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Schawk announces Q3 results; net income way up on the year

Thursday, November 04, 2010

Press release from the issuing company

Des Plaines, IL - 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 third-quarter 2010 results. Net income in the third quarter of 2010 was $7.8 million, or $0.30 per diluted share, versus $13.3 million, or $0.53 per diluted share, in the third quarter of 2009. Net income for the first nine months of 2010 was $26.1 million, or $1.01 per diluted share, compared to $15.8 million, or $0.63 per diluted share, for the comparable prior-year period.

Net income for the third quarter and first nine months of 2009 was positively impacted by the receipt of $9.2 million in cash as part of an indemnity claim settlement in connection with the Company's 2005 acquisition of Seven Worldwide Holdings, Inc., of which $5.0 million was reported as income. The favorable after-tax per share impact was $0.20 per share for both periods ended September 30, 2009. On a non-GAAP basis, adjusting for financial impacts relating to the indemnity claim settlement, foreign currency exposure and certain other items as further detailed in this earnings release, Adjusted net income was $8.8 million, or $0.34 per diluted share, in the third quarter of 2010 compared to Adjusted net income of $7.9 million, or $0.31 per diluted share, during the prior-year period, on a comparable basis. For the first nine months of 2010, Adjusted net income was $23.7 million, or $0.92 per diluted share, compared to Adjusted net income of $13.8 million, or $0.55 per diluted share, during the prior-year period, on a comparable basis.

President and Chief Executive Officer David A. Schawk, commented, "During the third quarter, we continued to see measured progress year over year with our largest client channel, consumer packaged goods accounts. However, new product introductions and packaging changes were slower than anticipated for the quarter as CPG's have become more cautious as general economic uncertainty continues. We remain dedicated to managing our operations efficiently to keep pace with the trends we are seeing in the marketplace."

Mr. Schawk added, "During the third quarter, we completed the acquisition of Untitled London Limited based in London, UK, which expands Schawk's digital marketing service capabilities. This acquisition reflects our commitment to further strengthening our overall portfolio of brand point management services we offer to our clients as they expand their ways of connecting with consumers."

Consolidated Results for Third Quarter Ended September 30, 2010

Consolidated net sales in the third quarter of 2010 were $112.6 million compared to $113.5 million in the same quarter of 2009, a decrease of approximately $0.9 million, or 0.8 percent. Quarter-over-quarter sales were negatively impacted by changes in foreign currency translation rates of approximately $0.1 million, as the U.S. dollar increased in value relative to the local currencies of certain of the Company's non-U.S. subsidiaries.

Consumer packaged goods (CPG) accounts sales in the third quarter of 2010 were $82.1 million, or 72.9 percent of total sales, compared to $80.2 million in the same quarter of 2009, an increase of 2.3 percent. The increase over the prior-year quarter was primarily driven by increased product and brand activity by Schawk's CPG clients. Advertising and retail accounts sales in the third quarter of 2010 were $20.1 million, or 17.9 percent of total sales, a decrease of 8.8 percent, from $22.1 million in the third quarter of 2009, largely driven by the loss of a lower margin, non-core retail client. However, the profit impact associated with this client loss was largely mitigated through cost reduction actions implemented during the quarter and throughout the year. Entertainment accounts sales for the third quarter of 2010 of $7.1 million, or 6.3 percent of total sales, decreased 15.6 percent, from $8.5 million in the same period of 2009, driven by continued declines in promotional activity.

Gross profit was $43.8 million in the third quarter of 2010, a decrease of $1.7 million from the third quarter of 2009. Third-quarter 2010 gross profit as a percentage of sales decreased to 38.9 percent of sales from 40.1 percent of sales in the 2009 third-quarter period. The decline in gross profit percent was largely driven by the reduced operating leverage resulting from the lower year-over-year revenue coupled with the restoration of certain temporary cost-reduction actions the Company enacted for 2009 in response to the economic environment during that period.

Selling, general and administrative (SG&A) expenses declined approximately $3.5 million to $28.7 million in the third quarter of 2010 from $32.2 million in the third quarter of 2009. The decline in SG&A expenses year over year is primarily driven by the Company's cost-reduction activities implemented in 2009 and 2010 coupled with $1.5 million in certain insurance recoveries detailed further in the Company's third quarter 2010 Form 10-Q. The aforementioned items were partially offset by restoration of certain temporary cost-reduction actions the Company enacted for 2009 as previously discussed.

The Company recorded a $0.7 million loss on foreign exchange exposures in the third quarter of 2010, compared to a gain of $0.6 million in the third quarter of 2009. The Company's foreign exchange gains or losses relate primarily to unhedged currency exposure from intercompany debt obligations of the Company's non-U.S. subsidiaries. Since foreign currency gains or losses primarily relate to intercompany financing activity, the economic impact to the Company is minimal, as these gains or losses are largely offset by corresponding losses or gains in accumulated comprehensive income, net, included in stockholder's equity.

Acquisition integration and restructuring expenses declined from $1.3 million in the third quarter of 2009 to $0.4 million in the third quarter of 2010. The charges in the 2010 third quarter relate to employee terminations and other associated costs and arose from the Company's continued focus on consolidating, reducing and re-aligning its work force and operations. These third-quarter actions are expected to result in annualized savings of approximately $1.2 million, with approximately $0.4 million to be realized during 2010. For the first nine months of 2010, acquisition integration and restructuring expenses were $1.4 million. The expected annualized savings resulting from actions taken in the first nine months of 2010 are approximately $7.8 million, with approximately $4.5 million to be realized during 2010.

During the third quarter of 2010, the Company recorded an additional $0.5 million expense related to its 2008 decision to terminate participation in a union supplemental retirement and disability fund. The additional $0.5 million of multi-employer pension withdrawal expense arose out of the Company's estimate of its future termination liability. The Company recorded an initial $7.3 million liability related to its decision to terminate participation in the fund in the fourth quarter of 2008 with an additional $1.8 million recorded in the fourth quarter of 2009.

Schawk reported operating income of $13.6 million in the 2010 third quarter compared to $17.6 million in the third quarter of 2009. In the third quarter of 2009, the Company received $9.2 million in cash as part of an indemnity claim settlement in connection with the Company's 2005 acquisition of Seven Worldwide Holdings, Inc., of which $5.0 million was reported as income. Excluding the effect of the indemnity claim settlement in the third quarter of 2009, operating income increased approximately $0.9 million compared to the prior-year quarter.

For the third quarter of 2010, the Company reported a tax expense of $4.2 million compared to $1.6 million during the same quarter in 2009. The increase in tax expense for the third quarter of 2010 compared to the prior-year quarter is primarily due to discrete period tax benefits related to the non-taxable indemnity settlement and amended tax return adjustments during the third quarter of 2009.

Net income in the third quarter of 2010 was $7.8 million, or $0.30 per diluted share, compared to $13.3 million, or $0.53 per diluted share, in the third quarter of 2009. Excluding the aforementioned after-tax effects of the indemnity settlement, acquisition integration and restructuring expenses, foreign currency gain or loss, multiemployer pension plan withdrawal expense, and amended tax return adjustments, Adjusted net income was $8.8 million, or $0.34 per diluted share, for the third quarter of 2010 compared to $7.9 million, or $0.31 per diluted share, on a comparable basis for the 2009 third quarter. Please refer to the tables at the end of this press release for a reconciliation of these non-GAAP measures.

Adjusted EBITDA and Management Adjusted EBITDA Performance

Adjusted EBITDA for the third quarter of 2010 was $18.3 million compared to $23.0 million for the third quarter of 2009. Management adjusted EBITDA for the third quarter of 2010 was $19.9 million compared to $19.3 million for the third quarter of 2009. For the first nine months of 2010, Adjusted EBITDA was $51.4 million compared to $41.6 million for the first nine months of 2009. Management adjusted EBITDA for the first nine months of 2010 was $55.6 million as compared to $43.0 million for the first nine months of 2009. Please refer to the "Reconciliation of Non-GAAP Adjusted EBITDA and Management Adjusted EBITDA" table attached at the end of this press release for a reconciliation of these measures.

 

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