Business News

Schawk Announces First-Quarter 2009 Results

Thursday 16. July 2009 - Schawk, Inc. (NYSE: SGK), a leading provider of brand point management services, enabling companies of all sizes to connect their brands with consumers to create deeper brand affinity, reported first-quarter 2009 results. Net loss in the first quarter of 2009 was $2.3 million, or $0.09 per diluted share, versus net income of $4.3 million, or $0.15 per diluted share in the first quarter of 2008.

Consolidated Results for First Quarter Ended March 31, 2009
Net sales in the first quarter of 2009 were $105.1 million compared to $126.4 million in the same period of 2008, a reduction of $21.3 million, or 16.9 percent. Approximately $7.6 million of the sales decline quarter over quarter 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 Company’s non-U.S. subsidiaries. The remainder of the quarter-over-quarter decline in sales was the result of a slowdown in the Company’s business as compared to the first quarter of 2008. Sales in the first quarter of 2009 attributable to acquisitions that were completed subsequent to the first quarter of 2008 totaled $2.4 million.
The slowdown in the Company’s business in the 2009 first quarter was particularly evident in the Company’s United States and Mexico reportable segment, which represents more than two-thirds of its sales and which experienced a sales decline of $11.1 million, or 13.4 percent. Also contributing to the quarter-over-quarter sales decline were lower sales in the Europe and Other reportable segments, as follows: sales in the Europe segment declined $5.2 million, or 29.6 percent, of which $4.2 million was attributable to changes in foreign currency translation rates; sales in the Other reportable segment declined $5.1 million, or 19.1 percent, of which $3.3 million was attributable to changes in foreign currency translation rates.
Consumer products packaging (CPG) accounts sales in the first quarter of 2009 were $68.7 million, or 65.4 percent of total sales, compared to $79.8 million in the same period of 2008, representing a decline of 14.0 percent. Advertising and retail accounts sales of $25.7 million, or 24.4 percent of total sales, in the first quarter of 2009 declined 29.4 percent compared to the prior-year period. Entertainment accounts sales for first quarter of 2009 of $8.3 million, or 7.9 percent of total sales, declined 10.2 percent as compared to the same period in 2008. In response to adverse economic conditions, many of the Company’s clients have reduced their levels of advertising, marketing and new product introductions and, particularly with respect to the Company’s CPG accounts, have delayed packaging redesigns and sales promotion projects, resulting in lower revenue for the Company. However, despite the softness experienced over the past few quarters, Schawk’s market share has remained strong across its client base. Furthermore, no major clients were lost during the quarter.
Gross profit was $33.1 million, or 31.5 percent of sales, in the first quarter of 2009, a decline of $9.9 million from $43.0 million, or 34.0 percent of sales, in the first quarter of 2008. The decrease in gross profit is largely attributable to the decrease in sales volume.
Selling, general and administrative (SG&A) expenses declined by $2.4 million, to $33.9 million in the first quarter of 2009 from $36.3 million in the first quarter of 2008, reflecting the Company’s cost reduction initiatives, partially offset by higher professional fees of $2.0 million related to internal control remediation efforts and related matters.
The Company reported an operating loss of $1.6 million in the 2009 first quarter compared to operating income of $6.7 million in the first quarter of 2008. The decrease in operating income, as compared to the prior-year period, was the result of lower sales volume and gross profit, as discussed above, acquisition, integration and restructuring expenses of $0.8 million and remediation and related expenses of $2.0 million.
The acquisition, integration and restructuring charge in the first quarter of 2009 arose from the Company’s previously announced plans to consolidate, reduce and re-align the Company’s work force and operations. As a result of these actions, the Company incurred costs of $0.8 million for employee terminations, obligations for future lease payments and other associated costs.
The remediation and related expenses of $2.0 million, which is included in the Company’s SG&A expenses, is principally due to an increase in the Company’s audit, legal and other costs related to the Company’s internal control remediation and related matters.
The Company reported a gain associated with foreign currency transactions of $0.1 million in the 2009 first quarter compared to a gain of $0.2 million on foreign currency transactions for the same period in 2008. These transactions were recorded by non-U.S. subsidiaries primarily for unhedged currency exposure arising from intercompany debt obligations.
Interest expense in the first quarter of 2009 was $1.4 million compared to $1.8 million in the first quarter of 2008, a result of a reduction in average interest rates during the 2009 period compared to the 2008 period, partially offset by an increase in average debt outstanding period over period.
Income tax for the first quarter of 2009 was a benefit of $0.7 million, which was principally due to the Company’s operating loss during the period, compared to income tax expense of $0.7 million in the first quarter of 2008.
Net loss in the first quarter of 2009 was $2.3 million, or $0.09 per diluted share, as compared to net income of $4.3 million, or $0.15 per diluted share, in the first quarter of 2008. As discussed above, during the first quarter of 2009 the Company incurred acquisition, integration and restructuring expenses of $0.8 million and remediation and related expenses of $2.0 million. Additionally the Company benefitted from a $0.1 million gain on foreign currency transactions in the first quarter of 2009. The loss before income taxes was $3.0 million. Because of this loss, the income tax provision for the first quarter was a benefit of $0.7 million. Excluding the aforementioned items (net of tax effect), first-quarter 2009 net loss was $0.6 million, or a loss of $0.02 per diluted share, as compared to income of $4.1 million, or $0.15 per diluted share, on the same basis for the comparable prior-year period. Please refer to the tables at the end of this press release for a reconciliation of non-GAAP measures.
Other Information
Depreciation and amortization expense was $4.8 million in the first quarter of 2009 compared to $5.5 million in the first quarter of 2008.
Capital expenditures in the first quarter of 2009 were $1.2 million compared to $2.4 million in the same period of 2008.
During the first quarter of 2009, the Company repurchased 488,700 shares for a cost of approximately $4.3 million. The Company has suspended its share repurchase program.
EBITDA and Adjusted EBITDA Performance
EBITDA for the first quarter of 2009 was $3.5 million compared to EBITDA of $12.3 million for the first quarter of 2008. Adjusted EBITDA for the first quarter of 2009 was $4.3 million compared to $12.3 million for the first quarter of 2008. These results for EBITDA and Adjusted EBITDA are calculated consistent with the non-GAAP reconciliation schedule presented at the end of this press release.
Cost-Reduction Activities
The $0.8 million restructuring charge in the first quarter 2009 noted above is anticipated to result in total annual savings of approximately $5.4 million (estimated $4.5 million to be realized in 2009) and is part of the Company’s previously announced actions for 2009 which are expected to generate annual savings of $7.0 to $8.0 million (estimated $5.0 to $6.0 million to be realized in 2009) with an estimated total restructuring charge for 2009 of $2.0 to $3.0 million. Furthermore, the Company has taken other specific 2009 cost-reduction actions expected to reduce expenses by approximately $6.0 to $7.0 million for the year.
Financing Update
In accordance with its recently amended debt agreements, the Company made principal prepayments on its debt facilities as follows: At closing on June 11, 2009, the Company paid $15.0 million — $7.9 million on its revolving credit facility, and $5.2 million and $1.9 million on Senior notes issued in its 2005 private placement of notes (“2005 Private Placement”) and 2003 private placement of notes (“2003 Private Placement”), respectively; on June 29, 2009, the Company paid $5.0 million — $2.6 million on its revolving credit facility, and $1.8 million and $0.6 million on Senior notes issued in its 2005 Private Placement and 2003 Private Placement, respectively. The Company also made $11.4 million of additional principal payments on its revolving credit facility prior to the end of the second quarter of 2009. Therefore, the Company made a total of $32.8 million of principal payments on its debt facilities during the second quarter of 2009, which included a $1.4 million scheduled principal payment in April of 2009 related to the 2003 Private Placement notes.
Full-Year 2009 Sales and “Adjusted EBITDA” Guidance
The Company currently expects full-year revenues to range between $440 to $450 million, and Adjusted EBITDA (as calculated under the terms of the Company’s amended debt agreements) to range between $43 to $51 million. The Company bases these annual estimates on a current expectation that consumer spending will modestly increase during 2009, CPGs, retail and corporate brands will increase their product innovation and promotional activities in response to competitive pressure, and that the Company’s cost reduction activities in 2008 and during 2009 are anticipated to lower the expense base of the Company.
In the event that consumer confidence is more than modestly increased, the Company expects that its revenue and Adjusted EBITDA will exceed initial projections. In addition, the Company presently expects that current cash balances and anticipated cash flows from operations and other activities will be sufficient to fund debt service as well as debt reduction through the end of 2009 without hindering the Company’s ability to focus on the services provided to its clients.
Management Comments
President and Chief Executive Officer David A. Schawk commented, “During the first quarter of 2009, we experienced a slowdown in business compared to first quarter of 2008, due primarily to continued general softness in the economy. However, we maintained our strong portfolio of major clients during the quarter and continue to believe that our clients are delaying projects pending an improvement in consumer spending trends.
“We continue to take steps to better utilize our global capacity while reducing our overall cost base, and as a result of the successful implementation of our restructuring actions thus far in 2009, we now expect to generate $7 to $8 million in annual cost savings. Furthermore, the Company has taken other 2009 cost-reduction actions expected to reduce expenses by approximately $6.0 to $7.0 million for 2009.”
Schawk concluded, “As markets normalize, we are well-positioned to meet the service demands of our clients through our more efficient organizational and operational processes. We believe these same initiatives will allow us to better leverage our operational structure as the market and our clients’ spending improves.”