Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-12631
CONSOLIDATED GRAPHICS, INC.
(Exact name of Registrant as specified in its charter)
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Texas
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76-0190827 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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5858 Westheimer Road, Suite 200 |
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Houston, Texas
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77057 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (713) 787-0977
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definition of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer 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).
Yes o No þ
The number of shares of Common Stock, par value $.01 per share, of the Registrant outstanding
at October 15, 2010 was 11,570,599.
CONSOLIDATED GRAPHICS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
INDEX
2
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONSOLIDATED GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
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September 30, |
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March 31, |
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2010 |
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2010 |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
5,913 |
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$ |
6,741 |
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Accounts receivable, net |
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174,652 |
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169,915 |
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Inventories |
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55,622 |
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48,879 |
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Prepaid expenses |
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15,096 |
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9,316 |
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Deferred income taxes |
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12,362 |
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17,294 |
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Total current assets |
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263,645 |
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252,145 |
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PROPERTY AND EQUIPMENT, net |
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379,367 |
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380,708 |
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GOODWILL |
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25,293 |
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24,226 |
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OTHER INTANGIBLE ASSETS, net |
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20,794 |
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22,647 |
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OTHER ASSETS |
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10,709 |
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7,509 |
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$ |
699,808 |
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$ |
687,235 |
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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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$ |
19,032 |
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$ |
22,235 |
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Accounts payable |
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97,061 |
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83,955 |
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Accrued liabilities |
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82,539 |
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88,174 |
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Income taxes payable |
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9,417 |
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Total current liabilities |
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198,632 |
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203,781 |
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LONG-TERM DEBT, net of current portion |
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152,677 |
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159,321 |
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OTHER LIABILITIES |
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16,038 |
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14,729 |
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DEFERRED INCOME TAXES, net |
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39,160 |
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39,978 |
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Total liabilities |
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406,507 |
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417,809 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS EQUITY |
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Common stock, $.01 par value;
100,000,000 shares authorized; 11,548,131
and 11,211,216 issued and outstanding |
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115 |
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112 |
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Additional paid-in capital |
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174,722 |
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166,094 |
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Retained earnings |
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116,789 |
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101,894 |
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Accumulated other comprehensive income |
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1,675 |
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1,326 |
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Total shareholders equity |
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293,301 |
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269,426 |
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$ |
699,808 |
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$ |
687,235 |
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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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Six Months Ended |
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September 30 |
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September 30 |
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2010 |
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2009 |
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2010 |
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2009 |
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SALES |
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$ |
260,106 |
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$ |
251,626 |
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$ |
496,823 |
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$ |
477,487 |
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COST OF SALES |
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197,952 |
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196,183 |
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380,218 |
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377,215 |
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Gross profit |
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62,154 |
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55,443 |
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116,605 |
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100,272 |
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SELLING EXPENSES |
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22,300 |
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23,584 |
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45,607 |
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46,375 |
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GENERAL AND ADMINISTRATIVE EXPENSES |
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23,682 |
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22,426 |
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46,098 |
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43,639 |
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LITIGATION AND OTHER CHARGES |
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718 |
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2,633 |
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(3,466 |
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2,633 |
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OTHER EXPENSE, net |
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38 |
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218 |
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57 |
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164 |
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Operating income |
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15,416 |
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6,582 |
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28,309 |
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7,461 |
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INTEREST EXPENSE, net |
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2,096 |
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2,347 |
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4,099 |
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4,831 |
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Income before taxes |
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13,320 |
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4,235 |
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24,210 |
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2,630 |
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INCOME TAXES |
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5,266 |
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2,153 |
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9,315 |
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862 |
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Net income |
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$ |
8,054 |
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$ |
2,082 |
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$ |
14,895 |
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$ |
1,768 |
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BASIC EARNINGS PER SHARE |
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$ |
0.70 |
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$ |
0.19 |
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$ |
1.30 |
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$ |
0.16 |
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DILUTED EARNINGS PER SHARE |
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$ |
0.69 |
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$ |
0.18 |
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$ |
1.28 |
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$ |
0.16 |
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SHARES USED TO COMPUTE EARNINGS
PER SHARE |
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Basic |
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11,547 |
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11,163 |
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11,437 |
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11,161 |
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Diluted |
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11,742 |
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11,377 |
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11,635 |
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11,355 |
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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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Accumulated |
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Additional |
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Other |
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Common Stock |
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Paid-In |
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Retained |
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Comprehensive |
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Shares |
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Amount |
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Capital |
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Earnings |
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Income |
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Total |
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BALANCE, March 31, 2010 |
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11,211 |
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$ |
112 |
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$ |
166,094 |
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$ |
101,894 |
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$ |
1,326 |
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$ |
269,426 |
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Net income |
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14,895 |
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14,895 |
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Other comprehensive income
currency translation adjustment |
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349 |
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349 |
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Comprehensive income |
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15,244 |
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Exercise of stock options,
including excess tax benefit |
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337 |
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3 |
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6,853 |
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6,856 |
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Share-based compensation expense |
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1,775 |
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1,775 |
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BALANCE, September 30, 2010 |
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11,548 |
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$ |
115 |
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$ |
174,722 |
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$ |
116,789 |
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$ |
1,675 |
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$ |
293,301 |
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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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Six Months Ended |
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September 30 |
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2010 |
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2009 |
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OPERATING ACTIVITIES |
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Net income |
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$ |
14,895 |
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$ |
1,768 |
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Adjustments to reconcile net income to net cash provided by operating activities |
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Depreciation |
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32,409 |
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33,903 |
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Amortization |
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1,781 |
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1,935 |
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Bad debt expense (recovery) |
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252 |
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(417 |
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Foreign currency gain |
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(16 |
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(287 |
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Litigation and other charges |
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(3,466 |
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2,633 |
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Deferred income taxes |
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4,624 |
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1,490 |
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Share-based compensation expense |
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1,775 |
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2,753 |
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Changes in assets and liabilities, net of effects of acquisitions |
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Accounts receivable |
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(2,898 |
) |
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4,250 |
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Inventories |
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(5,671 |
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93 |
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Prepaid expenses |
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(5,780 |
) |
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4,452 |
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Other assets |
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(2,949 |
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561 |
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Accounts payable and accrued liabilities |
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(6,219 |
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42,602 |
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Other liabilities |
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1,309 |
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1,045 |
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Income taxes payable |
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(9,426 |
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(377 |
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Net cash provided by operating activities |
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20,620 |
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96,404 |
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INVESTING ACTIVITIES |
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Acquisitions |
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(3,290 |
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(750 |
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Purchases of property and equipment |
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(16,025 |
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(11,380 |
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Proceeds from asset dispositions |
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2,651 |
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630 |
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Net cash used in investing activities |
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(16,664 |
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(11,500 |
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FINANCING ACTIVITIES |
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Proceeds from bank credit facilities |
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126,045 |
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55,480 |
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Payments on bank credit facilities |
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(125,499 |
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(119,009 |
) |
Payments on term equipment notes and other debt |
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(11,958 |
) |
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(20,308 |
) |
Proceeds from exercise of stock options, including excess tax benefit |
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6,856 |
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Net cash used in financing activities |
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(4,556 |
) |
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(83,837 |
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Effect of exchange rate changes on cash and cash equivalents |
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(228 |
) |
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218 |
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
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(828 |
) |
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1,285 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
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6,741 |
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|
9,762 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
5,913 |
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$ |
11,047 |
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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 and 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 six months ended September 30, 2010 are
not necessarily indicative of future operating results. Balance sheet information as of March 31,
2010 has been derived from the Companys most recent annual audited consolidated financial
statements. For further information, refer to the consolidated financial statements and footnotes
thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended March 31,
2010 filed with the SEC on May 21, 2010 (2010 Form 10-K).
Use of Estimates The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of certain estimates and assumptions by management in
determining the reported amounts of assets and liabilities, disclosure of contingent liabilities as
of the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period including depreciation of property and equipment and amortization or
impairment of intangible assets. The Company evaluates its estimates and assumptions on an ongoing
basis and relies on historical experience and various other factors that it believes to be
reasonable under the circumstances to determine such estimates. Because uncertainties with respect
to estimates and assumptions are inherent in the preparation of financial statements, actual
results could differ from these estimates.
Reclassification Certain reclassifications of prior period data have been made to conform to
current period reporting.
Cash and Cash Equivalents The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents. Pursuant to the Companys cash
management system, the Company deposits cash into its bank accounts as checks written by the
Company are presented to the bank for payment. Checks issued by the Company but not presented to
the banks for payment are included in accounts payable and totaled $49,454 as of September 30, 2010
and $40,342 as of March 31, 2010.
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. Revenue
from distribution services is recognized when the services are provided. 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 and diverse group of customers with no individual customer accounting for
more than 6% of the Companys revenues for the six months ended September 30, 2010. The Company
maintains an allowance for doubtful accounts based upon its evaluation of aging of receivables,
historical experience and the current economic environment. Accounts receivable in the accompanying
condensed consolidated balance sheets are reflected net of allowance for doubtful accounts of
$4,310 and $4,348 at September 30, 2010 and March 31, 2010, respectively.
7
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data and percentages)
(Unaudited)
Earnings Per Share Basic earnings per share are calculated by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share reflect net
income divided by the weighted average number of common shares, dilutive stock options and
restricted stock unit awards outstanding using the treasury stock method. Earnings per share are
set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,054 |
|
|
$ |
2,082 |
|
|
$ |
14,895 |
|
|
$ |
1,768 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
11,547,247 |
|
|
|
11,162,667 |
|
|
|
11,436,661 |
|
|
|
11,161,035 |
|
Dilutive options and stock awards |
|
|
194,895 |
|
|
|
214,671 |
|
|
|
198,390 |
|
|
|
194,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of common shares
outstanding |
|
|
11,742,142 |
|
|
|
11,377,388 |
|
|
|
11,635,051 |
|
|
|
11,355,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.70 |
|
|
$ |
0.19 |
|
|
$ |
1.30 |
|
|
$ |
0.16 |
|
Diluted |
|
$ |
0.69 |
|
|
$ |
0.18 |
|
|
$ |
1.28 |
|
|
$ |
0.16 |
|
Diluted earnings per share takes into consideration the dilution of certain unvested
restricted stock unit awards and unexercised stock options. For the three and six months ended
September 30, 2010, options to purchase 1,029,232 shares of common stock were outstanding but not
included in the computation of diluted earnings per share, because the option exercise price
exceeded the average quarterly traded price of the Companys common stock such that their inclusion
would have had an anti-dilutive effect. For the three and six months ended September 30, 2009,
options to purchase 1,160,211 shares of common stock were outstanding but not included in the
computation of diluted earnings per share, because the option exercise price exceeded the average
quarterly traded price of the Companys common stock such that their inclusion would have had an
anti-dilutive effect.
Inventories Inventories 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 include the cost of purchased raw materials, labor and overhead.
The carrying values of inventories are set forth below:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2010 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
23,787 |
|
|
$ |
20,932 |
|
Work in progress |
|
|
26,263 |
|
|
|
22,354 |
|
Finished goods |
|
|
5,572 |
|
|
|
5,593 |
|
|
|
|
|
|
|
|
|
|
$ |
55,622 |
|
|
$ |
48,879 |
|
|
|
|
|
|
|
|
Goodwill and Long-Lived Assets Goodwill totaled $25,293 at September 30, 2010 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 by estimating 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 (25% at March 31, 2010, based upon historical transactions in the
printing industry). 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.
8
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data and percentages)
(Unaudited)
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 a 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 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 intangible assets 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.
The Company compares the carrying value of long-lived assets, including property, plant and
equipment, and intangible assets other than goodwill or intangible assets with indefinite lives to
projections of future undiscounted cash flows attributable to such assets. 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. Property and equipment in the
accompanying condensed consolidated balance sheets are reflected net of accumulated depreciation of
$395,491 and $370,457 at September 30, 2010 and March 31, 2010, respectively.
The net book value of other intangible assets at September 30, 2010 was $20,794. 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 between 5 and 25 years. Such assets are
evaluated for recoverability with other long-lived assets as discussed above. Amortization expense
totaled $889 and $1,072 for the three months ended September 30, 2010 and 2009, respectively.
Amortization expense totaled $1,781 and $1,935 for the six months ended September 30, 2010 and
2009, respectively.
Supplemental Cash Flow Information The 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 $16,025 and
$11,380 for the six months ended September 30, 2010 and 2009, respectively. For the six months
ended September 30, 2010 and 2009, the Company paid cash for interest totaling $4,063 and $5,016,
respectively. For the six months ended September 30, 2010 and 2009, the Company paid cash for
income taxes, net of refunds, totaling $13,009 and $5,591, 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 $116,932 at September 30, 2010 and $116,787 at March
31, 2010, respectively, approximated their fair values. The Company believes that the recorded
values of its fixed rate debt obligations which totaled $54,777 at September 30, 2010 and $64,769
at March 31, 2010, respectively, 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 Currency Assets 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
loss related to the revaluation of certain transactions denominated in currencies other than the
reporting units functional currency totaled $38 and $218 for the three months ended September 30,
2010 and 2009, respectively, and $57 and $164 for the six months ended September 30, 2010 and 2009,
respectively, and is reflected as Other Expense on the condensed consolidated income statements.
Accumulated Other Comprehensive Income Accumulated Other Comprehensive Income is comprised of
foreign currency translation adjustments.
9
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data and percentages)
(Unaudited)
Geographic Information Revenues of the Companys subsidiaries operating outside the United
States were $12,664 and $12,047 for the three months ended September 30, 2010 and 2009,
respectively, and $25,340 and $21,798 for the six months ended September 30, 2010 and 2009,
respectively. Long-lived assets of the Companys subsidiaries operating outside the United States
were $33,218 as of September 30, 2010 and $35,822 as of March 31, 2010.
2. ACQUISITIONS
Revenues and expenses of the acquired businesses have been included in the accompanying
condensed consolidated financial statements beginning on their respective dates of acquisition. The
allocation of purchase price to the acquired assets and liabilities is based on estimates of fair
value and may be revised if and when additional information the Company is awaiting concerning
certain asset and liability valuations is obtained, provided that such information is received no
later than one year after the date of acquisition. During the six months ended September 30, 2010,
the Company paid cash totaling $3,290 and assumed liabilities totaling $6,875 to acquire the assets
of a printing business.
3. LONG TERM DEBT
The following is a summary of the Companys long-term debt as of:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2010 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Bank credit facilities |
|
$ |
113,332 |
|
|
$ |
113,186 |
|
Term equipment notes |
|
|
52,641 |
|
|
|
64,612 |
|
Other |
|
|
5,736 |
|
|
|
3,758 |
|
|
|
|
|
|
|
|
|
|
|
171,709 |
|
|
|
181,556 |
|
Lesscurrent portion |
|
|
(19,032 |
) |
|
|
(22,235 |
) |
|
|
|
|
|
|
|
|
|
$ |
152,677 |
|
|
$ |
159,321 |
|
|
|
|
|
|
|
|
In August 2010, the Company entered into a new Credit Agreement (the Credit Agreement),
which effectively amended and restated the previous bank credit facility. The Credit Agreement
currently provides for up to $285,000 in revolving credit and has a maturity date of October 6,
2014. At September 30, 2010, outstanding borrowings under the Credit Agreement were $90,700 and
accrued interest at a weighted average rate of 2.0%.
Under the terms of the Credit Agreement the proceeds from borrowings may be used to repay
certain indebtedness, finance certain acquisitions, provide for working capital and general
corporate purposes and, subject to certain restrictions, repurchase the Companys common stock.
In order to repurchase Company
common stock under the terms of the Credit Agreement, the Company must
(1) demonstrate compliance on a proforma basis, giving effect to such
repurchase with the financial covenants set forth in the Credit Agreement, and
(2) have a Leverage Ratio (Debt divided by EBITDA, as defined in the
Credit Agreement) not exceeding 2.50 to 1.00 on a proforma basis after giving
effect to the repurchase. 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. The collateral also secures, on a pari passu basis, the obligations under the A&B
Credit Facility and the Auxiliary Bank Facilities described below. Borrowings under the Credit
Agreement accrue interest, at the Companys option, at either LIBOR plus a margin of 1.375% to
2.75%, or an alternate base rate (based upon the greater of (i) the administrative agent banks
prime lending rate, (ii) the sum of the LIBOR rate for a one-month interest period plus 1.50% or
(iii) the sum of the Federal Funds effective rate plus .5% per annum) plus a margin of .0% to
1.25%. The Company is also required to pay an annual commitment fee ranging from .25% to .5% 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 September 30, 2010, the applicable margin on LIBOR
based loans is 1.625%, the applicable margin on alternative base rate loans is .125% and the
applicable commitment fee was .25%.
The Company is subject to certain covenants and restrictions, including limitations on
additional indebtedness it may incur in the future, and must meet certain financial tests under the
Credit Agreement. The Company was in compliance with such covenants, restrictions and financial
tests at September 30, 2010. 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 or 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.
10
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data and percentages)
(Unaudited)
The Company also maintains a secured credit facility (the A&B Credit Facility) which
provides revolving credit for its Canadian subsidiary, Annan & Bird Lithographers, Inc., available
for both U.S. dollar and Canadian dollar loans not to exceed in the aggregate $25,000 (U.S.
equivalent). At September 30, 2010, outstanding borrowings were $12,686 (U.S. equivalent) which
accrued interest at a weighted average rate of 2.7%. The A&B Credit Facility contains many of the
same covenants and restrictions contained in the Credit Agreement. Additionally, a default by the
Company under the Credit Agreement constitutes a default under the A&B Credit Facility and vice
versa.
In addition, the Company maintains two auxiliary revolving credit facilities (each an
Auxiliary Bank Facility and collectively the Auxiliary Bank Facilities). Each Auxiliary Bank
Facility is secured and has a maximum borrowing capacity of $5,000. One facility expires in October
2011 while the other facility expires in December 2010. At September 30, 2010, outstanding
borrowings under the Auxiliary Bank Facilities totaled $9,946 and accrued interest at a weighted
average rate of 2.9%. Because the Company currently has the ability and intent to refinance
borrowings outstanding under the Auxiliary Bank Facility expiring in December 2010, such borrowings
are classified as long-term debt in the accompanying condensed consolidated balance sheet at
September 30, 2010. The Auxiliary Bank Facilities cross-default to the events of default set forth
in the Credit Agreement.
At September 30, 2010, outstanding borrowings under term equipment notes totaled $52,641 and
carried interest rates between 3.9% and 7.1%. 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. Most of the term equipment
notes cross-default to the events of default set forth in the Credit Agreement.
At September 30, 2010, other debt obligations totaled $5,736 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 these other debt obligations.
As of September 30, 2010, the Companys available credit under existing credit facilities was
$198,881.
4. SHARE BASED COMPENSATION
Pursuant to the Consolidated Graphics, Inc. Amended and Restated Long-Term Incentive Plan (as
amended, the Plan), employees of the Company and members of the Companys Board of Directors have
been, or may be, granted options to purchase shares of the Companys common stock, restricted stock
unit awards or other forms of equity-based compensation. Options granted pursuant to the Plan
include incentive stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended and non-qualified stock options. Options previously granted under the Plan were at
a strike price not less than the market price of the stock at the date of grant and periodically
vest over a fixed period of up to ten years. Unvested options generally are cancelled upon
termination of employment and vested options generally expire shortly after termination of
employment. Otherwise, options expire after final vesting at the end of a fixed period generally
not in excess of an additional five years. At September 30, 2010, a total of 1,828,164 common
shares were reserved for issuance pursuant to the Plan, of which 302,223 shares of the Companys
common stock were available for future grants. Of the 302,223 shares available for future grants,
37,500 shares can be granted as restricted stock unit awards.
11
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data and percentages)
(Unaudited)
The following table summarizes stock option activity for the six months ended September 30,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
Stock Options |
|
Shares |
|
|
Exercise Price |
|
Outstanding at March 31, 2010 |
|
|
1,798,237 |
|
|
$ |
37.61 |
|
Granted |
|
|
15,000 |
|
|
|
42.62 |
|
Exercised |
|
|
(318,791 |
) |
|
|
12.74 |
|
Forfeited or expired |
|
|
(7,464 |
) |
|
|
44.88 |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2010 (a) |
|
|
1,486,982 |
|
|
$ |
42.96 |
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2010 (a) |
|
|
911,310 |
|
|
$ |
43.90 |
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Stock options outstanding as of September 30, 2010 have a weighted average
remaining contractual
life of 6.1 years. Based on the market value of the Companys common stock on
September 30, 2010, outstanding stock options have an aggregate intrinsic value
of $9,615 and exercisable stock options have an aggregate intrinsic value of
$4,627. |
The Company granted an award of 12,500 restricted stock unit awards during the six months
ended September 30, 2010 having a fair value of $529. The following table summarizes restricted
stock unit award activity for the six months ended September 30, 2010:
|
|
|
|
|
Restricted Stock Unit Awards |
|
Shares |
|
Outstanding at March 31, 2010 |
|
|
44,583 |
|
Granted |
|
|
12,500 |
|
Vested and issued |
|
|
(18,124 |
) |
Forfeited or expired |
|
|
|
|
|
|
|
|
Outstanding at September 30, 2010 (a) |
|
|
38,959 |
|
|
|
|
|
|
|
|
(a) |
|
Restricted stock units outstanding as of September 30, 2010 have a weighted
average remaining
contractual term of 1.1 years and a total intrinsic value of $1,615. |
The Company accounts for share-based compensation by measuring 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.
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 as of and for the year ended March 31, 2010. 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 and
print-related services with 70 printing businesses in 27 U.S. states, Toronto, and Prague. In
connection with our traditional print services, we also provide our customers with fulfillment and
mailing services, 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 accounts for more than 10% of our total revenues. No individual customer
accounts for more than 6% 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, legal, 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. 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) technology solutions 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; and (iv) cross media
capabilities allowing our customers to supplement the message of their printed materials through
other media, such as the internet, email, or text messages. 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, photo products such as calendars and photo books, catalogs and training manuals.
Most of our sales are generated by individual orders through commissioned sales personnel. We
predominantly 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 followed by
revenue in the quarter ended March. Conversely, revenues tend to be seasonally weaker in the
quarters ended June and September. Sales from election-related print business tend to be higher in
every other year in which national elections are held.
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, utilities, repair, 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, communication
expenses, various professional services, depreciation charges 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 integration 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. |
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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 for the periods indicated:
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Three Months |
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Six Months |
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Ended September 30 |
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Ended September 30 |
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2010 |
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2009 |
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2010 |
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2009 |
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(In millions) |
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(In millions) |
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Sales |
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$ |
260.1 |
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$ |
251.6 |
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$ |
496.8 |
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$ |
477.5 |
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Cost of sales |
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|
198.0 |
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|
196.2 |
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|
380.2 |
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|
377.2 |
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Gross profit |
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62.1 |
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55.4 |
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|
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116.6 |
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|
100.3 |
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Selling expenses |
|
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22.3 |
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23.6 |
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45.6 |
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46.4 |
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General and administrative expenses |
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23.7 |
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22.4 |
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46.2 |
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43.6 |
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Litigation and other charges |
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0.7 |
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2.6 |
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(3.5 |
) |
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2.6 |
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Other expense, net |
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0.2 |
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0.2 |
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Operating income |
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15.4 |
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6.6 |
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28.3 |
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7.5 |
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Interest expense, net |
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2.1 |
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2.4 |
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4.1 |
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4.8 |
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Income before taxes |
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13.3 |
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4.2 |
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24.2 |
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2.7 |
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Income taxes |
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5.2 |
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2.1 |
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9.3 |
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0.9 |
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Net income |
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$ |
8.1 |
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$ |
2.1 |
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$ |
14.9 |
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$ |
1.8 |
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14
The following table sets forth the components of income expressed as a percentage of sales for
the periods indicated:
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As a Percentage |
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As a Percentage |
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of Sales |
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of Sales |
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Three Months |
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Six Months |
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Ended September 30 |
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Ended September 30 |
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2010 |
|
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2009 |
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2010 |
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2009 |
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Sales |
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100.0 |
% |
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100.0 |
% |
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|
100.0 |
% |
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100.0 |
% |
Cost of sales |
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76.1 |
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78.0 |
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76.5 |
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79.0 |
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Gross profit |
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23.9 |
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22.0 |
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23.5 |
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21.0 |
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Selling expenses |
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8.6 |
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9.4 |
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9.2 |
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9.7 |
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General and administrative expenses |
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9.1 |
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8.9 |
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9.3 |
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9.1 |
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Litigation and other charges |
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0.3 |
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1.1 |
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(0.7 |
) |
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0.6 |
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Other expense, net |
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Operating income |
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5.9 |
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2.6 |
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5.7 |
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1.6 |
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Interest expense, net |
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0.8 |
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0.9 |
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0.8 |
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1.0 |
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Income before taxes |
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5.1 |
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1.7 |
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4.9 |
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0.6 |
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Income taxes |
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2.0 |
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0.9 |
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1.9 |
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0.2 |
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Net income |
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3.1 |
% |
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0.8 |
% |
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3.0 |
% |
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0.4 |
% |
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Comparative Analysis of Consolidated Income Statements for the Three Months Ended September 30,
2010 and 2009
Sales during the three month period ended September 30, 2010 increased $8.5 million, or 3%, to
$260.1 million from $251.6 million for the same period in the prior year. The increase in sales
was primarily due to higher election-related print business and the effect of an acquisition,
partially offset by a 1.2% year-over-year decline in same-store sales.
Gross profit during the three months ended September 30, 2010 increased $6.7 million, or 12%,
to $62.1 million, compared to $55.4 million for the same period in the prior year. The increase in
gross profit was due to the 3% increase in sales and an increase in the gross profit margin. Gross
profit margin (gross profit divided by revenues) increased from 22.0% in the September 2009 quarter
to 23.9% in the September 2010 quarter primarily as a result of lower labor costs, higher scrap
paper recycling income and fixed costs, such as depreciation, decreasing or not increasing as much
as sales.
Selling expense during the three months ended September 30, 2010 declined $1.3 million, or 5%,
to $22.3 million from $23.6 million for the same period in the prior year. The decrease was
primarily due to lower sales commission expense.
General and administrative expenses during the three months ended September 30, 2010 increased
$1.3 million, or 6%, to $23.7 million, from $22.4 million for the same period in the prior year.
This increase primarily resulted from increased staff within our information
technology group and new software licenses. As a percentage of sales, general and administrative
expenses increased to 9.1% in the current quarter compared to 8.9% for the same period in the prior
year.
Litigation and other charges during the three months ended September 30, 2010 were $0.7
million, and primarily consist of asset impairment charges.
Litigation and other charges during the three months ended
September 30, 2009 related to litigation that has since been
settled and the impairment of certain production equipment.
Other expense consists of foreign currency transaction losses resulting from certain
transactions of our Canadian and Czech Republic subsidiaries.
Net
interest expense declined from $2.4 million in last years September quarter to $2.1
million for the quarter ended September 30, 2010 due to a lower level of average debt outstanding.
For the three months ended September 30, 2010, the Companys effective tax rate was 39.5% as
compared to an effective tax rate of 50.8% for the same period in the prior year. The prior year
rate was significantly impacted by a larger percentage impact on the effective tax rate caused by
permanent differences, due to lower pre-tax income in the prior year and a higher state income tax
rate. In addition, during the September 2010 quarter, the effective tax rate was lower due to a
greater benefit for the domestic production activity deduction.
Comparative Analysis of Consolidated Income Statements for the Six Months Ended September 30, 2010
and 2009
Sales during the six month period ended September 30, 2010 increased $19.3 million, or 4%, to
$496.8 million from $477.5 million for the same period in the prior year. The increase in sales was
primarily due to higher election-related print business, the effect of an acquisition and a
year-over-year increase in same store sales.
15
Gross profit during the six months ended September 30, 2010 increased $16.3 million, or 16%,
to $116.6 million compared to $100.3 million for the same period in the prior year. The increase in
gross profit was due to the 4% increase in sales and an increase in the gross profit margin. Gross
profit margin (gross profit divided by revenues) increased to 23.5%
during the six months ended September 30, 2010 from 21.0% for the same period in the prior
year as a result of lower labor costs, higher scrap paper recycling income, and fixed costs, such
as depreciation, decreasing or not increasing as much as sales.
Selling expense during the six months ended September 30, 2010 declined $0.8 million, or 2%,
to $45.6 million from $46.4 million for the same period in the prior year. The decrease was
primarily due to lower sales commissions and other miscellaneous selling expenses. As a percentage
of sales, selling expenses decreased slightly to 9.2% in the current period as compared to 9.7% for
the same period in the prior year.
General and administrative expenses during the six months ended September 30, 2010 increased
$2.6 million, or 6%, to $46.2 million from $43.6 million for the same period in the prior year.
This increase primarily resulted from increased investments in staff within our information
technology group, new software licenses and higher bad debt expense. As a percentage of sales,
general and administrative expenses increased to 9.3% in the current period compared to 9.1% for
the same period in the prior year.
Litigation and other charges during the six months ended September 30, 2010 includes a $5.2
million positive adjustment resulting from the settlement of litigation for an amount lower than
previously recognized, partially offset by a $1.0 million charge for the cost of withdrawing from a
multi-employer pension plan and asset impairment charges. The previously disclosed litigation
settled was an isolated dispute between the Company and the former employer of an existing sales
employee.
Net interest expense during the six months ended September 30, 2010 declined to $4.1 million
from $4.8 million for the same period last year, due to a lower level of average debt outstanding
and lower interest rates on floating rate bank debt.
For the six months ended September 30, 2010, the Companys effective tax rate was 38.5% as
compared to an effective tax rate of 32.8% for the same period in the prior year. The difference
primarily relates to a lower state income tax rate due to the release of a valuation allowance in
the prior year.
Liquidity and Capital Resources
Sources and Uses of Cash
Our historical sources of cash have primarily been provided by operations and borrowings under
our various bank credit facilities. Our historical uses of cash have been for acquisitions of
printing businesses, capital expenditures, payment of principal and interest on outstanding debt
obligations, repurchases of our common stock and for working capital requirements. Various
components of our statement of cash flows are as follows:
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Six Months Ended |
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September 30 |
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2010 |
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2009 |
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(In millions) |
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Net cash provided by operating activities |
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$ |
20.6 |
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$ |
96.4 |
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Acquisitions |
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(3.3 |
) |
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(0.8 |
) |
Capital expenditures, net of proceeds from asset dispositions |
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(13.4 |
) |
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(10.8 |
) |
Net payments under bank credit facilities |
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0.5 |
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(63.5 |
) |
Net payments on term equipment notes and other debt |
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(12.0 |
) |
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(20.3 |
) |
Proceeds from exercise of stock options |
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6.9 |
|
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16
Our cash position, working capital and debt obligations are shown below:
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September 30, |
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March 31, |
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2010 |
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2010 |
|
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(In millions) |
|
Cash and cash equivalents |
|
$ |
5.9 |
|
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$ |
6.7 |
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Working capital |
|
|
65.0 |
|
|
|
48.4 |
|
Total debt |
|
|
171.7 |
|
|
|
181.6 |
|
Net cash provided by operating activities declined $75.8 million over the same period in the
prior year due to the change in working capital (primarily related to changes in accounts
receivable, inventories, accounts payable and accrued liabilities and income taxes payable). We
invested $16.0 million and $11.4 million in new equipment and technology during the six months
ended September 30, 2010 and 2009, respectively. We believe that our cash flow provided by
operations, combined with new borrowings, will be adequate to cover remaining fiscal year 2011
working capital needs, debt service requirements, planned capital expenditures (estimated to be
$45.0 million to $50.0 million), acquisitions of printing businesses, and the repurchase of our
common stock.
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 expect to fund future acquisitions through cash flow provided by operations or additional
borrowings under our primary bank credit facility.
In November 2010, our Board of Directors approved a common stock share repurchase program that
will expire in October 2011 providing for repurchases of our common stock not to exceed an
aggregate of $50.0 million in open-market, as well as privately negotiated transactions, pursuant
to applicable securities regulations and such purchases must be
permitted under the terms of the Companys Credit Agreement. We expect to fund any repurchases under the program through
cash flow provided by operations or additional borrowings under our primary bank credit facility.
The amount and timing of any purchases will depend upon a number of factors, including our
liquidity and potential alternative uses of our capital resources, the price and availability of
our shares, and general market conditions.
Debt Obligations
In August 2010, we entered into a new Credit Agreement (the Credit Agreement), which
effectively amended and restated the previous bank credit facility. The Credit Agreement currently
provides for up to $285.0 million in revolving credit and has a maturity date of October 6, 2014.
At September 30, 2010, outstanding borrowings under the Credit Agreement were $90.7 million and
accrued interest at a weighted average rate of 2.0%.
Under the terms of the Credit Agreement the proceeds from borrowings may be used to repay
certain indebtedness, finance certain acquisitions, provide for working capital and general
corporate purposes and, subject to certain restrictions, repurchase
our common stock. In order to repurchase our common
stock under the terms of the Credit Agreement, we must (1) demonstrate
compliance on a proforma basis, giving effect to such repurchase with the
financial covenants set forth in the Credit Agreement, and (2) have a
Leverage Ratio (Debt divided by EBITDA, as defined in the Credit Agreement) not
exceeding 2.50 to 1.00 on a proforma basis after giving effect to the
repurchase. 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. The
collateral also secures, on a pari passu basis, the obligations under the A&B Credit Facility and
the Auxiliary Bank Facilities described below. Borrowings under the Credit Agreement accrue
interest, at our option, at either LIBOR plus a margin of 1.375% to 2.75%, or an alternate base
rate (based upon the greater of (i) the administrative agent banks prime lending rate, (ii) the
sum of the LIBOR rate for a one-month interest period plus 1.50% or (iii) the sum of the Federal
Funds effective rate plus 0.5% per annum) plus a margin of 0.0% to 1.25%. We are also required to
pay an annual commitment fee ranging from 0.25% to 0.5% 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 September
30, 2010, the applicable margin on LIBOR based loans is 1.625%, the applicable margin on
alternative base rate loans is 0.125% and the applicable commitment fee was 0.25%.
We are subject to certain covenants and restrictions, including limitations on additional
indebtedness we may incur in the future, and must meet certain financial tests under the Credit
Agreement. We were in compliance with such covenants, restrictions and financial tests at September
30, 2010. In the event we are unable to remain in compliance with the Credit Agreement covenants
and financial tests contained in the Credit Agreement 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 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 we are 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 would
likely result.
17
We also maintain a secured credit facility (the A&B Credit Facility) which provides
revolving credit for our Canadian subsidiary, Annan & Bird Lithographers, Inc., available for both
U.S. dollar and Canadian dollar loans not to exceed in the aggregate $25.0 million (U.S.
equivalent). At September 30, 2010, outstanding borrowings were $12.7 million (U.S. equivalent)
which accrued interest at a weighted average rate of 2.7%. The A&B Credit Facility contains many of
the same covenants and restrictions contained in the Credit Agreement. Additionally, a default by
us under the Credit Agreement constitutes a default under the A&B Credit Facility and vice versa.
In addition, we maintain two auxiliary revolving credit facilities (each an Auxiliary Bank
Facility and collectively the Auxiliary Bank Facilities). Each Auxiliary Bank Facility is
secured and has a maximum borrowing capacity of $5.0 million. One facility expires in October 2011
while the other facility expires in December 2010. At September 30, 2010, outstanding borrowings
under the Auxiliary Bank Facilities totaled $9.9 million and accrued interest at a weighted average
rate of 2.9%. Because we currently have the ability and intent to refinance borrowings outstanding
under the Auxiliary Bank Facility expiring in December 2010, such borrowings are classified as
long-term debt in the accompanying condensed consolidated balance sheet at September 30, 2010. The
Auxiliary Bank Facilities cross-default to the events of default set forth in the Credit Agreement.
At September 30, 2010, outstanding borrowings under term equipment notes totaled $52.6 million
and carried interest rates between 3.9% and 7.1%. 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. Most of the term equipment notes
cross-default to the events of default set forth in the Credit Agreement.
At September 30, 2010, other debt obligations totaled $5.7 million and provided for principal
payments plus interest (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
other debt obligations.
As of September 30, 2010, our available credit under existing credit facilities was $198.9
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 $94.7 million as of
September 30, 2010.
Letters of credit We had letters of credit outstanding as of September 30, 2010 totaling $7.8
million. All of these letters of credit were issued pursuant to the terms of our Credit Agreement,
which expires October 6, 2014.
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 the future costs of incurred losses,
together with advice provided by administrators and consulting actuaries. The estimates of expected
loss amounts are subject to uncertainties arising from various sources, including changes in claims
reporting patterns, claims settlement patterns, judicial decisions, legislation and economic
conditions, which could result in an increase or decrease in accrued costs in future periods for
claim matters which occurred in a prior period. Although we believe that the accrued 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.
18
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. Revenue from distribution services is recognized when the services
are provided. 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 September 30, 2010 were
$174.7 million, net of a $4.3 million allowance for doubtful accounts. The valuation allowance was
determined based upon our evaluation of 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 a contraction in the
U.S. economy or other factors beyond our control. Changes in our estimates of collectability could
have a material adverse effect on our consolidated financial condition or results of operations.
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 potential 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 (25% at March 31, 2010, based upon historical transactions in the printing
industry). 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 exists. 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 the future costs of incurred losses,
together with advice provided by administrators and consulting actuaries. The estimates of expected
loss amounts are subject to uncertainties arising from various sources, including changes in claims
reporting patterns, claims settlement patterns, judicial decisions, legislation and economic
conditions, which could result in an increase or decrease in accrued costs in future periods for
claims matters which occurred in a prior period.
Accounting for income taxes As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes. This process involves estimating our
actual current tax exposure, together with assessing temporary differences resulting from differing
treatment of items for tax and financial reporting purposes. The tax effects of these temporary
differences are recorded as deferred tax assets or deferred tax liabilities. We must then assess
the likelihood that our deferred tax assets will be recovered from future taxable income, and to
the extent we believe that recovery is not likely, we must establish a valuation allowance.
Significant judgment is required in determining our provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance recorded against our net deferred tax assets.
Additionally, to account for uncertain tax positions we use 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 our
consolidated financial statements.
Accounting for acquisitions The allocations of purchase price to acquired assets and
liabilities are initially based on estimates of fair value and are 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, when appropriate, 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.
19
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 business expenses, including labor
costs, the unfavorable outcome of legal proceedings, the lack of or adequacy of insurance coverage
for its 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 our Annual Report on 10-K 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 Quarterly Reports on Form 10-Q 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. We are exposed to market risk in interest
rates related primarily to our debt obligations, which as of September 30, 2010 include borrowings
under our bank credit facilities, various term equipment notes and other debt obligations. As of
September 30, 2010, there were no material changes in our market risk or the estimated fair value
of our debt obligations relative to their recorded value, as reported in our Annual Report on
Form 10-K for the fiscal year ended March 31, 2010.
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.
20
CONSOLIDATED GRAPHICS, INC.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
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 is no assurance
that such coverage will in fact cover, or be sufficient to cover, all potential claims. Currently,
we are not aware of any legal proceedings or claims pending against the Company that our management
believes will have a material adverse effect on our financial condition or results of operations.
ITEM 1A. Risk Factors
There have been no material changes from risk factors previously disclosed in our Annual
Report on Form 10-K for the fiscal year ended March 31, 2010.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Removed and Reserved
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
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* |
10.1 |
|
|
Credit Agreement dated August 20, 2010, between Consolidated
Graphics, Inc., JP Morgan Chase Bank, N.A., as administrative agent,
J.P. Morgan Securities, Inc., as co-lead arranger and sole book
runner, Wells Fargo Bank, N.A., a syndication agent and co-lead
arranger, and the lenders and guarantors party thereto (Consolidated
Graphics, Inc. Form 8-K (August 20, 2010), Exhibit 10.1). |
|
31.1 |
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Certification of Joe R. Davis, principal executive officer, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
|
|
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.
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CONSOLIDATED GRAPHICS, INC.
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Dated: November 3, 2010 |
By: |
/s/ Jon C. Biro
|
|
|
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Jon C. Biro |
|
|
|
Executive Vice President and
Chief Financial and Accounting Officer |
|
22
Exhibit Index
|
|
|
|
|
* |
10.1 |
|
|
Credit Agreement dated August 20, 2010, between Consolidated
Graphics, Inc., JP Morgan Chase Bank, N.A., as administrative agent,
J.P. Morgan Securities, Inc., as co-lead arranger and sole book
runner, Wells Fargo Bank, N.A., a syndication agent and co-lead
arranger, and the lenders and guarantors party thereto (Consolidated
Graphics, Inc. Form 8-K (August 20, 2010), Exhibit 10.1). |
|
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