Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-12631
CONSOLIDATED GRAPHICS, INC.
(Exact name of Registrant as specified in its charter)
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Texas
(State or other jurisdiction of
incorporation or organization)
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76-0190827
(I.R.S. Employer Identification No.) |
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5858 Westheimer Road, Suite 200
Houston, Texas
(Address of principal executive offices)
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77057
(Zip Code) |
Registrants telephone number, including area code: (713) 787-0977
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 is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Securities Exchange Act of 1934).
Yes o No þ
The number of shares of Common Stock, par value $.01 per share, of the Registrant outstanding
at October 15, 2006 was 13,534,826.
CONSOLIDATED GRAPHICS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
INDEX
2
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
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September 30, |
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March 31, |
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2006 |
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2006 |
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(Unaudited) |
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(Audited) |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
8,230 |
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$ |
4,993 |
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Accounts receivable, net |
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160,392 |
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146,296 |
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Inventories |
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49,961 |
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38,430 |
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Prepaid expenses |
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9,956 |
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6,799 |
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Deferred income taxes |
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7,493 |
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8,356 |
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Total current assets |
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236,032 |
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204,874 |
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PROPERTY AND EQUIPMENT, net |
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299,602 |
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297,308 |
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GOODWILL AND OTHER INTANGIBLE ASSETS, net |
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98,814 |
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100,035 |
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OTHER ASSETS |
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7,086 |
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6,953 |
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$ |
641,534 |
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$ |
609,170 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES |
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Current portion of long-term debt |
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$ |
10,943 |
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$ |
10,821 |
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Accounts payable |
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53,728 |
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54,666 |
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Accrued liabilities |
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70,327 |
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68,436 |
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Income taxes payable |
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149 |
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3,477 |
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Total current liabilities |
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135,147 |
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137,400 |
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LONG-TERM DEBT, net of current portion |
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109,742 |
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90,678 |
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DEFERRED INCOME TAXES |
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59,940 |
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62,146 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS EQUITY |
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Common stock, $.01 par value;
100,000,000 shares authorized;
13,557,508 and 13,714,121 issued and
outstanding |
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136 |
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138 |
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Additional paid-in capital |
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177,734 |
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170,581 |
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Retained earnings |
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158,835 |
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148,227 |
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Total shareholders equity |
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336,705 |
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318,946 |
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$ |
641,534 |
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$ |
609,170 |
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See accompanying notes to consolidated financial statements.
3
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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September 30 |
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September 30 |
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2006 |
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2005 |
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2006 |
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2005 |
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SALES |
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$ |
234,236 |
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$ |
220,993 |
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$ |
472,661 |
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$ |
430,908 |
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COST OF SALES |
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171,780 |
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166,928 |
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346,200 |
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325,040 |
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Gross profit |
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62,456 |
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54,065 |
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126,461 |
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105,868 |
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SELLING EXPENSES |
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23,543 |
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22,513 |
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47,900 |
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44,543 |
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GENERAL AND ADMINISTRATIVE EXPENSES |
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15,013 |
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15,104 |
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32,228 |
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29,463 |
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Operating income |
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23,900 |
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16,448 |
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46,333 |
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31,862 |
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INTEREST EXPENSE, net |
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1,783 |
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1,426 |
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3,168 |
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2,790 |
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Income before taxes |
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22,117 |
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15,022 |
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43,165 |
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29,072 |
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INCOME TAXES |
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8,427 |
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5,689 |
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15,745 |
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11,010 |
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Net income |
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$ |
13,690 |
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$ |
9,333 |
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$ |
27,420 |
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$ |
18,062 |
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BASIC EARNINGS PER SHARE |
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$ |
1.01 |
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$ |
.68 |
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$ |
2.01 |
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$ |
1.31 |
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DILUTED EARNINGS PER SHARE |
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$ |
.98 |
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$ |
.66 |
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$ |
1.96 |
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$ |
1.27 |
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SHARES USED TO COMPUTE EARNINGS
PER SHARE |
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Basic |
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13,513 |
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13,754 |
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13,609 |
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13,761 |
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Diluted |
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13,966 |
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14,166 |
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13,984 |
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14,197 |
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See accompanying notes to consolidated financial statements.
4
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands)
(Unaudited, except March 31, 2006 balance)
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Additional |
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Common Stock |
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Paid-In |
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Retained |
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Shares |
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Amount |
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Capital |
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Earnings |
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Total |
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BALANCE, March 31, 2006 |
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13,714 |
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$ |
138 |
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$ |
170,581 |
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$ |
148,227 |
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$ |
318,946 |
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Exercise of stock options, including tax benefit |
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268 |
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2 |
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10,699 |
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10,701 |
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Share-based compensation expense |
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1,737 |
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1,737 |
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Repurchase and retire common stock |
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(424 |
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(4 |
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(5,283 |
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(16,812 |
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(22,099 |
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Net income |
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27,420 |
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27,420 |
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BALANCE, September 30, 2006 |
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13,558 |
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$ |
136 |
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$ |
177,734 |
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$ |
158,835 |
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$ |
336,705 |
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See accompanying notes to consolidated financial statements.
5
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six Months Ended |
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September 30 |
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2006 |
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2005 |
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OPERATING ACTIVITIES |
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Net income |
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$ |
27,420 |
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$ |
18,062 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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21,329 |
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22,382 |
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Deferred income tax provision |
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(1,343 |
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(766 |
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Share-based compensation expense |
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1,737 |
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Changes in assets and liabilities, net of effects of acquisitions: |
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Accounts receivable, net |
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(13,895 |
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(9,906 |
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Inventories |
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(11,586 |
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(2,008 |
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Prepaid expenses |
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(3,157 |
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1,151 |
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Other assets |
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(133 |
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(523 |
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Accounts payable and accrued liabilities |
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(211 |
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(3,824 |
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Income taxes payable |
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(3,328 |
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6,682 |
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Net cash provided by operating activities |
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16,833 |
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31,250 |
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INVESTING ACTIVITIES |
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Acquisitions of businesses, net of cash acquired |
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(4,757 |
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(1,235 |
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Purchases of property and equipment |
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(18,408 |
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(6,557 |
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Proceeds from asset dispositions |
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1,781 |
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1,256 |
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Net cash used in investing activities |
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(21,384 |
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(6,536 |
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FINANCING ACTIVITIES |
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Proceeds from bank credit facilities |
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76,477 |
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23,758 |
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Payments on bank credit facilities |
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(52,779 |
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(38,522 |
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Payments on term equipment notes and other debt |
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(4,512 |
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(3,681 |
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Payments to repurchase and retire common stock |
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(22,099 |
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(6,410 |
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Proceeds from exercise of stock options, including tax benefit |
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10,701 |
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692 |
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Net cash provided (used in) by financing activities |
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7,788 |
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(24,163 |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
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3,237 |
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551 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
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4,993 |
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7,752 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
8,230 |
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$ |
8,303 |
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See accompanying notes to consolidated financial statements.
6
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and percentages)
(Unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include the accounts of
Consolidated Graphics, Inc. and subsidiaries (collectively, the Company). All intercompany
accounts and transactions have been eliminated. Such statements have been prepared in accordance
with generally accepted accounting principles and the Securities and Exchange Commissions (SEC)
rules and regulations for reporting interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation of the accompanying
unaudited consolidated financial statements have been included. Operating results for the six
months ended September 30, 2006 are not necessarily indicative of future operating results. Balance
sheet information as of March 31, 2006 has been derived from the 2006 annual audited consolidated
financial statements of the Company. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the
fiscal year ended March 31, 2006, filed with the SEC in June 2006 (2006 Form 10-K).
Use of EstimatesThe preparation of financial statements in conformity with generally
accepted accounting principles requires the use of certain estimates and assumptions by management
in determining the reported amounts of assets and liabilities, disclosure of contingent liabilities
as of the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period including depreciation of property and equipment and amortization or
impairment of intangible assets. The Company evaluates its estimates and assumptions on an ongoing
basis and relies on historical experience and various other factors that it believes to be
reasonable under the circumstances to determine such estimates. Because uncertainties with respect
to estimates and assumptions are inherent in the preparation of financial statements, actual
results could differ from these estimates.
Reclassification Certain reclassifications of prior periods data have been made to conform
to current period reporting.
Revenue Recognition The Company recognizes revenue upon delivery of each job, except for
bill and hold transactions, in which case such revenue is recognized when all of the service
delivery criteria are fully met as per Staff Accounting Bulletin 104 issued by the SEC. Losses, if
any, on jobs are recognized at the earliest date such amount is determinable.
InventoriesInventories are valued at the lower of cost or market utilizing the first-in,
first-out method for raw materials and the specific identification method for work in progress and
finished goods. The carrying values of inventories are set forth below:
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September 30, |
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March 31, |
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2006 |
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2006 |
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Raw materials |
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$ |
14,290 |
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$ |
11,485 |
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Work in progress |
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29,905 |
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21,951 |
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Finished goods |
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5,766 |
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4,994 |
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$ |
49,961 |
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$ |
38,430 |
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Goodwill and Other Intangible Assets, net Goodwill totaled $87,695 at September 30, 2006
and represents the excess of the Companys purchase cost over the fair value of the net assets of
acquired businesses, net of previously recorded amortization and impairment expense. The net book
value of other intangible assets at September 30, 2006 was $11,119. Other intangible assets consist
primarily of the value assigned to such items as customer lists and tradenames in connection with
the allocation of purchase price for acquisitions under Statement of Financial Accounting Standards
(SFAS) No. 142 and are generally amortized on a straight-line basis over periods of up to ten
years. Amortization expense totaled $746 and $403 for the six months ended September 30, 2006 and
2005.
Earnings Per Share Basic earnings per share are calculated by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share reflect net
income divided by the weighted average number of common shares and dilutive stock options and
restricted stock unit awards outstanding.
7
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and percentages)
(Unaudited)
Supplemental Cash Flow Information The consolidated statements of cash flows provide
information about the Companys sources and uses of cash and exclude the effects of non-cash
transactions. For the six months ended September 30, 2006, the Company paid cash for interest and
income taxes, net of refunds, totaling $3,038 and $20,317. For the six months ended September 30,
2005, the Company paid cash for interest and income taxes, net of refunds, totaling $2,679 and
$5,117.
2. ACQUISITIONS
During the six months ended September 30, 2006, the Company (i) paid cash totaling $5,107 to
acquire certain real property and (ii) received cash totaling $350 in connection with the
finalization of certain working capital adjustments, in connection with certain prior year
acquisitions. Based on certain additional information received by the Company regarding its fiscal
2006 acquisitions, $1,530 of purchase price previously attributed to other intangible assets was
allocated to goodwill in the six month period ended September 30, 2006. The Company is awaiting
additional information concerning certain asset and liability valuations in order to finalize the
allocation of purchase price for certain of the Companys 2006 acquisitions, and expects to receive
such information no later than one year following the respective dates of the acquisitions.
3. LONG-TERM DEBT
The following is a summary of the Companys long-term debt as of:
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September 30, |
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March 31, |
|
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|
2006 |
|
|
2006 |
|
Bank credit facilities |
|
$ |
66,749 |
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$ |
43,051 |
|
Term equipment notes |
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|
40,033 |
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|
44,037 |
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Other |
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|
13,903 |
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|
14,411 |
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120,685 |
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|
101,499 |
|
Less: current portion |
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(10,943 |
) |
|
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(10,821 |
) |
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|
|
$ |
109,742 |
|
|
$ |
90,678 |
|
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At September 30, 2006, the Companys primary bank credit facility (as amended and restated,
the Credit Agreement) consisted of a $150,000 revolving credit facility scheduled to mature in
July 2007. Outstanding borrowings at such date were $60,000 and accrued interest at a weighted
average rate of 7.85%.
Under the terms of the Credit Agreement the proceeds from borrowings may be used to repay
certain indebtedness, finance certain acquisitions, provide for working capital and general
corporate purposes and, subject to certain restrictions, repurchase the Companys common stock.
Borrowings outstanding under the Credit Agreement are secured by substantially all of the Companys
assets other than real estate and certain equipment subject to term equipment notes and other
financings. Borrowings under the Credit Agreement accrue interest, at the Companys option, at
either (1) the London Interbank Offered Rate (LIBOR) plus a margin of 1.25% to 2.00%, or (2) an
alternate base rate (based upon the greater of the agent banks prime lending rate or the Federal
Funds effective rate plus .50%) plus a margin of up to .75%. The Company is also required to pay
an annual commitment fee ranging from .275% to .375% on available but unused amounts under the
Credit Agreement. The interest rate margin and the commitment fee are based upon certain financial
performance measures as set forth in the Credit Agreement and are redetermined quarterly. At
September 30, 2006, the applicable LIBOR interest rate margin was 1.25% and the applicable
commitment fee was .275%.
The Company is subject to certain covenants and restrictions and must meet certain financial
tests under the Credit Agreement. The Company was in compliance with such covenants, restrictions
and financial tests at September 30, 2006.
In addition to the Credit Agreement, the Company maintains two auxiliary revolving credit
facilities (each an Auxiliary Bank Facility and collectively the Auxiliary Bank Facilities)
with commercial banks. Each Auxiliary Bank Facility is unsecured and has a maximum borrowing
capacity of $5,000. At September 30, 2006, borrowings outstanding under the Auxiliary Bank
Facilities totaled $6,749 and accrued interest at a weighted average rate of 6.65%. Because the
Company currently has the ability and intends to refinance borrowings outstanding under the
Auxiliary Bank Facilities upon their scheduled maturity in the third quarter of fiscal 2007, such
borrowings are classified as long-term debt in the accompanying consolidated balance sheet at
September 30, 2006. The Auxiliary Bank Facilities cross-default to the covenants and restrictions
set forth in the Credit Agreement.
8
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and percentages)
(Unaudited)
The Companys term equipment notes consist primarily of notes payable pursuant to financing
agreements between the Company and various lenders (the Lender Notes) and between the Company and
the finance affiliate of a printing equipment manufacturer (the Equipment Notes). At September
30, 2006, outstanding borrowings under the Lender Notes totaled $26,722 and accrued interest at a
weighted average rate of 5.58%. The Lender Notes provide for either fixed monthly principal
payments plus interest (at fixed rates) or for fixed payments of principal and interest (at fixed
rates) for defined periods of up to eight years from the date of issuance, and are secured by
certain equipment of the Company. At September 30, 2006, outstanding borrowings under the Equipment
Notes totaled $10,895 and accrued interest at a weighted average rate of 5.92%. The Equipment Notes
provide for fixed payments of principal and interest (at fixed rates) for defined periods of up to
ten years from the date of issuance and are secured by the equipment which was concurrently
purchased from the manufacturer. At September 30, 2006, the remaining balance of term equipment
notes totaling $2,416 primarily consists of various secured debt obligations assumed by the Company
in connection with certain prior year acquisitions. The Company is not subject to any significant
financial covenants in connection with any of the term equipment notes.
The Companys remaining debt obligations consist of a mortgage note totaling $4,705, a
promissory note totaling $1,797, industrial revenue bonds totaling $6,685 and various other debt
obligations totaling $716. The Company does not have any significant financial covenants or
restrictions associated with these other debt obligations.
Subsequent to September 30, 2006, the Company entered into a new revolving credit agreement
(the New Credit Agreement) effectively amending and restating the Credit Agreement. The New
Credit Agreement provides for a $155,000 revolving credit facility, with an accordion feature that
could under prescribed conditions increase the amount to $240,000, and has a maturity date of
October 6, 2011. Borrowings under the New Credit Agreement accrue interest, at the Companys
option, at either (1) the London Interbank Offered Rate (LIBOR) plus a margin of .625% to 1.25%,
or (2) an alternate base rate (based upon the greater of the agent banks prime lending rate or the
Federal Funds effective rate plus .50%). The Company is also required to pay an annual commitment
fee ranging from .15% to .25% on available but unused amounts under the New Credit Agreement. The
interest rate margin and the commitment fee are based upon certain financial performance measures
as set forth in the New Credit Agreement and are redetermined quarterly. At the commencement date
of the New Credit Agreement, the applicable LIBOR interest rate margin was .625% and the applicable
commitment fee was .15%.
4. SHARE BASED COMPENSATION
The Company has a share-based compensation plan which is administered by the compensation
committee of the Companys Board of Directors. For additional information regarding this plan,
refer to Note 8. Stock Options of the Notes to the Consolidated Financial Statements contained in
the 2006 Form 10-K. Prior to April 1, 2006, the Company accounted for share-based compensation
using the intrinsic value method in accordance with Accounting Principles Board Opinion (APBO)
No. 25, Accounting for Stock Issued to Employees. Compensation expense is not recognized under
APBO No. 25 for share-based compensation transactions made at fair-value on the date of grant.
In December 2004, SFAS No. 123(R), Share-Based Payment, was issued, pursuant to which the
intrinsic value method of accounting under APBO No. 25 was superseded with a fair-value method that
requires recognition of compensation expense in the consolidated statement of operations for all
share-based compensation transactions.
Effective April 1, 2006, the Company adopted SFAS No. 123(R) using the modified prospective
method of transition, pursuant to which, compensation expense is recognized over the vesting period
in the consolidated statement of operations beginning with the date of adoption for (a) the
unvested portion of share-based compensation transactions previously occurring and (b) all
prospective share-based compensation transactions. For the six months ended September 30, 2006,
the Company recognized share-based compensation expense of $1,737 and a related income tax benefit
of $602. As of September 30, 2006, $2,572 of currently unrecognized share-based compensation
expense remains to be recognized in future periods.
In addition, SFAS No. 123(R) provides that the benefit of certain tax deductions the Company
receives in connection with the exercise of share-based compensation instruments be classified as
cash flow from financing activities as compared to cash flow from operating activities as required
under APBO No. 25. Accordingly, $3,219 of tax benefit is reflected as cash flow from financing
activities and $356 of tax benefit is recognized as cash flow from operations in the accompanying
consolidated statements of cash flows as of September 30, 2006 and 2005.
9
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and percentages)
(Unaudited)
As discussed above, results of operations for prior periods have not been restated to reflect
the provisions of SFAS No. 123(R). The following table sets forth pro forma information as if
share-based compensation expense for the three and six months ended September 30, 2005 was
determined using the fair-value method of accounting.
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2005 |
|
Net income as reported |
|
$ |
9,333 |
|
|
$ |
18,062 |
|
Less: Share-based compensation expense, net of tax |
|
|
(349 |
) |
|
|
(756 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
8,984 |
|
|
$ |
17,306 |
|
|
|
|
|
|
|
|
Basic Earnings Per Share: |
|
|
|
|
|
|
|
|
Net income as reported |
|
$ |
0.68 |
|
|
$ |
1.31 |
|
Pro forma net income |
|
$ |
0.65 |
|
|
$ |
1.26 |
|
Diluted Earnings Per Share: |
|
|
|
|
|
|
|
|
Net income as reported |
|
$ |
0.66 |
|
|
$ |
1.27 |
|
Pro forma net income |
|
$ |
0.63 |
|
|
$ |
1.22 |
|
The Company did not grant any stock options during the six months ended September 30, 2006.
The total intrinsic value of stock options exercised during the six months ended September 30, 2006
was $8,690. The following table summarizes stock option activity for the six months ended September
30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average Exercise |
|
Stock Options |
|
Shares |
|
|
Price |
|
Outstanding at March 31, 2006 |
|
|
1,974,459 |
|
|
$ |
34.31 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(267,687 |
) |
|
|
27.96 |
|
Forfeited or expired |
|
|
(17,374 |
) |
|
|
39.86 |
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 (a) |
|
|
1,689,398 |
|
|
|
35.28 |
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 (a) |
|
|
1,241,202 |
|
|
|
34.56 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Stock options outstanding as of September 30, 2006 have a weighted average remaining
contractual term of 5.3 years. Based on the market value of the Companys common stock on
September 30, 2006, outstanding stock options have an aggregate intrinsic value of $42,057
and exercisable stock options have an aggregate intrinsic value of $31,786. |
The Company granted an award of 12,500 restricted stock unit awards during the six months
ended September 30, 2006 having a fair value of $651. The following table summarizes restricted
stock unit award activity for the six months ended September 30, 2006:
|
|
|
|
|
Restricted Stock Unit Awards |
|
Shares |
|
Outstanding at March 31, 2006 |
|
|
|
|
Granted |
|
|
12,500 |
|
Exercised |
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 (a) |
|
|
12,500 |
|
|
|
|
|
Exercisable at September 30, 2006 (a) |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Restricted stock units outstanding and exercisable as of September 30, 2006 have a
remaining contractual term of 9.5 years and a total intrinsic value of $752. |
10
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains forward-looking information. Readers are cautioned that such
information involves known and unknown risks and uncertainties, including those created by general
market conditions, competition and the possibility that events may occur beyond our control, which
may limit our ability to maintain or improve our operating results or financial condition or
acquire additional printing businesses. When you consider our forward-looking information, you
should keep in mind the Risk Factors described in this Quarterly Report on Form 10-Q and in our
most recently filed Annual Report on Form 10-K for the fiscal year ended March 31, 2006. Although
management believes that the assumptions underlying the forward-looking statements are reasonable,
any of the assumptions could be inaccurate and there can be no assurance that any or all of the
assumptions underlying the forward-looking statements will prove to be accurate. The inclusion of
such information should not be regarded as a representation by us or any other person that our
objectives and plans will be achieved. We expressly disclaim any duty to provide updates to these
forward-looking statements, assumptions or other factors after the date of this Quarterly Report on
Form 10-Q to reflect the occurrence of events or changes in circumstances or expectations.
The following discussion of the financial condition and performance of our Company should be
read in conjunction with the consolidated financial statements included herein and the consolidated
financial statements and related notes and other detailed information regarding our Company
included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006 and other
reports filed by us with the Securities and Exchange Commission. Operating results for the six
months ended September 30, 2006 are not necessarily indicative of the results to be expected for
the entire fiscal year ending March 31, 2007 or any periods thereafter.
Overview
Our Organization
Consolidated Graphics is a leading national provider of commercial printing services and is
recognized as the largest sheetfed and digital commercial printing company in the United States.
Our corporate headquarters are in Houston, Texas, and we currently operate 67 printing businesses
spanning 26 states. Each of our printing businesses has a well-established operating history, more
than 25 years in most cases. Complementing the printing services we provide, we also offer (i)
state-of-the-art fulfillment services from 12 fulfillment centers located at or near one of our
printing businesses and (ii) proprietary digital technology solutions and e-commerce capabilities
from two technology hubs located at our corporate headquarters and at one of our printing
businesses near Washington D.C. Generally, each facility substantially relies on locally-based
customers; accordingly, we have a broad diversification of customers by industry-type and
geographic orientation, totaling more than 22,000. No individual facility or any individual
customer account for more than 10% of our revenues.
Our printing businesses maintain their own sales, customer service, estimating and planning,
prepress, production and accounting departments. Our corporate headquarters staff provides support
to our printing businesses in such areas as human resources, purchasing and management information
systems. We also maintain centralized treasury, risk management, tax and consolidated financial
reporting activities.
Nature of Our Services
We are a service business that utilizes sophisticated technology and equipment to produce
high-quality, custom-designed printed materials for a large base of customers in a broad
cross-section of industries, the majority of which are located in the markets our printing
businesses are based. In addition to providing a full range of prepress, digital and offset
printing and finishing services, our printing businesses offer fulfillment and mailing services, as
well as e-commerce software solutions and other print-related, value-added services. Most of the
e-commerce solutions are Internet-based, and like the printed materials we produce, are customized
to the specific needs of our customers. For marketing purposes, we refer to our e-commerce
capabilities using the CGXSolutions trademark. Collectively, all of these discrete capabilities
comprise a comprehensive range of printing services for which we typically charge an
all-inclusive fee. Accordingly, for financial reporting purposes, we report our revenues and
results of operations as a single segment.
Our sales are derived from commercial printing services. These services consist of (i)
traditional print services, including electronic prepress, printing, finishing, storage and
delivery of high-quality materials which are custom manufactured to our customers design
specifications; (ii) fulfillment and mailing services for such printed materials; and (iii) digital
technology solutions and e-commerce capabilities that enable our customers to more efficiently
procure and manage printed material and/or design, procure, distribute, track and analyze results
of printing-based marketing programs and activities. Examples of the types of documents we print
for our customers include high-quality, multi-color marketing materials, product and capability
brochures, point-of-purchase displays, direct mail pieces, shareholder communications, catalogs,
and training manuals.
11
Most of our sales are generated by individual orders through commissioned sales personnel. We
recognize revenue from these orders when we deliver the ordered goods and services. To a large
extent, continued engagement of our Company by our customers for successive business opportunities
depends upon the customers satisfaction with the quality of services we provide. As such, it is
difficult for us to predict with any high degree of certainty the number, size, and profitability
of printing services that we expect to provide for more than a few weeks in advance.
Our cost of sales mainly consists of raw materials consumed in the printing process, as well
as labor and outside services, such as delivery costs. Paper cost is the most significant component
of our materials cost; however, fluctuation in paper pricing generally does not materially impact
our operating margins because we typically quote, and subsequently purchase, paper for each
specific printing project we are awarded. As a result, any changes in paper pricing are effectively
passed through to customers by our printing businesses. Additionally, our cost of sales includes
salary and benefits paid to operating personnel, maintenance, repair, rental and insurance costs
associated with operating our facilities and equipment and depreciation charges.
Our selling expenses generally include the compensation paid to our sales professionals, along
with promotional, travel and entertainment costs. Our general and administrative expenses generally
include the salary and benefits paid to support personnel at our printing businesses and our
corporate staff, as well as office rent, utilities and communications expenses, various
professional services and amortization of identifiable intangible assets.
Our Strategy
We are focused on adding value to our printing businesses by providing the financial and
operational strengths, management support and technological advantages associated with a national
organization. Our strategy currently includes the following initiatives to generate sales and
profit growth:
|
|
|
Internal Sales GrowthWe seek to use our competitive advantages to expand
market share. We continue to pursue additional experienced sales professionals, invest
in new equipment and technology, expand our national accounts program, promote
cross-selling opportunities among individual facilities, and develop new and expanded
digital technology-based print-related services. |
|
|
|
|
Disciplined Acquisition ProgramWe selectively pursue opportunities to acquire
additional printing businesses at reasonable prices. Some of these acquisitions may
include smaller and/or distressed printing businesses for merger into one of our
existing businesses. |
|
|
|
|
Cost SavingsBecause of our size and national presence, we leverage our
economies of scale to purchase raw materials, supplies and equipment at preferential
prices, and centralize various administrative services to generate cost savings. |
|
|
|
|
Best Practices/BenchmarkingWe provide a forum for our printing businesses to
share their knowledge of technical processes and their best practices with one another,
as well as benchmark financial and operational data to help our printing businesses
identify and respond to changes in operating trends. |
|
|
|
|
Leadership DevelopmentThrough our unique Leadership Development Program, we
develop college graduates for future sales and management positions at our printing
businesses. |
12
Results of Operations
The following table sets forth our Companys unaudited condensed consolidated income
statements for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended September 30 |
|
|
Ended September 30 |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(In millions) |
|
|
(In millions) |
|
Sales |
|
$ |
234.2 |
|
|
$ |
221.0 |
|
|
$ |
472.7 |
|
|
$ |
430.9 |
|
Cost of sales |
|
|
171.8 |
|
|
|
166.9 |
|
|
|
346.2 |
|
|
|
325.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
62.4 |
|
|
|
54.1 |
|
|
|
126.5 |
|
|
|
105.9 |
|
Selling expenses |
|
|
23.5 |
|
|
|
22.5 |
|
|
|
47.9 |
|
|
|
44.5 |
|
General and administrative expenses |
|
|
15.0 |
|
|
|
15.2 |
|
|
|
32.2 |
|
|
|
29.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
23.9 |
|
|
|
16.4 |
|
|
|
46.4 |
|
|
|
31.9 |
|
Interest expense, net |
|
|
1.8 |
|
|
|
1.4 |
|
|
|
3.2 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
22.1 |
|
|
|
15.0 |
|
|
|
43.2 |
|
|
|
29.1 |
|
Income taxes |
|
|
8.4 |
|
|
|
5.7 |
|
|
|
15.8 |
|
|
|
11.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
13.7 |
|
|
$ |
9.3 |
|
|
$ |
27.4 |
|
|
$ |
18.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the components of income expressed as a percentage of sales for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a Percentage |
|
|
As a Percentage |
|
|
|
of Sales |
|
|
of Sales |
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended September 30 |
|
|
Ended September 30 |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
73.3 |
|
|
|
75.5 |
|
|
|
73.2 |
|
|
|
75.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
26.7 |
|
|
|
24.5 |
|
|
|
26.8 |
|
|
|
24.6 |
|
Selling expenses |
|
|
10.1 |
|
|
|
10.2 |
|
|
|
10.1 |
|
|
|
10.3 |
|
General and administrative expenses |
|
|
6.4 |
|
|
|
6.9 |
|
|
|
6.9 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
10.2 |
|
|
|
7.4 |
|
|
|
9.8 |
|
|
|
7.4 |
|
Interest expense, net |
|
|
0.8 |
|
|
|
0.6 |
|
|
|
0.7 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
9.4 |
|
|
|
6.8 |
|
|
|
9.1 |
|
|
|
6.8 |
|
Income taxes |
|
|
3.6 |
|
|
|
2.6 |
|
|
|
3.3 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
5.8 |
% |
|
|
4.2 |
% |
|
|
5.8 |
% |
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our sales and expenses during the periods shown were impacted by the acquisition of four
printing businesses (two as tuck-ins) in fiscal 2006. In accordance with the purchase method of
accounting, our consolidated income statements reflect sales and expenses of acquired businesses
only for post-acquisition periods. Accordingly, acquisitions affect our financial results in any
period compared to the prior year period by the full-period impact of prior year acquisitions (as
compared to the partial period impact in the prior year) and the partial-period impact of current
year acquisitions, and is referred to below as incremental impact of acquisitions.
Comparative Analysis of Consolidated Income Statements for the Three Months Ended September 30,
2006 and 2005
Sales in the three month period ended September 30, 2006 increased $13.2 million, or 6%, to
$234.2 million from $221.0 million for the same period in the prior year. The $13.2 million revenue
increase is attributable to $4.6 million of internal sales growth and $8.6 million from the
incremental impact of acquisitions. Electionrelated printing, which recurs generally on a
bi-annual basis, accounted for $3.6 million of our internal sales growth. The remainder of our
internal sales growth was primarily attributable to our strategic sales initiatives, consisting of
national sales, CGXSolutions and cross-selling. Compared to the prior year, national sales were up
17% in the September quarter and accounted for 8% of total sales and sales attributable to our
CGXSolutions sales channel (including $3.2 million to national
accounts) were up 69% in the
September quarter and accounted for 7% of total sales.
Gross profit in the three months ended September 30, 2006 increased $8.3 million, or 16%, to
$62.4 million from $54.1 million for the same period in the prior year. Approximately $5.0 million
of the increase is attributable to the increased
13
sales levels discussed above, including the incremental impact of acquisitions. The remaining
increase of $3.3 million is attributable to (i) margin leverage as certain of our operating costs
are more fixed in nature (for example depreciation and rent expense) and (ii) incremental
purchasing and pricing gains that we have been able to achieve.
Selling expense in the three months ended September 30, 2006 increased $1.0 million, or 5%, to
$23.5 million from $22.5 million for the same period in the prior year. The increase is directly
attributable to the increased sales levels noted above. As a percentage of sales, selling expenses
decreased to 10.1% in the current quarter as compared to 10.2% for the same period last year as (i)
our sales growth leveraged certain selling expenses which are more fixed in nature (for example
sales meetings and training) and (ii) certain of our sales growth including election-related
printing bears a lower level of sales commission and other expense.
General and administrative expenses in the three months ended September 30, 2006 decreased $.2
million, or 1%. Share-based compensation expense of $.5 million recognized in the current quarter
was offset by the recognition of a one-time sales and use tax credit of $.6 million. Our sales
growth discussed above combined with the fixed nature of much of our general and administrative
expense and our focus on controlling costs resulted in a 50 basis point decrease in general and
administrative expenses as a percentage of sales.
Interest expense in the three months ended September 30, 2006 increased $0.4 million, or 25%,
to $1.8 million from $1.4 million in the same period in the prior year, due principally to a higher
level of average debt outstanding and a generally higher interest rate environment.
We provided for income taxes in the three months ended September 30, 2006 of $8.4 million,
reflecting an effective tax rate of 38.1% as compared to an effective tax rate of 37.9% for the
same period in the prior year.
Comparative Analysis of Consolidated Income Statements for the Six Months Ended September 30, 2006
and 2005
Sales in the six month period ended September 30, 2006 increased $41.8 million, or 10%, to
$472.7 million from $430.9 million for the same period in the prior year. The $41.8 million revenue
increase is attributable to $24.0 million of internal sales growth and $17.8 million from the
incremental impact of acquisitions. Approximately 40% of our internal sales growth resulted from
election-related printing, which recurs generally on a bi-annual basis. The remainder of our
internal sales growth was primarily attributable to our strategic sales initiatives, consisting of
national sales, CGXSolutions and cross-selling. Compared to the prior year, national sales were up
44% and accounted for 9% of total sales and sales attributable to our CGXSolutions sales channel
(including $4.5 million to national accounts) were up 93% and accounted for 6% of total sales.
Gross profit in the six months ended September 30, 2006 increased $20.6 million, or 19%, to
$126.5 million from $105.9 million for the same period in the prior year. Approximately $10.2
million of the increase is attributable to the increased sales levels discussed above, including
the incremental impact of acquisitions. The remaining increase of $10.4 million is attributable to
(i) margin leverage as certain of our operating costs are more fixed in nature (for example
depreciation and rent expense) and (ii) incremental purchasing and pricing gains that we have been
able to achieve.
Selling expense in the six months ended September 30, 2006 increased $3.4 million, or 8%, to
$47.9 million from $44.5 million for the same period in the prior year. The increase is directly
attributable to the increased sales levels noted above. As a percentage of sales, selling expenses
decreased to 10.1% in the six months ended September 30, 2006 as compared to 10.3% for the same
period last year as (i) our sales growth leveraged certain selling expenses which are more fixed in
nature (for example sales meetings and training) and (ii) certain of our sales growth including
election-related printing bears a lower level of sales commission and other expense.
General and administrative expenses in the six months ended September 30, 2006 increased $2.7
million, or 9%, to $32.2 million from $29.5 million in the same period in the prior year.
Recognition of share-based compensation expense totaling $1.7 million was the most significant
element of the increase. The remainder of the increase was primarily attributable to the
incremental impact of acquisitions, net of a one-time sales and use tax credit of $.6 million. As
a percentage of sales, general and administrative expenses were unchanged from the prior year as
leverage from our sales growth discussed above offset the aforementioned net increase in expenses,
as most types of general and administrative expenses we incur are generally fixed from
period-to-period.
Interest expense in the six months ended September 30, 2006 increased $0.4 million, or 14%, to
$3.2 million from $2.8 million in the same period in the prior year, due principally to a higher
level of average debt outstanding and a generally higher interest rate environment.
14
We provided for income taxes for in the six months ended September 30, 2006 of $15.8 million,
reflecting an effective tax rate of 36.5% as compared to an effective tax rate of 37.9% for the
same period in the prior year. A one-time credit of $0.7 million, or 1.6% of taxable income, was
recognized in the current period for the impact of a net reduction in legislated state income tax
rates on previously provided deferred income taxes.
Liquidity and Capital Resources
Sources and Uses of Cash
Our historical sources of cash have primarily been cash provided by operations or borrowings
under our various bank credit facilities. Our historical uses of cash have been for acquisitions of
printing businesses, capital expenditures, payment of principal and interest on outstanding debt
obligations and repurchases of our common stock. Supplemental information pertaining to our
historical sources and uses of cash is presented as follows and should be read in conjunction with
our consolidated statements of cash flows and notes thereto included in Item 1. Financial
Statements:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
September 30 |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In millions) |
|
Net cash provided by operating activities |
|
$ |
16.8 |
|
|
$ |
31.3 |
|
Acquisitions of businesses |
|
|
(4.8 |
) |
|
|
(1.2 |
) |
Capital expenditures, net of proceeds from asset dispositions (1) |
|
|
(16.6 |
) |
|
|
(5.3 |
) |
Net proceeds (payments) under bank credit facilities |
|
|
23.7 |
|
|
|
(14.8 |
) |
Net payments on term equipment notes and other debt |
|
|
(4.5 |
) |
|
|
(3.7 |
) |
Payments to repurchase and retire common stock |
|
|
(22.1 |
) |
|
|
(6.4 |
) |
|
|
|
(1) |
|
Included in capital expenditures above is $2.0 million which was reflected as an
accrued liability in the March 31, 2006 balance sheet. |
Additionally, our cash position, working capital and debt obligations are shown below and
should be read in conjunction with our consolidated balance sheets and notes thereto included in
Item 1. Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2006 |
|
|
2006 |
|
|
|
(In millions) |
|
Cash and cash equivalents |
|
$ |
8.2 |
|
|
$ |
5.0 |
|
Working capital, inclusive of cash and cash equivalents |
|
|
100.9 |
|
|
|
67.5 |
|
Total debt obligations |
|
|
120.7 |
|
|
|
101.5 |
|
During the six months ended September 30, 2006, net cash provided by operating activities
decreased by $14.5 million as compared to the same period last year. This decrease principally
resulted from a significant increase in working capital, excluding cash and cash equivalents, as
compared to the same period last year, partially offset by a $9.3 million year-over-year increase
in net income. The increase in fiscal 2007 working capital includes increases in accounts
receivable and inventories totaling $25.5 million attributable to both internal growth and a
seasonal fluctuation caused in part by election-related printing which recurs generally on a
bi-annual basis.
We believe that our cash flow provided by operations will be adequate to cover our fiscal 2007
working capital needs, debt service requirements and planned capital expenditures to the extent
such items are known or are reasonably determinable based on current business and market
conditions. However, we may elect to finance certain of our capital expenditure requirements
through borrowings under our primary bank credit facility or the issuance of additional term
equipment notes.
We intend to continue pursuing acquisition opportunities at prices we believe are reasonable
based upon market conditions. However, we cannot accurately predict the timing, size or success of
our acquisition efforts or our associated potential capital commitments. There can be no assurance
that we will be able to acquire additional printing businesses on terms acceptable to us. During
the six months ended September 30, 2006, the Company announced that it had entered into non-binding
letters of intent to acquire Global Group Inc. in Fort Worth, Texas and Annan & Bird Lithographers
Ltd., located near Toronto in Mississauga, Ontario.
We expect to fund acquisitions in the foreseeable future through cash flow provided by
operations and/or additional borrowings. We have in the past issued our common stock as purchase
price consideration in some of our acquisitions.
15
Although we may issue common stock for such purposes in the future, we do not expect to do so
in the foreseeable future because of our current financial liquidity and ability to utilize
available cash or make additional borrowings instead of issuing common stock. The extent to which
we will be willing or able to use our common stock in the future to make acquisitions will depend
on its market value from time to time and the willingness of potential sellers to accept it as full
or partial payment for the acquisition price, as well as our financial liquidity and available
financing options.
In May 2006, our Board of Directors approved a common stock share repurchase program that will
expire in May 2007 providing for repurchases of our common stock not to exceed an aggregate of
$68.3 million in open-market or block purchase transactions. We expect to fund any repurchases
under the program through cash flow provided by operations or additional borrowings under our
primary bank credit facility. The amount and timing of any purchases will depend upon a number of
factors, including our liquidity and potential alternative uses of our capital resources, the price
and availability of our shares, and general market conditions. During the six month period ended
September 30, 2006, we repurchased 424,300 shares of our common stock at a total cost of $22.1
million. Subsequent to September 30, 2006, we have repurchased an additional 37,800 shares of our
common stock at a total cost of $2.3 million. There can be no assurance that we will determine to
make additional repurchases of our common stock, and if so, whether we will be able to do so on
terms acceptable to us.
Debt Obligations
At September 30, 2006, our primary bank credit facility (as amended and restated, the Credit
Agreement,) consisted of a $150.0 million revolving credit facility scheduled to mature in July
2007. Outstanding borrowings at such date were $60.0 million and accrued interest at a weighted
average rate of 7.85%.
Under the terms of the Credit Agreement the proceeds from borrowings may be used to repay
certain indebtedness, finance certain acquisitions, provide for working capital and general
corporate purposes and, subject to certain restrictions, repurchase our common stock. Borrowings
outstanding under the Credit Agreement are secured by substantially all of our assets other than
real estate and certain equipment subject to term equipment notes and other financings. Borrowings
under the Credit Agreement accrue interest, at our option, at either (1) the London Interbank
Offered Rate (LIBOR) plus a margin of 1.25% to 2.00%, or (2) an alternate base rate (based upon the
greater of the agent banks prime lending rate or the Federal Funds effective rate plus .50%) plus
a margin of up to .75%. We are also required to pay an annual commitment fee ranging from .275% to .375% on
available but unused amounts under the Credit Agreement. The interest rate margin and the
commitment fee are based upon certain financial performance measures as set forth in the Credit
Agreement and are redetermined quarterly. At September 30, 2006, the applicable LIBOR interest rate
margin was 1.25% and the applicable commitment fee was .275%.
We are subject to certain covenants and restrictions and we must meet certain financial tests
as defined in the Credit Agreement. We were in compliance with these covenants and financial tests
at September 30, 2006. In the event that we are unable to remain in compliance with these covenants
and financial tests in the future, our lenders would have the right to declare us in default with
respect to such obligations, and consequently, certain of our other debt obligations, including
substantially all of our term equipment notes, would be deemed to also be in default. All debt
obligations in default would be required to be re-classified as a current liability. In the event
that we were to be unable to obtain a waiver, re-negotiate or re-finance these obligations, a
material adverse effect on our ability to conduct our operations in the ordinary course likely
would be the result. Based on our view of current market and business conditions and our
expectations regarding our future operating results and cash flows, we believe that we will be able
to remain in compliance with these covenants and financial tests in the foreseeable future.
In addition to the Credit Agreement, we maintain two auxiliary revolving credit facilities
(each an Auxiliary Bank Facility and collectively the Auxiliary Bank Facilities) with
commercial banks. Each Auxiliary Bank Facility is unsecured and has a maximum borrowing capacity of
$5.0 million. At September 30, 2006, borrowings outstanding under the Auxiliary Bank Facilities
totaled $6.8 million and accrued interest at a weighted average rate of 6.65%. Because we
currently have the ability and intend to refinance the borrowings outstanding under the Auxiliary
Bank Facilities upon their scheduled maturity in the third quarter of fiscal 2007, such borrowings
are classified as long-term debt in our consolidated balance sheet at September 30, 2006. The
Auxiliary Bank Facilities cross-default to the covenants and restrictions set forth in the Credit
Agreement.
Our term equipment notes consist primarily of notes payable pursuant to financing agreements
between us and various lenders (the Lender Notes) and between us and the finance affiliate of a
printing equipment manufacturer (the
Equipment Notes). At September 30, 2006, outstanding borrowings under the Lender Notes totaled
$26.7 million and accrued interest at a weighted average rate of 5.58%. The Lender Notes provide
for either fixed monthly principal payments plus interest (at fixed rates) or for fixed payments of
principal and interest (at fixed rates) for defined periods of up to eight years from the date of
issuance, and are secured by certain equipment of the Company. At September 30, 2006, outstanding
16
borrowings under the Equipment Notes totaled $10.9 million and accrued interest at a weighted
average rate of 5.92%. The Equipment Notes provide for fixed payments of principal and interest (at
fixed rates) for defined periods of up to ten years from the date of issuance and are secured by
equipment which was concurrently purchased from the manufacturer. At September 30, 2006, the
remaining balance of term equipment notes totaling $2.4 million primarily consists of various
secured debt obligations assumed by us in connection with certain prior year acquisitions. We are
not subject to any significant financial covenants in connection with any of the term equipment
notes.
Our other debt obligations consist of a mortgage note of $4.7 million, a promissory note
totaling $1.8 million, industrial revenue bonds totaling $6.7 million and various other debt
obligations totaling $0.7 million. We do not have any significant financial covenants or
restrictions associated with these other debt obligations.
Subsequent to September 30, 2006, we entered into a new revolving credit agreement (the New
Credit Agreement) effectively amending and restating the Credit Agreement. The New Credit
Agreement provides for a $155.0 million revolving credit facility, with an accordion feature that
could under prescribed conditions increase the amount to $240.0 million, and has a maturity date of
October 6, 2011. Borrowings under the New Credit Agreement accrue interest, at our option, at
either (1) the London Interbank Offered Rate (LIBOR) plus a margin of .625% to 1.25%, or (2) an
alternate base rate (based upon the greater of the agent banks prime lending rate or the Federal
Funds effective rate plus .50%). We are also required to pay an annual commitment fee ranging from .15% to .25% on available but unused amounts under the New Credit Agreement. The interest rate
margin and the commitment fee are based upon certain financial performance measures as set forth in
the New Credit Agreement and are redetermined quarterly. At September 30, 2006, the applicable
LIBOR interest rate margin was .625% and the applicable commitment fee was .15%.
Contractual Obligations and Other Commitments
Operating leases We have entered into various noncancelable operating leases primarily
related to facilities and equipment used in the ordinary course of our business. Our future
contractual obligations under such operating leases total approximately $58.2 million as of
September 30, 2006.
Letters of credit In connection with our assumption of obligations under outstanding
industrial revenue bonds, which are reflected as debt in the accompanying consolidated financial
statements, and our assumption of certain contingent liabilities related to certain of our
acquisitions, we had letters of credit outstanding as of September 30, 2006 totaling $8.7 million. In addition, we had one other letter of credit totaling $0.1 million outstanding
as of September 30, 2006. All of these letters of credit were issued pursuant to the terms of our
Credit Agreement and extended under the terms of the New Credit Agreement.
Insurance programs We maintain third-party insurance coverage in amounts and against risks
we believe are reasonable under our circumstances. We are self-insured for most workers
compensation claims and for a significant component of our group health insurance programs. For
these exposures, we accrue expected loss amounts which are determined using a combination of our
historical loss experience and subjective assessment of our future loss exposure, together with
advice provided by administrators and consulting actuaries. The estimates of expected loss amounts
are subject to uncertainties arising from various sources, including changes in claims reporting
patterns, claims settlement patterns, judicial decisions, legislation and economic conditions,
which could result in an increase or decrease in accrued costs in future periods for claim matters
which occurred in a prior period. Although we believe that the accrued estimated loss amounts are
reasonable under the circumstances, significant differences related to the items noted above could
materially affect our risk exposure, insurance obligations, and future expense.
Critical Accounting Policies
We have identified our critical accounting policies based on the following factors
significance to our overall financial statement presentation, complexity of the policy and its use
of estimates and assumptions. We are required to make certain estimates and assumptions in
determining the reported amounts of assets and liabilities, disclosure of contingent liabilities
and the reported amounts of revenues and expenses. We evaluate our estimates and assumptions on an
ongoing basis and rely on historical experience and various other factors that we believe to be
reasonable under the circumstances to determine such estimates. Because uncertainties with respect
to estimates and assumptions are inherent in the preparation of financial statements, actual
results could differ from these estimates.
Receivables, net of valuation allowance Accounts receivable at September 30, 2006 were
$160.4 million, net of a $2.5 million allowance for doubtful accounts. The valuation allowance was
determined based upon our evaluation of known requirements, aging of receivables, historical
experience and the current economic environment. While we believe we have
17
appropriately considered known or expected outcomes, our customers ability to pay their
obligations could be adversely affected by contraction in the economy or other factors beyond our
control. Changes in our estimates of collectibility could have a material adverse affect on our
consolidated financial condition or results of operations.
Goodwill We evaluate the carrying value of our goodwill as of March 31st of each year, or
at any time that management becomes aware of an indication of impairment. Our evaluation is based
on certain data estimated by management to be indicators of future cash flows at each of our
facilities. Estimating future cash flows requires judgments regarding future economic conditions,
demand for services and pricing. Our evaluation also makes use of estimates of market multiples of
cash flow at which transactions could be completed in the current market. If our estimates of
future cash flows or market multiples prove to be materially inaccurate, an impairment charge could
be necessary in future periods.
Impairment of long-lived assets We evaluate long-lived assets, including property, plant
and equipment and intangible assets other than goodwill whenever events or changes in conditions
indicate that the carrying value may not be recoverable. The evaluation requires us to estimate
future undiscounted cash flows associated with an asset or group of assets. If the cost of the
asset or group of assets cannot be recovered by these undiscounted cash flows, then an impairment
may exist. Estimating future cash flows requires judgments regarding future economic conditions,
demand for services and pricing. Although we believe our estimates are reasonable, significant
differences in the actual performance of the asset or group of assets may materially affect our
asset values and require an impairment charge in future periods.
Insurance liabilities We are self-insured for the majority of our workers compensation and
group health insurance costs. Insurance claims liabilities have been accrued using a combination of
our historical loss experience and subjective assessment of our future loss exposure, together with
advice provided by administrators and consulting actuaries. The estimates of expected loss amounts
are subject to uncertainties arising from various sources, including changes in claims reporting
patterns, claims settlement patterns, judicial decisions, legislation and economic conditions,
which could result in an increase or decrease in accrued costs in future periods for claim matters
which occurred in a prior period.
Accounting for income taxes As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes. This process involves estimating our
actual current tax exposure, together with assessing temporary differences resulting from differing
treatment of items for tax and financial reporting purposes. The tax effects of these temporary
differences are recorded as deferred tax assets or deferred tax liabilities. We must then assess
the likelihood that our deferred tax assets will be recovered from future taxable income, and to
the extent we believe that recovery is not likely, we must establish a valuation allowance.
Significant judgment is required in determining our provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance recorded against our net deferred tax assets.
Additionally, we establish reserves when, despite our belief that our tax return positions are
fully supportable, we believe that certain positions are likely to be challenged and that we may
not succeed. We adjust these reserves in light of changing facts and circumstances. Our effective
tax rate includes the impact of reserve provisions and changes to reserves that we consider
appropriate.
Accounting for acquisitions The allocations of purchase price to acquired assets and
liabilities are initially based on estimates of fair value and is prospectively revised if and when
additional information we are waiting for at the time of the initial allocations concerning certain
asset and liability valuations is obtained, provided that such information is received no later
than one year after the date of acquisition. In addition, we retain an independent third-party
valuation firm to assist in the identification, valuation and determination of useful lives of
identifiable intangible assets in connection with our acquisitions.
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. FIN 48 prescribes
a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 will be effective for us beginning April 1, 2007. We have not yet
evaluated the effect FIN 48 will have on our financial statements and related disclosures.
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
Market risk generally means the risk that losses may occur in the value of certain financial
instruments as a result of movements in interest rates, foreign currency exchange rates and
commodity prices. We do not currently hold or utilize derivative financial instruments that could
expose our Company to market risk. However, we are exposed to market risk for
18
changes in interest rates related primarily to our debt obligations, which as of September 30,
2006 include borrowings under our bank credit facilities, various term equipment notes and other
debt obligations. As of September 30, 2006, there were no material changes in our market risk or
the estimated fair value of our debt obligations relative to their recorded value, as reported in
our Annual Report on Form 10-K for the fiscal year ended March 31, 2006.
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of the Companys
disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period
covered by this report. Based on such evaluation, the Companys CEO and CFO have concluded that, as
of the end of such period, the Companys disclosure controls and procedures were effective to
ensure that information required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms.
Internal Control Over Financial Reporting
There have not been any changes in the Companys internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal
quarter to which this report relates that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
19
CONSOLIDATED GRAPHICS, INC.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
From time to time, our Company is involved in litigation relating to claims arising out of its
operations in the normal course of business. We maintain insurance coverage against certain types
of potential claims in an amount which we believe to be adequate. Currently, we are not aware of
any legal proceedings or claims pending against the Company that our management believes will have
a material adverse effect on our financial condition or results of operations.
ITEM 1A. Risk Factors
There have been no material changes from risk factors previously disclosed in our Annual
Report on Form 10-K for the fiscal year ended March 31, 2006 in response to Item 1A to Part I of
Form 10-K.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
In May 2006, the Board of Directors approved a new common stock share repurchase program that
will expire in May 2007 providing for repurchases of our common stock not to exceed $68.3 million
in the aggregate in open-market or block purchase transactions. The following are details of
repurchases under this program for the period covered by this report:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
of Shares |
|
|
Dollar Value of |
|
|
|
|
|
|
|
|
|
|
|
Repurchased |
|
|
Shares that May |
|
|
|
|
|
|
|
|
|
|
|
as Part of |
|
|
Yet Be |
|
|
|
Total Number of |
|
|
Average |
|
|
Publicly |
|
|
Repurchased |
|
|
|
Shares |
|
|
Price Paid |
|
|
Announced |
|
|
Under the |
|
Period |
|
Repurchased (a) |
|
|
per Share |
|
|
Plans |
|
|
Announced Plans |
|
Repurchases from
July 1, 2006
through July 31,
2006 |
|
|
227,800 |
|
|
$ |
51.44 |
|
|
|
227,800 |
|
|
$ |
49,205,212 |
|
Repurchases from
August 1, 2006
through August
31, 2006 |
|
|
14,300 |
|
|
|
63.56 |
|
|
|
14,300 |
|
|
$ |
48,296,348 |
|
Repurchases from
September 1,
2006 through
September 30,
2006 |
|
|
34,700 |
|
|
$ |
60.39 |
|
|
|
34,700 |
|
|
$ |
46,200,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
276,800 |
|
|
$ |
53.19 |
|
|
|
276,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
All shares were purchased in open-market transactions. |
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
On August 3, 2006, the Company held its Annual Meeting of Shareholders. The following item was
submitted to a vote of shareholders through the solicitation of proxies:
Election of Class I Directors
The following persons were elected to serve as Class I directors on the Companys Board of
Directors until the 2009 Annual Meeting of Shareholders or until their successors have been duly
elected and qualified or until the earlier of their resignation or removal. Voting results were as
follows:
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Against |
|
|
|
|
|
|
|
|
|
|
|
|
|
or |
|
|
|
|
|
|
|
|
|
For |
|
|
Withheld |
|
|
Abstentions |
|
|
Broker Non-Votes |
|
Larry J. Alexander |
|
|
8,395,583 |
|
|
|
4,500,205 |
|
|
|
|
|
|
|
n/a |
|
Brady F. Carruth |
|
|
8,066,248 |
|
|
|
4,829,540 |
|
|
|
|
|
|
|
n/a |
|
Directors continuing in office as Class II directors are Gary L. Forbes and James H. Limmer
and as Class III directors are Joe R. Davis and Hugh N. West, M.D.
ITEM 5. Other Information
None.
21
ITEM 6. Exhibits
|
|
|
*3.1
|
|
Restated Articles of Incorporation of the Company filed with the Secretary of State of the State of
Texas on July 27, 1994 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1994), Exhibit 4(a)). |
*3.2
|
|
Articles of Amendment to the Restated Articles of Incorporation of the Company dated as of July 29,
1998 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1998), Exhibit 3.1). |
*3.3
|
|
Second Amended and Restated By-Laws of the Company adopted as of June 30, 2004 (Consolidated Graphics,
Inc. Form 10-Q (June 30, 2004), Exhibit 3.3). |
*4.1
|
|
Specimen Common Stock Certificate (Consolidated Graphics, Inc. Form 10-K (March 31, 1998), Exhibit 4.1). |
*4.2
|
|
Rights Agreement dated as of December 15, 1999 between Consolidated Graphics, Inc. and American Stock
Transfer and Trust Company, as Rights Agent, which includes as Exhibit A the Certificate of
Designations of Series A Preferred Stock, as Exhibit B the form of Rights Certificate and as Exhibit C
the form of summary of Rights to Purchase Shares (Consolidated Graphics, Inc. Form 8-K (December 15,
1999), Exhibit 4.1). |
*4.3
|
|
Amendment to Rights Agreement dated as of July 10, 2006 between Consolidated Graphics, Inc. and
American Stock Transfer and Trust Company and the related Summary of Rights to Purchase Stock, as
amended (Consolidated Graphics, Inc. Form 8-A/A (July 13, 2006), Exhibits 2 and 3). |
31.1
|
|
Certification of Joe R. Davis, principal executive officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
31.2
|
|
Certification of G. Christopher Colville, principal financial officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
32.1
|
|
Certification of Joe R. Davis, principal executive officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
32.2
|
|
Certification of G. Christopher Colville, principal financial officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Incorporated by reference |
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant,
Consolidated Graphics, Inc., has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
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CONSOLIDATED GRAPHICS, INC.
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Dated: November 1, 2006 |
By: |
/s/ G. Christopher Colville
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G. Christopher Colville |
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Executive Vice President,
Chief Financial and Accounting
Officer and Secretary |
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Exhibit Index
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*3.1
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Restated Articles of Incorporation of the Company filed with the Secretary of State of the State of
Texas on July 27, 1994 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1994), Exhibit 4(a)). |
*3.2
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Articles of Amendment to the Restated Articles of Incorporation of the Company dated as of July 29,
1998 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1998), Exhibit 3.1). |
*3.3
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Second Amended and Restated By-Laws of the Company adopted as of June 30, 2004 (Consolidated Graphics,
Inc. Form 10-Q (June 30, 2004), Exhibit 3.3). |
*4.1
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Specimen Common Stock Certificate (Consolidated Graphics, Inc. Form 10-K (March 31, 1998), Exhibit 4.1). |
*4.2
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Rights Agreement dated as of December 15, 1999 between Consolidated Graphics, Inc. and American Stock
Transfer and Trust Company, as Rights Agent, which includes as Exhibit A the Certificate of
Designations of Series A Preferred Stock, as Exhibit B the form of Rights Certificate and as Exhibit C
the form of summary of Rights to Purchase Shares (Consolidated Graphics, Inc. Form 8-K (December 15,
1999), Exhibit 4.1). |
*4.3
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Amendment to Rights Agreement dated as of July 10, 2006 between Consolidated Graphics, Inc. and
American Stock Transfer and Trust Company and the related Summary of Rights to Purchase Stock, as
amended (Consolidated Graphics, Inc. Form 8-A/A (July 13, 2006), Exhibits 2 and 3). |
31.1
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Certification of Joe R. Davis, principal executive officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
31.2
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Certification of G. Christopher Colville, principal financial officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
32.1
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Certification of Joe R. Davis, principal executive officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
32.2
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Certification of G. Christopher Colville, principal financial officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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* |
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Incorporated by reference |
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