Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
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.
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 o
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Accelerated filer þ |
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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).
The number of shares of Common Stock, par value $.01 per share, of the Registrant outstanding
at July 31, 2009 was 11,162,667.
CONSOLIDATED GRAPHICS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009
INDEX
2
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONSOLIDATED GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
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June 30 |
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March 31 |
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2009 |
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2009 |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
9,238 |
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$ |
9,762 |
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Accounts receivable, net |
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150,700 |
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173,501 |
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Inventories |
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51,251 |
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52,737 |
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Prepaid expenses |
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19,876 |
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17,340 |
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Deferred income taxes |
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16,558 |
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18,909 |
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Total current assets |
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247,623 |
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272,249 |
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PROPERTY AND EQUIPMENT, net |
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419,737 |
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430,519 |
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GOODWILL |
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29,436 |
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29,436 |
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OTHER INTANGIBLE ASSETS, net |
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23,828 |
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24,691 |
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OTHER ASSETS |
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7,730 |
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8,313 |
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$ |
728,354 |
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$ |
765,208 |
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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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$ |
27,976 |
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$ |
27,026 |
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Accounts payable |
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43,777 |
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48,519 |
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Accrued liabilities |
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84,295 |
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86,718 |
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Income taxes payable |
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93 |
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553 |
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Total current liabilities |
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156,141 |
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162,816 |
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LONG-TERM DEBT, net of current portion |
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257,081 |
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287,164 |
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OTHER LIABILITIES |
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15,227 |
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14,794 |
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DEFERRED INCOME TAXES, net |
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48,196 |
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49,970 |
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Total liabilities |
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476,645 |
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514,744 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS EQUITY |
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Common stock, $.01 par value;
100,000,000 shares authorized;
11,162,667 and 11,152,875 issued
and outstanding |
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111 |
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111 |
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Additional paid-in capital |
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164,675 |
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163,131 |
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Retained earnings |
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87,492 |
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87,806 |
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Accumulated other comprehensive loss |
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(569 |
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(584 |
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Total shareholders equity |
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251,709 |
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250,464 |
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$ |
728,354 |
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$ |
765,208 |
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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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2009 |
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2008 |
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SALES |
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$ |
225,861 |
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$ |
285,194 |
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COST OF SALES |
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181,032 |
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214,554 |
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Gross profit |
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44,829 |
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70,640 |
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SELLING EXPENSES |
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22,791 |
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28,404 |
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GENERAL AND ADMINISTRATIVE EXPENSES |
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21,213 |
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22,277 |
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OTHER (INCOME) EXPENSE, net |
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(54 |
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5 |
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Operating income |
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879 |
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19,954 |
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INTEREST EXPENSE, net |
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2,484 |
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4,211 |
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Income (loss) before taxes |
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(1,605 |
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15,743 |
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INCOME TAX EXPENSE (BENEFIT) |
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(1,291 |
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6,127 |
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Net income (loss) |
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$ |
(314 |
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$ |
9,616 |
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BASIC EARNINGS (LOSS) PER SHARE |
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$ |
(.03 |
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$ |
.87 |
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DILUTED EARNINGS (LOSS) PER SHARE |
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$ |
(.03 |
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$ |
.84 |
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SHARES USED TO COMPUTE EARNINGS
(LOSS) PER SHARE |
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Basic |
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11,159 |
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11,111 |
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Diluted |
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11,159 |
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11,461 |
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See accompanying notes to condensed consolidated financial statements.
4
CONSOLIDATED GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(In thousands)
(Unaudited)
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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, 2009 |
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11,153 |
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$ |
111 |
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$ |
163,131 |
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$ |
87,806 |
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$ |
(584 |
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$ |
250,464 |
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Net loss |
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(314 |
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(314 |
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Other comprehensive income -
currency translation adjustment, net of tax |
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15 |
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15 |
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Comprehensive loss |
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(299 |
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Exercise of stock options,
including tax benefit |
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10 |
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Share-based compensation expense |
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1,544 |
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1,544 |
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BALANCE, June 30, 2009 |
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11,163 |
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$ |
111 |
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$ |
164,675 |
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$ |
87,492 |
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$ |
(569 |
) |
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$ |
251,709 |
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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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2009 |
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2008 |
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OPERATING ACTIVITIES |
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Net income (loss) |
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$ |
(314 |
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$ |
9,616 |
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Adjustments to reconcile net income (loss) to net cash provided by
operating activities |
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Depreciation |
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16,873 |
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15,054 |
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Amortization |
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863 |
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956 |
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Bad debt expense (recovery) |
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(434 |
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289 |
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Foreign currency gain |
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(159 |
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(63 |
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Deferred income taxes |
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703 |
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(1,263 |
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Share-based compensation expense |
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1,544 |
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1,644 |
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Changes in assets and liabilities, net of effect of acquisitions |
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Accounts receivable, net |
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23,607 |
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10,431 |
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Inventories |
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1,696 |
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(825 |
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Prepaid expenses |
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(2,524 |
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(1,639 |
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Other assets |
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585 |
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68 |
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Accounts payable and accrued liabilities |
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(8,555 |
) |
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(2,277 |
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Other liabilities |
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433 |
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902 |
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Income taxes payable |
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(457 |
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3,706 |
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Net cash provided by operating activities |
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33,861 |
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36,599 |
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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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Purchases of property and equipment |
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(4,476 |
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(8,031 |
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Proceeds from asset dispositions |
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450 |
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975 |
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Net cash used in investing activities |
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(4,026 |
) |
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(13,710 |
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FINANCING ACTIVITIES |
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Proceeds from bank credit facilities |
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15,819 |
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42,644 |
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Payments on bank credit facilities |
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(30,048 |
) |
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(58,959 |
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Payments on term equipment notes and other debt |
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(16,251 |
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(5,499 |
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Proceeds from exercise of stock options, including excess tax benefit |
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2,947 |
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Net cash used in financing activities |
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(30,480 |
) |
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(18,867 |
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Effect of exchange rate changes on cash and cash equivalents |
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121 |
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37 |
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
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(524 |
) |
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4,059 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
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9,762 |
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15,131 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
9,238 |
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$ |
19,190 |
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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 with its consolidated subsidiaries
referred to as the Company). All intercompany accounts and transactions have been eliminated.
Such statements have been prepared in accordance with United States 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 condensed consolidated financial
statements have been included. Operating results for the three months ended June 30, 2009 are not
necessarily indicative of future operating results. Balance sheet information as of March 31, 2009
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/A for the fiscal year ended March 31, 2009
filed with the SEC on May 29, 2009 (2009 Form 10-K/A).
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.
ReclassificationCertain reclassifications of prior year data have been made to conform to
current period reporting.
Revenue Recognition and Accounts Receivable 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 not significant. The Company derives the majority of its
revenues from sales and services to a broad diverse group of customers with no individual customer
accounting for more than 4% of the Companys revenues for the three months ended June 30, 2009. The
Company maintains an allowance for doubtful accounts based upon the expected collectability of
accounts receivable. Accounts receivable in the accompanying condensed consolidated balance sheets
are reflected net of allowance for doubtful accounts of $4,568 and $6,556 at June 30, 2009 and
March 31, 2009, respectively.
Earnings Per ShareBasic earnings per share are calculated by dividing net income or net loss
by the weighted average number of common shares outstanding. Diluted earnings per share reflect
net income divided by the weighted average number of common shares, dilutive stock options and
restricted stock unit awards outstanding using the treasury stock method. Earnings per share are
set forth below:
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Three Months Ended |
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June 30 |
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2009 |
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2008 |
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Numerator: |
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Net income (loss) |
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$ |
(314 |
) |
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$ |
9,616 |
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Denominator: |
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Weighted average number of common shares outstanding |
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11,159,403 |
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|
11,110,592 |
|
Dilutive options and awards |
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|
349,986 |
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Diluted weighted average number of common shares outstanding |
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11,159,403 |
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|
11,460,578 |
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Net earnings (loss) per share |
|
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|
|
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|
|
Basic |
|
$ |
(.03 |
) |
|
$ |
.87 |
|
Diluted |
|
$ |
(.03 |
) |
|
$ |
.84 |
|
7
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share data and percentages)
(Unaudited)
Diluted net earnings (loss) per common share takes into consideration the dilution of certain
unvested restricted stock unit awards and unexercised stock options. For the quarter ended June 30,
2009, options and unvested restricted stock unit awards for 1,879,007 shares were
outstanding but not included in the computation of diluted net loss per share, because of the net
loss during the quarter. Their inclusion would have had an anti-dilutive effect. Of the 1,879,007
options to purchase shares, 1,224,424 shares had an option exercise price that exceeded the average
quarterly fair value of the Companys common stock. For the quarter ended June 30, 2008, options to
purchase 526,987 shares of common stock were outstanding but not included in the computation of
diluted net earnings per share, because the option exercise price exceeded the average quarterly
fair value of the Companys common stock such that their inclusion would have an anti-dilutive
effect.
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, |
|
|
|
2009 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
21,688 |
|
|
$ |
22,587 |
|
Work in progress |
|
|
24,094 |
|
|
|
24,896 |
|
Finished goods |
|
|
5,469 |
|
|
|
5,254 |
|
|
|
|
|
|
|
|
|
|
$ |
51,251 |
|
|
$ |
52,737 |
|
|
|
|
|
|
|
|
Goodwill and Long-Lived Assets The Company evaluates impairment of goodwill in accordance
with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, and its other long-lived assets, including property, plant and equipment, and intangible
assets other than goodwill or intangibles with indefinite lives in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.
Goodwill totaled $29,436 at June 30, 2009 and represents the excess of the Companys purchase
cost over the fair value of the net identifiable assets acquired, net of previously recorded
amortization and impairment charges. The Company assesses the impairment of goodwill as required by
SFAS No. 142. Under SFAS No. 142 the Company estimates the fair value for each reporting unit using
trailing twelve months earnings before interest, income taxes and depreciation and amortization
(EBITDA) multiplied by managements estimate of an appropriate enterprise value-to-EBITDA
multiple for each reporting unit, adjusted for a control premium. Managements total Company
enterprise value-to-EBITDA multiple is based upon the multiple derived from using the market
capitalization of the Companys common stock on or around the applicable balance sheet date, after
considering an appropriate control premium. This total Company enterprise value-to-EBITDA multiple
is then used as a starting point in determining the appropriate multiple for each reporting unit.
Each of the Companys printing businesses is separately evaluated for goodwill impairment because
they comprise individual reporting units. The Company evaluates goodwill for impairment at the end
of each fiscal year, or at any time that management becomes aware of an indication of impairment.
To the extent the net book value of the Company as a whole is greater than the Companys
market capitalization, all or a significant portion of its goodwill may be considered impaired.
Under the applicable accounting standards, the goodwill impairment analysis is a two-step test. The
first step, used to identify potential impairment, involves comparing each reporting units
estimated fair value to its carrying value including goodwill. If the fair value of a reporting
unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the
carrying value exceeds fair value, there is an indication of impairment and the second step is
performed to measure the amount of impairment. The second step involves calculating an implied fair
value of goodwill for each reporting unit for which the first step indicated potential impairment.
The implied fair value of goodwill is determined in the same manner as the amount of goodwill
recognized in a potential business combination, which is the excess of the fair value of the
reporting unit, as determined in the first step, over the aggregate fair values of the individual
assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a
business combination. If the implied fair value of goodwill in the proforma business combination
accounting described above exceeds the goodwill assigned to the reporting unit, there is no
impairment. If the goodwill assigned to a reporting unit exceeds the implied fair value of the
goodwill, an impairment charge is recorded for the excess. A recognized impairment loss cannot
exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in
the goodwill. Subsequent reversal of goodwill impairment losses is not permitted.
8
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share data and percentages)
(Unaudited)
Under SFAS No. 144, the Company compares the carrying value of long-lived assets to its fair
value determined by using projections of future undiscounted cash flows attributable to such assets
and other factors such as business trends and general economic conditions. In the event that the
carrying value of any long-lived asset exceeds the projection of future undiscounted cash flows
attributable to such asset, the Company records an impairment charge against income equal to the
excess, if any, of the carrying value over the assets fair value. The Company evaluates 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 net book value of other intangible assets at June 30, 2009 was $23,828. 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 and are generally amortized on a
straight-line basis over periods of up to 25 years. Such assets are evaluated for recoverability
with other long-lived assets as discussed above. Amortization expense totaled $863 and $956 for the
three months ended June 30, 2009 and 2008, respectively.
Supplemental Cash Flow InformationThe condensed consolidated statements of cash flows
provide information about the Companys sources and uses of cash and exclude the effects of
non-cash transactions. Total capital expenditures, which were all cash transactions, were $4,476
and $8,031 for the three months ended June 30, 2009 and 2008, respectively. For the three months
ended June 30, 2009 and 2008, the Company paid cash for interest
totaling $2,601 and $4,892,
respectively. For the three months ended June 30, 2009 and 2008, the Company paid cash for income
taxes, net of refunds, totaling $166 and $2,703, respectively.
Fair Value of Financial Instruments The Companys financial instruments consist of cash,
trade receivables, trade payables and debt obligations. The Company does not currently hold or
issue derivative financial instruments. The Company believes that the
recorded values of its variable
rate debt obligations, which totaled $218,801 at March 31, 2009 and $195,918 at June 30, 2009,
approximated their fair values. The Company believes that the
recorded values of its fixed rate
debt obligations which totaled $95,389 at March 31, 2009 and $89,139 at June 30, 2009, approximated their fair values. Estimates of fair value
are based on estimated interest rates for the same or similar debt offered to the Company having
the same or similar maturities and collateral requirements.
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 period-end exchange
rates. Income and expense items are translated at the average monthly exchange rates. The effects
of period-end translation are included as a component of Accumulated Other Comprehensive Income in
the condensed consolidated statement 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 ($54) and $5 for the three months ended June 30,
2009 and 2008, respectively and is recorded in Other (Income) Expense on the condensed consolidated
income statements.
Accumulated Other Comprehensive LossAccumulated other comprehensive loss is comprised
exclusively of foreign currency translation adjustments.
Geographic InformationRevenues of the Companys subsidiaries operating outside the United
States were $9,752 and $11,160 for the three months ended June 30, 2009 and 2008, respectively, and
long-lived assets were $34,533 as of June 30, 2009 and $34,632 as of March 31, 2009.
Subsequent EventsThe Company has evaluated events or transactions that occurred after June
30, 2009 and through the time the financial statements were issued on
August 5, 2009 for potential recognition or disclosure in the interim financial
statements.
9
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share data and percentages)
(Unaudited)
2. LONG TERM DEBT
The following is a summary of the Companys long-term debt as of:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2009 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Bank credit facilities |
|
$ |
191,818 |
|
|
$ |
214,701 |
|
Term equipment notes |
|
|
84,802 |
|
|
|
90,980 |
|
Other |
|
|
8,437 |
|
|
|
8,509 |
|
|
|
|
|
|
|
|
|
|
|
285,057 |
|
|
|
314,190 |
|
Lesscurrent portion |
|
|
(27,976 |
) |
|
|
(27,026 |
) |
|
|
|
|
|
|
|
|
|
$ |
257,081 |
|
|
$ |
287,164 |
|
|
|
|
|
|
|
|
The Companys primary bank credit facility (the Credit Agreement) currently provides for
$335,000 in revolving credit and has a maturity date of October 6, 2011. At June 30, 2009,
outstanding borrowings under the Credit Agreement were $164,000 and accrued interest at a weighted
average rate of 1.7%.
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, 2009, the applicable
LIBOR interest rate margin was 1.25% and the applicable commitment fee was .25%.
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, 2009. In the event the Company is unable to remain in compliance
with the Credit Agreement covenants and financial tests contained in the Credit Agreement in the
future, the Companys lenders would have the right to declare it in default with respect to such
obligations, and consequently, certain of our other debt obligations, including substantially all
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 the Company was unable to
obtain a waiver from its lenders, renegotiate or refinance these obligations, a material adverse
effect on the ability of the Company to conduct its operations in the ordinary course would likely
result.
The Company also maintains an unsecured credit facility with a commercial bank currently
consisting of a U.S. $5,000 maximum borrowing limit component and a separate Canadian dollar (C$)
C$27,000 maximum borrowing limit component. At June 30, 2009, outstanding borrowings were $2,000
which accrued interest at a weighted average rate of 1.6%, and C$18,500 ($16,003 U.S. equivalent),
which accrued interest at a weighted average rate of 1.8%.
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 2009 while the other facility expires in December 2009. At June 30,
2009, outstanding borrowings under the Auxiliary Bank Facilities totaled $9,815 and accrued
interest at a weighted average rate of 2.5%. Because the Company currently has the ability and
intent to refinance borrowings outstanding under the Auxiliary Bank Facilities expiring in October
and December 2009, such borrowings are classified as long-term debt in the accompanying condensed
consolidated balance sheet at June 30, 2009. The Auxiliary Bank Facilities cross-default to the
events of default set forth in the Credit Agreement.
At June 30, 2009, outstanding borrowings under term equipment notes totaled $84,802 and
carried interest 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. The term equipment notes
cross-default to the events of default set forth in the Credit Agreement. At June 30, 2009,
outstanding borrowings under the Companys real estate notes totaled
10
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share data and percentages)
(Unaudited)
$4,138 and carried a 6.0% interest rate. 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, 2009, other debt obligations totaled
$4,298 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 and other indebtedness the Company may incur in the future.
On July 30, 2009, the Company entered into a fifth amendment to its Credit Agreement (the
Amended Credit Agreement). The commitment amount under the Amended Credit Agreement remains
unchanged at $335,000 and the maturity date remains unchanged at October 6, 2011. The most
significant change under the Amended Credit Agreement was an increase in the maximum permitted
leverage ratio, as defined, which provides the Company with additional financial
flexibility. The amendment
also provided for an increase in margin of 1.0% to 1.5% on the interest paid on LIBOR borrowings
based upon the applicable leverage ratio, as defined in the Amended Credit Agreement. On the
effective date of the amendment, the LIBOR interest rate margin increased by 1.0%.
3. 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 2009 Form 10-K/A.
The Company granted 40,000 stock options during the three months ended June 30, 2009. There
were no stock options exercised during the three months ended June 30, 2009. The following table
summarizes stock option activity for the three months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Exercise |
|
Stock Options |
|
Shares |
|
|
Price |
|
Outstanding at March 31, 2009 |
|
|
1,799,776 |
|
|
$ |
37.85 |
|
Granted |
|
|
40,000 |
|
|
|
15.96 |
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(5,352 |
) |
|
|
19.35 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009 (a) |
|
|
1,834,424 |
|
|
|
37.42 |
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2009 (a) |
|
|
1,083,778 |
|
|
|
33.67 |
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Stock options outstanding as of June 30, 2009 have a weighted average remaining contractual life of
6.1 years. Based on the market value of the Companys common stock on June 30, 2009,
outstanding stock options have an aggregate intrinsic value of $2,064 and exercisable
stock options have an aggregate intrinsic value of $1,956. |
The Company granted an award of 25,000 restricted stock unit awards during the three months
ended June 30, 2009 having a fair value of $331. The following table summarizes restricted stock
unit award activity for the three months ended June 30, 2009:
|
|
|
|
|
Restricted Stock Unit Awards |
|
Shares |
|
Outstanding at March 31, 2009 |
|
|
29,375 |
|
Granted |
|
|
25,000 |
|
Vested and issued |
|
|
(9,792 |
) |
Forfeited or expired |
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009 (a) |
|
|
44,583 |
|
|
|
|
|
|
|
|
(a) |
|
Restricted stock units outstanding as of June 30, 2009 have a weighted average remaining contractual
term of 1.5 years and a total intrinsic value of $777. |
11
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, 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. 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, 2009, $9,045 of total unrecognized compensation cost related to stock options
and restricted stock unit awards is expected to be recognized over a weighted average period of 1.8 years. Share-based compensation
expenses totaled $1,544 and $1,644 for the three months ended June 30, 2009 and 2008.
4. 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, 2009 and March 31,
2009, the Company had $15,227 and $14,794 of unrecognized tax
benefits included in long-term other liabilities. Of the unrecognized tax benefits at June 30,
2009, $14,565 if recognized, would decrease the Companys effective income tax rate and increase
net income.
As of June 30, 2009, the Company believes it is reasonably possible that the unrecognized tax
benefits may increase within 12 months by as much as $547, primarily related to deductions to be
claimed on state tax returns for which the ultimate outcome is uncertain.
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 expense and any related penalties related to income tax
uncertainties as a component of income tax expense. The total net interest expense and penalties
related to tax uncertainties recognized for the three months ended June 30, 2009 and June 30, 2008
was $170 and $37, respectively. Accrued interest and penalties of $1,924 and $1,754 related to
income tax uncertainties are a component of long-term other liabilities at June 30, 2009 and March
31, 2009, respectively.
12
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/A as of and for the year ended March 31, 2009. 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 located in 27 U.S. states, one Canadian province and Prague, the Czech
Republic. Complementing the printing services we provide, we also offer state-of-the-art
fulfillment services and 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 where 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 software 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 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 providing commercial printing and print-related services. These
services consist of (i) traditional print services, including electronic prepress, digital and
offset printing, finishing, storage and delivery of high-quality printed documents 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
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 revenue in
the quarter ended March 31. Conversely, revenues tend to be seasonally weaker in the quarters ended
June 30 and September 30. Due to the current economic recession, which began in late fiscal 2008
and may potentially continue through fiscal 2010, these seasonal trends may not have a significant
impact on our sales as revenues are generally depressed. Additionally, a further deterioration in
the economy would likely adversely impact our revenues and results of operations.
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, supplies, rental and insurance costs associated with
operating our facilities and equipment and depreciation charges.
13
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, depreciation 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 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 |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Sales |
|
$ |
225.9 |
|
|
$ |
285.2 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
181.1 |
|
|
|
214.6 |
|
|
|
80.2 |
|
|
|
75.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
44.8 |
|
|
|
70.6 |
|
|
|
19.8 |
|
|
|
24.8 |
|
Selling expenses |
|
|
22.8 |
|
|
|
28.4 |
|
|
|
10.1 |
|
|
|
10.0 |
|
General and administrative expenses |
|
|
21.1 |
|
|
|
22.2 |
|
|
|
9.3 |
|
|
|
7.8 |
|
Other (income) expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
0.9 |
|
|
|
20.0 |
|
|
|
0.4 |
|
|
|
7.0 |
|
Interest expense, net |
|
|
2.5 |
|
|
|
4.3 |
|
|
|
1.1 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
(1.6 |
) |
|
|
15.7 |
|
|
|
(0.7 |
) |
|
|
5.5 |
|
Income taxes |
|
|
(1.3 |
) |
|
|
6.1 |
|
|
|
(0.6 |
) |
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
$ |
(0.3 |
) |
|
$ |
9.6 |
|
|
|
(0.1 |
)% |
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our sales and expenses for the three months ended June 30, 2009 were not impacted by
acquisitions.
Comparative Analysis of Consolidated Income Statements for the Three Months Ended June 30, 2009 and
2008
Sales in the three month period ended June 30, 2009 declined $59.3 million, or 21%, to $225.9
million from $285.2 million for the same period in the prior year. The decline in sales was due to
a reduction in demand for printing services as a
result of continuing weakness in the overall U.S. economy, a more difficult operating
environment and lower election-related print business.
14
Gross profit during the three months ended June 30, 2009 declined $25.8 million, or 37%, to
$44.8 million compared to $70.6 million for the same period in the prior year. The decline in gross
profit primarily resulted from the decline in sales, including the effects of a more difficult
operating environment. The decline in sales had the effect of increasing fixed costs as a
percentage of revenues thereby reducing gross profit margin (gross profit divided by revenues) from
24.8% in the June 2008 quarter to 19.8% this quarter.
Selling expense during the three months ended June 30, 2009 declined $5.6 million, or 20%, to
$22.8 million from $28.4 million for the same period in the prior year. The decrease was primarily
due to lower sales commissions and other miscellaneous selling expenses resulting from lower sales.
As a percentage of sales, selling expenses slightly increased to 10.1% in the current quarter as
compared to 10.0% for the same period in the prior year.
General and administrative expenses during the three months ended June 30, 2009 declined $1.1
million, or 5%, to $21.1 million from $22.2 million for the same period in the prior year. This
decline was primarily due to a reduction in salary and wages and bad debt recovery for the three
months ended June 30, 2009, as compared to bad debt expense for the three months ended June 30,
2008. As a percentage of sales, general and administrative expenses increased to 9.3% in the
current quarter compared to 7.8% for the same period in the prior year. This increase was due to
the decline in sales, partially offset by the effect of a decline in the general and administrative
expenses compared to the prior year.
Interest expense during the three months ended June 30, 2009 declined $1.8 million to $2.5
million compared to the same period last year, due to a lower level of average debt outstanding and
lower interest rates on floating rate bank debt.
For the quarter ended June 30, 2009, the Companys effective tax rate was 80% as compared to
an effective tax rate of 39% for the same period in the prior year.
The increase primarily related to a lower state income tax rate
mostly due to a release of a valuation allowance, due to tax
planning, and a larger percentage impact on the
effective tax rate caused by permanent differences, due to lower net income compared to the prior year.
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, repurchases of our common stock and for working capital requirements. Supplemental
information pertaining to our historical sources and uses of cash is presented as below 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 |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In millions) |
|
Net cash provided by operating activities |
|
$ |
33.9 |
|
|
$ |
36.6 |
|
Acquisitions of businesses |
|
|
|
|
|
|
(6.7 |
) |
Capital expenditures, net of proceeds from asset dispositions |
|
|
(4.0 |
) |
|
|
(7.1 |
) |
Net payments under bank credit facilities |
|
|
(14.2 |
) |
|
|
(16.3 |
) |
Net payments on term equipment notes and other debt |
|
|
(16.3 |
) |
|
|
(5.5 |
) |
Proceeds from exercise of stock options |
|
|
|
|
|
|
2.9 |
|
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, |
|
|
|
2009 |
|
|
2009 |
|
|
|
(In millions) |
|
Cash and cash equivalents |
|
$ |
9.2 |
|
|
$ |
9.8 |
|
Working capital, inclusive of cash and cash equivalents |
|
|
91.5 |
|
|
|
109.4 |
|
Total debt |
|
|
285.1 |
|
|
|
314.2 |
|
Net cash provided by operating activities declined $2.7 million over the same three-month
period in the prior year, due primarily to a net loss, compared to net income in the prior year,
and changes in working capital items (primarily accounts receivable, accounts payable and accrued
liabilities). We invested $4.5 million in new equipment and technology during the three months
ended June 30, 2009. We believe that our cash flow provided by operations, combined with new
borrowings, will be adequate to cover our debt service requirements, planned capital
expenditures and working capital requirements for the remaining fiscal year 2010. For the year
ended March 31, 2010, we expect to spend approximately $20 million on capital expenditures.
15
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 under our primary bank credit facility. We have however, in the past issued
our common stock as purchase price consideration in some of our acquisitions and may do so again in
the future.
Debt Obligations
Our primary bank credit facility (the Credit Agreement) currently provides for $335 million
in revolving credit and has a maturity date of October 6, 2011. At June 30, 2009, outstanding
borrowings under the Credit Agreement were $164 million and accrued interest at a weighted average
rate of 1.7%.
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, 2009 the applicable LIBOR interest rate margin was 1.25% and
the applicable commitment fee was .25%.
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, 2009. In the event that we are unable to remain in compliance with the Credit
Agreements 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 from our lenders, or renegotiate or
refinance these obligations, a material adverse effect on our ability to conduct our operations in
the ordinary course likely would result.
We also maintain an unsecured credit facility with a commercial bank (the A&B Credit
Facility) currently consisting of a U.S. $5 million maximum borrowing limit component and a
separate Canadian dollar (C$) C$27 million maximum borrowing limit component. At June 30, 2009,
outstanding borrowings under the A&B Credit Facility were $2.0 million, which accrued interest at a
weighted average rate of 1.6%, and C$18.5 million ($16 million U.S. equivalent), which accrued
interest at a weighted average rate of 1.8%. An annual reduction of C$4 million on the Canadian
dollar denominated commitment occurs on December 31 during each year of the A&B Credit Facility
until the final maturity date of October 6, 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 2009 while the other facility expires in December 2009. At June 30, 2009, outstanding
borrowings under the Auxiliary Bank Facilities totaled $9.8 million and accrued interest at a
weighted average rate of 2.5%. Because we currently have the ability and intent to refinance the
borrowings outstanding under the Auxiliary Bank Facilities expiring in October and December 2009,
such borrowings are classified as long-term debt in our condensed consolidated balance sheet at
June 30, 2009. The Auxiliary Bank Facilities cross-default to the events of default set forth in
the Credit Agreement.
At June 30, 2009, outstanding borrowings under our term equipment notes totaled $84.8 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. The term equipment notes
cross-default to the events of default set forth in the Credit Agreement. At June 30, 2009,
outstanding borrowings under our real estate notes totaled $4.1 million 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, 2009, other
debt obligations totaled $4.3 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 other debt obligations. The
Credit Agreement places certain limitations on the amount of additional term note obligations and
other indebtedness we may incur in the future.
16
On July 30, 2009, we entered into a fifth amendment to our Credit Agreement (the Amended
Credit Agreement). The commitment amount under the Amended Credit Agreement remains unchanged at
$335 million and the maturity date remains unchanged at October 6, 2011. The most significant
change under the Amended Credit Agreement was an increase in the
maximum permitted leverage ratio, as defined,
which provides us with additional financial flexibility. The amendment also provided for an
increase in margin of 1.0% to 1.5% on the interest paid on LIBOR borrowings based upon the
applicable leverage ratio, as defined in the Amended Credit Agreement. On the effective
date of the amendment, the LIBOR interest rate margin increased by
1.0%.
As of July 31, 2009, our available credit under existing credit facilities as amended was
approximately $173.3 million.
Commitment and Contingencies
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 $89.3 million as of June
30, 2009.
Letters of credit We had letters of credit outstanding as of June 30, 2009 totaling $6.1
million. All of these letters of credit were issued pursuant to the terms of our Credit Agreement,
which expires October 6, 2011.
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 our accrued loss estimates are
reasonable, significant differences related to the items noted above could materially affect our
risk exposure, insurance coverage, 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.
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. Revenue is recognized net of sales taxes.
Receivables, net of valuation allowance Accounts receivable at June 30, 2009 were $150.7
million, net of a $4.6 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 the continuing contraction in the U.S. 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.
17
Impairment of Goodwill We evaluate the carrying value of our goodwill as of each fiscal
year end, or at any time that management becomes aware of an indication of impairment. Under the
applicable accounting standards, the goodwill impairment analysis is a two-step test. In the first
step, we determine fair value for each reporting unit using trailing twelve
months earnings before interest, income taxes and depreciation and amortization (EBITDA),
multiplied by managements estimate of an appropriate enterprise value-to-EBITDA multiple for each
reporting unit, adjusted for a control premium. Managements total Company enterprise
value-to-EBITDA multiple is based upon the multiple derived from using the market capitalization of
the Companys common stock on or around the applicable balance sheet date, after considering an
appropriate control premium. This total Company enterprise value-to-EBITDA multiple is then used as
a starting point in determining the appropriate multiple for each reporting unit. If the carrying
value of the reporting unit exceeds the estimated fair value of the reporting unit, we must perform
a second step to measure the amount of impairment. This second step involves estimating the fair
value of identifiable tangible and intangible assets and determining an implied value of goodwill.
To the extent the implied value of goodwill is less than the carrying value of goodwill for a
particular reporting unit, we are required to record an impairment charge. The process of
determining the fair values of assets and liabilities can involve a considerable degree of
estimation.
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 condensed consolidated
financial statements, we are required to estimate 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 Financial Interpretation
No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No.109
(FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. Although we believe our estimates are reasonable, the final outcome of uncertain tax
positions may be different from that which is reflected in the 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.
New Accounting Pronouncements
In December 2007, the FASB issued SFAS 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. Our adoption of SFAS No. 141R effective for fiscal 2010 did not have a material impact on our
consolidated financial condition or results of operations.
18
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 depends 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, financial stability of its customers, the
sustained growth
of its digital printing business, seasonality of election-related business, its ability to
adequately manage expenses, including labor costs, the unfavorable outcome of legal proceedings,
the lack of or adequacy of insurance coverage for its business operations, the continued availability of raw
materials at affordable prices, retention of its key management and operating personnel,
satisfactory labor relations, the potential for additional goodwill impairment charges, 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 Quarterly 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 most recently filed Annual Report on Form 10-K/A and Current Reports on Form 8-K. Should one or
more of the foregoing risks or uncertainties materialize, or should the Companys underlying
assumptions, expectations, beliefs or projections 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, 2009 include
borrowings under our bank credit facilities, various term equipment notes and other debt
obligations. As of June 30, 2009, 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/A for the fiscal year ended March 31, 2009.
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.
19
CONSOLIDATED GRAPHICS, INC.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
As previously reported, on May 4, 2007, Rudamac, Inc. (Plaintiff) filed suit in Superior
Court for the State of California, Los Angeles County, against the Company, the Companys
subsidiary Thousand Oaks, and an employee of Thousand Oaks who had previously been employed by
Plaintiff. In the lawsuit, the Plaintiff alleged that the defendants were liable for the
unauthorized use of certain business information of Plaintiff that was obtained by Employee during
his employment with Plaintiff.
On January 28, 2009, the jury rendered a verdict against the defendants in the above matter
and awarded the Plaintiff $5.7 million in compensatory damages jointly and severally against the
defendants. On February 2, 2009, the jury rendered a verdict for punitive damages against Thousand
Oaks for $1.5 million and against the Company for $6.65 million. The court subsequently entered a
judgment against the defendants based on such verdicts and, on May 28, 2009, the defendants filed
an appeal on the judgment.
The Company has not changed its previous estimates that the aggregate liability and expense to
the Company with respect to this matter, and related claims with its insurance carriers governing
whether the insurance carriers are obligated to cover such claims, could be approximately $17.0
million. The Company recognized a charge of such amount in its quarter ended December 31, 2008.
In addition, from time to time, our Company is involved in other 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, but there
can be no assurance that such coverage will in fact cover, or be sufficient to cover, all potential
claims. Currently, we are not aware of any other 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/A for the fiscal year ended March 31, 2009 in response to Item 1A to Part 1 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
None.
20
ITEM 6. Exhibits
|
|
|
*3.1
|
|
Restated Articles of Incorporation of the Company filed with the Secretary of State of the State of
Texas on July 27, 1994 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1994), Exhibit 4(a)). |
*3.2
|
|
Articles of Amendment to the Restated Articles of Incorporation of the Company dated as of July 29,
1998 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1998), Exhibit 3.1). |
*3.3
|
|
Second Amended and Restated By-Laws of the Company adopted as of June 30, 2004 (Consolidated Graphics,
Inc. Form 10-Q (June 30, 2004), Exhibit 3.3). |
*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). |
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 |
21
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.
|
|
|
|
|
|
CONSOLIDATED GRAPHICS, INC.
|
|
Dated: August 5, 2009 |
By: |
/s/ Jon C. Biro
|
|
|
|
Jon C. Biro |
|
|
|
Executive Vice President and
Chief Financial and Accounting Officer |
|
|
22
Exhibit Index
|
|
|
*3.1
|
|
Restated Articles of Incorporation of the Company filed with the Secretary of State of the State of
Texas on July 27, 1994 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1994), Exhibit 4(a)). |
*3.2
|
|
Articles of Amendment to the Restated Articles of Incorporation of the Company dated as of July 29,
1998 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1998), Exhibit 3.1). |
*3.3
|
|
Second Amended and Restated By-Laws of the Company adopted as of June 30, 2004 (Consolidated Graphics,
Inc. Form 10-Q (June 30, 2004), Exhibit 3.3). |
*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). |
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 |
23