SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form
10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number
001-09335
SCHAWK, INC.
(Exact name of Registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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66-0323724
(I.R.S. Employer
Identification No.)
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1695 South River Road
Des Plaines, Illinois
(Address of principal
executive office)
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60018
(Zip
Code)
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847-827-9494
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12 (b) of
the Act:
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Title of Each Class
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Name of Exchange on Which Registered
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Class A Common Stock, $.008 par value
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New York Stock Exchange
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Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 o No þ
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 229.405 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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
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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 aggregate market value on June 30, 2009 of the voting
and non-voting common equity stock held by non-affiliates of the
registrant was approximately $62,813,000.
The number of shares of the Registrants Common Stock
outstanding as of March 10, 2010 was 25,261,181.
SCHAWK,
INC
FORM 10-K
ANNUAL REPORT
TABLE OF
CONTENTS
DECEMBER
31, 2009
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PART I
General
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
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
certain 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
BLUEtm
confer the benefits of brand consistency, accuracy and speed to
market for its clients.
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As the only truly 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 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 in 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.
The Companys clients currently include more than 20 of the
Fortune 100 companies and more than 60 of the Fortune
500 companies. These clients select Schawk for its
comprehensive brand point management services as they seek to
more effectively and consistently communicate their visual
identities and execute their branding and marketing strategies
on a global scale. The Company believes its clients are
increasingly choosing to outsource their graphic and creative
services needs to it for a variety of reasons, including its:
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ability to service our clients graphic requirements
throughout the world;
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rapid turnaround and delivery times;
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comprehensive,
up-to-date
knowledge of the print specifications and capabilities of
converters and printers located throughout the world;
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high quality design and creative capabilities with integrated
production art expertise;
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consistent reproduction of brand equity across multiple
packaging and promotional media;
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digital imaging asset management; and
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efficient workflow management resulting in globally competitive
overall cost to the client.
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The Company also sees evidence that many consumer products
manufacturers are continuing to outsource what they believe are
non-core competencies. These non-core competencies
include those functions that are outside the competency of
creating and manufacturing the products they sell. This would
include the type of services that Schawk offers.
In January 2005, the Company acquired one of its largest
competitors, Seven Worldwide, Inc. (Seven) (formerly
Applied Graphics Technologies, Inc.) and purchased the business
of Winnetts from Weir Holdings, Inc. in December 2004. In
February 2006, the Company sold certain operations, including
substantially all of the prepress services business being
provided through its Book and Publishing operations, most of
which were acquired as part of the Seven acquisition in 2005.
Effective July 1, 2009, the Company restructured its
operations on a geographic basis, in three operating segments:
North America, Europe and Asia Pacific. This organization
reflects a change in the management reporting structure that was
implemented during the third quarter of 2009. Accordingly, all
previously reported amounts have been reclassified to conform to
the current-period presentation. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Segment Information for financial
information about the Companys segments.
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 which were previously
reported in the Other reporting segment. North America is the
dominant segment with 86 percent of consolidated revenues
as of December 31, 2009. The Companys Europe
reportable segment includes all operations in Europe, including
its European branding and design capabilities and its digital
solutions business in London which were previously reported in
the Other reporting segment. The Companys Asia Pacific
reportable segment includes all operations in Asia and
Australia, including its Asia Pacific branding and design
capabilities, which were previously reported in the Other
reporting segment.
At December 31, 2008, the Companys operations were
reported in three segments for financial reporting purposes:
United States and Mexico, Europe and Other. The Other segment
consisted of the Asia and Canada
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businesses, the Companys Anthem Worldwide creative design
business and the Companys enterprise products
business Schawk Digital Solutions.
Graphic
Services Industry
Industry services. The Companys
principal industry, premedia graphic services, includes the
tasks involved in creating, manipulating and preparing tangible
images and text for reproduction to exact specifications for a
variety of media, including packaging for consumer products,
point-of-sale
displays, other promotional
and/or
advertising materials, and the internet. Packaging for consumer
products encompasses folding cartons, boxes, trays, bags,
pouches, cans, containers, packaging labels and wraps. Graphic
services do not entail the actual printing or production of such
packaging materials, but rather include the various preparatory
steps such as art production, color separation and plate
manufacturing services. While graphic services represent a
relatively small percentage of overall product packaging and
promotion costs, the visual impact and effectiveness of product
packaging and promotions are largely dependent upon the quality
of graphic imaging work.
Size of industry. The global graphic services
industry has thousands of market participants, including
independent premedia service providers, converters, printers
and, to a lesser extent, advertising agencies. Most graphic
services companies focus on publication work such as textbooks,
advertising, catalogs, newspapers and magazines. The
Companys target markets, however, are high-end packaging,
advertising and promotional applications for the consumer
products, retail and pharmaceutical industries. The Company
estimates the North American market for graphic services in the
consumer products packaging industry is approximately
$1.5 billion and the worldwide market is as high as
$6.0 billion. The Company estimates the broader market for
graphic services including publishing, advertising and
promotional as well as packaging applications in North America
may be as high as $8.0 billion and worldwide may be as high
as $30.0 billion. Within the consumer products graphic
industry, the market is highly fragmented with thousands of
limited service partners, only a small number of which have
annual revenues exceeding $20.0 million.
While the cost of technology has reduced some of the barriers to
entry in relation to equipment costs, the demand for expertise,
systems, speed, consistency and dependability that is scalable
and can be delivered locally, regionally and globally have
created a different and expanded set of entry barriers. As a
result, the Company believes new
start-ups
have difficulty competing with it. Other barriers to entry
include expanded restrictions and compliance requirements
brought about by varying governmental regulations related to
consumer products packaging, increasing customization demands of
retailers, certainty of supply and many clients preference
for established firms with a global reach. The Company believes
that the number of graphic services providers to the consumer
products industry will continue to diminish due to consolidation
and attrition caused by competitive forces such as accelerating
technological requirements for advanced systems, the need for
highly skilled personnel and the growing demands of clients for
full-service knowledge based regional and global capabilities.
Graphic services for consumer products
companies. High quality graphic services are
critical to the effectiveness of any consumer products
marketing strategy. A strategic, creative or executional change
in the graphic image of a package, advertisement or
point-of-sale
promotional display can dramatically increase sales of a
particular product. New product development has become a vital
strategy for consumer products companies, which introduce
thousands of new products each year. In addition to introducing
new products, consumer products companies are constantly
redesigning their packaging, advertising and promotional
materials for existing products to respond to rapidly changing
consumer tastes (such as the fat or carbohydrate content of
foods), current events (such as major sports championships and
blockbuster film releases) and changing regulatory requirements.
The speed and frequency of these changes and events have led to
increased demand for shorter turnaround and delivery time
between the creative design phase and the distribution of
packaged products and related advertising and promotional
materials that promote them. Moreover, the demand for global
brand equity consistency between visuals and copy across brand
touchpoints a product package, point of sale,
advertisement out of home advertising and more recently online
media has been accelerating. The Company believes
that all of these factors lead consumer products and retail
companies to seek out larger graphics services companies with
integrated strategic, creative and executional service offerings
with a geographic reach that will enable them to bring their
products to market more quickly, consistently and efficiently.
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Graphic services for consumer product packaging, whether it is
an
over-the-counter
product on drug store shelves, a private label product on
grocery store shelves, or a national food or beverage brand on
discount retailers shelves, present specific challenges.
Packaging requirements for consumer products are complex and
demanding due to variations in package materials, shapes, sizes,
substrates, custom colors, storage conditions, expanding
regulatory requirements and marketing objectives. An
ever-increasing number of stock-keeping units, or SKUs, compete
for shelf space and market share, making product differentiation
essential to our clients. In recent years consumer products
companies have redirected significant portions of their
marketing budgets toward package design and
point-of-sale
media as they recognize the power of
point-of-sale
marketing on consumer buying behavior. Because premedia services
represent only a small portion (estimated to be less than
10 percent) of the overall cost of consumer products
packaging, changes in package design have only a modest impact
on overall costs. Recognizing this high benefit/low cost
relationship and the continuous need to differentiate their
offerings, consumer products companies change package designs
frequently as part of their core marketing strategy.
Factors driving increased demand for our brand point
management services. Rapidly changing consumer
tastes, shifting marketing budgets, the need for product
differentiation, changing regulatory requirements, the relative
cost-effectiveness of packaging redesign and other factors
continue to drive increases in the volume and frequency of
package design modifications. These factors, along with the
related changes in advertising and promotional materials, has
resulted in significantly increased demand for the services
Schawk provides. Additionally, the trend among progressive
grocery retailers to develop private label brands, activate them
in the marketplace and optimize their brand portfolios is
favorable to Schawk. As grocery retailers become more
sophisticated marketers, the Company believes they are
increasingly recognizing the benefit of Schawks brand
point management offering.
Our
Services
Schawks offerings include strategic, creative and
executional services related to three core competencies: graphic
services, brand strategy and design, and software. Graphic
services and brand strategy and design represented approximately
98 percent of the Companys revenues in 2009, with
software sales representing the remaining 2 percent.
Graphic services. Under the Schawk brand,
graphic services encompasses a number of creative and
executional service offerings including traditional premedia
business as well as high-end digital photography, color
retouching, large format digital printing and sales and
promotional samples. Additionally, Schawk offers digital
three-dimensional modeling of prototypes or existing packages
for its consumer products clients. Graphic service operations
are located throughout North America, Europe and Asia.
Brand strategy and design. Under the Anthem
brand, the Company offers brand consulting and creative design
for packaging applications to consumer products companies, food
and beverage retailers and mass merchandisers. Anthem consists
of leading creative design firms acquired since 1998 in Toronto,
San Francisco, Cincinnati, Sydney, London, York, England,
Melbourne and Hilversum, the Netherlands, as well as
start-ups in
Chicago, New Jersey, New York, and Singapore.
Software. Services that help differentiate
Schawk from its competitors are its software products that
include graphic lifecycle content management systems that are
comprised of digital asset management, workflow management,
online proofing and intelligence performance management modules.
These products are supported by services that include
implementation,
on-site
management, validation for highly regulated environments, and
support and training. Schawk offers these products and services
through its digital solutions subsidiary, a software development
company that develops software solutions for the marketing
services departments of consumer products companies,
pharmaceutical/life sciences companies and retail companies. In
2009, Schawk Digital Solutions launched and successfully
implemented for several clients an innovative Copy Management
System that serves as a single source of truth for
all copy and automates its placement on packaging mechanicals,
simplifying complex workflows, improving time to market and
reducing the risks that incorrect labeling presents to its
clients. Through its integrated software solution,
BLUEtm,
Schawk Digital Solutions works with clients to organize their
digital assets, streamline their internal workflow, improve
efficiency, reduce waste, and help clients meet the requirements
of regulatory bodies globally. The improved speed to market
allows consumer products companies to
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increase the number of promotions without increasing costs.
Schawks software products are supported with managed
services, asset optimization, implementation and support and
training for clients.
To capitalize on market trends, management believes the Company
must continue to provide clients with the ability to make
numerous changes and enhancements while delivering additional
value directed at meeting the expanded needs of its clients
within increasingly shorter turnaround times. Accordingly, the
Company focuses its efforts on improving its response times and
continues to invest in rapidly emerging technology and the
continuing education of its employees. The Company also educates
its clients on the opportunities and complexities of
state-of-the-art
equipment and software. For example, the Company has anticipated
the need to provide services to comply with expanded regulatory
requirements related to proposed regulations regarding food,
beverage and product safety. The Company believes that its
ability to provide quick turnaround, expanded services and
delivery times, dependability and value-added training and
education programs will continue to give it a competitive
advantage in serving clients who require high volume, high
quality product imagery.
Over the course of our business history, the Company has
developed strong relationships with many of the major converters
and printers in the United States, Canada, Europe and Asia. As a
result, the Company has compiled an extensive proprietary
database containing detailed information regarding the
specifications, capabilities and limitations of printing
equipment in the markets it serves around the world. This
database enables it to increase the overall efficiency of the
printing process. Internal operating procedures and conditions
may vary from printer to printer, affecting the quality of the
color image. In order to minimize the effects of these
variations, the Company makes necessary adjustments to the color
separation work to account for irregularities or idiosyncrasies
in the printing presses of each of the clients converters.
The Companys database also enhances its ability to ensure
the consistency of its clients branding strategies. The
Company strives to afford its clients total control over their
imaging processes with customized and coordinated services
designed to fit each individual clients particular needs,
all aimed at ensuring that the color quality, accuracy and
consistency of a clients printed matter are maintained.
Summary financial information for continuing operations by
significant geographic area is contained in
Note 18 Segment and Geographic Reporting to the
Companys consolidated financial statements.
Competitive
Strengths
The Company believes that the following factors have been
critical to its past success and represent the foundation for
future growth.
The Company is a leader in a highly fragmented
market. The Company is one of the worlds
largest independent graphics services providers. There are
thousands of independent market participants in its industry in
North America and the vast majority of these are
single-location, small niche firms with annual revenues of less
than $20.0 million. The Company believes that its size,
expertise, breadth of services and global presence represent a
substantial competitive advantage in its industry.
The Company has direct client
relationships. While many participants in the
graphic services industry serve only intermediaries such as
advertising firms and printers, the Company typically maintains
direct relationships with its clients. As part of this focus on
direct client relationships, the Company also deploys employees
on-site at
and near client locations, leading to faster turnaround and
delivery times and deeper, longer-lasting client relationships.
At December 31, 2009, the Company had more than 100 sites
at or near client locations staffed by approximately 335 Schawk
employees. The Companys direct client relationships enable
it to strengthen and expand client relationships by better and
more quickly anticipating and adapting to clients needs.
The Company has a comprehensive service
offering. The Company provides its clients with a
comprehensive offering of integrated strategic, creative and
executional services. The Company has built upon its core
premedia services by acquiring and integrating high value/high
margin services such as brand strategy and design, creative
services and workflow management software and services. In
addition to generating more revenue, the increased breadth of
its service offering enables it to manage the premedia graphic
process, from design and image creation to media fulfillment.
This results in quicker, more consistent and cost-effective
solutions for its clients that enables them to undertake more
product introductions or existing packaging alterations without
exceeding their budgets.
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The Company has unique global
capabilities. The Company has more than 150
locations in 14 countries across 4 continents. The Company has
combined this global platform with its proprietary databases of
printer assets across the world, ensuring that the Company
provides consistent service to clients on a local, regional and
global basis. The ability to ensure a consistent and compelling
brand image is increasingly important to global clients as they
continue to expand their markets, extend and unify their brands
and outsource their production internationally. The
Companys global presence and proprietary databases help
ensure consistent and compelling brand images for its clients
around the world.
The Company generates strong cash flow. The
Company has a history of generating strong cash flow through
profitable growth in operating performance and a strong
financial discipline. The Company has been able to manage its
costs efficiently, address prevailing market conditions and
avoid dependence on revenue growth to maintain or increase
profitability. Also, historically, the Company has had only a
modest need for maintenance capital investment. The Company
believes that these factors should enable it to continue to
generate strong cash flow.
Strategy
The Company seeks to enhance its leadership position in the
graphic services industry. Its strategies to realize this
objective include:
Capitalizing on our enhanced platform. The
Company seeks to capitalize on the breadth of its services and
its global presence. The Companys dedicated business
development team emphasizes the ability to tailor integrated
solutions on a global scale to meet its clients specific
needs. Its total brand point management approach yields new
opportunities by expanding service offerings to existing clients
and winning global representation of clients previously using
its services only in a single market. This strategy is expected
to drive additional organic growth in the future.
Matching our services to the needs of our
clients. The Companys clients continually
create new products and seek to extend and enhance their
existing brands while maximizing brand equity consistency across
the regions in which they sell their products, whether these
regions are local, regional or global in nature. The Company
continues to match its service offerings to meet its
clients needs and, where necessary, adapt services as
their needs change and grow. The Companys adaptability is
exemplified by its ability to scale its service offerings, shift
employees among its locations to address surges in a
clients promotional activity, and originate services from
additional global locations based on changes in a clients
global branding strategy.
Pursuing acquisitions opportunistically. Where
opportunities arise and in response to client needs, Schawk
seeks strategic acquisitions of selected businesses to broaden
its service offerings, enhance its client base or build a new
market presence. The Company believes that there will continue
to be a number of attractive acquisition candidates in the
fragmented and consolidating industry in which the Company
operates. As discussed under Managements Discussion
and Analysis of Financial Condition and Results of
Operation Liquidity and Capital Resources, the
Companys current credit facility, renegotiated in January
2010, contains covenants that may limit its ability to make
significant acquisitions.
Acquisitions
Since 1965, the Company has integrated approximately 57 graphic
imaging, creative and design businesses into its operations,
ranging in size from $2 million to $370 million in
revenue. The Company typically has sought to acquire businesses
that represent market niche companies with Fortune 1000 client
lists, excellent client services or proprietary products, solid
management
and/or offer
the opportunity to expand into new service or geographic markets.
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The Companys acquisition of Winnetts and Seven in 2005
increased its ability to meet and adapt to clients needs
and industry trends by:
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expanding its geographic reach to Europe, Australia and India,
which benefits its existing clients as they seek to establish
global brand consistency; and
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increasing and expanding the scope of its global service
offerings, such as creative design and high-end retouching,
enhanced capabilities in serving life-sciences industry clients,
and entering into new markets, such as retail and media.
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The Seven and Winnetts acquisitions also increased the amount of
business the Company does for the worlds largest consumer
products companies, particularly for the
non-U.S. divisions
of our existing clients. As a result of these and subsequent
acquisitions, the Company maintains the necessary geographic
reach and range of service offerings to succeed in meeting its
clients imaging and branding needs on a global basis. The
Company believes it is the only brand image solutions company
positioned to offer such a breadth of services on a global
scale. The Companys recent acquisitions are noted below:
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Effective December 31, 2008, the Company acquired
100 percent of the outstanding stock of Brandmark
International Holding B.V., a Netherlands-based brand identity
and creative design firm, which has historically done business
as DJPA. Brandmark provides services to consumer products
companies through its locations in Hilversum, The Netherlands
and London, United Kingdom.
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On May 31, 2008, the Company acquired Marque Brand
Consultants Pty Ltd, an Australian-based brand strategy and
creative design firm that provides services to consumer product
companies.
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On September 1, 2007, the Company acquired Protopak
Innovations, Inc., a Toronto, Canada company that produces
prototypes and samples for the packaging industry.
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On August 1, 2007, the Company acquired Perks Design
Partners Pty Ltd., an Australia-based brand strategy and
creative design firm that provides services to consumer products
companies.
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On August 1, 2007, the Company acquired the remaining
10 percent of the outstanding stock of Schawk India, Ltd.
from the minority shareholders. The Company had previously
acquired 50 percent of a company currently known as Schawk
India, Ltd. in February 2005 as part of its acquisition of Seven
Worldwide, Inc. On July 1, 2006, the Company increased its
ownership of Schawk India, Ltd. to 90 percent. Schawk
India, Ltd. provides artwork management, premedia and print
management services.
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On May 31, 2007, the Company acquired the operating assets
of Benchmark Marketing Services, LLC, a Cincinnati, Ohio-based
creative design agency that provides services to consumer
product companies. The operations of Benchmark have been
combined with those of Anthem Cincinnati.
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In July 2006, the Company acquired the operating assets of WBK,
Inc., a Cincinnati, Ohio-based design agency that provides
services to retailers and consumer products companies. This
operating unit is now known as Anthem Cincinnati.
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As discussed under Managements Discussion and
Analysis of Financial Condition and Results of
Operation Liquidity and Capital Resources, the
Companys current credit facility contains covenants that
may limit its ability to make acquisitions.
Marketing
and Distribution
The Company markets its services nationally and internationally
through its website, social media, media engagement and highly
focused marketing programs, targeted at existing and potential
clients. The Company sells its services through a group of
approximately 200 direct salespersons who call on consumer
products manufacturers, including those in the food and
beverage, home products, pharmaceutical and cosmetics industries
and mass merchant retailers. The Companys salespersons,
business development group and client service technicians share
responsibility for marketing its offerings to existing and
potential clients, thereby fostering long-term institutional
relationships with our clients.
9
Clients
The Companys clients consist of direct purchasers of
graphic services, including end-use consumer product
manufacturers of food, beverage, non-food and beverage and
pharmaceutical products, groceries, pharmacies, department and
mass merchant retailers, converters and advertising agencies.
Many of its clients, a number of whom are Fortune
1000 companies, have global operations and often use
numerous converters both domestically and internationally.
Because these clients desire uniformity of color and image
quality across a variety of media, the Company plays a very
important role in coordinating their printing activities by
maintaining current equipment specifications regarding its
clients and converters. Management believes that this role has
enabled it to establish closer and more stable relationships
with these clients. Converters have worked closely with the
Company to reduce required lead-time, thereby lowering their
costs. End-use clients often select and use Schawk to ensure
better control of their packaging or other needs and depend on
Schawk to act as their agent to ensure quality management of
data along with consistency among numerous converters and
packaging media. Schawk has established more than 100
on-site
locations at or near clients that require high volume,
specialized service. As its art production services continue to
expand, the Company anticipates that it will further develop our
on-site
services.
Many clients purchase from Schawk on a daily and weekly basis
and work closely with it year-round as they frequently redesign
product packaging or introduce new products. While certain
promotional activities are seasonal, such as those relating to
summer,
back-to-school
time and holidays, shorter technology-driven graphic cycle time
has enabled consumer products manufacturers to tie their
promotional activities to regional
and/or
current events (such as sporting events or motion picture
releases). This prompts manufacturers to redesign their packages
more frequently, resulting in a correspondingly higher number of
packaging redesign assignments. This technology-driven trend
toward more frequent packaging changes has offset previous
seasonal fluctuations in the volume of Schawks business.
See Seasonality and Cyclicality.
In addition, consumer product manufacturers have a tendency to
single-source their graphic work with respect to a particular
product line so that continuity can be assured in changes to the
product image. As a result, the Company developed a base of
steady clients in the food and beverage, health and beauty and
home care industries. In both 2008 and 2009, its largest client
accounted for approximately 9 percent of the Companys
total revenues and the 10 largest clients in the aggregate
accounted for 41 percent of revenues for both periods.
Competition
The Companys competition comes primarily from other
graphic service providers and converters and printers that have
graphic service capabilities. The Company believes that
converters and printers serve approximately one-half of its
target market, and the other one-half is served by independent
graphic service providers. Independent graphic service providers
are companies whose business is performing graphic services for
one or more of the principal printing processes. Since the
acquisition of Seven, the Company believes that only three
firms Southern Graphics Systems, Matthews
International Corporation and Vertis Communications
compete with it on a national or international basis in certain
markets. The remaining independent graphic service providers are
regional or local firms that compete in specific markets. To
remain competitive, each firm must maintain client relationships
and recognize, develop and capitalize on
state-of-the-art
technology and contend with the increasing demands for speed.
Some converters with graphic service capabilities compete with
Schawk by performing such services in connection with printing
work. Independent graphic service providers, such as Schawk,
however, may offer greater technical capabilities, image quality
control and speed of delivery. In addition, converters often
utilize Schawks services because of the rigorous demands
being placed on them by clients who are requiring faster
turnaround times. Increasingly, converters are being required to
invest in technology to improve speed in the printing process
and have avoided spending on graphic services technology.
As requirements of speed, consistency and efficiency continue to
be critical, along with the recognition of the importance of
focusing on their core competencies, the Company believes
clients have increasingly recognized that Schawk provides
services at a rate and cost that makes outsourcing more cost
effective and efficient.
10
Research
and Development
The Company is dedicated to keeping abreast of and, in a number
of cases, initiating technological process developments in its
industry that have applications for a variety of purposes
including, but not limited to, speed. To build upon its
leadership position, the Company is actively involved in system
and software technical evaluations of various computer systems
and software manufacturers and also independently pursues
software development for implementation at its operating
facilities. The Company continually invests in new technology
designed to support its high quality graphic services. The
Company concentrates its efforts in understanding systems and
equipment available in the marketplace and creating solutions
using
off-the-shelf
products customized to meet a variety of specific client and
internal requirements.
BLUEtm
and Schawk
3-D imaging
capabilities are examples of Schawks commitment to
research and development.
As an integral part of our commitment to research and
development, the Company supports its internal Schawk Technical
Advisory Board, as it researches and evaluates new technologies
in the graphic arts and telecommunications industries. This
board meets quarterly to review new equipment and programs, and
then disseminates the information to the entire Company and to
clients as appropriate.
Employees
As of December 31, 2009, Schawk had approximately
3,100 employees worldwide. Of this number, approximately
12 percent are production employees represented by local
units of the Graphic Communications Conference of the
International Brotherhood of Teamsters and by local units of the
Communications, Energy & Paperworkers Union of Canada
and the GPMU in the UK. The percentage of employees covered by
union contracts that expire within one year is approximately
7 percent. The Companys union employees are vital to
its operations. Schawk considers its relationships with its
employees and unions to be good.
Backlog
The Company does not maintain backlog figures as the rapid
turn-around requirements of its clients result in little
backlog. Basic graphic service projects are generally in and out
of its facilities in five to seven days. More complex projects
and orders are generally in and out of its facilities within two
to four weeks. Approximately one-half of total revenues are
derived from clients with whom the Company has entered into
agreements that generally have terms of between one year and
five years in duration. With respect to revenues from clients
that are not under contract, Schawk maintains client
relationships by delivering timely graphic services, providing
technology enhancements to make the process more efficient and
bringing extensive experience with and knowledge of printers and
converters.
Seasonality
and Cyclicality
The Companys business for the consumer product packaging
graphic market is not currently seasonal because of the number
of design changes that are able to be processed as a result of
speed-to-market
concepts and all-digital workflows. As demand for new products
has increased, traditional cycles related to timing of major
brand redesign activity have gone from a three to four year
cycle to a much shorter cycle. With respect to the advertising
markets, some seasonality has historically existed in that the
months of December and January were typically the slowest months
of the year in this market because advertising agencies and
their clients typically finish their work by mid-December and do
not start up again until mid-January. In recent years, late
summer months have seen a slowdown brought about primarily as a
result of Schawks ability to turn work more efficiently
and the holiday schedules of its client base. With respect to
the fourth quarter, this seasonality in Schawks business
is expected to be offset by the increase in holiday-related
business with respect to the retail portion of its business in
the United States. Advertising spending is generally cyclical as
the consumer economy is cyclical. When consumer spending and GDP
decreases, advertising and marketing activity is often reduced
or changed. As an example, this may result in fewer advertising
and/or
marketing campaigns
and/or the
reduction in print and broadcast media ads and the redeployment
to internet programs.
11
Purchasing
and Raw Materials
The Company purchases photographic film and chemicals, storage
media, ink, paper, plate materials and various other supplies
and chemicals on consignment for use in its business. These
items are purchased from a variety of sources and are available
from a number of producers, both foreign and domestic. In 2009,
materials and supplies accounted for $22 million or
approximately 7.8 percent of the Companys cost of
sales, and no shortages are anticipated. Furthermore, as a
growing proportion of the workflow is digital, the already small
percentage of cost of sales attributable to material costs will
continue to decrease. Historically, the Company has negotiated
and enjoys significant volume discounts on materials and
supplies from most of its major suppliers.
Intellectual
Property
The Company owns no significant patents. The
trademarks Schawk! Schawk, Schawk
Digital Solutions, Anthem!, Anthem
Worldwide, PaRTS, BLUE, BLUE
DNA, ENVISION, MPX,
MEDIALINK, MEDIALINK STUDIO, RPM
(Retail Performance Manager), CPM (Campaign
Performance Manager), BRANDSQUARE,
AGT, APPLIED GRAPHICS TECHNOLOGIES, and
the trade names Ambrosi, Anthem New
Jersey, Anthem New York, Anthem Los
Angeles, Anthem San Francisco,
Anthem Toronto, Anthem Chicago,
Anthem Singapore,, Anthem Cincinnati,
Anthem York, Schawkgraphics,
Schawk Asia, Schawk Atlanta,
Schawk Cactus, Schawk Canada,
Schawk Cherry Hill, Schawk Chicago,
Schawk Cincinnati 446, Schawk Cincinnati
447, Schawk Creative Imaging, Schawk
Designers Atelier, Schawk India,
Schawk Japan, Schawk Australia,
Schawk Kalamazoo, Schawk Mexico,
Schawk Milwaukee, Schawk Minneapolis,
Schawk Los Angeles, Schawk
San Francisco, Schawk UK Limited,
Schawk New York, Schawk Penang,
Schawk St. Paul, Schawk Toronto,
Schawk Shanghai, Schawk Singapore,
Schawk Stamford, Schawk
3-D,
Laserscan, Protopak, Seven,
DJPA, Schawk Retail Marketing, and
Winnetts are the most significant trademarks and
trade names used by the Company or its subsidiaries.
Available
Information
The Companys website is www.schawk.com, where investors
can obtain copies of the Companys annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and any amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after the
Company has filed such materials with, or furnished them to, the
SEC. The Company will also furnish a paper copy of such filings
free of charge upon request.
The
Companys operating results may be adversely affected by
issues that affect its clients spending decisions during
periods of economic weakness or uncertainty.
The Companys revenues are derived from many clients in a
variety of industries and businesses, some of whose product
introduction, marketing and advertising spending levels can be
subject to significant reductions based on changes in, among
other things, general economic conditions. Schawks
operating results may reflect its clients order patterns
and its business is sensitive to the effects of economic
downturns or decreased business and consumer spending on its
clients businesses. In addition, because the Company
conducts its operations in a variety of markets, it is subject
to economic conditions in each of these markets. Accordingly,
general economic downturns or localized downturns in markets
where the Company has operations or other circumstances that
result in reductions in its clients investment in product
introduction and innovation or marketing and advertising budgets
can negatively impact the Companys sales volume and
revenues, its margins and its ability to respond to competition
or to take advantage of business opportunities.
Prolonged deterioration, weakness or uncertainty in global
economic conditions and in the credit and capital markets and
weak consumer and business confidence has and could continue to
significantly impact the overall demand for Schawks
services. As clients come under increasing pressures or continue
to operate in a weak or uncertain economic environment, it may
result in, among other consequences, a further reduction in
spending on the
12
services that the Company provides, which could have a material
adverse effect on its operating cash flows, financial condition
or results of operations.
The
Company is subject to unpredictable order flows.
Although approximately one-half of the Companys revenues
are derived from clients with whom the Company has contractual
agreements ranging from one to five years in duration,
individual assignments from clients are on an as
needed,
project-by-project
basis. The contractual agreements do not require minimum
volumes, therefore, depending on the level of activity with its
clients, the Company can experience unpredictable order flows.
While technological advances have enabled Schawk to shorten
considerably its production cycle to meet its clients
increasing
speed-to-market
demands, the Company may in turn receive less advance notice
from its clients of upcoming projects or the cancellation or
postponement of anticipated projects. Although the Company has
established long-standing relationships with many of its clients
and believes its reputation for quality service is excellent,
the Company is not able to predict with certainty the volume of
its business even in the near future and will remain susceptible
to unexpected fluctuations in client spending.
The
Company operates in a highly competitive industry.
The Company competes with other providers of graphic imaging and
creative services. The market for such services is highly
fragmented, with several national and many regional participants
in the United States as well as in foreign countries in which it
operates. The Company faces, and will continue to face,
competition in its business from many sources, including
national and large regional companies, some of which have
greater financial, marketing and other resources than the
Company. In addition, local and regional firms specializing in
particular markets compete on the basis of established long-term
relationships or specialized knowledge of such markets. The
introduction of new technologies also may create lower barriers
to entry that may allow other firms to provide competing
services.
There can be no assurance that competitors will not introduce
services or products that achieve greater market acceptance
than, or are technologically superior to, Schawks current
service offerings. The Company cannot offer assurance that it
will be able to continue to compete successfully or that
competitive pressures will not adversely affect its business,
financial condition and results of operations.
The
Company may not realize expected benefits from its technology
enhancement, cost reduction and capacity utilization
initiatives.
In order to improve the efficiency of its operations, Schawk
implemented certain technology enhancement, cost reduction and
capacity utilization activities in 2008 and 2009, including
workforce reductions and work site realignment, and has plans to
continue these or similar actions throughout 2010 in order to
achieve certain cost savings and to strategically realign its
resources. The Company cannot assure you that it will realize
the expected cost savings or improve its operating performance
as a result of its past, current and future cost reduction
activities and technology enhancement initiatives. It also
cannot assure you that its cost reduction activities will not
adversely affect its ability to retain key employees, the
significant loss of whom could adversely affect its operating
results. Further, as a result of its cost reduction activities,
the Company may not have the appropriate level of resources and
personnel to appropriately react to significant changes or
fluctuations in its markets and in the level of demand for its
services.
13
The
Company may encounter difficulties arising from future
acquisitions or consolidation efforts, which may adversely
impact its business.
The Company has a history of making acquisitions and, over the
past several years, has invested, and in the future may continue
to invest, a substantial amount of capital in acquisitions.
Acquisitions involve numerous risks, including:
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difficulty in assimilating the operations and personnel of the
acquired company with Schawks existing operations and
realizing anticipated synergies;
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the loss of key employees or key clients of the acquired company;
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difficulty in maintaining uniform standards, controls,
procedures and policies; and
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unrecorded liabilities of acquired companies that the Company
failed to discover during its due diligence investigations.
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There is no assurance that the Company will realize the expected
benefits from any future acquisitions or that its existing
operations will not be harmed as a result of any such
acquisitions. In addition, the cost of unsuccessful acquisition
efforts could adversely affect its financial performance. The
Company has undertaken consolidation efforts in the past in
connection with its acquisitions, and in connection with any
future acquisitions, the Company will likely undertake
consolidation plans to eliminate duplicate facilities and to
otherwise improve operating efficiencies. Any future
consolidation efforts may divert the attention of management,
disrupt the Companys ordinary operations or those of its
subsidiaries, result in charges and additional costs or
otherwise adversely affect the Companys financial
performance.
Future acquisitions or organic growth also may place a strain on
the Companys financial and other resources. In order to
manage future growth of its client services staff, Schawk will
need to continue to improve its operational, financial and other
internal systems. If the Companys management is unable to
manage growth effectively and revenues do not increase
sufficiently to cover its increased expenses, the Companys
results of operations could be adversely affected.
The
Company is dependent on certain key clients.
In both 2009 and 2008, the Companys ten largest clients
accounted for approximately 41 percent of its revenues and
approximately 9 percent of total revenues came from the
Companys largest single client. While the Company seeks to
build long-term client relationships, revenues from any
particular client can fluctuate from period to period due to
such clients purchasing patterns, which, with respect to
the Companys consumer product company clients, may be
driven by increases or decreases in their level of investment in
brand enhancements and product introductions. Any termination of
a business relationship with, or a significant sustained
reduction in business received from, any of the Companys
principal clients for any reason could have a material adverse
effect on the Companys business, financial condition and
results of operations.
The
Companys clients could shift a significant portion of
their marketing dollars from print to online at a level that
exceeds Schawks current ability to deliver the online
services they need at the volumes they require.
As online marketing and advertising opportunities continue to
grow as a direct, measurable, and interactive way for the
Companys clients to reach consumers, more companies are
shifting marketing dollars away from print to online. While
Schawk currently offers a number of services that meet its
clients online marketing and advertising needs, responding
quickly, effectively and efficiently to requirements for more
comprehensive interactive services might require the acquisition
of additional talent or an established interactive agency, and
its business might be adversely affected if it is unable to keep
pace with or capitalize on these shifting marketing and
advertising trends.
14
The
Company remains susceptible to risks associated with
technological and industry change, including risks based on the
services it provides and may seek to provide in the future as a
result of technological and industry changes.
The Company believes its ability to develop and exploit emerging
technologies has contributed to its success and has demonstrated
to its clients the value of using its services rather than
attempting to perform these functions in-house or through
lower-cost, reduced-service competitors. The Company believes
its success also has depended in part on its ability to adapt
its business as technology advances in its industry have changed
the way graphics projects are produced. These changes include a
shift from traditional production of images to offering more
consulting and project management services to clients and, more
recently, repositioning the Company in the marketplace to
reflect the Companys brand point management services.
Accordingly, Schawks ability to grow will depend upon its
ability to keep pace with technological advances, industry
evolutions and client expectations on a continuing basis and to
integrate available technologies and provide additional services
commensurate with client needs in a commercially appropriate
manner. Its business may be adversely affected if the Company is
unable to keep pace with relevant technological and industry
changes or if the technologies or business strategies that the
Company adopts or services it promotes do not receive widespread
market acceptance.
If the
Company fails to maintain an effective system of disclosure and
internal controls, it may not be able to accurately report its
financial results and may incur substantial costs related to
remediation of its internal controls.
The Company reported certain material weaknesses in internal
control in connection with its assessment of the effectiveness
of its internal controls as of December 31, 2008 and
December 31, 2007, which have since been remediated.
Additionally, in March 2008, it announced that a material charge
for impairment of goodwill associated with one of the
Companys Canadian operating units should have been
recorded as of December 31, 2002. As a result of accounting
errors previously identified, the Company restated its 2006 and
2005 financial statements in its
Form 10-K
for the year ended December 31, 2007 and restated its
consolidated balance sheet at December 31, 2007. If the
Company were to determine that its previous material weaknesses
were not properly rectified or fails to maintain the
effectiveness of its internal controls, its operating results
could be harmed and could result in further material
misstatements in its financial statements. Inferior controls and
procedures or the identification of additional accounting errors
could cause the Companys investors to lose confidence in
its internal controls and in its reported financial information,
which, among other things, could have a negative impact on the
trading price of the Companys stock, and subject the
Company to increased regulatory scrutiny and a higher risk of
stockholder litigation.
Additionally, the Company has incurred significant costs and may
incur substantial costs in the future in connection with
remediation of its internal control weaknesses and ongoing
enhancements to its internal controls, which also has diverted a
significant amount of attention from its management that
otherwise could have been directed toward operations. There can
be no assurances that it will not discover additional instances
of significant deficiencies or material weaknesses in its
internal controls and operations, which could have a further
adverse effect on its financial results.
The
Companys operating results fluctuate from quarter to
quarter, which may cause the value of its stock to
decline.
The Companys quarterly operating results have fluctuated
in the past and may fluctuate in the future as a result of a
variety of factors, many of which are outside of the
Companys control, including:
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timing of the completion of particular projects or orders;
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material reduction, postponement or cancellation of major
projects, or the loss of a major client;
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timing and amount of new business;
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differences in order flows;
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sensitivity to the effects of changing economic conditions on
its clients businesses;
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the strength of the consumer products industry;
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the relative mix of different types of work with differing
margins;
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costs relating to expansion or reduction of operations,
including costs to integrate current and any future acquisitions;
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changes in interest costs, foreign currency exchange rates and
tax rates; and
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costs associated with compliance with legal and regulatory
requirements.
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Because of this, fixed costs that are not in line with revenue
levels may not be detected until late in any given quarter and
operating results could be adversely affected. Due to these
factors or other unanticipated events, the Companys
financial and operating results in any one quarter may not be a
reliable indicator of its future performance.
The
United States Securities and Exchange Commission (the
SEC) investigation may result in significant costs
and expenses, may divert resources and could have a material
adverse effect on the Companys business and results of
operations.
As further described under Item 3 Legal
Proceedings, in March 2009 the Company was advised by the
Staff of the SEC that the SEC had commenced a formal
investigation arising out of the Companys April 2008
restatement of its financial results for 2005, 2006 and the
first three quarters of 2007. The Company has incurred
professional fees and other costs in responding to the
SECs earlier informal inquiry and presently ongoing formal
inquiry and expects to continue to incur professional fees and
other costs in the future, which may be significant, until
resolved.
In addition, the Companys management, board of directors
and employees may need to expend a substantial amount of time in
addressing the SECs investigation, which could divert a
significant amount of resources and attention that would
otherwise be directed toward operations, all of which could
materially adversely affect its business and results of
operations. Further, if the SEC were to conclude that
enforcement action is appropriate, the Company
and/or its
current or former officers and directors could be sanctioned or
required to pay significant civil penalties and fines. Any of
these events could have a material adverse effect on the
Companys business and results of operations.
Impairment
charges have had and could continue to have a material adverse
effect on the Companys financial results.
The Company has recorded a significant amount of goodwill and
other identifiable intangible assets, primarily customer
relationships. Goodwill and other identifiable intangible assets
were approximately $225 million as of December 31,
2009, or approximately 54 percent of total assets.
Goodwill, which represents the excess of cost over the fair
value of the net assets of the businesses acquired, was
approximately $188 million as of December 31, 2009, or
45 percent of total assets. Goodwill and other identifiable
intangible assets are recorded at fair value on the date of
acquisition and, in accordance with the Intangibles
Goodwill and Other Topic of the Codification (ASC 350), are
reviewed at least annually for impairment. For the fiscal year
ended December 31, 2008, the Company recorded
$48.0 million of impairment charges related to goodwill.
Future events may occur that could adversely affect the value of
the Companys assets and require additional impairment
charges. Such events may include, but are not limited to,
strategic decisions made in response to changes in economic and
competitive conditions, the impact of a deteriorating economic
environment and decreases in the Companys market
capitalization due to a decline in the trading price of the
Companys common stock. Circumstances and conditions that
gave rise to charges in 2008 could occur again in the future,
which may create a need to record additional impairment
adjustments that could have a material adverse affect on the
Companys financial results.
16
Currency
exchange rate fluctuations could have an adverse effect on the
Companys revenue, cash flows and financial
results.
For the fiscal year ended December 31, 2009, consolidated
net sales from operations outside the United States were
approximately $137 million, which represented approximately
28 percent of consolidated net sales. Because the Company
conducts a significant portion of its business outside the
United States, it faces exposure to adverse movements in foreign
currency exchange rates. Currency exchange rates fluctuate in
response to, among other things, changes in local, regional or
global economic conditions, changes in monetary or trade
policies and unexpected changes in regulatory environments.
Fluctuations in currency exchange rates may affect the
Companys operating performance by impacting revenues and
expenses outside of the United States due to fluctuations in
currencies other than the U.S. dollar or where the Company
translates into U.S. dollars for financial reporting
purposes the assets and liabilities of its foreign operations
conducted in local currencies. A weakened U.S. dollar will
increase the cost of local operating expenses to the extent that
the Company must purchase components in foreign currencies,
while an increase in the value of the dollar could increase the
real cost to its clients outside the United States where the
Company sells services in U.S. dollars. Accordingly, the
Companys financial results could ultimately be materially
adversely affected by fluctuations in foreign currency exchange
rates.
The
Companys foreign operations are subject to political,
investment, currency, regulatory and other risks that could
hinder it from transferring funds out of a foreign country,
delay its debt service payments, cause its operating costs to
increase and adversely affect its results of
operations.
The Companys foreign operations have expanded
significantly as a result of its acquisition of Winnetts in
December 2004 and its acquisition of Seven in January 2005. The
Company presently operates in fourteen countries in North
America, Europe and Asia and intends to continue expanding its
global operations. As a result, the Company is subject to
various risks associated with operating in foreign countries,
such as:
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local economic and market conditions;
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political, social and economic instability;
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war, civil disturbance or acts of terrorism;
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taking of property by nationalization or expropriation without
fair compensation;
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adverse or unexpected changes in government policies and
regulations;
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imposition of limitations on conversions of foreign currencies
into U. S. dollars or remittance of dividends and other
payments by foreign subsidiaries;
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imposition or increase of withholding and other taxes on
remittances and other payments by foreign subsidiaries;
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rapidly rising inflation in certain foreign countries; and
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impositions or increase of investment and other restrictions or
requirements by foreign governments.
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These and other risks could disrupt the Companys
operations or force it to incur unanticipated costs and have an
adverse effect on its ability to make payments on its debt
obligations.
Certain
Schawk family members and affiliated trusts collectively own a
significant interest in the Company and may collectively
exercise their control in a manner that may be adverse to your
interests.
Certain members of the Schawk family and certain Schawk family
trusts collectively control a majority of the outstanding voting
power of the Company. Therefore, the Schawk family has the power
in most cases to determine the outcome of any matter that is
required to be submitted to stockholders for approval, including
the election of all the Companys directors. Clarence W.
Schawk and David A. Schawk, members of the Schawk family, also
serve on the board of directors of the Company. Accordingly, it
is possible that members of the Schawk family could influence or
exercise their control over the Company in a manner that may be
adverse to your interests.
17
In addition, as a result of the Schawk familys controlling
interest, as permitted under the corporate governance rules of
the New York Stock Exchange (NYSE), the Company has
elected controlled company status under those rules.
As a controlled company, the Company may rely on exemptions from
certain NYSE corporate governance requirements that otherwise
would be applicable to a NYSE-listed company, including the
requirements that (1) a majority of the board of directors
consist of independent directors and (2) the Company have a
separate nominating and corporate governance committee and a
separate compensation committee, in each case composed entirely
of independent directors and operating pursuant to written
charters. The Company has relied on the controlled company
exemption in the past and intends to continue to rely on it in
the future. As a result, although the Company is listed on the
NYSE, stockholders may not realize the benefits from the
requirements and protections that these corporate governance
rules impose on the significant number of NYSE-listed companies
that do not operate under the controlled company exemption.
The
Company is subject to debt covenants under its debt arrangements
that may restrict its operational flexibility and limit the
Companys ability to take advantage of opportunities for
growth.
As further discussed under Managements Discussion
and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources,
the Companys current credit facility, as well as its
outstanding senior notes, contain covenants that limit the
extent to which it may, among other things, incur additional
indebtedness, make capital expenditures, grant liens on its
assets, increase dividends being paid on its common stock,
repurchase its outstanding shares and make other restricted
payments, sell its assets, make acquisitions or enter into
consolidations or mergers. The credit facility also requires the
Company to maintain specified financial ratios and satisfy
financial condition tests. These ratios, tests and covenants
could restrict the Companys business plans or limit or
prohibit its ability to take actions that the Company believes
would be beneficial to the Company and its stockholders,
including making significant acquisitions as opportunities
arise. Additionally, these ratios, tests and covenants could
place Schawk at a competitive disadvantage to its competitors
who may not be subject to similar restrictions and could limit
the Companys ability to plan for or react to changes in
industry and market conditions.
In the
event the Company fails to comply with the debt covenants under
its debt arrangements, it may not be able to obtain the
necessary amendments or waivers, and its lenders could
accelerate the payment of all outstanding amounts due under
those arrangements.
The Companys ability to meet the financial ratios and
tests contained in its credit facility, its senior notes and
other debt arrangements, and otherwise comply with debt
covenants may be affected by various events, including those
that may be beyond the Companys control. Accordingly, it
may not be able to continue to meet those ratios, tests and
covenants. A significant breach of any of these covenants,
ratios, tests or restrictions, as applicable, could result in an
event of default under the Companys debt arrangements,
which would allow its lenders to declare all amounts outstanding
to be immediately due and payable. If the lenders were to
accelerate the payment of the Companys indebtedness, its
assets may not be sufficient to repay in full the indebtedness
and any other indebtedness that would become due as a result of
any acceleration. Further, as a result of any breach and during
any cure period or negotiations to resolve a breach or expected
breach, the Companys lenders may refuse to make further
loans, which would materially affect its liquidity and results
of operations.
In the event the Company were to fall out of compliance with one
or more of its debt covenants in the future, it may not be
successful in amending its debt arrangements or obtaining
waivers for any such non-compliance. Even if it is successful in
entering into an amendment or waiver, the Company could incur
substantial costs in doing so, its borrowing costs could
increase, and it may be subject to more restrictive covenants
than the covenants under its existing amended debt arrangements.
It is possible that any amendments to the Companys credit
facility or any restructured credit facility could impose
covenants and financial ratios more restrictive than under its
current facilities, and it may not be able to maintain
compliance with those more restrictive covenants and financial
ratios. In that event, the Company would need to seek another
amendment to, or a refinancing of, its debt arrangements. Any of
the foregoing events could have a material adverse impact on the
Companys business and results of operations, and there can
be no assurance that it would be able to obtain the necessary
waivers or amendments on commercially reasonable terms, or at
all.
18
The
loss of key personnel could adversely affect the Companys
current operations and its ability to achieve continued
growth.
The Company is highly dependent upon the continued service and
performance of the its senior management team and other key
employees, in particular David A. Schawk, its President and
Chief Executive Officer, A. Alex Sarkisian, its Chief Operating
Officer, and Timothy J. Cunningham, its Chief Financial Officer.
The loss of any of these officers may significantly delay or
prevent the achievement of the Companys business
objectives.
The Companys continued success also will depend on
retaining the highly skilled employees that are critical to the
continued advancement, development and support of its client
services and ongoing sales and marketing efforts. Any loss of a
significant number of its client service, sales or marketing
professionals could negatively affect its business and
prospects. Although the Company generally has been successful in
its recruiting efforts, it competes for qualified individuals
with companies engaged in its business lines and with other
technology, marketing and manufacturing companies. Accordingly,
the Company may be unable to attract and retain suitably
qualified individuals, and its failure to do so could have an
adverse effect on its ability to implement its business plan.
If, for any reason, these officers or key employees do not
remain with the Company, operations could be adversely affected
until suitable replacements with appropriate experience can be
found.
Work
stoppages and other labor relations matters, such as
multi-employer pension withdrawal obligations, may make it
substantially more difficult or expensive for the Company to
produce its products and services, which could result in
decreased sales or increased costs, either of which would
negatively impact the Companys financial condition and
results of operations.
The Company is subject to risk of work stoppages and other labor
relations matters, as approximately 12 percent of its
employees worldwide are unionized. A prolonged work stoppage or
strike at any one of Schawks principal facilities could
have a negative impact on its business, financial condition or
results of operations. Also, periodic renegotiation of labor
contracts may result in increased costs or charges to the
Company. In addition, future decisions by the Company to reduce
or terminate participation in multi-employer pension plans at
any of its participating facilities may trigger additional
liabilities for partial termination withdrawals under the
multi-employer plans.
The
price for the Companys common stock can be volatile and
unpredictable.
The market price of the Companys common stock can be
volatile and may experience broad fluctuations over short
periods of time. From January 1 through December 31, 2009,
the high and low sales price of its common stock on the New York
Stock Exchange ranged from $5.18 to $13.82, and the
Companys stock price experienced similar volatility in
2008. See the market price information under the caption
Stock Prices under Item 5. Market for the
Registrants Common Stock, Related Stockholder Matters and
Issuer Purchases of Equity Securities. The market price of
the Companys common stock may continue to experience
strong fluctuations due to unexpected events affecting the
Company, variations in its operating results, analysts
earnings estimates or investors expectations concerning
its future results and its business generally, and such
fluctuations may be exacerbated by limited market liquidity as a
significant number of the Companys outstanding shares are
held by the Schawk family. In addition, the market price of its
common stock may fluctuate due to broader market and industry
factors, such as:
|
|
|
|
|
adverse information about, or the operating and stock price
performance of, other companies in the Companys industry
or companies that comprise its client base, such as consumer
products companies;
|
|
|
|
deterioration or adverse changes in general economic conditions;
|
|
|
|
continued high levels of volatility in the stock markets due to,
among other things, disruptions in the capital and credit
markets; and
|
|
|
|
announcements of new clients or service offerings by
Schawks competitors.
|
These and other market and industry factors may seriously harm
the market price of the Companys common stock, regardless
of its actual operating performance.
19
The
Company may be subject to losses that might not be covered in
whole or in part by existing insurance coverage. These uninsured
losses could result in substantial liabilities to the Company
that would negatively impact its financial
condition.
The Company carries comprehensive liability, fire and extended
coverage insurance on all of its facilities, and other
specialized coverages, including errors and omissions coverage,
with policy specifications and insured limits customarily
carried for similar properties and purposes. There are certain
types of risks and losses, however, that generally are not
insured because they are either uninsurable or not economically
insurable. In addition, there are some types of possible events
or losses, such as a substantial monetary judgment stemming from
a product liability claim or recall, that could exceed the
Companys policy limits. Should an uninsured loss or a loss
in excess of insured limits occur, the Company could incur
significant liabilities, and if such loss affects property the
Company owns, the Company could lose capital invested in that
property or the anticipated future revenues derived from the
activities conducted at that property, while remaining liable
for any lease or other financial obligations related to the
property. In addition to substantial financial liabilities, an
uninsured loss or a loss that exceeds the Companys
coverage could adversely affect its ability to replace property
or capital equipment that is destroyed or damaged, and its
productive capacity may diminish.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
As of December 31, 2009, the Company owns or leases the
following office and operating facilities, in the respective
business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square
|
|
Owned/
|
|
|
|
Lease
|
|
|
Location
|
|
Feet
|
|
Leased
|
|
Purpose
|
|
Expiration Date
|
|
Operating Segment
|
|
Atlanta, Georgia
|
|
|
28,705
|
|
|
Leased
|
|
Operating Facility
|
|
March, 2017
|
|
North America
|
Antwerp, Belgium
|
|
|
39,000
|
|
|
Owned
|
|
Operating Facility
|
|
N/A
|
|
Europe
|
Battle Creek, Michigan
|
|
|
7,262
|
|
|
Leased
|
|
Operating Facility
|
|
January, 2014
|
|
North America
|
Bristol, U.K.
|
|
|
9,200
|
|
|
Leased
|
|
Vacant
|
|
September, 2014
|
|
Europe
|
Carlstadt, New Jersey
|
|
|
46,000
|
|
|
Vacant
|
|
Subletting
|
|
February, 2011
|
|
North America
|
Chennai, India
|
|
|
37,000
|
|
|
Leased
|
|
Operating Facility
|
|
October, 2011
|
|
Asia Pacific
|
Chicago, Illinois
|
|
|
68,146
|
|
|
Leased
|
|
Operating Facility
|
|
June, 2012
|
|
North America
|
Chicago, Illinois
|
|
|
42,000
|
|
|
Leased
|
|
Vacant
|
|
June, 2019
|
|
North America
|
Chicago, Illinois
|
|
|
58,800
|
|
|
Leased
|
|
Operating Facility
|
|
September, 2015
|
|
North America
|
Cincinnati, Ohio
|
|
|
74,200
|
|
|
Leased
|
|
Operating Facility
|
|
August, 2014
|
|
North America
|
Cincinnati, Ohio
|
|
|
32,610
|
|
|
Leased
|
|
Operating Facility
|
|
June, 2015
|
|
North America
|
Crystal Lake, Illinois
|
|
|
5,880
|
|
|
Owned
|
|
Vacant
|
|
N/A
|
|
North America
|
Des Plaines, Illinois
|
|
|
18,200
|
|
|
Owned
|
|
Executive Offices
|
|
N/A
|
|
North America
|
Des Plaines, Illinois
|
|
|
54,751
|
|
|
Leased
|
|
Operating Facility
|
|
March, 2010(1)
|
|
North America
|
Dusseldorf, Germany
|
|
|
2,300
|
|
|
Leased
|
|
Operating Facility
|
|
October, 2012
|
|
Europe
|
Hilversum, Netherlands
|
|
|
5,250
|
|
|
Leased
|
|
Operating Facility
|
|
October, 2011
|
|
Europe
|
Kalamazoo, Michigan
|
|
|
67,000
|
|
|
Owned
|
|
Operating Facility
|
|
N/A
|
|
North America
|
Leeds, U.K.
|
|
|
16,200
|
|
|
Leased
|
|
Operating Facility
|
|
January, 2010
|
|
Europe
|
Leeds, U.K.
|
|
|
4,400
|
|
|
Leased
|
|
Operating Facility
|
|
December, 2013
|
|
Europe
|
London, U.K.
|
|
|
42,700
|
|
|
Leased
|
|
Operating Facility
|
|
March, 2015
|
|
Europe
|
London, U.K.
|
|
|
3,500
|
|
|
Leased
|
|
Operating Facility
|
|
June, 2010
|
|
Europe
|
Los Angeles, California
|
|
|
100,500
|
|
|
Owned
|
|
Operating Facility
|
|
N/A
|
|
North America
|
Manchester, U.K.
|
|
|
45,200
|
|
|
Leased
|
|
Operating Facility
|
|
September, 2023
|
|
Europe
|
Meerhout, Belgium
|
|
|
5,900
|
|
|
Leased
|
|
Operating Facility
|
|
July, 2010
|
|
Europe
|
Minneapolis, Minnesota
|
|
|
31,000
|
|
|
Owned
|
|
Operating Facility
|
|
N/A
|
|
North America
|
Mississauga, Canada
|
|
|
58,000
|
|
|
Leased
|
|
Operating Facility
|
|
December, 2014
|
|
North America
|
Mt. Olive, New Jersey
|
|
|
12,904
|
|
|
Leased
|
|
Operating Facility
|
|
August, 2012
|
|
North America
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square
|
|
Owned/
|
|
|
|
Lease
|
|
|
Location
|
|
Feet
|
|
Leased
|
|
Purpose
|
|
Expiration Date
|
|
Operating Segment
|
|
North Ryde, Australia
|
|
|
13,900
|
|
|
Leased
|
|
Operating Facility
|
|
May, 2011
|
|
Asia Pacific
|
New Berlin, Wisconsin
|
|
|
43,000
|
|
|
Leased
|
|
Operating Facility
|
|
June, 2013
|
|
North America
|
New York, New York
|
|
|
52,500
|
|
|
Leased
|
|
Subletting
|
|
December, 2012
|
|
North America
|
New York, New York
|
|
|
8,000
|
|
|
Leased
|
|
Subletting
|
|
December, 2010
|
|
North America
|
New York, New York
|
|
|
15,000
|
|
|
Leased
|
|
Operating Facility
|
|
Month-to-month
|
|
North America
|
New York, New York
|
|
|
5,000
|
|
|
Leased
|
|
Operating Facility
|
|
April, 2010
|
|
North America
|
Newcastle, U.K.
|
|
|
17,000
|
|
|
Leased
|
|
Operating Facility
|
|
September, 2010
|
|
Europe
|
Penang, Malaysia
|
|
|
38,000
|
|
|
Owned
|
|
Operating Facility
|
|
N/A
|
|
Asia Pacific
|
Plano, Texas
|
|
|
12,287
|
|
|
Leased
|
|
Subletting
|
|
December, 2011
|
|
North America
|
Queretaro, Mexico
|
|
|
18,000
|
|
|
Owned
|
|
Operating Facility
|
|
N/A
|
|
North America
|
Redmond, Washington
|
|
|
24,236
|
|
|
Leased
|
|
Operating Facility
|
|
April, 2017
|
|
North America
|
Roseville, Minnesota
|
|
|
28,000
|
|
|
Leased
|
|
Operating Facility
|
|
May, 2011
|
|
North America
|
San Francisco, California
|
|
|
20,141
|
|
|
Leased
|
|
Operating Facility
|
|
August, 2013
|
|
North America
|
San Francisco, California
|
|
|
13,530
|
|
|
Leased
|
|
Operating Facility
|
|
October, 2014
|
|
North America
|
Shanghai, China
|
|
|
19,400
|
|
|
Leased
|
|
Operating Facility
|
|
November, 2011
|
|
Asia Pacific
|
Shenzhen, China
|
|
|
7,100
|
|
|
Leased
|
|
Operating Facility
|
|
December, 2010
|
|
Asia Pacific
|
Shenzhen, China
|
|
|
11,300
|
|
|
Leased
|
|
Operating Facility
|
|
July, 2010
|
|
Asia Pacific
|
Singapore
|
|
|
7,750
|
|
|
Leased
|
|
Operating Facility
|
|
August, 2010
|
|
Asia Pacific
|
Stamford, Connecticut
|
|
|
20,000
|
|
|
Leased
|
|
Operating Facility
|
|
August, 2010
|
|
North America
|
Sterling Heights, Michigan
|
|
|
26,400
|
|
|
Leased
|
|
Operating Facility
|
|
December, 2012
|
|
North America
|
Surry Hills, Australia
|
|
|
3,900
|
|
|
Leased
|
|
Operating Facility
|
|
June, 2010
|
|
Asia Pacific
|
Swindon, U.K.
|
|
|
39,000
|
|
|
Leased
|
|
Subletting
|
|
September, 2018
|
|
Europe
|
Tokyo, Japan
|
|
|
900
|
|
|
Vacant
|
|
Operating Facility
|
|
April, 2010
|
|
Asia Pacific
|
Tokyo, Japan
|
|
|
1,884
|
|
|
Leased
|
|
Operating Facility
|
|
April, 2012
|
|
Asia Pacific
|
Toronto, Ontario, Canada
|
|
|
8,300
|
|
|
Leased
|
|
Operating Facility
|
|
January, 2010
|
|
North America
|
Toronto, Ontario, Canada
|
|
|
17,500
|
|
|
Leased
|
|
Operating Facility
|
|
November, 2011
|
|
North America
|
Toronto, Ontario, Canada
|
|
|
13,604
|
|
|
Leased
|
|
Operating Facility
|
|
February, 2013
|
|
North America
|
York, U.K.
|
|
|
8,440
|
|
|
Leased
|
|
Operating Facility
|
|
December, 2010
|
|
Europe
|
|
|
|
(1) |
|
The Company and the lessor of this property expect to enter into
a new lease for this property on or prior to March 31, 2010
with a lease expiration date of March, 2015. |
|
|
Item 3.
|
Legal
Proceedings
|
On January 31, 2005, the Company acquired 100 percent
of the outstanding stock of Seven Worldwide (Seven).
The stock purchase agreement entered into by the Company with
Kohlberg & Company, L.L.C. (Kohlberg) to
acquire Seven provided for a payment of $10.0 million into
an escrow account. The escrow was established to insure that
funds were available to pay Schawk any indemnity claims it may
have under the stock purchase agreement.
During 2006, Kohlberg filed a Declaratory Judgment Complaint in
the state of New York seeking the release of the
$10.0 million held in escrow. The Company filed a
cross-motion for summary judgment asserting that it has valid
claims against the amounts held in escrow and that, as a result,
such funds should not be released to Kohlberg, but rather paid
out to the Company. Kohlberg denied that it has any indemnity
obligations to the Company. On April 9, 2009, the court
entered an order denying both parties cross-motions for
summary judgment. As of June 30, 2009, the Company had a
receivable from Kohlberg on its Consolidated Balance Sheets in
the amount of $4.2 million, for a Seven Worldwide Delaware
unclaimed property liability settlement and certain other tax
settlements paid by the Company for pre-acquisition tax
liabilities and related professional fees. In addition, in
February 2008, the Company paid $6.0 million in settlement
of Internal Revenue Service audits of Seven Worldwide, Inc.,
that had been accrued as of the acquisition date for the
pre-acquisition years of 1996 to 2003.
21
On September 8, 2009, a settlement was reached between the
Company and Kohlberg with respect to the funds held in escrow,
whereby the escrow agent was directed to disperse an escrow
amount of $9.2 million to the account of the Company and
the remainder of the escrow amount to be paid to the account of
Kohlberg. Upon disbursement of such funds in September 2009, the
escrow account terminated. The disbursement of the escrow amount
resolved all disputes between the Company and Kohlberg
concerning the disposition of the escrowed funds.
The Company accounted for the $9.2 million escrow account
distribution as a reduction of the $4.2 million balance in
the account receivable outstanding from Kohlberg and recorded
the remaining $5.0 million as income on the Indemnity
settlement income line on the December 31, 2009
Consolidated Statements of Operations.
The United States Securities and Exchange Commission (the
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 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.
In addition, from time to time, the Company has been a party to
routine pending or threatened legal proceedings and
arbitrations. The Company insures some, but not all, of its
exposure with respect to such proceedings. Based upon
information presently available, and in light of legal and other
defenses available to the Company, management does not consider
the liability from any threatened or pending litigation to be
material to the Company. The Company has not experienced any
significant environmental problems.
PART II
|
|
Item 5.
|
Market
for the Registrants Common Stock, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
Stock
Prices
The Companys Class A common stock is listed on the
New York Stock Exchange under the symbol SGK. The
Company had approximately 994 stockholders of record as of
February 24, 2010.
Set forth below are the high and low sales prices for the
Companys Class A common stock for each quarterly
period within the two most recent fiscal years.
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
2009 High/Low
|
|
2008 High/Low
|
|
March 31
|
|
$
|
11.75 5.18
|
|
|
$
|
16.70 12.79
|
|
June 30
|
|
|
8.38 5.92
|
|
|
|
17.49 11.88
|
|
September 30
|
|
|
12.82 6.44
|
|
|
|
18.61 9.92
|
|
December 31
|
|
|
13.82 9.38
|
|
|
|
15.11 10.25
|
|
Dividends
Declared Per Class A Common Share
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
2009
|
|
|
2008
|
|
|
March 31
|
|
$
|
0.0325
|
|
|
$
|
0.0325
|
|
June 30
|
|
|
0.0100
|
|
|
|
0.0325
|
|
September 30
|
|
|
0.0100
|
|
|
|
0.0325
|
|
December 31
|
|
|
0.0100
|
|
|
|
0.0325
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.0625
|
|
|
$
|
0.1300
|
|
|
|
|
|
|
|
|
|
|
22
In June 2009, the Company entered into certain amendments to its
debt agreements that, among other things, restricted dividends
to a maximum of $0.3 million per quarter. The lenders
waived this restriction for the dividend declared in the first
quarter of 2009. In January 2010, the Company entered into an
amended and restated credit agreement with its lenders. The
financial covenants in the amended and restated credit agreement
do not specifically restrict future dividend payments; however,
dividend payments are included in restricted payments, along
with stock repurchases and certain other payments, for which
there is a $5.0 million annual limitation. For the first
quarter of 2010, the Company increased its quarterly dividend to
$0.04 per share, or approximately $1.0 million per quarter,
and, subject to declarations at the discretion of the Board of
Directors, expects quarterly dividends at this rate to continue
throughout 2010.
The graph below compares the cumulative total shareholder return
on the Companys common stock for the last five fiscal
years with (i) the cumulative total return of the Russell
2000 Index, a broad market index for small cap stocks,
(ii) a peer group of four companies: Bemis Inc.,
Bowne & Co., Matthews International Corp., and
Multi-Color Corp. (the Peer Group Index), and
(iii) the Morgan Stanley Consumer Index, an index designed
to measure the performance of consumer-oriented, stable growth
industries.
For 2009 and subsequent years, the Company is replacing the Peer
Group Index with the Morgan Stanley Consumer Index. The Morgan
Stanley Consumer Index measures the performance of
30 companies in consumer-oriented, stable growth
industries, a number of which are presently Schawk clients, and
is representative of the Companys diversified client base
in the food and beverage, pharmaceutical, tobacco, and personal
product industries.
The Company believes the Peer Group Index is no longer
representative of Schawks line of business due to the Peer
Group Index component companies principal emphasis on
printing and product manufacturing, such as memorialization
products, labels, packaging products and related materials.
Comparison
of 5 Year Cumulative Total Return
Assumes Initial Investment of $100*
|
|
|
* |
|
Assumes $100 invested at the close of trading December 31,
2004 in Schawk, Inc. common stock, Russell 2000 Index, the Peer
Group Index, and the Morgan Stanley Consumer Index. Cumulative
total return assumes reinvestment of dividends. |
23
Equity
Compensation Plan Information
The following table summarizes information as of
December 31, 2009, relating to equity compensation plans of
the Company pursuant to which Common Stock is authorized for
issuance (shares in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available
|
|
|
|
|
|
|
|
|
|
for Future Issuance
|
|
|
|
Number of Securities
|
|
|
|
|
|
Under Equity
|
|
|
|
to be Issued Upon
|
|
|
Weighted-Average
|
|
|
Compensation Plans
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
(Excluding Shares
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Reflected in the First
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Column)
|
|
|
Equity compensation plans approved by security holders
|
|
|
2,505
|
|
|
$
|
12.81
|
|
|
|
1,377
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,505
|
|
|
$
|
12.81
|
|
|
|
1,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of Equity Securities by the Company
In December of 2008, the Companys Board of Directors
authorized the repurchase of up to two million shares of its
common stock during 2009. During the first quarter of 2009, the
Company repurchased 488,700 shares, before discontinuing
the share repurchase program 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, although no shares had been tendered during
2009. The Company records the receipt of common stock in payment
for stock options exercised as a purchase of treasury stock.
The following table summarizes the shares repurchased by the
Company during 2009 (shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No. Shares
|
|
|
|
|
|
|
|
|
|
Avg.
|
|
|
Purchased as
|
|
|
|
|
|
|
Total No.
|
|
|
Price
|
|
|
Part of Publicly
|
|
|
Dollar Value of Shares
|
|
|
|
Shares
|
|
|
Paid Per
|
|
|
Announced
|
|
|
that may be Purchased
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Program
|
|
|
Under Program
|
|
|
January
|
|
|
199
|
|
|
$
|
9.47
|
|
|
|
199
|
|
|
|
NA
|
|
February
|
|
|
190
|
|
|
$
|
8.41
|
|
|
|
190
|
|
|
|
NA
|
|
March
|
|
|
100
|
|
|
$
|
7.82
|
|
|
|
100
|
|
|
|
NA
|
|
4/1 - 6/30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/1 - 9/30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/1 - 12/31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Total
|
|
|
489
|
|
|
$
|
8.72
|
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
Item 6.
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006(1)
|
|
2005(2)
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
Consolidated Statement of Operations Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
452,446
|
|
|
$
|
494,184
|
|
|
$
|
544,409
|
|
|
$
|
546,118
|
|
|
$
|
565,485
|
|
Operating income (loss)
|
|
$
|
35,784
|
|
|
$
|
(56,555
|
)
|
|
$
|
60,173
|
|
|
$
|
54,912
|
|
|
$
|
53,562
|
|
Income (loss) from continuing operations
|
|
$
|
19,497
|
|
|
$
|
(60,006
|
)
|
|
$
|
30,598
|
|
|
$
|
25,949
|
|
|
$
|
28,522
|
|
Earnings (loss) per common share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.78
|
|
|
$
|
(2.24
|
)
|
|
$
|
1.14
|
|
|
$
|
0.98
|
|
|
$
|
1.12
|
|
Diluted
|
|
$
|
0.78
|
|
|
$
|
(2.24
|
)
|
|
$
|
1.10
|
|
|
$
|
0.95
|
|
|
$
|
1.06
|
|
Consolidated Balance Sheet Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
416,219
|
|
|
$
|
440,353
|
|
|
$
|
534,987
|
|
|
$
|
530,760
|
|
|
$
|
552,611
|
|
Long-term debt
|
|
$
|
64,707
|
|
|
$
|
112,264
|
|
|
$
|
105,942
|
|
|
$
|
140,763
|
|
|
$
|
169,579
|
|
Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share
|
|
$
|
0.0625
|
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
|
|
(1) |
|
Consolidated Statement of Operations and Balance Sheet
Information was impacted by the disposition of the Book and
Catalogue operations on February 28, 2006. This disposition
impacts the information presented above for years 2006 and 2005. |
|
(2) |
|
Consolidated Statement of Operations and Consolidated Balance
Sheet Information was impacted by the acquisition of Seven on
January 31, 2005 and the acquisition of Winnetts on
December 31, 2004. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
(Thousands of dollars, except per share amounts)
Cautionary
Statement Regarding Forward-Looking Information
Certain statements contained herein and in Item 1.
Business 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; the discovery of new internal
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
25
Exchange Commission. The Company assumes no obligation to update
publicly any of these statements in light of future events.
Executive
overview
Marketing, promotional and advertising spending by consumer
products companies and retailers drives a majority of the
Companys revenues. The markets served are primarily
consumer products, pharmaceutical, entertainment and retail. The
Companys business in this area involves producing graphic
images for various applications. Generally, the Company or a
third party creates an image and then the image is manipulated
to enhance the color and to prepare it for print. The
applications vary from consumer product packaging, including
food and beverage packaging images, to retail advertisements in
newspapers, including freestanding inserts (FSIs),
magazine ads and the Internet. The graphics process is generally
the same regardless of the application. The following steps in
the graphics process must take place to produce a final image:
|
|
|
|
|
Strategic Analysis
|
|
|
|
Planning and Messaging
|
|
|
|
Conceptual Design
|
|
|
|
Content Creation
|
|
|
|
File Building
|
|
|
|
Retouching
|
|
|
|
Art Production
|
|
|
|
Pre-Media
|
The Companys involvement in a client project may involve
many of the above steps or just one of the steps, depending on
the clients needs. Each client assignment, or
job, is a custom job in that the image being
produced is unique, even if it only involves a small change from
an existing image, such as adding a low fat banner
on a food package. Essentially, such changes equal new revenue
for Schawk. The Company is paid for its graphic imaging work
regardless of the success or failure of the food product, the
promotion or the ad campaign.
Historically, a substantial majority of the Companys
revenues have been derived from providing graphic services for
consumer product packaging applications. Packaging changes occur
with regular frequency and lack of notice, and client
turn-around requirements are tight, thereby creating little
backlog. There are regular promotions throughout the year that
create revenue opportunities for the Company, such as:
Valentines Day, Easter, Fourth of July,
Back-to-School,
Halloween, Thanksgiving and Christmas. In addition, there are
event-driven promotions that occur regularly, such as the Super
Bowl, Grammy Awards, World Series, Indianapolis 500 and the
Olympics. Additionally, changing regulatory requirements
necessitate new packaging and a high degree of documentation.
Lastly, there are a number of health related banners
that are added to food and beverage packaging, such as
heart healthy, low in carbohydrates,
enriched with essential vitamins, low in
saturated fat and caffeine free. All of these
items require new product packaging designs or changes in
existing designs, in each case creating additional opportunities
for revenue. Graphic services for the consumer products
packaging industry generally involve higher margins due to the
substantial expertise necessary to meet consumer products
companies precise specifications and to quickly,
consistently and efficiently bring their products to market, as
well as due to the complexity and variety of packaging
materials, shapes and sizes, custom colors and storage
conditions.
Through several acquisitions, the Company has increased the
percentage of its revenue derived from providing graphics
services to advertising and retail clients and added to its
service offering graphic services to the entertainment market.
These clients typically require high volume, commodity-oriented
premedia graphic services. Graphic services for these clients
typically yield relatively lower margins due to the lower degree
of complexity in providing such services, and the number and
size of companies in the industry capable of providing such
services.
In 2009, approximately 9 percent of the Companys
total revenues came from its largest single client. While the
Company seeks to build long-term client relationships, revenues
from any particular client can fluctuate from
26
period to period due to the clients purchasing patterns.
Any termination of or significant reduction in the Company
business relationship with any of its principal clients could
have a material adverse effect on its business, financial
condition and results of operations.
Recent
Acquisitions
The Company has grown its business through a combination of
internal growth and acquisitions. Schawk has completed
approximately 57 acquisitions since 1965. The Companys
recent acquisitions have significantly expanded its service
offerings and its geographic presence, making us the only
independent premedia firm with substantial operations in North
America, Europe, Asia and Australia. As a result of these
acquisitions, the Company is able to offer a broader range of
services to its clients. Its expanded geographic presence also
allows us to better serve its multinational clients
demands for global brand consistency.
Brandmark International Holding B.V. Effective
December 31, 2008, the Company acquired 100 percent of
the outstanding stock of Brandmark International Holding B.V., 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 of Brandmark are included in the
Consolidated Financial Statements as of December 31, 2008,
in the Europe operating segment. The purchase price was
$10.5 million and may be increased by up to
$0.7 million if a specified target of earnings before
interest and taxes is achieved for the fiscal year ended
March 31, 2009. At year-end 2009, the Company believes the
additional purchase price adjustment will be minimal and expects
to settle with the former owners in early 2010.
Marque Brand Consultants Pty Ltd. Effective
May 31, 2008, the Company acquired 100 percent of the
outstanding stock of Marque Brand Consultants Pty Ltd, an
Australia-based brand strategy and creative design firm that
provides services to consumer products companies. The net assets
and results of operations of Marque are included in the
Consolidated Financial Statements in the Asia Pacific operating
segment beginning June 1, 2008. The purchase price was
$2.5 million and is subject to adjustment if certain
thresholds of net sales and earnings before interest and taxes
are exceeded for calendar years 2008 and 2009. The Company paid
$235 as a purchase price adjustment for the year ended
December 31, 2008 and has accrued an estimate of $447 for a
purchase price adjustment for the year ended December 31,
2009, that it expects to settle in 2010.
Protopak Innovations, Inc. On
September 1, 2007, the Company acquired Protopak
Innovations, Inc., a Toronto, Canada-based company that produces
prototypes and samples for the packaging industry. The
acquisition price was $12.1 million. The price is subject
to adjustment if certain thresholds of earnings before interest
and taxes are achieved for the fiscal years ending
September 30, 2008, 2009 and 2010. Because the earnings
threshold was exceeded for the fiscal year ended
September 30, 2008, the Company paid a $0.7 million
purchase price adjustment and allocated the additional purchase
price to goodwill. There was no purchase price adjustment for
the year ended September 30, 2009 because the earnings
threshold was not achieved. The Company currently believes that
the earnout for the year ending September 30, 2010, if any,
will be immaterial to its balance sheet and cash flow. The net
assets and results of operations are included in the
Consolidated Financial Statements beginning September, 1 2007
and are included in the North America operating segment.
Perks Design Partners Pty Ltd. On
August 1, 2007, the Company acquired Perks Design Partners
Pty Ltd., an Australia-based brand strategy and creative design
firm that provides services to consumer products companies. The
acquisition price was $3.3 million. The net assets and
results of operations are included in the Consolidated Financial
Statements beginning August 1, 2007 and are included in the
Asia Pacific operating segment.
Benchmark Marketing Services, LLC. On
May 31, 2007, the Company acquired the operating assets of
Benchmark Marketing Services, LLC, a Cincinnati, Ohio-based
creative design agency that provides services to consumer
product companies. The acquisition price was $5.8 million,
subject to adjustment if certain thresholds of sales are
achieved for the fiscal years ended May 31, 2008 and 2009.
No purchase price adjustment was recorded for either fiscal year
because the sales targets were not achieved. In addition, the
Company recorded a reserve of $0.7 million for the
estimated expenses associated with vacating the leased premises
that Benchmark formerly occupied. Based on an integration plan
formulated at the time of the acquisition, it was determined
that the Benchmark operations would be merged with the
Companys existing Anthem Cincinnati operations. The Anthem
Cincinnati facility was expanded and upgraded to accommodate the
combined operations and Benchmark relocated
27
to the Anthem Cincinnati facility in the fourth quarter of 2008.
The net assets and results of operations are included in the
Consolidated Financial Statements beginning June 1, 2007
and are included in the North America operating segment.
Schawk India, Ltd. On August 1, 2007, the
Company acquired the remaining 10 percent of the
outstanding stock of Schawk India, Ltd from the minority
shareholders for $0.5 million. The Company had previously
acquired 50 percent of a company currently known as Schawk
India, Ltd. in February 2005 as part of its acquisition of Seven
Worldwide, Inc. On July 1, 2006, the Company increased its
ownership of Schawk India, Ltd. to 90 percent. Schawk
India, Ltd. provides artwork management, premedia and print
management services.
WBK, Inc. On July 1, 2006, the Company
acquired the operating assets of WBK, Inc., a Cincinnati,
Ohio-based design agency that provides services to retailers and
consumer products companies. This operating unit is now known as
Anthem Cincinnati. The acquisition price was $4.9 million,
subject to adjustment if certain thresholds of sales and
earnings before interest, taxes, depreciation and amortization
are achieved for calendar years 2006 through 2008 and for the
six-month period ended June 30, 2009. No earnout was due
for 2006 because the sales and earnings threshold were not met.
During 2008, the Company paid $0.9 million to the former
owner of WBK as a result of achieving the sales and earnings
thresholds in 2007 and allocated the additional purchase price
to goodwill. No earn-out was due for the year 2008 or for the
six-moth period ended June 30, 2009 because the sales and
earnings targets were not achieved.
Anthem York. In January 2006, the Company
acquired certain operating assets of the internal design agency
operation of Nestle UK and entered into a design services
agreement with this client. This operation is known as Anthem
York. The acquisition price was $2.2 million.
Seven Worldwide, Inc. On January 31,
2005, the Company acquired Seven Worldwide, Inc.
(Seven), a graphic services company with operations
in 40 locations in the United States, Europe, Australia and
India. The purchase price of $210.6 million consisted of
$135.6 million paid in cash at closing, $4.5 million
of acquisition-related professional fees and the issuance of
four million shares of common stock with a value of
$70.5 million. Seven Worldwide Inc.s results of
operations are included in the consolidated financial statements
beginning January 31, 2005.
The stock purchase agreement entered into by the Company with
Kohlberg & Company, L.L.C. (Kohlberg) to
acquire Seven provided for a payment of $10.0 million into
an escrow account. The escrow was established to insure that
funds were available to pay Schawk any indemnity claims it may
have under the stock purchase agreement. During 2006, Kohlberg
filed a Declaratory Judgment Complaint in the state of New York
seeking the release of the $10.0 million held in escrow. On
September 8, 2009, a settlement was reached between the
Company and Kohlberg with respect to the funds held in escrow,
whereby the escrow agent was directed to disperse an escrow
amount of $9.2 million to the account of the Company and
the remainder of the escrow amount to be paid to the account of
Kohlberg. Upon disbursement of such funds in September 2009, the
escrow account terminated. The Company accounted for the
$9.2 million escrow account distribution as a reduction of
the $4.2 million balance in the account receivable
outstanding from Kohlberg and recorded the remaining
$5.0 million as income on the Indemnity settlement income
line on the December 31, 2009 Consolidated Statements of
Operations.
Winnetts. On December 31, 2004, the
Company acquired certain assets and the business of Weir
Holdings, Ltd., known as Winnetts, a UK based
graphic services company with operations in six locations in the
UK, Belgium and Spain. The acquisition price was
$23.3 million. Winnetts was the Companys first
operation in Europe. The two largest graphics business
acquisitions in the Companys history were Seven and
Winnetts. The principal objective in acquiring Winnetts and
Seven was to expand the Companys geographic presence and
its service offering. This expansion enabled it to provide a
more comprehensive level of customer service, to build a broader
platform from which to grow its business and continue to pursue
greater operating efficiencies.
The Company began work on a consolidation plan before the
acquisitions of Seven and Winnetts were finalized, recording a
combined exit reserve of approximately $15.3 million based
on the plan. The major expenses included in the exit reserve
were severance pay for employees of acquired facilities that
were merged with existing Schawk operations and lease
termination expenses. The Company made payments of approximately
$0.8 million in 2009 for lease termination expenses and
anticipates making future payments of approximately
$2.4 million. (See
28
Note 2 Acquisitions to the Consolidated
Financial Statements for further discussion). The Company
realized significant synergies and reduced operating costs from
the closing of nine US and UK operating facilities and the
downsizing of several other operating facilities in 2005 and
early 2006 and the elimination of the Seven corporate
headquarters in New York City.
Financial
Results Overview
Net sales declined $41.7 million or 8.4 percent for
the year ended December 31, 2009 to $452.4 million
from $494.2 million in 2008. For the year ended
December 31, 2009, net income was $19.5 million or
$0.78 per fully diluted share, as compared to a net loss of
$60.0 million or $2.24 per fully diluted share for 2008.
The Company experienced an 11.9 percent net sales increase
in the fourth quarter of 2009 as compared to the fourth quarter
of 2008. Through the nine month period ended September 30,
2009, the Company had experienced a 14.2 percent decline in
net sales as compared to the prior year period. For the full
year of 2009, sales declined in the North America operating
segment by 8.1 percent and in the Europe operating segment
by 5.1 percent, while sales increased in the Asia Pacific
operating segment by 2.5 percent.
Gross profit increased by $6.7 million or 4.1 percent
in 2009 to $171.1 million from $164.4 million in 2008.
The increase in gross profit percentage occurred in all
reportable segments as follows: North America increased by
$3.7 million or 2.8 percent, Asia Pacific increased by
$1.1 million or 8.2 percent and Europe increased by
$1.9 million or 9.8 percent. The improvement in gross
profit in 2009 over the previous year is mainly due to the
Companys cost reduction and capacity utilization efforts.
Selling, general and administrative expenses decreased
$18.0 million, or 12.1 percent, in 2009 to
$130.6 million from $148.6 million in 2008, primarily
as a result of the Companys cost reduction program. The
Company also had reduced expenses in 2009, compared to similar
expenses recorded in the prior year, as follows: impairment of
goodwill in 2008 of $48.0 million not repeated in 2009;
restructuring expenses associated with the Companys cost
reductions activities of $6.5 million in 2009 compared to
$10.4 million in 2008; pension withdrawal expenses of
$1.8 million in 2009 compared to $7.3 million in 2008;
and impairment of long lived assets of $1.4 million in 2009
compared to $6.6 million in 2008 In addition, the Company
recorded a credit of $5.0 million in 2009 for an indemnity
settlement related to the 2005 acquisition of Seven Worldwide
Holdings Ltd. The decrease in operating expenses
contributed to an operating income of $35.8 million in 2009
as compared to an operating loss of $56.6 million in 2008.
Goodwill
impairment
The Companys intangible assets not subject to amortization
consist entirely of goodwill. The Company performs a goodwill
impairment test annually, or when events or changes in business
circumstances indicate that the carrying value may not be
recoverable. The Company historically performed its annual
impairment test as of December 31; however, in the fourth
quarter of 2008 the Company changed its annual test date to
October 1.
In the third quarter of 2009, the Company restructured its
operations on a geographic basis, in three areas: North America,
Europe and Asia Pacific (see Note 18 Segment
and Geographic Reporting) and allocated goodwill to the new
segments on a relative fair value basis. The Company performed
its 2009 goodwill impairment test as of October 1, 2009,
assigning goodwill to multiple reporting units on a geographic
basis at the operating segment level. Using projections of
operating cash flow for each reporting unit, the Company
performed a step one assessment of the fair value of each
reporting unit as compared to the carrying value of each
reporting unit. The step one impairment analysis indicated no
potential impairment of the assigned goodwill.
Because of a significant decrease in the Companys market
capitalization during the first quarter of 2009, the Company
performed an additional goodwill impairment test as of
March 31, 2009 and determined that goodwill was not
impaired.
The Company performed its 2008 impairment test as of
October 1, 2008. The Company assigned its goodwill to
multiple reporting units, mainly on a geographic basis at a
level below the operating segments. The test indicated that
goodwill assigned to the Companys European and Anthem
reporting units was impaired by $30.7 million and
$17.3 million, respectively, as of October 1, 2008,
which was recorded in the fourth quarter of 2008. With the
29
segment reorganization in the third quarter of 2009, the
impairment of goodwill was reassigned to the new segments as
follows: North America $14.3 million,
Europe $32.7 million and Asia
Pacific $1.0 million. The goodwill impairment
reflected the decline in global economic conditions and general
reduction in consumer and business confidence experienced during
the fourth quarter of 2008.
Cost
reduction and capacity utilization actions
Beginning in the second quarter of 2008 and continuing
throughout 2009, 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 2009 was $6.5 million,
compared to $10.4 million in 2008 and is presented as
Acquisition integration and restructuring expense in the
Consolidated Statements of Operations.
The expense for the years 2008 and 2009 and the cumulative
expense since the cost reduction programs inception was
recorded in the following operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Pacific
|
|
|
Corporate
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
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
|
|
$
|
9.3
|
|
|
$
|
5.0
|
|
|
$
|
1.2
|
|
|
$
|
1.4
|
|
|
$
|
16.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
It is estimated that cost savings resulting from the 2009 cost
reduction actions was approximately $8.9 million for 2009
and will be approximately $15.6 million for 2010. Cost
savings resulting from the 2008 cost reduction actions is
estimated to have been approximately $7.4 million during
2008 and $21.9 million in 2009.
Multiemployer
pension withdrawal expense
As more fully described in Note 14 Employee
Benefit Plans, in the fourth quarter of 2008 the Company decided
to terminate participation in the Supplemental Retirement and
Disability Fund for employees of its Minneapolis, MN and Cherry
Hill, NJ facilities and notified the board of trustees of the
unions pension fund that it would no longer be making
contributions for these facilities to the unions plan. The
Companys decision triggered the assumption of a partial
termination withdrawal liability. The Company recorded a
liability as of December 31, 2008, net of discount, for
$7.3 million to reflect this obligation, which is included
in Other long-term liabilities on the Consolidated Balance
Sheets as of December 31, 2008. At December 31, 2009,
the Company recorded an additional expense of $1.8 million
as a result of updates to the assumptions used in the
termination withdrawal calculation. Because the Company
estimates that this obligation will be paid during 2010, the
$9.2 million total liability is included in Accrued
expenses on the Consolidated Balance Sheets as of
December 31, 2009. The expense for 2008 and 2009 associated
with the pension withdrawal liability is reflected in
Multiemployer pension withdrawal expense on the Consolidated
Statements of Operations.
Impairment
of long lived assets
During 2008, the Company made a decision to sell land and
buildings at three locations and engaged independent appraisers
to assess their fair values. Based on the appraisal reports, the
Company determined that the carrying values of the properties
could not be supported by their estimated fair values. The
combined carrying value of $10.0 million was written down
by $3.5 million at December 31, 2008, based on the
properties estimated fair values less costs to sell of
$6.5 million. The revised carrying value of
$6.5 million was classified as Assets held for sale on the
Consolidated Balance Sheets at December 31, 2008. During
2009, two of the three properties were sold with selling prices
approximately equal to their carrying values, and the Company
reappraised the third property to assess its current value. As a
result of the updated appraisal, the Company recorded a further
write-down of the property in the amount of $1.3 million at
December 31, 2009, which is included in Impairment of
long-lived assets on the Consolidated Statements of Operations.
In addition, the Company reclassified the remaining property
from
30
held for sale to held and used at December 31, 2009,
because the sale of the property during the next twelve months
is unlikely.
Also during 2008, software that had been capitalized by the
Company in accordance with the Internal-Use Software Subtopic of
the Codification, ASC
350-40, was
reviewed for impairment due to changes in circumstances which
indicated that the carrying amount of these assets might not be
recoverable. As a result of these circumstances, the Company
wrote down the capitalized costs of the software to fair value.
The amount of the write-down recorded in 2008 was
$2.3 million.
There were various other impairments recorded in both 2009 and
2008 related to fixed assets and to customer relationship
intangible assets. The total impairment expense recorded was
$1.4 million and $6.6 million for 2009 and 2008,
respectively, and is reflected as Impairment of long-lived
assets on the Consolidated Statements of Operations. See
Note 6 Impairment of Long-lived Assets for
additional information.
Restatement
of Prior Period Financial Statements
As disclosed in the Companys
Form 10-K
for the year ended December 31, 2007, the Company restated
its 2006 and 2005 consolidated financial statements to correct
accounting errors discovered subsequent to the issuance of the
original financial statements and to correct errors that were
discovered during the financial statement audits for the
respective years but which were not recorded because they were
considered at the time of the original financial statement
issuance to be immaterial. In addition, the quarterly results
for 2006 and the first three quarters of 2007 were restated.
Due to the restatements, the United States Securities and
Exchange Commission has been conducting a fact-finding
investigation to determine whether there have been violations of
certain provisions of the federal securities laws. See
Item 3 Legal Proceedings for further
information.
Controls
and Procedures
In connection with managements assessment of the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2009, management has
concluded that its internal control over financial reporting was
effective as of the end of such period. Internal controls
related to three areas that were identified as material
weaknesses for the year-ended December 31, 2008 (revenue
recognition,
work-in-process
inventory and entity-level controls) have been remediated. See
Part II, Item 9A. Controls and Procedures
for a discussion of managements evaluation of the
Companys disclosure controls and procedures,
Managements Report on Internal Control over Financial
Reporting and its remediation activities.
31
Results
of Operations
Consolidated
The following table sets forth certain amounts, ratios and
relationships from the Consolidated Statements of Operations for
the Years Ended December 31, 2009 and 2008:
Schawk,
Inc.
Comparative
Consolidated Statements of Operations
Years
Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
%
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
Change
|
|
|
|
(In thousands)
|
|
|
Net sales
|
|
$
|
452,446
|
|
|
$
|
494,184
|
|
|
$
|
(41,738
|
)
|
|
|
|
(8.4
|
)%
|
Cost of sales
|
|
|
281,372
|
|
|
|
329,814
|
|
|
|
(48,442
|
)
|
|
|
|
(14.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
171,074
|
|
|
|
164,370
|
|
|
|
6,704
|
|
|
|
|
4.1
|
%
|
Gross profit percentage
|
|
|
37.8
|
%
|
|
|
33.3
|
%
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
130,576
|
|
|
|
148,596
|
|
|
|
(18,020
|
)
|
|
|
|
(12.1
|
)%
|
Acquisition integration and restructuring expenses
|
|
|
6,459
|
|
|
|
10,390
|
|
|
|
(3,931
|
)
|
|
|
|
(37.8
|
)%
|
Indemnity settlement income
|
|
|
(4,986
|
)
|
|
|
|
|
|
|
(4,986
|
)
|
|
|
|
nm
|
|
Multiemployer pension withdrawal expense
|
|
|
1,800
|
|
|
|
7,254
|
|
|
|
(5,454
|
)
|
|
|
|
(75.2
|
)%
|
Impairment of long-lived assets
|
|
|
1,441
|
|
|
|
6,644
|
|
|
|
(5,203
|
)
|
|
|
|
(78.3
|
)%
|
Impairment of goodwill
|
|
|
|
|
|
|
48,041
|
|
|
|
(48,041
|
)
|
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
35,784
|
|
|
|
(56,555
|
)
|
|
|
92,339
|
|
|
|
|
nm
|
|
Operating margin percentage
|
|
|
7.9
|
%
|
|
|
(11.4
|
%)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
535
|
|
|
|
291
|
|
|
|
244
|
|
|
|
|
83.8
|
%
|
Interest expense
|
|
|
(9,225
|
)
|
|
|
(6,852
|
)
|
|
|
(2,373
|
)
|
|
|
|
(34.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,690
|
)
|
|
|
(6,561
|
)
|
|
|
(2,129
|
)
|
|
|
|
32.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
27,094
|
|
|
|
(63,116
|
)
|
|
|
90,210
|
|
|
|
|
nm
|
|
Income tax provision (benefit)
|
|
|
7,597
|
|
|
|
(3,110
|
)
|
|
|
10,707
|
|
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
19,497
|
|
|
$
|
(60,006
|
)
|
|
$
|
79,503
|
|
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
28.0
|
%
|
|
|
4.9
|
%
|
|
|
|
|
|
|
|
|
|
Expressed as a percentage of Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
37.8
|
%
|
|
|
33.3
|
%
|
|
|
450
|
|
bpts
|
|
|
|
|
Selling, general and administrative expense
|
|
|
28.9
|
%
|
|
|
30.1
|
%
|
|
|
(120
|
)
|
bpts
|
|
|
|
|
Multiemployer pension withdrawal expense
|
|
|
0.4
|
%
|
|
|
1.5
|
%
|
|
|
(110
|
)
|
bpts
|
|
|
|
|
Impairment of goodwill
|
|
|
|
|
|
|
9.7
|
%
|
|
|
(970
|
)
|
bpts
|
|
|
|
|
Indemnity settlement
|
|
|
(1.1
|
)%
|
|
|
|
|
|
|
(110
|
)
|
bpts
|
|
|
|
|
Acquisition integration and restructuring expenses
|
|
|
1.4
|
%
|
|
|
2.1
|
%
|
|
|
(70
|
)
|
bpts
|
|
|
|
|
Impairment of long-lived assets
|
|
|
0.3
|
%
|
|
|
1.3
|
%
|
|
|
(100
|
)
|
bpts
|
|
|
|
|
Operating margin (loss)
|
|
|
7.9
|
%
|
|
|
(11.4
|
)%
|
|
|
1,930
|
|
bpts
|
|
|
|
|
bpts = basis points
nm = not meaningful
Net sales for the twelve months ended December 31,
2009 were $452.4 million compared to $494.2 million
for the twelve months ended December 31, 2008, a reduction
of $41.7 million, or 8.4 percent. Sales declined by
32
$34.3 million or 8.1 percent in the North America
segment and $3.6 million or 5.1 percent in the Europe
segment. However, sales increased by $0.7 million or
2.5 percent in the Asia Pacific segment. Sales attributable
to acquisitions for the twelve months ended December 31,
2009 compared to the prior year totaled $11.1 million, or
2.5 percent. Excluding acquisitions, revenue would have
declined by $52.8 million, or 10.7 percent, versus the
prior year. Approximately $13.7 million of the sales
decline
period-over-period
was the result of changes in foreign currency translation rates,
as the U.S. dollar increased in value relative to certain
of the local currencies of the Companys foreign
subsidiaries. The
period-over-period
decline in sales primarily reflects the slowdown in the US and
global economies, which started in the latter half of 2008 and
continued throughout 2009. Many of the Companys clients
have delayed packaging redesigns and sales promotion projects,
resulting in lower revenues in 2009 compared to 2008. However,
revenue in the fourth quarter of 2009 increased in comparison to
the fourth quarter of 2008.
Consumer products packaging accounts sales for 2009 were
$318.7 million, or 70.4 percent of total sales, as
compared to $346.7 million in 2008, representing a decline
of 8.1 percent. Advertising and retail accounts sales for
2009 were $89.8 million or 19.8 percent of total sales
as compared to $102.0 million in 2008, representing a
decline of 12.0 percent. Entertainment account sales for
2009 were $32.8 million or 7.2 percent of total sales
as compared to $36.1 million in 2008 representing a decline
of 9.2 percent. In response to adverse economic conditions,
many of the Companys clients maintained reduced levels of
advertising, marketing and new product introductions, as
compared to the comparable prior year period, and, particularly
with respect to the Companys consumer products packaging
accounts, have delayed packaging redesigns and sales promotion
projects, resulting in lower revenue for the Company. However,
consumer products packaging revenue increased in the fourth
quarter of 2009 compared to the fourth quarter of 2008.
Gross profit was $171.1 million, or
37.8 percent of sales, in 2009, an increase of
$6.7 million or 4.1 percent, from $164.4 million,
or 33.3 percent of sales, in 2008. The increase in gross
profit is largely attributable to cost savings related to the
Companys cost reduction efforts. The gross profit in 2009
increased in all reportable segments as compared to prior year.
North America increased by $3.7 million or
2.8 percent, Europe increased by $1.9 million or
9.8 percent and Asia Pacific increased by $1.1 million
or 8.2 percent. Gross profit as a percentage of sales in
2009 improved by 4.5 percent over the previous year.
Selling, general and administrative expenses decreased
$18.0 million or 12.1 percent in 2009 to
$130.6 million from $148.6 million in 2008. The
decrease in selling, general and administrative expenses is
primarily attributable to the decrease in salaries and payroll
costs associated with the Companys cost reduction efforts.
In addition, included in selling, general and administrative
expense are gains of $0.5 million associated with foreign
currency transactions in 2009, compared to foreign currency
losses of $4.3 million in 2008.
Operating income (loss) increased by $92.3 million,
to $35.8 million in 2009, from an operating loss of
$56.6 million in 2008. The operating income percentage was
7.9 percent in 2009 compared to an operating loss of
11.4 percent in 2008. The increase in operating income in
2009 compared to 2008 is due to an improvement in gross profit
and a decrease in selling, general and administrative expenses
as described above, as well as the following expense reductions
in 2009 as compared to similar expenses in 2008: impairment of
goodwill in 2008 of $48.0 million not repeated in 2009;
restructuring expenses associated with the Companys cost
reductions activities of $6.5 million in 2009 vs.
$10.4 million in 2008; pension withdrawal expenses of
$1.8 million in 2009 vs. $7.3 million in 2008; and
impairment of long lived assets of $1.4 million in 2009
compared to $6.6 million in 2008. In addition, the Company
recorded income of $5.0 million in 2009 for an indemnity
settlement related to the 2005 acquisition of Seven Worldwide
Holdings Ltd.
Interest expense for 2009 was $9.2 million compared
to $6.9 million for 2008 an increase of $2.4 million
or 34.6 percent. The higher interest expense in the 2009
period reflects an increase in interest costs attributable to
the Companys June 2009 debt amendments. See
Revolving Credit Facility, Note Purchase Agreement and
Other Debt Arrangements section below for further
information.
Income tax provision (benefit) was at an effective tax
rate of 28.0 percent and 4.9 percent for 2009 and
2008, respectively. The 2009 effective tax rate was impacted by
the receipt of a $5.0 million non-taxable indemnity
settlement and federal examination affirmative adjustments of
$2.8 million. The 2008 effective tax rate was impacted by
the non-deductibility of $10.5 million of goodwill
impairment charges, an increase in the deferred tax
33
asset valuation allowance of approximately $6.8 million and
income tax reserve increases of approximately $4.4 million.
Other
Information
Depreciation and amortization expense was $18.7 million for
2009 compared to $20.8 million in 2008.
Capital expenditures in 2009 were $5.3 million compared to
$14.9 million in 2008, reflecting the Companys cost
reduction efforts during 2009. Capital expenditures are expected
to increase in the future. See Liquidity and Capital
Resources.
The following table sets forth certain amounts, ratios and
relationships calculated from the Consolidated Statements for
the Years Ended December 31, 2008 and 2007:
Schawk,
Inc.
Comparative
Consolidated Statements of Operations
Years
Ended December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
%
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
Change
|
|
|
|
(In thousands)
|
|
|
Net sales
|
|
$
|
494,184
|
|
|
$
|
544,409
|
|
|
$
|
(50,225
|
)
|
|
|
|
(9.2
|
)%
|
Cost of sales
|
|
|
329,814
|
|
|
|
352,015
|
|
|
|
(22,201
|
)
|
|
|
|
(6.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
164,370
|
|
|
|
192,394
|
|
|
|
(28,024
|
)
|
|
|
|
(14.6
|
)%
|
Gross profit percentage
|
|
|
33.3
|
%
|
|
|
35.3
|
%
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
148,596
|
|
|
|
131,024
|
|
|
|
17,572
|
|
|
|
|
13.4
|
%
|
Impairment of goodwill
|
|
|
48,041
|
|
|
|
|
|
|
|
48,041
|
|
|
|
|
nm
|
|
Acquisition integration and restructuring expenses
|
|
|
10,390
|
|
|
|
|
|
|
|
10,390
|
|
|
|
|
nm
|
|
Multiemployer pension withdrawal expense
|
|
|
7,254
|
|
|
|
|
|
|
|
7,254
|
|
|
|
|
nm
|
|
Impairment of long-lived assets
|
|
|
6,644
|
|
|
|
1,197
|
|
|
|
5,447
|
|
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(56,555
|
)
|
|
|
60,173
|
|
|
|
(116,728
|
)
|
|
|
|
nm
|
|
Operating margin percentage
|
|
|
(11.4
|
%)
|
|
|
11.1
|
%
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
291
|
|
|
|
297
|
|
|
|
(6
|
)
|
|
|
|
(2.0
|
)%
|
Interest expense
|
|
|
(6,852
|
)
|
|
|
(9,214
|
)
|
|
|
2,362
|
|
|
|
|
(25.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,561
|
)
|
|
|
8,917
|
)
|
|
|
2,356
|
|
|
|
|
(26.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(63,116
|
)
|
|
|
51,256
|
|
|
|
(114,372
|
)
|
|
|
|
nm
|
|
Income tax provision (benefit)
|
|
|
(3,110
|
)
|
|
|
20,658
|
|
|
|
(23,768
|
)
|
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(60,006
|
)
|
|
$
|
30,598
|
|
|
$
|
(90,604
|
)
|
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
4.9
|
%
|
|
|
40.3
|
%
|
|
|
|
|
|
|
|
|
|
Expressed as a percentage of Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
33.3
|
%
|
|
|
35.3
|
%
|
|
|
(200
|
)
|
bpts
|
|
|
|
|
Selling, general and administrative expense
|
|
|
30.1
|
%
|
|
|
24.1
|
%
|
|
|
600
|
|
bpts
|
|
|
|
|
Multiemployer pension withdrawal expenses
|
|
|
1.5
|
%
|
|
|
|
|
|
|
150
|
|
bpts
|
|
|
|
|
Impairment of goodwill
|
|
|
9.7
|
%
|
|
|
|
|
|
|
970
|
|
bpts
|
|
|
|
|
Acquisition integration and restructuring expenses
|
|
|
2.1
|
%
|
|
|
|
|
|
|
210
|
|
bpts
|
|
|
|
|
Impairment of long-lived assets
|
|
|
1.3
|
%
|
|
|
0.2
|
%
|
|
|
110
|
|
bpts
|
|
|
|
|
Operating margin
|
|
|
(11.4
|
)%
|
|
|
11.1
|
%
|
|
|
(2,250
|
)
|
bpts
|
|
|
|
|
34
bpts = basis points
nm = not meaningful
Net sales for the twelve months ended December 31,
2008 were $494.2 million compared to $544.4 million
for the twelve months ended December 31, 2007, a reduction
of $50.2 million, or 9.2 percent. The sales decline
was $47.9 million in the North America segment,
$8.9 million in the Europe segment and no change in the
Asia Pacific segment.
Consumer products packaging accounts sales for 2008 were
$346.7 million, or 70.2 percent of total sales, as
compared to $377.1 million in 2007, representing a decline
of 8.1 percent. Advertising and retail accounts sales for
2008 were $102.0 million or 20.6 percent of total
sales as compared to $119.5 million in 2007, representing a
decline of 14.6 percent. Entertainment account sales for
2008 were $36.1 million or 7.3 percent of total sales
as compared to $42.8 million in 2007, representing a
decline of 15.7 percent. Results for 2008 compared with
2007 reflect the slowdown in the U.S. economy, as a number
of clients delayed projects, resulting in lower revenue for the
Company. No major clients were lost during 2008.
Gross profit declined by $28.0 million or
14.6 percent in 2008 to $164.4 million from
$192.4 million in 2007. Of this decline, 61 percent is
attributable to the lower volume of sales and 39 percent is
attributable to a 2.0 percent decline in the gross profit
percentage. The decline in the gross profit percentage occurred
in all reportable segments.
Selling, general and administrative expenses increased
$17.6 million or 13.4 percent in 2008 to
$148.6 million from $131.0 million in 2007. The
increase in selling, general and administrative expenses is
primarily attributable to professional fees, which included
audit fees and other costs related to the Companys
internal control remediation and related matters of
$6.8 million, losses associated with foreign currency
transactions of $4.3 million, consulting fees related to
the Companys re-branding initiative of $1.2 million,
and a $1.1 million gain on sale of assets in the 2007
period that was not repeated in the 2008 period.
Operating income (loss) declined by $116.7 million
in 2008 to a loss of $56.6 million from an operating income
of $60.2 million in 2007. The decrease in operating income
in 2008 compared to 2007 is principally due to lower gross
profit, the increased selling, general and administrative
expenses of $17.6 million and the following charges and
expenses in 2008 for which similar expenses were not recorded in
2007: impairment of goodwill of $48.0 million;
restructuring expenses associated with the Companys cost
reductions activities of $10.4 million; pension withdrawal
expenses of $7.3 million; and an increase over the prior
year in impairment of long lived assets of $5.4 million.
The Company recorded pre-tax foreign exchange losses of
$4.3 million in 2008. These losses were recorded by
international subsidiaries that had unhedged currency exposure
arising primarily from intercompany debt obligations. The losses
were primarily attributable to a 27 percent decline in the
exchange rate of the British pound compared to the United States
dollar during the second half of 2008.
Interest expense for 2008 was $6.9 million compared
to $9.2 million for 2007 as a result of a decrease in
average outstanding debt and a reduction in average interest
rates.
Income tax provision (benefit) was at an effective tax
rate of 4.9 percent and 40.3 percent for 2008 and
2007, respectively. The decrease in the effective rate for 2008
compared to 2007 is primarily due to the non-deductibility of
$10.5 million of the goodwill impairment recorded with
respect to the Companys European and Anthem operations, an
increase in the deferred tax asset valuation allowance of
approximately $6.8 million and income tax reserve increases
of approximately $4.4 million.
Other
Information
Depreciation and amortization expense was $20.8 million for
2008 compared to $21.4 million in 2007.
Capital expenditures in 2008 were $14.9 million compared to
$18.1 million in 2007.
35
Segment
Information
Effective July 1, 2009, the Company restructured its
operations on a geographic basis, in three operating segments:
North America, Europe and Asia Pacific. This organization
reflects a change in the management reporting structure that was
implemented during the third quarter of 2009. Accordingly, all
previously reported amounts have been reclassified to conform to
the current-period presentation.
North
America Segment
The following table sets forth North America segment results for
the years ended December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
2008 vs. 2007
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
Increase (Decrease)
|
|
|
2009
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
(In thousands)
|
|
Net Sales
|
|
$
|
390,713
|
|
|
$
|
425,055
|
|
|
$
|
472,922
|
|
|
$
|
(34,342
|
)
|
|
|
(8.1
|
)%
|
|
$
|
(47,867
|
)
|
|
|
(10.1
|
)%
|
Acquisition integration and restructuring expenses
|
|
$
|
3,614
|
|
|
$
|
5,701
|
|
|
|
|
|
|
$
|
(2,087
|
)
|
|
|
(36.6
|
)%
|
|
$
|
5,701
|
|
|
|
nm
|
|
Goodwill impairment charges
|
|
|
|
|
|
$
|
14,334
|
|
|
|
|
|
|
$
|
(14,334
|
)
|
|
|
nm
|
|
|
$
|
14,334
|
|
|
|
nm
|
|
Impairment of long-lived assets
|
|
$
|
1,366
|
|
|
$
|
4,308
|
|
|
$
|
1,111
|
|
|
$
|
(2,942
|
)
|
|
|
(68.3
|
)%
|
|
$
|
3,197
|
|
|
|
nm
|
|
Depreciation and amortization
|
|
$
|
11,601
|
|
|
$
|
12,783
|
|
|
$
|
12,778
|
|
|
$
|
(1,182
|
)
|
|
|
(9.2
|
)%
|
|
$
|
5
|
|
|
|
nm
|
|
Operating income
|
|
$
|
56,734
|
|
|
$
|
23,848
|
|
|
$
|
66,381
|
|
|
$
|
32,886
|
|
|
|
nm
|
|
|
$
|
(42,533
|
)
|
|
|
(64.1
|
)%
|
Operating margin
|
|
|
14.5
|
%
|
|
|
5.6
|
%
|
|
|
14.0
|
%
|
|
|
|
|
|
|
890
|
bpts
|
|
|
|
|
|
|
(930
|
) bpts
|
Capital expenditures
|
|
$
|
3,653
|
|
|
$
|
10,404
|
|
|
$
|
10,216
|
|
|
$
|
(6,751
|
)
|
|
|
(64.9
|
)%
|
|
$
|
188
|
|
|
|
1.8
|
%
|
Total assets
|
|
$
|
320,655
|
|
|
$
|
328,494
|
|
|
$
|
387,396
|
|
|
$
|
(7,839
|
)
|
|
|
(2.4
|
)%
|
|
$
|
(58,902
|
)
|
|
|
(15.2
|
)%
|
bpts = basis points
nm = not meaningful
2009
compared to 2008
Net sales for the twelve months ended December 31, 2009 for
the North America segment were $390.7 million compared to
$425.1 million in the prior year, a reduction of
$34.3 million or 8.1 percent. Approximately
$3.8 million of the
period-over-period
sales decline 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. The
period-over-period
decline in sales reflects the slowdown in the North American
economy, which started in the latter half of 2008 and continued
throughout 2009. In response to adverse economic conditions,
many of the Companys clients reduced their levels of
advertising, marketing and new product introductions and,
particularly with respect to the Companys consumer
products packaging accounts, delayed packaging redesigns and
sales promotion projects, resulting in lower revenue for the
Company.
Operating income was $56.7 million, or 14.5 percent of
sales, in 2009 compared to $23.8 million, or
5.6 percent of sales, in 2008, an increase of
$32.9 million. The increase in operating income is
principally due to the Companys cost reduction
initiatives, which began in the second half of 2008 and
continued throughout 2009, as well as the effect of the goodwill
impairment charge that was not repeated in 2009.
2008
compared to 2007
Net sales for the twelve months ended December 31, 2008 for
the North America segment were $425.1 million compared to
$472.9 million in the prior year, a reduction of
$47.9 million or 10.1 percent. The
period-over-period
decline in sales reflects the slowdown in the North American
economy, which started in the latter half of 2008. In response
to adverse economic conditions, many of the Companys
clients reduced their levels of advertising,
36
marketing and new product introductions and, particularly with
respect to the Companys consumer products packaging
accounts, delayed or reduced the frequency of packaging
redesigns and sales promotion projects, resulting in lower
revenue for the Company.
Operating income was $23.8 million, or 5.6 percent of
sales, in 2008 compared to $66.4 million, or
14.0 percent of sales, in the prior year, a decrease of
$42.5 million, or 64.1 percent. The decrease in
operating income in 2008 is principally due to period over
period sales decline, goodwill impairment charges of
$14.3 million and acquisition integration and restructuring
expenses of $5.7 million.
Europe
Segment
The following table sets forth Europe segment results for the
years ended December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
2008 vs. 2007
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
Increase (Decrease)
|
|
|
2009
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
(In thousands)
|
|
Net Sales
|
|
$
|
67,409
|
|
|
$
|
71,040
|
|
|
$
|
79,916
|
|
|
$
|
(3,631
|
)
|
|
|
(5.1
|
)%
|
|
$
|
(8,876
|
)
|
|
|
(11.1
|
)%
|
Acquisition integration and restructuring expenses
|
|
$
|
1,400
|
|
|
$
|
3,552
|
|
|
|
|
|
|
$
|
(2,152
|
)
|
|
|
(60.6
|
)%
|
|
$
|
3,552
|
|
|
|
nm
|
|
Goodwill impairment charges
|
|
|
|
|
|
$
|
32,703
|
|
|
|
|
|
|
$
|
(32,703
|
)
|
|
|
nm
|
|
|
$
|
32,703
|
|
|
|
nm
|
|
Impairment of long-lived assets
|
|
$
|
75
|
|
|
|
|
|
|
|
|
|
|
$
|
75
|
|
|
|
nm
|
|
|
|
|
|
|
|
nm
|
|
Depreciation and amortization
|
|
$
|
3,075
|
|
|
$
|
3,344
|
|
|
$
|
3,767
|
|
|
$
|
(269
|
)
|
|
|
8.0
|
%
|
|
$
|
(423
|
)
|
|
|
(11.2
|
)%
|
Operating income (loss)
|
|
$
|
3,836
|
|
|
$
|
(37,324
|
)
|
|
$
|
6,531
|
|
|
$
|
41,160
|
|
|
|
nm
|
|
|
$
|
(43,855
|
)
|
|
|
nm
|
|
Operating margin
|
|
|
5.7
|
%
|
|
|
(52.5
|
)%
|
|
|
8.2
|
%
|
|
|
|
|
|
|
5,820
|
bpts
|
|
|
|
|
|
|
(6,060
|
) bpts
|
Capital expenditures
|
|
$
|
618
|
|
|
$
|
2,233
|
|
|
$
|
765
|
|
|
$
|
(1,615
|
)
|
|
|
(72.3
|
)%
|
|
$
|
1,468
|
|
|
|
nm
|
|
Total assets
|
|
$
|
44,508
|
|
|
$
|
46,554
|
|
|
$
|
78,427
|
|
|
$
|
(2,046
|
)
|
|
|
(4.4
|
)%
|
|
$
|
(31,873
|
)
|
|
|
(40.6
|
)%
|
bpts = basis points
nm = not meaningful
2009
compared to 2008
Net sales in the Europe segment for the twelve months ended
December 31, 2009 were $67.4 million compared to
$71.0 million in the prior year, a reduction of
$3.6 million or 5.1 percent. Sales contributed by
acquisitions for the twelve months ended December 31, 2009
compared to the prior year totaled $10.2 million or
15.1 percent. Excluding acquisitions, revenues would have
declined by $13.8 million or 19.4 percent versus the
prior year. Approximately $9.3 million of the
period-over-period
sales decline was the result of changes in foreign currency
translation rates, as the U.S. dollar increased in value
relative to the local currencies of the Companys foreign
subsidiaries. As in North America, many of the Companys
European clients have delayed projects, resulting in lower
revenues for the Company.
Operating income was $3.8 million, or 5.7 percent of
sales, in 2009 compared to an operating loss of
$37.3 million, or 52.5 percent of sales, in 2008, an
increase of $41.2 million. The increase in operating income
is principally due to $32.7 million of impairment of
goodwill in 2008 that did not repeat in 2009 and a decrease in
acquisition integration and restructuring expenses of
2.2 million. Operating costs were also lower in the twelve
months of 2009 compared to 2008.
2008
compared to 2007
Net sales in the Europe segment for the twelve months ended
December 31, 2008 were $71.0 million compared to
$79.9 million in the prior year, a reduction of
$8.9 million or 11.1 percent. Approximately
$5.4 million of the
period-over-period
sales decline was the result of changes in foreign currency
translation rates, as the U.S. dollar
37
increased in value relative to certain of the local currencies
of the Companys foreign subsidiaries. As in North America,
many of the Companys European clients delayed projects,
resulting in lower revenues for the Company.
There was an operating loss of $37.3 million, or
52.5 percent of sales, in the twelve months of 2008
compared to operating income of $6.5 million, or
8.2 percent of sales in the prior year, a decrease of
$43.9 million. The decrease in operating income in 2008 is
principally due to lower sales, goodwill impairment charges of
$32.7 million and acquisition integration and restructuring
expenses of $3.6 million.
Asia
Pacific Segment
The following table sets forth Asia Pacific segment results for
the years ended December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
2008 vs. 2007
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
Increase (Decrease)
|
|
|
2009
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
(In thousands)
|
|
Net Sales
|
|
$
|
29,348
|
|
|
$
|
28,630
|
|
|
$
|
28,613
|
|
|
$
|
718
|
|
|
|
2.5
|
%
|
|
$
|
17
|
|
|
|
0.1
|
%
|
Acquisition integration and restructuring expenses
|
|
$
|
992
|
|
|
$
|
248
|
|
|
|
|
|
|
$
|
744
|
|
|
|
nm
|
|
|
$
|
248
|
|
|
|
nm
|
|
Goodwill impairment charges
|
|
|
|
|
|
$
|
1,004
|
|
|
|
|
|
|
$
|
(1,004
|
)
|
|
|
nm
|
|
|
$
|
1,004
|
|
|
|
nm
|
|
Depreciation and amortization
|
|
$
|
1,008
|
|
|
$
|
935
|
|
|
$
|
752
|
|
|
$
|
73
|
|
|
|
7.8
|
%
|
|
$
|
183
|
|
|
|
24.3
|
%
|
Operating income
|
|
$
|
7,389
|
|
|
$
|
1,366
|
|
|
$
|
5,513
|
|
|
$
|
6,023
|
|
|
|
nm
|
|
|
$
|
(4,147
|
)
|
|
|
(75.2
|
)%
|
Operating margin
|
|
|
25.2
|
%
|
|
|
4.8
|
%
|
|
|
19.3
|
%
|
|
|
|
|
|
|
2,040
|
bpts
|
|
|
|
|
|
|
(1,450
|
) bpts
|
Capital expenditures
|
|
$
|
898
|
|
|
$
|
1,425
|
|
|
$
|
317
|
|
|
$
|
(527
|
)
|
|
|
(37.0
|
)%
|
|
$
|
1,108
|
|
|
|
nm
|
|
Total assets
|
|
$
|
21,839
|
|
|
$
|
29,073
|
|
|
$
|
27,098
|
|
|
$
|
(7,234
|
)
|
|
|
(24.9
|
)%
|
|
$
|
1,975
|
|
|
|
7.3
|
%
|
bpts = basis points
nm = not meaningful
2009
compared to 2008
Net sales in the Asia Pacific segment for the twelve months
ended December 31, 2009 were $29.3 million compared to
$28.6 million in the prior year, an increase of
$0.7 million or 2.5 percent. Sales contributed by
acquisitions for 2009 compared to the prior year totaled
$0.9 million or 3.1 percent. Excluding acquisitions,
revenues would have declined by $0.2 million or
0.7 percent versus the prior year. Approximately
$0.6 million of the
period-over-period
sales decline was the result of changes in foreign currency
translation rates, as the U.S. dollar increased in value
relative to certain of the Companys foreign subsidiaries.
Operating income was $7.4 million in the twelve months of
2009, or 25.2 percent of sales, as compared to
$1.4 million, or 4.8 percent of sales, in 2008, an
increase of $6.0 million. The increase in operating income
is principally due to lower operating expenses for 2009 due to
the Companys cost reduction efforts. Additionally the
goodwill impairment charges of 1.0 million in 2008 did not
repeat in 2009.
2008
compared to 2007
Net sales in the Asia Pacific segment for the twelve months
ended December 31, 2008 and 2007 were approximately equal
at $28.6 million. Sales contributed by acquisitions for the
twelve months ended December 31, 2008 compared to the same
period last year totaled $0.9 million or 3.1 percent.
Excluding acquisitions, revenues would have declined by
$0.9 million or 3.1 percent versus the same period
last year.
Operating income was $1.4 million in the twelve months of
2008, or 4.8 percent of sales, as compared to
$5.5 million, or 19.3 percent of sales, in the prior
year, a decrease of $4.1 million. The decrease in operating
income in 2008 is principally due to an increase in salaries and
other administrative expenses of $1.9 million, a goodwill
impairment charge of $1.0 million, an increase of $0.9 million
in foreign exchange losses and acquisition integration and
restructuring expenses of $0.3 million.
38
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 December 31, 2009 was $77.6 million. As
noted below, the Company entered into an amended and restated
credit agreement in January 2010.
As of December 31, 2009, the Company had $12.2 million
in consolidated cash and cash equivalents, compared to
$20.2 million at December 31, 2008.
Cash
provided by operating activities
Cash provided by operating activities was $56.4 million in
2009 compared to cash provided by operating activities of
$33.2 million in 2008. The increase in cash provided by
operating activities
year-over-year
reflects the improvement in net income to $19.5 million in
2009 compared to a net loss of $60.0 million in 2008. The
net loss in 2008 included non-cash expenses of
$48.0 million for goodwill impairment and $6.6 million
for impairment of fixed assets and other intangible assets. The
cash provided by operating activities in 2009 includes
$9.2 million of cash received from an indemnity settlement
related to the 2005 acquisition of Seven Worldwide Holdings,
Inc. Of the $9.2 million of cash received,
$5.0 million was recorded as income in 2009 and
$4.2 million as settlement of an outstanding receivable.
Depreciation and intangible asset amortization expense in 2009
was $13.9 million and $4.7 million, respectively, as
compared to $16.7 million and $4.1 million,
respectively, in 2008. The decrease in depreciation expense in
2009 compared to the prior year reflects the Companys
efforts to reduce capital expenditures during 2009.
Cash used
in investing activities
Cash used investing activities was $0.9 million in 2009
compared to $26.2 million of cash used in investing
activities during 2008. The favorable change in cash flow from
investing activities in 2009 compared to the prior year is
principally due to a decrease in capital expenditures and
acquisitions
year-over-year.
In addition, the cash flow from investing activities in 2009
reflects proceeds of $5.1 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 $5.3 million in 2009 compared to
$14.9 million in 2008. Cash used in investing activities
includes acquisitions in 2009 of $0.7 million compared to
$12.8 million in 2008. 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
effectiveness and internal controls, as well as to reduce
operating costs.
Cash used
in financing activities
Cash used in financing activities in 2009 was $63.2 million
compared to $0.6 million in 2008. The cash used in
financing activities in 2009 reflects $58.3 million of net
payments on debt compared to $28.0 million of net proceeds
from debt in 2008. The debt payments in 2009 include
$20.0 million of prepayments made by the Company to its
lenders in June 2009 pursuant to the June 11, 2009 debt
agreement amendments, as well as additional paydowns of its
revolving credit facility using cash generated from operations
during 2009. See Revolving Credit Facility, Note Purchase
Agreement and Other Debt Arrangements section below for
further information. The Company used $4.3 million to
purchase shares of its common stock during 2009, all of which
occurred in the first quarter, compared to common stock
purchases of $27.4 million during 2008. In addition, the
Company received proceeds of $1.9 million from the issuance
of common stock during 2009 compared to $2.2 million in
2008, attributable in both periods to stock option exercises and
issuance of shares pursuant to the Companys employee stock
purchase plan. The Company paid dividends of $1.5 million
in 2009, compared to $3.4 million in 2008. The decrease in
dividends paid in 2009 was due to a dividend restriction
resulting from the Companys June 2009 amendments to its
revolving credit agreement. See 2009 Amendments to
Revolving Credit Facility and Note Purchase Agreements
below. In January 2010, the Company entered into an amended and
39
restated credit agreement with its lenders. See 2010
Revolving Credit Facility Refinancing and Note Purchase
Agreement Amendments below. The financial covenants in the
amended and restated credit agreement do not specifically
restrict future dividend payments; however, dividend payments
are included in restricted payments, along with stock
repurchases and certain other payments, for which there is a
$5.0 million annual limitation. For the first quarter of
2010, the Company increased its quarterly dividend to $0.04 per
share, or approximately $1.0 million per quarter, and,
subject to declarations at the discretion of the Board of
Directors, expects quarterly dividends at this rate to continue
throughout 2010.
Revolving
Credit Facility, Note Purchase Agreements and Other Debt
Arrangements
Borrowings
and Debt Agreements at December 31, 2009
In January 2005, the Company entered into a five year unsecured
revolving credit facility credit agreement with JPMorgan Chase
Bank, N.A. On February 28, 2008, certain covenants of the
credit agreement were amended to allow the Company to increase
certain restricted payments (primarily dividends and stock
repurchases) and maximum acquisition amounts. Specifically, the
amendment increased the aggregate dollar amount of restricted
payments that the Company may make from $15.0 million to
$45.0 million annually, increased the Companys
allowable maximum acquisition amount from $50.0 million to
$75.0 million annually and increased the Companys
permitted foreign subsidiary investment amount from
$60.0 million to $120.0 million. The increase in the
restricted payment covenant was designed primarily to allow for
greater share repurchases. This facility was further amended in
June 2009. Pursuant to the 2009 amendment, $7.9 million of
the outstanding revolving credit balance at December 31,
2008 was paid at closing and $2.6 million was paid later in
June 2009. See 2009 Amendments to Revolving Credit
Facility and Note Purchase Agreements below. This credit
facility has since been terminated in connection with the
Companys January 2010 refinancing. See 2010
Revolving Credit Facility Refinancing and Note Purchase
Agreement Amendments below. The total balance outstanding
under the revolving credit agreement at December 31, 2009
was $19.9 million and is included in Long-term debt on the
December 31, 2009 Consolidated Balance Sheets.
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. The first note, in the original principal amount of
$10.0 million, will mature in January 2010. The second and
third notes, each in the original principal amount of
$20.0 million, mature in 2011 and 2012, respectively. The
terms of these notes were amended in June 2009. See 2009
Amendments to Revolving Credit Facility and Note Purchase
Agreements below. Pursuant to the 2009 amendment,
$5.2 million of the combined principal of the three notes
was paid at closing and $1.8 million was paid later in June
2009, with the payments being applied on a prorata basis to
reduce the original maturity amounts shown above. Under the
revised payment schedule, $8.6 million matures in January
2010, and $17.2 million will mature in both 2011 and 2012.
Additionally as amended, the first, second and third notes bear
interest at 8.81 percent, 8.99 percent and
9.17 percent, respectively. The total outstanding balance
of these notes, $43.0 million, is included on the
December 31, 2009 Consolidated Balance Sheets as follows:
$8.6 million is included in Current maturities of long-term
debt and $34.4 million is included in Long-term 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, pursuant to an exception from
the registration requirements of the Securities Act of 1933, of
two series of notes: Tranche A, for $15.0 million and
Tranche B, for $10.0 million. The terms of these notes
were amended in June 2009. See 2009 Amendments to
Revolving Credit Facility and Note Purchase Agreements
below. Under the original terms, the Tranche A note was
payable in annual installments of $2.1 million from 2007 to
2013, and the Tranche B note was payable in annual
installments of $1.4 million from 2008 to 2014. Pursuant to
the 2009 amendment, $1.9 million of the combined principal
of the two notes was paid at closing and $0.6 million was
paid later in June 2009, with the payments being applied on a
prorata basis to reduce the original installment amounts. Under
the amended terms, the remaining balance of the Tranche A
note will be payable in annual installments of $1.8 million
from 2009 to 2013, and the remaining balance of the
Tranche B note will be payable in annual installments of
$1.2 million from 2010 to 2014, provided that upon the
Company obtaining a consolidated leverage ratio of 2.75 to 1 and
the refinancing of the Companys revolving credit facility,
40
principal installments due under the 2003 Private Placement will
return to the pre-2009 amendment levels ($2.1 million on
each December 31 and $1.4 million on each April 1). The
originally scheduled Tranche B installment payment of
$1.4 million was paid when due in April 2009. The amended
scheduled Tranche A installment payment of
$1.8 million was paid when due in December 2009. As
amended, the Tranche A and Tranche B notes bear
interest at 8.90 percent and 8.98 percent,
respectively. The combined balance of the of the Tranche A
and Tranche B notes, $13.5 million, is included on the
December 31, 2009 Consolidated Balance Sheets as follows:
$3.1 million is included in Current maturities of long-term
debt and $10.4 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
December 31, 2009; however, a $0.8 million Canadian
dollar letter of credit had been issued against funds available
under the credit line.
2009
Amendments to Revolving Credit Facility and Note Purchase
Agreements
As a result of goodwill impairment charges and restructuring
activities in the fourth quarter of 2008, compounded by the
Companys stock repurchase program and weaker earnings
performance, the Company was in violation of certain restrictive
debt covenants at December 31, 2008 and March 31,
2009. On June 11, 2009, the Company entered into amendments
that, among other things, restructured its leverage and minimum
net worth covenants under its revolving credit facility and note
purchase agreements. In particular the amendments:
|
|
|
|
|
reduced the size of the Companys revolving credit facility
by $32.5 million, from $115.0 million (expandable to
$125.0 million) to $82.5 million;
|
|
|
|
after the payment of $2.6 million in June 2009, the size of
the Companys revolving credit facility was further reduced
to $80.0 million;
|
|
|
|
increased the Companys maximum permitted cash-flow
leverage ratio from 3.25 to 5.00 for the first quarter of 2009,
decreasing to 3.00 in the fourth quarter of 2009 and thereafter;
|
|
|
|
amended the credit facilitys pricing terms, including
increasing the interest rate margin applicable on the revolving
credit facility indebtedness to a variable rate of LIBOR plus
300 to 450 basis points (bpts), depending on
the cash flow leverage ratio, and set the minimum LIBOR at
2.0 percent;
|
|
|
|
increased the unused revolver commitment fee rate to
50 bpts per year;
|
|
|
|
increased the interest rate on indebtedness outstanding under
each of the notes outstanding under the Companys note
agreements by 400 bpts;
|
|
|
|
reset the Companys minimum quarterly fixed charge coverage
ratio;
|
|
|
|
prohibit the Company from repurchasing its shares without lender
consent and restrict future dividend payments by the Company
(beginning with the first dividend declared after March,
2009) to an aggregate $0.3 million per fiscal quarter,
or approximately $0.01 per share based on the number of shares
of common stock currently outstanding;
|
|
|
|
required the Company to obtain lender approval of any
acquisitions;
|
|
|
|
revised the Companys minimum consolidated net worth
covenant to be based on 90 percent of the Companys
consolidated net worth as of March 31, 2009;
|
|
|
|
reduced the amount of the Companys permitted capital
expenditures to $17.5 million, from $25.0 million,
during any fiscal year; and
|
|
|
|
provided a waiver for any noncompliance with certain financial
covenants, as well as covenants relating to (i) the
reduction of indebtedness within prescribed time periods using
the proceeds of a previously completed asset sale, (ii) the
payment of dividends, and (iii) the delivery of the
Companys annual and quarterly financial statements for the
periods ended December 31, 2008 and March 31, 2009,
respectively, within prescribed time periods.
|
41
In addition, all amounts due under the credit facility and the
outstanding senior notes became fully secured through liens on
substantially all of the Companys and its domestic
subsidiaries personal property.
As part of the credit facility amendments, the note purchase
agreements associated with the Companys outstanding senior
notes were amended to include financial and other covenants that
were the same as or substantially equivalent to the revised
financial and other covenants under the amended credit facility.
2010
Revolving Credit Facility Refinancing and Note Purchase
Agreement Amendments
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 revolving credit facility. 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 closing,
the applicable margin was 300 basis points, resulting in an
interest rate at closing of 3.22 percent.
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.
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 December 31, 2009.
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.
Management believes that the level of working capital is
adequate for the Companys liquidity needs related to
normal operations both currently and in the foreseeable future,
and that the Company has sufficient resources to support its
operations, either through currently available cash and cash
generated from future operations, or pursuant to its
renegotiated credit facility. The Companys ability to
realize its near-term business objectives is subject to, among
other things, its ability to remain in compliance with its
covenants under its debt arrangements. Based on its 2010
business plan, which contains a number of assumptions related to
economic trends and the Companys business and operations,
the Company presently expects to remain in compliance with its
debt
42
covenants for the foreseeable future; however compliance in 2010
and thereafter remains subject to many variables, including
those described under Risk Factors contained in this
report.
The Company operates in thirteen countries besides the United
States. The Company currently believes that there are no
political, economic or currency restrictions that materially
limit the Companys flexibility in managing its global cash
resources.
Seasonality
With the acquisitions of Winnetts and Seven, the seasonal
fluctuations in business on a combined basis generally result in
lower revenues in the first quarter as compared to the other
quarters of the year ended December 31.
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.
Cash flows from its historically profitable operations have
permitted the Company to re-invest in the business through
capital expenditures and acquisitions of complementary
businesses. 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 effectiveness and internal
controls, as well as to reduce operating costs. Also, over the
next five years, the Companys two and a half-year
revolving credit facility and all of its long-term private
placement debt matures. The Companys total contractual
obligations over the next five years total approximately
$163 million, including all debt obligations (see
contractual obligation table below.) At this time, the Company
believes that cash flow from operations and its ability to
refinance its maturing debt obligations will be sufficient to
finance the Company during the next five years, assuming no
significant business acquisitions. If a significant acquisition
is undertaken in the next five years, the Company would likely
need to access the debt and equity markets to finance such an
acquisition.
The following table summarizes the effect that minimum debt,
lease and other material noncancelable commitments are expected
to have on the Companys cash flow in the future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
than 1
|
|
|
1-3
|
|
|
3-5
|
|
|
than 5
|
|
Contractual Obligations
|
|
Total
|
|
|
Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
|
(In thousands)
|
|
|
Debt obligations
|
|
$
|
77,565
|
|
|
$
|
12,858
|
|
|
$
|
60,406
|
|
|
$
|
4,301
|
|
|
$
|
|
|
Interest on debt(1)
|
|
|
8,693
|
|
|
|
4,467
|
|
|
|
3,841
|
|
|
|
385
|
|
|
|
|
|
Operating lease obligations
|
|
|
57,076
|
|
|
|
13,079
|
|
|
|
22,371
|
|
|
|
13,826
|
|
|
|
7,800
|
|
Purchase obligations
|
|
|
8,445
|
|
|
|
7,415
|
|
|
|
1,030
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
2,061
|
|
|
|
62
|
|
|
|
31
|
|
|
|
31
|
|
|
|
1,937
|
|
Multiemployer pension withdrawal
|
|
|
9,200
|
|
|
|
9,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncertain tax positions(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
163,040
|
|
|
$
|
47,081
|
|
|
$
|
87,679
|
|
|
$
|
18,543
|
|
|
$
|
9,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects scheduled interest payments on fixed-rate debt.
Variable-rate interest on approximately $19,850 of variable rate
debt under its revolving credit agreement as of
December 31, 2009 is excluded because regular interest
payments are not scheduled and fluctuate depending on
outstanding principal balance and market-rate interest levels. |
|
(2) |
|
As of December 31, 2009, the Companys total liability for
uncertain tax positions was $18,137, including $1,878 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. |
43
Purchase obligations resulting from purchase orders entered in
the normal course of business are not significant. The
Companys major manufacturing cost is employees labor.
The Company expects to fund future contractual obligations
through funds generated from operations, together with general
company financing transactions.
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 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.
The Company believes that the following are the most critical
accounting estimates that could have an effect on Schawks
reported results.
Accounts Receivable. The Companys
clients are primarily consumer product manufacturers,
advertising agencies; retailers, both grocery and non-grocery,
and entertainment companies. Accounts receivable consist
primarily of amounts due to Schawk from its normal business
activities. In assessing the carrying value of its accounts
receivable, the Company estimated the recoverability by making
assumptions based on the aging of its outstanding receivables,
its historical write-off experience and specific risks
identified in the accounts receivable portfolio. Based on the
Companys estimates and assumptions, an allowance for
doubtful accounts and credit memos of $1.6 million was
established at December 31, 2009, compared to an allowance
of $3.1 million at December 31, 2008. A change in the
Companys assumptions would result in the Company
recovering an amount of its accounts receivable that differs
from the carrying value. Any difference could result in an
increase or decrease in bad debt expense.
Impairment of Long-Lived Assets. The Company
records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the
assets might be impaired and the undiscounted future cash flows
estimated to be generated by those assets are less than the
carrying amount of those items. Events that may indicate that
certain long-lived assets might be impaired might include a
significant downturn in the economy or the consumer packaging
industry, a loss of a major customer or several customers, a
significant decrease in the market value of an asset, a
significant adverse change in the manner in which an asset is
used or an adverse change in the physical condition of an asset.
The Companys cash flow estimates are based on historical
results adjusted to reflect its best estimate of future market
and operating conditions and forecasts. The net carrying value
of assets not recoverable is reduced to fair value. The
Companys estimates of fair value represent its best
estimate based on industry trends and reference to market rates
and transactions. During 2009, the Company recorded an
impairment charge of $1.4 million, principally for land and
buildings where the carrying values could not be supported by
current appraised market values and reflected this expense as
Impairment of long-lived assets in the Consolidated Statements
of Operations at December 31, 2009. A change in the
Companys business climate in future periods, including a
significant downturn in the Companys operations, could
lead to a required assessment of the recoverability of the
Companys long-lived assets, resulting in future additional
impairment charges.
Goodwill and Other Acquired Intangible
Assets. The Company has made acquisitions in the
past that included a significant amount of goodwill, customer
relationships and, to a lesser extent, other intangible assets.
Goodwill is not amortized but is subject to an annual (or under
certain circumstances more frequent) impairment test based on
its estimated fair value. Customer relationships and other
intangible assets are amortized over their useful lives and are
tested for impairment when events and circumstances indicate
that an impairment condition may exist. Events that may indicate
potential impairment include a loss of, or a significant
decrease in volume from, a major customer, a change in the
expected useful life of an asset, a change in the market value
of an asset, a significant adverse change in legal factors or
business climate, unanticipated competition relative to a major
customer or the loss of key personnel relative to a major
customer. When a potential impairment condition has been
identified, an impairment test of the intangible asset is
performed, based on estimated future undiscounted cash
44
flows. During 2009, the Company recorded an impairment
write-down of $0.1 million for a customer relationship
intangible asset for which it was determined that future
estimated cash flows did not support the carrying value. There
are many assumptions and estimates underlying the determination
of an impairment loss. Another estimate using different, but
still reasonable, assumptions could produce a significantly
different result. Therefore, additional impairment losses could
be recorded in the future. The Company did not identify any
other events or changes in circumstances that would indicate an
impairment condition existed at December 31, 2009, with
respect to its intangible assets other than goodwill.
The Company performs a goodwill impairment test annually, or
when events or changes in business circumstances indicate that
the carrying value may not be recoverable. The Company
historically performed its annual impairment test as of December
31; however, in the fourth quarter of 2008 the Company changed
its annual test date to October 1.
In the third quarter of 2009, the Company restructured its
operations on a geographic basis, in three areas: North America,
Europe and Asia Pacific (see Note 18 Segment
and Geographic Reporting). The Company allocated goodwill to the
new segments on a relative fair value basis and relied on the
goodwill impairment analysis performed as of June 30, 2009,
which indicated no impairment of the assigned goodwill.
The Company performed its 2009 goodwill impairment test as of
October 1, 2009. The Company assigned its goodwill to
multiple reporting units on a geographic basis at the operating
segment level in accordance with the Segment Reporting Topic of
the Codification, ASC 280. Using projections of operating cash
flow for each reporting unit, the Company performed a step one
assessment of the fair value of each reporting unit as compared
to the carrying value of each reporting unit. The step one
impairment analysis indicated no potential impairment of the
assigned goodwill.
Because of a significant decrease in the Companys market
capitalization during the first quarter of 2009, the Company
performed an additional goodwill impairment test as of
March 31, 2009 and determined that goodwill was not
impaired.
The Company performed its 2008 impairment test as of
October 1, 2008. In accordance with the
Intangibles Goodwill and Other Topic of the
Codification, ASC 350, the Company assigned its goodwill to
multiple reporting units, mainly on a geographic basis at a
level below the operating segments. The test indicated that
goodwill assigned to the Companys European and Anthem
reporting units was impaired by $30.7 million and
$17.3 million, respectively, as of October 1, 2008,
which was recorded in the fourth quarter of 2008. With the
segment reorganization in the third quarter of 2009, the
impairment of goodwill was reassigned to the new segments as
follows: North America $14.3 million,
Europe $32.7 million and Asia
Pacific $1.0 million. The goodwill impairment
reflected the decline in global economic conditions and general
reduction in consumer and business confidence experienced during
the fourth quarter of 2008.
The estimates and assumptions used by the Company to test its
goodwill are consistent with the business plans and estimates
used to manage operations and to make acquisition and
divestiture decisions. The use of different assumptions could
impact whether an impairment charge is required and, if so, the
amount of such impairment. If the Company fails to achieve
estimated volume and pricing targets, experiences unfavorable
market conditions or achieves results that differ from its
estimates, then revenue and cost forecasts may not be achieved,
and the Company may be required to recognize impairment charges.
Additionally, future goodwill impairment charges may be
necessary if the Companys market capitalization decreases
due to a decline in the trading price of the Companys
common stock.
Income Taxes. Deferred tax assets and
liabilities are determined based on the difference between the
financial statement and tax basis of assets and liabilities
using tax rates in effect for the year in which the differences
are expected to reverse. A valuation allowance is provided when
it is more likely than not that some portion of the deferred tax
assets arising from temporary differences and net operating
losses will not be realized. Federal, state and foreign tax
authorities regularly audit Schawk, like other multi-national
companies, and tax assessments may arise several years after tax
returns have been filed. Effective January 1, 2007, the
Company adopted the provisions of Income Taxes Topic of the
Codification, ASC 740, that contains a two-step approach to
recognizing and measuring uncertain tax positions. The first
step is to evaluate the tax position for recognition by
determining if the
45
weight of available evidence indicates it is more likely than
not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any.
The second step is to measure the tax benefit as the largest
amount that is more than 50 percent likely of being
realized upon ultimate settlement. The Company considers many
factors when evaluating and estimating its tax positions and tax
benefits, which may require periodic adjustments and which may
not accurately anticipate actual outcomes. Actual outcomes could
result in a change in reported income tax expense for a
particular period. See Note 11 Income Taxes to
the Consolidated Financial Statements for further discussion.
The Company has provided valuation allowances against deferred
tax assets, primarily arising from the acquisition of Seven in
2005, due to the dormancy of the companies generating the tax
assets or due to income tax rules limiting the availability of
the losses to offset future taxable income.
Exit Reserves. The Company records reserves
for the consolidation of workforce and facilities of acquired
companies. The exit plans are approved by company management
prior to, or shortly after, the acquisition date. The exit plans
provide for severance pay, lease abandonment costs and other
related expenses. A change in any of the assumptions used to
estimate the exit reserves that result in a decrease to the
reserve would result in a decrease to goodwill. Any change in
assumptions that result in an increase to the exit reserves
would result in a charge to income. During 2009, the Company
recorded a reduction to its exit reserves for the Benchmark
acquisition in the amount of $0.1 million as a credit to
goodwill and an increase to its exit reserves for Seven and
Winnetts for $1.0 million as a charge to income, primarily
due to changes in sublease assumptions at the vacated
facilities. At December 31, 2009, the Company had exit
reserves of approximately $2.4 million that were included
in Accrued expenses and Other noncurrent liabilities on the
Consolidated Balance Sheets, for exit activities completed in
2005 and 2006, primarily for facility closure costs. Future
increases or decreases in these reserves are possible, as the
Company continues to assess changes in circumstance that would
alter the future cost assumptions used in the calculation of the
reserves. However, the Company believes that, because the
current exit reserves are diminishing, any further changes to
the exit reserves would be immaterial to its consolidated
financial statements. See Note 2 Acquisitions
to the Consolidated Financial Statements for further discussion.
New
Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board
(FASB) amended the Accounting Standards Codification
(ASC) 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.
In June 2009, the FASB issued a final Statement of Financial
Accounting Standards (SFAS) No. 168,
The FASB Accounting Standards
Codificationtm
and the Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement
No. 162 to establish the FASB Accounting Standards
Codificationtm
(also referred to as Codification or ASC) as the single source
of authoritative nongovernmental U.S. generally accepted
accounting principles (GAAP). The ASC is effective
for interim and annual periods ending after September 15,
2009. The ASC did not change GAAP but reorganized existing US
accounting and reporting standards issued by the FASB and other
related private sector standard setters. The Company began to
reference the ASC when referring to GAAP in its financial
statements starting with the third quarter of 2009.
Additionally, because the ASC does not change GAAP, the Company
references the applicable ASC section for all periods presented
(including periods
46
before the authoritative release of ASC), except for the
grandfathered guidance not included in the Codification. The
change to ASC did not have an impact on the Companys
financial position, results of operations, or cash flows.
In May 2009, the FASB issued accounting guidance regarding
subsequent events. This guidance, found under the Subsequent
Events Topic of the Codification, ASC 855, and effective for
interim or annual periods ending after June 15, 2009,
establishes general standards of accounting for disclosure of
events that occur after the balance sheet date but before
financial statements are issued or available to be issued. It
requires the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date, that
is, whether that date represents the date the financial
statements were issued or were available to be issued. The
Company adopted this guidance as of June 30, 2009. The
adoption of this guidance did not have a material impact on the
Companys consolidated financial statements. In February
2010, the FASB amended the Accounting Standards Codification as
summarized in Accounting Standards Update
No. 2010-09,
Subsequent Events (Topic 855) Amendments to Certain
Recognition and Disclosure Requirements. The amendments in the
ASU remove the requirement for a Securities and Exchange
Commission filer to disclose a date through which subsequent
events have been evaluated in both issued and revised financial
statements. The adoption of this guidance did not have a
material impact on the Companys consolidated financial
statements.
In April 2009, the FASB issued new guidance regarding the
accounting for assets acquired and liabilities assumed in a
business combination that arise from contingencies. This new
guidance, found under the Business Combinations
Identifiable Assets and Liabilities, and Any Noncontrolling
Interest Subtopic of the Codification, ASC
805-20,
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|
Requires that assets acquired and liabilities assumed in a
business combination that arise from contingencies be recognized
at fair value if fair value can be reasonably estimated. If fair
value of such an asset or liability cannot be reasonably
estimated, the asset or liability would generally be recognized
in accordance with the Contingencies Topic of the Codification,
ASC 450;
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|
Eliminates the requirement to disclose an estimate of the range
of outcomes of recognized contingencies at the acquisition date.
For unrecognized contingencies, the FASB decided to require that
entities include only the disclosures required by the
Contingencies Topic of the Codification, ASC 450, and that those
disclosures be included in the business combination footnote;
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Requires that contingent consideration arrangements of an
acquiree assumed by the acquirer in a business combination be
treated as contingent consideration of the acquirer and should
be initially and subsequently measured at fair value in
accordance with ASC
805-20.
|
ASC 805-20
is effective for assets or liabilities arising from
contingencies in business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company
adopted ASC
805-20
effective January 1, 2009 and it did not have any material
impact on the Companys financial condition, results of
operations, or cash flows.
In April 2008, the FASB issued guidance on determining the
useful life of intangible assets. The Implementation Guidance
and Illustrations for Intangibles Other than Goodwill, ASC
350-30-55,
discussed in the Intangibles Goodwill and Other
Topic of the Codification, amends the factors to be considered
in determining the useful life of intangible assets. Its intent
is to improve the consistency between the useful life of an
intangible asset and the period of expected cash flows used to
measure its fair value by allowing an entity to consider its own
historical experience in renewing or extending the useful life
of a recognized intangible asset. The new guidance became
effective for fiscal years beginning after December 15,
2008 and was adopted by the Company as of January 1, 2009.
The adoption of this guidance did not have a material impact on
the Companys consolidated financial statements.
In December 2007, the FASB issued accounting guidance regarding
business combinations. This accounting guidance, found under the
Business Combinations Topic of the Codification, ASC 805,
retains the requirement that the purchase method of accounting
for acquisitions be used for all business combinations. ASC 805
expands the disclosures previously required, better defines the
acquirer and the acquisition date in a business combination, and
establishes principles for recognizing and measuring the assets
acquired (including goodwill), the liabilities assumed and any
noncontrolling interests in the acquired business. ASC 805
changes the accounting for acquisition
47
related costs from being included as part of the purchase price
of a business acquired to being expensed as incurred and will
require the acquiring company to recognize contingent
consideration arrangements at their acquisition date fair
values, with subsequent changes in fair value generally to be
reflected in earnings, as opposed to additional purchase price
of the acquired business. As the Company has a history of
growing its business through acquisitions, the Company
anticipates that the adoption of FASB guidance included in
ASC 805 will have an impact on its results of operations in
future periods, which impact depends on the size and the number
of acquisitions it consummates in the future.
According to the Transition and Open Effective Date Information
of the ASC Business Combinations Topic, ASC
805-10-65,
the acquirer shall record an adjustment to income tax expense
for changes in valuation allowances or uncertain tax positions
related to the acquired businesses. Certain of the
Companys acquisitions consummated in prior years would be
subject to changes in accounting for the changes in valuation
allowances on deferred tax assets. After December 31, 2008,
reductions of valuation allowances would reduce the income tax
provision as opposed to goodwill. ASC 805, effective for all
business combinations with an acquisition date in the first
annual period following December 15, 2008, was adopted by
the Company as of January 1, 2009.
In December 2007, the FASB issued accounting guidance regarding
non-controlling interests in consolidated financial statements.
This guidance, found under the Consolidations Topic of the
Codification, ASC
810-10-45,
and effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008,
requires the recognition of a non-controlling interest as equity
in the consolidated financial statements and separate from the
parents equity. The amount of net earnings attributable to
the non-controlling interest will be included in consolidated
net income on the face of the income statement. This guidance
also includes expanded disclosure requirements regarding the
interests of the parent and its non-controlling interest. The
Company adopted ASC
810-10-45 as
of January 1, 2009. The adoption of this guidance did not
have a material impact on the Companys consolidated
financial statements.
Impact of
Inflation
The Company believes that over the past three years inflation
has not had a significant impact on the Companys results
of operations.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate Exposure
The Company has $19.9 million of variable rate debt
outstanding at December 31, 2009 and expects to use its
variable rate credit facilities during 2010 and beyond to fund
acquisitions and cash flow needs. The debt is variable to the
Eurocurrency and prime rates. Assuming interest rate volatility
in the future is similar to what has been seen in recent years,
the Company does not anticipate that short-term changes in
interest rates will materially affect its consolidated financial
position, results of operations or cash flows. An adverse change
of 10 percent in interest rates (from 5.1 percent at
December 31, 2009 to 5.6 percent) would add
approximately $0.1 million of interest cost annually based
on the variable rate debt outstanding at December 31, 2009.
The Company historically has not actively managed interest rate
exposure on variable rate debt or hedged its interest rate
exposures. However, the Company is currently reviewing its
interest rate management policies and procedures to ascertain
the merits of hedging its interest rate exposures. The
Companys $57.7 million in outstanding fixed rate debt
is fixed at rates that range from 8.81 percent to
9.17 percent.
Foreign
Exchange Exposure
The Company is subject to changes in various foreign currency
exchange rates. The Companys principal currency exposures
relate to the British Pound, Canadian Dollar, Euro, Chinese Yuan
Renminbi, Malaysian Ringgit, Japanese Yen, Indian Rupee and the
Australian Dollar. The Companys 2009 results of operations
were unfavorably affected by an increase in the average value of
the US dollar relative to most foreign currencies. An adverse
change of 10 percent in exchange rates would have resulted
in a decrease in sales of $11.8 million, or
2.6 percent, and a decrease in income before income taxes
of $1.3 million, or 4.9 percent, for the year ended
December 31, 2009.
48
For the years ended December 31, 2009 and December 31,
2008, the Company recorded pre-tax foreign exchange gains
(losses) of $0.5 million and $(4.3 million)
respectively. These gains (losses) were recorded by
international subsidiaries primarily for unhedged currency
exposure arising from intercompany debt obligations. These gains
(losses) are included in Selling, general and administrative
expenses in the Consolidated Statement of Operations. The
Company has not historically hedged its foreign currency
exposures. However, the Company is currently reviewing its
foreign currency management policies and procedures to ascertain
the merits of hedging its foreign currency exposures.
49
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Item 8.
|
Financial
Statements and Supplementary Data
|
Index to
Financial Statements
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Page
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51
|
|
Financial Statements:
|
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|
52
|
|
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|
|
53
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|
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54
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55
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56
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Financial Statement Schedule:
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101
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50
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Schawk, Inc.
We have audited the accompanying consolidated balance sheets of
Schawk, Inc. and subsidiaries as of December 31, 2009 and
2008, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2009. Our audit also
included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Schawk, Inc. and subsidiaries at
December 31, 2009 and 2008, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Schawk, Inc.s internal control over financial reporting as
of December 31, 2009, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our
report dated March 15, 2010 expressed an unqualified
opinion on the effectiveness of internal control over financial
reporting.
/s/ Ernst & Young LLP
Chicago, Illinois
March 15, 2010
51
Schawk,
Inc.
Consolidated Balance Sheets
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|
December 31,
|
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December 31,
|
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2009
|
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2008
|
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|
(In thousands, except
|
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share amounts)
|
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ASSETS
|
Current assets:
|
|
|
|
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|
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Cash and cash equivalents
|
|
$
|
12,167
|
|
|
$
|
20,205
|
|
Trade accounts receivable, less allowance for doubtful accounts
of $1,619 in 2009 and $3,138 in 2008
|
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|
88,822
|
|
|
|
83,218
|
|
Inventories
|
|
|
20,536
|
|
|
|
23,617
|
|
Prepaid expenses and other current assets
|
|
|
8,192
|
|
|
|
11,243
|
|
Income tax receivable
|
|
|
2,565
|
|
|
|
3,348
|
|
Assets held for sale
|
|
|
|
|
|
|
6,555
|
|
Deferred income taxes
|
|
|
992
|
|
|
|
2,765
|
|
|
|
|
|
|
|
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Total current assets
|
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|
133,274
|
|
|
|
150,951
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Property and equipment, net
|
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50,247
|
|
|
|
58,325
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Goodwill
|
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|
187,664
|
|
|
|
184,037
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Other intangible assets, net
|
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|
37,605
|
|
|
|
39,125
|
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Deferred income taxes
|
|
|
1,424
|
|
|
|
2,752
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Other assets
|
|
|
6,005
|
|
|
|
5,163
|
|
|
|
|
|
|
|
|
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|
Total assets
|
|
$
|
416,219
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|
|
$
|
440,353
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LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
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|
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Trade accounts payable
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$
|
16,957
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|
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$
|
20,694
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Accrued expenses
|
|
|
64,079
|
|
|
|
51,934
|
|
Deferred income taxes
|
|
|
205
|
|
|
|
82
|
|
Income taxes
|
|
|
14,600
|
|
|
|
|
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Current portion of long-term debt
|
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|
12,858
|
|
|
|
23,563
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|
|
|
|
|
|
|
|
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Total current liabilities
|
|
|
108,699
|
|
|
|
96,273
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Long-term liabilities:
|
|
|
|
|
|
|
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Long-term debt
|
|
|
64,707
|
|
|
|
112,264
|
|
Deferred income taxes
|
|
|
2,059
|
|
|
|
1,858
|
|
Other long-term liabilities
|
|
|
15,920
|
|
|
|
29,137
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
82,686
|
|
|
|
143,259
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.008 par value, 40,000,000 shares
authorized, 29,855,796 and 29,478,456 shares issued at
December 31, 2009 and 2008, respectively, 25,108,894 and
25,218,566 shares outstanding at December 31, 2009 and
2008, respectively
|
|
|
220
|
|
|
|
217
|
|
Additional paid-in capital
|
|
|
191,701
|
|
|
|
187,801
|
|
Retained earnings
|
|
|
85,953
|
|
|
|
68,016
|
|
Accumulated comprehensive income, net
|
|
|
7,804
|
|
|
|
1,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
285,678
|
|
|
|
257,402
|
|
Treasury stock, at cost, 4,746,902 and 4,259,890 shares of
common stock at December 31, 2009 and 2008, respectively
|
|
|
(60,844
|
)
|
|
|
(56,581
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
224,834
|
|
|
|
200,821
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
416,219
|
|
|
$
|
440,353
|
|
|
|
|
|
|
|
|
|
|
The Notes to Consolidated Financial Statements are an integral
part of these consolidated statements.
52
Schawk,
Inc.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
452,446
|
|
|
$
|
494,184
|
|
|
$
|
544,409
|
|
Cost of sales
|
|
|
281,372
|
|
|
|
329,814
|
|
|
|
352,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
171,074
|
|
|
|
164,370
|
|
|
|
192,394
|
|
Selling, general, and administrative expenses
|
|
|
130,576
|
|
|
|
148,596
|
|
|
|
131,024
|
|
Acquisition integration and restructuring expenses
|
|
|
6,459
|
|
|
|
10,390
|
|
|
|
|
|
Indemnity settlement income
|
|
|
(4,986
|
)
|
|
|
|
|
|
|
|
|
Multiemployer pension withdrawal expense
|
|
|
1,800
|
|
|
|
7,254
|
|
|
|
|
|
Impairment of long-lived assets
|
|
|
1,441
|
|
|
|
6,644
|
|
|
|
1,197
|
|
Impairment of goodwill
|
|
|
|
|
|
|
48,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
35,784
|
|
|
|
(56,555
|
)
|
|
|
60,173
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
535
|
|
|
|
291
|
|
|
|
297
|
|
Interest expense
|
|
|
(9,225
|
)
|
|
|
(6,852
|
)
|
|
|
(9,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,690
|
)
|
|
|
(6,561
|
)
|
|
|
(8,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
27,094
|
|
|
|
(63,116
|
)
|
|
|
51,256
|
|
Income tax provision (benefit)
|
|
|
7,597
|
|
|
|
(3,110
|
)
|
|
|
20,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
19,497
|
|
|
$
|
(60,006
|
)
|
|
$
|
30,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.78
|
|
|
$
|
(2.24
|
)
|
|
$
|
1.14
|
|
Diluted
|
|
$
|
0.78
|
|
|
$
|
(2.24
|
)
|
|
$
|
1.10
|
|
Weighted average number of common and common equivalent
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
24,966
|
|
|
|
26,739
|
|
|
|
26,869
|
|
Diluted
|
|
|
25,001
|
|
|
|
26,739
|
|
|
|
27,701
|
|
Dividends per Class A common share
|
|
$
|
0.0625
|
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
The Notes to Consolidated Financial Statements are an integral
part of these consolidated statements.
53
Schawk,
Inc.
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
19,497
|
|
|
$
|
(60,006
|
)
|
|
$
|
30,598
|
|
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
13,924
|
|
|
|
16,693
|
|
|
|
17,574
|
|
Amortization
|
|
|
4,729
|
|
|
|
4,058
|
|
|
|
3,779
|
|
Impairment of goodwill
|
|
|
|
|
|
|
48,041
|
|
|
|
|
|
Impairment of long-lived assets
|
|
|
1,441
|
|
|
|
6,644
|
|
|
|
1,197
|
|
Non-cash restructuring charge
|
|
|
210
|
|
|
|
628
|
|
|
|
|
|
Deferred income taxes
|
|
|
3,200
|
|
|
|
(8,452
|
)
|
|
|
1,323
|
|
Amortization of deferred financing fees
|
|
|
1,027
|
|
|
|
168
|
|
|
|
437
|
|
Loss (gain) on sale of equipment
|
|
|
(111
|
)
|
|
|
362
|
|
|
|
(852
|
)
|
Share-based compensation expense
|
|
|
1,737
|
|
|
|
1,385
|
|
|
|
1,011
|
|
Tax benefit from stock options exercised
|
|
|
(222
|
)
|
|
|
(100
|
)
|
|
|
(608
|
)
|
Changes in operating assets and liabilities, net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(3,278
|
)
|
|
|
25,184
|
|
|
|
21,204
|
|
Inventories
|
|
|
3,576
|
|
|
|
(2,936
|
)
|
|
|
883
|
|
Prepaid expenses and other assets
|
|
|
1,438
|
|
|
|
969
|
|
|
|
(4,408
|
)
|
Trade accounts payable, accrued expenses and other liabilities
|
|
|
(539
|
)
|
|
|
3,075
|
|
|
|
(5,884
|
)
|
Income taxes
|
|
|
9,801
|
|
|
|
(2,465
|
)
|
|
|
4,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
56,430
|
|
|
|
33,248
|
|
|
|
70,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from disposal of property and equipment
|
|
|
5,087
|
|
|
|
1,189
|
|
|
|
2,605
|
|
Purchases of property and equipment
|
|
|
(5,257
|
)
|
|
|
(14,912
|
)
|
|
|
(18,121
|
)
|
Acquisitions, net of cash acquired
|
|
|
(739
|
)
|
|
|
(12,784
|
)
|
|
|
(21,384
|
)
|
Other
|
|
|
(19
|
)
|
|
|
309
|
|
|
|
(261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(928
|
)
|
|
|
(26,198
|
)
|
|
|
(37,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
1,945
|
|
|
|
2,208
|
|
|
|
4,116
|
|
Proceeds from issuance of long-term debt
|
|
|
113,081
|
|
|
|
185,479
|
|
|
|
133,220
|
|
Payments of long-term debt including current maturities
|
|
|
(171,343
|
)
|
|
|
(157,446
|
)
|
|
|
(166,665
|
)
|
Tax benefit from stock options exercised
|
|
|
222
|
|
|
|
100
|
|
|
|
608
|
|
Payment of deferred financing fees
|
|
|
(1,243
|
)
|
|
|
(89
|
)
|
|
|
|
|
Cash dividends
|
|
|
(1,547
|
)
|
|
|
(3,411
|
)
|
|
|
(3,474
|
)
|
Purchase of common stock
|
|
|
(4,277
|
)
|
|
|
(27,430
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(63,162
|
)
|
|
|
(589
|
)
|
|
|
(32,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency rate changes
|
|
|
(378
|
)
|
|
|
1,990
|
|
|
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(8,038
|
)
|
|
|
8,451
|
|
|
|
1,577
|
|
Cash and cash equivalents beginning of period
|
|
|
20,205
|
|
|
|
11,754
|
|
|
|
10,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
12,167
|
|
|
$
|
20,205
|
|
|
$
|
11,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends issued in the form of Class A common stock
|
|
$
|
13
|
|
|
$
|
24
|
|
|
$
|
24
|
|
Cash paid for interest
|
|
$
|
6,446
|
|
|
$
|
5,494
|
|
|
$
|
7,574
|
|
Cash paid (refunds received) for income taxes, net
|
|
$
|
(5,082
|
)
|
|
$
|
6,481
|
|
|
$
|
15,923
|
|
The Notes to Consolidated Financial Statements are an integral
part of these consolidated statements.
54
Schawk,
Inc.
Consolidated Statements of Stockholders Equity
Years Ended December 31, 2007, 2008 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Class A
|
|
|
Additional
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
Shares
|
|
|
Common
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Stockholders
|
|
|
|
Outstanding
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Equity
|
|
|
|
(In thousands, except share amounts)
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
26,620,810
|
|
|
$
|
212
|
|
|
$
|
178,432
|
|
|
$
|
105,060
|
|
|
$
|
6,655
|
|
|
$
|
(29,160
|
)
|
|
$
|
261,199
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,598
|
|
|
|
|
|
|
|
|
|
|
|
30,598
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,507
|
|
|
|
|
|
|
|
7,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of ASC 740
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
(703
|
)
|
|
|
|
|
|
|
|
|
|
|
(756
|
)
|
Sale of Class A common stock
|
|
|
345,754
|
|
|
|
3
|
|
|
|
3,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,269
|
|
Tax benefit from stock options exercised
|
|
|
|
|
|
|
|
|
|
|
608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
608
|
|
Purchase of Class A treasury stock
|
|
|
(2,146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
(42
|
)
|
Stock issued under employee stock purchase plan
|
|
|
47,683
|
|
|
|
1
|
|
|
|
846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
847
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,011
|
|
Issuance of Class A common stock under dividend
reinvestment program
|
|
|
1,381
|
|
|
|
|
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
26
|
|
|
|
2
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,474
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
27,013,482
|
|
|
|
216
|
|
|
|
184,110
|
|
|
|
131,457
|
|
|
|
14,162
|
|
|
|
(29,176
|
)
|
|
|
300,769
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,006
|
)
|
|
|
|
|
|
|
|
|
|
|
(60,006
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,794
|
)
|
|
|
|
|
|
|
(12,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(72,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Class A common stock
|
|
|
142,533
|
|
|
|
1
|
|
|
|
1,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,432
|
|
Tax benefit from stock options exercised
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
Purchase of Class A treasury stock
|
|
|
(2,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,430
|
)
|
|
|
(27,430
|
)
|
Stock issued under employee stock purchase plan
|
|
|
60,657
|
|
|
|
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
775
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,385
|
|
Issuance of Class A common stock under dividend
reinvestment program
|
|
|
1,894
|
|
|
|
|
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
25
|
|
|
|
1
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,411
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
25,218,566
|
|
|
|
217
|
|
|
|
187,801
|
|
|
|
68,016
|
|
|
|
1,368
|
|
|
|
(56,581
|
)
|
|
|
200,821
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,497
|
|
|
|
|
|
|
|
|
|
|
|
19,497
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,436
|
|
|
|
|
|
|
|
6,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Class A common stock
|
|
|
309,997
|
|
|
|
2
|
|
|
|
1,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,389
|
|
Tax benefit from stock options exercised
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
Purchase of Class A treasury stock
|
|
|
(488,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,277
|
)
|
|
|
(4,277
|
)
|
Stock issued under employee stock purchase plan
|
|
|
69,031
|
|
|
|
1
|
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
555
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,737
|
|
Issuance of Class A common stock under dividend
reinvestment program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
14
|
|
|
|
1
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,547
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
25,108,894
|
|
|
$
|
220
|
|
|
$
|
191,701
|
|
|
$
|
85,953
|
|
|
$
|
7,804
|
|
|
$
|
(60,844
|
)
|
|
$
|
224,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Notes to Consolidated Financial Statements are an integral
part of these financial statements.
55
Schawk,
Inc.
Notes to
Consolidated Financial Statements
(In
thousands, except per share data)
|
|
Note 1
|
Significant
Accounting Policies
|
Basis of
Presentation
The Companys consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain previously reported immaterial
amounts have been reclassified to conform to the current-period
presentation.
Principles
of Consolidation
The consolidated financial statements include the accounts of
all wholly and majority owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
Cash
Equivalents
Cash equivalents include highly liquid debt instruments and time
deposits having an original maturity at the date of purchase of
three months or less. Cash equivalents are stated at cost, which
approximates fair value.
Accounts
Receivable and Concentration of Credit Risk
The Company sells its products to a wide range of customers in
the consumer products, retail, advertising agency and
entertainment industries. The Company performs ongoing credit
evaluations of its customers and does not require collateral. An
allowance for doubtful accounts and credit memos is maintained
at a level management believes is sufficient to cover potential
losses. The Company evaluates the collectability of its accounts
receivable based on the length of time the receivable is past
due and its historic experience of write-offs. Trade accounts
receivable are charged to the allowance when the Company
determines that the receivable will not be collectible. Trade
accounts receivable balances are determined to be delinquent
when the amount is past due, based on the payment terms with the
customer. An allowance for credit memos is maintained based upon
historical credit memo issuance.
Inventories
The Companys inventories include
made-to-order
graphic designs, images and text for a variety of media
including the consumer products, retail, and entertainment
industries and consist primarily of raw materials and work in
process inventories as well as a 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
overhead pool of costs includes costs associated with direct
labor employees (including direct labor costs not chargeable to
specific jobs, which are also considered a direct cost of
production) and all indirect costs associated with the
production/creative design process, excluding any selling,
general and administrative costs.
Approximately 20 percent of total inventories in 2009 and
13 percent in 2008 are determined on the last in, first out
(LIFO) cost basis. The remaining raw materials inventories are
determined on the first in, first out (FIFO) cost basis. The
Company evaluates the realizability of inventories and adjusts
the carrying value as necessary.
Property
and Equipment
Property and equipment, including capitalized leases, is stated
at cost, less accumulated depreciation and amortization, and is
being depreciated and amortized using the straight-line method
over the estimated useful lives of the assets or the term of the
leases, ranging from 3 to 30 years.
56
Goodwill
Acquired goodwill is not amortized, but instead is subject to an
annual impairment test and subject to testing at other times
during the year if certain events occur indicating that the
carrying value of goodwill may be impaired. In accordance with
the Intangibles Goodwill and Other Topic of the
Codification, ASC 350, goodwill must be tested for impairment at
the reporting unit level. In the third quarter of 2009, the
Company restructured its operations on a geographic basis, in
three areas: North America, Europe and Asia Pacific. For
purposes of the goodwill impairment test, the reporting units of
the Company, after considering the requirements of ASC 350 and
the relevant provisions of the Segment Reporting Topic of the
Codification, ASC 280, and related interpretive literature, were
defined on a geographic basis corresponding to the
Companys realigned operating segments.
If the carrying amount of the reporting unit is greater than the
fair value, goodwill impairment may be present. The Company
measures the goodwill impairment based upon the fair value of
the underlying assets and liabilities of the reporting unit and
estimates the implied fair value of goodwill. Fair value is
determined considering both the income approach (discounted cash
flow), and the market approach. An impairment charge is
recognized to the extent the recorded goodwill exceeds the
implied fair value of goodwill.
The Company had historically performed its annual goodwill test
as of December 31st of each year, but during 2008, the
Company changed its annual goodwill testing date from year-end
to October 1. The Company performed its 2009 goodwill test
as of October 1, 2009 and determined that no impairment of
goodwill was indicated. In 2008, when performing the required
goodwill test as of October 1, 2008, the Company determined
that goodwill allocated to its Europe and former Anthem
reporting units was impaired and recorded an impairment
adjustment in the amount of $48,041. See Note 7
Goodwill and Intangible Assets for further information.
Software
Developed for Internal Use
The Company capitalizes certain direct development costs
associated with internal-use computer software in accordance
with the Internal-Use Software Subtopic of the Codification, ASC
350-40.
These costs are incurred during the application development
stage of a project and include external direct costs of services
and payroll costs for employees devoting time to the software
projects principally related to software coding, designing
system interfaces and installation and testing of the software.
The costs capitalized are primarily employee compensation and
outside consultant fees incurred to develop the software prior
to implementation. These costs are recorded as fixed assets in
computer software and licenses and are amortized over a period
of from three to seven years beginning when the asset is
substantially ready for use. Costs incurred during the
preliminary project stage, as well as maintenance and training
costs, are expensed as incurred.
During 2008, software that had been capitalized by the Company
in accordance with ASC
350-40 was
reviewed for impairment due to changes in circumstances which
indicated that the carrying amount of the assets might not be
recoverable. These changes in circumstances included the
expectation that the software would not provide substantive
service potential and there was a change in the extent to which
the software was to be used. In addition, it was determined that
the cost to modify the software for the Companys needs
would significantly exceed originally expected development
costs. As a result of these circumstances, the Company wrote
down the capitalized costs of the software to fair value. The
amount of this write-down, recorded in 2008, was $2,336 and is
included in Impairment of long-lived assets in the Consolidated
Statement of Operations. The expense was recorded in Corporate.
Software
Developed for Sale to Customers
The Companys policy for capitalization of
internally-developed software for sale to customers is in
accordance with the Costs to Be Sold, Leased, or Marketed
Subtopic of the Codification Software Topic, ASC
985-20.
Substantially all costs are incurred prior to the point at which
technological feasibility is established for the computer
software under development and as such are charged to expense
when incurred.
57
Long-lived
Assets
The recoverability of long-lived assets, including amortizable
intangibles, is evaluated by comparing their carrying value to
the expected future undiscounted cash flows to be generated from
such assets when events or circumstances indicate that
impairment may have occurred. The Company also re-evaluates the
periods of amortization of long- lived assets to determine
whether events and circumstances warrant revised useful lives.
If impairment has occurred, the carrying value of the long-lived
asset is adjusted to its fair value, generally equal to the
future estimated undiscounted cash flows associated with the
asset.
During 2009 and 2008, respectively, the Company recorded $1,441
and $6,644 of impairments related to long-lived assets. See
Note 6 Impairment of Long-lived Assets for more
information.
Revenue
Recognition
The Company derives revenue primarily from providing products
and services to its clients on a custom-job basis. In accordance
with SEC Staff Accounting Bulletin 104, Topic 13
Revenue Recognition
(SAB No. 104), revenue is recognized when
persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable, and collectability
is reasonably assured. The Company records a revenue accrual
entry at each month-end for jobs that meet the four SAB 104
criteria but which have not yet been invoiced to the client.
Revenue for services is recognized when the services are
provided to the customer.
The Companys products and services are sold directly
through its worldwide sales force and revenue is recognized at
the time the products
and/or
services are delivered, either electronically or through
traditional shipping methods, after satisfaction of all the
terms and conditions of the underlying arrangement. When the
Company provides a combination of products and services to
clients, the arrangement is evaluated under the Multiple-Element
Arrangements Subtopic within the Revenue Recognition Topic of
the Codification, ASC
605-25. ASC
605-25
addresses certain aspects of accounting by a vendor for
arrangements under which the vendor will perform multiple
revenue-generating activities.
The Company also derives revenue through its Digital Solutions
businesses from the sale of software, software implementation
services, technical support services and managed application
service provider (ASP) services. The Company recognizes revenue
related to the sales in accordance with the Revenue Recognition
Topic within the Software Topic of the Codification, ASC
985-605. In
multiple element software arrangements, the Company allocates
revenue to each element based on its relative fair value. The
fair value of any undelivered element is determined using
vendor-specific objective evidence (VSOE) or, in the
absence of VSOE for all elements, the residual method when VSOE
exists for all of the undelivered elements. In the absence of
fair value for a delivered element, the Company first allocates
revenue based on VSOE of the undelivered elements and the
residual revenue to the delivered elements. Where VSOE of the
undelivered elements cannot be determined, which is the case for
the majority of the Companys software revenue
arrangements, the Company defers revenue for the delivered
elements until undelivered elements are delivered and revenue is
recognized ratably over the term of the underlying client
contract, when obligations have been satisfied. For services
performed on a time and materials basis where no other elements
are included in the client contract, revenue is recognized upon
performance once the criteria of SAB 104 have been met.
Vendor
Rebates
The Company has entered into agreements with several of its
major suppliers for fixed rate discounts and volume discounts,
primarily received in cash, on materials used in its production
process. Some of the discounts are determined based upon a fixed
discount rate, while others are determined based upon the
purchased volume during a given period, typically one year. The
Company is following the guidance in the Customer Payments and
Incentives Topic within the Revenue Recognition Topic of the
Codification, ASC
605-50, as
it is recognizing the amount of the discounts as a reduction of
the cost of materials either included in raw materials or work
in process inventories or as a credit to cost of goods sold to
the extent that the product has been sold to a customer. The
Company recognizes the amount of volume discounts based upon an
estimate of purchasing levels for a given period, typically one
year, and past experience with a particular vendor. Some rebate
payments are received monthly while others are received
quarterly. Historically, the Company has not recorded
significant adjustments to estimated vendor rebates.
58
Customer
Rebates
The Company has rebate agreements with certain customers. The
agreements offer discount pricing based on volume over a
multi-year period. The Company accrues the estimated rebates
over the term of the agreement. The Company accounts for changes
in the estimated rebate amounts when it has been determined that
the estimated sales for the rebate period have changed.
Shipping
and Handling Fees and Costs
Shipping and handling fees billed to customers for product
shipments are recorded in Net sales in the Consolidated
Statements of Operations. Shipping and handling costs are
included in inventory for
jobs-in-progress
and included in Cost of sales in the Consolidated Statements of
Operations when jobs are completed and revenue is recognized.
Income
Taxes
Income taxes are accounted for using the asset and liability
approach. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax
basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse. A valuation allowance is provided if, based on
available evidence, it is more likely than not that some portion
of the deferred tax assets will not be realized.
The Company has amended its accounting policy related to the
quantification and valuation of deferred tax assets which may be
limited as to use. Under certain tax rules, net operating losses
and other tax attributes may be limited in use based upon the
occurrence of certain events, such as changes of ownership or
changes in business continuity. When an event of this type
occurs, the deferred tax assets may not be used in full to
offset future tax liabilities. The Company has historically
included these limited tax attributes in its inventory of
deferred tax assets, offset by a full valuation allowance. The
Company will no longer reflect deferred tax assets that become
subject to these limitations, nor will corresponding valuation
allowances for these items be required.
Foreign subsidiaries are taxed according to regulations existing
in the countries in which they do business. Provision has not
been made for United States income taxes on distributions that
may be received from foreign subsidiaries which are considered
to be permanently invested overseas.
The Company, like other multi-national companies, is regularly
audited by federal, state and foreign tax authorities, and tax
assessments may arise several years after tax returns have been
filed. In June 2006, the Financial Accounting Standards Board
issued guidance related to accounting for uncertainty in income
taxes, codified within the Income Taxes Topic of the
Codification, ASC 740, which was adopted by the Company on
January 1, 2007. ASC 740 addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under ASC
740, the Company may recognize the tax benefit from an uncertain
tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The
tax benefits recognized in the financial statements from such a
position should be measured based on the largest benefit that
has a greater than fifty percent likelihood of being realized
upon ultimate settlement. ASC 740 also provides guidance on
de-recognition, classification, interest and penalties on income
taxes, accounting in interim periods and requires increased
disclosures of unrecognized tax benefits.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
59
Foreign
Currency Translation
The Companys foreign subsidiaries use the local currency
as their functional currency. Accordingly, foreign currency
assets and liabilities are translated at the rate of exchange
existing at the balance sheet date and income and expense
amounts are translated at the average of the monthly exchange
rates. Adjustments resulting from the translation of foreign
currency financial statements into United States dollars are
included in Accumulated comprehensive income, net as a component
of Stockholders equity.
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.
|
|
|
|
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 financial instruments including cash and
cash equivalents, accounts receivable, accounts payable and
long-term debt approximates carrying value at December 31,
2009 and 2008, except as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
Fair value of fixed-rate notes payable
|
|
$
|
57,449
|
|
|
$
|
65,262
|
|
Carrying value of fixed-rate notes payable
|
|
$
|
56,533
|
|
|
$
|
69,286
|
|
The carrying value of amounts outstanding under the
Companys revolving credit agreement is considered to
approximate fair value as interest rates vary, based on
prevailing market rates. The fair value of the Companys
fixed rate notes payable is based on quoted market prices
(Level 1 within the fair value hierarchy). Under the
Financial Instruments Topic of the Codification, ASC 825,
entities are permitted to choose to measure many financial
instruments and certain other items at fair value. The Company
did not elect the fair value measurement option under ASC 825
for any of its financial assets or liabilities.
During 2009 and 2008, the Company has undertaken restructuring
activities, as discussed in Note 3 Acquisition
Integration and Restructuring, tested its goodwill as discussed
in Note 7 Goodwill and Other Intangible Assets,
and recorded certain asset impairments as discussed in
Note 6 Impairment of Long-Lived Assets. These
activities required the Company to perform fair value
measurements, based on Level 3 inputs, on a non-recurring
basis, on certain asset groups to test for potential impairment.
Certain of these fair value measurements indicated that the
asset groups were impaired and, therefore, the assets were
written down to fair value. Once an asset has been impaired, it
is not remeasured at fair value on a recurring basis; however,
it is still subject to fair value measurements to test for
recoverability of the carrying amount.
Stock
Based Compensation
Effective January 1, 2006, the Company adopted the
provisions of the Stock Compensation Topic of the Codification,
ASC 718, which requires the measurement and recognition of
compensation expense for all share-based payment awards to
employees and directors based on estimated fair values. ASC 718
supersedes the
60
Companys previous accounting methodology using the
intrinsic value method. Under the intrinsic value method, no
share-based compensation expense related to stock option awards
granted to employees had been recognized in the Companys
Consolidated Statements of Operations, as all stock option
awards granted under the plans had an exercise price equal to
the market value of the Common Stock on the date of the grant.
The Company adopted ASC 718 using the modified prospective
transition method. Under this transition method, compensation
expense recognized during years subsequent to 2005 included
compensation expense for all share-based awards granted prior
to, but not yet vested, as of December 31, 2005, based on
the grant date fair value estimated in accordance with ASC 718
and using an accelerated expense attribution method.
Compensation expense during years subsequent to 2005 for
share-based awards granted after January 1, 2006 is based
on the grant date fair value estimated in accordance with the
provisions of ASC 718 and is computed using the straight-line
expense attribution method. In accordance with the modified
prospective transition method, the Companys consolidated
financial statements for prior periods have not been restated to
reflect the impact of ASC 718.
New
Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board
(FASB) amended the Accounting Standards Codification
(ASC) 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.
In June 2009, the FASB issued a final Statement of Financial
Accounting Standards (SFAS) No. 168,
The FASB Accounting Standards
Codificationtm
and the Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement
No. 162 to establish the FASB Accounting Standards
Codificationtm
(also referred to as Codification or ASC) as the single source
of authoritative nongovernmental U.S. generally accepted
accounting principles (GAAP). The ASC is effective
for interim and annual periods ending after September 15,
2009. The ASC did not change GAAP but reorganized existing US
accounting and reporting standards issued by the FASB and other
related private sector standard setters. The Company began to
reference the ASC when referring to GAAP in its financial
statements starting with the third quarter of 2009.
Additionally, because the ASC does not change GAAP, the Company
references the applicable ASC section for all periods presented
(including periods before the authoritative release of ASC),
except for the grandfathered guidance not included in the
Codification. The change to ASC did not have an impact on the
Companys financial position, results of operations, or
cash flows.
In May 2009, the FASB issued accounting guidance regarding
subsequent events. This guidance, found under the Subsequent
Events Topic of the Codification, ASC 855, and effective for
interim or annual periods ending after June 15, 2009,
establishes general standards of accounting for disclosure of
events that occur after the balance sheet date but before
financial statements are issued or available to be issued. It
requires the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date, that
is, whether that date represents the date the financial
statements were issued or were available to be issued. The
Company adopted this guidance as of June 30, 2009. The
adoption of this guidance did not have a material impact on the
Companys consolidated financial statements. In February
2010, the FASB amended the Accounting Standards Codification as
summarized in Accounting Standards Update
No. 2010-09,
Subsequent Events (Topic 855) Amendments to Certain
Recognition and Disclosure Requirements. The amendments in the
ASU remove the requirement for a Securities and Exchange
Commission filer to disclose a date through which subsequent
events have been evaluated in both issued
61
and revised financial statements. The adoption of this guidance
did not have a material impact on the Companys
consolidated financial statements.
In April 2009, the FASB issued new guidance regarding the
accounting for assets acquired and liabilities assumed in a
business combination that arise from contingencies. This new
guidance, found under the Business Combinations
Identifiable Assets and Liabilities, and Any Noncontrolling
Interest Subtopic of the Codification, ASC
805-20,
|
|
|
|
|
Requires that assets acquired and liabilities assumed in a
business combination that arise from contingencies be recognized
at fair value if fair value can be reasonably estimated. If fair
value of such an asset or liability cannot be reasonably
estimated, the asset or liability would generally be recognized
in accordance with the Contingencies Topic of the Codification,
ASC 450;
|
|
|
|
Eliminates the requirement to disclose an estimate of the range
of outcomes of recognized contingencies at the acquisition date.
For unrecognized contingencies, the FASB decided to require that
entities include only the disclosures required by the
Contingencies Topic of the Codification, ASC 450, and that those
disclosures be included in the business combination footnote;
|
|
|
|
Requires that contingent consideration arrangements of an
acquiree assumed by the acquirer in a business combination be
treated as contingent consideration of the acquirer and should
be initially and subsequently measured at fair value in
accordance with ASC
805-20.
|
ASC 805-20
is effective for assets or liabilities arising from
contingencies in business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company
adopted ASC
805-20
effective January 1, 2009 and it did not have any material
impact on the Companys financial condition, results of
operations, or cash flows.
In April 2008, the FASB issued guidance on determining the
useful life of intangible assets. The Implementation Guidance
and Illustrations for Intangibles Other than Goodwill, ASC
350-30-55,
discussed in the Intangibles Goodwill and Other
Topic of the Codification, amends the factors to be considered
in determining the useful life of intangible assets. Its intent
is to improve the consistency between the useful life of an
intangible asset and the period of expected cash flows used to
measure its fair value by allowing an entity to consider its own
historical experience in renewing or extending the useful life
of a recognized intangible asset. The new guidance became
effective for fiscal years beginning after December 15,
2008 and was adopted by the Company as of January 1, 2009.
The adoption of this guidance did not have a material impact on
the Companys consolidated financial statements.
In December 2007, the FASB issued accounting guidance regarding
business combinations. This accounting guidance, found under the
Business Combinations Topic of the Codification, ASC 805,
retains the requirement that the purchase method of accounting
for acquisitions be used for all business combinations. ASC 805
expands the disclosures previously required, better defines the
acquirer and the acquisition date in a business combination, and
establishes principles for recognizing and measuring the assets
acquired (including goodwill), the liabilities assumed and any
noncontrolling interests in the acquired business. ASC 805
changes the accounting for acquisition related costs from being
included as part of the purchase price of a business acquired to
being expensed as incurred and will require the acquiring
company to recognize contingent consideration arrangements at
their acquisition date fair values, with subsequent changes in
fair value generally to be reflected in earnings, as opposed to
additional purchase price of the acquired business. As the
Company has a history of growing its business through
acquisitions, the Company anticipates that the adoption of FASB
guidance included in ASC 805 will have an impact on its results
of operations in future periods, which impact depends on the
size and the number of acquisitions it consummates in the future.
According to the Transition and Open Effective Date Information
of the ASC Business Combinations Topic, ASC
805-10-65,
after January 1, 2009 the acquirer shall record an
adjustment to income tax expense for changes in valuation
allowances or uncertain tax positions related to the acquired
businesses. ASC 805, effective for all business combinations
with an acquisition date in the first annual period following
December 15, 2008, was adopted by the Company as of
January 1, 2009.
62
In December 2007, the FASB issued accounting guidance regarding
non-controlling interests in consolidated financial statements.
This guidance, found under the Consolidations Topic of the
Codification, ASC
810-10-45,
and effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008,
requires the recognition of a non-controlling interest as equity
in the consolidated financial statements and separate from the
parents equity. The amount of net earnings attributable to
the non-controlling interest will be included in consolidated
net income on the face of the income statement. This guidance
also includes expanded disclosure requirements regarding the
interests of the parent and its non-controlling interest. The
Company adopted ASC
810-10-45 as
of January 1, 2009. The adoption of this guidance did not
have a material impact on the Companys consolidated
financial statements.
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
as of December 31, 2008 and January 1, 2009,
respectively, 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 Company has recorded a purchase price allocation based on a
fair value appraisal by an independent consulting company. The
goodwill ascribed to this acquisition is not deductible for tax
purposes. A summary of the fair values assigned to the acquired
assets is as follows:
|
|
|
|
|
Accounts receivable
|
|
$
|
1,193
|
|
Inventory
|
|
|
3
|
|
Other current assets
|
|
|
78
|
|
Fixed assets
|
|
|
146
|
|
Goodwill
|
|
|
7,427
|
|
Customer relationships
|
|
|
5,008
|
|
Trade names
|
|
|
56
|
|
Accounts payable
|
|
|
(472
|
)
|
Accrued expenses
|
|
|
(634
|
)
|
Income tax payable
|
|
|
(134
|
)
|
Deferred income taxes
|
|
|
(840
|
)
|
Other long term liabilities
|
|
|
(1,805
|
)
|
|
|
|
|
|
Total cash paid at closing, net of $430 cash acquired
|
|
$
|
10,026
|
|
|
|
|
|
|
The purchase price may be increased by up to $703 if a specified
target of earnings before interest and taxes is 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. The purchase price
adjustment is expected to be paid in the first quarter of 2010,
contingent on receipt of the sellers audited financial
statements and agreement upon certain earnings adjustments
specified in the purchase agreement.
The weighted-average amortization period of the customer
relationship and trade name intangible assets is 5.9 years.
The intangible asset amortization expense was $891 for the year
ended December 31, 2009, and will be approximately $858
each year in 2010 through 2014.
63
Supplemental pro-forma information is not presented because the
acquisition is considered to be immaterial to the Companys
consolidated financial statements.
Marque
Brand Consultants Pty Ltd.
Effective May 31, 2008, the Company acquired
100 percent of the outstanding stock of Marque Brand
Consultants Pty Ltd. (Marque), an
Australia based brand strategy and creative design
firm that provides services to consumer products companies. The
net assets and results of operations of Marque are included in
the Consolidated Financial Statements in the Asia Pacific
operating segment beginning June 1, 2008. This business was
acquired to expand the Companys creative design business
in Australia. Having an expanded creative design capability in
Australia will allow the Company to provide services for its
multinational clients with Australian operations. Marque is a
sister company to Perks Design Partners Pty Ltd., which the
Company acquired August 1, 2007.
The purchase price of $2,470 consisted of $994 paid in cash to
the seller at closing, $1,108 paid to escrow accounts, $294 paid
for a net tangible asset adjustment, and $74 paid for
acquisition-related professional fees. The Company has recorded
a purchase price allocation based on a tangible and intangible
asset appraisal performed by an independent consulting firm. The
goodwill ascribed to this acquisition is not deductible for tax
purposes.
The Share Sale Agreement provides that the purchase price may be
increased if certain thresholds of net sales and earnings before
interest and taxes are exceeded for calendar years 2008 and
2009. During 2009, the Company paid $235 to the former owners
for a purchase price adjustment for the first earnout period
ended December 31, 2008 and has accrued $447 at
December 31, 2009 for an estimated purchase price
adjustment for the second earnout period ended December 31,
2009, which is expected to be settled in 2010. The additional
purchase price recorded for both years has been allocated to
goodwill.
Perks
Design Partners Pty Ltd.
Effective August 1, 2007, the Company acquired
100 percent of the outstanding stock of Perks Design
Partners Pty Ltd. (Perks), an Australia-based brand
strategy and creative design firm that provides services to
consumer products companies. The net assets and results of
operations of Perks are included in the Consolidated Financial
Statements in the Asia Pacific operating segment beginning
August 1, 2007. This business was acquired to expand the
Companys creative design business in Australia. The
Company has multinational clients which have requested that it
increase its global coverage to include Australia so that the
Company can provide design services for their Australian
operations. The reputation of Perks as a quality provider of
design services to multinational consumer products clients was
another factor the Company considered in acquiring Perks.
The purchase price of $3,328 consisted of $1,792 paid in cash to
the seller at closing, $1,193 paid to escrow accounts, $178 paid
for an estimated net tangible asset adjustment and $165 paid for
acquisition-related professional fees. The Company has recorded
a purchase price allocation based upon a tangible and intangible
asset appraisal performed by an independent consulting firm. The
goodwill ascribed to this acquisition is not deductible for tax
purposes.
Protopak
Innovations,
Inc.
Effective September 1, 2007, the Company acquired
100 percent of the outstanding stock of Protopak
Innovations, Inc. (Protopak), a Toronto,
Canada-based Company that produces prototypes and samples used
by the consumer products packaging industry as part of the
marketing and sales of their products. The net assets and
results of operations of Protopak are included in the
Consolidated Financial Statements in the North America operating
segment. This business was acquired to complement the
Companys existing consumer packaging business. The
prototype service provided by Protopak will allow the Company to
provide its clients with product packaging samples reflecting
its customer proposed modifications to its products. Prior to
acquiring this business, the Company had, for the most part,
outsourced this service. The Company determined that Protopak
was a leader in this business and serviced many
U.S.-based
multinational consumer product companies both in Canada and for
clients U.S. offices. Many of Protopaks clients
were also clients of the Company, so management of the Company
believed there was a complimentary fit between the two
businesses.
64
The base purchase price of $12,109 consisted of $11,367 paid in
cash to the seller at closing, $588 paid to the seller in April
2008 for a working capital adjustment based on the final closing
date balance sheet and $154 paid for acquisition-related
professional fees. The Company recorded a purchase price
allocation based on a fair value appraisal performed by an
independent consulting firm. The goodwill ascribed to this
acquisition is not deductible for tax purposes.
The acquisition agreement provides that the purchase price may
be increased if certain thresholds of earnings before interest
and taxes are exceeded for the fiscal years ending
September 30, 2008, September 30, 2009 and
September 30, 2010. Because the earnings threshold was
exceeded for the fiscal year ended September 30, 2008, the
Company paid $670 to the former owner in the first quarter of
2009 for a purchase price adjustment and allocated the
additional purchase price to goodwill. The Company has not paid
a purchase price adjustment for the fiscal year ended
September 30, 2009 because the earnings before interest and
taxes for this period was below the required threshold. If the
earnings threshold is exceeded for the fiscal year ending
September 30, 2010, the purchase price allocation will be
adjusted to reflect this additional purchase price adjustments
in the period earned.
Schawk
India, Ltd.
The Company acquired 50 percent of a company currently
known as Schawk India, Ltd., which provides artwork management,
pre media and print management services, in February 2005 as
part of the Companys acquisition of Seven Worldwide
Holdings, Inc. and acquired an additional 40 percent on
July 1, 2006. The net assets and results of operations of
Schawk India, Inc., net of minority interest, have been included
in the consolidated financial statements in the Asia Pacific
operating segment since July 1, 2006.
Effective August 1, 2007, the Company purchased the
remaining 10 percent of the outstanding stock of Schawk
India, Ltd. from the minority shareholders for $500. The
purchase price, less $33 representing the minority interest, was
allocated to goodwill. The primary reason for the acquisition
was to acquire the remaining minority interest in Schawk, India,
Ltd. The Company previously acquired a 90 percent interest
in this company and determined that 100 percent ownership
would allow the Company to better manage and make better use of
the workforce and resources in India. This resulted in the
recognition of goodwill in the Companys consolidated
financial statements.
Benchmark
Marketing Services, LLC
On May 31, 2007, the Company acquired the operating assets
of Benchmark Marketing Services, LLC (Benchmark), a
Cincinnati, Ohio-based creative design agency that provides
services to consumer products companies. The net assets and
results of operations of Benchmark are included in the
Consolidated Statement of Operations beginning June 1, 2007
in the North America operating segment. This business was
acquired to gain an established workforce in the Cincinnati area
to complement the Companys existing Anthem Cincinnati
creative design operation.
The base purchase price of $5,833 consisted of $5,213 paid in
cash to the seller at closing, $550 paid to the seller for a
working capital adjustment based on the closing date balance
sheet and $70 paid for acquisition-related professional fees. In
addition, the Company recorded a reserve of $666 as of the
acquisition date for the estimated expenses associated with
vacating the leased premises that Benchmark then occupied. Based
on an integration plan formulated at the time of the
acquisition, it was determined that the Benchmark operations
would be merged with the Companys existing Anthem
Cincinnati operations. The Anthem Cincinnati facility was
expanded and upgraded to accommodate the combined operations and
Benchmark relocated to this facility in October 2008. The
initial reserve and subsequent reserve modifications were
recorded as adjustments to goodwill in accordance with the
Recognition Section of the Business Combinations Topic of the
Codification, ASC
805-10-25,
and as adjustments to current and non-current liabilities. There
was no reserve balance remaining as of December 31, 2009.
The following table summarizes the reserve activity from
December 31, 2007 through December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Adjustments
|
|
|
Payments
|
|
|
2008
|
|
|
Facility closure cost
|
|
$
|
666
|
|
|
$
|
(198
|
)
|
|
$
|
(42
|
)
|
|
$
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
Adjustments
|
|
|
Payments
|
|
|
2009
|
|
|
Facility closure cost
|
|
$
|
426
|
|
|
$
|
(78
|
)
|
|
$
|
(348
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The acquisition agreement provides that the purchase price may
be adjusted if certain sales targets are exceeded for the fiscal
years ended May 31, 2008, and May 31, 2009. No
purchase price adjustment was recorded for either fiscal year
because the sales targets were not achieved.
WBK,
Inc.
On July 1, 2006, the Company acquired the operating assets
of WBK, Inc., a Cincinnati, Ohio-based design agency that
provides services to retailers and consumer products companies.
The results of operations of WBK, Inc. are included in the
Consolidated Statement of Operations beginning July 1,
2006. A primary reason for the acquisition of WBK, Inc. was to
acquire an established design firm in Cincinnati with a track
record in working with major consumer product clients. This
resulted in the recognition of goodwill in the Companys
consolidated financial statements. The goodwill is deductible as
an operating expense for tax purposes.
The purchase price of $4,865 consisted of $4,813 paid in cash to
the seller and $52 of acquisition-related professional fees. The
Company recorded a purchase price allocation based upon a
tangible and intangible asset fair value appraisal provided by
an independent consulting firm. The purchase agreement, as
amended, provides for potential increases to the purchase price
if certain earning thresholds are exceeded for the years 2006
through 2008 and for the six-month period ended June 30,
2009. No earn-out was due for 2006 because the earning threshold
was not met. The Company paid $943 in the first quarter of 2008
to the former owner of WBK, Inc. for the earn-out due for the
year 2007. The additional purchase price was allocated to
goodwill. No earn-out was due for the year 2008 or for the
six-month period ended June 30, 2009 because the sales and
earnings thresholds were not achieved.
Seven
Worldwide Holdings, Inc.
On January 31, 2005, the Company acquired 100 percent
of the outstanding stock of Seven Worldwide Holdings, Inc.
(Seven Worldwide). The purchase price of $210,568
consisted of $135,566 paid in cash at closing, $4,482 of
acquisition-related professional fees and the issuance of
4,000 shares of the Companys Class A common
stock with a value of $70,520. This business acquisition
provided a graphic services company with an established,
knowledgeable work force in the retail, advertising and
pharmaceutical markets. Seven Worldwide also had an established
work force and presence in the United Kingdom and Australia with
consumer packaging companies, and the Company was seeking to
expand its presence in these regions. This resulted in the
recognition of goodwill in the Companys consolidated
financial statements.
The Company recorded an estimated exit reserve at
January 31, 2005 in the amount of $12,775. The major
expenses included in the exit reserve were employee severance
and lease termination expenses. As management of the Company
completed its assessment of the acquired operations, additional
amounts were added to the initial reserve estimate. The initial
reserve and subsequent reserve modifications were recorded in
accordance with the Recognition Section of the Business
Combinations Topic of the Codification, ASC
805-10-25,
where decreases subsequent to the twelve month period following
the acquisition date adjust the goodwill balance and increases
are charges to operating results in the period, and as
adjustments to current and non-current liabilities. The reserve
balance related to facility closings will be paid over the term
of the leases of the closed facilities, with the longest lease
expiring in 2015. The adjustments recorded during 2009 are
primarily the result of changes in
sub-lease
assumptions for a
sub-tenant
of the vacated facility, as well as foreign currency translation
changes.
The remaining reserve balance of $2,117 is included in Accrued
expenses and Other long-term liabilities on the Consolidated
Balance Sheets as of December 31, 2009.
66
The following table summarizes the reserve recorded at
January 31, 2005 and the activity through December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
January 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Adjustment
|
|
|
Payments
|
|
|
2005
|
|
|
Employee severance
|
|
$
|
7,075
|
|
|
$
|
5,092
|
|
|
$
|
(6,721
|
)
|
|
$
|
5,446
|
|
Facility closure cost
|
|
|
5,700
|
|
|
|
5,171
|
|
|
|
(1,223
|
)
|
|
|
9,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,775
|
|
|
$
|
10,263
|
|
|
$
|
(7,944
|
)
|
|
$
|
15,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Adjustment
|
|
|
Payments
|
|
|
2006
|
|
|
Employee severance
|
|
$
|
5,446
|
|
|
$
|
155
|
|
|
$
|
(5,263
|
)
|
|
$
|
338
|
|
Facility closure cost
|
|
|
9,648
|
|
|
|
1,873
|
|
|
|
(2,930
|
)
|
|
|
8,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,094
|
|
|
$
|
2,028
|
|
|
$
|
(8,193
|
)
|
|
$
|
8,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Adjustment
|
|
|
Payments
|
|
|
2007
|
|
|
Employee severance
|
|
$
|
338
|
|
|
$
|
(81
|
)
|
|
$
|
(187
|
)
|
|
$
|
70
|
|
Facility closure cost
|
|
|
8,591
|
|
|
|
(3,183
|
)
|
|
|
(1,557
|
)
|
|
|
3,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,929
|
|
|
$
|
(3,264
|
)
|
|
$
|
(1,744
|
)
|
|
$
|
3,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Adjustment
|
|
|
Payments
|
|
|
2008
|
|
|
Employee severance
|
|
$
|
70
|
|
|
$
|
(70
|
)
|
|
$
|
|
|
|
$
|
|
|
Facility closure cost
|
|
|
3,851
|
|
|
|
(1,052
|
)
|
|
|
(925
|
)
|
|
|
1,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,921
|
|
|
$
|
(1,122
|
)
|
|
$
|
(925
|
)
|
|
$
|
1,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
Adjustment
|
|
|
Payments
|
|
|
2009
|
|
|
Facility closure cost
|
|
$
|
1,874
|
|
|
$
|
970
|
|
|
$
|
(727
|
)
|
|
$
|
2,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weir
Holdings Limited
On December 31, 2004, the Company acquired the operating
assets and assumed certain liabilities of Weir Holdings Limited,
a company registered under the laws of England, and its
subsidiaries. Weir Holdings, which operates under the trade name
Winnetts, is one of the leading providers of graphic
services to consumer products companies, retailers and major
print groups in the United Kingdom and European markets. This
business was acquired to expand the Companys graphic
services offering into Europe. Weir Holdings was an established
graphic services company with a knowledgeable work force and was
the first graphic services acquisition in Europe by the Company.
This resulted in the recognition of goodwill in the
Companys consolidated financial statements.
In connection with its acquisition of the assets of Winnetts,
the Company established a facility exit reserve at
December 31, 2004 in the amount of $2,500, primarily for
employee severance and lease abandonment expenses. The exit
reserve balance related to employee severance was paid during
2006. The exit reserve related to the facility closure will be
paid over the term of the lease, which expires in 2014. The
initial reserve and subsequent reserve modifications were
recorded in accordance with the Recognition Section of the
Business Combinations Topic of the Codification, ASC
805-10-25,
where decreases subsequent to the twelve month period following
the acquisition date adjust the goodwill balance and increases
are charges to operating results in the period, and as
adjustments to current and non-current liabilities. The
remaining reserve balance of $314 is included in Accrued
expenses and Other long-term liabilities on the Consolidated
Balance Sheet as of December 31, 2009.
67
The following table summarizes the reserve recorded at
December 31, 2004 and the activity through
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
Adjustment
|
|
|
Payments
|
|
|
2005
|
|
|
Employee severance
|
|
$
|
1,254
|
|
|
$
|
65
|
|
|
$
|
(902
|
)
|
|
$
|
417
|
|
Facility closure cost
|
|
|
1,246
|
|
|
|
718
|
|
|
|
(632
|
)
|
|
|
1,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,500
|
|
|
$
|
783
|
|
|
$
|
(1,534
|
)
|
|
$
|
1,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Adjustment
|
|
|
Payments
|
|
|
2006
|
|
|
Employee severance
|
|
$
|
417
|
|
|
$
|
|
|
|
$
|
(417
|
)
|
|
$
|
|
|
Facility closure cost
|
|
|
1,332
|
|
|
|
(686
|
)
|
|
|
(245
|
)
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,749
|
|
|
$
|
(686
|
)
|
|
$
|
(662
|
)
|
|
$
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Adjustment
|
|
|
Payments
|
|
|
2007
|
|
|
Facility closure cost
|
|
$
|
401
|
|
|
$
|
24
|
|
|
$
|
(16
|
)
|
|
$
|
409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Adjustment
|
|
|
Payments
|
|
|
2008
|
|
|
Facility closure cost
|
|
$
|
409
|
|
|
$
|
(72
|
)
|
|
$
|
(28
|
)
|
|
$
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
Adjustment
|
|
|
Payments
|
|
|
2009
|
|
|
Facility closure cost
|
|
$
|
309
|
|
|
$
|
86
|
|
|
$
|
(81
|
)
|
|
$
|
314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
acquisitions
During the year ended December 31, 2007, the Company paid
$668 for additional consideration to the former owners of
certain companies acquired in 2003 and 2004. The additional
consideration was paid pursuant to the contingency provisions of
the purchase agreements and was allocated to goodwill.
|
|
Note 3
|
Acquisition
Integration and Restructuring
|
Actions
Initiated in 2008
In 2008, the Company initiated a cost reduction 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.
68
The following table summarizes the expense recorded and the cash
payments for the year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Employee
|
|
|
Lease
|
|
|
Related
|
|
|
|
|
|
|
Terminations
|
|
|
Obligations
|
|
|
Costs
|
|
|
Total
|
|
|
Liability balance at January 1, 2008
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Expense recorded
|
|
|
4,552
|
|
|
|
4,315
|
|
|
|
895
|
|
|
|
9,762
|
|
Cash payments
|
|
|
(3,259
|
)
|
|
|
(224
|
)
|
|
|
(895
|
)
|
|
|
(4,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance at December 31, 2008
|
|
$
|
1,293
|
|
|
$
|
4,091
|
|
|
$
|
|
|
|
$
|
5,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the accruals recorded,
adjustments, and the cash payments during the year ended
December 31, 2009, related to the cost reduction 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 $4,212 is included in Accrued expenses and Other long-term
liabilities on the Consolidated Balance Sheets at
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
Lease
|
|
|
|
|
|
|
Terminations
|
|
|
Obligations
|
|
|
Total
|
|
|
Liability balance at December 31, 2008
|
|
$
|
1,293
|
|
|
$
|
4,091
|
|
|
$
|
5,384
|
|
New accruals
|
|
|
54
|
|
|
|
1,885
|
|
|
|
1,939
|
|
Adjustments
|
|
|
(310
|
)
|
|
|
(307
|
)
|
|
|
(617
|
)
|
Cash payments
|
|
|
(749
|
)
|
|
|
(1,745
|
)
|
|
|
(2,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance at December 31, 2009
|
|
$
|
288
|
|
|
$
|
3,924
|
|
|
$
|
4,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and the
cash payments during the year ended December 31, 2009,
related to the cost reduction actions initiated during 2009. The
remaining reserve balance of $1,033 is included in Accrued
expenses and Other long-term liabilities on the Consolidated
Balance Sheets at December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
Lease
|
|
|
|
|
|
|
Terminations
|
|
|
Obligations
|
|
|
Total
|
|
|
Liability balance at December 31, 2008
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
New accruals
|
|
|
3,461
|
|
|
|
192
|
|
|
|
3,653
|
|
Adjustments
|
|
|
(14
|
)
|
|
|
3
|
|
|
|
(11
|
)
|
Cash payments
|
|
|
(2,522
|
)
|
|
|
(87
|
)
|
|
|
(2,609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance at December 31, 2009
|
|
$
|
925
|
|
|
$
|
108
|
|
|
$
|
1,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the restructuring actions initiated in 2008 and
2009 shown above, for which the combined expense was $4,964 for
the year ended December 31, 2009, the Company recorded
additional restructuring expenses as follows: 1) during the
second quarter of 2009 $882 related primarily to
adjustments to acquisition exit reserves recorded in the UK
during 2005 and $77 of leasehold improvement write-offs related
to Asia facility closures initiated during the second quarter of
2009; 2) during the third quarter of 2009 $147
of asset write-offs for leasehold improvements and other fixed
assets related to the closing of offices in Melbourne, Australia
and Toronto, Canada, $175 for a consulting project related to
the Companys restructuring and $61 for moving costs
related to Corporate office restructuring; 3) during the
fourth quarter of 2009 $153 for a consulting project
related to the Companys restructuring. The total expense,
including the additional restructuring expenses described above,
of $6,459 for the year ended December 31, 2009, is
presented as Acquisition integration and restructuring expense
in the Consolidated Statements of Operations.
69
The expense for the years 2008 and 2009 and the cumulative
expense since the cost reduction programs inception was
recorded in the following segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Pacific
|
|
|
Corporate
|
|
|
Total
|
|
|
Year ended December 31, 2009
|
|
$
|
3,614
|
|
|
$
|
1,400
|
|
|
$
|
992
|
|
|
$
|
453
|
|
|
$
|
6,459
|
|
Year ended December 31, 2008
|
|
|
5,701
|
|
|
|
3,552
|
|
|
|
248
|
|
|
|
889
|
|
|
|
10,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative since program inception
|
|
$
|
9,315
|
|
|
$
|
4,952
|
|
|
$
|
1,240
|
|
|
$
|
1,342
|
|
|
$
|
16,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Raw materials
|
|
$
|
2,736
|
|
|
$
|
2,994
|
|
Work in process
|
|
|
16,969
|
|
|
|
18,487
|
|
Finished goods
|
|
|
1,771
|
|
|
|
3,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,476
|
|
|
|
24,547
|
|
Less: LIFO reserve
|
|
|
(940
|
)
|
|
|
(930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,536
|
|
|
$
|
23,617
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5
|
Property
and Equipment
|
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Useful Life
|
|
|
2009
|
|
|
2008
|
|
|
Land and improvements
|
|
|
10-15 years
|
|
|
$
|
5,939
|
|
|
$
|
5,201
|
|
Buildings and improvements
|
|
|
15-30 years
|
|
|
|
15,825
|
|
|
|
15,125
|
|
Machinery and equipment
|
|
|
3-7 years
|
|
|
|
85,209
|
|
|
|
92,735
|
|
Leasehold improvements
|
|
|
Life of lease
|
|
|
|
19,878
|
|
|
|
18,625
|
|
Computer software and licenses
|
|
|
3-7 years
|
|
|
|
19,836
|
|
|
|
19,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146,687
|
|
|
|
150,908
|
|
Accumulated depreciation and amortization
|
|
|
|
|
|
|
(96,440
|
)
|
|
|
(92,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,247
|
|
|
$
|
58,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6
|
Impairment
of Long-lived Assets
|
During 2008, the Company made a decision to sell land and
buildings at three locations and engaged independent appraisers
to assess their market values. Based on the appraisal reports,
the Company determined that the carrying values of the
properties could not be supported by their estimated fair
values. The combined carrying value of $10,025 was written down
by $3,470 at December 31, 2008, based on the
properties estimated fair values, less anticipated costs
to sell, of $6,555. In accordance with the Property, Plant and
Equipment Topic of the Codification, ASC 360, the $6,555
adjusted carrying value of the land and buildings is classified
as Assets held for sale on the Consolidated Balance Sheets at
December 31, 2008. During 2009, two of the three properties
were sold, with selling prices approximately equal to their
carrying values, and the Company reappraised the third property
to assess its current value. Based on the updated appraisal, the
Company recorded a further write-down of the property in the
amount of $1,305 at December 31, 2009. The expense for
these write-downs in both 2009 and 2008 is included in
Impairment of long-lived assets in the Consolidated Statements
of Operations and was recorded in the North America operating
segment. In addition, the Company reclassified the adjusted
carrying value of the
70
remaining property from held for sale to held and used at
December 31, 2009, because the sale of the property during
the next twelve months is unlikely.
During 2009, the Company recorded an impairment charge of $61
related to fixed assets in the North America segment and an
impairment charge of $75 related to a customer relationship
intangible asset, for which the carrying value could not be
supported by future cash flows, in the Europe segment. Both of
these charges are included in Impairment of long-lived assets in
the Consolidated Statements of Operations. Additionally, the
Company incurred $210 of fixed asset impairments in 2009
relating to its restructuring and cost reduction plan, included
in Acquisition integration and restructuring expense in the
Consolidated Statements of Operations. These charges were
principally incurred in the Asia Pacific operating segment.
Refer to Note 3 Acquisition Integration and
Restructuring for further information.
During 2008, software that had been capitalized by the Company
in accordance with the Internal-Use Software Subtopic of the
Codification, ASC
350-40, was
reviewed for impairment due to changes in circumstances which
indicated that the carrying amount of the assets might not be
recoverable. These changes in circumstances included the
expectation that the software would not provide substantive
service potential and there was a change in the extent to which
the software was to be used. In addition, it was determined that
the cost to modify the software for the Companys needs
would significantly exceed originally expected development
costs. As a result of these circumstances, the Company
wrote-down the capitalized costs of the software to fair value.
The amount of this write-down recorded in 2008 was $2,336 and is
included in Impairment of long-lived assets in the Consolidated
Statements of Operations. The expense was recorded in Corporate.
The Company also recorded a $468 impairment charge in 2008 to
write-down certain fixed assets of its large format print
operation to fair value. The expense was recorded in the North
America segment. Also, included in the Impairment of long-lived
assets in the Consolidated Statement of Operations for 2008, is
$209 of additional fixed asset impairments, mainly related to
leasehold improvements at a production facility where the lease
was terminated prior to the contractual lease termination date.
This expense was recorded mainly in the North America segment.
In addition, the Company recorded $161 of impairment charges
related to customer relationship intangible assets where future
cash flows could not support the carrying values. This
impairment charge was recorded mainly in the North America
operating segment. Additionally, the Company incurred $628 of
fixed asset impairments in 2008 relating to its restructuring
and cost reduction plan, included in Acquisition integration and
restructuring expense in the Consolidated Statements of
Operations. Refer to Note 3 Acquisition
Integration and Restructuring for further information.
In 2007, the Company recorded $1,197 of impairment charges,
primarily for a customer relationship asset for which future
estimated cash flows did not support the carrying value. The
2007 impairment charge was recorded in the North America
operating segment.
|
|
Note 7
|
Goodwill
and Other 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, or when events or changes
in business circumstances indicate that the carrying value may
not be recoverable. The Company historically performed its
annual impairment test as of December 31; however, in the fourth
quarter of 2008 the Company changed its annual test date to
October 1.
In the third quarter of 2009, the Company restructured its
operations on a geographic basis, in three areas: North America,
Europe and Asia Pacific (see Note 18 Segment
and Geographic Reporting). The Company allocated goodwill to the
new segments on a relative fair value basis and relied on the
goodwill impairment analysis performed as of June 30, 2009,
which indicated no impairment of the assigned goodwill.
In the fourth quarter of 2009, the Company performed the
required goodwill impairment test as of October 1, 2009.
The Company assigned its goodwill to multiple reporting units on
a geographic basis at the operating segment level in accordance
with the Segment Reporting Topic of the Codification, ASC 280.
Using projections of operating
71
cash flow for each reporting unit, the Company performed a step
one assessment of the fair value of each reporting unit as
compared to the carrying value of each reporting unit. The step
one impairment analysis indicated no potential impairment of the
assigned goodwill.
Because of a significant decrease in the Companys market
capitalization during the first quarter of 2009, the Company
performed an additional goodwill impairment test as of
March 31, 2009 and determined that goodwill was not
impaired.
The Company performed its 2008 impairment test as of
October 1, 2008, which indicated that goodwill assigned to
the Companys European and former Anthem reporting units
was impaired by $30,657 and $17,384, respectively, as of
October 1, 2008, which was recorded in the fourth quarter
of 2008. With the segment reorganization in the third quarter of
2009, the impairment of goodwill was reassigned to the new
segments as follows: North America $14,334,
Europe $32,703 and Asia Pacific $1,004.
The goodwill impairment reflected the decline in global economic
conditions and general reduction in consumer and business
confidence experienced during the fourth quarter of 2008.
The estimates and assumptions used by the Company to test its
goodwill are consistent with the business plans and estimates
used to manage operations and to make acquisition and
divestiture decisions. The use of different assumptions could
impact whether an impairment charge is required and, if so, the
amount of such impairment. If the Company fails to achieve
estimated volume and pricing targets, experiences unfavorable
market conditions or achieves results that differ from its
estimates, then revenue and cost forecasts may not be achieved,
and the Company may be required to recognize impairment charges.
Additionally, future goodwill impairment charges may be
necessary if the Companys market capitalization decreases
due to a decline in the trading price of the Companys
common stock.
The changes in the carrying amount of goodwill by operating
segment during the years ended December 31, 2009 and 2008
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Pacific
|
|
|
Total
|
|
|
Balance at December 31, 2007
|
|
$
|
202,024
|
|
|
$
|
36,202
|
|
|
$
|
8,142
|
|
|
$
|
246,368
|
|
Acquisitions
|
|
|
|
|
|
|
7,661
|
|
|
|
26
|
|
|
|
7,687
|
|
Additional purchase accounting adjustments
|
|
|
(12,827
|
)
|
|
|
(113
|
)
|
|
|
88
|
|
|
|
(12,852
|
)
|
Adjustments to exit reserves
|
|
|
(1,063
|
)
|
|
|
(188
|
)
|
|
|
|
|
|
|
(1,251
|
)
|
Adjustments to exit reserve present value
|
|
|
72
|
|
|
|
78
|
|
|
|
|
|
|
|
150
|
|
Goodwill impairment
|
|
|
(14,334
|
)
|
|
|
(32,703
|
)
|
|
|
(1,004
|
)
|
|
|
(48,041
|
)
|
Foreign currency translation
|
|
|
(3,644
|
)
|
|
|
(3,276
|
)
|
|
|
(1,104
|
)
|
|
|
(8,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
170,228
|
|
|
|
7,661
|
|
|
|
6,148
|
|
|
|
184,037
|
|
Acquisitions
|
|
|
|
|
|
|
177
|
|
|
|
|
|
|
|
177
|
|
Additional purchase accounting adjustments
|
|
|
40
|
|
|
|
(415
|
)
|
|
|
526
|
|
|
|
151
|
|
Adjustments to exit reserves
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
(78
|
)
|
Adjustments to exit reserve present value
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Foreign currency translation
|
|
|
2,288
|
|
|
|
430
|
|
|
|
653
|
|
|
|
3,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
172,484
|
|
|
$
|
7,853
|
|
|
$
|
7,327
|
|
|
$
|
187,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
The Companys other intangible assets subject to
amortization are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Patents
|
|
|
20.0 years
|
|
|
|
85
|
|
|
|
(85
|
)
|
|
|
|
|
Trade names
|
|
|
2.7 years
|
|
|
|
732
|
|
|
|
(681
|
)
|
|
|
51
|
|
Contract acquisition cost
|
|
|
3.0 years
|
|
|
|
2,155
|
|
|
|
(1,108
|
)
|
|
|
1,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.3 years
|
|
|
$
|
56,525
|
|
|
$
|
(18,920
|
)
|
|
$
|
37,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Weighted
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Average Life
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Customer relationships
|
|
|
14.2 years
|
|
|
$
|
49,212
|
|
|
$
|
(11,053
|
)
|
|
$
|
38,159
|
|
Digital images
|
|
|
5.0 years
|
|
|
|
811
|
|
|
|
(595
|
)
|
|
|
216
|
|
Developed technologies
|
|
|
3.0 years
|
|
|
|
712
|
|
|
|
(712
|
)
|
|
|
|
|
Non-compete agreements
|
|
|
3.4 years
|
|
|
|
658
|
|
|
|
(367
|
)
|
|
|
291
|
|
Patents
|
|
|
20.0 years
|
|
|
|
85
|
|
|
|
(85
|
)
|
|
|
|
|
Trade names
|
|
|
2.6 years
|
|
|
|
672
|
|
|
|
(473
|
)
|
|
|
199
|
|
Contract acquisition cost
|
|
|
3.0 years
|
|
|
|
935
|
|
|
|
(675
|
)
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.3 years
|
|
|
$
|
53,085
|
|
|
$
|
(13,960
|
)
|
|
$
|
39,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 its experience that customers are reluctant to
change suppliers. Amortization expense related to the other
intangible assets totaled $4,729, $4,058, and $3,779 in 2009,
2008 and 2007, respectively. The Company recorded an impairment
charge of $75 in 2009 in the Europe operating segment for a
digital image asset for which future cash flows did not support
the carrying value. In 2008 and 2007, respectively, the Company
recorded impairment charges in the North America operating
segment of $161 and $1,197, respectively, for customer
relationship assets for which future cash flows did not support
the carrying value. The impairment charges are included in
Impairment of long-lived assets in the Consolidated Statements
of Operations. Amortization expense for each of the next five
years is expected to be approximately $4,515 for 2010, $4,235
for 2011, $4,049 for 2012 and $3,797 for 2013 and 2014.
73
|
|
Note 8
|
Accrued
Expenses
|
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Accrued compensation and payroll taxes
|
|
$
|
21,021
|
|
|
$
|
16,946
|
|
Deferred revenue
|
|
|
10,583
|
|
|
|
8,217
|
|
Multiemployer pension withdrawal
|
|
|
9,151
|
|
|
|
|
|
Accrued sales & use tax
|
|
|
3,976
|
|
|
|
1,227
|
|
Deferred lease costs
|
|
|
3,817
|
|
|
|
3,992
|
|
Restructuring reserves
|
|
|
3,347
|
|
|
|
3,456
|
|
Accrued professional fees
|
|
|
2,481
|
|
|
|
3,665
|
|
Vacant property reserve
|
|
|
1,564
|
|
|
|
2,243
|
|
Facility exit reserve
|
|
|
1,225
|
|
|
|
1,309
|
|
Accrued interest
|
|
|
765
|
|
|
|
721
|
|
Accrued property taxes
|
|
|
628
|
|
|
|
920
|
|
Accrued customer rebates
|
|
|
587
|
|
|
|
1,498
|
|
Other
|
|
|
4,934
|
|
|
|
7,740
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64,079
|
|
|
$
|
51,934
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9
|
Other
Long-Term Liabilities
|
Other long-term liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Multiemployer pension withdrawal liability
|
|
$
|
|
|
|
$
|
7,410
|
|
Vacant property reserve
|
|
|
3,660
|
|
|
|
4,080
|
|
Deferred revenue
|
|
|
2,931
|
|
|
|
2,543
|
|
Restructuring reserve
|
|
|
1,898
|
|
|
|
1,928
|
|
Employment tax reserve
|
|
|
1,848
|
|
|
|
2,396
|
|
Reserve for uncertain tax positions
|
|
|
1,635
|
|
|
|
7,343
|
|
Facility exit reserve
|
|
|
1,206
|
|
|
|
1,300
|
|
Other
|
|
|
2,742
|
|
|
|
2,137
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,920
|
|
|
$
|
29,137
|
|
|
|
|
|
|
|
|
|
|
During 2009 and 2008, the Company recorded adjustments to
several vacant property and exit reserves. The adjustments
reflect changes in the projections of future costs for the
vacant facilities due to new sublease agreements executed and
other changes in future cost and sublease income assumptions.
Adjustments totaling $72 and $1,101,were recorded to facility
exit reserves as credits to goodwill during 2009 and 2008,
respectively, as the affected reserves were initially recorded
as exit reserves in connection with acquisitions in accordance
with the Recognition Section of the Business Combinations Topic
of the Codification, ASC
805-10-25.
An expense of $1,170 resulting from adjustments to exit reserves
and vacant property reserves was recorded in 2009, compared to a
$102 credit to income in 2008.
Total Company debt outstanding at December 31, 2009 was
approximately $77.6 million, which reflects a net debt
reduction of approximately $58.3 million since
December 31, 2008.
74
Debt obligations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Revolving credit agreement
|
|
$
|
19,850
|
|
|
$
|
66,250
|
|
Series A senior note payable Tranche A
|
|
|
7,374
|
|
|
|
10,714
|
|
Series A senior note payable Tranche B
|
|
|
6,145
|
|
|
|
8,572
|
|
Series C senior note payable
|
|
|
8,602
|
|
|
|
10,000
|
|
Series D senior note payable
|
|
|
17,206
|
|
|
|
20,000
|
|
Series E senior note payable
|
|
|
17,206
|
|
|
|
20,000
|
|
Other
|
|
|
1,182
|
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,565
|
|
|
|
135,827
|
|
Less amounts due in one year or less
|
|
|
(12,858
|
)
|
|
|
(23,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64,707
|
|
|
$
|
112,264
|
|
|
|
|
|
|
|
|
|
|
Annual maturities of debt obligations at December 31, 2009,
based on the June 2009 amendments and January 2010 refinancing
discussed below, are as follows:
|
|
|
|
|
2010
|
|
$
|
12,858
|
|
2011
|
|
|
20,278
|
|
2012
|
|
|
40,128
|
|
2013
|
|
|
3,072
|
|
Thereafter
|
|
|
1,229
|
|
|
|
|
|
|
|
|
$
|
77,565
|
|
|
|
|
|
|
Revolving
Credit Facility, Note Purchase Agreements and Other Debt
Arrangements
Borrowings
and Debt Agreements at December 31, 2009
In January 2005, the Company entered into a five year unsecured
revolving credit facility credit agreement with JPMorgan Chase
Bank, N.A. On February 28, 2008, certain covenants of the
credit agreement were amended to allow the Company to increase
certain restricted payments (primarily dividends and stock
repurchases) and maximum acquisition amounts. Specifically, the
amendment increased the aggregate dollar amount of restricted
payments that the Company may make from $15,000 to $45,000
annually, increased the Companys allowable maximum
acquisition amount from $50,000 to $75,000 annually and
increased the Companys permitted foreign subsidiary
investment amount from $60,000 to $120,000. The increase in the
restricted payment covenant was designed primarily to allow for
greater share repurchases. This facility was further amended in
June 2009. Pursuant to the 2009 amendment, $7,889 of the
outstanding revolving credit balance at December 31, 2008
was paid at closing and $2,630 was paid later in June 2009. See
2009 Amendments to Revolving Credit Facility and Note
Purchase Agreements below. This credit facility has since
been terminated in connection with the Companys January
2010 refinancing. See 2010 Revolving Credit Facility
Refinancing and Note Purchase Agreement Amendments below.
The total balance outstanding under the revolving credit
agreement at December 31, 2009 was $19,850 and is included
in Long-term debt on the December 31, 2009 Consolidated
Balance Sheets.
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. The
first note, in the original principal amount of $10,000, will
mature in January 2010. The second and third notes, each in the
original principal amount of $20,000, mature in 2011 and 2012,
respectively. The terms of these notes were amended in June
2009. See 2009 Amendments to Revolving Credit Facility and
Note Purchase Agreements below. Pursuant to the 2009
amendment, $5,240 of the combined principal of the three notes
was paid at closing and $1,746 was paid later in June 2009, with
the payments being applied on a prorata basis to reduce the
original maturity amounts shown above. Under the revised payment
schedule, $8,602 matures in January 2010, and $17,206 will
mature in both 2011 and 2012. Additionally as amended, the
first, second and third notes bear interest at
8.81 percent, 8.99 percent and 9.17 percent,
respectively. The total outstanding balance of these
75
notes, $43,014, is included on the December 31, 2009
Consolidated Balance Sheets as follows: $8,602 is included in
Current maturities of long-term debt and $34,412 is included in
Long-term 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, pursuant to an exception from
the registration requirements of the Securities Act of 1933, of
two series of notes: Tranche A, for $15,000 and
Tranche B, for $10,000. The terms of these notes were
amended in June 2009. See 2009 Amendments to Revolving
Credit Facility and Note Purchase Agreements below. Under
the original terms, the Tranche A note was payable in
annual installments of $2,143 from 2007 to 2013, and the
Tranche B note was payable in annual installments of $1,429
from 2008 to 2014. Pursuant to the 2009 amendment, $1,871 of the
combined principal of the two notes was paid at closing and $624
was paid later in June 2009, with the payments being applied on
a prorata basis to reduce the original installment amounts.
Under the amended terms, the remaining balance of the
Tranche A note will be payable in annual installments of
$1,843 from 2009 to 2013, and the remaining balance of the
Tranche B note will be payable in annual installments of
$1,229 from 2010 to 2014, provided that upon the Company
obtaining a consolidated leverage ratio of 2.75 to 1 and the
refinancing of the Companys revolving credit facility,
principal installments due under the 2003 Private Placement will
return to the pre-2009 amendment levels ($2,143 on each December
31 and $1,429 on each April 1). The originally scheduled
Tranche B installment payment of $1,429 was paid when due
in April 2009. The amended scheduled Tranche A installment
payment of $1,843 was paid when due in December 2009. As
amended, the Tranche A and Tranche B notes bear
interest at 8.90 percent and 8.98 percent,
respectively. The combined balance of the of the Tranche A
and Tranche B notes, $13,519, is included on the
December 31, 2009 Consolidated Balance Sheets as follows:
$3,073 is included in Current maturities of long-term debt and
$10,446 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 December 31, 2009;
however, a $750 Canadian dollar letter of credit had been issued
against funds available under the credit line.
2009
Amendments to Revolving Credit Facility and Note Purchase
Agreements
As a result of goodwill impairment charges and restructuring
activities in the fourth quarter of 2008, compounded by the
Companys stock repurchase program and weaker earnings
performance, the Company was in violation of certain restrictive
debt covenants at December 31, 2008 and March 31,
2009. On June 11, 2009, the Company entered into amendments
that, among other things, restructured its leverage and minimum
net worth covenants under its revolving credit facility and note
purchase agreements. In particular the amendments:
|
|
|
|
|
reduced the size of the Companys revolving credit facility
by $32,500, from $115,000 (expandable to $125,000) to $82,500;
|
|
|
|
after the payment of $2,630 in June 2009, the size of the
Companys revolving credit facility was further reduced to
$80,000;
|
|
|
|
increased the Companys maximum permitted cash-flow
leverage ratio from 3.25 to 5.00 for the first quarter of 2009,
decreasing to 3.00 in the fourth quarter of 2009 and thereafter;
|
|
|
|
amended the credit facilitys pricing terms, including
increasing the interest rate margin applicable on the revolving
credit facility indebtedness to a variable rate of LIBOR plus
300 to 450 basis points (bpts), depending on
the cash flow leverage ratio, and set the minimum LIBOR at
2.0 percent;
|
|
|
|
increased the unused revolver commitment fee rate to
50 bpts per year;
|
|
|
|
increased the interest rate on indebtedness outstanding under
each of the notes outstanding under the Companys note
agreements by 400 bpts;
|
|
|
|
reset the Companys minimum quarterly fixed charge coverage
ratio;
|
76
|
|
|
|
|
prohibit the Company from repurchasing its shares without lender
consent and restrict future dividend payments by the Company
(beginning with the first dividend declared after March,
2009) to an aggregate $300 per fiscal quarter, or
approximately $0.01 per share based on the number of shares of
common stock currently outstanding;
|
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|
required the Company to obtain lender approval of any
acquisitions;
|
|
|
|
revised the Companys minimum consolidated net worth
covenant to be based on 90 percent of the Companys
consolidated net worth as of March 31, 2009;
|
|
|
|
reduced the amount of the Companys permitted capital
expenditures to $17,500, from $25,000, during any fiscal
year; and
|
|
|
|
provided a waiver for any noncompliance with certain financial
covenants, as well as covenants relating to (i) the
reduction of indebtedness within prescribed time periods using
the proceeds of a previously completed asset sale, (ii) the
payment of dividends, and (iii) the delivery of the
Companys annual and quarterly financial statements for the
periods ended December 31, 2008 and March 31, 2009,
respectively, within prescribed time periods.
|
In addition, all amounts due under the credit facility and the
outstanding senior notes became fully secured through liens on
substantially all of the Companys and its domestic
subsidiaries personal property.
As part of the credit facility amendments, the note purchase
agreements associated with the Companys outstanding senior
notes were amended to include financial and other covenants that
were the same as or substantially equivalent to the revised
financial and other covenants under the amended credit facility.
2010
Revolving Credit Facility Refinancing and Note Purchase
Agreement Amendments
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 revolving credit facility. 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
closing, the applicable margin was 300 basis points,
resulting in an interest rate at closing of 3.22 percent.
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.
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
77
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
December 31, 2009.
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
Prior to the June 2009 amendments to its debt agreements, the
Company had $173 of unamortized deferred financing fees relating
to its original revolving credit agreement and the 2005 and 2003
Private Placements. In accordance with the Debt
Modifications and Extinguishments Subtopic of the Codification,
ASC 470-50,
the Company has written-off $31 of the previously unamortized
deferred finance costs related to its revolving credit facility
in proportion to the decrease in its revolving credit limit from
$115,000 to $80,000. In accordance with ASC
470-50, fees
paid to lenders and third parties to obtain the amended
revolving credit facility, amounting to $866, have been
capitalized as deferred financing fees and are being amortized
based on the remaining term of the original revolving credit
agreement, which expired January 31, 2010. At
December 31, 2009, $758 of these deferred financing fees
had been amortized and are included in Interest expense on the
December 31, 2009 Consolidated Statements of Operations.
For the amendments to the 2005 Private Placement and the 2003
Private Placement, the Company has followed the Debt
Modifications and Extinguishments Subtopic of the Codification,
ASC 470-50,
for situations where the modifications are not accounted for as
being similar to debt extinguishments. As a result, no gain or
loss has been recognized from the modifications. The fees and
costs associated with the modifications have been recorded as
follows: 1) the amendment fees of $304 paid to the lenders
have been capitalized as deferred financing fees and will be
amortized over the life of the amended agreements; 2) fees
paid to third parties of $233 have been expensed as incurred;
3) the previously unamortized deferred financing fees of
$73 related to the original 2005 and 2003 Private Placements
will be amortized over the life of the amended agreements.
In addition, $73 of legal fees related to the 2010 refinancing
of the revolving credit facility have been capitalized as
deferred financing fees at December 31, 2009 and will be
amortized over the term of the new credit facility beginning in
the first quarter of 2010.
The total amortization of deferred financing fees was $1,027,
$168 and $132 for the years ended December 31, 2009,
December 31, 2008 and December 31, 2007, respectively,
and is included in Interest expense on the Consolidated
Statements of Operations.
The domestic and foreign components of income (loss) before
income taxes are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
United States
|
|
$
|
13,918
|
|
|
$
|
(23,450
|
)
|
|
$
|
33,034
|
|
Foreign
|
|
|
13,176
|
|
|
|
(39,666
|
)
|
|
|
18,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,094
|
|
|
$
|
(63,116
|
)
|
|
$
|
51,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
The provision (benefit) for income taxes is comprised of the
following:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
103
|
|
|
$
|
1,219
|
|
|
$
|
12,433
|
|
State
|
|
|
(118
|
)
|
|
|
887
|
|
|
|
3,199
|
|
Foreign
|
|
|
4,412
|
|
|
|
3,236
|
|
|
|
3,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,397
|
|
|
|
5,342
|
|
|
|
19,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
2,771
|
|
|
|
(6,104
|
)
|
|
|
(264
|
)
|
State
|
|
|
1,097
|
|
|
|
(1,768
|
)
|
|
|
(154
|
)
|
Foreign
|
|
|
(668
|
)
|
|
|
(580
|
)
|
|
|
1,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,200
|
|
|
|
(8,452
|
)
|
|
|
1,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,597
|
|
|
$
|
(3,110
|
)
|
|
$
|
20,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys effective tax rate for the year ended
December 31, 2009 is 28.0 percent as compared with
4.9 percent for 2008. The current years effective
rate was primarily impacted by the receipt of a $4,986
non-taxable indemnity settlement payment and federal examination
affirmative adjustments of $2,833.
Reconciliation between the provision for income taxes for
continuing operations computed by applying the US federal
statutory tax rate to income (loss) before incomes taxes and the
actual provision is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income taxes at U.S. Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Indemnification settlement
|
|
|
(6.4
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
Federal examination settlement
|
|
|
(5.1
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
Foreign rate differential
|
|
|
(3.5
|
)
|
|
|
(1.1
|
)
|
|
|
(0.7
|
)
|
Uncertain tax positions
|
|
|
2.7
|
|
|
|
(7.1
|
)
|
|
|
1.8
|
|
State income taxes
|
|
|
2.6
|
|
|
|
2.0
|
|
|
|
3.6
|
|
Nondeductible expenses
|
|
|
2.2
|
|
|
|
3.0
|
|
|
|
0.8
|
|
Deferred tax asset valuation allowance
|
|
|
|
|
|
|
(10.8
|
)
|
|
|
(0.9
|
)
|
Remediation adjustments
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
Nondeductible impairment charges
|
|
|
|
|
|
|
(16.6
|
)
|
|
|
|
|
Other, net
|
|
|
0.5
|
|
|
|
(0.3
|
)
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28.0
|
%
|
|
|
4.9
|
%
|
|
|
40.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2009, the Company amended its accounting policy related
to the quantification and valuation of deferred tax assets which
may be limited as to use. Under certain tax rules, net operating
losses and other tax attributes may be limited in use based upon
the occurrence of certain events, such as changes of ownership
or changes in business continuity. When an event of this type
occurs, the deferred tax assets may not be used in full to
offset future tax liabilities. The Company has historically
included these limited tax attributes in its inventory of
deferred tax assets, offset by a full valuation allowance. The
company will no longer reflect deferred tax assets that become
subject to these limitations, nor will corresponding valuation
allowances for these items be required. Deferred tax assets have
been reduced by $2,778 in 2009 related to U.S. and state
net operating loss carryforwards which are permanently precluded
from use under Internal Revenue Code Section 382:
Limitation on Net Operating Loss Carryforwards and Certain
Built-In Losses Following Ownership Change with a
corresponding reduction in the valuation allowance to reflect
this change of accounting policy.
79
Temporary differences and carryforwards giving rise to deferred
income tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Operating loss carryforwards
|
|
$
|
16,997
|
|
|
$
|
17,870
|
|
Capital loss carryforwards
|
|
|
7,287
|
|
|
|
6,604
|
|
Income tax credits
|
|
|
6,601
|
|
|
|
4,996
|
|
Multiemployer pension withdrawal liability
|
|
|
3,654
|
|
|
|
2,939
|
|
Restructuring reserves
|
|
|
3,561
|
|
|
|
4,364
|
|
Accruals and reserves not currently deductible
|
|
|
3,160
|
|
|
|
3,403
|
|
Other
|
|
|
6,542
|
|
|
|
7,444
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets
|
|
|
47,802
|
|
|
|
47,620
|
|
Valuation allowances
|
|
|
(26,765
|
)
|
|
|
(28,619
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets, net
|
|
$
|
21,037
|
|
|
$
|
19,001
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Domestic subsidiary stock
|
|
$
|
(8,553
|
)
|
|
$
|
(8,553
|
)
|
Intangible assets
|
|
|
(3,737
|
)
|
|
|
(3,232
|
)
|
Depreciation and amortization
|
|
|
(2,784
|
)
|
|
|
(1,643
|
)
|
Other
|
|
|
(5,811
|
)
|
|
|
(1,997
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities
|
|
$
|
(20,885
|
)
|
|
$
|
(15,425
|
)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Company has U.S. federal
and state net operating loss carry forwards of $1,943 and
$51,420, respectively, $44,134 of foreign net operating loss
carry forwards, $17,133 of foreign capital loss carry forwards,
and U. S. and foreign income tax credit carry forwards of
$1,765 and $4,836, respectively, which will be available to
offset future income tax liabilities. If not used, $1,943 of the
net operating loss carry forwards will expire in 2022 to 2025
while the remainder has no expiration period. Certain of these
carry forwards are subject to limitations on use due to tax
rules affecting acquired tax attributes, loss sharing between
group members, and business continuation, and therefore the
Company has established tax-effected valuation allowances
against these tax benefits in the amount of $26,765 at
December 31, 2009. Included in this total are valuation
allowances related to pre-acquisition deferred tax assets which
were established in prior years as an adjustment to goodwill.
With the adoption of ASC 805, effective January 1, 2009,
changes to valuation allowances established in purchase
accounting after December 31, 2008 are recorded as part of
the income tax provision as opposed to goodwill.
As discussed in the
Form 10-K
for the year ended December 31, 2007, the Company reported
a material weakness in internal controls relating to income
taxes as of December 31, 2007. In 2008, the Company
reviewed significant tax balances on a substantive basis as a
result of its material weakness in controls relating to income
taxes. In 2008, the Company reflected income tax adjustments
related to these remediation efforts, resulting in a $9,288
increase in Deferred Tax Assets, net of Deferred Tax
Liabilities, a $6,410 increase in Valuation Allowances, a $2,223
decrease to Goodwill, and a $474 decrease to Income Tax Expense,
primarily related to purchase accounting, which should have been
recorded in 2007 or prior. These adjustments were recorded in
2008 since the corrections are considered immaterial to both the
2008 and 2007 Consolidated Balance Sheets and Consolidated
Statements of Operations. The $6,268 deferred tax asset
adjustment and the related valuation allowance were reversed
upon settlement of intercompany transactions in the fourth
quarter of 2008.
The undistributed earnings of foreign subsidiaries were
approximately $44,387, and $32,801 at December 31, 2009 and
2008, respectively. No income taxes are provided on the
undistributed earnings because they are considered permanently
reinvested.
During 2009, the Company created a Luxembourg holding company
(Lux SARL) and transferred its foreign subsidiary operations to
Lux SARL in a transaction which qualifies as a tax-free
reorganization. Lux SARL will redeploy earnings distributions
from foreign subsidiaries to invest in new non-US acquisitions
or expansions of existing non-US operations. As a result of the
reorganizations, the Company expects that it will have less
foreign
80
source earnings in the U.S. to support U.S. foreign
tax credits. The Company has total foreign tax credit
carryforwards of $1,539, offset by a valuation allowance of
$1,167 in 2009. The Company has the ability to claim a deduction
for these credits prior to expiration, and thus the net carrying
value of the credits of $372 assumes that a deduction would be
claimed instead of a tax credit. If unutilized, these
U.S. foreign tax credits will begin to expire in 2016.
The Company adopted the provisions of ASC 740 on January 1,
2007. As a result of the implementation of ASC 740, the Company
recorded a $2,209 increase in the liability for unrecognized tax
benefits which is offset by a reduction of deferred tax
liability of $110, an increase in goodwill of $981, a decrease
to additional paid in capital of $53 and a reduction in current
taxes payable of $362, resulting in a net decrease to the
January 1, 2007 retained earnings balance of $703.
It is expected that the amount of unrecognized tax benefits that
will change in the next twelve months attributable to the
anticipated settlement of examinations or statute closures will
be in the range of $10,000 to $12,000. Of the total amount of
unrecognized tax benefits of $16,259, approximately $6,600 would
reduce the effective tax rate. With the adoption of ASC 805,
effective January 1, 2009, increases or decreases to
unrecognized tax benefits established in purchase accounting
will be recorded as part of the income tax provision as opposed
to goodwill.
All federal income tax returns of Schawk, Inc. and subsidiaries
are closed through 2005. During 2009, the Company filed a
carryback claim for 2008 net operating losses which
resulted in the commencement of an examination of its 2006 to
2008 tax years. The examination was concluded in January 2010
and is pending acceptance by the Joint Committee of Taxation.
The largest contributing factor to the 2008 net operating
loss is related to the Companys filing of a change in
accounting method which allows the Company to expense costs as
incurred as opposed to capitalizing into inventory those costs
associated with providing graphic services, brand strategy and
design software to its customers. The method change was approved
by the Internal Revenue Service in January 2010.
State income tax returns are generally subject to examination
for a period of 3 to 5 years after filing of the respective
return. The impact of any federal changes remains subject to
examination by various states for a period of up to one year
after formal notification to the states. Schawk, Inc. and its
subsidiaries have various state income tax returns in the
process of examination, administrative appeals or litigation.
The Company recognizes accrued interest related to unrecognized
tax benefits and penalties in income tax expense in the
Consolidated Statements of Operations. During the years ended
December 31, 2009 and 2008, the Company recognized $719 and
$(48) in net interest (income) expense, respectively. The
Company had approximately $1,878 and $1,055 of accrued interest
expense and penalties for December 31, 2009, and 2008,
respectively.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Balance at January 1
|
|
$
|
8,194
|
|
|
$
|
13,597
|
|
|
$
|
13,550
|
|
Additions related to tax positions in prior years
|
|
|
8,587
|
|
|
|
3,009
|
|
|
|
805
|
|
Reductions related to settlements
|
|
|
(549
|
)
|
|
|
(3,699
|
)
|
|
|
|
|
Reductions due to statute closures
|
|
|
(69
|
)
|
|
|
(4,606
|
)
|
|
|
(764
|
)
|
Reductions for tax positions in prior years
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
146
|
|
|
|
(107
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
16,259
|
|
|
$
|
8,194
|
|
|
$
|
13,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12
|
Related
Party Transactions
|
The Company leases land and a building from a related party. See
Note 13 Leases and Commitments.
81
|
|
Note 13
|
Leases
and Commitments
|
The Company leases land and a building in Des Plaines, Illinois
from a related party. Total rent expense incurred under this
operating lease was in $756 in 2009, $725 in 2008 and $704 in
2007.
The Company leases various plant facilities and equipment under
operating leases that cannot be cancelled and expire at various
dates through September 2023. Some of the leases contain renewal
options and leasehold improvement incentives. Leasehold
improvement incentives received from landlords are deferred and
recognized as a reduction of rent expense over the respective
lease term. Rent expense is recorded on a straight-line basis,
taking into consideration lessor incentives and scheduled rent
increases. Total rent expense incurred under all operating
leases was approximately $14,248, $16,003 and $16,535, for the
years ended December 31, 2009, 2008 and 2007, respectively.
Future minimum payments under leases with terms of one year or
more are as follows at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
Gross Rents
|
|
|
Subleases
|
|
|
Net Rents
|
|
|
2010
|
|
$
|
14,958
|
|
|
$
|
(1,879
|
)
|
|
$
|
13,079
|
|
2011
|
|
|
12,697
|
|
|
|
(1,143
|
)
|
|
|
11,554
|
|
2012
|
|
|
11,477
|
|
|
|
(660
|
)
|
|
|
10,817
|
|
2013
|
|
|
7,748
|
|
|
|
(363
|
)
|
|
|
7,385
|
|
2014
|
|
|
6,804
|
|
|
|
(363
|
)
|
|
|
6,441
|
|
Thereafter
|
|
|
9,066
|
|
|
|
(1,266
|
)
|
|
|
7,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,750
|
|
|
$
|
(5,674
|
)
|
|
$
|
57,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has a deferred compensation agreement with the
Chairman of the Board of Directors dated June 1, 1983 which
was ratified and included in a restated employment agreement
dated October 1, 1994. The agreement provides for deferred
compensation for 10 years equal to 50 percent of final
salary and was modified on March 9, 1998 to determine a
fixed salary level for purposes of this calculation. The Company
has a deferred compensation liability equal to $815 at
December 31, 2009 and December 31, 2008, which is
included in Other long-term liabilities on the Consolidated
Balance Sheets. The liability was calculated using the net
present value of ten annual payments at a 6 percent
discount rate assuming, for calculation purposes only, that
payments begin one year from the balance sheet date.
The Company also has a non-qualified income deferral plan for
which certain highly-compensated employees are eligible. The
plan allows eligible employees to defer a portion of their
compensation until retirement or separation from the Company.
The plan is unfunded and is an unsecured liability of the
Company. The Companys liability under the plan was $1,134
and $981 at December 31, 2009 and December 31, 2008,
respectively, and is included in Other long-term liabilities on
the Consolidated Balance Sheets.
|
|
Note 14
|
Employee
Benefit Plans
|
The Company has various defined contribution plans for the
benefit of its employees. The plans provide a match of employee
contributions based on a discretionary percentage determined by
management. The Company suspended its matching contribution to
the 401K plan during the first quarter of 2009, as part of its
cost reduction efforts. The matching percentage of wages was
5.0 percent in 2008 and 2007. Contributions to the plans
were $384, $4,473 and $4,260 in 2009, 2008 and 2007,
respectively. In addition, the Companys European
subsidiaries contributed $671, $695 and $739 to several
defined-contribution plans for their employees in 2009, 2008 and
2007, respectively.
The Company is required to contribute to certain union sponsored
defined benefit pension plans under various labor contracts
covering union employees. Pension expense related to the union
plans, which is determined based upon payroll data, was
approximately $981, $1,391 and $1,430 in 2009, 2008 and 2007,
respectively.
The Company has participated in the Supplemental Retirement and
Disability Fund (SRDF) pursuant to collective bargaining
agreements with the Graphic Communications Union (GCU) and its
various locals covering
82
employees working at various facilities, including the
Companys facilities in Minneapolis, MN and Cherry Hill,
NJ. Effective May 1, 2008, the SRDF decided to meet its
obligations under the Pension Protection Act of 2006 by
substantially increasing contributions required by participating
employers. In the fourth quarter of 2008, the Company decided to
terminate participation in the SRDF for employees of its
Minneapolis, MN and Cherry Hill, NJ facilities and in March 2009
formally notified the Board of Trustees of the unions
pension fund that they would no longer be making contributions
for these facilities to the unions plan. In accordance
with ERISA Section 4203 (a), 29 U.S. C.
Section 1383, the Companys decision triggered the
assumption of a partial termination withdrawal liability. The
Company recorded a liability as of December 31, 2008, net
of discount, for $7,254 to reflect this obligation, which is
included in Other long-term liabilities on the Consolidated
Balance Sheet. At December 31, 2009, the Company recorded
an additional expense of $1,800 as a result of updates to the
assumptions used in the termination withdrawal calculation.
Because the Company estimates that this obligation will be paid
during 2010, the total liability of $9,151 is included in
Accrued expenses on the Consolidated Balance Sheets as of
December 31, 2009. The expense for 2008 and 2009 associated
with the pension withdrawal liability is reflected in
Multiemployer pension withdrawal expense on the Consolidated
Statement of Operations.
The Company established an employee stock purchase plan on
January 1, 1999 that permits employees to purchase common
shares of the Company through payroll deductions. The number of
shares issued for this plan was 70 in 2009, 60 in 2008, and 48
in 2007. The shares were issued at a 5 percent discount
from the
end-of-quarter
closing market price of the Companys common stock. The
discount from market value was $29 in 2009, $41 in 2008 and $45
in 2007.
The Company has collective bargaining agreements with production
employees representing approximately 12 percent of its
workforce. The significant contracts are with local units of the
Graphic Communications Conference of the International
Brotherhood of Teamsters, the Communications, Energy &
Paperworkers Union of Canada and the GPMU union in the UK and
expire in 2010 through 2011. The percentage of employees covered
by contracts expiring within one year is approximately
7 percent.
|
|
Note 15
|
Stock
Based Compensation
|
Effective January 1, 2006, the Company adopted the
provisions of the Stock Compensation Topic of the Codification,
ASC 718, which requires the measurement and recognition of
compensation expense for all share-based payment awards to
employees and directors based on estimated fair values. ASC 718
supersedes the Companys previous accounting methodology
using the intrinsic value method. Under the intrinsic value
method, no share-based compensation expense related to stock
option awards granted to employees had been recognized in the
Companys Consolidated Statements of Operations, as all
stock option awards granted under the plans had an exercise
price equal to the market value of the Common Stock on the date
of the grant.
The Company adopted ASC 718 using the modified prospective
transition method. Under this transition method, compensation
expense recognized during the years ended December 31, 2007
and December 31, 2006 included compensation expense for all
share-based awards granted prior to, but not yet vested, as of
December 31, 2005, based on the grant date fair value
estimated in accordance with the original provisions of ASC 718
and using an accelerated expense attribution method.
Compensation expense during the three years ended
December 31, 2009 for share-based awards granted subsequent
to January 1, 2006 is based on the grant date fair value
estimated in accordance with the provisions of ASC 718 and is
computed using the straight-line expense attribution method. In
accordance with the modified prospective transition method, the
Companys Consolidated Financial Statements for prior
periods have not been restated to reflect the impact of ASC 718.
2006
Long-Term Incentive Plan
Effective May 17, 2006, the Companys stockholders
approved the Schawk Inc. 2006 Long-Term Incentive Plan
(2006 Plan). The 2006 Plan provides for the grant of
stock options, stock appreciation rights, restricted stock,
restricted stock units, performance-based awards and other cash
and stock-based awards to officers, other employees and
directors of the Company. Options granted under the plan have an
exercise price equal to the market price of the underlying stock
at the date of grant and are exercisable for a period of ten
years from the date of grant. Options granted pursuant to the
2006 Plan vest over a three-year period. The total number of
shares of
83
common stock available for issuance under the 2006 Plan is 741as
of December 31, 2009. No additional shares have been
reserved for issuance under the 2006 Plan.
The Company issued 217, 189 and 155 stock options, as well as
153, 66 and 35 restricted shares, during the years ended
December 31, 2009, 2008 and 2007, respectively, under the
2006 Plan.
Options
The Company has granted stock options under several share-based
compensation plans. The Companys 2003 Equity Option Plan
provided for the granting of options to purchase up to
5,252 shares of Class A common stock to key employees.
The Company also adopted an Outside Directors Formula
Stock Option Plan authorizing unlimited grants of options to
purchase shares of Class A common stock to outside
directors. Options granted under the plan have an exercise price
equal to the market price of the underlying stock at the date of
grant and are exercisable for a period of ten years from the
date of grant. Options granted pursuant to the 2003 Equity
Option Plan and Outside Directors Stock Option Plan vest over a
two-year period.
The Company issued 15, 15 and 35 stock options during 2009, 2008
and 2007, respectively, to its directors under the Outside
Directors Stock Option Plan.
The Company recorded $942, $866 and $721 of compensation expense
relating to outstanding options during the years ended
December 31, 2009 and 2008, and 2007, respectively.
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 option life 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 years ended December 31,
2009, 2008, and 2007, using the Black-Scholes option-pricing
model:
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Expected dividend yield
|
|
1.34% - 1.39%
|
|
0.81% - 0.83%
|
|
0.63% - 0.71%
|
Expected stock price volatility
|
|
43.75% - 43.80%
|
|
31.50% - 34.80%
|
|
28.24% - 29.97%
|
Risk-free interest rate range
|
|
2.79% - 3.33%
|
|
2.98% - 3.75%
|
|
3.96% - 4.54%
|
Weighted-average expected life
|
|
6.81 - 7.21 years
|
|
6.50 - 7.50 years
|
|
5.50 - 6.00 years
|
Forfeiture rate
|
|
0.85% - 1.00%
|
|
1.00% - 2.00%
|
|
2.72%
|
Total fair value of options granted
|
|
$679
|
|
$1,174
|
|
$1,216
|
The following table summarizes the Companys activities
with respect to its stock option plans for 2009, 2008 and 2007
(in thousands, except price per share and contractual term):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Weighted Average
|
|
|
|
|
Number of
|
|
Exercise Price
|
|
Remaining
|
|
Aggregate
|
|
|
Shares
|
|
Per Share
|
|
Term
|
|
Intrinsic Value
|
|
Outstanding January 1, 2007
|
|
|
3,151
|
|
|
$
|
12.11
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
190
|
|
|
$
|
18.70
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(313
|
)
|
|
$
|
10.44
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(55
|
)
|
|
$
|
18.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2007
|
|
|
2,973
|
|
|
$
|
12.45
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
204
|
|
|
$
|
15.87
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(143
|
)
|
|
$
|
9.97
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(115
|
)
|
|
$
|
15.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Weighted Average
|
|
|
|
|
Number of
|
|
Exercise Price
|
|
Remaining
|
|
Aggregate
|
|
|
Shares
|
|
Per Share
|
|
Term
|
|
Intrinsic Value
|
|
Outstanding December 31, 2008
|
|
|
2,919
|
|
|
$
|
12.40
|
|
|
|
4.30
|
|
|
$
|
3,374
|
|
Granted
|
|
|
232
|
|
|
$
|
6.95
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(169
|
)
|
|
$
|
8.33
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(477
|
)
|
|
$
|
12.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2009
|
|
|
2,505
|
|
|
$
|
12.81
|
|
|
|
4.87
|
|
|
$
|
5,944
|
|
Vested at December 31, 2009
|
|
|
2,119
|
|
|
$
|
13.10
|
|
|
|
3.73
|
|
|
$
|
4,517
|
|
Exercisable at December 31, 2009
|
|
|
2,119
|
|
|
$
|
13.10
|
|
|
|
3.73
|
|
|
$
|
4,517
|
|
The weighted-average grant-date fair value of options granted
during the years ended December 31, 2009, 2008 and 2007 was
$2.93, $5.76 and $6.38, respectively. The total intrinsic value
for options exercised during the years ended December 31,
2009, 2008 and 2007, respectively, was $433, $456 and $2,856.
Cash received from option exercises under all plans for the
years ended December 31, 2009, 2008 and 2007 was
approximately $1,389, $1,432 and $3,269, respectively. The
actual tax benefit realized for the tax deductions from option
exercises under all plans totaled approximately $222, $100 and
$608, respectively, for the years ended December 31, 2009,
2008 and 2007.
The following table summarizes information concerning
outstanding and exercisable options at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Weighted
|
|
|
|
Weighted
|
Range of
|
|
Number
|
|
Contractual Life
|
|
Average Exercise
|
|
Number
|
|
Average Exercise
|
Exercise Price
|
|
Outstanding
|
|
(Years)
|
|
Price
|
|
Exercisable
|
|
Price
|
|
$6.20 - $8.26
|
|
|
312
|
|
|
|
6.6
|
|
|
$
|
7.20
|
|
|
|
98
|
|
|
$
|
7.73
|
|
8.26 - 10.33
|
|
|
894
|
|
|
|
2.2
|
|
|
$
|
9.32
|
|
|
|
894
|
|
|
$
|
9.32
|
|
10.33 - 12.39
|
|
|
40
|
|
|
|
2.9
|
|
|
$
|
10.62
|
|
|
|
40
|
|
|
$
|
10.62
|
|
12.39 - 14.45
|
|
|
420
|
|
|
|
4.2
|
|
|
$
|
14.19
|
|
|
|
421
|
|
|
$
|
14.19
|
|
14.45 - 16.52
|
|
|
192
|
|
|
|
8.3
|
|
|
$
|
15.87
|
|
|
|
58
|
|
|
$
|
15.80
|
|
16.52 - 18.58
|
|
|
201
|
|
|
|
7.0
|
|
|
$
|
18.03
|
|
|
|
162
|
|
|
$
|
17.93
|
|
18.58 - 20.65
|
|
|
441
|
|
|
|
5.5
|
|
|
$
|
18.89
|
|
|
|
441
|
|
|
$
|
18.89
|
|
20.65 - 21.08
|
|
|
5
|
|
|
|
7.9
|
|
|
$
|
21.08
|
|
|
|
5
|
|
|
$
|
21.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,505
|
|
|
|
|
|
|
|
|
|
|
|
2,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, 2008 and 2007 there was $974,
$1,311 and $1,169, respectively, of total unrecognized
compensation cost related to nonvested options outstanding. That
cost is expected to be recognized over a weighted average period
of 2 years. A summary of the Companys nonvested
option activity for the years ended December 31, 2009, 2008
and 2007 is as follows (in thousands, except price per share and
contractual term):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
Grant Date
|
|
|
Number of
|
|
Fair Value
|
|
|
Shares
|
|
Per Share
|
|
Nonvested at January 1, 2007
|
|
|
326
|
|
|
$
|
5.70
|
|
Granted
|
|
|
191
|
|
|
$
|
6.38
|
|
Vested
|
|
|
(232
|
)
|
|
$
|
5.65
|
|
Forfeited
|
|
|
(30
|
)
|
|
$
|
6.55
|
|
|
|
|
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
Grant Date
|
|
|
Number of
|
|
Fair Value
|
|
|
Shares
|
|
Per Share
|
|
Nonvested at December 31, 2007
|
|
|
255
|
|
|
$
|
6.25
|
|
Granted
|
|
|
204
|
|
|
$
|
5.76
|
|
Vested
|
|
|
(107
|
)
|
|
$
|
6.23
|
|
Forfeited
|
|
|
(28
|
)
|
|
$
|
6.15
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2008
|
|
|
324
|
|
|
$
|
5.95
|
|
Granted
|
|
|
232
|
|
|
$
|
2.93
|
|
Vested
|
|
|
(146
|
)
|
|
$
|
5.87
|
|
Forfeited
|
|
|
(24
|
)
|
|
$
|
4.22
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2009
|
|
|
386
|
|
|
$
|
4.26
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock
As discussed above, the Companys 2006 Long-Term Incentive
Plan provides for the grant of various types of share-based
awards, including restricted stock. Restricted shares are valued
at the price of the common stock on the date of grant and vest
at the end of a three year period. During the vesting period the
participant has the rights of a shareholder in terms of voting
and dividend rights but is restricted from transferring the
shares. The expense is recorded on a straight-line basis over
the vesting period.
The Company recorded $795, $519 and $290 of compensation expense
relating to restricted stock during years ended
December 31, 2009, 2008 and 2007, respectively.
A summary of the restricted share activity for the years ended
December 31, 2009, 2008 and 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
Grant Date
|
|
|
Number of
|
|
Fair Value
|
|
|
Shares
|
|
Per Share
|
|
Outstanding at January 1, 2007
|
|
|
25
|
|
|
$
|
17.43
|
|
Granted
|
|
|
35
|
|
|
$
|
18.47
|
|
Forfeited
|
|
|
(2
|
)
|
|
$
|
17.93
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
58
|
|
|
$
|
18.04
|
|
Granted
|
|
|
66
|
|
|
$
|
15.90
|
|
Forfeited
|
|
|
(6
|
)
|
|
$
|
18.32
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
118
|
|
|
$
|
16.84
|
|
Granted
|
|
|
153
|
|
|
$
|
6.94
|
|
Vested restriction lapsed
|
|
|
(23
|
)
|
|
$
|
10.37
|
|
Forfeited
|
|
|
(11
|
)
|
|
$
|
18.32
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
237
|
|
|
$
|
10.70
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, 2008 and 2007, there was $1,227,
$1,086 and $669, respectively, of total unrecognized
compensation cost related to the outstanding restricted shares
that will be recognized over a weighted average period of
2.0 years.
86
Employee
Share-Based Compensation Expense
The table below shows the amounts recognized in the financial
statements for the three years ended December 31, 2009 for
share-based compensation related to employees. The expense is
included in selling, general and administrative expenses in the
Consolidated Statement of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Total cost of share-based compensation
|
|
$
|
1,737
|
|
|
$
|
1,385
|
|
|
$
|
1,011
|
|
Income tax
|
|
|
(351
|
)
|
|
|
(263
|
)
|
|
|
(287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount charged against income
|
|
$
|
1,386
|
|
|
$
|
1,122
|
|
|
$
|
724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
|
$
|
0.04
|
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
0.06
|
|
|
$
|
0.04
|
|
|
$
|
0.03
|
|
There were no amounts related to employee share-based
compensation capitalized as assets during the three years ended
December 31, 2009.
|
|
Note 16
|
Indemnity
Settlement
|
On January 31, 2005, the Company acquired 100 percent
of the outstanding stock of Seven Worldwide (Seven).
The stock purchase agreement entered into by the Company with
Kohlberg & Company, L.L.C. (Kohlberg) to
acquire Seven provided for a payment of $10,000 into an escrow
account. The escrow was established to insure that funds were
available to pay Schawk any indemnity claims it may have under
the stock purchase agreement.
During 2006, Kohlberg filed a Declaratory Judgment Complaint in
the state of New York seeking the release of the $10,000 held in
escrow. The Company filed a cross-motion for summary judgment
asserting that it has valid claims against the amounts held in
escrow and that, as a result, such funds should not be released
to Kohlberg, but rather paid out to the Company. Kohlberg denied
that it has any indemnity obligations to the Company. On
April 9, 2009, the court entered an order denying both
parties cross-motions for summary judgment. As of
June 30, 2009, the Company had a receivable from Kohlberg
on its Consolidated Balance Sheets in the amount of $4,214, for
a Seven Worldwide Delaware unclaimed property liability
settlement and certain other tax settlements paid by the Company
for pre-acquisition tax liabilities and related professional
fees. In addition, in February 2008, the Company paid $6,000 in
settlement of Internal Revenue Service audits of Seven
Worldwide, Inc., that had been accrued as of the acquisition
date for the pre-acquisition years of 1996 to 2003.
On September 8, 2009, a settlement was reached between the
Company and Kohlberg with respect to the funds held in escrow,
whereby the escrow agent was directed to disperse an escrow
amount of $9,200 to the account of the Company and the remainder
of the escrow amount to be paid to the account of Kohlberg. Upon
disbursement of such funds in September 2009, the escrow account
terminated. The disbursement of the escrow amount resolved all
disputes between the Company and Kohlberg concerning the
disposition of the escrowed funds.
The Company accounted for the $9,200 escrow account distribution
as a reduction of the $4,214 balance in the account receivable
outstanding from Kohlberg and recorded the remaining $4,986 as
income on the Indemnity settlement income line on the
December 31, 2009 Consolidated Statements of Operations.
|
|
Note 17
|
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 and 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.
87
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Weighted average shares-Basic
|
|
|
24,966
|
|
|
|
26,739
|
|
|
|
26,869
|
|
Effect of dilutive stock options
|
|
|
35
|
|
|
|
|
|
|
|
832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares-Diluted
|
|
|
25,001
|
|
|
|
26,739
|
|
|
|
27,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 2,236 shares of Class A common
stock at an exercise price from $6.94 $21.08 per
share were outstanding at December 31, 2009, but were not
included in the computation of diluted earnings per share
because the options were anti-dilutive. The options expire at
various dates through April 9, 2019.
Since the Company was in a loss position for the year ended
December 31, 2008, there was no difference between the
number of shares used to calculate basic and diluted loss per
share for those periods. At December 31, 2008, potentially
dilutive options to purchase 478 shares of Class A
common stock were not included in the diluted per share
calculations because they would be antidilutive. In addition,
Options to purchase 1,436 shares of Class A common
stock at exercise prices ranging from $14.25 $21.08
per share were outstanding at December 31, 2008, but were
not included in the computation of diluted earnings per share
because the options were anti-dilutive. The options expire at
various dates through September 9, 2018.
Options to purchase 304 shares of Class A common stock
at an exercise price from $17.43 $20.65 per share
were outstanding at December 31, 2007, but were not
included in the computation of diluted earnings per share
because the options were anti-dilutive. The options expire at
various dates through November 6, 2017.
|
|
Note 18
|
Segment
and Geographic Reporting
|
The Companys service offerings include strategic, creative
and executional services related to three core competencies:
graphic services, brand strategy and design, and software,
Graphic services and brand strategy and design represented
approximately 98 percent of the Companys revenues in 2009,
with software sales representing the remaining 2 percent.
These services are provided to clients in the consumer products
packaging, retail, pharmaceutical and advertising markets. In
both 2008 and 2009, its largest client accounted for
approximately 9 percent of the Companys total revenues and
the 10 largest clients in the aggregate accounted for 41 percent
of revenues for both periods. The Companys services are
provided with an employment force of approximately 3,100
employees worldwide, of which approximately 12 percent are
production employees represented by labor unions. The percentage
of employees covered by union contracts that expire within one
year is approximately 7 percent.
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.
Effective July 1, 2009, the Company restructured its
operations on a geographic basis into three operating segments:
North America, Europe and Asia Pacific. This organization
reflects a change in the management reporting structure that was
implemented during the third quarter of 2009.
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
which were previously reported in the Other segment.
88
The Companys Europe segment includes all operations
located in Europe, including its European branding and design
capabilities and its digital solutions business in London which
were previously reported in the Other segment.
The Companys Asia Pacific segment includes all operations
in Asia and Australia, including its Asia Pacific branding and
design capabilities, which were previously reported in the Other
segment.
The Company has determined that each of its operating segments
is also a reportable segment under ASC 280. The segment
information for 2008 and 2007 has been reclassified to conform
to the new 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 profitability. 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 continuing operations was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Sales to external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
390,713
|
|
|
$
|
425,055
|
|
|
$
|
472,922
|
|
Europe
|
|
|
67,409
|
|
|
|
71,040
|
|
|
|
79,916
|
|
Asia Pacific
|
|
|
29,348
|
|
|
|
28,630
|
|
|
|
28,613
|
|
Intercompany sales elimination
|
|
|
(35,024
|
)
|
|
|
(30,541
|
)
|
|
|
(37,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
452,446
|
|
|
$
|
494,184
|
|
|
$
|
544,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating segment income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
56,734
|
|
|
$
|
23,848
|
|
|
$
|
66,381
|
|
Europe
|
|
|
3,836
|
|
|
|
(37,324
|
)
|
|
|
6,531
|
|
Asia Pacific
|
|
|
7,389
|
|
|
|
1,366
|
|
|
|
5,513
|
|
Corporate
|
|
|
(32,175
|
)
|
|
|
(44,445
|
)
|
|
|
(18,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
35,784
|
|
|
|
(56,555
|
)
|
|
|
60,173
|
|
Interest
expense-net
|
|
|
(8,690
|
)
|
|
|
(6,561
|
)
|
|
|
(8,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
27,094
|
|
|
$
|
(63,116
|
)
|
|
$
|
51,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
11,601
|
|
|
$
|
12,783
|
|
|
$
|
12,778
|
|
Europe
|
|
|
3,075
|
|
|
|
3,344
|
|
|
|
3,767
|
|
Asia Pacific
|
|
|
1,008
|
|
|
|
935
|
|
|
|
752
|
|
Corporate
|
|
|
2,969
|
|
|
|
3,689
|
|
|
|
4,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,653
|
|
|
$
|
20,751
|
|
|
$
|
21,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The operating segment income (loss) for 2008 includes goodwill
impairment charges as follows: North America segment
$14,334; Europe segment $32,703; and Asia Pacific
segment $1,004.
The Corporate operating loss for 2008 includes the following
charges: $7,254 for employer pension withdrawal expense; $6,800
for expenses related to remediation of material weaknesses and
SEC investigation; and $2,336 for impairment of long-lived
assets.
The Corporate operating loss for 2009 includes an $1,800 expense
for employer pension withdrawal and a credit of $4,986 for an
indemnity settlement.
89
The North America operating income for 2009 includes a $1,305
charge for impairment of land and buildings.
Segment
information related to total assets and expenditures for long
lived assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Total Assets:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
320,655
|
|
|
$
|
328,494
|
|
Europe
|
|
|
44,508
|
|
|
|
46,554
|
|
Asia Pacific
|
|
|
21,839
|
|
|
|
29,073
|
|
Corporate
|
|
|
29,217
|
|
|
|
36,232
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
416,219
|
|
|
$
|
440,353
|
|
|
|
|
|
|
|
|
|
|
Expenditures for long-lived assets:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
3,653
|
|
|
$
|
10,404
|
|
Europe
|
|
|
618
|
|
|
|
2,233
|
|
Asia Pacific
|
|
|
898
|
|
|
|
1,425
|
|
Corporate
|
|
|
88
|
|
|
|
850
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,257
|
|
|
$
|
14,912
|
|
|
|
|
|
|
|
|
|
|
Summary
financial information for continuing operations by country for
2009, 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
Canada
|
|
|
Europe
|
|
|
Other
|
|
|
Total
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
328,442
|
|
|
$
|
35,071
|
|
|
$
|
62,558
|
|
|
$
|
26,375
|
|
|
$
|
452,446
|
|
Long-lived assets
|
|
$
|
44,720
|
|
|
$
|
3,571
|
|
|
$
|
4,305
|
|
|
$
|
3,656
|
|
|
$
|
56,252
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
348,469
|
|
|
$
|
45,976
|
|
|
$
|
67,764
|
|
|
$
|
31,975
|
|
|
$
|
494,184
|
|
Long-lived assets
|
|
$
|
51,059
|
|
|
$
|
3,890
|
|
|
$
|
4,889
|
|
|
$
|
3,650
|
|
|
$
|
63,488
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
388,051
|
|
|
$
|
44,054
|
|
|
$
|
80,055
|
|
|
$
|
32,249
|
|
|
$
|
544,409
|
|
Long-lived assets
|
|
$
|
65,117
|
|
|
$
|
5,589
|
|
|
$
|
7,292
|
|
|
$
|
3,943
|
|
|
$
|
81,941
|
|
Sales are attributed to countries based on the point of origin
of the sale. Approximately 9 percent of total revenues came
from the Companys largest single client for the year ended
December 31, 2009.
Long-lived assets include property, plant and equipment assets
stated at net book value and other non current assets that are
identified with the operations in each country.
United
States Securities and Exchange Commission
The United States Securities and Exchange Commission (the
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.
90
|
|
Note 20
|
Quarterly
Financial Data (unaudited)
|
Schawk, Inc maintains its financial records on the basis of a
fiscal year ending December 31.
Unaudited quarterly data for 2009 and 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
Year 2009
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009(1)
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
105,088
|
|
|
$
|
111,989
|
|
|
$
|
113,463
|
|
|
$
|
121,906
|
|
Cost of sales
|
|
|
71,994
|
|
|
|
69,055
|
|
|
|
67,957
|
|
|
|
72,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
33,094
|
|
|
|
42,934
|
|
|
|
45,506
|
|
|
|
49,540
|
|
Selling, general, and administrative expenses
|
|
|
33,901
|
|
|
|
31,774
|
|
|
|
31,549
|
|
|
|
33,352
|
|
Acquisition integration and restructuring expense
|
|
|
817
|
|
|
|
1,501
|
|
|
|
1,328
|
|
|
|
2,813
|
|
Indemnity settlement income
|
|
|
|
|
|
|
|
|
|
|
(4,986
|
)
|
|
|
|
|
Multiemployer pension withdrawal expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,800
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
136
|
|
|
|
|
|
|
|
1,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(1,624
|
)
|
|
|
9,523
|
|
|
|
17,615
|
|
|
|
10,270
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
70
|
|
|
|
30
|
|
|
|
124
|
|
|
|
311
|
|
Interest expense
|
|
|
(1,449
|
)
|
|
|
(2,468
|
)
|
|
|
(2,880
|
)
|
|
|
(2,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,379
|
)
|
|
|
(2,438
|
)
|
|
|
(2,756
|
)
|
|
|
(2,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(3,003
|
)
|
|
|
7,085
|
|
|
|
14,859
|
|
|
|
8,153
|
|
Income tax provision (benefit)
|
|
|
(707
|
)
|
|
|
2,317
|
|
|
|
1,553
|
|
|
|
4,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,296
|
)
|
|
$
|
4,768
|
|
|
$
|
13,306
|
|
|
$
|
3,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.09
|
)
|
|
$
|
0.19
|
|
|
$
|
0.53
|
|
|
$
|
0.15
|
|
Diluted
|
|
$
|
(0.09
|
)
|
|
$
|
0.19
|
|
|
$
|
0.53
|
|
|
$
|
0.15
|
|
|
|
|
(1) |
|
Results for the fourth quarter of 2009 include a pretax charge
of $1,800 for withdrawal from a multiemployer pension plan, a
pretax charge of $2,813 for acquisition integration and
restructuring expense and a pretax charge of $1,305 for
impairment of long-lived assets, See Note 14
Employee Benefit Plans, Note 3 Acquisition
Integration and Restructuring and Note 6
Impairment of long-lived assets for further information. |
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
Year 2008
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008(1)
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
126,407
|
|
|
$
|
133,436
|
|
|
$
|
125,446
|
|
|
$
|
108,895
|
|
Cost of sales
|
|
|
83,440
|
|
|
|
86,650
|
|
|
|
82,279
|
|
|
|
77,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
42,967
|
|
|
|
46,786
|
|
|
|
43,167
|
|
|
|
31,450
|
|
Selling, general, and administrative expenses
|
|
|
36,271
|
|
|
|
36,104
|
|
|
|
37,203
|
|
|
|
39,018
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,041
|
|
Acquisition integration and restructuring expense
|
|
|
|
|
|
|
3,174
|
|
|
|
1,942
|
|
|
|
5,274
|
|
Multiemployer pension withdrawal expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,254
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
2,184
|
|
|
|
4,073
|
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
6,696
|
|
|
|
5,324
|
|
|
|
(51
|
)
|
|
|
(68,524
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
74
|
|
|
|
64
|
|
|
|
63
|
|
|
|
90
|
|
Interest expense
|
|
|
(1778
|
)
|
|
|
(1,696
|
)
|
|
|
(1,625
|
)
|
|
|
(1,753
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,704
|
)
|
|
|
(1,632
|
)
|
|
|
(1,562
|
)
|
|
|
(1,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
4,992
|
|
|
|
3,692
|
|
|
|
(1,613
|
)
|
|
|
(70,187
|
)
|
Income tax provision (benefit)
|
|
|
732
|
|
|
|
2,916
|
|
|
|
5,063
|
|
|
|
(11,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,260
|
|
|
$
|
776
|
|
|
$
|
(6,676
|
)
|
|
$
|
(58,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.16
|
|
|
$
|
0.03
|
|
|
$
|
(0.25
|
)
|
|
$
|
(2.27
|
)
|
Diluted
|
|
$
|
0.15
|
|
|
$
|
0.03
|
|
|
$
|
(0.25
|
)
|
|
$
|
(2.27
|
)
|
|
|
|
(1) |
|
Results for the fourth quarter of 2008 include $48,041 of pretax
goodwill impairment charges, a pretax charge of $7,254 for
withdrawal from a multiemployer pension plan and a pretax charge
of $5,274 for acquisition integration and restructuring expense.
See Note 6 Goodwill and Intangible Assets,
Note 14 Employee Benefit Plans and
Note 3 Acquisition Integration and
Restructuring for further information. |
|
|
Note 21
|
Subsequent
Events
|
In accordance with the Subsequent Events Topic of the
Codification, ASC 855, the Company evaluated subsequent events
through the filing date of this report. There have been no
material events subsequent to the balance sheet date that would
have affected the amounts recorded or disclosed in the
Companys financial statements.
92
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
The Company conducted an evaluation of the effectiveness of the
Companys disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended
(Exchange Act) as of the end of the period
covered by this
Form 10-K.
The evaluation was conducted by management under the supervision
of the Audit Committee, and with the participation of the Chief
Executive Officer and Chief Financial Officer. Based on that
evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that the Companys disclosure
controls and procedures were effective as of the end of the
period covered by this
Form 10-K.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
effective internal control over financial reporting, as defined
in
Rule 13a-15(f)
under the Securities and Exchange Act of 1934. Internal control
over financial reporting is a process designed by, or under the
supervision of, the principal executive and financial officers,
or persons performing similar functions, and effected by the
board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles in the United States (GAAP).
Internal control over the financial reporting includes those
policies and procedures that: (i) pertain to the
maintenance of records that in reasonable detail, accurately and
fairly, reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that
transactions are properly recorded to permit preparation of
financial statements in accordance with GAAP, and that receipts
and expenditures of the company are being made only in
accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Companys assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2009. In making this assessment, management
used the control criteria framework of the Committee of
Sponsoring Organizations (COSO) of the Treadway Commission
published in its report entitled Internal Control
Integrated Framework . Based on its evaluation, management
concluded that the Companys internal control over
financial reporting was effective as of December 31, 2009.
Ernst & Young, the independent registered public
accounting firm that audited the financial statements included
in this annual report, has issued an auditors report on
the Companys internal control over financial reporting as
of December 31, 2009.
Remediation
of Previously Identified Material Weaknesses
As more fully described under Item 9A of the Companys
Form 10-K
for the year ended December 31, 2008 (2008
Form 10-K)
, the Companys management concluded that as of
December 31, 2008, there were material weaknesses in the
Companys internal control over financial reporting
relating to:
|
|
|
|
|
Revenue recognition;
|
|
|
|
Work-in-process
inventory; and
|
|
|
|
Entity-level controls.
|
Management has been actively engaged in remediation efforts to
address these material weaknesses. These remediation efforts,
highlighted below, were specifically designed to address the
material weaknesses identified by management. As a result of its
assessment of the effectiveness as of December 31, 2009 of
its internal control over financial reporting, management
determined that these material weaknesses in our controls no
longer existed.
93
The Companys corrective actions completed in fiscal 2009
to address our material weakness in revenue recognition included
the following:
|
|
|
|
|
provided
follow-up
training on revenue recognition with employees worldwide;
|
|
|
|
provided comprehensive guidance and procedures leading to
increased compliance with the accounting policy addressing
revenue recognition;
|
|
|
|
created role of subject matter expert to respond to questions on
revenue recognition;
|
|
|
|
rolled out an on-line tool to facilitate compliance with revenue
recognition criteria;
|
|
|
|
formalized and strengthened internal testing processes for
evaluating compliance with revenue recognition
requirements; and
|
|
|
|
strengthened procedures to increase involvement of finance
management in review of sales contracts.
|
The Companys corrective actions completed in fiscal 2009
to address our material weakness in
work-in-process
inventory included the following:
|
|
|
|
|
implemented a substantive review process to mitigate the risk of
errors in
work-in-process
inventory reporting;
|
|
|
|
documented and implemented more formal and streamlined processes
and controls over accounting for
work-in-process
inventory;
|
|
|
|
improved consistency in the identification of inventoriable
costs;
|
|
|
|
provided detailed procedures and guidance addressing accounting
for inventory; and
|
|
|
|
enhanced inventory processes at the Companys large format
printing operations, representing approximately 10 percent
of the Companys total inventory, through implementation of
system upgrades to allow for improved transaction processing,
accounting, reporting and controls.
|
The Companys corrective actions completed in fiscal 2009
to address our material weakness in entity-level controls
included the following:
|
|
|
|
|
hired a Vice President Corporate Controller, Vice
President Finance, Operations and Investor
Relations, Director of Internal Audit and European Finance
Director with experience in large, global public companies;
|
|
|
|
enhanced management analysis and analytical reviews of operating
unit and corporate financial results;
|
|
|
|
redefined and enhanced the role of the Disclosure Committee to
provide improved oversight of the accuracy and timeliness of
disclosures made by the Company;
|
|
|
|
improved structure and process around budgeting and forecasting;
|
|
|
|
significantly strengthened alignment between field finance
personnel and corporate finance management resulting in improved
information flow and accountability;
|
|
|
|
added, updated and deployed numerous accounting
policies; and
|
|
|
|
deployed an expanded and redefined Delegation of Authority
policy to define the limits of authority designated to specified
positions of responsibility within the Company.
|
Changes
in Internal Control Over Financial Reporting
Other than the changes noted above, there have been no changes
in the Companys internal control over financial reporting
during the quarter ended December 31, 2009 that have
materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial
reporting.
94
Report of
Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting
Board of
Directors and Stockholders of
Schawk, Inc.
We have audited Schawk, Inc.s internal control over
financial reporting as of December 31, 2009 based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Schawk, Inc.s
management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting
included in the accompanying Managements Report on
Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on the companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Schawk, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Schawk, Inc. as of
December 31, 2009 and December 28, 2008, and the
related consolidated statements of operations,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2009, and our report
dated March 15, 2010 expressed an unqualified opinion
thereon.
/s/ Ernst &
Young LLP
Chicago,
Illinois
March 15, 2010
95
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information contained in the Companys proxy statement
for the 2010 annual meeting of stockholders (the 2010
Proxy Statement) regarding the Companys directors
and executive officers, committees of the Companys board
of directors, audit committee financial experts,
Section 16(a) beneficial ownership reporting compliance and
stockholder director nomination procedures set forth under the
captions and subcaptions Directors and Executive
Officers, Corporate Governance, and
Section 16(a) Beneficial Ownership Reporting
Compliance is incorporated herein by reference.
The Company has adopted a code of ethics (the Code of
Ethics), as required by the listing standards of the New
York Stock Exchange and the rules of the SEC. This Code of
Ethics applies to all of the Companys directors, officers
and employees. The Company has also adopted a charter for its
Audit Committee. The Company has posted the Code of Ethics and
the Audit Committee Charter on its website (www.schawk.com) and
will post on its website any amendments to, or waivers from, its
Code of Ethics applicable to any of the Companys directors
or executive officers. The foregoing information will also be
available in print to any stockholder who requests such
information.
As required by New York Stock Exchange rules, in 2009 the
Companys Chief Executive Officer submitted to the NYSE the
annual certification relating to the Companys compliance
with NYSEs corporate governance listing requirements.
|
|
Item 11.
|
Executive
Compensation
|
The information contained in the Companys 2010 Proxy
Statement under the captions Compensation Discussion and
Analysis and Executive Compensation, including
under the subcaptions Director Compensation,
Compensation Committee Interlocks and Insider
Participation and Compensation Committee
Report is incorporated herein by reference (except that
the Compensation Committee Report shall not be deemed to be
filed with the Securities and Exchange Commission).
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information contained in the Companys 2010 Proxy
Statement under the caption Security Ownership of Certain
Beneficial Owners and Management is incorporated herein by
reference. The information regarding securities authorized for
issuance under the Companys equity compensation plans is
incorporated herein by reference to Part II, Item 5,
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchasers of Equity
Securities, of this
Form 10-K.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information contained in the Companys 2010 Proxy
Statement under the caption Transactions with Related
Persons and the information related to director
independence under the caption Corporate Governance
is incorporated herein by reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information contained in the Companys 2010 Proxy
Statement under the caption Independent Public
Accountants is incorporated herein by reference.
96
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
|
|
|
|
|
PAGE
|
(a) 1. The following financial statements of Schawk, Inc. are
filed as part of this report under
Item 8-Financial
Statements and Supplementary Data:
|
|
|
|
|
51
|
|
|
52
|
|
|
53
|
|
|
54
|
|
|
55
|
|
|
56
|
2. Financial statement schedules required to be filed by
Item 8 of this form, and by Item 15(b) below:
|
|
|
|
|
101
|
3. Exhibits
|
|
|
97
|
|
|
|
|
Exhibit
|
|
Description
|
|
Incorporated herein by Reference(1)
|
|
3.1
|
|
Certificate of Incorporation of Schawk, Inc., as amended.
|
|
Exhibit 4.2 to Registration Statement No. 333-39113
|
3.3
|
|
By-Laws of Schawk, Inc., as amended.
|
|
Exhibit 3.2 to Form 8-K filed with the SEC December 18, 2007
|
4.1
|
|
Specimen Class A Common Stock Certificate.
|
|
Exhibit 4.1 to Registration Statement No. 33-85152
|
10.1
|
|
Lease Agreement dated as of July 1, 1987, by and between
Process Color Plate, a division of Schawk, Inc. and The Clarence
W. Schawk 1979 Childrens Trust.
|
|
Registration Statement No. 33-85152
|
10.2
|
|
Lease Agreement dated as of June 1, 1989, by and between
Schawk Graphics, Inc., a division of Schawk, Inc. and C.W.
Properties.
|
|
Registration Statement No. 33-85152
|
10.3
|
|
Schawk, Inc. 1991 Outside Directors Formula Stock Option
Plan, as amended.*
|
|
Exhibit 10.3 to Form 10-Q filed with the SEC on July 2, 2008
|
10.4
|
|
Form of Amended and Restated Employment Agreement between
Clarence W. Schawk and Schawk, Inc.*
|
|
Registration Statement No. 33-85152
|
10.4.1
|
|
Addendum to Restated Employment Agreement dated March 9,
1998 between Schawk, Inc. and Clarence W. Schawk*
|
|
Exhibit 10.4.1 to Form 10-K filed with the SEC on April 28, 2008
|
10.5
|
|
Form of Amended and Restated Employment Agreement between David
A. Schawk and Schawk, Inc.*
|
|
Registration Statement No. 33-85152
|
10.6
|
|
Letter of Agreement dated September 21, 1992, by and
between Schawk, Inc. and Judith W. McCue.
|
|
Registration Statement No. 33-85152
|
10.7
|
|
Schawk, Inc. Retirement Trust effective January 1, 1996.*
|
|
Exhibit 10.37 to Form 10-K filed with the SEC on March 28, 1996
|
10.8
|
|
Schawk, Inc. Retirement Plan for Imaging Employees Amended and
Restated effective January 1, 1996.*
|
|
Exhibit 10.38 to Form 10-K filed with the SEC on March 28, 1996
|
10.9
|
|
Stockholder Investment Program dated July 28, 1995.
|
|
Registration Statement No. 33-61375
|
10.10
|
|
Schawk, Inc. Employee Stock Purchase Plan effective
January 1, 1999.*
|
|
Registration Statement No. 333-68521
|
10.11
|
|
Note Purchase Agreement dated as of December 23, 2003 by
and between Schawk, Inc. and Massachusetts Mutual Life Insurance
Company
|
|
Exhibit 10.47 to Form 10-K filed with the SEC on March 8, 2004
|
10.12
|
|
Schawk, Inc. 2001 Equity Option Plan
|
|
Appendix B to Proxy Statement for the 2001 Annual Meeting of
Stockholders
|
10.13
|
|
Schawk, Inc. 2003 Equity Option Plan
|
|
Appendix A to Proxy Statement for the 2003 Annual Meeting of
Stockholders (File No. 001
|
10.14
|
|
Stock Purchase Agreement by and among Schawk, Inc., Seven
Worldwide, Inc., KAGT Holdings, Inc. and the Stockholders of
KAGT Holdings, Inc. dated as of December 17, 2004.
|
|
Exhibit 2.1 to Form 8-K filed with the SEC on December 20, 2004
|
10.15
|
|
Business Sale Deed by and among Schawk, Inc., Schawk UK Limited,
Sokaris XXI, S.L., Schawk Belgium B.V.B.A. and Weir Holdings
Limited dated December 31, 2004.
|
|
Exhibit 2.1 to Form 8-K filed with the SEC on January 6, 2005
|
10.16
|
|
Amended and Restated Registration Rights Agreement, dated as of
January 31, 2005, among Schawk, Inc. and certain principal
stockholders of Schawk, Inc.
|
|
Exhibit 10.1 to Form 8-K filed with the SEC on February 2, 2005
|
10.17
|
|
Credit Agreement, dated as of January 28, 2005, among
Schawk, Inc., certain subsidiaries of Schawk, Inc. from time to
time party thereto, certain financial institutions from time to
time party thereto as lenders, and JPMorgan Chase Bank, N.A., as
agent.
|
|
Exhibit 10.4 to Form 8-K filed with the SEC on February 2, 2005
|
98
|
|
|
|
|
Exhibit
|
|
Description
|
|
Incorporated herein by Reference(1)
|
|
10.18
|
|
Note Purchase and Private Shelf Agreement, dated as of
January 28, 2005, among Schawk, Inc., Prudential Investment
Management, Inc., The Prudential Insurance Company of America,
and RGA Reinsurance Company.
|
|
Exhibit 10.5 to Form 8-K filed with the SEC on February 2, 2005
|
10.19
|
|
First Amendment, dated as of January 28, 2005, to Note
Purchase Agreement dated as of December 23, 2003 among
Schawk, Inc. and the noteholders party thereto.
|
|
Exhibit 10.6 to Form 8-K filed with the SEC on February 2, 2005
|
10.20
|
|
Asset Purchase Agreement, dated as of March 3, 2006, by and
between CAPS Group Acquisition, LLC and Schawk, Inc.
|
|
Exhibit 10.1 to Form 10-Q filed with the SEC on May 10, 2006
|
10.21
|
|
Schawk, Inc. 2006 Long-term Incentive Plan
|
|
Annex A to the Proxy Statement for the 2006 Annual Meeting filed
with the SEC on April 21, 2006
|
10.22
|
|
Amendment No. 1, dated as of February 28, 2008, to
Credit Agreement dated as of January 28, 2005 among Schawk,
Inc., certain subsidiaries of Schawk, Inc., certain lenders, and
JPMorgan Chase Bank, N.A., on behalf of itself and as agent.
|
|
Exhibit 10.1 to Registrants Form 8-K filed with the SEC on
March 5, 2008
|
10.23
|
|
Separation Agreement and General Release dated May 31, 2008
between James J. Patterson and Schawk USA, Inc.
|
|
Exhibit 10.1 to Form 8-K filed with the SEC on June 5, 2008
|
10.24
|
|
Employment Agreement dated as of September 18, 2008 between
Timothy J. Cunningham and Schawk, Inc.*
|
|
Exhibit 10.1 to Form 8-K filed with the SEC on September 23, 2008
|
10.25
|
|
Amendment No. 2, dated as of June 11, 2009, to Credit
Agreement, as amended, dated as of January 28, 2005, among
Schawk, Inc., the lenders party thereto and JPMorgan Chase Bank,
N.A., on behalf of itself and as agent.
|
|
Exhibit 10.1 to Form 8-K filed with the SEC on June 12, 2009
|
10.26
|
|
First Amendment, dated as of June 11, 2009, to Note
Purchase and Private Shelf Agreement dated as of
January 28, 2005, among Schawk, Inc. and the noteholders
party thereto.
|
|
Exhibit 10.2 to Form 8-K filed with the SEC on June 12, 2009
|
10.27
|
|
Second Amendment, dated as of June 12, 2009, to Note
Purchase Agreement dated as of December 23, 2003 among
Schawk, Inc. and the noteholders party thereto.
|
|
Exhibit 10.3 to Form 8-K filed with the SEC on June 12, 2009
|
10.28
|
|
Amended and Restated Credit Agreement, dated as of
January 12, 2010, among Schawk, Inc., certain subsidiary
borrowers of Schawk, Inc., the financial institutions party
thereto as lenders and JPMorgan Chase Bank, N.A., on behalf of
itself and the other lenders as agent.
|
|
Exhibit 10.1 to Form 8-K filed with the SEC on January 14, 2010
|
10.29
|
|
Second Amendment, dated as of January 12, 2010, to Note
Purchase and Private Shelf Agreement dated as of
January 28, 2005 among Schawk, Inc. and the noteholders
party thereto.
|
|
Exhibit 10.2 to Form 8-K filed with the SEC on January 14, 2010
|
10.30
|
|
Third Amendment, dated as of January 12, 2010, to Note
Purchase Agreement dated as of December 23, 2003 among
Schawk, Inc. and the noteholders party thereto.
|
|
Exhibit 10.3 to Form 8-K filed with the SEC on January 14, 2010
|
10.31
|
|
Lease Extension Agreement, dated as of January 22, 2010,
between Schawk, Inc. and Graphics IV Limited Partnership**
|
|
|
18
|
|
Preferability Letter of Ernst & Young LLP
|
|
Exhibit 18 to Form 10-Q filed with the SEC on November 17, 2008
|
99
|
|
|
|
|
Exhibit
|
|
Description
|
|
Incorporated herein by Reference(1)
|
|
21
|
|
List of Subsidiaries.**
|
|
|
23
|
|
Consent of Independent Registered Public Accounting Firm**
|
|
|
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. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002**
|
|
|
|
|
|
(1) |
|
The file number of each report or filing referred to herein is
001-09335
unless otherwise noted. |
|
* |
|
Represents a management contract or compensation plan or
arrangement required to be identified and filed pursuant to
Items 15(a)(3) and 15(b) of
Form 10-K. |
|
** |
|
Document filed herewith. |
100
Schawk,
Inc.
SCHEDULE
II VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Provision
|
|
Write-offs/
|
|
Other
|
|
|
Allowances for
|
|
Beginning
|
|
Charged to
|
|
Allowances
|
|
Additions
|
|
Balance at
|
Losses on Receivables
|
|
of Year
|
|
Expense
|
|
Taken(1)
|
|
(Deductions)(2)
|
|
End of Year
|
|
2009
|
|
$
|
3,138
|
|
|
$
|
(1,377
|
)
|
|
$
|
(249
|
)
|
|
$
|
107
|
|
|
$
|
1,619
|
|
2008
|
|
$
|
2,063
|
|
|
$
|
1,834
|
|
|
$
|
(519
|
)
|
|
$
|
(240
|
)
|
|
$
|
3,138
|
|
2007
|
|
$
|
2,255
|
|
|
$
|
515
|
|
|
$
|
(879
|
)
|
|
$
|
172
|
|
|
$
|
2,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Provision
|
|
|
|
Other
|
|
|
Deferred Tax Asset
|
|
Beginning
|
|
Charged to
|
|
Allowance
|
|
Additions
|
|
Balance at
|
Valuation Allowance
|
|
of Year
|
|
Expense
|
|
Changes(3)
|
|
(Deductions)(2)
|
|
End of Year
|
|
2009
|
|
$
|
28,619
|
|
|
$
|
(11
|
)
|
|
$
|
(4,135
|
)
|
|
$
|
2,292
|
|
|
$
|
26,765
|
|
2008
|
|
$
|
27,346
|
|
|
$
|
7,488
|
|
|
$
|
(17
|
)
|
|
$
|
(6,198
|
)
|
|
$
|
28,619
|
|
2007
|
|
$
|
24,492
|
|
|
$
|
1,211
|
|
|
$
|
365
|
|
|
$
|
1,278
|
|
|
$
|
27,346
|
|
|
|
|
(1) |
|
Net of collections on accounts previously written off. |
|
(2) |
|
Consists principally of adjustments related to foreign exchange. |
|
(3) |
|
Allowance changes arising from reductions in net operating loss
carry-forwards which are precluded from use and purchase
accounting adjustments. |
101
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) 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, in Cook County, State of Illinois, on
the 15th day of March 2010.
Schawk, Inc.
John B. Toher
Vice President and Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated on
the 15th day of March 2010.
|
|
|
|
|
|
/s/ Clarence
W. Schawk
Clarence
W. Schawk
|
|
Chairman of the Board and Director
|
|
|
|
/s/ David
A. Schawk
David
A. Schawk
|
|
President, Chief Executive Officer, and Director
(Principal Executive Officer)
|
|
|
|
/s/ A.
Alex Sarkisian, Esq.
A.
Alex Sarkisian
|
|
Executive Vice President, Chief Operating Officer and
Director
|
|
|
|
/s/ Timothy
J. Cunningham
Timothy
J. Cunningham
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
/s/ John
B. Toher
John
B. Toher
|
|
Vice President and Corporate Controller
(Principal Accounting Officer)
|
|
|
|
/s/ John
T. McEnroe, Esq.
John
T. McEnroe, Esq.
|
|
Director and Assistant Secretary
|
|
|
|
/s/ Leonard
S. Caronia
Leonard
S. Caronia
|
|
Director
|
|
|
|
/s/ Judith
W. McCue, Esq.
Judith
W. McCue, Esq.
|
|
Director
|
|
|
|
/s/ Hollis
W. Rademacher
Hollis
W. Rademacher
|
|
Director
|
|
|
|
/s/ Michael
G. ORourke
Michael
G. ORourke
|
|
Director
|
|
|
|
/s/ Stanley
N. Logan
Stanley
N. Logan
|
|
Director
|
102