UnThreaded | Threaded | Whole Thread (5) | Ignore Thread Prev | Next
Author: kitkatklub Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Feste Award Winner! Old School Fool Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1264  
Subject: Schawk--SGK Date: 12/31/2003 9:23 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
Business Description


Schawk, Inc. and its subsidiaries,are Digital Imaging Graphics Arts company that serves consumer products packaging, advertising and promotional markets. Services include digital imaging graphic services to the consumer products packaging market.

They produce conventional, electronic and desktop color separations, creative design, art production, electronic retouching, conventional and digital plate making and digital press proofs for the three main printing processes used in the graphic arts industry: lithography, flexography and gravure.Services also include both digital and analog image database archival and management as well as 3D imaging for package design, large format printing, digital photography, workflow management consulting services, and various related outsourcing and graphics arts consulting services.

The preparation of film, digital tape and press proofs for lithography, flexography and other printing processes related to packaging accounted for over 85% of net sales for 2002 and over 70% of net sales during 2001 and 2000. The balance of the company's business consists of the production of similar advertising and promotional applications.

They have both digital and analog data archives of product package layouts and designs for many of its clients. This activity brings value to those clients while improves efficiency in accommodating clients' rapidly changing packaging design modifications and product line extensions.

SGK believes that its clients have increasingly chosen to outsource their imaging needs because they provide

1) high quality customized imaging capabilities
2)rapid turnaround and delivery times
3)up-to-date knowledge of the printing press specifications of converters and
printers located throughout the United States, Canada, Mexico and Asia
4)color expertise
5) digital imaging asset management
6) workflow management
7) art production
8) ability to service its clients' global graphic requirements through the company's North American facilities and international subsidiaries and alliance partners.


SGK focuses on three primary markets:
consumer products packaging, advertising agencies, and promotion. The food and beverage segment of the consumer products industry has packaging requirements that are complex and demanding due to variations in packaging materials, shapes and sizes, custom colors, varying storage conditions and marketing enhancements. Product extensions and frequent packaging redesigns have resulted in an increasing volume of color separation and related work in the consumer products industry and in particular for the food and beverage segment.

Growth Strategy

1) Organic Growth. Historically they have primarily grown through acquisitions. As there were fewer companies that met acquisition criteria in the marketplace in the last few years, they have increased focus on organic growth, and have placed heavy emphasis on sales to gain new clients.

They separated the sales force into new account development and existing account development groups. The new account development group contacts Fortune 1000 accounts that the company does not currently do business with. The existing account group works with their current clients to increase the number of brands that the company handles and to increase the number of services that the Company provides to the client.

2) Growth through Acquisitions. The company's profitability and ready access to capital have enabled it to make strategic acquisitions of companies that range in size from $2 million to $20 million in revenues.

In its 49-year business history, they have integrated more than 44 graphic and imaging businesses into its operations while streamlining overhead and improving margins in the aggregate. They acquired 13 businesses from March 1998 to November 1999 with combined annualized revenues in excess of $77 million.


To achieve business objectives, management stresses the following:

1)Client Service. The company's offering continues to be increasingly focused on meeting the changing needs of its clients. This requires a commitment to working with clients to understand these needs.

Because of the increasingly competitive markets faced by its clients, the Company must be flexible enough to modify its operations in order to meet the specialized needs of its clients.

The Company's emphasis on on-site client representatives and operations helps to address this requirement and hasfurther solidified existing client relationships.

2)Employee Training and Investment in Equipment.SGK believes that its most valuable assets are its employees because its ability to provide clients with high quality services and products depends upon their dedication and expertise. They provide extensive and continuous training to keep its employees abreast of the latest technological developments and the particular needs of its clients.

3)Technical Expertise.SGK is able to provide its clients with high quality services and products and quick response time because of its efficient utilization of state-of-the-art equipment, software, digital server, storage technology, and telecommunication systems.

Backlog

SGK does not have or keep backlog figures as projects or orders are generally in and out of the facilities within five to seven days. Generally, the company does not have contracts with its clients, but maintains client relationships by delivering timely graphic services, providing technology enhancements to make the process more efficient and bringing extensive experience with and knowledge of printers and converters. This is not helpful when trying to get an idea of what business the company can expect to be assured of in the next year. Couple that with the fact they have no contracts to count on and estimating growth becomes a guessing game.



Balance Sheet

2002 2001


Cash and cash equivalents 2,051 1,112
Accounts receivable 37,946 38,302
Inventories 8,540 7,925

Total current assets 54,678 54,546

Property and equipment 40,652 47,606
Goodwill 60,476 60,023
Total assets $160,470 $ 166,125

Accounts payable 4,696 3,327
Notes payable to banks 3,281 2,963
Current portion of long-term debt
and capital lease obligations 6,260 6,273

Total current liabilities 28,024 27,750

Long-term debt 37,186 52,000
Capital lease obligations 46 131
Deferred income taxes 4,418 4,443
Total liabilities 70,700 86,600
Total equity 89,800 79,500


2002 2001 2000 1999 1998
Current ratio 1.95 1.96 1.39 1.58 2.22
Quick Ratio 1.65 1.68 1.19 1.38 2.02

AR growth -1.04% -5.20% -2.42% 20.35% --

DSO 74.29 80.65 138.01 336.02 36.74
Days Inventory on hand 30.93 29.07 25.95 29.11 30.16

ROA 8.41% 4.82% 6.31% 6.66% ---
ROE 15.03% 10.06% 14.23% 17.69% 27.23%
ROIC 11.66% 8.49% 11.95% 11.75% 1.78%
Debt to equity 52.12% 77.23% 90.60% 122.34% 74.15%
Debt to capitalization 34.26% 43.58% 47.54% 55.02% 42.58%
Book value 4.20 3.70 3.48 3.15 2.97
Cash per share 0.10 0.05 0.02 0.14 0.10
Working capital 26.7 26.7 15.6 22.3 35.5
Non Cash Working Capital 34.2 34.9 34.7 33.5 41.9

**ROE improving but considerably lower than 1998.ROIC and ROA are also better
**DSO has decreased significantly and inventory turns are stable
**Accounts receivables under good control and decreasing
**Not much cash
** They have fairly high levels of debt, but are paying the debt down, even in the 2002 and 2001 slow market environment. While revenues were down, they were able to increase net margins and decrease debt.Long-term debt and capital lease obligations decreased to $37.2 million at December 31, 2002 from $52.1 million at December 31, 2001. The Company reduced long-term debt by payment of $9.0 million on its unsecured credit facility and $6.0 million on its Note Purchase Agreement dated August 18, 1995. The outstanding amount on the demand lines of credit, included in current liabilities, increased by $0.3 million. They have made adjustments in spending and costs during a poor business environment and not only improved the bottom line, but also paid off debt. Their management of money is good.
**Decent balance sheet as the company cuts costs and improves returns. They do a good job of managing the direction of flow of their cash. AR and DSO are low and improving and accounts payable have increased slightly.



Income Statement in thousands

              2002          2001           2000 


Net sales 186,189 189,643 210,804
Cost of sales 112,249 114,526 127,505
Gross profit 73,940 75,117 83,299

SG&A 49,361 54,460 55,034
Goodwill amortization -- 2,161 2,155
Restructuring 2,631 1,120 3,137

Operating income 21,948 17,376 22,973
Interest expense (2,789) (4,236) (5,819)
EBIT 19,713 13,129 18,111
Income tax 6,203 5,320 7,567
Net income 13,531 8,018 10,641

EPS
Basic 0.63 0.37 0.50
Diluted 0.62 0.37 0.50

Dividends 0.13 0.13 0.13





2002 2001 2000 1999 1998
Gross Profit 46% 47% 46% 47% 51%
Operating Margin 20% 17% 20% 21% 25%
Net Margin 7% 4% 5% 6% 12%
Growth in Revenue 0% -10% 12% 27% --
Growth in Net Income 69% -25% -10% -33% --
Growth in COGS 1% -11% 14% 37% --


**Schawk has had a trend of declining revenue for 2001 and 2002.Net sales for 2001 decreased 10.0% from the prior year. The decrease in revenues was primarily attributable to soft market conditions and mergers among many of the largest clients. Soft market conditions that began impacting the company's results in mid-2000 continued throughout all of 2001. However, prepress for the packaging part of the business started to pick up in the fourth quarter. Conversely, the prepress for advertising and promotion part of the business remained soft throughout the fourth quarter reflecting the lowest level of advertising spending in 20 years.The trend continued down in 2002 in spite of the pickup in the fourth quarter of 2001 Net sales for 2002 decreased 1.8% versus 2001. Consumer products packaging increased 7.8% in 2002, but lower sales in the graphic for advertising agency business more than offset the gains from the consumer products packaging business. The most recent 4 quarters show revenues up at $202.2M which is an 8% increase so perhaps Schawk is on its way to better earnings.

**Gross margin as a percentage of net sales for 2002 increased to 39.7%
from 39.6% for the prior year. Given the fact that net sales were lower than the prior period, the increase in gross margin is a result of cost-cutting and restructuring

**Restructuring and other charges of $2.6 million in 2002 resulted from $2.2M of charges for asset impairment recorded in accordance with the new accounting standard for asset impairments.


**Net margins declined significantly from 12% down to 4% in 2001 They are rising in 2002. This is most likely the result of the company's cost-cutting measures and aggressive restructuring. They have combined or closed facilities and laid off workers.

**Pays dividend but they are not increasing and are low yield


**Schawk has had a trend of declining revenue for 2001 and 2002.Net sales for 2001 decreased 10.0% from the prior year. The decrease in revenues was primarily attributable to soft market conditions and mergers among many of the largest clients. Soft market conditions that began impacting the company's results in mid-2000 continued throughout all of 2001. However, prepress for the packaging part of the business started to pick up in the fourth quarter. Conversely, the prepress for advertising and promotion part of the business remained soft throughout the fourth quarter reflecting the lowest level of advertising spending in 20 years.The trend continued down in 2002 in spite of the pickup in the fourth quarter of 2001 Net sales for 2002 decreased 1.8% versus 2001. Consumer products packaging increased 7.8% in 2002, but lower sales in the graphic for advertising agency business more than offset the gains from the consumer products packaging business. The most recent 4 quarters show revenues up at $202.2M which is an 8% increase so perhaps Schawk is on its way to better earnings.

**Gross margin as a percentage of net sales for 2002 increased to 39.7%
from 39.6% for the prior year. Given the fact that net sales were lower than the prior period, the increase in gross margin is a result of cost-cutting and restructuring

**Restructuring and other charges of $2.6 million in 2002 resulted from $2.2M of charges for asset impairment recorded in accordance with the new accounting standard for asset impairments.


**Net margins declined significantly from 12% down to 4% in 2001 They are rising in 2002. This is most likely the result of the company's cost-cutting measures and aggressive restructuring. They have combined or closed facilities and laid off workers.

**Pays dividend but they are not increasing and are low yield


Cash Flow Ratios

2002 2001 2000 1999 1998

Growth in Capex -33.10% -12.65% -72.05% 55.91% ---
Capex/operating cash flow 34.77% 62.50% 80.58% 240.49% 217.71%
Free cash flow 18.2 8.7 4 -34.7 -26.5
Free cash flow per share 0.85 0.40 0.19 -1.64 -1.21
Operating cash/Revenue 2.07 2.9 1.94 2.09 0.99

Growth in Cash Flow 109.20% 117.50% 111.53% 30.94% ---
Total shares 21.4 21.5 21.4 21.2 21.9

**free cash flow positive last 3 years not unexpected in a soft market
**Capex easily covered by operating cash flow 2002. The spending was a much greater percentage in 1998 and 1999
**operating cash to revenue stays at stable levels and the ratio does not decline when revenue declines.


The Company purchased $1.0 million and $1.5 million in Class A Common
Stock in 2002 and 2001, respectively, under a share repurchase program approved

Options
2.542 M shares outstanding
Dilution 11.9% which is high
$2.37 value per share Black-Scholes
Value total $6.02M
Value per share $0.29


Discussion

The following is what gives me pause about SGK:

Revenue EBIT Depreciation Net income EPS
Dec 02 186.2 22.4 12 13.5 0.62
Dec 01 186.2 17.3 14.1 8 0.37
12/00 206.5 23.9 14.3 0.6 0.5
12/99 184.8 24.5 12.3 11.8 0.55
12/98 145.4 33.3 7.7 17.7 1.06
12/97 116.1 24.3 6.9 12.1 0.55
12/96 90.8 13.6 15.4 5.5 0.22
12/95 172.3 14.3 16.2 6.9 0.26
12/94 186.1 24.2 14.9 13.5 0.64

Notice that the company is essentially making the same revenue in 2002 as in 1994. They haven't grown much in terms of earnings. The EPS is actually declining. This may not be a very analytical way to evaluate an equity, but just where is this company going? I like the way they have responded to a worsening economy by cutting costs and trimming excess personnel, but are they at a point where we can't realistically expect more from them? For some businesses, there must be a point where they are wringing every last dollar out of the business that is possible. Given there is no provision for expansion at Schawk, maybe this is as far as they will go. They are at higher revenues for the four most recent quarters; approaching the 2000 levels. Perhaps you could at least expect them to grow at the rate of inflation, but that's not a very satisfactory return. In the 2002 10K there was no mention of plans to expand the business into new areas or aggressively try to capture market share from competitors. They do intend to continue making acquisitions as they have in the past, but this does not seem to have been especially profitable. I am also concerned that they have no backlog of orders and no contracts. There is no guarantee of income in 2004. They work day by day, filling most work orders in 5 to 7 days and then they need the next order to come in. If it doesn't, they are not making money. And its also interesting that one of their growth strategies was to increase spending and emphasis on the sales force, but spending in SG&A declined.

They are not a bad company, they just aren't very dynamic presently. I think there are better places to invest.

Current price $13.63
PE 17.70
52 week low $8.99
52 week high $13.95
yield 0.95

>^..^<
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (5) | Ignore Thread Prev | Next

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement