Filed by Bowne Pure Compliance
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 June 30, 2007
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
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76-0190827 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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5858 Westheimer Road, Suite 200 |
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Houston, Texas
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77057 |
(Address of principal executive offices)
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(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 þ
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Accelerated filer o
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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 $.01 per share, of the Registrant outstanding
at July 15, 2007 was 13,737,321.
CONSOLIDATED GRAPHICS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007
INDEX
2
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
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June 30, |
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March 31, |
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2007 |
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2007 |
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(Unaudited) |
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(Audited) |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
13,167 |
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$ |
12,043 |
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Accounts receivable, net |
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174,966 |
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185,722 |
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Inventories |
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45,227 |
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46,951 |
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Prepaid expenses |
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7,839 |
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7,532 |
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Deferred income taxes |
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10,085 |
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8,479 |
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Total current assets |
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251,284 |
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260,727 |
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PROPERTY AND EQUIPMENT, net |
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357,361 |
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354,156 |
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GOODWILL AND OTHER INTANGIBLE ASSETS, net |
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98,571 |
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101,768 |
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OTHER ASSETS |
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7,329 |
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7,318 |
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$ |
714,545 |
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$ |
723,969 |
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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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$ |
12,381 |
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$ |
12,421 |
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Accounts payable |
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53,534 |
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58,519 |
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Accrued liabilities |
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69,537 |
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89,496 |
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Income taxes payable |
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7,279 |
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138 |
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Total current liabilities |
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142,731 |
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160,574 |
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LONG-TERM DEBT, net of current portion |
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122,270 |
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142,144 |
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OTHER LIABILITIES |
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20,603 |
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DEFERRED INCOME TAXES |
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46,274 |
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55,715 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS EQUITY |
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Common stock, $.01 par value;
100,000,000 shares authorized;
13,737,321 and 13,693,698 issued and
outstanding |
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137 |
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137 |
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Additional paid-in capital |
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188,331 |
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185,098 |
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Retained earnings |
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194,859 |
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180,113 |
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Accumulated other comprehensive income |
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(660 |
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188 |
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Total shareholders equity |
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382,667 |
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365,536 |
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$ |
714,545 |
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$ |
723,969 |
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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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June 30 |
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2007 |
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2006 |
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SALES |
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$ |
258,646 |
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$ |
238,425 |
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COST OF SALES |
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190,469 |
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174,420 |
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Gross profit |
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68,177 |
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64,005 |
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SELLING EXPENSES |
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26,434 |
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24,357 |
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GENERAL AND ADMINISTRATIVE EXPENSES |
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19,312 |
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17,215 |
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OTHER
(INCOME) EXPENSE, net |
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(2,350 |
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Operating income |
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24,781 |
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22,433 |
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INTEREST EXPENSE, net |
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1,894 |
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1,385 |
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Income before taxes |
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22,887 |
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21,048 |
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INCOME TAXES |
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9,330 |
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7,318 |
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Net income |
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$ |
13,557 |
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$ |
13,730 |
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BASIC EARNINGS PER SHARE |
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$ |
.99 |
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$ |
1.00 |
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DILUTED EARNINGS PER SHARE |
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$ |
.96 |
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$ |
.97 |
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SHARES USED TO COMPUTE EARNINGS PER SHARE |
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Basic |
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13,716 |
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13,705 |
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Diluted |
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14,162 |
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14,188 |
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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, 2007 balances)
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Accumulated |
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Additional |
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Other |
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Common Stock |
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Paid-In |
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Retained |
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Comprehensive |
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Shares |
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Amount |
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Capital |
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Earnings |
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Income |
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Total |
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BALANCE, March 31, 2007 |
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13,694 |
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137 |
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185,098 |
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180,113 |
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188 |
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365,536 |
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Exercise of stock options,
including tax benefit |
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43 |
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2,000 |
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2,000 |
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Compensation expense |
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1,233 |
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1,233 |
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Currency translation adjustment |
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(848 |
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(848 |
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Adoption of FIN 48 cumulative
effect adjustment |
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1,189 |
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1,189 |
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Net income |
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13,557 |
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13,557 |
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BALANCE, June 30, 2007 |
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13,737 |
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$ |
137 |
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$ |
188,331 |
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$ |
194,859 |
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$ |
(660 |
) |
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$ |
382,667 |
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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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Three Months Ended |
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June 30 |
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2007 |
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2006 |
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OPERATING ACTIVITIES |
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Net income |
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$ |
13,557 |
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$ |
13,730 |
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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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12,715 |
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10,843 |
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Deferred income tax provision |
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(1,216 |
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(1,674 |
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Share-based compensation expense |
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1,233 |
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1,226 |
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Non-cash currency gain |
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(2,781 |
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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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11,344 |
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(6,719 |
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Inventories |
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1,722 |
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(1,097 |
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Prepaid expenses |
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(298 |
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(97 |
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Other assets |
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9 |
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(32 |
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Accounts
payable, accrued liabilities and other |
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(10,192 |
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1,452 |
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Income taxes payable |
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7,141 |
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4,786 |
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Net cash provided by operating activities |
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33,234 |
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22,418 |
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INVESTING ACTIVITIES |
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Acquisitions of businesses, net of cash acquired |
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(5,638 |
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Purchases of property and equipment |
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(9,339 |
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(10,379 |
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Proceeds from asset dispositions |
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633 |
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1,163 |
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Net cash used in investing activities |
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(14,344 |
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(9,216 |
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FINANCING ACTIVITIES |
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Proceeds from bank credit facilities |
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12,398 |
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13,696 |
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Payments on bank credit facilities |
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(29,707 |
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(13,097 |
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Payments on term equipment notes and other debt |
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(2,638 |
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(2,060 |
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Payments to repurchase and retire common stock |
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(7,375 |
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Proceeds from exercise of stock options |
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2,000 |
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|
692 |
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Net cash used in financing activities |
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(17,947 |
) |
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(8,144 |
) |
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Effect of exchange rate changes on cash |
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181 |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
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1,124 |
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5,058 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
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12,043 |
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4,993 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
13,167 |
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$ |
10,051 |
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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 three
months ended June 30, 2007 are not necessarily indicative of future operating results. Balance
sheet information as of March 31, 2007 has been derived from the 2007 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, 2007, filed with the SEC in May 2007 (2007 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.
Revenue RecognitionThe 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.
Earnings Per ShareBasic 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.
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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June 30, |
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March 31, |
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2007 |
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2007 |
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Raw materials |
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$ |
15,512 |
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$ |
15,608 |
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Work in progress |
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24,137 |
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|
26,659 |
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Finished goods |
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5,578 |
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|
4,684 |
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$ |
45,227 |
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$ |
46,951 |
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Goodwill and Other Intangible Assets, netGoodwill totaled $80,804 at June 30, 2007 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. For the three
months ended June 30, 2007, the Company recorded a goodwill adjustment totaling $2,743 related to
the tax effect of prior year adjustments previously recorded as deferred income tax liabilities.
The net book value of other intangible assets at June 30, 2007 was $17,767. Other intangible assets
consist primarily of the value assigned to such items as customer lists and trade names in
connection with the allocation of purchase price for acquisitions under Statement of Financial
Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, and are generally amortized on a straight-line basis over
periods of up to ten years. Amortization expense totaled $574 and $401 for the three months ended
June 30, 2007 and 2006.
7
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and percentages)
(Unaudited)
Supplemental Cash Flow InformationThe 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 three months ended June 30, 2007, the Company paid cash for interest and
income taxes, net of refunds, totaling $2,128 and $390. For the three months ended June 30, 2006,
the Company paid cash for interest and income taxes, net of refunds, totaling $1,531 and $3,801.
Foreign CurrencyAssets and liabilities of subsidiaries operating outside the United States
with a functional currency other than the U.S. dollar are translated at the quarter-end exchange
rates. Income and expense items are translated at the average monthly
exchange rate. The effects of translation are included as a component of accumulated other comprehensive
income in shareholders equity. For the three months ended June 30, 2007, the Company recorded a net foreign
currency transaction gain of $2,350 related to the revaluation of certain transactions denominated
in currencies outside of the reporting units functional currency. The net foreign currency
transaction gain is recorded in Other Income on the Consolidated Income Statement.
Accumulated Other Comprehensive IncomeOther comprehensive income is comprised exclusively of
foreign currency translation adjustments, net of tax effect.
2. ACQUISITIONS
During the three months ended June 30, 2007, the Company paid cash totaling $5,638 to satisfy
certain liabilities incurred in connection with certain prior periods acquisitions. Based on
certain additional information received by the Company regarding its fiscal 2007 acquisitions,
$2,600 of purchase price previously attributed to goodwill was allocated to other intangible assets
in the three month period ended June 30, 2007. 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 2007 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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|
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|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2007 |
|
|
2007 |
|
Bank credit facilities |
|
$ |
76,865 |
|
|
$ |
94,143 |
|
Term equipment notes |
|
|
45,613 |
|
|
|
48,144 |
|
Other |
|
|
12,173 |
|
|
|
12,278 |
|
|
|
|
|
|
|
|
|
|
|
134,651 |
|
|
|
154, 565 |
|
Less: current portion |
|
|
(12,381 |
) |
|
|
(12,421 |
) |
|
|
|
|
|
|
|
|
|
$ |
122,270 |
|
|
$ |
142,144 |
|
|
|
|
|
|
|
|
The Companys primary bank credit facility (as amended, the Credit Agreement) provides for a
$155,000 revolving credit facility, with an accordion feature that could under prescribed
conditions increase the facility to $240,000, and has a maturity date of October 6, 2011. At June
30, 2007, outstanding borrowings under the Credit Agreement were $39,000 and accrued interest at a
weighted average rate of 7.09%.
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 .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 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 June 30, 2007, the applicable
LIBOR interest rate margin was .625% and the applicable commitment fee was .15%.
8
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and percentages)
(Unaudited)
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
June 30, 2007.
The Company also maintains an unsecured credit facility with a commercial bank (the A&B
Credit Facility) consisting of a U.S. $35,000 maximum borrowing limit component and a separate
Canadian $5,000 maximum borrowing limit component. At June 30, 2007, outstanding borrowings were
U.S. $27,000, which accrued interest at a weighted average rate of 5.98%, and Canadian $4,000
($3,776 U.S. equivalent), which accrued interest at a weighted average rate of 5.20%.
Under the terms of the A&B Credit Facility, U.S. dollar denominated borrowings accrue interest
and bear an annual commitment fee at rates equal to those under the Credit Agreement. Canadian
dollar denominated borrowings accrue interest at the Companys option, at either (1) the Canadian
Dollar Offer Rate (CDOR) plus a margin of .625% to 1.25%, or (2) an alternate base rate based
upon the Canadian Prime Rate. The Company is also required to pay an annual commitment fee ranging
from .15% to .25% on available but unused Canadian dollar amounts. For both the U.S. and Canadian
components, the interest rate margin and the commitment fee are based upon the financial
performance measures set forth in the Credit Agreement and are redetermined quarterly. An annual
reduction of U.S. $4,000 on the U.S. dollar denominated commitment occurs on each anniversary date
of the A&B Credit Facility until the final maturity date of January 2, 2011. There are no
significant covenants or restrictions set forth in the A&B Credit Facility; however, a default by
the Company under the Credit Agreement will constitute a default under the A&B Credit Facility. At
June 30, 2007, the applicable CDOR interest rate margin was .625% and the applicable commitment fee
was .15%. Proceeds from borrowings under the A&B Credit Facility may be used for general corporate
purposes.
In addition 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. One
facility expires in December 2007 while the other facility expires in October 2008. At June 30,
2007, outstanding borrowings under the Auxiliary Bank Facilities totaled $7,089 and accrued
interest at a weighted average rate of 6.15%. Because the Company currently has the ability and
intent to refinance borrowings outstanding under the Auxiliary Bank Facility expiring in December
2007, such borrowings are classified as long-term debt in the accompanying consolidated balance
sheet at June 30, 2007. The Auxiliary Bank Facilities cross-default to the covenants and
restrictions set forth in the Credit Agreement.
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 June 30,
2007, outstanding borrowings under the Lender Notes totaled $34,730 and accrued interest at a
weighted average rate of 5.87%. 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 June 30, 2007, outstanding borrowings under the Equipment
Notes totaled $9,554 and accrued interest at a weighted average rate of 5.91%. 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 June 30, 2007, the remaining balance of term equipment notes
totaling $1,329 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; however, the Credit
Agreement places certain limitations on the amount of additional term note obligations the Company
may incur in the future.
The Companys remaining debt obligations consist of a mortgage note totaling $4,559, a
promissory note totaling $902, industrial revenue bonds totaling $6,185 and various other debt
obligations totaling $527. The Company does not have any significant financial covenants or
restrictions associated with these other debt obligations.
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. Share-Based Compensation of the Notes to the Consolidated Financial Statements
contained in the 2007 Form 10-K.
9
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and percentages)
(Unaudited)
The
Company accounts for share-based compensation in accordance with SFAS
No. 123(R), Share-Based Payment, and
measures the cost of employee services received in exchange for an award of equity instruments,
including grants of stock options and restricted stock unit awards, based on the fair value of the
award at the date of grant. The fair value of stock options is determined using the Black-Scholes
model. Restricted stock unit awards are valued at the closing stock price on date of grant.
For the three months ended June 30, 2007, the Company recorded $1,233 of share-based
compensation expense with an after-tax impact to net income of $730, and the impact to both basic
and diluted earnings per share was $.05. For the three months ended June 30, 2006, the Company
recorded $1,226 of share-based compensation expense with an after-tax impact to net income of
$799, and the impact to both basic and diluted earnings per share was $.06.
As of June 30, 2007, $1,353 of total unrecognized compensation cost related to stock options
is expected to be recognized over a weighted average period of 1.3 years.
The Company did not grant any stock options during the three months ended June 30, 2007. The
total intrinsic value of stock options exercised during the three months ended June 30, 2007 was
$1,757. The following table summarizes stock option activity for the three months ended June 30,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average Exercise |
|
Stock Options |
|
Shares |
|
|
Price |
|
Outstanding at March 31, 2007 |
|
|
1,534,234 |
|
|
$ |
36.66 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(43,623 |
) |
|
|
30.46 |
|
Forfeited or expired |
|
|
(58,249 |
) |
|
|
44.17 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007 (a) |
|
|
1,432,362 |
|
|
|
36.55 |
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2007 (a) |
|
|
1,141,988 |
|
|
|
35.43 |
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Stock options outstanding as of June 30, 2007 have a weighted average remaining contractual
term of 4.8 years. Based on the market value of the Companys common stock on June 30, 2007,
outstanding stock options have an aggregate intrinsic value of $46,881 and exercisable stock
options have an aggregate intrinsic value of $37,377. |
The Company granted an award of 12,500 restricted stock unit awards during the three months
ended June 30, 2007 having a fair value of $920. The following table summarizes restricted stock
unit award activity for the three months ended June 30, 2007:
|
|
|
|
|
Restricted Stock Unit Awards |
|
Shares |
|
Outstanding at March 31, 2007 |
|
|
12,500 |
|
Granted |
|
|
12,500 |
|
Exercised |
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007 (a) |
|
|
25,000 |
|
|
|
|
|
Exercisable at June 30, 2007 (a) |
|
|
2,500 |
|
|
|
|
|
|
|
|
(a) |
|
Restricted stock units outstanding as of June 30, 2007 have a weighted average remaining
contractual term of 2.9 years and a total intrinsic value of $1,732. |
5. INCOME TAXES
On April 1, 2007, the Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes an Interpretation
of FASB Statement No. 109. The cumulative effect of adopting FIN 48 has been recorded as a net
increase to retained earnings of $1,190.
10
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and percentages)
(Unaudited)
On April 1, 2007, the date of adoption of FIN 48, and June 30, 2007, the Company had
$19,334 and $20,603 of unrecognized tax benefits. Of the unrecognized tax benefits at June 30,
2007, $11,209 if recognized, would decrease the Companys effective income tax rate and increase
net income. The impact on net income reflects the reduction of unrecognized tax benefits net of
certain deferred tax assets and federal tax benefit of state income tax items.
As of
April 1, 2007, the Company believes it is reasonably possible that the total
amounts of unrecognized tax benefits may decrease within 12 months by as much as $3,513,
due primarily to statute expirations related to federal and state tax positions. The
unrecognized tax benefits relate to certain tax deductions claimed on federal and state tax returns
that are uncertain as to the ultimate outcome.
The Companys federal income tax
returns for the tax years after 2002 remain subject to examination. The various states in which
the Company is subject to income tax are generally open for the tax years after 2001.
The Company classifies interest expense and any related penalties related to income
tax uncertainties as a component of income tax expense. The total interest expense related to tax
uncertainties recognized for the three months ended June 30,
2007 was $291. Accrued interest and penalties of $2,633 and $2,933 related to income tax uncertainties was recognized as a component of other noncurrent
liabilities at April 1, 2007 and June 30, 2007.
11
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, 2007. 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, 2007 and other
reports filed by us with the Securities and Exchange Commission. Operating results for the three
months ended June 30, 2007 are not necessarily indicative of the results to be expected for the
entire fiscal year ending March 31, 2008 or any periods thereafter.
Overview
Our Organization
Consolidated Graphics is a leading North American provider of commercial printing services
with 68 printing businesses spanning 27 states plus one Canadian province. 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 in the Baltimore/Washington D.C. area.
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.
12
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, including stock-based compensation, 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 large,
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 continually seek to hire additional experienced sales professionals,
invest in new equipment and technology, expand our national accounts program, develop
new and expanded digital technology-based print-related services and provide sales
training and education about our breadth of capabilities and services to our sales
professionals. |
|
|
|
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 extensive geographic footprint, we
leverage our economies of scale to purchase 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 talent for future sales and management positions at our printing businesses. |
13
Results of Operations
The following table sets forth our Companys unaudited condensed consolidated income
statements and certain percentage relationships for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a Percentage |
|
|
|
|
|
|
|
|
|
|
|
of Sales |
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended June 30 |
|
|
Ended June 30 |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
258.6 |
|
|
$ |
238.4 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
190.4 |
|
|
|
174.4 |
|
|
|
73.6 |
|
|
|
73.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
68.2 |
|
|
|
64.0 |
|
|
|
26.4 |
|
|
|
26.8 |
|
Selling expenses |
|
|
26.4 |
|
|
|
24.4 |
|
|
|
10.2 |
|
|
|
10.2 |
|
General and administrative expenses |
|
|
19.3 |
|
|
|
17.2 |
|
|
|
7.5 |
|
|
|
7.2 |
|
Other
(income) expense, net |
|
|
(2.3 |
) |
|
|
|
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
24.8 |
|
|
|
22.4 |
|
|
|
9.6 |
|
|
|
9.4 |
|
Interest expense, net |
|
|
1.9 |
|
|
|
1.4 |
|
|
|
0.7 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
22.9 |
|
|
|
21.0 |
|
|
|
8.9 |
|
|
|
8.8 |
|
Income taxes |
|
|
9.3 |
|
|
|
7.3 |
|
|
|
3.7 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
13.6 |
|
|
$ |
13.7 |
|
|
|
5.2 |
% |
|
|
5.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our sales and expenses during the periods shown were impacted by the acquisition of two
printing businesses in fiscal 2007. 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 June 30, 2007 and
2006
Sales in the three month period ended June 30, 2007 increased $20.2 million, or 8%, to $258.6
million from $238.4 million for the same period in the prior year. The $20.2 million revenue
increase is attributable to $27.0 million from the incremental impact of acquisitions, which was
partially offset by a decrease in internal sales growth primarily related to a $4.9 million
decrease in election-related printing compared to the same period in
the prior year. Excluding the decrease in election-related printing,
internal sales were down .8% from the same period in the prior year. Compared to
the prior year, national sales were up 17% in the 2007 June quarter and accounted for 10% of total
sales, and sales attributable to our CGXSolutions sales channel were up 12% in the 2007 June
quarter and accounted for 6% of total sales.
Gross profit in the three months ended June 30, 2007 increased $4.2 million, or 7%, to $68.2
million from $64.0 million for the same period in the prior year. This increase is primarily
attributable to the increased sales levels discussed above, which were significantly impacted by
the incremental impact of acquisitions.
Selling expense in the three months ended June 30, 2007 increased $2.0 million, or 9%, to
$26.4 million from $24.4 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
remained constant at 10.2% in the current quarter as compared to the same period last year.
General and administrative expenses in the three months ended June 30, 2007 increased $2.1
million, or 12%, to $19.3 million from $17.2 million for the same period in the prior year. This
increase is primarily attributable to the incremental impact of acquisitions (including direct
expenses and $.1 million of incremental intangible asset amortization) and $.2 million related to
terminated letters of intent. As a percentage of sales, general and administrative expenses
increased to 7.5% in the 2007 June quarter as compared to 7.2% for the same period last year.
Other
income of $2.3 million in the three months ended June 30, 2007 relates to a foreign
currency transaction net gain which is primarily the result of certain transactions at our Canadian
subsidiary which are denominated in U.S. dollars.
Interest expense in the three months ended June 30, 2007 increased $.5 million, or 4%, to $1.9
million from $1.4 million in the same period in the prior year, due principally to a higher level
of average debt outstanding.
We provided for income taxes in the three months ended June 30, 2007 of $9.3 million,
reflecting an effective tax rate of 40.8% as compared to an effective tax rate of 34.8% for the
same period in the prior year. The three months ended June 30, 2006 included a 3.3% decrease in
our effective tax rate due to the impact of a net reduction in legislated state income taxes on previously
provided for deferred income taxes. The three months ended June 30, 2007 includes a 2.8% increase in
our effective tax rate due to the effect of our adoption of the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes an Interpretation
of FASB Statement No. 109. For additional information regarding FIN 48, refer to Note 5. Income
Taxes in the footnotes to our consolidated financial statements.
14
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:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30 |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
Net cash provided by operating activities |
|
$ |
33.2 |
|
|
$ |
22.4 |
|
Acquisitions of businesses |
|
|
(5.6 |
) |
|
|
|
|
Capital expenditures, net of proceeds from asset dispositions |
|
|
(8.7 |
) |
|
|
(9.2 |
) |
Net proceeds (payments) under bank credit facilities |
|
|
(17.3 |
) |
|
|
0.6 |
|
Net payments on term equipment notes and other debt |
|
|
(2.6 |
) |
|
|
(2.1 |
) |
Payments to repurchase and retire common stock |
|
|
|
|
|
|
(7.4 |
) |
Proceeds from exercise of stock options |
|
|
2.0 |
|
|
|
0.7 |
|
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:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2007 |
|
|
2007 |
|
|
|
(In millions) |
|
Cash and cash equivalents |
|
$ |
13.2 |
|
|
$ |
12.0 |
|
Working capital, inclusive of cash and cash equivalents |
|
|
108.6 |
|
|
|
100.2 |
|
Total debt obligations |
|
|
134.7 |
|
|
|
154.6 |
|
During the three months ended June 30, 2007, net cash provided by operating activities
increased by $10.8 million as compared to the same period last year. This increase was principally
the result of our year-over-year net decrease in working capital, excluding cash and cash
equivalents.
We believe that our cash flow provided by operations will be adequate to cover our remaining
fiscal 2008 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 three months ended June 30, 2007, the Company announced that it had signed a memorandum of
understanding for the potential acquisition of The Cyril Scott Company of Lancaster, Ohio.
Subsequent to June 30, 2007, we completed the acquisition of Pikes Peak Lithographing Co. of
Colorado Springs, Colorado.
15
We expect to fund future acquisitions 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. 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 2007, our Board of Directors approved a common stock share repurchase program that will
expire in May 2008 providing for repurchases of our common stock not to exceed an aggregate of
$100.0 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. There can be no assurance that we
will decide to make additional repurchases of our common stock, and if so, whether we will be able
to do so on terms acceptable to us. No shares of our common stock were repurchased during the three
month period ended June 30, 2007.
Debt Obligations
Our primary bank credit facility (as amended, the Credit Agreement) provides for a $155.0
million revolving credit facility, with an accordion feature that could under prescribed conditions
increase the facility to $240.0 million, and has a maturity date of October 6, 2011. At June 30,
2007, outstanding borrowings under the Credit Agreement were $39.0 million and accrued interest at
a weighted average rate of 7.09%.
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 .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 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 June 30, 2007, the applicable LIBOR interest rate margin was .625% and
the applicable commitment fee was .15%.
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 June 30, 2007. 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.
We also maintain an unsecured credit facility with a commercial bank (the A&B Credit
Facility) consisting of a U.S. $35.0 million maximum borrowing limit component and a separate
Canadian $5.0 million maximum borrowing limit component. At June 30, 2007, outstanding borrowings
under the A&B Credit Facility were U.S. $27.0 million, which accrued interest at a weighted average
rate of 5.98%, and Canadian $4.0 million ($3.8 million U.S. equivalent), which accrued interest at
a weighted average rate of 5.20%.
Under the terms of the A&B Credit Facility, U.S. dollar denominated borrowings accrue interest
and bear an annual commitment fee at rates equal to those under the Credit Agreement. Canadian
dollar denominated borrowings accrue interest at our option, at either (1) the Canadian Dollar
Offer Rate (CDOR) plus a margin of .625% to 1.25%, or (2) an alternate base rate based upon the
Canadian Prime Rate. We are also required to pay an annual commitment fee ranging from .15% to .25%
on available but unused Canadian dollar amounts. For both the U.S. and Canadian components, the
interest rate margin and the commitment fee are based upon the financial performance measures set
forth in the Credit Agreement and are redetermined quarterly. An annual reduction of U.S. $4.0
million on the U.S. dollar denominated commitment occurs on each anniversary date of the A&B Credit
Facility until the final maturity date of January 2, 2011. There are no significant covenants or
restrictions set forth in the A&B Credit Facility; however, a default by us under the Credit
Agreement constitutes a default under the A&B Credit Facility. At June 30, 2007, the applicable CDOR
interest rate margin was .625% and the applicable commitment fee was .15%.
16
In addition, 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. One facility
expires in October 2008 while the other facility expires in December 2007. At June 30, 2007,
outstanding borrowings under the Auxiliary Bank Facilities totaled $7.1 million and accrued
interest at a weighted average rate of 6.15%. Because we currently have the ability and intent to
refinance the borrowings outstanding under the Auxiliary Bank Facility expiring in December 2007,
such borrowings are classified as long-term debt in our consolidated balance sheet at June 30,
2007. 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 June 30, 2007, outstanding borrowings
under the Lender Notes totaled $34.7 million and accrued interest at a weighted average rate of
5.87%. 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
June 30, 2007, outstanding borrowings under the Equipment Notes totaled $9.6 million and accrued
interest at a weighted average rate of 5.91%. 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
June 30, 2007, the remaining balance of term equipment notes totaling $1.3 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. The Credit Agreement places certain limitations on the amount of
additional term note obligations we may incur in the future; however, we do not anticipate that
these limitations will restrict our ability to make any of our planned 2008 capital expenditures.
Our other debt obligations consist of a mortgage note of $4.6 million, a promissory note
totaling $.9 million, industrial revenue bonds totaling $6.2 million and various other debt
obligations totaling $.5 million. We do not have any significant financial covenants or
restrictions associated with these other debt obligations.
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 $56.7 million as of June
30, 2007.
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 June 30, 2007 totaling $8.1 million. In addition, we had one other letter of credit totaling $.1 million outstanding as of
June 30, 2007. All of these letters of credit were issued pursuant to the terms of our Credit
Agreement, which expires in October 2011, and we will be required to obtain replacement letters of
credit at that time, as needed.
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.
17
Receivables, net of valuation allowance Accounts receivable at June 30, 2007 were $175.0
million, net of a $3.1 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 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 effect 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 the need for 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 claims 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 account for uncertain tax positions in accordance with FIN 48. For additional
information regarding FIN 48, refer to Note 5. Income Taxes in the footnotes to our consolidated
financial statements.
Accounting for acquisitions The allocations of purchase price to acquired assets and
liabilities are initially based on estimates of fair value and are prospectively revised if and
when additional information concerning certain asset and liability valuations we are waiting for at
the time of the initial allocations 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.
18
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 to manage
market risk or that could expose us to other market risk. However, we are exposed to market risk
for changes in interest rates related primarily to our debt obligations, which as of June 30, 2007
include borrowings under our bank credit facilities, various term equipment notes and other debt
obligations. As of June 30, 2007, 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, 2007.
We have operations in Canada, and thus are also exposed to market risk for changes in foreign
currency exchange rates relative to the Canadian dollar. The effects of foreign currency exchange
rates on our future results could also be impacted by changes in sales levels or local currency
prices.
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive Officer
(CEO), in his capacity as principal executive officer and principal financial officer, 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, in his capacity as principal executive officer and principal financial officer, has
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, 2007 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 2007, the Board of Directors approved a new common stock share repurchase program that
will expire in May 2008 providing for repurchases of our common stock not to exceed $100.0 million
in the aggregate in open-market or block purchase transactions. No repurchases of common stock
were made in the period covered by this report.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
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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). |
*10.1
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Form of Restricted Stock Unit
Agreement (Consolidated Graphics, Inc. Form 8-K (June 14, 2007), Exhibit
10.1) + |
31.1
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Certification of Joe R. Davis, principal executive officer and 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 and 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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+ |
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Compensatory plan or arrangement under which executive officers or directors of the Company
may participate |
20
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: August 1, 2007 |
By: |
/s/ Joe R. Davis
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Joe R. Davis |
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Chief Executive Officer and
Principal Financial Officer |
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21
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
|
|
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
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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). |
*10.1
|
|
Form of Restricted Stock Unit
Agreement (Consolidated Graphics, Inc. Form 8-K (June 14, 2007), Exhibit
10.1) + |
31.1
|
|
Certification of Joe R. Davis, principal executive officer and 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 and 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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+ |
|
Compensatory plan or arrangement under which executive officers or directors of the Company
may participate. |
22