to $12.0 million in the first half of 2008 from $30.7 million in the same period of 2007. First-half 2008 operating income percentage was 4.6 percent compared to 11.3 percent in the 2007 first half. The decrease in operating income in the first half of 2008 compared to the first half of 2007 is the result of lower sales volume, a $3.3 million increase in professional fees, which included audit fees and other costs related to Schawk's restatement, internal control remediation and related matters, professional fees for due diligence related to a potential acquisition which was not consummated, and consulting fees related to the Company's re-branding initiative. Additionally, first-half 2008 operating income was impacted by the $2.2 million charge related to the impairment of long-lived assets and cost reduction plan expenses of $3.2 million. First-half 2007 operating income included a $1.1 million gain from the sale of assets. Excluding acquisition integration and restructuring expenses and the impairment charge, operating income in the first half of 2008 was $17.4 million and the operating income percentage was 6.7 percent compared to operating income of $29.5 million and operating income percentage of 10.9 percent, in the same period of 2007, excluding the gain on the sale of property.

First-half 2008 interest expense was $3.5 million compared to $4.8 million in the first half of 2007 as a result of a decrease in average outstanding debt and a reduction in average interest rates. Outstanding debt decreased $2.6 million at June 30, 2008, compared to outstanding debt at December 31, 2007.

Income tax expense for the first half of 2008 was at an effective rate of 42.0 percent compared to an effective tax rate of 38.6 percent in the first half of 2007. The increase in 2008 compared to 2007 was driven by the recording of cumulative FIN No. 48 reserve decrease of $1.1 million and valuation allowance increase of $1.6 million.

Other Information

Depreciation and amortization expense was $10.9 million for the first half of 2008 compared to $10.5 million in the prior-year first half.

Capital expenditures in the first half of 2008 were $5.4 million compared to $7.8 million in the same period of 2007.

Management Comments

President and Chief Executive Officer David A. Schawk commented, "Results for the second quarter continue to reflect the slowdown in business we experienced during the first quarter, primarily as a result of general softness in the U.S. economy. While Schawk saw increased business in April and May, results for the month of June were disappointing, as sales did not continue their positive momentum. In the second quarter, we experienced an environment in which various clients increased project activity only to delay it as the month of June progressed. Furthermore, we believe clients are taking a cautious stance with respect to promotional marketing activity due to the absorption of higher commodity and shipping costs, coupled with the uncertainty that exists within the economy.

"Schawk is aggressively pursuing new revenue by bringing innovative products and workflows to markets globally. Additionally, as a result of the adverse sales performance in the first half, growing price pressures and the related profit impact, we are focusing on enhancing our capacity utilization and anticipate this will improve our operating margins. During the quarter, the Company initiated its previously announced cost reduction plan to aggressively lower its cost base and more effectively utilize its lower cost global production capabilities. By closing and consolidating manufacturing locations and expanding our sales and services offering while reducing staffing levels, we seek to consolidate technologies and workflows, thus allowing the Company to improve its capacity utilization rates. As a result of this plan's initiation during the second quarter, Schawk incurred expenses of $3.2 million. The total costs of this plan to reduce personnel and realign sites to perform work in lower cost venues while continuing to provide high levels of service and quality to our clients are still expected to approximate between $7.0 million and $8.5 million for the 2008 fiscal year. Cost savings in 2008 are estimated to range between $4.0 and $5.0 million, with full-year 2009 savings estimated to be between $12.0 and $13.0 million."

Schawk continued, "While we have made progress in our efforts to remediate material weaknesses in our internal controls, we continue to work diligently to improve our processes to design effective controls and to add accounting resources as necessary. During the second quarter, we incurred $1.5 million in professional fees, which included our restatement and internal control issues and the Company's re-branding initiative. We also anticipate an increase in general and administrative costs between $3.0 million and $3.5 million during the remaining two quarters of 2008 related to the development of the proper internal controls. We expect to significantly improve our internal control system and our material weaknesses by year end."

Schawk concluded, "Despite unpredictable economic and industry conditions, the Company is intently focused on continuing to deliver world-class service to its clients. Through our efforts to reduce costs, we are optimistic our operating margins will improve through the latter half of 2008 and beyond."

 

 

SHARE

Email Icon Email

Print Icon Print

Become a Member

Join the thousands of printing executives who are already part of the WhatTheyThink Community.

Copyright © 2016 WhatTheyThink. All Rights Reserved