XNYS:SGK Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012



 




 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

þ                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

o                TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-09335

GRAPHIC

SCHAWK, INC.
(Exact name of Registrant as specified in its charter)
Delaware
 
66-0323724
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
1695 South River Road
   
Des Plaines, Illinois
 
60018
(Address of principal executive office)
 
(Zip Code)

847-827-9494
(Registrant’s telephone number, including area code)
 
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 þ No o
 
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 (§232.405 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 þ  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):


Large accelerated filer o
 
Accelerated filer þ
     
Non-accelerated filer o
 
Smaller reporting company o

(Do not check if a smaller reporting company)

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 number of shares of the Registrant’s Common Stock outstanding as of April 27, 2012 was 25,841,446



 
 

 


SCHAWK, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2012



   
Page
 
     
 
     
 
     
 
     
 
 
     
 
     
     
     
     
 
     
     
     
     
  28
     
 
     
 
     
 
     




Schawk, Inc.
(In thousands, except share amounts)

   
March 31,
2012
   
December 31,
2011
 
   
(unaudited)
       
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 8,192     $ 13,732  
Trade accounts receivable, less allowance for doubtful accounts of $1,955 at March 31, 2012
   and $1,926 at December 31, 2011
    96,278       99,967  
Inventories
    27,880       24,672  
Prepaid expenses and other current assets
    13,323       14,894  
Income tax receivable
    4,386       5,620  
Deferred income taxes
    719       682  
Total current assets
    150,778       159,567  
                 
Property and equipment, less accumulated depreciation of $113,951 at March 31, 2012
 and $109,925 at December 31, 2011
    62,573       60,064  
Goodwill, net
    211,547       205,365  
Other intangible assets, net:
               
  Customer relationships
    36,822       41,709  
  Other
    911       354  
Deferred income taxes
    6,025       5,933  
Other assets
    7,339       6,521  
                 
Total assets
  $ 475,995     $ 479,513  
                 
Liabilities and stockholders’ equity
               
Current liabilities:
               
Trade accounts payable
  $ 18,079     $ 18,366  
Accrued expenses
    70,613       60,636  
Deferred income taxes
    3,210       3,209  
Income taxes payable
    1,020       511  
Current portion of long-term debt
    4,597       21,442  
Total current liabilities
    97,519       104,164  
                 
Long-term liabilities:
               
Long-term debt
    75,575       73,737  
Deferred income taxes
    13,857       13,476  
Other long-term liabilities
    13,741       14,211  
Total long-term liabilities
    103,173       101,424  
 
               
 Stockholders’ equity:
               
Common stock, $0.008 par value, 40,000,000 shares authorized, 30,945,995 and 30,766,517 shares issued at March 31, 2012
  and December 31, 2011, respectively; 25,883,654 and 25,703,125 shares outstanding at March 31, 2012 and
  December 31, 2011, respectively
    226       225  
Additional paid-in capital
    206,394       203,811  
Retained earnings
    121,943       125,619  
Accumulated other comprehensive income, net
    11,537       9,080  
Treasury stock, at cost, 5,062,341 and 5,063,392 shares of common stock at March 31, 2012 and
   December 31, 2011,  respectively
    (64,797 )     (64,810 )
Total stockholders’ equity
    275,303       273,925  
                 
Total liabilities and stockholders’ equity
  $ 475,995     $ 479,513  

The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
 
 


Schawk, Inc.
(Unaudited)
(In thousands, except per share amounts)

   
Three Months Ended
 March 31,
 
   
2012
   
2011
 
             
Net sales
  $ 112,750     $ 107,234  
Cost of sales
    75,684       68,482  
Gross profit
    37,066       38,752  
                 
Selling, general and administrative expenses
    33,928       31,032  
Business and systems integration expenses
    3,170       1,239  
Acquisition integration and restructuring expenses
    1,084       431  
Foreign exchange loss
    470       501  
Operating income (loss)
    (1,586 )     5,549  
                 
Other income (expense):
               
Interest income
    16       18  
Interest expense
    (842 )     (1,287 )
                 
Income (loss) before income taxes
    (2,412 )     4,280  
Income tax provision (benefit)
    (805 )     1,491  
                 
Net income (loss)
  $ (1,607 )   $ 2,789  
                 
Earnings (loss) per share:
               
Basic
  $ (0.06 )   $ 0.11  
Diluted
  $ (0.06 )   $ 0.11  
                 
Weighted average number of common and common
equivalent shares outstanding:
               
Basic
    25,767       25,817  
Diluted
    25,767       26,246  
                 
Dividends per Class A common share
  $ 0.08     $ 0.08  
                 
Comprehensive income
  $ 850     $ 5,463  

The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
 
 

 

Schawk, Inc.
Three Months Ended March 31, 2012 and 2011
(Unaudited)
(In thousands)


   
2012
   
2011
 
             
Cash flows from operating activities
           
Net income (loss)
  $ (1,607 )   $ 2,789  
Adjustments to reconcile net income to cash provided by (used in) operating activities:
               
Depreciation
    3,300       3,100  
Amortization
    1,355       1,228  
Non-cash restructuring charge
    65       87  
Amortization of deferred financing fees
    95       154  
Gain realized on sale of property and equipment
    (9 )     (2 )
Stock based compensation expense
    1,832       471  
Changes in operating assets and liabilities, net of acquisitions:
               
Trade accounts receivable
    4,813       9,957  
Inventories
    (3,105 )     (1,816 )
Prepaid expenses and other current assets
    1,317       (185 )
Trade accounts payable, accrued expenses and other liabilities
    6,978       (13,713 )
Income taxes refundable (payable)
    1,748       (2,463 )
Net cash provided by (used in) operating activities
    16,782       (393 )
                 
Cash flows from investing activities
               
Proceeds from sales of property and equipment
    12       27  
Purchases of property and equipment
    (5,516 )     (3,026 )
Acquisitions, net of cash acquired
    --       (182 )
Net cash used in investing activities
    (5,504 )     (3,181 )
                 
Cash flows from financing activities
               
Issuance of common stock
    738       483  
Proceeds from issuance of long-term debt
    76,864       25,963  
Payments of long-term debt including current portion
    (92,042 )     (47,283 )
Payment of deferred financing fees
    (831 )     (5 )
Cash dividends
    (2,056 )     (2,059 )
Net cash used in financing activities
    (17,327 )     (22,901 )
Effect of foreign currency rate changes
    509       692  
Net decrease in cash and cash equivalents
    (5,540 )     (25,783 )
Cash and cash equivalents at beginning of period
    13,732       36,889  
                 
Cash and cash equivalents at end of period
  $ 8,192     $ 11,106  
                 

The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.


Schawk, Inc.
(Unaudited)
(In thousands, except per share data)

 
Note 1 – Significant Accounting Policies
 
The significant accounting policies of Schawk, Inc. (“Schawk” or the “Company”) are included in Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Form 10-K”). There have been no material changes in the Company’s significant accounting policies since December 31, 2011.
 
 
Interim Financial Statements
 
The unaudited consolidated interim financial statements of the Company have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Certain previously reported immaterial amounts have been reclassified to conform to the current-period presentation. In the opinion of management, all adjustments necessary for a fair presentation for the periods presented have been recorded.
 
These financial statements should be read in conjunction with, and have been prepared in conformity with, the accounting principles reflected in the Company’s consolidated financial statements and the notes thereto for the three years ended December 31, 2011, as filed with its 2011 Form 10-K. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2012.
 
 
Recent Accounting Pronouncements
 
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurements (Topic 820). The amendments in ASU 2011-04 result in common definitions of fair value and common requirements for measurement of and disclosure requirements between U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. Consequently, the amendments change some fair value measurement principles and disclosure requirements. The amendments in ASU 2011-04 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted ASU 2011-04 effective January 1, 2012. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
 
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220). The amendments in ASU 2011-05 require companies to present items of net income, items of other comprehensive income (“OCI”) and total comprehensive income in one continuous statement or two separate but consecutive statements. Companies will no longer be allowed to present OCI in the statement of stockholders’ equity. In December 2011, the FASB issued ASU No. 2011-12 Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The Amendments in ASU 2011-12 indefinitely defer certain provisions of ASU 2011-05, which revised the manner in which entities present comprehensive income in their financial statements. The deferred provisions of ASU 2011-05 relate to reclassification adjustments between OCI and net income being presented separately on the face of the financial statements. The amendments in ASU 2011-05 and 2011-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The financial statement presentations required by ASU 2011-05 and 2011-12 were adopted by the Company effective January 1, 2012.
 
In September 2011, the FASB issued ASU No. 2011-08, Intangibles Goodwill and Other (Topic 350). The amendments in ASU 2011-08 amend the guidance in FASB Accounting Standards Codification (“ASC”) 350-20 on testing goodwill for impairment. Under the revised guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment before calculating the fair value of the reporting unit (i.e., step 1 of the goodwill impairment test). If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. The ASU does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. In addition, the ASU does not amend the requirement to test goodwill for impairment between annual tests if events or circumstances warrant; however, it does revise the examples of events and circumstances that an entity should consider. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted ASU 2011-08 effective January 1, 2012. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
 
 
Note 2 – Inventories
 
The Company’s inventories consist primarily of work-in-process inventory, as well as raw materials and finished goods inventory related to the Company’s Los Angeles print operation. Work-in-process consists primarily of unbilled labor and overhead costs. Raw materials are stated at the lower of cost or market.

The majority of the Company’s inventories are valued on the first-in, first-out (FIFO) basis. The remaining inventories are valued using the last-in, first-out (LIFO) method. The Company periodically evaluates the realizability of inventories and adjusts the carrying value as necessary.

Inventories consist of the following:

   
March 31,
   
December 31,
 
   
2012
   
2011
 
             
Raw materials
  $ 1,997     $ 2,014  
Work-in-process
    26,061       22,544  
Finished goods
    532       824  
      28,590       25,382  
Less: LIFO reserve
    (710 )     (710 )
                 
Total
  $ 27,880     $ 24,672  

Note 3 – Earnings Per Share

Basic earnings per share are computed by dividing net income (loss) 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, including 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.

The following table details the computation of basic and diluted earnings (loss) per common share:

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
             
Net income (loss)
  $ (1,607 )   $ 2,789  
                 
Weighted average shares – Basic
    25,767       25,817  
Effect of dilutive stock options
    --       429  
Adjusted weighted average shares and assumed conversions - Diluted
    25,767       26,246  
                 
Basic earnings (loss) per common share
  $ (0.06 )   $ 0.11  
Diluted earnings (loss) per common share
  $ (0.06 )   $ 0.11  

Since the Company was in a loss position for the three-month period ended March 31, 2012, there was no difference between the number of shares used to calculate basic and diluted loss per share for that period. There were 149 potentially dilutive stock options not included in the diluted per share calculation at March 31, 2012 because they would be anti-dilutive. In addition, the following table presents the potentially dilutive outstanding stock options excluded from the computation of diluted earnings per share for each period because they would be anti-dilutive:

 
   
Three Months Ended
March 31,
 
   
2012
   
2011
 
             
Anti-dilutive options
    1,416       125  
Exercise price range
  $ 11.71 - 21.08     $ 18.20 - 21.08  


Note 4 – Comprehensive Income

The Company reports certain changes in equity during a period in accordance with the Comprehensive Income Topic of the Codification, ASC 220. Accumulated comprehensive income, net includes cumulative translation adjustments and changes in gains and losses on hedged transactions, net of tax. The components of comprehensive income for the three-month periods ended March 31, 2012 and 2011 are as follows:

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
             
Net income (loss)
  $ (1,607 )   $ 2,789  
Foreign currency translation adjustments
    2,457       2,674  
 
Comprehensive income
  $ 850     $ 5,463  


 
 
Note 5 – Stock Based Compensation
 
The Company accounts for stock based payments in accordance with the provisions of the Stock Compensation Topic of the Codification, ASC 718, based on the grant date fair value and using the straight-line expense attribution method.
 
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 term 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 three-month periods ended March 31, 2012 and March 31, 2011, using the Black-Scholes option-pricing model.

   
Three Months Ended
     
Three Months Ended
   
   
March 31, 2012
     
March 31, 2011
   
                 
Expected dividend yield
    2.73  
%
    1.57 - 1.76  
%
Expected stock price volatility
    57.19  
%
    52.70 - 52.78  
%
Risk-free interest rate
    1.33  
%
    2.54 - 2.84  
%
Weighted-average expected life of options
    6.21  
years
    6.28  
years
Forfeiture rate
    3.0  
%
    3.0  
%

The number of options and shares of restricted stock granted during the three-month periods ended March 31, 2012 and March 31, 2011 was 180 and 177, respectively. The total fair value of options and restricted stock granted during the three-month periods ended March 31, 2012 and March 31, 2011 was $1,604 and $2,286 respectively. As of March 31, 2012 and March 31, 2011, respectively, there was $2,714 and $3,942 of total unrecognized compensation cost related to nonvested options and restricted shares outstanding. That cost is expected to be recognized over a weighted average period of approximately two years. Expense recognized for the three-month periods ended March 31, 2012 and March 31, 2011 was $1,832 and $471, respectively, reflecting an increase in the level of grants and the related plan provisions for rights upon retirement.


Note 6 – Impairment of Long-lived Assets and Insurance Recoveries
 
During the first quarter of 2012, the Company recorded impairment charges in the amount of $65 related to leasehold improvements no longer being utilized as a result of an office consolidation. During the first quarter of 2011, the Company recorded impairment charges in the amount of $87 related to building improvements at Company facilities that are being combined with other operating facilities or shut-down. Since the impairments relate to the Company’s ongoing restructuring and cost reduction initiatives, the impairment charges are included in Acquisition integration and restructuring expenses in the Consolidated Statements of Comprehensive Income. See Note 12 – Acquisition Integration and Restructuring.
 
The Company maintains insurance coverage for property loss, business interruption, and directors and officers liability and records insurance recoveries in the period in which the insurance carrier validates the claim and confirms the amount of reimbursement to be paid. During the first quarter of 2012, the Company did not receive any insurance settlements. During the first quarter of 2011, the Company received insurance settlements of $93 for business interruption and other expenses related to a 2009 flood at one of its North American operations and $69 related to a recovery of legal fees related to employment issues. The insurance recoveries are reflected in Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income.
 

Note 7 – Acquisitions
 
Lipson Associates, Inc. and Laga, Inc.
 
Effective October 19, 2011, the Company acquired substantially all of the domestic assets and assumed certain trade account and business related liabilities of Lipson Associates, Inc. and Laga, Inc., as well as the stock of their foreign operations. Lipson Associates, Inc. and Laga, Inc. does business as Brandimage – Desgrippes & Laga (“Brandimage”).

Brandimage is a leading branding and design network specializing in providing services that seek to engage and enhance the brand experience, including brand positioning and strategy, product development and structural design, package design and environmental design. Brandimage has operations in Chicago, Cincinnati, Paris, Brussels, Shanghai, Seoul and Hong Kong. The Brandimage business was acquired to enhance the Company’s service offerings related to branding and design and operates in conjunction with Schawk's legacy brand development capabilities, which are performed under its Anthem Worldwide brand.

The purchase price of $23,297 consisted of $27,011 paid in cash at closing, less $3,714 accrued as a receivable for a net working capital adjustment and indemnification of certain pre-acquisition contingencies. The Company funded the purchase price through a draw from its existing credit facility. The Company recorded a preliminary purchase price allocation at March 31, 2012. A fair value appraisal is being performed by an independent consulting company and the Company will finalize the purchase price allocation later in 2012 once the final valuations have been established. During the first quarter of 2012, the Company adjusted its preliminary purchase price allocation based on a preliminary fair value appraisal performed by an independent consulting company. The additional purchase accounting adjustments in the first quarter principally reflect an increase in goodwill and a decrease in customer relationships as a result of the preliminary valuation. The goodwill ascribed to this acquisition consists largely of expected profitability from future services and is deductible for tax purposes.
 


 
A summary of the estimated preliminary fair values assigned to the acquired assets is as follows:
 
Accounts receivable
  $ 4,940  
Inventory
    4,016  
Prepaid expenses and other current assets
    4,980  
Income tax receivable
    8  
Property and equipment
    482  
Goodwill
    18,466  
Customer relationships
    5,894  
Trade name
    741  
Other assets
    241  
Trade accounts payable
    (3,247 )
Accrued expenses
    (7,174 )
Notes payable
    (23 )
Deferred income taxes
    (385 )
Other long term liabilities
    (3,889 )
         
Cash paid at closing, net of $1,961 cash acquired
  $ 25,050  
 
The weighted average amortization periods of the customer relationships intangible asset and the trade name intangibles asset is 8.0 years and 5.0 years, respectively. The intangible asset amortization expense for the customer relationships intangible asset and the trade name intangible asset will be approximately $737 and $148, respectively, on an annual basis. The intangible asset amortization expense recorded in the three-month period ended March 31, 2012 for the customer relationships intangible asset and the trade name intangible asset was $81 and $66, respectively.
 
 
Real Branding LLC
 
Effective November 10, 2010, the Company acquired 100 percent of the equity of Real Branding LLC (“Real Branding”), a United States - based digital marketing agency. Real Branding provides digital marketing services to consumer product and entertainment clients through its locations in San Francisco and New York. This business was acquired to strengthen the Company’s ability to offer integrated strategic, creative and executional services in the digital media marketplace in the Americas operating segment.
 
The purchase price of $9,590 consisted of $6,000 paid in cash at closing, $182 paid for a net working capital adjustment in the first quarter of 2011, and $3,408 recorded as an estimated liability to the sellers for contingent consideration based on future performance of the business. Under the acquisition agreement, the purchase price may be increased by up to $6,000 if a specified target of earnings before interest, taxes, depreciation and amortization is achieved for the years 2011 through 2014 and is payable periodically during 2012 through 2015, based on actual future performance. Based on performance projections available at the date of the acquisition, the Company originally recorded estimated contingent consideration of $3,958, less a present value discount of $550. During the fourth quarter of 2011, it became apparent that the original performance projections would not be achieved and the Company reevaluated the estimated contingent consideration payable based on current expectations of the performance of the Real Branding business during 2012 through 2014. As a result of the reevaluation, the Company reduced the estimated contingent consideration payable as of December 31, 2011 to $264, less a present value discount of $25, resulting in a net reduction in the estimated contingent consideration payable of $3,320. At March 31, 2012, the recorded estimated contingent consideration payable remained at $264, less a present value discount of $23.
 
 
Exit Reserves from Prior Acquisitions
 
The Company recorded exit reserves related to its acquisitions of Weir Holdings Limited and Seven Worldwide Holdings, Inc., which occurred in 2004 and 2005, respectively. The major expenses included in the exit reserves were employee severance and lease termination expenses. The exit reserve balances related to employee severance were paid in prior years. The exit reserves related to the facility closures are being paid over the term of the leases, with the longest lease expiring in 2015. The remaining reserve balance of $356 is included on the Consolidated Balance Sheets as of March 31, 2012 as follows: $200 is included in Accrued expenses and $156 is included in Other long-term liabilities.
 
 
The following table summarizes the reserve activity from December 31, 2011 through March 31, 2012 for facility closure costs:
 
   
Beginning of
               
End of
 
   
Period
   
Adjustments
   
Payments
   
Period
 
                         
First quarter
  $ 367     $ 27     $ (38 )   $ 356  
 
 
 
Note 8 – Debt
 
Debt obligations consist of the following:
 
 
   
March 31,
2012
   
December 31,
 2011
 
             
Revolving credit agreement
  $ 45,806     $ 68,968  
Series A senior note payable - Tranche A
    3,687       3,687  
Series A senior note payable - Tranche B
    3,687       3,687  
Series E senior note payable
    --       17,206  
Series F senior note payable
    25,000       --  
Other
    1,992       1,631  
      80,172       95,179  
Less amounts due in one year or less
    (4,597 )     (21,442 )
                 
Total
  $ 75,575     $ 73,737  

In 2003 and 2005, the Company entered into two private placements of debt to provide long-term financing. The senior notes issued under these note purchase agreements that were outstanding at March 31, 2012 bear interest at rates from 8.90 percent to 8.98 percent. The remaining aggregate balance of the notes, $7,374, is included on the March 31, 2012 Consolidated Balance Sheets as follows: $3,072 is included in Current portion of long-term debt and $4,302 is included in Long-term debt.

Effective January 12, 2010, the Company and certain subsidiary borrowers of the Company entered into an amended and restated credit agreement (the “2010 Credit Agreement”) with JPMorgan Chase Bank, N.A. The 2010 Credit Agreement provided 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 sub-facility and a $10,000 sub-facility for letters of credit. Loans under the facility generally bore interest at a rate of LIBOR plus a margin that varies with the Company’s cash flow leverage ratio, in addition to applicable commitment fees, with a maximum rate of LIBOR plus 350 basis points. Loans under the facility were not subject to a minimum LIBOR floor. At December 31, 2011, there was $47,000 outstanding under the LIBOR portion of the facility at an interest rate of approximately 2.72 percent, and $14,515 of prime rate borrowings outstanding at an interest rate of approximately 4.75 percent. The Company’s Canadian subsidiary borrowed under the revolving credit facility in the form of bankers’ acceptance agreements and prime rate borrowings. At December 31, 2011, there was $7,257 outstanding under bankers’ acceptance agreements at an interest rate of approximately 3.80 percent and $196 outstanding under prime rate borrowings at an interest rate of approximately 4.50 percent.
 
In December 2007, the Company’s 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 March 31, 2012.
 
 
2012 Revolving Credit Facility Refinancing and Note Purchase Agreement Amendments
 
Amended and Restated Credit Agreement. On January 27, 2012, the Company entered into a Second Amended and Restated Credit Agreement (the “2012 Credit Agreement”), among the Company, certain subsidiary borrowers of the Company, the financial institutions party thereto as lenders, JPMorgan Chase Bank, N.A., on behalf of itself and the other lenders as agent, and PNC Bank, National Association, on behalf of itself and the other lenders as syndication agent, in order to amend and restate the 2010 Credit Agreement, that was scheduled to terminate on July 12, 2012.

The 2012 Credit Agreement provides for a five-year unsecured, multicurrency revolving credit facility in the principal amount of $125,000 (the “New Facility”), 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 New Facility by up to $50,000 by obtaining one or more new commitments from new or existing lenders to fund such increase. Loans under the New Facility generally bear interest at a LIBOR or Federal funds rate plus a margin that varies with the Company’s cash flow leverage ratio, in addition to applicable commitment fees, with a maximum rate of LIBOR plus 225 basis points. At closing, the applicable margin on LIBOR-based loans was 175 basis points. Following the closing, the unutilized portion of the New Facility will be used primarily for general corporate purposes, such as working capital and capital expenditures, and, to the extent opportunities arise, acquisitions and investments.

At March 31, 2012, there was $19,000 outstanding under the LIBOR portion of the facility at an interest rate of approximately 2.19 percent. At the Company’s option, loans under the facility could bear interest at prime plus 1.5 percent. At March 31, 2012, there was $19,785 of prime rate borrowings outstanding at an interest rate of approximately 4.25 percent. The Company’s Canadian subsidiary borrowed under the revolving credit facility in the form of bankers’ acceptance agreements and prime rate borrowings. At March 31, 2012, there was $6,820 outstanding under bankers’ acceptance agreements at an interest rate of approximately 3.05 percent and $201 outstanding under prime rate borrowings at an interest rate of approximately 3.75 percent.

The 2012 Credit Agreement contains various customary affirmative and negative covenants and events of default. Under the terms of the 2012 Credit Agreement, the Company is no longer subject to restrictive covenants on permitted capital expenditures. Certain restricted payments, such as regular dividends and stock repurchases, are permitted provided that the Company maintains compliance with its minimum fixed-charge coverage ratio (with respect to regular dividends) and a specified maximum cash-flow leverage ratio (with respect to other permitted restricted payments). Other covenants include, among other things, restrictions on the Company’s 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 2012 Credit Agreement; engage in certain transactions with affiliates; engage in sale/leaseback transactions; and engage in certain hedging arrangements. The 2012 Credit Agreement also requires compliance with specified financial ratios and tests, including a minimum fixed-charge coverage ratio and a maximum cash-flow ratio. The 2012 Credit Agreement no longer contains the minimum consolidated net worth requirement that was a covenant under the Former Facility.
 
 
Amended and Restated Private Shelf Agreement. Concurrently with its entry into the 2012 Credit Agreement, on January 27, 2012, the Company entered into an Amended and Restated Note Purchase and Private Shelf Agreement with Prudential Investment Management, Inc. (“Prudential”) and certain existing noteholders and note purchasers named therein (the “Private Shelf Agreement”), which provides for a $75,000 private shelf facility for a period of up to three years (the “Private Shelf Facility”). At closing, the Company issued $25,000 aggregate principal amount of its 4.38% Series F Senior Notes due January 27, 2019 (the “Notes”) under the Private Shelf Agreement, with a portion of the net proceeds being used to finance $20,278 in principal payments due in 2012 under the Company’s existing senior notes, including its 9.17% Series E Senior Notes that became due January 28, 2012.
 
The Private Shelf Agreement contains financial and other covenants that are the same or substantially equivalent to covenants under the 2012 Credit Agreement described above. Notes issued under the Private Shelf Facility may have maturities of up to ten years and are unsecured. Either the Company or Prudential may terminate the unused portion of the Private Shelf Facility prior to its scheduled termination upon 30 days’ written notice.
 
Any future borrowings under the Private Shelf Facility may be used for general corporate purposes, such as working capital and capital expenditures.
 
Amendment to Note Purchase Agreement. Concurrently with the entry into the Private Shelf Agreement, the Company entered into the Fifth Amendment (the “Fifth Amendment”) to Note Purchase Agreement, dated as of December 23, 2003, as amended, with the noteholders party thereto (the “Mass Mutual Noteholders”). The Fifth Amendment amends certain financial and other covenants in the note purchase agreement so that such financial and other covenants are the same or substantially equivalent to covenants under the 2012 Credit Agreement described above. The Fifth Amendment also amends certain provisions contained in the note purchase agreement to reflect that amounts due under existing senior notes issued to the Mass Mutual Noteholders are no longer secured.

The Company was in compliance with all covenant obligations under the aforementioned credit agreements at March 31, 2012.
 
Other Debt Arrangements
 
In September 2011, the Company financed $992 of business insurance premiums for a 2011 – 2012 policy term. The premiums are due in equal quarterly payments ending in June 2012. In March 2012, the Company financed $714  of business insurance premiums for a 2012 – 2013 policy term. The premiums are due in equal quarterly payments ending in December 2012. The total balance outstanding for insurance premiums at March 31, 2012 is $1,046 and is included in Current portion of long-term debt on the March 31, 2012 Consolidated Balance Sheets.
 
In September 2011, the Company financed $906 of three-year software license agreements effective through September 2014. The payments are due in annual installments ending in September 2013. The total balance outstanding for the software license fees at March 31, 2012 is $503, which is included on the March 31, 2012 Consolidated Balance Sheets as follows: $252 is included in Current portion of long-term debt and $251 is included in Long-term debt.
 
In October 2011, the Company financed a $649 three-year equipment and software maintenance agreement effective through November 2014. The payments are due in annual installments ending in December 2013. The total balance outstanding for the equipment and software maintenance fees at March 31, 2012 is $432, which is included on the March 31, 2012 Consolidated Balance Sheets as follows: $216 is included in Current portion of long-term debt and $216 is included in Long-term debt.
 
The Company also had $10 of various notes payable from its October 2011 acquisition of Brandimage, included in Current portion of long-term debt on the March 31, 2012 Consolidated Balance Sheets.
 
Deferred Financing Fees
 
The Company incurred and capitalized $831 of deferred financing fees during the first quarter of 2012. During the first quarter of 2012, the Company amortized deferred financing fees totaling $95. During the first quarter of 2011, the Company amortized deferred financing fees totaling $154. These amounts are included in Interest expense on the Consolidated Statements of Comprehensive Income. At March 31, 2012, the Company had $1,112 of unamortized deferred financing fees.

 
 
Note 9 – Goodwill and Intangible Assets
 
The Company’s 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 Company’s goodwill is not amortized throughout the period, but is subject to an annual impairment test. The Company performs an impairment test annually as of October 1, or more frequently if events or changes in business circumstances indicate that the carrying value may not be recoverable.
 
The changes in the carrying amount of goodwill by reportable segment during the quarter ended March 31, 2012, were as follows:
 
 
                 
Asia
       
     
Americas
   
Europe
   
Pacific
   
Total
 
Cost:
                         
December 31, 2011
    $ 198,510     $ 40,364     $ 10,037     $ 248,911  
Acquisitions
      266       --       --       266  
Additional purchase accounting adjustments
      3,507       992       683       5,183  
Foreign currency translation
      495       1,050       288       1,832  
                                   
March 31, 2012
    $ 202,778     $ 42,406     $ 11,008     $ 256,192  
                                   
Accumulated impairment:
                                 
December 31, 2011
    $ (14,422 )   $ (27,878 )   $ (1,246 )   $ (43,546 )
Foreign currency translation
      (116 )     (957 )     (26 )     (1,099 )
                                   
March 31, 2012
    $ (14,538 )   $ (28,835 )   $ (1,272 )   $ (44,645 )
                                     
Net book value:
                                 
December 31, 2011
    $ 184,088     $ 12,486     $ 8,791     $ 205,365  
                                     
March 31, 2012
    $ 188,240     $ 13,571     $ 9,736     $ 211,547  
                                     

 
The Company’s other intangible assets subject to amortization are as follows:
 
 
     
    March 31, 2012
 
 
Weighted
Average Life
 
       Cost
   
       Accumulated
       Amortization
   
       Net
 
                     
Customer relationships
13.2 years
  $ 62,056     $ (25,234 )   $ 36,822  
Digital images
5.0 years
    450       (450 )     --  
Developed technologies
3.0 years
    712       (712 )     --  
Non-compete agreements
3.6 years
    877       (797 )     80  
Trade names
3.9 years
    1,482       (784 )     698  
Contract acquisition cost
3.0 years
    1,220       (1,087 )     133  
                           
 
12.6 years
  $ 66,797     $ (29,064 )   $ 37,733  
 
     
    December 31, 2011
 
 
Weighted
Average Life
 
       Cost
   
       Accumulated
       Amortization
   
       Net
 
                     
Customer relationships
12.9 years
  $ 65,466     $ (23,757 )   $ 41,709  
Digital images
5.0 years
    450       (450 )     --  
Developed technologies
3.0 years
    712       (712 )     --  
Non-compete agreements
3.6 years
    864       (774 )     90  
Trade names
2.8 years
    738       (707 )     31  
Contract acquisition cost
3.0 years
    1,220       (987 )     233  
                           
 
12.4 years
  $ 69,450     $ (27,387 )   $ 42,063  

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 the Company’s experience that clients are reluctant to change suppliers.
 
Amortization expense related to the other intangible assets totaled $1,355 and $1,228 for the three-month periods ended March 31, 2012 and March 31, 2011, respectively. Amortization expense for each of the next five twelve-month periods beginning April 1, 2012, is expected to be approximately $5,419 for 2013, $5,263 for 2014, $5,060 for 2015, $4,433 for 2016, and $4,352 for 2017.
 
 
Note 10 – Income Taxes

The Company’s interim period income tax provision is determined as follows:

·  
At the end of each fiscal quarter, the Company estimates the income tax that will be provided for the fiscal year

·  
The forecasted annual effective tax rate is applied to the year-to-date ordinary income (loss) at the end of each quarter to compute the year-to-date tax applicable to ordinary income (loss). The term ordinary income (loss) refers to income (loss) from continuing operations before income taxes, excluding significant, unusual or infrequently occurring items. The tax provision or benefit related to ordinary income (loss) in each quarter is the difference between the most recent year-to-date and the prior quarter-to-date computations.
 
·  
The tax effects of significant or infrequently occurring items are recognized as discrete items in the interim periods in which the events occur. The impact of changes in tax laws or rates on deferred tax amounts, the effects of changes in judgment about valuation allowances established in prior years, and changes in tax reserves resulting from the finalization of tax audits or reviews are examples of significant, unusual or infrequently occurring items which are recognized as discrete items in the interim period in which the event occurs.

The determination of the forecasted annual effective tax rate is based upon a number of significant estimates and judgments, including the forecasted annual income (loss) before income taxes of the corporation in each tax jurisdiction in which it operates and the development of tax planning strategies during the year. In addition, the Company’s tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, as well as other factors that cannot be predicted with certainty. The company will continue to reassess the need for a valuation allowance on a quarterly basis and consider reversing a significant portion of the valuation reserve upon assessment of certain factors, including a demonstration of sustained profitability and the support of internal financial forecasts demonstrating the utilization of the NOLs prior to their expiration. As such, there can be significant volatility in interim tax provisions.

The following table sets out the tax provision (benefit) and the effective tax rates of the Company:

 
Three Months Ended
March 31,
 
(in thousands)
2012
 
2011
 
         
Income (loss) before income taxes
$ (2,412)   $ 4,280  
Income tax provision (benefit)
$ (805)   $ 1,491  
Effective tax rate
  33.4   34.8 %
             

In the first quarter of 2012, the Company recognized a tax benefit of $805 on a loss before income taxes of $2,412, or an effective tax rate of 33.4 percent. The lower rate on the income tax benefit in the first quarter of 2012, as compared to an income tax provision in the first quarter of 2011, is primarily due to the impact of discrete tax expenses applied to a current quarter loss. Foreign taxes provided at other than the 35.0 percent U.S. statutory rate, U.S. state income taxes, nondeductible expenses and other permanent differences contributed to the difference from the 35.0 percent U.S. statutory rate.

The Company had reserves for unrecognized tax benefits, exclusive of interest and penalties, of $1,630 and $1,362 at March 31, 2012 and December 31, 2011, respectively. The reserve for uncertain tax positions as of March 31, 2012 increased due to increases for the establishment of additional uncertain tax positions of $270 and foreign exchange rate fluctuations of $15 offset by a decrease for a statute of limitations closure of $17.


Note 11 – Segment Reporting

 
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.
 
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.
 
The Company’s Americas segment includes all of the Company’s operations located in North and South America, including its operations in the United States, Canada, Mexico and Brazil, its U.S. brand strategy and design business and its U.S. digital solutions business. The Company’s Europe segment includes all operations located in Europe, including its European brand strategy and design business and its digital solutions business in London. The Company’s Asia Pacific segment includes all operations in Asia and Australia, including its Asia Pacific brand strategy and design business. The Company has determined that each of its operating segments is also a reportable segment under ASC 280.
 
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 Company’s CODM and is most consistent with the presentation of profitability reported within the consolidated financial statements.
 
 
Segment information relating to results of operations was as follows:

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
             
Sales to external clients:
           
Americas
  $ 92,837     $ 92,385  
Europe
    22,392       17,592  
Asia Pacific
    8,120       6,653  
Intercompany sales elimination
    (10,599 )     (9,396 )
                 
Total
  $ 112,750     $ 107,234  
                 
Operating segment income (loss):
               
Americas
  $ 7,951     $ 12,086  
Europe
    1,423       2,121  
Asia Pacific
    114       30  
Corporate
    (11,074 )     (8,688 )
Operating income (loss)
    (1,586 )     5,549  
Interest expense, net
    (826 )     (1,269 )
 
Income (loss) before income taxes
  $ (2,412 )   $ 4,280  



 
 Note 12 – Acquisition Integration and Restructuring

In 2008, the Company initiated a cost reduction and restructuring 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.

The following table summarizes the accruals recorded, adjustments, and the cash payments during the three-month period ended March 31, 2012, related to cost reduction and restructuring actions initiated during 2008, 2010, 2011 and 2012. The adjustments are comprised principally of changes to previously recorded expense accruals. The remaining reserve balance of $3,717 is included on the Consolidated Balance Sheets at March 31, 2012 as follows: $2,165 in Accrued expenses and $1,552 in Other long-term liabilities.

   
Employee
   
Lease
       
   
Terminations
   
Obligations
   
Total
 
                   
Actions Initiated in 2008
                 
Liability balance at December 31, 2011
  $ --     $ 2,789     $ 2,789  
Adjustments
    --       420       420  
Cash payments
    --       (187 )     (187 )
                         
Liability balance at March 31, 2012
  $ --     $ 3,022     $ 3,022  
                         
Actions Initiated in 2010
                       
Liability balance at December 31, 2011
  $ 408     $ --     $ 408  
Adjustments
    10       --       10  
Cash payments
    (15 )     --       (15 )
                         
Liability balance at March 31, 2012
  $ 403     $ --     $ 403  
                         
Actions Initiated in 2011
                       
Liability balance at December 31, 2011
  $ 125     $ --     $ 125  
Adjustments
    (7 )     --       (7 )
Cash payments
    (103 )     --       (103 )
                         
Liability balance at March 31, 2012
  $ 15     $ --     $ 15  
                         
Actions Initiated in 2012
                       
Liability balance at December 31, 2011
  $ --     $ --     $ --  
New accruals
    538       35       573  
Adjustments
    13       --       13  
Cash payments
    (309 )     --       (309 )
                         
Liability balance at March 31, 2012
  $ 242     $ 35     $ 277  
                         


The combined expenses for the cost reduction and restructuring actions initiated in 2008, 2010, 2011 and 2012 shown above was $1,009 for the three-month period ended March 31, 2012. In addition, the Company recorded impairment charges in the amount of $65 related to leasehold improvements no longer being utilized as a result of an office consolidation and $10 related to payroll taxes related to employee terminations. The total expenses for the three-month period ended March 31, 2012 was $1,084 and is presented as Acquisition integration and restructuring expense in the Consolidated Statements of Comprehensive Income.
 
The expenses for the three-month period ended March 31, 2012 and March 31, 2011 and the cumulative expense since the cost reduction program’s inception were recorded in the following segments:

               
Asia
             
   
Americas
   
Europe
   
Pacific
   
Corporate
   
Total
 
                               
Three months ended March 31, 2012
  $ 718     $ 331     $ 35     $ --     $ 1,084  
Three months ended March 31, 2011
  $ 163     $ 264     $ --     $ 4     $ 431  
Cumulative since program inception
  $ 12,108     $ 6,424     $ 1,205     $ 1,910     $ 21,647  


 
 
Note 13 – Derivative Financial Instruments
 
 
Fair Value Hedge

In order to mitigate foreign exchange rate exposure, the Company entered into several forward contracts during 2012. The forward contracts were designated as fair value hedges at inception. Under the Derivatives and Hedging Topic of the FASB Codification, ASC 815, the derivative fair value gains or losses from these fair value hedges are recorded in the Consolidated Statements of Comprehensive Income. The forward contracts are measured at fair value on a recurring basis and are classified as Level 2 inputs under the fair value hierarchy established in Note 14 – Fair Value Measurements. Since the forward contracts were settled prior to period end, there was no fair value recorded for the derivative instruments on the Consolidated Balance Sheets as of March 31, 2012. The effect on earnings of the derivative instruments on the Consolidated Statements of Comprehensive Income for the three month period ended March 31, 2012 was a loss of $121, compared to a gain of $107 from derivative instruments for the three month period ended March 31, 2011.
 

Note 14 – 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 entity’s 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 such financial instruments as cash and cash equivalents, accounts receivable, accounts payable and long-term debt approximates carrying value at March 31, 2012. The Company’s contingent purchase consideration relating to its 2010 acquisition of Real Branding is recorded at fair value as of March 31, 2012 and is categorized as Level 3 within the fair value hierarchy. The fair value of this liability was estimated using a present value analysis as of March 31, 2012. This analysis considers, among other items, the financial forecasts of future operating results of the acquiree, the probability of reaching the forecast and the associated discount rate.
 
The following table summarizes the changes in the fair value of the Company’s contingent consideration during the first three months of 2012:
 
   
Contingent
 
   
Consideration
 
   
Fair Value
 
       
Liability balance at January 1, 2012
  $ 239  
Accretion of present value discount
    2  
         
Liability balance at March 31, 2012
  $ 241  
 
The following table summarizes the fair values as of March 31, 2012:
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Other long-term liabilities:
                       
Contingent consideration
  $ --     $ --     $ 241     $ 241  


Note 15 – Multiemployer Pension Withdrawal
 
The Company has participated in the San Francisco Lithographers Pension Trust (“SF LPT”) pursuant to collective bargaining agreements with the Teamsters Local 853. Effective June 30, 2011, the Company decided to terminate participation in the SF LPT and provided notification that it would no longer be making contributions to the plan.  In accordance with ERISA Section 4203 (a), 29 U.S.C. Section 1383, the Company’s decision triggered the assumption of a partial termination withdrawal liability. The Company recorded an estimated liability of $1,846 as of June 30, 2011 to reflect this obligation. The liability is expected to be settled in 2012. The Company’s estimated liability of $1,846 is unchanged as of March 31, 2012 and is included in Accrued expenses on the Consolidated Balance Sheets.
 

 

Cautionary Statement Regarding Forward-Looking Information

Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report that relate to the Company’s 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 Company’s 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 Company’s 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 cost reduction plans and to realize anticipated cost savings; 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 and the discovery of any future 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 anticipated costs or lower than anticipated benefits associated with the Company’s ongoing information technology and business process improvement initiative; unanticipated costs or 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 Company’s filings with the Securities and Exchange Commission. The Company assumes no obligation to update publicly any of these statements in light of future events.
 
Business Overview
 
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. In so doing, the Company helps its clients develop, deploy and promote their brands and products through its comprehensive offering of integrated strategic, creative and executional services across print and digital mediums. 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 world’s largest independent business service providers in the graphics industry. The Company currently delivers these services through more than 155 locations in 26 countries across North and South 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 Schawk’s 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 Company’s 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. Anthem’s 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 company’s brand, category, market share, equity and sales. Strategic services also represent some of Schawk’s highest value, highest margin services.
 
The Company’s 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, large-format printing, and digital promotion and advertising. 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 Company’s 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 today’s 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 Company’s 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 BLUE™ confer the benefits of brand consistency, accuracy and speed to market for its clients.
 
 
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 the 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, which is an issue in both mature and 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.
 
Organization

The Company is organized on a geographic basis, in three operating and reportable segments: Americas, Europe and Asia Pacific. The Company’s Americas segment includes all of the Company’s operations located in North and South America, including its operations in the United States, Canada, Mexico and Brazil, its U.S. branding and design capabilities and its U.S. digital solutions business The Company’s Europe segment includes all operations located in Europe, including its European branding and design capabilities and its digital solutions business in London. The Company’s Asia Pacific segment includes all operations in Asia and Australia, including its Asia Pacific branding and design capabilities.

 
 
Financial Overview

Net sales increased $5.5 million or 5.1 percent in the first quarter of 2012 to $112.8 million from $107.2 million in the first quarter of 2011. The sales increase in the first quarter of 2012 compared to the prior year’s quarter reflects an increase in consumer products packaging accounts sales, offset by a decrease in promotional activity from the Company’s advertising and retail and entertainment accounts. Sales attributable to acquisitions for the quarter ended March 31, 2012 were $7.0 million, or 6.2 percent of total sales. Excluding the impact of acquisitions, revenue would have decreased by $1.5 million or 1.4 percent. Sales in the current quarter compared to the prior year’s quarter were negatively impacted by changes in foreign currency translation rates of approximately $0.5 million, as the U.S. dollar increased in value relative to the local currencies of certain of the Company’s non-U.S. subsidiaries. Net sales increased in all segments in the first quarter of 2012 compared to the prior year’s quarter. The Americas segment increased by $0.5 million, or 0.5 percent, the Europe segment by $4.8 million, or 27.3 percent and the Asia Pacific segment by $1.5 million, or 22.1 percent. The Company’s inventories, composed principally of the cost of unbilled client services, increased $3.2 million during the first quarter of 2012 as a result of higher production activity during the quarter.

Gross profit decreased by $1.7 million or 4.4 percent in the first quarter of 2012 to $37.1 million from $38.8 million in the first quarter of 2011. The decline in gross profit in the current quarter compared to the prior year’s quarter is principally due to increases in employee-related costs associated with the expansion of client service offerings. Gross profit in the Americas operating segment decreased by $4.0 million or 13.2 percent. Gross profit in the Europe operating segment increased by $1.7 million or 28.8 percent and increased in the Asia Pacific operating segment by $0.6 million or 22.3 percent.
 
The Company recorded an operating loss of $1.6 million in the first quarter of 2012 compared to an operating profit of $5.5 million in the first quarter of 2011, a decrease of $7.1 million. The decline in operating income in the current quarter compared to the prior year’s quarter is due in part to the lower gross profit in the first quarter of 2012 compared to the first quarter of 2011 as well as the following items: Selling, general and administrative expenses increased $2.9 million, or 9.3 percent, in the first quarter of 2012 to $33.9 million from $31.0 million in the first quarter of 2011. Included in selling, general and administrative expenses for the first quarter of 2011 is a credit to income of approximately $1.5 million related to reserve reductions for certain of the Company’s vacant leased properties, for which changed circumstances required revisions in the estimates of future expenses related to the leases. Excluding this credit to income in the prior year, the increase in selling, general and administrative expenses in the first quarter of 2012, compared to the first quarter of 2011, is principally due to increases in equity compensation costs, as well as increases in other employee-related costs associated with the expansion of client service offerings. Business and systems integration expenses related to the Company’s information technology and business process improvement initiative increased $1.9 million to $3.2 million in the first quarter of 2012 from $1.2 million in the first quarter of 2011. Acquisition integration and restructuring expenses, related to the Company’s cost reduction and capacity utilization initiatives, were $1.1 million in the first quarter of 2012 compared to $0.4 million in the first quarter of 2011. The Company recorded a net loss of $0.5 million on foreign exchange exposures in both the first quarter of 2012 and first quarter of 2011.

The Company recorded an income tax benefit of $0.8 million in the first quarter of 2012 compared to an income tax expense of $1.5 million in the first quarter of 2011. The effective tax rate was 33.4 percent for the first quarter of 2012 compared to an effective tax rate of 34.8 percent in the first quarter of 2011.

In the first quarter of 2012, the Company recorded a net loss of $1.6 million, or $0.06 per diluted share, as compared to net income of $2.8 million, or $0.11 per diluted share, in the first quarter of 2011.
 
 
Cost Reduction and Capacity Utilization Actions
 
Beginning in 2008, and continuing to-date, 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 the three-month periods ended March 31, 2012 and March 31, 2011 was $1.1 million and $0.4 million, respectively, and is presented as Acquisition integration and restructuring expense in the Consolidated Statements of Comprehensive Income. See Note 12 – Acquisition Integration and Restructuring in Part I, Item 1 for additional information.
 
The expense for each of the years 2008 through 2011 and for the first three months of 2012, and the cumulative expense since the cost reduction program’s inception, was recorded in the following operating segments:
 
               
Asia
             
(in millions)
 
Americas
   
Europe
   
Pacific
   
Corporate
   
Total
 
                               
Three months ended March 31, 2012
  $ 0.7     $ 0.4     $ --     $ --     $ 1.1  
Year ended December 31, 2011
    0.8       0.6       --       0.1       1.5  
Year ended December 31, 2010
    1.3       0.5       --       0.5       2.3  
Year ended December 31, 2009
    3.6       1.4       1.0       0.4       6.4  
Year ended December 31, 2008
    5.7       3.6       0.2       0.9       10.4  
                                         
Cumulative since program inception
  $ 12.1     $ 6.5     $ 1.2     $ 1.9     $ 21.7  
 
The Company is exploring various additional cost reduction actions that could be taken if revenue, particularly in the Americas segment, does not improve.
 


 
Results of Operations
 
Consolidated

The following table sets forth certain amounts, ratios and relationships calculated from the Consolidated Statements of Comprehensive Income for the three-month periods ended:

   
Three Months Ended
March 31,
   
2012 vs. 2011
Increase (Decrease)
 
                 $     %  
   
2012
   
2011
   
Change
 
Change
 
                         
Net Sales
  $ 112,750     $ 107,234     $ 5,516     5.1 %
Cost of sales
    75,684       68,482       7,202     10.5 %
Gross profit
    37,066       38,752       (1,686 )   (4.4 ) %
Gross profit percentage
    32.9  
%
  36.1  
%
           
                               
Selling, general and administrative expenses
    33,928       31,032       2,896     9.3 %
Business and systems integration expenses
    3,170       1,239       1,931  
nm
 
Acquisition integration and restructuring expenses
    1,084       431       653  
nm
 
Foreign exchange loss
    470       501       (31 )   (6.2 ) %
Operating income (loss)
    (1,586 )     5,549       (7,135 )
nm
 
Operating margin percentage
    (1.4 )
%
  5.2  
%
           
                               
Other income (expense):
                             
Interest income
    16       18       (2 )   (11.1 ) %
Interest expense
    (842 )     (1,287 )     445     (34.6 ) %
                               
Income (loss) before income taxes
    (2,412 )     4,280       (6,692 )
nm
 
Income tax provision (benefit)
    (805 )     1,491       (2,296 )
nm
 
                               
Net income (loss)
  $ (1,607 )   $ 2,789     $ (4,396 )
nm
 
                               
Effective income tax rate
    33.4  
%
  34.8  
%
           
                               
Expressed as a percentage of Net Sales:
                             
                               
Gross margin
    32.9  
%
  36.1  
%
  (320 )   bp  
Selling, general and administrative expenses
    30.1  
%
  28.9  
%
  120     bp  
Business and systems integration expenses
    2.8  
%
  1.2  
%
  160     bp  
Acquisition integration and restructuring expenses
    1.0  
%
  0.4  
%
  60     bp  
Foreign exchange loss
    0.4  
%
  0.5  
%
  (10 )   bp  
Operating margin
    (1.4 )
%
  5.2  
%
  (660 )   bp  
                               

bp  = basis points
nm = not meaningful
 
 
Net sales in the first quarter of 2012 were $112.8 million compared to $107.2 million in the first quarter of 2011, an increase of $5.5 million, or 5.1 percent. The sales increase in the first quarter of 2012 compared to the prior year’s quarter reflects an increase in consumer products packaging accounts sales, offset by a decrease in promotional activity from the Company’s advertising and retail and entertainment accounts. Sales attributable to acquisitions for the quarter ended March 31, 2012 were $7.0 million, or 6.2 percent of total sales. Excluding acquisitions, revenue would have decreased by $1.5 million or 1.4 percent. Sales in the current quarter compared to the prior year’s quarter were negatively impacted by changes in foreign currency translation rates of approximately $0.5 million, as the U.S. dollar increased in value relative to the local currencies of certain of the Company’s non-U.S. subsidiaries. Net sales increased in all segments in the first quarter of 2012 compared to the prior year’s quarter. The Americas segment increased by $0.5 million, or 0.5 percent, the Europe segment by $4.8 million, or 27.3 percent and the Asia Pacific segment by $1.5 million, or 22.1 percent.

Consumer products packaging accounts sales in the first quarter of 2012 were $89.6 million, or 79.4 percent of total sales, as compared to $81.6 million, or 76.1 percent of total sales, in the same period of the prior year, representing an increase of 9.8 percent. Advertising and retail accounts sales of $17.3 million in the first quarter of 2012, or 15.4 percent of total sales, decreased 9.8 percent from $19.2 million in the first quarter of 2011. Entertainment account sales of $5.8 million in the first quarter of 2012, or 5.2 percent of total sales, decreased 9.4 percent from $6.4 million in the first quarter of 2011. During the first quarter of 2012, the Company continued to see measured progress with its largest client segment, consumer packaged goods accounts, with their continued product and brand innovation activity in the areas of strategy and design. However, new product introductions and packaging changes were slower than anticipated for the quarter as consumer packaged goods clients continue to exercise caution based on economic uncertainties and higher commodity prices.

Gross profit was $37.1 million, or 32.9 percent, of sales in the first quarter of 2012, a decrease of $1.7 million, or 4.4 percent, from $38.8 million, or 36.1 percent of sales, in the first quarter of 2011. The decline in gross profit in the current quarter compared to the prior year’s quarter is principally due to increases in employee-related costs associated with the expansion of client service offerings.
 

The Company recorded an operating loss of $1.6 million in the first quarter of 2012 compared to an operating profit of $5.5 million in the first quarter of 2011, a decrease of $7.1 million. The operating loss percentage was 1.4 percent for the first quarter of 2012, compared to a 5.2 percent operating income percentage in the first quarter of 2011. The decline in operating income in the current quarter compared to the prior year’s quarter is due in part to the decrease in gross profit in the first quarter of 2012 compared to the first quarter of 2011 as well as to the items discussed below.

Selling, general and administrative expenses increased $2.9 million, or 9.3 percent, in the first quarter of 2012 to $33.9 million from $31.0 million in the first quarter of 2011. Included in selling, general and administrative expenses for the first quarter of 2011 is a credit to income of approximately $1.5 million related to reserve reductions for certain of the Company’s vacant leased properties, for which changed circumstances required revisions in the estimates of future expenses related to the leases. Excluding this credit to income in the prior year, the increase in selling, general and administrative expenses in the first quarter of 2012, compared to the first quarter of 2011, is principally due to increases in equity compensation costs, as well as increases in other employee-related costs associated with the expansion of client service offerings.

Business and systems integration expenses related to the Company’s information technology and business process improvement initiative increased $1.9 million to $3.2 million in the first quarter of 2012 from $1.2 million in the first quarter of 2011. Acquisition integration and restructuring expenses, related to the Company’s cost reduction and capacity utilization initiatives, were $1.1 million in the first quarter of 2012 compared to $0.4 million in the first quarter of 2011. The Company recorded a net loss of $0.5 million on foreign exchange exposures in both the first quarter of 2012 and first quarter of 2011. The Company’s foreign exchange exposure includes unrealized losses related primarily to currency exposure from intercompany debt obligations of the Company’s non-U.S. subsidiaries. In order to mitigate foreign exchange rate exposure, the Company entered into several forward contracts, designated as fair value hedges, which resulted in expense for the first quarter of 2012 of $0.1 million, compared to a gain of $0.1 million from hedging activities for the first quarter of 2011.

Interest expense in the first quarter of 2012 was $0.8 million compared to $1.3 million in the first quarter of 2011, a decrease of $0.4 million, or 34.6 percent.
 
The Company recorded an income tax benefit of $0.8 million in the first quarter of 2012 compared to an income tax expense of $1.5 million in the first quarter of 2011. The effective tax rate was 33.4 percent for the first quarter of 2012 compared to an effective tax rate of 34.8 percent in the first quarter of 2011.

In the first quarter of 2012, the Company recorded a net loss of $1.6 million, as compared to net income of $2.8 million for the first quarter of 2011.

 
Other Information

Depreciation and amortization expense was $4.7 million for the first quarter of 2012 as compared to $4.3 million for the same period of 2011.

Capital expenditures in the first quarter of 2012 were $5.5 million compared to $3.0 million in the same period of 2011. The increase in capital expenditures in the current period compared to the prior year’s period is primarily related to the Company’s information technology and business process improvement initiatives.


Segment Information

 Americas

The following table sets forth Americas segment results for the three-month periods ended March 31, 2012 and 2011:

   
Three Months Ended
March 31,
   
2012 vs. 2011
Increase (Decrease)
   
(in thousands)
 
2012
   
2011
     $     %    
                           
Net sales
  $ 92,837     $ 92,385     $ 452     0.5    %
Acquisition integration and restructuring expenses
  $ 718     $ 164     $ 554  
nm
   
Foreign exchange (gain) loss
  $ 15     $ (123 )   $ 138  
nm
   
Depreciation and amortization
  $ 2,658     $ 2,631     $ 27     1.0    %
Operating income
  $ 7,951     $ 12,086     $ (4,135 )   (34.2 )  %
Operating margin
    8.6  
%
  13.1  
%
        (450 )  bp
Capital expenditures
  $ 2,780     $ 1,696     $ 1,084     63.9    %
Total assets
  $ 358,960     $ 341,943     $ 17,017     5.0    %

nm = not meaningful
bp = basis points

Net sales in the first quarter of 2012 for the Americas segment were $92.8 million compared to $92.4 million in the same period of the prior year, an increase of $0.5 million or 0.5 percent. Sales contributed by acquisitions for the first quarter of 2012 totaled $3.8 million. Excluding the impact of sales contributed by acquisitions, sales in the first quarter of 2012 decreased by $3.3 million compared to the first quarter of 2011. Sales in the current quarter compared to the prior year’s quarter were negatively impacted by changes in foreign currency translation rates of approximately $0.2 million, as the U.S. dollar increased in value relative to the local currencies of certain of the Company’s non-U.S. subsidiaries.

Operating income was $8.0 million or 8.6 percent of sales, in the first quarter of 2012 compared to $12.1 million, or 13.1 percent of sales, in the first quarter of 2011, a decrease of $4.1 million. The decrease in operating income is principally due to lower margins from the Company’s recent acquisitions as well as increases in employee-related costs.
 
 
Europe

The following table sets forth Europe segment results for the three-month periods ended March 31, 2012 and 2011:

   
Three Months Ended
March 31,
   
2012 vs. 2011
Increase (Decrease)
   
(in thousands)
 
2012
   
2011
     $     %    
                           
Net sales
  $ 22,392     $ 17,592     $ 4,800     27.3    %
Acquisition integration and restructuring expenses
  $ 331     $ 264     $ 67     25.4    %
Foreign exchange (gain) loss
  $ (44 )   $ 73     $ (117 )
nm
   
Depreciation and amortization
  $ 840     $ 704     $ 136     19.3    %
Operating income
  $ 1,423     $ 2,121     $ (698 )   (32.9 )  %
Operating margin
    6.4  
%
  12.1  
%
        (570 )  bp
Capital expenditures
  $ 205     $ 292     $ (87 )   (29.8 )  %
Total assets
  $ 61,371     $ 48,610     $ 12,761     26.3    %

nm = not meaningful
bp = basis points

Net sales in the Europe segment in the first quarter of 2012 were $22.4 million compared to $17.6 million in the same period of the prior year, an increase of $4.8 million or 27.3 percent. Sales contributed by acquisitions for the first quarter of 2012 totaled $2.8 million. Sales in the current quarter compared to the prior year’s quarter were negatively impacted by changes in foreign currency translation rates of approximately $0.4 million, as the U.S. dollar increased in value relative to the local currencies of certain of the Company’s non-U.S. subsidiaries.

Operating income was $1.4 million, or 6.4 percent of sales, in the first quarter of 2012 compared to $2.1 million or 12.1 percent of sales in the first quarter of 2011, a decrease of $0.7 million. The decrease in operating income in the current period compared to the prior year’s period is due in part to increase in operating expenses from recent acquisitions.
 

 
 
 
Asia Pacific

The following table sets forth Asia Pacific segment results for the three-month periods ended March 31, 2012 and 2011:

   
Three Months Ended
 March 31,
   
2012 vs. 2011
Increase (Decrease)
   
(in thousands)
 
2012
   
2011
     $     %    
                           
Net sales
  $ 8,120     $ 6,653     $ 1,467     22.1   %
Acquisition integration and restructuring expenses
  $ 35     $ --     $ 35  
nm
   
Foreign exchange loss
  $ 168     $ 117     $ 51     43.6   %
Depreciation and amortization
  $ 393     $ 325     $ 68     20.9    %
Operating income
  $ 114     $ 30     $ 84  
nm
   
Operating margin
    1.4   %   0.5   %         90    bp
Capital expenditures
  $ 197     $ 219     $ (22 )   (10.0)    %
Total assets
  $ 29,094     $ 23,857     $ 5,237     22.0    %

nm = not meaningful
bp = basis points

Net sales in the Asia Pacific segment in the first quarter of 2012 were $8.1 million compared to $6.7 million in the same period of the prior year, an increase of $1.5 million or 22.1 percent. Sales contributed by acquisitions for the first quarter of 2012 totaled $0.5 million. Sales for the first quarter of 2012, as compared to the first quarter of 2011, benefited from an increase of approximately $0.1 million resulting from changes in foreign currency translation rates, as the U.S. dollar decreased in value relative to certain of the local currencies of the Company’s non-U.S. subsidiaries.

Operating income was relatively flat at $0.1 million in the first quarter of 2012, or 1.4 percent of sales, as compared to less than $0.1 million, or 0.5 percent of sales, in the first quarter of 2011.
 

 
Liquidity and Capital Resources
 
The Company’s primary liquidity needs are to fund capital expenditures, support working capital requirements and service indebtedness. The Company’s principal sources of liquidity are cash generated from its operating activities and borrowings under its credit agreement. The Company’s total debt outstanding at March 31, 2012 was $80.2 million compared to $95.2 million at December 31, 2011.
 
As of March 31, 2012, the Company had $8.2 million in consolidated cash and cash equivalents, compared to $13.7 million at December 31, 2011.
 
Cash provided by (used in) operating activities. Cash provided by operating activities was $16.8 million in the first quarter of 2012 compared to cash used in operating activities of $0.4 million in the first quarter of 2011. The increase in cash provided from operations reflects favorable changes in the non-cash current assets and current liabilities in the first quarter of 2012 compared to the first quarter of 2011, partially offset by the decrease in net income, from a net income of $2.8 million for the first quarter of 2011 to a net loss of $1.6 million for the first quarter of 2012. The Company’s inventories, composed principally of the cost of unbilled client services, increased $3.2 million during the first quarter of 2012 as a result of higher production activity.
 
Depreciation and intangible asset amortization expense in the first quarter of 2012 was $3.3 million and $1.4 million, respectively, as compared to $3.1 million and $1.2 million, respectively, in the first quarter of the prior year.

Cash used in investing activities. Cash used in investing activities was $5.5 million in the first quarter of 2012 compared to $3.2 million during the comparable 2011 period. Capital expenditures were $5.5 million in the first quarter of 2012 compared to $3.0 million in the first quarter of 2011, reflecting an increase in capital expenditures related to the Company’s information technology and business process improvement initiative. Over the next five years, assuming no significant business acquisitions, routine capital expenditures are expected to be in the range of $11.0 to $13.0 million annually. In addition, during the current fiscal year, the Company expects to incur capital investment and related business and system integration expenses in the range of $10.0 million to $15.0 million for the Company’s information technology and business process improvement initiative 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 the first quarter of 2012 was $17.3 million compared to cash used in financing activities of $22.9 million during the first quarter of 2011. The cash used in financing activities in the first quarter of 2012 reflects $15.2 million of net payments of debt compared to $21.3 million of net payments of debt during the first quarter of 2011. The Company received proceeds of $0.7 million from the issuance of common stock during the first quarter of 2012 compared to $0.5 million in the first quarter of 2011. The issuance of common stock in both periods is attributable to stock option exercises and issuance of shares pursuant to the Company’s employee stock purchase plan. During the first quarter of 2012, the Company paid $0.8 million for deferred financing fees related to its January 2012 credit facility refinancing and note purchase agreement amendments. Dividend payments on common stock at $0.08 per share quarterly were $2.1 million for both the first quarter of 2012 and the first quarter of 2011. Subject to declarations at the discretion of the Board of Directors, the Company expects quarterly dividends at $0.08 per share to continue for the remainder of 2012.
 
 
Revolving Credit Facility, Note Purchase Agreements and Other Debt Arrangements.

In 2003 and 2005, the Company entered into two private placements of debt to provide long-term financing. The senior notes issued under these note purchase agreements that were outstanding at March 31, 2012 bear interest at rates from 8.90 percent to 8.98 percent. The remaining aggregate balance of the notes, $7.4 million, is included on the March 31, 2012 Consolidated Balance Sheets as follows: $3.1 million is included in Current portion of long-term debt and $4.3 million is included in Long-term debt.

Effective January 12, 2010, the Company and certain subsidiary borrowers of the Company entered into an amended and restated credit agreement (the “2010 Credit Agreement”) with JPMorgan Chase Bank, N.A. The 2010 Credit Agreement provided 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 sub-facility and a $10.0 million sub-facility for letters of credit. Loans under the facility generally bore interest at a rate of LIBOR plus a margin that varies with the Company’s cash flow leverage ratio, in addition to applicable commitment fees, with a maximum rate of LIBOR plus 350 basis points. Loans under the facility were not subject to a minimum LIBOR floor. At December 31, 2011, there was $47.0 million outstanding under the LIBOR portion of the facility at an interest rate of approximately 2.72 percent, and $14.5 million of prime rate borrowings outstanding at an interest rate of approximately 4.75 percent. The Company’s Canadian subsidiary borrowed under the revolving credit facility in the form of bankers’ acceptance agreements and prime rate borrowings. At December 31, 2011, there was $7.3 million outstanding under bankers’ acceptance agreements at an interest rate of approximately 3.80 percent and $0.2 million outstanding under prime rate borrowings at an interest rate of approximately 4.50 percent.
 
In December 2007, the Company’s 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 March 31, 2012.
 
Amended and Restated Credit Agreement.  On January 27, 2012, the Company entered into a Second Amended and Restated Credit Agreement (the “2012 Credit Agreement”), among the Company, certain subsidiary borrowers of the Company, the financial institutions party thereto as lenders, JPMorgan Chase Bank, N.A., on behalf of itself and the other lenders as agent, and PNC Bank, National Association, on behalf of itself and the other lenders as syndication agent, in order to amend and restate the 2010 Credit Agreement, that was scheduled to terminate on July 12, 2012.
 
The 2012 Credit Agreement provides for a five-year unsecured, multicurrency revolving credit facility in the principal amount of $125.0 million (the “New Facility”), 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 New Facility by up to $50.0 million by obtaining one or more new commitments from new or existing lenders to fund such increase. Loans under the New Facility generally bear interest at a LIBOR or Federal funds rate plus a margin that varies with the Company’s cash flow leverage ratio, in addition to applicable commitment fees, with a maximum rate of LIBOR plus 225 basis points. At closing, the applicable margin on LIBOR-based loans was 175 basis points. Following the closing, the unutilized portion of the New Facility will be used primarily for general corporate purposes, such as working capital and capital expenditures, and, to the extent opportunities arise, acquisitions and investments.
 

At March 31, 2012, there was $19.0 million outstanding under the LIBOR portion of the facility at an interest rate of approximately 2.19 percent. At the Company’s option, loans under the facility could bear interest at prime plus 1.5 percent. At March 31, 2012, there was $19.8 million of prime rate borrowings outstanding at an interest rate of approximately 4.25 percent. The Company’s Canadian subsidiary borrowed under the revolving credit facility in the form of bankers’ acceptance agreements and prime rate borrowings. At March 31, 2012, there was $6.8 million outstanding under bankers’ acceptance agreements at an interest rate of approximately 3.05 percent and $0.2 million outstanding under prime rate borrowings at an interest rate of approximately 3.75 percent.

The 2012 Credit Agreement contains various customary affirmative and negative covenants and events of default. Under the terms of the 2012 Credit Agreement, the Company is no longer subject to restrictive covenants on permitted capital expenditures.  Certain restricted payments, such as regular dividends and stock repurchases, are permitted provided that the Company maintains compliance with its minimum fixed-charge coverage ratio (with respect to regular dividends) and a specified maximum cash-flow leverage ratio (with respect to other permitted restricted payments). Other covenants include, among other things, restrictions on the Company’s 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 2012 Credit Agreement; engage in certain transactions with affiliates; engage in sale/leaseback transactions; and engage in certain hedging arrangements. The 2012 Credit Agreement also requires compliance with specified financial ratios and tests, including a minimum fixed-charge coverage ratio and a maximum cash-flow ratio. The 2012 Credit Agreement no longer contains the minimum consolidated net worth requirement that was a covenant under the Former Facility.

Amended and Restated Private Shelf Agreement. Concurrently with its entry into the 2012 Credit Agreement, on January 27, 2012, the Company entered into an Amended and Restated Note Purchase and Private Shelf Agreement with Prudential Investment Management, Inc. (“Prudential”) and certain existing noteholders and note purchasers named therein (the “Private Shelf Agreement”), which provides for a $75.0 million private shelf facility for a period of up to three years (the “Private Shelf Facility”). At closing, the Company issued $25.0 million aggregate principal amount of its 4.38% Series F Senior Notes due January 27, 2019 (the “Notes”) under the Private Shelf Agreement, with a portion of the net proceeds being used to finance $20.3 million in principal payments due in 2012 under the Company’s existing senior notes, including its 9.17% Series E Senior Notes that became due January 28, 2012.
 
The Private Shelf Agreement contains financial and other covenants that are the same or substantially equivalent to covenants under the 2012 Credit Agreement described above. Notes issued under the Private Shelf Facility may have maturities of up to ten years and are unsecured. Either the Company or Prudential may terminate the unused portion of the Private Shelf Facility prior to its scheduled termination upon 30 days’ written notice.
 
Any future borrowings under the Private Shelf Facility may be used for general corporate purposes, such as working capital and capital expenditures.
 
Amendment to Note Purchase Agreement. Concurrently with the entry into the Private Shelf Agreement, the Company entered into the Fifth Amendment (the “Fifth Amendment”) to Note Purchase Agreement, dated as of December 23, 2003, as amended, with the noteholders party thereto (the “Mass Mutual Noteholders”). The Fifth Amendment amends certain financial and other covenants in the note purchase agreement so that such financial and other covenants are the same or substantially equivalent to covenants under the 2012 Credit Agreement described above. The Fifth Amendment also amends certain provisions contained in the note purchase agreement to reflect that amounts due under existing senior notes issued to the Mass Mutual Noteholders are no longer secured.
 
The Company was in compliance with all covenant obligations under the aforementioned credit agreements at March 31, 2012.
 
Other Debt Arrangements. In September 2011, the Company financed $1.0 million of business insurance premiums for a 2011 – 2012 policy term. The premiums are due in equal quarterly payments ending in June 2012. In March 2012, the Company financed $0.7 million of business insurance premiums for a 2012 – 2013 policy term. The premiums are due in equal quarterly payments ending in December 2012. The total balance outstanding for insurance premiums at March 31, 2012 is $1.0 million and is included in Current portion of long-term debt on the March 31, 2012 Consolidated Balance Sheets.
 
In September 2011, the Company financed $0.9 million of three-year software license agreements effective through September 2014. The payments are due in annual installments ending in September 2013. The total balance outstanding for the software license fees at March 31, 2012 is $0.5 million, which is included on the March 31, 2012 Consolidated Balance Sheets as follows: $0.3 million is included in Current portion of long-term debt and $0.2 million is included in Long-term debt.
 
In October 2011, the Company financed a $0.6 million three-year equipment and software maintenance agreement effective through November 2014. The payments are due in annual installments ending in December 2013. The total balance outstanding for the equipment and software maintenance fees at March 31, 2012 is $0.4 million, which is included on the March 31, 2012 Consolidated Balance Sheets as follows: $0.2 million is included in Current portion of long-term debt and $0.2 million is included in Long-term debt.
 
 
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.

There were no material changes in the Company’s minimum debt, lease and other material noncancelable commitments as of March 31, 2012 from those reported in the Company’s Form 10-K for the year ended December 31, 2011.
 

Recent Accounting Pronouncements
 
See Note 1 – Significant Accounting Policies to the Consolidated Financial Statements, included in Part I, Item 1, for information on recent accounting pronouncements.
 
Critical accounting policies and estimates

The discussion and analysis of the Company’s 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Form 10-K for the year ended December 31, 2011 for further discussion of the Company’s critical accounting estimates and policies.

 

A discussion regarding market risk is included in the Company’s Form 10-K for the year ended December 31, 2011. There have been no material changes in information regarding market risk relating to the Company’s business on a consolidated basis since December 31, 2011.

 
 
(a) Evaluation of Disclosure Controls and Procedures
 
We have established disclosure controls and procedures to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors as appropriate to allow timely decisions regarding required disclosure.
 
Based on their evaluation as of March 31, 2012, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective.
 
(b) Changes in Internal Control Over Financial Reporting
 
There have been no changes in our internal controls over financial reporting during the first quarter of fiscal 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. In connection with the Company's information technology and business process improvement initiative, the Company is currently implementing a new global Enterprise Resource Planning (“ERP”) system, which will replace multiple legacy financial systems used for job production and invoicing, and which includes upgrades to the Company’s general accounting, financial reporting and human resource systems. The first phase of the new ERP system, consisting principally of an upgrade of the Company’s general accounting and financial reporting systems, was implemented during the first quarter of 2012. During the remainder of 2012, and possibly into 2013, additional phases of the ERP system will be implemented, including the job production and invoicing modules.  As a result of the implementation of the new ERP system, certain of the Company’s internal controls over financial reporting and related processes will be modified or redesigned to conform with and support the new ERP system.
 

 

 

 

The Company has included in Part I, Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2011 (the “Annual Report”) descriptions of certain risks and uncertainties that could affect the Company’s business, future performance or financial condition. The risk factors described in the Annual Report (collectively, the “Risk Factors”) could materially adversely affect the Company’s business, financial condition, future results or trading price of the Company’s common stock. In addition to the other information contained in the reports the Company files with the SEC, investors should consider these Risk Factors prior to making an investment decision with respect to the Company’s stock. The risks described in the Risk Factors, however, are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or those that are currently considered to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.



Purchases of Equity Securities by the Company

In November 2010, the Board of Directors of the Company reinstated the Company’s share repurchase program, which authorizes the Company to repurchase from time to time up to two million shares of Schawk Inc. common stock per year, subject to the restricted payment limitations of the Company’s credit facility. The Company did not repurchase any shares of its common stock during either the thee-month period ended March 31, 2012 or March 31, 2011. In addition, shares of common stock are occasionally tendered to the Company by certain employee and director stockholders in payment of stock options exercised. No shares of Schawk, Inc. common stock were tendered to the Company in connection with stock option exercises during either the thee-month period ended March 31, 2012 or March 31, 2011.

 

3.1
Certificate of Incorporation of Schawk, Inc., as amended. Incorporated herein by reference to Exhibit 4.2 to Registration Statement
No. 333-39113.
   
3.3
By-Laws of Schawk, Inc., as amended. Incorporated herein by reference to Exhibit 3.2 to Form 8-K filed with the SEC on December 18, 2007.
   
4.1
 
Specimen Class A Common Stock Certificate. Incorporated herein by reference to Exhibit 4.1 to Registration Statement No. 33-85152.
   
10.1
Second Amended and Restated Credit Agreement, dated as of January 27, 2012, among Schawk, Inc., certain subsidiary borrowers of Schawk, Inc., the financial institutions party thereto as lenders, JPMorgan Chase Bank, N.A., on behalf of itself and the other lenders as agent, and PNC Bank, National Association, on behalf of itself and the other lenders as syndication agent.  Incorporated by reference to Exhibit 10.1 to Form 8-K filed with the SEC on February 1, 2012.
   
10.2
Amended and Restated Note Purchase and Private Shelf Agreement, dated as of January 27,2012, among Schawk, Inc., Prudential Investment
Management, Inc., and the noteholders party thereto. Incorporated by reference to Exhibit 10.2 to Form 8-K filed with the SEC on
February 1, 2012.
   
10.3
Fifth Amendment, dated as of January 27, 2012, to Note Purchase Agreement dated as of December 23, 2003 among Schawk, Inc. and the
noteholders party thereto.  Incorporated by reference to Exhibit 10.3 to Form 8-K filed with the SEC on February 1, 2012.
   
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. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
   
101
The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (Unaudited), (ii) Consolidated Statements of Comprehensive Income (Unaudited), (iii) Consolidated Statements of Cash Flows (Unaudited) and (iv) Notes to Consolidated Financial Statements. **
   
   
 
* Filed or furnished herewith
   
 
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files submitted under Exhibit 101 are not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.



 
 
Pursuant to the requirements 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, on the 2nd day of May, 2012.


Schawk, Inc.
(Registrant)

By:
/s/ John B. Toher
 
John B. Toher
 
Vice President and
 
Corporate Controller


 

 
28

 

XNYS:SGK Quarterly Report 10-Q Filling

XNYS:SGK Stock - Get Quarterly Report SEC Filing of XNYS:SGK stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

Content Partners
XNYS:SGK Quarterly Report 10-Q Filing - 3/31/2012
Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol |  Title Star Rating |  Category |  Total Assets |  Top Holdings |  Top Sectors |  Symbol |  Name Title |  Date |  Author |  Collection |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol / Ticker |  Title Star Rating |  Category |  Total Assets |  Symbol / Ticker |  Name Title |  Date |  Author |  Collection |  Popularity |  Interest Title |  Date |  Company |  Symbol |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Popularity |  Our Choices Title |  Date |  Company |  Symbol |  Interest |  Popularity