Schawk Announces Q2 Results: Net Income Nearly Doubles
Press release from the issuing company
DES PLAINES, Ill., July 23 -- Schawk, Inc., North America's leading provider of digital imaging graphics services to the consumer products industry, reported that it had second quarter earnings of $0.18 per share, fully diluted, an 80% increase compared to $0.10 per share, fully diluted, in the prior year second quarter. For the six months ended June 30, 2002, Schawk reported earnings of $0.31 per share, fully diluted versus $0.16 per share fully diluted in the prior year six-month period.
Net income was $4.0 million in the second quarter of 2002 compared with $2.1 million in the prior year second quarter. Net income was $6.7 million for the six-month period ended June 30, 2002 as compared to $3.5 million in the prior year six-month period.
Second Quarter Ended June 30, 2002
Schawk reported net sales of $46.2 million for second quarter 2002 compared to net sales of $47.5 million in second quarter 2001, a 2.7% decrease. Strong revenues on the consumer products packaging side of the business were offset by weak revenues on the advertising agency side of the business.
Gross margin for the second quarter increased to 42.2% from 40.8% in the prior year second quarter. The increased gross margin percentage is primarily due to lower costs from restructuring programs put in place during the past two years.
Operating income for the second quarter ended June 30, 2002, excluding Restructuring and other charges (special charges), was $6.6 million compared to operating income for the prior year second quarter, excluding special charges, of $4.8 million. Including special charges, operating income was $4.4 million in each period. The increase in operating income excluding special charges is primarily due to cost reduction efforts over the past two years coupled with strength in the consumer products packaging portion of the business. Operating margin was 9.6% (14.2% before special charges) in the current year second quarter and 9.2% (10.1% before special charges) in the prior year second quarter.
Included in the calculation of Operating Income is a charge for impairment of value of long-lived assets classified as Restructuring and Other charges (special charges) on the statement of operations. The Company performed a review of all of its long-lived assets as of June 30, 2002 in accordance with Statement of Financial Accounting Standards No. 144 (see New Accounting Pronouncements below). As a result of this review it was determined that certain assets were not in use and/or their future cash flows were not sufficient to support the book value of the asset. The largest part of the impairment charge ($1.1 million) was purchased software and capitalized software development services that related to a software project that was changed in scope and approach such that certain purchased software and software development costs had no value. Other items included in the impairment charge were internally developed software for sale ($0.3 million) that was superseded by other internally developed software for sale, fixed assets no longer in use ($0.4 million) and other long-term assets whose future cash flows were expected to be negligible ($0.3 million).
Other income (expense) decreased to ($0.4 million) from ($0.8 million) in the prior year second quarter. The decrease in other income (expense) was primarily due to lower interest expense. Interest expense for the second quarter of 2002 was $0.7 million versus $1.1 million in the second quarter of the prior year. The favorable comparison is primarily due to lower debt levels as a result of paying down debt in 2002 versus 2001 and lower interest rates on the floating rate portion of the debt. Other income also included interest income of $0.2 million from state tax refunds as described below.
Income tax expense in the second quarter was significantly lower than the normal due to state tax refunds and the settlement of an outstanding tax obligation. The state tax refunds including interest income totaled $1.0 million. Of this total $0.8 million was refunded taxes and was recorded as a credit on the income tax provision line (offset by an additional $0.3 million of federal tax) on the statement of operations and $0.2 million was interest income. The interest income was recorded in other income (expense) on the statement of operations. In addition, an outstanding tax liability was settled for $1.1 million. Based on the settlement of this obligation and a review of other potential tax obligations, tax liabilities were reduced by an additional $1.0 million in the second quarter of 2002. The total credit to the income tax provision on the statement of operations was $1.5 million resulting in a tax provision of $34 thousand.
Six Months Ended June 30, 2002
For the six-month period ended June 30, 2002 net sales were $89.0 million as compared to $93.4 million for the same period of the prior year, a 4.7% decrease. As described above, although our consumer products packaging business was strong, our advertising agency business was weak in the first half of the year due to the decrease in ad spending.
Gross margin for the six-month period ended June 30, 2002 was 41.6% as compared to 40.5% in the prior year period. The higher gross margin is primarily due to lower costs in 2002 as a result of the restructurings in the past two years.
Operating income before special charges in the six month periods was $11.6 million versus $8.6 million, respectively. Operating income including special charges for the six-month period of 2002 was $9.5 million as compared to $7.9 million in the prior year period. The increase in operating income was primarily due to lower costs as a result of restructuring efforts in the last two years. Operating margin for the six months ended June 30, 2002 was 10.7% (13.0% before special charges) as compared to 8.4% (9.2% before special charges) in the prior year six-month period.
Other income (expense) for the six months ended June 30, 2002 was ($1.1 million) as compared to ($2.0 million) in the prior year period. The lower net expense was primarily due to lower interest rates and lower debt levels. Interest expense was $1.5 million in the current six-month period compared to $2.4 million in the prior year period.
With respect to the income tax provision, the effective tax rate for the six months ended June 30, 2002 was 20.3% as compared to 41.2% in the prior year period. The lower effective tax rate and tax expense was due to transactions that occurred in the second quarter of 2002 as described above. The Company expects that the effective tax rate for the third and fourth quarters will return to the normal 2002 level of approximately 38%.
David A. Schawk, president and chief executive officer commented, "We had very strong earnings in the second quarter of 2002. Our clients in the consumer packaging segments of our business stepped up their business with us as anticipated. In addition, we continue to see the benefits of our restructuring programs positively impacting our operating income and the bottom line. Reduced staffing levels and lower borrowing levels and interest rates were the principal drivers to Schawk's improved profitability. Although the consumer products packaging segment of our business had strong sales volume, sales were down 2.7% from the prior year second quarter as a result of continued weakness in the advertising agency portion of the business. This business continues to suffer from a weak ad market. There is no indication as to when this part of the business will improve."
Mr. Schawk continued, "During the second quarter, we noted an increased level of interest not only in our primary graphics services offerings, but also in our integrated offerings including brand and workflow consulting services as well as our service capabilities in Asia. These additional services are in response to our clients need for greater speed to market, global consistency, responsiveness and efficiency throughout the process from design to print. We continue to work with our clients on strategies to reduce costs and leverage our capabilities to maximize their competitive advantages."
Mr. Schawk concluded, "We delivered a solid second quarter in a very tough business environment. Our business supporting consumer products packaging was strong again in the second quarter and we had increased sales in that portion of our business. We expect the ad agency business to continue to be soft versus the prior year, throughout 2002. However, we are encouraged by the acceptance of Schawk's integrated value approach by our primary multinational, consumer product client base, and we look forward to a strong finish for the second half of 2002."
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