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, 2008
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
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76-0190827
(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, a non-accelerated filer or a smaller reporting company. See definition of large accelerated
filer, accelerated filer and smaller reporting company 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
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Smaller reporting company 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 $.01 per share, of the Registrant outstanding
at July 15, 2008 was 11,145,053.
CONSOLIDATED GRAPHICS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008
INDEX
2
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONSOLIDATED GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
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June 30, |
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March 31, |
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2008 |
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2008 |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
19,190 |
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$ |
15,131 |
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Accounts receivable, net |
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198,360 |
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209,000 |
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Inventories |
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62,421 |
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61,511 |
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Prepaid expenses |
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8,769 |
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7,127 |
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Deferred income taxes |
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10,874 |
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9,353 |
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Total current assets |
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299,614 |
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302,122 |
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PROPERTY AND EQUIPMENT, net |
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421,680 |
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421,347 |
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GOODWILL AND OTHER INTANGIBLE ASSETS, net |
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140,396 |
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141,381 |
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OTHER ASSETS |
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7,746 |
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7,813 |
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$ |
869,436 |
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$ |
872,663 |
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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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$ |
23,047 |
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$ |
23,252 |
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Accounts payable |
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60,474 |
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56,948 |
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Accrued liabilities |
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79,187 |
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83,488 |
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Income taxes payable |
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3,890 |
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184 |
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Total current liabilities |
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166,598 |
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163,872 |
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LONG-TERM DEBT, net of current portion |
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341,142 |
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362,448 |
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OTHER LIABILITIES |
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14,557 |
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13,655 |
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DEFERRED INCOME TAXES |
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53,148 |
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52,895 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS EQUITY |
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Common stock, $.01 par value;
100,000,000 shares authorized;
11,145,053 and 11,079,011 issued and
outstanding |
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111 |
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111 |
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Additional paid-in capital |
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157,795 |
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153,204 |
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Retained earnings |
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136,992 |
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127,376 |
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Accumulated other comprehensive loss |
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(907 |
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(898 |
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Total shareholders equity |
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293,991 |
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279,793 |
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$ |
869,436 |
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$ |
872,663 |
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See accompanying notes to condensed consolidated financial statements.
3
CONSOLIDATED GRAPHICS, INC.
CONDENSED 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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2008 |
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2007 |
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SALES |
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$ |
285,194 |
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$ |
258,646 |
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COST OF SALES |
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214,554 |
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190,469 |
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Gross profit |
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70,640 |
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68,177 |
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SELLING EXPENSES |
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28,404 |
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26,434 |
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GENERAL AND ADMINISTRATIVE EXPENSES |
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22,277 |
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19,312 |
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OTHER (INCOME) EXPENSE, net |
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5 |
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(2,350 |
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Operating income |
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19,954 |
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24,781 |
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INTEREST EXPENSE, net |
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4,211 |
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1,894 |
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Income before taxes |
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15,743 |
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22,887 |
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INCOME TAXES |
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6,127 |
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9,330 |
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Net income |
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$ |
9,616 |
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$ |
13,557 |
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BASIC EARNINGS PER SHARE |
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$ |
.87 |
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$ |
.99 |
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DILUTED EARNINGS PER SHARE |
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$ |
.84 |
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$ |
.96 |
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SHARES USED TO COMPUTE EARNINGS
PER SHARE |
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Basic |
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11,111 |
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13,716 |
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Diluted |
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11,461 |
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14,162 |
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See accompanying notes to condensed consolidated financial statements.
4
CONSOLIDATED GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands)
(Unaudited, except March 31, 2008 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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Loss |
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Total |
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BALANCE, March 31, 2008 |
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11,079 |
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$ |
111 |
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$ |
153,204 |
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$ |
127,376 |
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$ |
(898 |
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$ |
279,793 |
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Exercise of stock options,
including tax benefit |
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66 |
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2,947 |
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2,947 |
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Compensation expense |
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1,644 |
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1,644 |
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Currency translation adjustment |
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(9 |
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(9 |
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Net income |
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9,616 |
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9,616 |
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BALANCE, June 30, 2008 |
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11,145 |
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$ |
111 |
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$ |
157,795 |
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$ |
136,992 |
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$ |
(907 |
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$ |
293,991 |
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See accompanying notes to condensed consolidated financial statements.
5
CONSOLIDATED GRAPHICS, INC.
CONDENSED 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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2008 |
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2007 |
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OPERATING ACTIVITIES |
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Net income |
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$ |
9,616 |
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$ |
13,557 |
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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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16,010 |
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12,715 |
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Deferred income taxes |
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(1,263 |
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(1,216 |
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Share-based compensation expense |
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1,644 |
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1,233 |
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Non-cash currency gain |
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(63 |
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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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10,720 |
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11,344 |
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Inventories |
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(825 |
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1,722 |
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Prepaid expenses |
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(1,639 |
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(298 |
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Other assets |
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68 |
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9 |
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Accounts payable and accrued liabilities |
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(2,277 |
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(10,192 |
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Other liabilities |
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902 |
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Income taxes payable |
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3,706 |
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7,141 |
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Net cash provided by operating activities |
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36,599 |
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33,234 |
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INVESTING ACTIVITIES |
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Acquisitions of businesses, net of cash acquired |
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(6,654 |
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(5,638 |
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Purchases of property and equipment |
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(8,031 |
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(9,339 |
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Proceeds from asset dispositions |
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975 |
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633 |
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Net cash used in investing activities |
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(13,710 |
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(14,344 |
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FINANCING ACTIVITIES |
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Proceeds from bank credit facilities |
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42,644 |
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12,398 |
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Payments on bank credit facilities |
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(58,959 |
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(29,707 |
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Payments on term equipment notes and other debt |
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(5,499 |
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(2,638 |
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Proceeds from exercise of stock options, including tax benefit |
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2,947 |
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2,000 |
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Net cash used in financing activities |
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(18,867 |
) |
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(17,947 |
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Effect of exchange rate changes on cash |
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37 |
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181 |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
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4,059 |
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1,124 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
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15,131 |
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12,043 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
19,190 |
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$ |
13,167 |
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See accompanying notes to condensed consolidated financial statements.
6
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share data and percentages)
(Unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed 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, 2008 are not necessarily indicative of future operating results. Balance
sheet information as of March 31, 2008 has been derived from the Companys most recent annual
audited consolidated financial statements. 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, 2008 filed with the SEC in May 2008 (2008 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 Recognition The Company primarily recognizes revenue upon delivery of the printed
product to the customer. In the case of customer fulfillment arrangements, including multiple
deliverables of printing services and distribution services, revenue relating to the printed
product is recognized upon the delivery of the printed product into the Companys fulfillment
warehouses, and invoicing of the customer for the product at an agreed price. Because printed
products manufactured for the Companys customers are customized based upon the customers
specifications, product returns are insignificant.
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, dilutive stock options and
restricted stock unit awards outstanding using the treasury stock method.
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. Raw materials consist of paper, ink, proofing materials, plates, boxes and other
general supplies. Inventory values consist of purchased raw materials, labor and overhead costs.
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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2008 |
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2008 |
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Raw materials |
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$ |
26,929 |
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$ |
25,983 |
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Work in progress |
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29,566 |
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29,447 |
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Finished goods |
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5,926 |
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|
6,081 |
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$ |
62,421 |
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|
$ |
61,511 |
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Goodwill and Other Intangible Assets, netGoodwill totaled $102,360 at June 30, 2008 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 June 30, 2008 was $38,036. Other intangible assets consist
primarily of the value assigned to such items as established customer relationships and trade names
in connection with the allocation of purchase price for acquisitions under Statement of Financial
Accounting Standards (SFAS) No. 141, Business Combinations, and are generally amortized on a
straight-line basis over periods of up to 25 years. Amortization expense totaled $957 and $574 for
the three months ended June 30, 2008 and 2007.
7
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, 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, 2008, the Company paid cash for interest and
income taxes, net of refunds, totaling $4,892 and $2,703. 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.
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 the
Condensed Consolidated Statements of Shareholders Equity. The net foreign currency transaction (gain) loss
related to the revaluation of certain transactions denominated in currencies other than the
reporting units functional currency totaled $5 and ($2,350) for the three months ended June 30,
2008 and 2007 and is recorded in Other (Income) Expense on the Condensed Consolidated Income
Statement.
Accumulated Other Comprehensive LossAccumulated other comprehensive loss is comprised
exclusively of foreign currency translation adjustments, net of tax effect.
2. ACQUISITIONS
During the three months ended June 30, 2008, the Company paid cash totaling $6,654 to satisfy
certain liabilities incurred in connection with certain prior period acquisitions. The Company is
awaiting additional information concerning certain asset and liability valuations in order to
finalize the allocation of purchase price for certain 2008 fiscal 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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|
|
June 30, |
|
|
March 31, |
|
|
|
2008 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Bank credit facilities |
|
$ |
255,871 |
|
|
$ |
271,868 |
|
Term equipment notes |
|
|
99,071 |
|
|
|
104,505 |
|
Other |
|
|
9,247 |
|
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|
9,327 |
|
|
|
|
|
|
|
|
|
|
|
364,189 |
|
|
|
385,700 |
|
Lesscurrent portion |
|
|
(23,047 |
) |
|
|
(23,252 |
) |
|
|
|
|
|
|
|
|
|
$ |
341,142 |
|
|
$ |
362,448 |
|
|
|
|
|
|
|
|
The Companys primary bank credit facility (as amended, the Credit Agreement) currently
provides for $335,000 in revolving credit and has a maturity date of October 6, 2011. At June 30,
2008, outstanding borrowings under the Credit Agreement were $218,700 and accrued interest at a
weighted average rate of 4.0%.
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 1.50%, 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 .275% on available but unused amounts under the Credit Agreement. The interest
rate margin and the commitment fee are based upon certain financial performance measures set forth
in the Credit Agreement and are redetermined quarterly. At June 30, 2008, the applicable LIBOR
interest rate margin was 1.00% and the applicable commitment fee was .20%.
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, 2008.
8
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share data and percentages)
The Company also maintains an unsecured credit facility with a commercial bank currently
consisting of a U.S. $5,000 maximum borrowing limit component and a separate Canadian $31,000
maximum borrowing limit component. At June 30, 2008, outstanding borrowings were U.S. $3,500 which
accrued interest at a weighted average rate of 3.8%, and Canadian $24,500 ($24,231 U.S.
equivalent), which accrued interest at a weighted average rate of 4.6%.
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 October 2008 while the other facility expires in December 2008. At June 30,
2008, outstanding borrowings under the Auxiliary Bank Facilities totaled $9,440 and accrued
interest at a weighted average rate of 3.2%. Because the Company currently has the ability and
intent to refinance borrowings outstanding under the Auxiliary Bank Facilities expiring in October
and December 2008, such borrowings are classified as long-term debt in the accompanying
Condensed Consolidated Balance Sheet at June 30, 2008. The Auxiliary Bank Facilities cross-default to the
covenants and restrictions set forth in the Credit Agreement.
At June 30, 2008, outstanding borrowings under term equipment notes totaled $99,071 and
accrued interest at rates between 3.9% and 8.1%. The term equipment notes provide for principal
payments plus interest for defined periods of up to ten years from the date of issuance, and are
secured by certain equipment of the Company. The Company is not subject to any significant
financial covenants in connection with any of the term equipment notes. At June 30, 2008,
outstanding borrowings under our real estate notes totaled $4,377 and accrued interest at 6.0%. The
real estate notes provide for principal payments plus interest for defined periods of up to ten
years from the date of issuance and are secured by the real estate. At June 30, 2008, other debt
obligations totaled $4,870 and provided for principal payments plus interest (fixed and variable
rates) for defined periods up to 16 years from the date of issuance. The Company does not have any
significant financial covenants or restrictions associated with the real estate notes or other debt
obligations. The Credit Agreement places certain limitations on the amount of additional term note
obligations the Company may incur in the future.
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 2008 Form 10-K.
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. The Company recognizes expense for share-based compensation over the vesting
period, which represents the period in which an employee is required to provide service in exchange
for the award, or through the date an employee is eligible for retirement, whichever period is
shorter.
As of June 30, 2008, $13,708 of total unrecognized compensation cost related to stock options
is expected to be recognized over a weighted average period of
1.7 years. Share-based compensation expenses totaled $1,644 and $1,233 for the three months ended June
30, 2008 and 2007.
9
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share data and percentages)
(Unaudited)
The Company granted 512,500 stock options during the three months ended June 30, 2008. The
total intrinsic value of stock options exercised during the three months ended June 30, 2008 was
$1,239. The following table summarizes stock option activity for the three months ended June 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average Exercise |
|
Stock Options |
|
Shares |
|
|
Price |
|
Outstanding at March 31, 2008 |
|
|
1,457,477 |
|
|
$ |
36.93 |
|
Granted |
|
|
512,500 |
|
|
|
57.13 |
|
Exercised |
|
|
(66,042 |
) |
|
|
39.81 |
|
Forfeited or expired |
|
|
(6,008 |
) |
|
|
51.63 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008 (a) |
|
|
1,897,927 |
|
|
|
42.24 |
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2008 (a) |
|
|
1,168,080 |
|
|
|
35.40 |
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Stock options outstanding as of June 30, 2008 have a weighted average remaining contractual
term of 5.6 years. Based on the market value of the Companys common stock on June 30, 2008,
outstanding stock options have an aggregate intrinsic value of $19,287 and exercisable stock
options have an aggregate intrinsic value of $17,786. |
The Company granted an award of 12,500 restricted stock unit awards during the three months
ended June 30, 2008 having a fair value of $709. The following table summarizes restricted stock
unit award activity for the three months ended June 30, 2008:
|
|
|
|
|
Restricted Stock Unit Awards |
|
Shares |
|
Outstanding at March 31, 2008 |
|
|
22,500 |
|
Granted |
|
|
12,500 |
|
Issued |
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008 (a) |
|
|
35,000 |
|
|
|
|
|
Exercisable at June 30, 2008 (a) |
|
|
5,625 |
|
|
|
|
|
|
|
|
(a) |
|
Restricted stock units outstanding as of June 30, 2008 have a weighted average remaining
contractual term of 1.6 years and a total intrinsic value of $1,724. |
5. INCOME TAXES
The Company accounts for uncertain income tax positions in accordance with the Financial
Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement No. 109. As of June 30, 2008 and March 31,
2008, the Company had $14,556 and $13,655 of unrecognized tax benefits. Of the unrecognized tax
benefits at June 30, 2008, $11,990 if recognized, would decrease the Companys effective income tax
rate and increase net income.
As of June 30, 2008, the Company believes it is reasonably possible that the unrecognized tax
benefits may increase within 12 months by as much as $1,475, due primarily to certain tax
deductions to be claimed on state tax returns that are uncertain as to the ultimate outcome.
The Companys federal income tax returns for the tax years after 2004 remain subject to
examination. The various states in which the Company is subject to income tax are generally open
for the tax years after 2002.
The Company classifies net interest income and any related penalties related to income tax
uncertainties as a component of income tax expense. The total net interest expense related to tax
uncertainties recognized for the three months ended June 30, 2008 and June 30, 2007 was $37 and
$291. Accrued interest and penalties of $1,656 and $1,619 related to income tax uncertainties are
a component of other noncurrent liabilities at June 30, 2008 and March 31, 2008.
10
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following managements discussion and analysis of financial condition and results of
operations should be read in conjunction with our unaudited condensed consolidated financial statements and
notes to unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q and our
audited financial statements and notes thereto included in our Annual Report on Form 10-K as of and
for the year ended March 31, 2008. This discussion contains forward-looking statements that reflect
our current views with respect to future events and financial performance. Our actual results may
differ materially from those anticipated in these forward-looking statements as a result of certain
factors such as those referenced in the section entitled Forward-Looking Statements below.
Overview
Our Organization
Consolidated Graphics is a leading U.S. and Canadian provider of commercial printing services
with 70 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 13
fulfillment centers located at or near one of our printing businesses and (ii) proprietary digital
technology solutions and e-commerce capabilities. Generally, each facility substantially relies on
locally-based customers; accordingly, we have over 20,000 individual customers with a broad
diversification by industry-type and geographic orientation. No individual facility or any
individual customer accounts for more than 10% of our total 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, internal financial
controls design, and management information systems. We also maintain centralized treasury, risk
management, tax, internal audit 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 Internet-based technology solutions and other print-related, value-added services. The
technology solutions, like the printed materials we produce, are customized to the specific needs
of our customers. For marketing purposes, we refer to our technology solutions 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, trading
cards, catalogs and training manuals.
Most of our sales are generated by individual orders through commissioned sales personnel. We
typically 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 products and 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 revenues, however, tend to be strongest in the quarter ended December 31 followed by
revenues in the quarter ended March 31. Conversely, revenues tend to be seasonally weaker in the
quarters ended June 30 and September 30.
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.
11
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 share-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 consolidation 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. |
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 |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
|
|
|
|
|
|
Sales |
|
$ |
285.2 |
|
|
$ |
258.6 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
214.6 |
|
|
|
190.4 |
|
|
|
75.2 |
|
|
|
73.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
70.6 |
|
|
|
68.2 |
|
|
|
24.8 |
|
|
|
26.4 |
|
Selling expenses |
|
|
28.4 |
|
|
|
26.4 |
|
|
|
10.0 |
|
|
|
10.2 |
|
General and administrative expenses |
|
|
22.3 |
|
|
|
19.3 |
|
|
|
7.8 |
|
|
|
7.5 |
|
Other (income) expense, net |
|
|
|
|
|
|
(2.3 |
) |
|
|
|
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
19.9 |
|
|
|
24.8 |
|
|
|
7.0 |
|
|
|
9.6 |
|
Interest expense, net |
|
|
4.2 |
|
|
|
1.9 |
|
|
|
1.5 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
15.7 |
|
|
|
22.9 |
|
|
|
5.5 |
|
|
|
8.9 |
|
Income taxes |
|
|
6.1 |
|
|
|
9.3 |
|
|
|
2.1 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
9.6 |
|
|
$ |
13.6 |
|
|
|
3.4 |
% |
|
|
5.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our sales and expenses for the three months ended June 30, 2008 were impacted by the
acquisition of three printing businesses in fiscal 2008. 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 impact of acquisitions. We refer to
revenue growth or decline, excluding the effect of revenues contributed by acquisitions, in the
most recent fiscal year as organic or same-store sales growth or decline.
12
The following table sets forth the components of revenue change for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended June 30, 2008 |
|
|
|
$ |
|
|
% |
|
|
|
(In millions) |
|
Acquisitions (1) |
|
$ |
31.9 |
|
|
|
12.3 |
% |
Election-related |
|
|
4.7 |
|
|
|
1.9 |
|
Other internal |
|
|
(10.0 |
) |
|
|
(3.9 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
26.6 |
|
|
|
10.3 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the acquisitions of
The Pikes Peak Lithographing Company, The Cyril-Scott Company and PBM
Graphics, Inc. |
Comparative Analysis of Consolidated Income Statements for the Three Months Ended June 30, 2008 and
2007
Sales in the three month period ended June 30, 2008 increased $26.6 million, or 10%, to $285.2
million from $258.6 million for the same period in the prior year. The revenue increase was due to
a $31.9 million increase caused by the impact of acquisitions in fiscal year 2008, partially offset
by a $10.0 million decline in same store sales compared to the same period in the prior year.
The decline in internal sales growth was primarily due to a reduction in demand for printing
services as a result of weakness of the overall U.S. economy, along with a more competitive pricing
environment. Offsetting this decline was an increase in election-related business that increased
revenue $4.7 million.
Gross profit during the three months ended June 30, 2008 increased $2.4 million, or 4%, to
$70.6 million from $68.2 million for the same period in the prior year. This increase was primarily
due to the impact of acquisitions on the sales volumes discussed above. Gross profit as a
percentage of sales, however, declined to 24.8% from 26.4% compared
to the same period in the prior year due to relatively lower gross margins
for recently acquired businesses, the decline in same store sales and
less favorable selling prices.
Selling expense during the three months ended June 30, 2008 increased $2.0 million, or 7%, to
$28.4 million from $26.4 million for the same period in the
prior year. The increase was due to the businesses we acquired in 2008. As a percentage of sales, selling expenses declined to
10.0% in the current quarter as compared to 10.2% for the same period in the prior year. This
decline was primarily due to relatively lower selling expenses as a percentage of sales for recently acquired businesses.
General and administrative expenses during the three months ended June 30, 2008 increased $3.0
million, or 15%, to $22.3 million from $19.3 million for the same period in the prior year. This
increase was primarily due to the incremental impact of acquisitions (including direct expenses and
incremental intangible asset amortization). As a percentage of sales, general and administrative
expenses increased to 7.8% in the current quarter as compared to 7.5% for the same period in the
prior year.
Other
income during the three months ended June 30, 2008 was approximately zero
compared to $2.3 million for the same period in the prior year. The
prior year foreign currency transaction gain primarily resulted from certain transactions at our Canadian subsidiary denominated in
U.S. dollars.
Interest expense during the three months ended June 30, 2008 increased $2.3 million to $4.2
million from $1.9 million for the same period in the prior year, primarily due to higher levels of
average debt outstanding due to borrowings used to fund the fiscal year 2008 acquisitions, capital
expenditures and share repurchases under our common stock repurchase program during fiscal year
2008.
Income tax expense during the three months ended June 30, 2008 totaled $6.1 million,
reflecting an effective tax rate of 38.9% as compared to an effective tax rate of 40.8% for the
same period in the prior year. The decrease is primarily due to lower foreign taxes and interest
expense related to uncertain tax positions.
13
Liquidity and Capital Resources
Sources and Uses of Cash
Our historical sources of cash have primarily been cash provided by operations and 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 condensed consolidated statements of cash flows and notes
thereto included in Item 1. Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30 |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
Net cash provided by operating activities |
|
$ |
36.6 |
|
|
$ |
33.2 |
|
Acquisitions of businesses |
|
|
(6.7 |
) |
|
|
(5.6 |
) |
Capital expenditures, net of proceeds from asset dispositions |
|
|
(7.1 |
) |
|
|
(8.7 |
) |
Net payments under bank credit facilities |
|
|
(16.3 |
) |
|
|
(17.3 |
) |
Net payments on term equipment notes and other debt |
|
|
(5.5 |
) |
|
|
(2.6 |
) |
Proceeds from exercise of stock options |
|
|
2.9 |
|
|
|
2.0 |
|
Additionally, our cash position, working capital and debt obligations are shown below and
should be read in conjunction with our condensed consolidated balance sheets and notes thereto
included in Item 1. Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2008 |
|
|
2008 |
|
|
|
(In millions) |
|
Cash and cash equivalents |
|
$ |
19.2 |
|
|
$ |
15.1 |
|
Working capital, inclusive of cash and cash equivalents |
|
|
133.0 |
|
|
|
138.3 |
|
Total debt obligations |
|
|
364.2 |
|
|
|
385.7 |
|
Net cash provided by operating activities increased $3.4 million over the same period in the
prior year. This increase was primarily due to changes in working
capital items. We believe that our cash flow provided by operations, combined with existing capacity
under our bank credit facilities, will be adequate to cover our remaining fiscal 2009 working
capital growth, debt service requirements and planned capital expenditures.
We intend to continue pursuing acquisition opportunities at prices we believe are reasonable
based upon prevailing market conditions. However, we cannot accurately predict the timing, size and
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.
We also 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 additional borrowings instead of issuing common stock.
Debt Obligations
Our primary bank credit facility (as amended, the Credit Agreement) currently provides for
$335 million in revolving credit and has a maturity date of October 6, 2011. At June 30, 2008,
outstanding borrowings under the Credit Agreement were $218.7 million and accrued interest at a
weighted average rate of 4.0%.
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 1.50%, 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 .275% on available but
unused amounts under the Credit Agreement. The interest rate margin and the commitment fee are
based upon certain financial performance measures set forth in the Credit Agreement and are
redetermined quarterly. At June 30, 2008 the applicable LIBOR interest rate margin was 1.00% and
the applicable commitment fee was .20%.
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, 2008. 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 reclassified as a current liability. In the event
that we were unable to obtain a waiver, renegotiate or refinance these obligations, a material
adverse effect on our ability to conduct our operations in the ordinary course likely would result.
14
We also maintain an unsecured credit facility with a commercial bank (the A&B Credit
Facility) currently
consisting of a U.S. $5 million maximum borrowing limit component and a separate Canadian $31
million maximum borrowing limit component. At June 30, 2008, outstanding borrowings under the A&B
Credit Facility were U.S. $3.5 million, which accrued interest at a weighted average rate of 3.8%,
and Canadian $24.5 million ($24.2 million U.S. equivalent), which accrued interest at a weighted
average rate of 4.6%. An annual reduction of Canadian $4 million on the Canadian 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
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 million. One facility expires
in October 2008 while the other facility expires in December 2008. At June 30, 2008, outstanding
borrowings under the Auxiliary Bank Facilities totaled $9.5 million and accrued interest at a
weighted average rate of 3.2%. Because we currently have the ability and intent to refinance the
borrowings outstanding under the Auxiliary Bank Facilities expiring in October and December 2008,
such borrowings are classified as long-term debt in our condensed consolidated balance sheet at June 30,
2008. The Auxiliary Bank Facilities cross-default to the covenants and restrictions set forth in
the Credit Agreement.
At June 30, 2008, outstanding borrowings under our term equipment notes totaled $99.1 million
and accrued interest at rates between 3.9% and 8.1%. The term equipment notes provide for principal
payments plus interest for defined periods of up to ten years from the date of issuance, and are
secured by certain equipment of the Company. We are not subject to any significant financial
covenants in connection with any of the term equipment notes. At June 30, 2008, outstanding
borrowings under our real estate notes totaled $4.4 million and accrued interest at 6%. The real
estate notes provide for principal payments plus interest for defined periods of up to ten years
from the date of issuance and are secured by the real estate. At June 30, 2008, other debt
obligations totaled $4.8 million and provided for principal payments plus interest (at fixed and
variable rates) for defined periods up to 16 years from the date of issuance. We do not have any
significant financial covenants or restrictions associated with the real estate notes or the other
debt obligations. The Credit Agreement places certain limitations on the amount of additional term
note obligations we may incur in the future.
As of June 30, 2008, our available credit under existing credit facilities was approximately
$118.2 million.
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 $96.1 million as of June
30, 2008.
Letters of credit In connection with our assumption of obligations under outstanding
industrial revenue bonds, which are reflected as debt in the
accompanying condensed 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, 2008 totaling $6.6 million. 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.
15
Revenue Recognition We primarily recognize revenue upon delivery of the printed product to
the customer. In the case of customer fulfillment arrangements, including multiple deliverables of
printing services and distribution services, revenue relating to the printed product is recognized
upon the delivery of the printed product into our fulfillment warehouses, and invoicing of the
customer for the product at an agreed price. Because printed products manufactured for our
customers are customized based upon the customers specifications, product returns are
insignificant. We derive the majority of our revenues from sales and services to a broad and
diverse group of customers, with no individual customer accounting for more than 10% of our
revenues as of June 30, 2008.
Receivables, net of valuation allowance Accounts receivable at June 30, 2008 were $198.4
million, net of a $3.5 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 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 and other intangible assets We evaluate the carrying value of our goodwill and
other intangible assets with indefinite lives as of each fiscal year end, 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 and calculation of estimated discounted cash
flows. 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 or intangible assets with indefinite lives
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.
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.
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued the Statement of
Financial Accounting Standards ( SFAS) No. 157,
Fair Value Measurement (SFAS No. 157), which defines
fair value, establishes a framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosures about fair value
measurement. Our adoption of SFAS
No. 157 effective for fiscal 2009 did not have a material impact on our consolidated financial
condition or results of operations.
16
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB
No. 115, (SFAS No. 159). SFAS No. 159 permits
entities to choose, at specified election dates, to measure eligible items at fair value (the fair
value option). A business entity shall report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting period. We have not
elected to apply the provisions of SFAS No. 159; therefore, the adoption of SFAS No. 159 did not
affect our consolidated financial condition or results of operations.
In
December 2007, the FASB issued FAS No. 141 (revised
2007), Business Combinations (SFAS No.
141R) which requires the acquired entity to recognize the assets acquired, the liabilities assumed
and any non-controlling interest in the acquiree at the acquisition date, measured at the fair
values as of that date. Goodwill is measured as a residual of the fair values at the acquisition
date. Acquisition related costs are recognized separately from the acquisition. This statement is
effective as of the beginning of the first fiscal year that begins after December 15, 2008. We are
currently evaluating the impact, if any, of the adoption of SFAS No. 141R will have on our
consolidated financial condition or results of operations.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, in which the Company discusses factors it believes may affect its
performance or results in the future. Forward-looking statements are all statements other than
historical facts, such as statements regarding assumptions, expectations, beliefs and projections
about future events or conditions. You can generally identify forward-looking statements by the
appearance in such a statement of words like anticipate, believe, continue, could,
estimate, expect, intend, may, might, plan, potential, predict, forecast,
project, should or will or other comparable words or the negative of such words. The accuracy
of the Companys assumptions, expectations, beliefs and projections depend on events or conditions
that change over time and are thus susceptible to change based on actual experience, new
developments and known and unknown risks, including those created by general market conditions,
competition and the possibility that events may occur beyond the Companys control, which may limit
its ability to maintain or improve its operating results or financial condition or acquire
additional printing businesses. The Company gives no assurance that the forward-looking statements
will prove to be correct and does not undertake any duty to update them. The Companys actual
future results might differ from the forward-looking statements made in this Quarterly Report on
Form 10-Q for a variety of reasons, which include, continuing weakness in the economy, the growth
of its digital printing or election related business, its ability to adequately manage expenses,
including labor costs, the continued availability of raw materials at affordable prices and
retention of its key management and operating personnel, satisfactory labor relations, its ability
to identify new acquisition opportunities, negotiate and finance such acquisitions on acceptable
terms and successfully absorb and manage such acquisitions in a timely and efficient manner, as
well as other risks described under the heading Risk Factors of this Annual Report on Form 10-Q
and the risk factors and cautionary statements described in the other documents the Company files
or furnishes from time to time with the Securities and Exchange Commission, including its Annual
Report on Form 10-K and Current Reports on Form 8-K. Should one or more of the foregoing risks or
uncertainties materialize, or should the Companys underlying assumptions prove incorrect, the
Companys actual results may vary materially from those anticipated in its forward-looking
statements, and its business, financial condition and results of operations could be materially and
adversely affected.
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 in
interest rates related primarily to our debt obligations, which as of June 30, 2008 include
borrowings under our bank credit facilities, various term equipment notes and other debt
obligations. As of June 30, 2008, 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, 2008.
17
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive Officer
(CEO) and Chief Financial and Accounting 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, and that such information is accumulated and
communicated to our management, including our CEO and CFO, as appropriate, to allow timely
decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our 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, our internal control over financial reporting.
18
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, 2008 in response to Item 1A to Part I of
Form 10-K.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
Consolidated Graphics, Inc. 1994 Long-Term Incentive Plan, as amended. Effective June 30,
2008, the Board of Directors approved a sixth amendment to the Consolidated Graphics, Inc. 1994
Long-Term Incentive (the Plan) to, among other things, comply with the requirements of Section
409A of the Internal Revenue Code and the Treasury Regulations and other guidance issued
thereunder, and make other technical or administrative amendments to the Plan. For administrative
convenience, the Board of Directors thereafter amended and restated the Plan effective as of June
30, 2008 to incorporate all previous amendments to the Plan. As amended and restated, the Plan is
now referred to as the Consolidated Graphics, Inc. Amended and Restated Long-Term Incentive Plan.
The
foregoing are summaries only, and are not necessarily complete and
are thus qualified by the full text of the sixth amendment to the
Plan, as well as the amendment and restatement of the Plan filed
herewith as Exhibits 10.4 and 10.5.
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). |
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*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). |
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*3.4 |
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Amendment to the Second Amended and Restated By-Laws of the Company adopted as of December 21, 2007
(Consolidated Graphics, Inc. Form 8-K (December 26, 2007), Exhibit 1). |
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*4.1 |
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Specimen Common Stock Certificate (Consolidated Graphics, Inc. Form 10-K (March 31, 1998), Exhibit 4.1). |
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*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). |
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*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). |
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*4.4 |
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Second Amendment to Rights Agreement dated as of September 25, 2007 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 (September 28, 2007), Exhibits 3 and 4). |
|
*10.1 |
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Employment Agreement dated May 22, 2008, between Joe R. Davis and the Company (Consolidated
Graphics, Inc. Form 8-K (May 29, 2008), Exhibit 10.1). |
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*10.2 |
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|
Consolidated Graphics, Inc. Annual Incentive Compensation Plan, dated effective as of April 1, 2008
(Consolidated Graphics, Inc. Form 8-K (May 29, 2008), Exhibit 10.2). +Ω |
|
*10.3 |
|
|
Form of Annual Incentive Award Agreement for Executives (Consolidated Graphics, Inc. Form 8-K (May 29,
2008), Exhibit 10.3). + |
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10.4 |
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Sixth Amendment to the Consolidated Graphics, Inc. 1994 Long-Term Incentive Plan, as amended. + |
19
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10.5 |
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Consolidated Graphics, Inc. Amended and Restated Long-Term Incentive Plan. + |
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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. |
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31.2 |
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Certification of Jon C. Biro, principal financial and accounting officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
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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. |
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32.2 |
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|
Certification of Jon C. Biro, principal financial and accounting officer, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
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* |
|
Incorporated by reference |
|
+ |
|
Compensatory plan or arrangement under which executive officers or directors of the Company
may participate. |
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Ω |
|
Subject to shareholder approval at the Annual Shareholders Meeting to be held August 7,
2008. |
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 6, 2008 |
By: |
/s/ Jon C. Biro
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Jon C. Biro |
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Executive Vice President and
Chief Financial and Accounting 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). |
|
*3.4 |
|
|
Amendment to the Second Amended and Restated By-Laws of the Company adopted as of December 21, 2007
(Consolidated Graphics, Inc. Form 8-K (December 26, 2007), Exhibit 1). |
|
*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). |
|
*4.4 |
|
|
Second Amendment to Rights Agreement dated as of September 25, 2007 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 (September 28, 2007), Exhibits 3 and 4). |
|
*10.1 |
|
|
Employment Agreement dated May 22, 2008, between Joe R. Davis and the Company (Consolidated
Graphics, Inc. Form 8-K (May 29, 2008), Exhibit 10.1). |
|
*10.2 |
|
|
Consolidated Graphics, Inc. Annual Incentive Compensation Plan, dated effective as of April 1, 2008
(Consolidated Graphics, Inc. Form 8-K (May 29, 2008), Exhibit 10.2). +Ω |
|
*10.3 |
|
|
Form of Annual Incentive Award Agreement for Executives (Consolidated Graphics, Inc. Form 8-K (May 29,
2008), Exhibit 10.3). + |
|
10.4 |
|
|
Sixth Amendment to the Consolidated Graphics, Inc. 1994 Long-Term Incentive Plan, as amended. + |
|
10.5 |
|
|
Consolidated Graphics, Inc. Amended and Restated Long-Term Incentive Plan. + |
|
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 Jon C. Biro, principal financial and accounting 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 Jon C. Biro, principal financial and accounting officer, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Incorporated by reference |
|
+ |
|
Compensatory plan or arrangement under which executive officers or directors of the Company
may participate. |
|
Ω |
|
Subject to shareholder approval at the Annual Shareholders Meeting to be held August 7,
2008. |
22