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CONSOLIDATED GRAPHICS, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

Commission File Number 0-24068

CONSOLIDATED GRAPHICS, INC.
(Exact name of Registrant as specified in its charter)

Registrant's 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 ý    No o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yes ý    No o

        The number of shares of Common Stock, par value $.01 per share, of the Registrant outstanding at January 16, 2004 was 13,491,933.

CONSOLIDATED GRAPHICS, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003

INDEX

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PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

CONSOLIDATED GRAPHICS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

See accompanying notes to consolidated financial statements.

3

CONSOLIDATED GRAPHICS, INC.

CONSOLIDATED INCOME STATEMENTS

(In thousands, except per share data)
(Unaudited)

See accompanying notes to consolidated financial statements.

4

CONSOLIDATED GRAPHICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

See accompanying notes to consolidated financial statements.

5

CONSOLIDATED GRAPHICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

        The accompanying unaudited consolidated financial statements include the accounts of Consolidated Graphics, Inc. and subsidiaries (collectively, the "Company"). All intercompany accounts and transactions have been eliminated. Such statements have been prepared in accordance with generally accepted accounting principles and the Securities and Exchange Commission's rules and regulations for reporting interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the accompanying unaudited consolidated financial statements have been included. Operating results for the three or nine months ended December 31, 2003 are not necessarily indicative of future operating results. Balance sheet information as of March 31, 2003 has been derived from the 2003 annual audited consolidated financial statements of the Company. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the fiscal year ended March 31, 2003, filed with the Securities and Exchange Commission in June 2003.

        Earnings (Loss) Per Share—Basic earnings (loss) per share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share reflect net income (loss) divided by the weighted average number of common shares and dilutive stock options outstanding.

        Supplemental Cash Flow Information—The consolidated statements of cash flows provide information about the Company's sources and uses of cash and exclude the effects of non-cash transactions. The Company issued term notes payable totaling $3,970 (see Note 4. Long-Term Debt) during the nine months ended December 31, 2003 to finance the purchase of certain new equipment. For the nine months ended December 31, 2003, the Company paid (or received) cash for interest and income taxes, net of refunds, totaling $5,900 and $(2,867). For the nine months ended December 31, 2002, the Company paid cash for interest and income taxes, net of refunds, totaling $8,200 and $870.

        Stock-Based Compensation—The Company's only stock-based compensation plan is the Consolidated Graphics, Inc. Long-Term Incentive Plan (the "Plan"), which has been approved by the Company's shareholders. Under this Plan, employees and members of the Board of Directors of the Company have been, or may be, granted options to purchase shares of the Company's common stock at a price not less than the market price of the stock at the date of grant. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, as of March 31, 2003; however, as permitted under SFAS No. 123, the Company continues to use the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation expense or liability has been recognized by the Company in the accompanying consolidated financial statements for granted options since all were granted at the fair market value of the stock at the date of grant.

        Had the Company used the fair-value-based method of accounting prescribed by SFAS No. 123 and charged compensation expense against income over the vesting period for granted options at their fair

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value at the date of grant, net income (loss) and earnings (loss) per share as reported would have been reduced to the following pro forma amounts:

        The pro forma compensation expense may not be representative of future amounts because options vest over several years and generally expire upon termination of employment, and additional options may be granted in future years. For purposes of determining pro forma compensation expense, the weighted-average projected incremental fair value of options on the grant date for the nine months ended December 31, 2003 was $8.26, determined by the Company utilizing the Black-Scholes option-pricing model. The following assumptions were used for the nine months ended December 31, 2003—dividend yield of 0.0%, expected volatility of 34.8%, average risk-free interest rate of 3.3% and average expected life of 5 years. There were no stock options granted during the three months ended December 31, 2003.

        The Black-Scholes model, as well as other currently accepted option valuation models, calculate the fair value of freely tradable, fully transferable options without vesting and/or trading restrictions, which significantly differ from the provisions associated with the Company's stock option awards. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated values. Accordingly, management does not believe this model provides a reliable single measure of the fair value of the Company's stock option awards.

2. ACCOUNTING CHANGE

        Effective April 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which required it to discontinue amortizing goodwill, perform an initial transitional impairment test and conduct annual impairment tests to determine if the remaining balance of goodwill of each of its reporting units should be reduced to reflect its estimated fair value. Prior to its adoption of SFAS No. 142, the Company periodically evaluated whether the remaining balance of goodwill was recoverable by assessing current and future levels of income and cash flows on an undiscounted basis, as well as other factors, such

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as business trends and general market conditions. The Company determined that each of its individual printing businesses constitutes a stand-alone reporting unit under SFAS No. 142. The Company determines fair value under SFAS No. 142 using capitalization of earnings estimates and market valuation multiples. A number of factors could cause the Company to further impair its goodwill balance at the date of its annual impairment test, which is March 31. These factors include a decline in the financial performance of an individual reporting unit due to adverse business developments and/or changes in general market conditions, as well as a decline in market valuation multiples.

        As of April 1, 2002, net goodwill balances attributable to each of the Company's reporting units were tested for impairment by comparing the fair value of each reporting unit to its carrying value. Based on these impairment tests the Company recognized a transitional impairment charge of $74,376, net of deferred tax benefit totaling $15,379, which is reflected as a cumulative effect of accounting change in the accompanying consolidated income statement for the nine months ended December 31, 2002.

3. ACQUISITIONS

        During the nine months ended December 31, 2003, the Company acquired for cash totaling $4,987 the business and assets of Custom Graphics of Solon, Ohio, and the San Francisco commercial sheet-fed operations of Lithographix, Inc. Both businesses were merged into existing operations of the Company. The allocation of the purchase price of the businesses acquired include current assets of $1,827, property and equipment of $5,067, and other assets of $426, less current liabilities of $2,333. Additionally, to satisfy certain liabilities incurred in connection with the acquisition of certain businesses in prior periods or pursuant to earnout agreements, the Company paid cash totaling $1,056 during the nine months ended December 31, 2003.

4. LONG-TERM DEBT

        The following is a summary of the Company's long-term debt as of:

        On November 10, 2003, the Company completed an amendment to its existing bank credit facility (as amended, the "Credit Agreement"). The Credit Agreement is composed of a $150,000 revolving credit facility that will mature in July 2007. Prior to the amendment, the bank credit facility was composed of a $175,000 five-year revolving credit line and a $50,000 five-year term loan (the "Term Loan") scheduled to expire in December 2005. Proceeds from the Credit Agreement were used to pay the outstanding balance

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on the Term Loan, which totaled $20,000 as of the date of the amendment. At December 31, 2003, borrowings outstanding under the Credit Agreement were $43,200 and accrued interest at a weighted average rate of 3.12%. In connection with the amendment to the bank credit facility, the Company incurred additional financing costs totaling $480, which are being amortized over the remaining term of the Credit Agreement, and expensed $400 of previously deferred financing costs as required under generally accepted accounting principles.

        The proceeds from borrowings under the Credit Agreement can be used to repay certain indebtedness, finance certain acquisitions, provide for working capital and general corporate purposes, and subject to certain restrictions, repurchase the Company's common stock. Borrowings outstanding under the Credit Agreement are secured by substantially all of the Company's 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 Company's option, at either (1) the London Interbank Offered Rate (LIBOR) plus a margin of 1.25% to 2.00%, or (2) an alternate base rate (based upon the greater of the agent bank's prime lending rate or the Federal Funds effective rate plus .50%) plus a margin of up to .75%. The Company is also required to pay a commitment fee on available but unused amounts ranging from .275% to .375% annually. The interest rate margin and the commitment fee are based upon certain financial performance measures as set forth in the Credit Agreement and are redetermined quarterly.

        The Company is subject to certain covenants and restrictions and must meet certain financial tests as defined in the Credit Agreement. The Company was in compliance with these covenants and financial tests at December 31, 2003.

        In addition, the Company maintains two auxiliary revolving credit facilities (each an "Auxiliary Bank Facility" and collectively the "Auxiliary Bank Facilities") with commercial banks. One Auxiliary Bank Facility is unsecured, has a maximum borrowing capacity of $5,000 and expires in February 2004. The other Auxiliary Bank Facility is also unsecured, has a maximum borrowing capacity of $3,000 and expires in July 2004. At December 31, 2003, borrowings outstanding under the Auxiliary Bank Facilities totaled $7,202 and accrued interest at a weighted average rate of 2.92%. Because the Company has the ability to refinance its Auxiliary Bank Facilities and plans to do so annually, the borrowings outstanding are classified as long-term debt in the accompanying consolidated balance sheets.

        The Company's term equipment notes consist primarily of notes payable pursuant to financing agreements between the Company and various lenders (the "Lender Notes") and between the Company and the finance affiliates of two printing equipment manufacturers (the "Equipment Notes"). At December 31, 2003, outstanding borrowings under the Lender Notes totaled $38,659 and accrued interest at a weighted average rate of 5.70%. The Lender Notes provide for fixed monthly principal payments plus interest over a five-year term, ending with a balloon payment at maturity, and are secured by certain equipment of the Company. At December 31, 2003, outstanding borrowings under the Equipment Notes totaled $26,348 and accrued interest at a weighted average rate of 6.13%. The Equipment Notes provide for fixed payments of principal and interest for defined periods of up to ten years from the date of issuance and are secured by the applicable equipment purchased from the respective manufacturers. The remaining balance of term equipment notes totaling $1,795 primarily consists of various secured debt obligations assumed by the Company in connection with certain prior year acquisitions. The Company is not subject to

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any significant financial covenants in connection with any of the term equipment notes; however, the Credit Agreement places certain limitations on the amount of additional term note obligations the Company may incur in the future.

        The Company's other debt obligations consist of a promissory note totaling $4,397, industrial revenue bonds totaling $3,955 and various other debt obligations totaling $472. The Company does not have any significant financial covenants or restrictions associated with these other debt obligations.

5. RECENT ACCOUNTING PRONOUNCEMENTS

        SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, was issued in April 2003 and amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. SFAS No. 149 does not have a material impact on the Company's financial position or results of operations.

        SFAS No.150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, was issued in May 2003 and requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. SFAS No. 150 is effective for interim periods beginning after June 15, 2003. SFAS No. 150 does not have a material impact on the Company's financial position or results of operations.

        The Financial Accounting Standards Board initially issued Interpretation ("FIN") No. 46, Consolidation of Variable Interest Entities, in January 2003, then revised and reissued FIN No. 46 in December 2003 ("FIN No. 46R".) This interpretation requires that a company that controls another entity through interests other than voting interests should consolidate such controlled entity. FIN No. 46 or FIN No. 46R are effective no later than the end of the first reporting period ending after December 15, 2003 and do not have a material impact on the Company's financial position or results of operations.

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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion contains forward-looking information. Readers are cautioned that such information involves known and unknown risks and uncertainties, including those created by general market conditions, competition and the possibility that events may occur which limit the ability of our Company to maintain or improve its operating results and acquire additional printing businesses. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate, and there can be no assurance that the forward-looking statements included herein will prove to be accurate. The inclusion of such information should not be regarded as a representation by us or any other persons that our objectives and plans will be achieved. We expressly disclaim any duty to provide updates to these forward-looking statements, assumptions or other factors after the date of this Report on Form 10-Q to reflect the occurrence of events or changes in circumstances or expectations.

        The following discussion of the financial condition and performance of our Company should be read in conjunction with the consolidated financial statements included herein and the consolidated financial statements and related notes and other detailed information regarding our Company included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2003 and other reports filed by us with the Securities and Exchange Commission. Operating results for the three or nine months ended December 31, 2003 are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 2004 or any periods thereafter.

Overview

        Our Company is a leading national provider of commercial printing services with 65 printing facilities in 25 states and is recognized as the largest sheet-fed and half-web commercial printing company in the United States. We are focused on adding value to our operating companies by providing the financial and operational strengths, management support and technological advantages associated with a national organization. Our strategy currently includes the following initiatives to generate sales and profit growth:

•

Market Share Expansion—In the midst of recent difficult industry conditions, we seek to use our competitive advantages to expand market share by investing in new equipment and technology, making tuck-in acquisitions, growing our national accounts customer base and developing complementary, value-added services.



•

Disciplined Acquisition Program—We selectively pursue opportunities to acquire well-managed printing businesses at reasonable prices.



•

Cost Savings—We leverage our size and national presence to achieve economies of scale and purchase supplies and equipment at preferential prices.



•

Best Practices/Benchmarking—We 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 Development—Through our unique Leadership Development Program, we hire recent college graduates and train them for future sales and management positions at our printing businesses.

        Each of our printing operations maintains their own sales, estimating, customer service, prepress, production, postpress and accounting departments. Our corporate headquarters staff provides support to our printing operations in such areas as human resources, purchasing and management information systems. We also maintain centralized treasury, risk management, tax and consolidated financial reporting activities.

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        The majority of our sales are derived from commercial printing services, which include electronic prepress, printing, finishing, storage and delivery of high quality, custom-designed products. Examples of such products include multicolor product and capability brochures, shareholder communications, catalogs, training manuals, point-of-purchase marketing materials and direct mail pieces. We also serve our customers by providing a variety of print-related services, including fulfillment and mailing services and Internet-based software solutions and electronic media services through CGXmedia.

        Our sales primarily consist of individual orders generated by commissioned sales personnel and, in some cases, pursuant to national contracts. We recognize revenue from these orders when we deliver the ordered products. To a large extent, continued engagement of our Company by our customers for successive jobs depends upon the customer's satisfaction with the quality of services we provide. As such it is difficult for us to predict the number, size and profitability of printing jobs that we expect to produce for more than a few weeks in advance.

        Our cost of sales mainly consist of raw materials consumed in the printing process, as well as labor and outside services. Paper is the largest component of our materials cost; however, fluctuations in paper prices generally do not significantly impact our operating margins because any changes in paper pricing are generally passed through to our customers by our printing businesses. Additionally, our cost of sales includes maintenance, repair, rental and insurance costs associated with operating our facilities and equipment, along with depreciation charges.

        Our selling expenses generally include the salary and commissions 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, as well as office rent, utilities and communications expenses, and various professional fees.

Results of Operations

        The following table sets forth the Company's unaudited condensed consolidated income statements for the periods indicated:

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        The following table sets forth the components of income expressed as a percentage of sales for the periods indicated: