10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-12631
CONSOLIDATED GRAPHICS, INC.
(Exact name of Registrant as specified in its charter)
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Texas
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76-0190827 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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5858 Westheimer Road, Suite 200 |
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Houston, Texas
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77057 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (713) 787-0977
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. 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 Regulations 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 $.01 per share, of the Registrant outstanding
at January 15, 2010 was 11,167,667.
CONSOLIDATED GRAPHICS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2009
INDEX
2
PART I FINANCIAL INFORMATION
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ITEM 1. |
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Financial Statements |
CONSOLIDATED GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
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December 31, |
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March 31, |
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2009 |
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2009 |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
8,070 |
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$ |
9,762 |
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Accounts receivable, net |
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193,269 |
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173,501 |
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Inventories |
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49,782 |
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52,737 |
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Prepaid expenses |
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11,399 |
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17,340 |
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Deferred income taxes |
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17,861 |
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18,909 |
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Total current assets |
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280,381 |
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272,249 |
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PROPERTY AND EQUIPMENT, net |
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395,551 |
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430,519 |
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GOODWILL |
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29,436 |
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29,436 |
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OTHER INTANGIBLE ASSETS, net |
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22,636 |
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24,691 |
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OTHER ASSETS |
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7,552 |
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8,313 |
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$ |
735,556 |
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$ |
765,208 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES |
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Current portion of long-term debt |
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$ |
22,505 |
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$ |
27,026 |
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Accounts payable |
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94,602 |
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48,519 |
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Accrued liabilities |
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90,229 |
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86,718 |
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Income taxes payable |
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385 |
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553 |
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Total current liabilities |
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207,721 |
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162,816 |
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LONG-TERM DEBT, net of current portion |
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198,564 |
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287,164 |
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OTHER LIABILITIES |
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14,254 |
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14,794 |
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DEFERRED INCOME TAXES, net |
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50,273 |
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49,970 |
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Total liabilities |
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470,812 |
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514,744 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS EQUITY |
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Common stock, $.01 par value;
100,000,000 shares authorized;
11,167,667 and 11,152,875 issued
and outstanding |
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111 |
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111 |
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Additional paid-in capital |
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163,813 |
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163,131 |
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Retained earnings |
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101,013 |
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87,806 |
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Accumulated other comprehensive loss |
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(193 |
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(584 |
) |
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Total shareholders equity |
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264,744 |
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250,464 |
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$ |
735,556 |
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$ |
765,208 |
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See accompanying notes to condensed consolidated financial statements.
3
CONSOLIDATED GRAPHICS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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December 31, |
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December 31, |
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2009 |
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2008 |
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2009 |
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2008 |
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SALES |
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$ |
276,374 |
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$ |
315,815 |
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$ |
753,861 |
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$ |
897,960 |
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COST OF SALES |
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209,770 |
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241,055 |
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586,985 |
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679,974 |
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Gross profit |
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66,604 |
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74,760 |
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166,876 |
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217,986 |
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SELLING EXPENSES |
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22,678 |
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26,153 |
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69,053 |
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81,336 |
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GENERAL AND ADMINISTRATIVE EXPENSES |
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22,117 |
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24,981 |
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65,756 |
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71,975 |
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GOODWILL IMPAIRMENT CHARGE |
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62,524 |
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62,524 |
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LITIGATION AND OTHER CHARGES |
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3,138 |
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17,000 |
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5,771 |
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17,000 |
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OTHER (INCOME) EXPENSE, net |
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48 |
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(386 |
) |
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212 |
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(638 |
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Operating income (loss) |
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18,623 |
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(55,512 |
) |
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26,084 |
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(14,211 |
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INTEREST EXPENSE, net |
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2,616 |
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4,108 |
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7,447 |
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12,171 |
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Income (loss) before taxes |
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16,007 |
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(59,620 |
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18,637 |
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(26,382 |
) |
INCOME TAX EXPENSE (BENEFIT) |
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4,568 |
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(16,054 |
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5,430 |
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(2,735 |
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Net income (loss) |
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$ |
11,439 |
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$ |
(43,566 |
) |
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$ |
13,207 |
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$ |
(23,647 |
) |
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BASIC EARNINGS (LOSS) PER SHARE |
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$ |
1.02 |
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$ |
(3.91 |
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$ |
1.18 |
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$ |
(2.12 |
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DILUTED EARNINGS (LOSS) PER SHARE |
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$ |
1.00 |
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$ |
(3.91 |
) |
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$ |
1.16 |
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$ |
(2.12 |
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SHARES USED TO COMPUTE EARNINGS (LOSS)
PER SHARE |
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Basic |
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11,164 |
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11,147 |
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11,162 |
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11,135 |
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Diluted |
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11,458 |
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11,147 |
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11,390 |
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11,135 |
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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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Loss |
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Total |
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BALANCE, March 31, 2009 |
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11,153 |
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$ |
111 |
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$ |
163,131 |
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$ |
87,806 |
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$ |
(584 |
) |
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$ |
250,464 |
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Net income |
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13,207 |
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13,207 |
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Other comprehensive income -
currency translation adjustment, net
of tax |
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391 |
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391 |
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Comprehensive income |
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13,598 |
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Exercise of stock options, including
tax benefit |
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15 |
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111 |
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111 |
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Share-based compensation expense |
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3,949 |
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3,949 |
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Purchase of remaining interest in a
consolidated subsidiary, net of tax |
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(3,378 |
) |
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(3,378 |
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BALANCE, December 31, 2009 |
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11,168 |
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$ |
111 |
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$ |
163,813 |
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$ |
101,013 |
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$ |
(193 |
) |
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$ |
264,744 |
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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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Nine Months Ended |
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December 31, |
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2009 |
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2008 |
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OPERATING ACTIVITIES |
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Net income (loss) |
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$ |
13,207 |
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$ |
(23,647 |
) |
Adjustments to reconcile net income (loss) to net cash provided by
operating activities |
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Depreciation |
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51,806 |
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46,380 |
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Amortization |
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2,832 |
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3,176 |
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Bad debt expense |
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488 |
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3,040 |
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Foreign currency (gain) loss |
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(360 |
) |
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|
518 |
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Goodwill impairment charge |
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62,524 |
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Litigation and other charges |
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5,771 |
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17,000 |
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Deferred income taxes |
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|
3,997 |
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(17,724 |
) |
Share-based compensation expense |
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3,949 |
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|
5,120 |
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Changes in assets and liabilities |
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Accounts receivable |
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(19,225 |
) |
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(2,651 |
) |
Inventories |
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3,733 |
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|
1,882 |
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Prepaid expenses |
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5,968 |
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(3,111 |
) |
Other assets |
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|
766 |
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(446 |
) |
Accounts payable and accrued liabilities |
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48,006 |
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(3,977 |
) |
Other liabilities |
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(540 |
) |
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|
1,131 |
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Income taxes payable |
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(144 |
) |
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(52 |
) |
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Net cash provided by operating activities |
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120,254 |
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|
89,163 |
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INVESTING ACTIVITIES |
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Acquisitions of businesses, net of cash acquired |
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(2,289 |
) |
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(6,684 |
) |
Purchases of property and equipment |
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(21,686 |
) |
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(48,725 |
) |
Proceeds from asset dispositions |
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|
3,106 |
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|
1,284 |
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Net cash used in investing activities |
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|
(20,869 |
) |
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|
(54,125 |
) |
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FINANCING ACTIVITIES |
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Proceeds from bank credit facilities |
|
|
94,462 |
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|
184,266 |
|
Payments on bank credit facilities |
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(164,511 |
) |
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|
(202,197 |
) |
Proceeds from issuance of term equipment notes |
|
|
|
|
|
|
1,926 |
|
Payments on term equipment notes and other debt |
|
|
(25,952 |
) |
|
|
(17,696 |
) |
Purchase of remaining interest in a consolidated subsidiary |
|
|
(5,500 |
) |
|
|
|
|
Proceeds from exercise of stock options, including excess tax benefit |
|
|
111 |
|
|
|
3,019 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(101,390 |
) |
|
|
(30,682 |
) |
|
|
|
|
|
|
|
|
|
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|
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|
Effect of exchange rate changes on cash and cash equivalents |
|
|
313 |
|
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|
34 |
|
|
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|
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NET INCREASE/DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(1,692 |
) |
|
|
4,390 |
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
9,762 |
|
|
|
15,131 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
8,070 |
|
|
$ |
19,521 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except 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 nine months ended December 31, 2009 are
not necessarily indicative of future operating results. Balance sheet information as of March 31,
2009 has been derived from the Companys most recent annual audited consolidated financial
statements. For further information, refer to the consolidated financial statements and footnotes
thereto included in the Companys Annual Report on Form 10-K/A for the fiscal year ended March 31,
2009 filed with the SEC on May 29, 2009 (2009 Form 10-K/A).
Use of EstimatesThe preparation of financial statements in conformity with generally
accepted accounting principles requires the use of certain estimates and assumptions by management
in determining the reported amounts of assets and liabilities, disclosure of contingent liabilities
as of the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period including depreciation of property and equipment and amortization or
impairment of intangible assets. The Company evaluates its estimates and assumptions on an ongoing
basis and relies on historical experience and various other factors that it believes to be
reasonable under the circumstances to determine such estimates. Because uncertainties with respect
to estimates and assumptions are inherent in the preparation of financial statements, actual
results could differ from these estimates.
ReclassificationCertain reclassifications of prior year data have been made to conform to
current period reporting.
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 $54,672 as of December 31, 2009
and $5,684 as of March 31, 2009.
Revenue Recognition and Accounts Receivable The Company primarily recognizes revenue upon
delivery of the printed product to the customer. In the case of customer fulfillment arrangements,
including multiple deliverables of printing services and distribution services, revenue relating to
the printed product is recognized upon the delivery of the printed product into the Companys
fulfillment warehouses, and invoicing of the customer for the product at an agreed price. Because
printed products manufactured for the Companys customers are customized based upon the customers
specifications, product returns are not significant. The Company derives the majority of its
revenues from sales and services to a broad diverse group of customers with no individual customer
accounting for more than 6% of the Companys revenues for the nine months ended December 31, 2009.
The Company maintains an allowance for doubtful accounts based upon the expected collectability of
accounts receivable. Accounts receivable in the accompanying condensed consolidated balance sheets
are reflected net of allowance for doubtful accounts of $4,165 and $6,556 at December 31, 2009 and
March 31, 2009, respectively.
7
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and percentages)
(Unaudited)
Earnings Per ShareBasic earnings per share are calculated by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share reflect net
income divided by the weighted average number of common shares, dilutive stock options and
restricted stock unit awards outstanding using the treasury stock method. Earnings per share are
set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
December 31 |
|
|
December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
11,439 |
|
|
$ |
(43,566 |
) |
|
$ |
13,207 |
|
|
$ |
(23,647 |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
11,164 |
|
|
|
11,147 |
|
|
|
11,162 |
|
|
|
11,135 |
|
Dilutive options and awards |
|
|
294 |
|
|
|
|
|
|
|
228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of common shares
outstanding |
|
|
11,458 |
|
|
|
11,147 |
|
|
|
11,390 |
|
|
|
11,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.02 |
|
|
$ |
(3.91 |
) |
|
$ |
1.18 |
|
|
$ |
(2.12 |
) |
Diluted |
|
$ |
1.00 |
|
|
$ |
(3.91 |
) |
|
$ |
1.16 |
|
|
$ |
(2.12 |
) |
Diluted earnings (loss) per share takes into consideration the dilution of certain unvested
restricted stock unit awards and unexercised stock options. For the three and nine months ended
December 31, 2009, options to purchase 1,108 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 fair value of the Companys common stock such that their inclusion
would have an anti-dilutive effect. For the three and nine months ended December 31, 2008, options
to purchase 2,113 shares of common stock were outstanding but not included in the computation of
diluted earnings (loss) per share, because of the net loss during the three and nine months ended
December 31, 2008. Their inclusion would have had an anti-dilutive effect. Of the 2,113 options to
purchase shares, 1,728 shares had an option exercise price that exceeded the average quarterly fair
value of the Companys common stock.
InventoriesInventories are valued at the lower of cost or market utilizing the first-in,
first-out method for raw materials and the specific identification method for work in progress and
finished goods. Raw materials consist of paper, ink, proofing materials, plates, boxes and other
general supplies. Inventory values include the cost of purchased raw materials, labor and overhead
costs. The carrying values of inventories are set forth below:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
19,654 |
|
|
$ |
22,587 |
|
Work in progress |
|
|
24,554 |
|
|
|
24,896 |
|
Finished goods |
|
|
5,574 |
|
|
|
5,254 |
|
|
|
|
|
|
|
|
|
|
$ |
49,782 |
|
|
$ |
52,737 |
|
|
|
|
|
|
|
|
Goodwill and Long-Lived Assets Goodwill totaled $29,436 at December 31, 2009 and represents
the excess of the Companys purchase cost over the fair value of the net identifiable assets
acquired, net of previously recorded amortization and impairment charges. The Company assesses the
impairment of goodwill 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. 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 per share data and percentages)
(Unaudited)
To the extent the net book value of the Company as a whole is greater than the Companys
market capitalization, all or a significant portion of its goodwill may be considered impaired.
Under the applicable accounting standards, the goodwill impairment analysis is a two-step test. The
first step, used to identify potential impairment, involves comparing each reporting units
estimated fair value to its carrying value including goodwill. If the fair value of a reporting
unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the
carrying value exceeds fair value, there is an indication of impairment and the second step is
performed to measure the amount of impairment. The second step involves calculating an implied fair
value of goodwill for each reporting unit for which the first step indicated potential impairment.
The implied fair value of goodwill is determined in the same manner as the amount of goodwill
recognized in a 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. Accordingly,
during the quarter ended December 31, 2008, the Company recognized a non-cash impairment of its
goodwill in the accompanying condensed consolidated financial statements in the amount of $62,524,
representing 56% of the Companys consolidated goodwill, as of December 31, 2008.
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
their fair value determined by using projections of future undiscounted cash flows attributable to
such assets and other factors such as business trends and general economic conditions. In the event
that the carrying value of any long-lived asset exceeds the projection of future undiscounted cash
flows attributable to such asset, the Company records an impairment charge against income equal to
the excess, if any, of the carrying value over the assets fair value. The Company evaluates
long-lived assets whenever events or changes in conditions indicate that the carrying value may not
be recoverable.
The net book value of other intangible assets at December 31, 2009 was $22,636. 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 $898 and $1,029 for the three months ended December 31, 2009 and 2008, respectively.
Amortization expense totaled $2,832 and $3,176 for the nine months ended December 31, 2009 and
2008, respectively.
Litigation Charge In January and February 2009, a jury rendered verdicts for compensatory and
punitive damages against the Company due to a lawsuit involving an isolated dispute between the
Company and the former employer of an existing sales employee. As a result of these verdicts, a
pre-tax litigation charge of $17,000 has been accrued in the December 31, 2008 condensed
consolidated financial statements. The Company accrued additional charges in the nine months ended
December 31, 2009 to reflect the actual damages, fees and costs included in the order entered by
the judge. The Company intends to continue its defense of this matter
and intends to appeal the judgment.
Supplemental Cash Flow InformationThe condensed consolidated statements of cash flows
provide information about the Companys sources and uses of cash and exclude the effects of
non-cash transactions. Total capital expenditures, which were all cash transactions, were $21,686
for the nine months ended December 31, 2009. Total capital
expenditures were $56,002 during the nine months ended
December 31, 2008. Of this amount, $48,725 were cash transactions
and $7,277 were non-cash transactions, that were financed with term notes (See Notes 2. Long-Term Debt).
For the nine months ended December 31, 2009, the Company paid
cash totaling $1,539 to acquire certain assets of a
printing business and $750 to satisfy liabilities in connection with a prior period acquisition. In
addition, the Company paid cash totaling $5,500 to acquire the remaining interest in a consolidated
subsidiary. The Company recorded a deferred tax benefit of $2,122 related
to the acquisition of the remaining interest in the consolidated
subsidiary. For the nine months ended December 31, 2008, the Company paid cash totaling $6,684 to
satisfy certain liabilities in connection with certain prior period acquisitions. For the nine
months ended December 31, 2009 and 2008, the Company paid cash for interest totaling $7,580 and
$12,273, respectively. For the nine months ended December 31, 2009, the Company received a cash
refund for income taxes, net of payments, totaling $5,081. For the nine months ended December 31, 2008,
the Company paid cash for income taxes, net of refunds, of $14,185.
9
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and percentages)
(Unaudited)
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
$151,132 at December 31, 2009 and $218,801 at March 31, 2009, respectively, approximated their fair
values. The Company believes that the recorded values of its fixed rate debt obligations which
totaled $69,937 at December 31, 2009 and $95,389 at March 31, 2009, 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 CurrencyAssets and liabilities of subsidiaries operating outside the United States
with a functional currency other than the U.S. dollar are translated at the period-end exchange
rates. Income and expense items are translated at the average monthly exchange rates. The effects
of period-end translation are included as a component of Accumulated Other Comprehensive Income in
the condensed consolidated statement of shareholders equity. The net foreign currency transaction
(gain) loss related to the revaluation of certain transactions denominated in currencies other than
the reporting units functional currency totaled $48 and ($386) for the three months ended December
31, 2009 and 2008, respectively, and $212 and ($638) for the nine months ended December 31, 2009
and 2008, respectively, and is recorded in Other (Income) Expense on the condensed consolidated
income statements.
Accumulated Other Comprehensive LossAccumulated other comprehensive loss is comprised of
foreign currency translation adjustments.
Geographic InformationRevenues of the Companys subsidiaries operating outside the United
States were $15,344 and $13,081 for the three months ended December 31, 2009 and 2008, respectively
and $37,142 and $36,303 for the nine months ended December 31, 2009 and 2008, respectively.
Long-lived assets of the Companys subsidiaries operating outside the United States were $34,785 as
of December 31, 2009 and $34,632 as of March 31, 2009.
Subsequent EventsThe Company has evaluated events or transactions that occurred after
December 31, 2009 and through the time the financial statements were issued on February 3, 2010 for
potential recognition or disclosure in the interim financial statements.
2. LONG TERM DEBT
The following is a summary of the Companys long-term debt as of:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Bank credit facilities |
|
$ |
147,532 |
|
|
$ |
214,701 |
|
Term equipment notes |
|
|
69,772 |
|
|
|
90,980 |
|
Other |
|
|
3,765 |
|
|
|
8,509 |
|
|
|
|
|
|
|
|
|
|
|
221,069 |
|
|
|
314,190 |
|
Lesscurrent portion |
|
|
(22,505 |
) |
|
|
(27,026 |
) |
|
|
|
|
|
|
|
|
|
$ |
198,564 |
|
|
$ |
287,164 |
|
|
|
|
|
|
|
|
The Companys primary bank credit facility (the Credit Agreement) currently provides for
$300,000 in revolving credit and has a maturity date of October 6, 2011. At December 31, 2009,
outstanding borrowings under the Credit Agreement were $122,200 and accrued interest at a weighted
average rate of 2.7%.
Under the terms of the Credit Agreement the proceeds from borrowings may be used to repay
certain indebtedness, finance certain acquisitions, provide for working capital and general
corporate purposes and, subject to certain restrictions, repurchase the Companys common stock.
Borrowings outstanding under the Credit Agreement are secured by substantially all of the Companys
assets other than real estate and certain equipment subject to term equipment notes and other
financings. Borrowings under the Credit Agreement accrue interest, at the Companys option, at
either LIBOR plus a margin of 1.625% to 3%, or an alternate base rate (based upon the greater of
the agent banks prime lending rate or the Federal Funds effective rate plus .5%) plus a margin of
..125% to 1.5%. The Company is also required to pay an annual commitment fee ranging from .25% to
..50% 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 December 31, 2009, the applicable LIBOR interest rate
margin was 2.25% and the applicable commitment fee was .375%.
10
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and percentages)
(Unaudited)
The Company is subject to certain covenants and restrictions and must meet certain financial
tests under the Credit Agreement. The Company was in compliance with such covenants, restrictions
and financial tests at December 31, 2009. In the event the Company is unable to remain in
compliance with the Credit Agreement covenants and financial tests contained in the Credit
Agreement in the future, the Companys lenders would have the right to declare it in default with
respect to such obligations, and consequently, certain of our other debt obligations, including substantially all
our term equipment notes, would be deemed to also be in default. All debt obligations in default
would be required to be reclassified as a current liability. In the event the Company was unable to
obtain a waiver from its lenders, renegotiate or refinance these obligations, a material adverse
effect on the ability of the Company to conduct its operations in the ordinary course would likely
result.
The Company also maintains an unsecured credit facility with a commercial bank currently
consisting of a U.S. $5,000 maximum borrowing limit component and a separate Canadian dollar (C$)
C$23,000 maximum borrowing limit component. At December 31, 2009, outstanding borrowings were
$2,000 which accrued interest at a weighted average rate of 2.7%, and C$14,000 ($13,341 U.S.
equivalent), which accrued interest at a weighted average rate of 3%.
In addition, the Company maintains two auxiliary revolving credit facilities (each an
Auxiliary Bank Facility and collectively the Auxiliary Bank Facilities) with commercial banks.
Each Auxiliary Bank Facility is unsecured and has a maximum borrowing capacity of $5,000. One
facility expires in October 2011 while the other facility expires in December 2010. At December 31,
2009, outstanding borrowings under the Auxiliary Bank Facilities totaled $9,991 and accrued
interest at a weighted average rate of 3%. 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 December 31, 2009. The Auxiliary Bank Facilities cross-default to the events of default
set forth in the Credit Agreement.
At December 31, 2009, outstanding borrowings under term equipment notes totaled $69,772 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. The term equipment notes
cross-default to the events of default set forth in the Credit Agreement.
At December 31, 2009, other debt obligations totaled $3,765 and provided for principal
payments plus interest (fixed and variable rates) for defined periods up to 16 years from the date
of issuance. The Company does not have any significant financial covenants or restrictions
associated with the other debt obligations. The Credit Agreement places certain limitations on the
amount of additional term note obligations and other indebtedness the Company may incur in the
future.
3. SHARE BASED COMPENSATION
Pursuant to the Consolidated Graphics, Inc. Amended and Restated Long-Term Incentive Plan (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.
11
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and percentages)
(Unaudited)
The Company granted 65 stock options during the nine months ended December 31, 2009. The
following table summarizes stock option activity for the nine months ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
Stock Options |
|
Shares |
|
|
Exercise Price |
|
Outstanding at March 31, 2009 |
|
|
1,800 |
|
|
$ |
37.85 |
|
Granted |
|
|
65 |
|
|
|
17.38 |
|
Exercised |
|
|
(5 |
) |
|
|
17.16 |
|
Forfeited or expired |
|
|
(10 |
) |
|
|
27.08 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 (a) |
|
|
1,850 |
|
|
$ |
37.24 |
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009 (a) |
|
|
1,141 |
|
|
$ |
33.40 |
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Stock options outstanding as of December 31, 2009 have a weighted average
remaining contractual
life of 5.7 years. Based on the market value of the Companys common stock on
December 31, 2009, outstanding stock options have an aggregate intrinsic value of
$14,672 and exercisable stock options have an aggregate intrinsic value of
$10,811. |
The Company granted an award of 25 restricted stock unit awards during the nine months ended
December 31, 2009 having a fair value of $331. The following table summarizes restricted stock unit
award activity for the nine months ended December 31, 2009:
|
|
|
|
|
Restricted Stock Unit Awards |
|
Shares |
|
Outstanding at March 31, 2009 |
|
|
30 |
|
Granted |
|
|
25 |
|
Vested and issued |
|
|
(10 |
) |
Forfeited or expired |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 (a) |
|
|
45 |
|
|
|
|
|
|
|
|
(a) |
|
Restricted stock units outstanding as of December 31, 2009 have a weighted
average remaining
contractual term of 1.0 years and a total intrinsic value of $1,561. |
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. The Company recognizes expense for
share-based compensation over the vesting period, which represents the period in which an employee
is required to provide service in exchange for the award.
12
|
|
|
ITEM 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following managements discussion and analysis of financial condition and results of
operations should be read in conjunction with our unaudited condensed consolidated financial
statements and notes to unaudited condensed consolidated financial statements in this Quarterly
Report on Form 10-Q and our audited financial statements and notes thereto included in our Annual
Report on Form 10-K/A as of and for the year ended March 31, 2009. This discussion contains
forward-looking statements that reflect our current views with respect to future events and
financial performance. Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors such as those referenced in the section
entitled Forward-Looking Statements below.
Overview
Our Organization
Consolidated Graphics is a leading U.S. and Canadian provider of commercial printing services
with 70 printing businesses located in 27 U.S. states, Toronto, Canada and Prague, the Czech
Republic. Complementing the printing services we provide, we also offer state-of-the-art
fulfillment services and proprietary digital technology solutions and e-commerce capabilities.
Generally, each facility substantially relies on locally-based customers; accordingly, we have over
20,000 individual customers with a broad diversification by industry-type and geographic
orientation. No individual facility accounts for more than 12% 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, 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) digital technology solutions and e-commerce capabilities that
enable our customers to more efficiently procure and manage printed material and/or design,
procure, distribute, track and analyze results of printing-based marketing programs and activities.
Examples of the types of documents we print for our customers include high-quality, multi-color
marketing materials, product and capability brochures, point-of-purchase displays, direct mail
pieces, shareholder communications, trading cards, catalogs and training manuals.
Most of our sales are generated by individual orders through commissioned sales personnel. We
recognize revenue from these orders when we deliver the ordered goods and services. To a large
extent, continued engagement of our Company by our customers for successive business opportunities
depends upon the customers satisfaction with the quality of products and services we provide. As
such, it is difficult for us to predict with any high degree of certainty the number, size, and
profitability of printing services that we expect to provide for more than a few weeks in advance.
Our revenues, however, tend to be strongest in the quarter ended December 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, repair, supplies, rental and
insurance costs associated with operating our facilities and equipment and depreciation charges.
13
Our selling expenses generally include the compensation paid to our sales professionals, along
with promotional, travel and entertainment costs. Our general and administrative expenses generally
include the salary and benefits paid to support personnel at our printing businesses and our
corporate staff, including share-based compensation, as well as office rent, utilities and
communications expenses, various professional services, depreciation and amortization of
identifiable intangible assets.
Our Strategy
We are focused on adding value to our printing businesses by providing the financial and
operational strengths, management support and technological advantages associated with a large,
national organization. Our strategy currently includes the following initiatives to generate sales
and profit growth:
|
|
|
Internal Sales GrowthWe seek to use our competitive advantages to expand
market share. We continually seek to hire additional sales professionals, invest in new
equipment and technology, expand our national accounts program, develop new and
expanded digital technology-based print-related services and provide sales training and
education about our breadth of capabilities and services to our sales professionals. |
|
|
|
Disciplined Acquisition ProgramWe selectively pursue opportunities to acquire
additional printing businesses at reasonable prices. Some of these acquisitions may
include smaller and/or distressed printing businesses for consolidation into one of our
existing businesses. |
|
|
|
Cost SavingsBecause of our size and extensive geographic footprint, we
leverage our economies of scale to purchase supplies and equipment at preferential
prices, and centralize various administrative services to generate cost savings. |
|
|
|
Best Practices/BenchmarkingWe provide a forum for our printing businesses to
share their knowledge of technical processes and their best practices with one another,
as well as benchmark financial and operational data to help our printing businesses
identify and respond to changes in operating trends. |
|
|
|
Leadership DevelopmentThrough our unique Leadership Development Program, we
develop talent for future sales and management positions at our printing businesses. |
Results of Operations
The following table sets forth our Companys unaudited condensed consolidated income
statements for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine months |
|
|
|
Ended December 31 |
|
|
Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In millions) |
|
|
(In millions) |
|
Sales |
|
$ |
276.4 |
|
|
$ |
315.8 |
|
|
$ |
753.9 |
|
|
$ |
898.0 |
|
Cost of sales |
|
|
209.8 |
|
|
|
241.0 |
|
|
|
587.0 |
|
|
|
680.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
66.6 |
|
|
|
74.8 |
|
|
|
166.9 |
|
|
|
218.0 |
|
Selling expenses |
|
|
22.7 |
|
|
|
26.2 |
|
|
|
69.1 |
|
|
|
81.3 |
|
General and administrative expenses |
|
|
22.1 |
|
|
|
25.0 |
|
|
|
65.8 |
|
|
|
72.0 |
|
Goodwill impairment charge |
|
|
|
|
|
|
62.5 |
|
|
|
|
|
|
|
62.5 |
|
Litigation and other charges |
|
|
3.2 |
|
|
|
17.0 |
|
|
|
5.8 |
|
|
|
17.0 |
|
Other (income) expense, net |
|
|
|
|
|
|
(0.4 |
) |
|
|
0.2 |
|
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
18.6 |
|
|
|
(55.5 |
) |
|
|
26.0 |
|
|
|
(14.2 |
) |
Interest expense, net |
|
|
2.6 |
|
|
|
4.1 |
|
|
|
7.4 |
|
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
16.0 |
|
|
|
(59.6 |
) |
|
|
18.6 |
|
|
|
(26.4 |
) |
Income tax expense (benefit) |
|
|
4.6 |
|
|
|
(16.0 |
) |
|
|
5.4 |
|
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
$ |
11.4 |
|
|
$ |
(43.6 |
) |
|
$ |
13.2 |
|
|
$ |
(23.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
14
The following table sets forth the components of income expressed as a percentage of sales for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a Percentage |
|
|
As a Percentage |
|
|
|
of Sales |
|
|
of Sales |
|
|
|
Three Months |
|
|
Nine months |
|
|
|
Ended December 31 |
|
|
Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
75.9 |
|
|
|
76.3 |
|
|
|
77.9 |
|
|
|
75.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
24.1 |
|
|
|
23.7 |
|
|
|
22.1 |
|
|
|
24.3 |
|
Selling expenses |
|
|
8.2 |
|
|
|
8.3 |
|
|
|
9.2 |
|
|
|
9.1 |
|
General and administrative expenses |
|
|
8.0 |
|
|
|
7.9 |
|
|
|
8.7 |
|
|
|
8.0 |
|
Goodwill impairment charge |
|
|
|
|
|
|
19.8 |
|
|
|
|
|
|
|
7.0 |
|
Litigation and other charges |
|
|
1.2 |
|
|
|
5.4 |
|
|
|
0.7 |
|
|
|
1.9 |
|
Other (income) expense, net |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
6.7 |
|
|
|
(17.6 |
) |
|
|
3.5 |
|
|
|
(1.6 |
) |
Interest expense, net |
|
|
0.9 |
|
|
|
1.3 |
|
|
|
1.0 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
5.8 |
|
|
|
(18.9 |
) |
|
|
2.5 |
|
|
|
(2.9 |
) |
Income tax expense (benefit) |
|
|
1.7 |
|
|
|
(5.1 |
) |
|
|
0.7 |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
|
4.1 |
% |
|
|
(13.8 |
)% |
|
|
1.8 |
% |
|
|
(2.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparative Analysis of Consolidated Income Statements for the Three Months Ended December 31, 2009
and 2008
Sales during the three month period ended December 31, 2009 declined $39.4 million, or 12%, to
$276.4 million from $315.8 million for the same period in the prior year. The decline in sales was
primarily due to a year-over-year same store revenue decline caused by the business climate during
the year and lower election-related print business.
Gross profit during the three months ended December 31, 2009 declined $8.2 million, or 11%, to
$66.6 million compared to $74.8 million for the same period in the prior year. The decline in gross
profit primarily resulted from the decline in sales. The Companys gross profit margin (gross
profit divided by revenues) increased from 23.7% in the
December 2008 quarter to 24.1% in the December 2009 quarter as a result of labor and other cost reductions partially offset by the effect of lower
sales.
Selling expense during the three months ended December 31, 2009 declined $3.5 million, or 13%,
to $22.7 million from $26.2 million for the same period in the prior year. The decrease was
primarily due to lower sales commissions as a result of a decline in sales. As a percentage of
sales, selling expenses decreased to 8.2% in the current quarter as compared to 8.3% for the same
period in the prior year.
General and administrative expenses during the three months ended December 31, 2009 declined
$2.9 million, or 12%, to $22.1 million from $25 million for the same period in the prior year. This
decline was primarily due to a reduction in salary and wages, lower share-based compensation
expense and lower bad debt expense. Due to lower sales, as a percentage of sales, general and
administrative expenses increased to 8% in the current quarter compared to 7.9% for the same period
in the prior year.
The goodwill impairment charge during the three months ended December 31, 2008 related to a
non-cash impairment of goodwill. The Company did not have a goodwill impairment charge for the
three months ended December 31, 2009.
Litigation and other charges during the three months ended December 31, 2009 relate to the
previously disclosed litigation that resulted in a charge of $17 million in the December 2008
quarter, as well as the impairment of certain production equipment and lease termination costs.
Interest expense during the three months ended December 31, 2009 declined $1.5 million to $2.6
million compared to the same period in the prior year due to a lower level of average debt
outstanding and lower interest rates on floating rate bank debt.
For the three months ended December 31, 2009, the Companys effective tax rate was 28% as
compared to an effective tax rate of 27% for the same period in the
prior year. The prior year rate was significantly impacted by the
goodwill impairment (a significant portion of this charge was
non-deductible and a permanent difference). The rate for the current quarter was primarily impacted by
the recognition of uncertain tax benefits due to the expiration of
certain statutes of limitation.
Comparative Analysis of Consolidated Income Statements for the Nine months Ended December 31, 2009
and 2008
Sales in the nine month period ended December 31, 2009 declined $144.1 million, or 16%, to
$753.9 million from $898 million for the same period in the prior year. The decline in sales was
due to a reduction in demand for print due to the business climate during the year and lower
election-related print business.
15
Gross profit during the nine months ended December 31, 2009 declined $51.1 million, or 23%, to
$166.9 million compared to $218 million for the same period in the prior year. The decline in gross
profit primarily resulted from the decline in sales. The decline in sales had the effect of
increasing fixed costs as a percentage of revenues, thereby reducing gross profit margin (gross
profit divided by revenues) from 24.3% in the prior period compared to 22.1% in the current period.
Selling expense during the nine months ended December 31, 2009 declined $12.2 million, or 15%,
to $69.1 million from $81.3 million for the same period in the prior year. The decrease was
primarily due to lower sales commissions, resulting from lower sales. As a percentage of sales,
selling expenses slightly increased to 9.2% in the current period as compared to 9.1% for the same
period in the prior year.
General and administrative expenses during the nine months ended December 31, 2009 declined
$6.2 million, or 9%, to $65.8 million from $72 million for the same period in the prior year. This
decline was primarily due to a reduction in salary and wages, lower share-based compensation costs
and lower bad debt expense. As a percentage of sales, general and administrative expenses
increased to 8.7% in the current period compared to 8.0% for the same period in the prior year.
This increase was due to the decline in sales, which had the affect of increasing fixed costs as a
percentage of revenues.
The goodwill impairment charge during the nine months ended December 31, 2008 related to a
non-cash impairment of goodwill. The Company did not have a goodwill impairment charge for the nine
months ended December 31, 2009.
Litigation and other charges during the nine months ended December 31, 2009 relate to the
previously disclosed litigation that resulted in a charge of $17 million in the December 2008
quarter, as well as the impairment of certain production equipment and lease termination costs.
Interest expense during the nine months ended December 31, 2009 declined $4.8 million to $7.4
million compared to the same period last year, due to a lower level of average debt outstanding and
lower interest rates on floating rate bank debt.
For the nine months ended December 31, 2009, the Companys effective tax rate was
29% as compared to an effective tax rate of 10% for the same period in the prior year. The
difference primarily relates to the impact of the goodwill impairment (a significant portion of the
charge was non-deductible and a permanent difference) on income and tax expense in the nine months ended December 31, 2008,
offset by a greater impact of the recognition of uncertain tax
benefits due to the expiration of certain statutes of limitation in the current year.
Liquidity and Capital Resources
Sources and Uses of Cash
Our historical sources of cash have primarily been cash provided by operations and borrowings
under our various bank credit facilities. Our historical uses of cash have been for acquisitions of
printing businesses, capital expenditures, payment of principal and interest on outstanding debt
obligations, repurchases of our common stock and for working capital requirements. Various
components of our statement of cash flows are as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine months Ended |
|
|
|
December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In millions) |
|
Net cash provided by operating activities |
|
$ |
120.3 |
|
|
$ |
89.2 |
|
Acquisitions of businesses |
|
|
(2.3 |
) |
|
|
(6.7 |
) |
Capital expenditures, net of proceeds from asset
dispositions |
|
|
(18.6 |
) |
|
|
(47.4 |
) |
Net payments under bank credit facilities |
|
|
(70.1 |
) |
|
|
(17.9 |
) |
Net payments on term equipment notes and other debt |
|
|
(26.0 |
) |
|
|
(15.8 |
) |
16
Our cash position, working capital and debt obligations are shown below:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2009 |
|
|
|
(In millions) |
|
Cash and cash equivalents |
|
$ |
8.1 |
|
|
$ |
9.8 |
|
Working capital |
|
|
72.7 |
|
|
|
109.4 |
|
Total debt |
|
|
221.1 |
|
|
|
314.2 |
|
Net cash provided by operating activities increased $31.1 million over the same nine-month
period in the prior year, due primarily to a reduction in working capital. We invested $21.7 million in new equipment and technology during the nine
months ended December 31, 2009. We believe that our cash flow provided by operations, combined with
new borrowings, will be adequate to cover our debt service requirements, planned capital
expenditures and working capital requirements for the remainder of fiscal year 2010. For the year
ended March 31, 2010, we expect to spend approximately $25 million on capital expenditures, net of
proceeds from asset dispositions and excluding acquisitions.
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 and/or additional
borrowings under our primary bank credit facility. We have however, in the past issued our common
stock as purchase price consideration in some of our acquisitions and may do so again in the
future.
Debt Obligations
Our primary bank credit facility (the Credit Agreement) currently provides for $300 million
in revolving credit and has a maturity date of October 6, 2011. At December 31, 2009, outstanding
borrowings under the Credit Agreement were $122.2 million and accrued interest at a weighted
average rate of 2.7%.
Under the terms of the Credit Agreement the proceeds from borrowings may be used to repay
certain indebtedness, finance certain acquisitions, provide for working capital and general
corporate purposes and, subject to certain restrictions, repurchase our common stock. Borrowings
outstanding under the Credit Agreement are secured by substantially all of our assets other than
real estate and certain equipment subject to term equipment notes and other financings. Borrowings
under the Credit Agreement accrue interest, at our option, at either LIBOR plus a margin of 1.625%
to 3%, or an alternate base rate (based upon the greater of the agent banks prime lending rate or
the Federal Funds effective rate plus .50%) plus a margin of .125% to 1.5%. We are 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 December
31, 2009 the applicable LIBOR interest rate margin was 2.25% and the applicable commitment fee was
..375%.
We are subject to certain covenants and restrictions and we must meet certain financial tests
as defined in the Credit Agreement. We were in compliance with these covenants and financial tests
at December 31, 2009. In the event that we are unable to remain in compliance with the Credit
Agreements covenants and financial tests in the future, our lenders would have the right to
declare us in default with respect to such obligations, and consequently, certain of our other debt
obligations, including substantially all of our term equipment notes, would be deemed to also be in
default. All debt obligations in default would be required to be reclassified as a current
liability. In the event that we were unable to obtain a waiver from our lenders, or renegotiate or
refinance these obligations, a material adverse effect on our ability to conduct our operations in
the ordinary course likely would result.
We also maintain an unsecured credit facility with a commercial bank currently consisting of a
U.S. $5 million maximum borrowing limit component and a separate Canadian dollar (C$) C$23
million maximum borrowing limit component. At December 31, 2009, outstanding borrowings were $2
million, which accrued interest at a weighted average rate of 2.7%, and C$14 million ($13.3 million
U.S. equivalent), which accrued interest at a weighted average rate of 3%.
In addition, we maintain two auxiliary revolving credit facilities (each an Auxiliary Bank
Facility and collectively the Auxiliary Bank Facilities) with commercial banks. Each Auxiliary
Bank Facility is unsecured and has a maximum borrowing capacity of $5 million. One facility expires
in October 2011 while the other facility expires in December 2010. At December 31, 2009,
outstanding borrowings under the Auxiliary Bank Facilities totaled $10 million and accrued interest
at a weighted average rate of 3%. Because we currently have the ability and intent to refinance the
borrowings outstanding under the Auxiliary Bank Facility expiring in December 2010, such borrowings
are classified as long-term debt in our condensed consolidated balance sheet at December 31, 2009.
The Auxiliary Bank Facilities cross-default to the events of default set forth in the Credit
Agreement.
17
At December 31, 2009, outstanding borrowings under our term equipment notes totaled $69.8
million and accrued interest at 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. The term equipment notes
cross-default to the events of default set forth in the Credit Agreement.
At December 31, 2009, other debt obligations totaled $3.8 million and provided for principal
payments plus interest (at fixed and variable rates) for defined periods up to 16 years from the
date of issuance. We do not have any significant financial covenants or restrictions associated
with the other debt obligations. The Credit Agreement places certain limitations on the amount of
additional term note obligations and other indebtedness we may incur in the future.
As of December 31, 2009, our available credit under existing credit facilities was
approximately $183.8 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 $98.7 million as of
December 31, 2009.
Letters of credit We had letters of credit outstanding as of December 31, 2009 totaling $5.5
million. All of these letters of credit were issued pursuant to the terms of our Credit Agreement,
which expires October 6, 2011.
Insurance programs We maintain third-party insurance coverage in amounts and against
risks we believe are reasonable under our circumstances. We are self-insured for most workers
compensation claims and for a significant component of our group health insurance programs. For
these exposures, we accrue expected loss amounts which are determined using a combination of our
historical loss experience and subjective assessment of our future loss exposure, together with
advice provided by administrators and consulting actuaries. The estimates of expected loss amounts
are subject to uncertainties arising from various sources, including changes in claims reporting
patterns, claims settlement patterns, judicial decisions, legislation and economic conditions,
which could result in an increase or decrease in accrued costs in future periods for claim matters
which occurred in a prior period. Although we believe that our accrued loss estimates are
reasonable, significant differences related to the items noted above could materially affect our
risk exposure, insurance coverage, and future expense.
Critical Accounting Policies
We have identified our critical accounting policies based on the following factors
significance to our overall financial statement presentation, complexity of the policy and its use
of estimates and assumptions. We are required to make certain estimates and assumptions in
determining the reported amounts of assets and liabilities, disclosure of contingent liabilities
and the reported amounts of revenues and expenses. We evaluate our estimates and assumptions on an
ongoing basis and rely on historical experience and various other factors that we believe to be
reasonable under the circumstances to determine such estimates. Because uncertainties with respect
to estimates and assumptions are inherent in the preparation of financial statements, actual
results could differ from these estimates.
Revenue Recognition We primarily recognize revenue upon delivery of the printed product to
the customer. In the case of customer fulfillment arrangements, including multiple deliverables of
printing services and distribution services, revenue relating to the printed product is recognized
upon the delivery of the printed product into our fulfillment warehouses, and invoicing of the
customer for the product at an agreed price. Because printed products manufactured for our
customers are customized based upon the customers specifications, product returns are
insignificant. Revenue is recognized net of sales taxes.
Receivables, net of valuation allowance Accounts receivable at December 31, 2009 were
$193.3 million, net of a $4.2 million allowance for doubtful accounts. The valuation allowance was
determined based upon our evaluation of known requirements, aging of receivables, historical
experience and the current economic environment. While we believe we have appropriately considered
known or expected outcomes, our customers ability to pay their obligations could be adversely
affected by the continuing contraction in the U.S. economy or other factors beyond our control.
Changes in our estimates of collectability could have a material adverse effect on our consolidated
financial condition or results of operations.
18
Impairment of Goodwill We evaluate the carrying value of our goodwill as of each fiscal
year end, or at any time that management becomes aware of an indication of impairment. Under the
applicable accounting standards, the goodwill impairment analysis is a two-step test. In the first
step, we determine fair value for each reporting unit using trailing twelve months earnings before
interest, income taxes and depreciation and amortization (EBITDA), multiplied by managements
estimate of an appropriate enterprise value-to-EBITDA multiple for each reporting unit, adjusted
for a control premium.
Managements total Company enterprise value-to-EBITDA multiple is based upon the multiple
derived from using the market capitalization of the Companys common stock on or around the
applicable balance sheet date, after considering an appropriate control premium. This total Company
enterprise value-to-EBITDA multiple is then used as a starting point in determining the appropriate
multiple for each reporting unit. If the carrying value of the reporting unit exceeds the estimated
fair value of the reporting unit, we must perform a second step to measure the amount of
impairment. This second step involves estimating the fair value of identifiable tangible and
intangible assets and determining an implied value of goodwill. To the extent the implied value of
goodwill is less than the carrying value of goodwill for a particular reporting unit, we are
required to record an impairment charge. The process of determining the fair values of assets and
liabilities can involve a considerable degree of estimation.
Impairment of long-lived assets We evaluate long-lived assets, including property, plant
and equipment, and intangible assets other than goodwill or intangible assets with indefinite lives
whenever events or changes in conditions indicate that the carrying value may not be recoverable.
The evaluation requires us to estimate future undiscounted cash flows associated with an asset or
group of assets. If the cost of the asset or group of assets cannot be recovered by these
undiscounted cash flows, then the need for an impairment may exist. Estimating future cash flows
requires judgments regarding future economic conditions, demand for services and pricing. Although
we believe our estimates are reasonable, significant differences in the actual performance of the
asset or group of assets may materially affect our asset values and require an impairment charge in
future periods.
Insurance liabilities We are self-insured for the majority of our workers compensation and
group health insurance costs. Insurance claims liabilities have been accrued using a combination of
our historical loss experience and subjective assessment of our future loss exposure, together with
advice provided by administrators and consulting actuaries. The estimates of expected loss amounts
are subject to uncertainties arising from various sources, including changes in claims reporting
patterns, claims settlement patterns, judicial decisions, legislation and economic conditions,
which could result in an increase or decrease in accrued costs in future periods for claims or
matters which occurred in a prior period.
Accounting for income taxes As part of the process of preparing our condensed consolidated
financial statements, we are required to estimate income taxes. This process involves estimating
our actual current tax exposure, together with assessing temporary differences resulting from
differing treatment of items for tax and financial reporting purposes. The tax effects of these
temporary differences are recorded as deferred tax assets or deferred tax liabilities. We must then
assess the likelihood that our deferred tax assets will be recovered from future taxable income,
and to the extent we believe that recovery is not likely, we must establish a valuation allowance.
Significant judgment is required in determining our provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance recorded against our net deferred tax assets.
Additionally, 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 the financial
statements.
Accounting for acquisitions The allocations of purchase price to acquired assets and
liabilities are initially based on estimates of fair value and are prospectively revised if and
when additional information concerning certain asset and liability valuations we are waiting for at
the time of the initial allocations is obtained, provided that such information is received no
later than one year after the date of acquisition. In addition, we retain an independent
third-party valuation firm to assist in the identification, valuation and determination of useful
lives of identifiable intangible assets in connection with our acquisitions.
New Accounting Pronouncements
We followed the transition guidance related to the FASB issued SFAS No. 141 (revised 2007),
Business Combinations, as outlined in Accounting Standards Codification (ASC) 805-10-65, which
requires the acquiring entity to recognize the assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree at the acquisition date, measured at the fair values as of
that date. Goodwill is measured as a residual of the fair values at the acquisition date.
Acquisition related costs are recognized separately from the acquisition. The transition effective
for fiscal 2010 had no impact on our consolidated financial condition or results
of operations.
In October 2009, the FASB issued ASU 2009-13, which amends the criteria in ASC 605, Revenue
Recognition, for revenue recognition in multiple deliverable arrangements. The amendments
establish a selling price hierarchy for determining the selling price of a deliverable. The
selling price used for each deliverable will be based on vendor-specific objective evidence if
available, third-party evidence if vendor-specific objective evidence is not available, or
estimated selling price if neither vendor-specific objective evidence nor third-party evidence is
available. This update is effective for fiscal years beginning on or after June 15, 2010, and may
be applied on either prospective or retrospective basis, with early adoption permitted. The
Company elected to early adopt ASU 2009-13 effective for fiscal year 2010. The early adoption
had no effect on our consolidated financial condition or results of operations.
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/A 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.
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ITEM 3. |
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Quantitative and Qualitative Disclosure About Market Risk |
Market risk generally means the risk that losses may occur in the value of certain financial
instruments as a result of movements in interest rates, foreign currency exchange rates and
commodity prices. We do not currently hold or utilize derivative financial instruments to manage
market risk or that could expose us to other market risk. However, we are exposed to market risk in
interest rates related primarily to our debt obligations, which as of December 31, 2009 include
borrowings under our bank credit facilities, various term equipment notes and other debt
obligations. As of December 31, 2009, there were no material changes in our market risk or the
estimated fair value of our debt obligations relative to their recorded value, as reported in our
Annual Report on Form 10-K/A for the fiscal year ended March 31, 2009.
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ITEM 4. |
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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
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ITEM 1. |
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Legal Proceedings |
During the quarter ended December 31, 2009, there were no material changes in the status of
previously reported litigation matters. 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 other legal proceedings or
claims pending against the Company that our management believes will have a material adverse effect
on our financial condition or results of operations.
There have been no material changes from risk factors previously disclosed in our Annual
Report on Form 10-K/A for the fiscal year ended March 31, 2009.
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ITEM 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
None.
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ITEM 3. |
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Defaults upon Senior Securities |
None.
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ITEM 4. |
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Submission of Matters to a Vote of Security Holders |
None.
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ITEM 5. |
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Other Information |
None.
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*3.1 |
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Third Amendment and Restated By-Laws of the Company adopted effective
as of January 1, 2010 (Consolidated Graphics, Inc. 8-K (November 2,
2009), Exhibit 99.1). |
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31.1 |
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Certification of Joe R. Davis, principal executive officer, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of Jon C. Biro, principal financial and accounting
officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certification of Joe R. Davis, principal executive officer, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
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Certification of Jon C. Biro, principal financial and accounting
officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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* |
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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: February 3, 2010 |
By: |
/s/ Jon C. Biro
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Jon C. Biro |
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Executive Vice President and
Chief Financial and Accounting Officer |
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22
Exhibit Index
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*3.1 |
|
|
Third Amendment and Restated By-Laws of the Company adopted effective
as of January 1, 2010 (Consolidated Graphics, Inc. 8-K (November 2,
2009), Exhibit 99.1). |
|
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. |
|
|
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* |
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Incorporated by reference. |
23