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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2012

 

OR

 

o         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)

 

Texas

 

76-0190827

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

 

 

5858 Westheimer Road, Suite 200

 

 

Houston, Texas

 

77057

(Address of principal executive offices)

 

(Zip Code)

 

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 x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x 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):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

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 x

 

The number of shares of Common Stock, par value $.01 per share, of the Registrant outstanding at January 31, 2013 was 9,618,475.

 

 

 



Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

 

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2012

 

INDEX

 

Part I — Financial Information

3

 

 

 

Item 1.

Financial Statements (unaudited)

3

 

 

 

 

Condensed Consolidated Balance Sheets at December 31, 2012 and March 31, 2012

3

 

 

 

 

Condensed Consolidated Income Statements for the Three and Nine Months Ended December 31, 2012 and 2011

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended December 31, 2012 and 2011

5

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity for the Nine Months Ended December 31, 2012

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2012 and 2011

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

 

 

 

 

Forward-Looking Statements

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

21

 

 

 

Item 4.

Controls and Procedures

21

 

 

 

Part II — Other Information

22

 

 

 

Item 1.

Legal Proceedings

22

 

 

 

Item 1A.

Risk Factors

22

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22

 

 

 

Item 3.

Defaults upon Senior Securities

22

 

 

 

Item 4.

Mine Safety Disclosures

22

 

 

 

Item 5.

Other Information

22

 

 

 

Item 6.

Exhibits

23

 

 

 

 

Signatures

24

 

 

 

 

Exhibit Index

25

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1.  Financial Statements

 

CONSOLIDATED GRAPHICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

December 31,

 

March 31,

 

 

 

2012

 

2012

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

8,525

 

$

6,065

 

Accounts receivable, net

 

181,515

 

162,093

 

Inventories

 

60,941

 

54,129

 

Prepaid expenses

 

10,891

 

14,976

 

Deferred income taxes

 

9,848

 

16,552

 

Total current assets

 

271,720

 

253,815

 

PROPERTY AND EQUIPMENT, net

 

357,018

 

377,055

 

GOODWILL

 

24,974

 

24,847

 

OTHER INTANGIBLE ASSETS, net

 

12,933

 

15,623

 

OTHER ASSETS

 

7,551

 

10,569

 

 

 

$

674,196

 

$

681,909

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Current portion of long-term debt

 

$

21,437

 

$

23,596

 

Accounts payable

 

90,055

 

90,392

 

Accrued liabilities

 

71,511

 

68,496

 

Income taxes payable

 

2,790

 

 

Total current liabilities

 

185,793

 

182,484

 

LONG-TERM DEBT, net of current portion

 

130,811

 

140,150

 

OTHER LIABILITIES

 

35,208

 

31,523

 

DEFERRED INCOME TAXES, net

 

42,989

 

54,051

 

Total liabilities

 

394,801

 

408,208

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

Common stock, $.01 par value; 100,000,000 shares authorized; 9,618,475 and 10,239,819 issued and outstanding

 

96

 

102

 

Additional paid-in capital

 

153,833

 

161,914

 

Retained earnings

 

124,434

 

109,832

 

Accumulated other comprehensive income

 

1,032

 

1,853

 

Total shareholders’ equity

 

279,395

 

273,701

 

 

 

$

674,196

 

$

681,909

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31

 

December 31

 

 

 

2012

 

2011

 

2012

 

2011

 

SALES

 

$

295,277

 

$

283,891

 

$

797,220

 

$

794,644

 

COST OF SALES

 

222,716

 

216,052

 

613,390

 

611,207

 

Gross profit

 

72,561

 

67,839

 

183,830

 

183,437

 

SELLING EXPENSES

 

23,939

 

23,149

 

70,030

 

68,411

 

GENERAL AND ADMINISTRATIVE EXPENSES

 

24,638

 

24,839

 

73,571

 

72,266

 

GOODWILL IMPAIRMENT CHARGE

 

 

1,984

 

 

1,984

 

OTHER CHARGES

 

349

 

 

4,311

 

5,281

 

OTHER EXPENSE

 

290

 

238

 

17

 

429

 

Operating income

 

23,345

 

17,629

 

35,901

 

35,066

 

INTEREST EXPENSE

 

1,246

 

1,676

 

4,081

 

4,831

 

Income before taxes

 

22,099

 

15,953

 

31,820

 

30,235

 

INCOME TAXES

 

5,840

 

5,119

 

9,300

 

10,281

 

Net income

 

$

16,259

 

$

10,834

 

$

22,520

 

$

19,954

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE

 

$

1.69

 

$

1.05

 

$

2.28

 

$

1.86

 

DILUTED EARNINGS PER SHARE

 

$

1.68

 

$

1.04

 

$

2.27

 

$

1.83

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING USED TO COMPUTE EARNINGS PER SHARE

 

 

 

 

 

 

 

 

 

Basic

 

9,622

 

10,332

 

9,886

 

10,712

 

Diluted

 

9,659

 

10,459

 

9,937

 

10,885

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

Three Months Ended
December 31

 

Nine Months Ended
December 31

 

 

 

2012

 

2011

 

2012

 

2011

 

NET INCOME

 

$

16,259

 

$

10,834

 

$

22,520

 

$

19,954

 

Other comprehensive loss - currency translation adjustment, net of tax

 

(318

)

(1,823

)

(821

)

(2,665

)

Other comprehensive loss

 

(318

)

(1,823

)

(821

)

(2,665

)

Comprehensive income

 

$

15,941

 

$

9,011

 

$

21,699

 

$

17,289

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

Common Stock

 

Additional
Paid-In

 

Retained

 

Accumulated
Other
Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, March 31, 2012

 

10,240

 

$

102

 

$

161,914

 

$

109,832

 

$

1,853

 

$

273,701

 

Net income

 

 

 

 

 

 

 

22,520

 

 

 

22,520

 

Other comprehensive loss - currency translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

(821

)

(821

)

Exercise of stock options, including tax benefit

 

68

 

 

 

1,058

 

 

 

 

 

1,058

 

Share-based compensation expense

 

 

 

 

 

1,849

 

 

 

 

 

1,849

 

Repurchase and retirement of common stock

 

(690

)

(6

)

(10,988

)

(7,918

)

 

 

(18,912

)

BALANCE, December 31, 2012

 

9,618

 

$

96

 

$

153,833

 

$

124,434

 

$

1,032

 

$

279,395

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended
December 31

 

 

 

2012

 

2011

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

22,520

 

$

19,954

 

Adjustments to reconcile net income to net cash provided by operating activities—

 

 

 

 

 

Depreciation

 

52,559

 

50,352

 

Amortization

 

2,691

 

2,697

 

Bad debt expense

 

1,204

 

1,016

 

Goodwill impairment charge

 

 

1,984

 

Other charges

 

4,311

 

5,281

 

Foreign currency loss (gain)

 

(39

)

96

 

Deferred income taxes

 

(4,368

)

4,353

 

Share-based compensation expense

 

1,849

 

1,853

 

Changes in assets and liabilities, net of effects of acquisitions—

 

 

 

 

 

Accounts receivable, net

 

(21,206

)

(17,142

)

Inventories

 

(6,829

)

(4,443

)

Prepaid expenses

 

4,023

 

1,963

 

Other assets

 

3,015

 

1,908

 

Accounts payable and accrued liabilities

 

(2,042

)

(9,044

)

Other liabilities

 

1,301

 

2,496

 

Income taxes payable

 

2,790

 

5

 

Net cash provided by operating activities

 

61,779

 

63,329

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Acquisitions of businesses, net of cash acquired

 

(59

)

(3,309

)

Capital expenditures

 

(31,373

)

(48,813

)

Proceeds from asset dispositions

 

1,736

 

2,694

 

Net cash used in investing activities

 

(29,696

)

(49,428

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from bank credit facilities

 

80,151

 

112,423

 

Payments on bank credit facilities

 

(76,446

)

(84,743

)

Proceeds from issuance of term equipment notes

 

1,591

 

11,610

 

Payments on term equipment notes and other debt

 

(17,165

)

(11,772

)

Payments to repurchase and retire common stock

 

(18,912

)

(41,425

)

Proceeds from exercise of stock options, including excess tax benefit

 

1,058

 

3,432

 

Net cash used in financing activities

 

(29,723

)

(10,475

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

100

 

(134

)

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

2,460

 

3,292

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

6,065

 

3,710

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

8,525

 

$

7,002

 

 

See accompanying notes to condensed consolidated financial statements.

 

7



Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data and percentages)

(Unaudited)

 

1.  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Consolidated Graphics, Inc. (collectively with its consolidated subsidiaries, 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 Commission’s (“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, 2012 are not necessarily indicative of future operating results. Balance sheet information as of March 31, 2012 has been derived from the Company’s most recent annual audited consolidated financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2012 (“2012 Form 10-K”).

 

Use of Estimates — The preparation of financial statements in conformity with U.S. 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.

 

Reclassifications — Certain reclassifications of prior period data have been made to conform to the 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 Company’s 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 bank for payment are included in accounts payable and totaled $41,317 as of December 31, 2012 and $42,993 as of March 31, 2012.

 

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 Company’s fulfillment warehouses, and invoicing of the customer for the product at an agreed price. Revenue from distribution services is recognized when the services are provided. Because printed products manufactured for the Company’s customers are customized based upon the customer’s specifications, product returns are not significant. Revenue is recognized net of sales taxes. The Company derives the majority of its revenues from sales and services to a broad and diverse group of customers with no individual customer accounting for more than 6% of the Company’s revenues for the nine months ended December 31, 2012. The Company maintains an allowance for doubtful accounts based upon its evaluation of aging of receivables, historical experience and the current economic environment. Accounts receivable in the accompanying condensed consolidated balance sheets are reflected net of allowance for doubtful accounts of $3,689 and $3,246 at December 31, 2012 and March 31, 2012, respectively.

 

Inventories — Inventories are valued at the lower of cost or market utilizing the first-in, first-out method for raw materials and the specific identification method for work in progress and finished goods. Raw materials consist of paper, ink, proofing materials, plates, boxes and other general supplies. Inventory values include the cost of purchased raw materials, labor and overhead. The carrying values of inventories are set forth below:

 

 

 

December 31,
2012

 

March 31,
2012

 

 

 

 

 

 

 

Raw materials

 

$

24,482

 

$

24,565

 

Work in progress

 

28,595

 

21,345

 

Finished goods

 

7,864

 

8,219

 

 

 

$

60,941

 

$

54,129

 

 

8



Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data and percentages)

(Unaudited)

 

Goodwill and Long-Lived Assets — Goodwill totaled $24,974 at December 31, 2012 and represents the excess of the Company’s purchase cost over the fair value of the net identifiable assets acquired, net of previously recorded amortization and impairment charges. Each of the Company’s 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.

 

Under the applicable accounting standards, the Company first assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of the events or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company is required to perform the first step of the two-step impairment test. The first step, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value including goodwill. The Company estimates the fair value for each reporting unit using trailing twelve months earnings before interest, income taxes and depreciation and amortization (“EBITDA”) multiplied by management’s estimate of an appropriate enterprise value-to-EBITDA multiple for each reporting unit, adjusted for a control premium. Management’s total Company enterprise value-to-EBITDA multiple is based upon the multiple derived from using the market capitalization of the Company’s common stock on or around the applicable balance sheet date, after considering an appropriate control premium (25% at March 31, 2012, based upon historical transactions in the printing industry). 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. The Company recognized a non-cash pre-tax impairment charge to its goodwill in the amount of $1,984 in the quarter ended December 31, 2011. Tax benefits totaling $774 were recorded in connection with this impairment.

 

The Company compares the carrying value of long-lived assets, including property, plant and equipment and intangible assets (other than goodwill or intangible assets with indefinite lives), to projections of future undiscounted cash flows attributable to such assets whenever events or changes in conditions indicate the carrying value may not be recoverable. 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 asset’s fair value. Property and equipment in the accompanying condensed consolidated balance sheets are reflected net of accumulated depreciation of $505,694 and $463,649 at December 31, 2012 and March 31, 2012, respectively.

 

The net book value of other intangible assets at December 31, 2012 was $12,933. 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 $892 for the three months ended December 31, 2012 and 2011, respectively. Amortization expense totaled $2,691 and $2,697 for the nine months ended December 31, 2012 and 2011, respectively.

 

Supplemental Cash Flow Information — The condensed consolidated statements of cash flows provide information about the Company’s sources and uses of cash and exclude the effects of non-cash transactions. For the nine months ended December 31, 2012 and 2011, the Company paid cash for interest totaling $4,077 and $5,072, respectively. For the nine months ended December 31, 2012 and 2011, the Company paid cash for income taxes, net of refunds, totaling $4,437 and $1,401, respectively.

 

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CONSOLIDATED GRAPHICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data and percentages)

(Unaudited)

 

Earnings Per Share — Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share reflect net income divided by the weighted average number of common shares, dilutive stock options and restricted stock unit awards outstanding using the treasury stock method. Earnings per share are set forth below:

 

 

 

Three Months Ended
December 31

 

Nine Months Ended
December 31

 

 

 

2012

 

2011

 

2012

 

2011

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

16,259

 

$

10,834

 

$

22,520

 

$

19,954

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

9,621,864

 

10,331,687

 

9,885,652

 

10,712,361

 

Dilutive options and stock awards

 

36,746

 

127,640

 

50,877

 

173,018

 

Diluted weighted average number of common shares outstanding

 

9,658,610

 

10,459,327

 

9,936,529

 

10,885,379

 

Net earnings per share

 

 

 

 

 

 

 

 

 

Basic

 

$

1.69

 

$

1.05

 

$

2.28

 

$

1.86

 

Diluted

 

$

1.68

 

$

1.04

 

$

2.27

 

$

1.83

 

 

Diluted net earnings per share take into consideration the dilutive effect of certain unvested restricted stock unit awards and unexercised stock options. For the three and nine months ended December 31, 2012 and 2011 options to purchase 1,053,577 and 869,248 shares of common stock, respectively, were outstanding but not included in the computation of diluted net earnings per share because the inclusion would have had an anti-dilutive effect.

 

Fair Value of Financial Instruments — The Company’s 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 $97,432 at December 31, 2012 and $96,793 at March 31, 2012, respectively, approximated their fair values. The Company believes that the recorded values of its fixed rate debt obligations, which totaled $54,816 at December 31, 2012 and $66,953 at March 31, 2012, 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 and were determined to be Level 2 under the fair value hierarchy.

 

Foreign Currency — Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than the U.S. dollar are translated at the period-end exchange rates. Income and expense items are translated at the average monthly exchange rates. The effects of period-end translation are included as a component of Other Comprehensive Loss in the condensed consolidated statements of comprehensive income. The net foreign currency transaction loss or (gain) related to the revaluation of certain transactions denominated in currencies other than the reporting unit’s functional currency totaled ($27) and $238 for the three months ended December 31, 2012 and 2011, respectively, and ($240) and $429 for the nine months ended December 31, 2012 and 2011, respectively, and is recorded in Other Expense on the condensed consolidated income statements.

 

Accumulated Other Comprehensive Income — Accumulated Other Comprehensive Income is comprised of foreign currency translation adjustments.

 

Geographic Information — Revenues of the Company’s subsidiaries operating outside the United States were $19,591 and $18,016 for the three months ended December 31, 2012 and 2011, respectively, and $46,621 and $44,642 for the nine months ended December 31, 2012 and 2011, respectively. Long-lived assets of the Company’s subsidiaries operating outside the United States were $39,133 as of December 31, 2012 and $36,233 as of March 31, 2012.

 

Multi-Employer Pension Plans — The Company participates in multi-employer pension plans for certain of its employees covered by union agreements. During the nine months ended December 31, 2011, the Company recognized expense of $5,281 for the present value of the liability for withdrawing from certain multi-employer pension plans. The Company’s subsidiaries have in the past withdrawn from certain multi-employer pension plans. Upon withdrawing from a plan, the Company receives a notice from the plan administrator demanding payment of a withdrawal liability as may be required by applicable law.  The Company can choose to pay the withdrawal liability in a lump sum or in quarterly payments. Withdrawal liabilities in the accompanying balance sheets total $17,645 at December 31, 2012 and $17,906 at March 31, 2012. In January 2013, two of the Company’s subsidiaries reached agreement with certain unions to withdraw from a multi-employer pension plan. The Company estimates it will recognize a charge of $9,800 in the quarter ending March 31, 2013 for the present value of the liability for withdrawing from this plan. The

 

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CONSOLIDATED GRAPHICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data and percentages)

(Unaudited)

 

Company is awaiting further information required to compute the actual withdrawal liability and required payments with respect to all of the plans from which it has withdrawn.  As a result, the Company has estimated the withdrawal liabilities reflected in the accompanying balance sheet using limited information available from the plans, which has not been independently verified.  Therefore, the withdrawal liabilities are subject to adjustment.  The withdrawal liability is expected to be paid over a 20 year period, but may be extended in the event of mass withdrawal from one or more of the plans.

 

2.  ACQUISITIONS

 

Revenues and expenses of the acquired businesses have been included in the accompanying condensed consolidated financial statements beginning on their respective dates of acquisition. The allocation of purchase price to the acquired assets and liabilities is based on estimates of fair value and may be prospectively revised if and when additional information the Company is awaiting concerning certain asset and liability valuations is obtained, provided that such information is received no later than one year after the date of acquisition. For the nine months ended December 31, 2012, the Company paid cash totaling $59 to satisfy liabilities in connection with a prior period acquisition. For the nine months ended December 31, 2011, the Company paid cash totaling $3,162 and assumed liabilities totaling $3,142 to acquire the assets of a printing business and $147 to satisfy liabilities in connection with a prior period acquisition.

 

3.  LONG - TERM DEBT

 

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

 

 

 

December 31,

 

March 31,

 

 

 

2012

 

2012

 

 

 

 

 

 

 

Bank credit facilities

 

$

97,432

 

$

93,793

 

Term equipment notes

 

52,744

 

65,310

 

Other

 

2,072

 

4,643

 

 

 

152,248

 

163,746

 

Less—current portion

 

(21,437

)

(23,596

)

 

 

$

130,811

 

$

140,150

 

 

In June 2012, we amended the Company’s existing primary secured credit agreement (the “Credit Agreement”) to, among other things, extend the maturity date from October 6, 2014 to June 8, 2017. The Credit Agreement currently provides up to $285,000 in revolving credit and contains an accordion feature that could, under prescribed conditions, increase the facility by $100,000 to $385,000. At December 31, 2012, outstanding borrowings under the Credit Agreement were $84,600 and accrued interest at a weighted average rate of 1.9%.

 

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 Company’s common stock. In order to repurchase Company common stock under the terms of the Credit Agreement, the Company must (1) demonstrate compliance on a proforma basis, giving effect to such repurchase with the financial covenants set forth in the Credit Agreement, and (2) have a Leverage Ratio (Debt divided by EBITDA, as defined in the Credit Agreement) not exceeding 2.75 to 1.00 on a proforma basis after giving effect to such repurchase. 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. The collateral also secures, on a pari passu basis, the obligations under the A&B Credit Facility and the Auxiliary Bank Facilities described below. Borrowings under the Credit Agreement accrue interest, at the Company’s option, at either LIBOR plus a margin of 1.25% to 2.25%, or an alternate base rate (based upon the greater of (i) the administrative agent bank’s prime lending rate, (ii) the sum of the LIBOR rate for a one-month interest period plus 1.50% or (iii) the sum of the Federal Funds effective rate plus .5% per annum) plus a margin of 0% to .75%. The Company is also required to pay an annual commitment fee ranging from .25% to .375% 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, 2012, the applicable margin on LIBOR based loans was 1.5%, the applicable margin on alternative base rate loans was 0% and the applicable commitment fee was .25% on unused amounts.

 

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Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data and percentages)

(Unaudited)

 

The Company is subject to certain covenants and restrictions, including limitations on additional indebtedness it may incur in the future, and must meet certain financial tests under the Credit Agreement. The Company was in compliance with such covenants, restrictions and financial tests at December 31, 2012. 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 Company’s lenders would have the right to declare it in default with respect to such obligations, and consequently, certain of our other debt obligations, including substantially all our term equipment notes, would be deemed to also be in default. All debt obligations in default would be required to be reclassified as a current liability. In the event the Company was unable to obtain a waiver from its lenders or renegotiate or refinance these obligations, a material adverse effect on the ability of the Company to conduct its operations in the ordinary course would likely result.

 

The Company also maintains a secured credit facility (the “A&B Credit Facility”) which provides revolving credit for its Canadian subsidiary, Annan & Bird Lithographers, Inc., available for both U.S. dollar and Canadian dollar loans not to exceed in the aggregate $25,000 (U.S. equivalent). The A&B Credit Facility expires in June 2017. At December 31, 2012, outstanding borrowings were $3,306 (U.S. equivalent) which accrued interest at a weighted average rate of 3.0%. The A&B Credit Facility contains many of the same covenants and restrictions contained in the Credit Agreement. Additionally, a default by the Company under the Credit Agreement constitutes a default under the A&B Credit Facility and vice-versa.

 

In addition, the Company maintains two auxiliary revolving credit facilities (each an “Auxiliary Bank Facility” and collectively the “Auxiliary Bank Facilities”). Each Auxiliary Bank Facility is secured and has a maximum borrowing capacity of $5,000. One facility expires in December 2013 while the other facility expires in October 2014. At December 31, 2012, outstanding borrowings under the Auxiliary Bank Facilities totaled $9,526 and accrued interest at a weighted average rate of 2.6%. Because the Company currently has the ability and intent to refinance borrowings outstanding under the Auxiliary Bank Facility expiring in December 2013, such borrowings are classified as long-term debt in the accompanying condensed consolidated balance sheet at December 31, 2012. The Auxiliary Bank Facilities cross-default to the events of default set forth in the Credit Agreement.

 

At December 31, 2012, outstanding borrowings under term equipment notes totaled $52,744 and carried interest rates between 2.8% and 4.1%. The term equipment notes provide for principal payments plus interest for defined periods of up to seven years from the date of issuance, and are secured by certain equipment of the Company. The Company is not subject to any significant financial covenants in connection with any of the term equipment notes. Most of the term equipment notes cross-default to the events of default set forth in the Credit Agreement.

 

At December 31, 2012, other debt obligations totaled $2,072 and provided for principal payments plus interest (fixed and variable rates) for defined periods up to 16 years from the date of issuance. The Company does not have any significant financial covenants or restrictions associated with these other debt obligations.

 

As of December 31, 2012, the Company’s available credit under existing credit facilities was $219,009.

 

4.  SHARE - BASED COMPENSATION

 

Pursuant to the Consolidated Graphics, Inc. 1994 Amended and Restated Long-Term Incentive Plan (as amended, the “1994 Plan”), employees of the Company and members of the Company’s Board of Directors have been, or may be, granted options to purchase shares of the Company’s common stock, restricted stock unit awards or other forms of equity-based compensation. Options granted pursuant to the 1994 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 1994 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 are generally cancelled on 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. At December 31, 2012, a total of 1,488,668 common shares were reserved for issuance pursuant to the 1994 Plan, of which 145,424 shares of the Company’s common stock were available for future grants. Of the 145,424 shares available for future grants, 37,500 shares may be granted as restricted stock unit awards.

 

At the 2012 Annual Meeting of Shareholders, the Company’s shareholders voted to adopt the Consolidated Graphics, Inc. 2012 Long-Term Incentive Plan (the “2012 Plan”).  The 2012 Plan provides for a total of 350,000 common shares.  Unless amended with approval of the shareholders, only stock option awards may be issued under the 2012 Plan. At December 31, 2012, no options to purchase shares of the Company’s common stock were granted pursuant to the 2012 Plan.

 

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Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data and percentages)

(Unaudited)

 

The following table summarizes stock option activity for the 1994 Plan for the nine months ended December 31, 2012:

 

Stock Options

 

Shares

 

Weighted-
Average
Exercise Price

 

Outstanding at March 31, 2012

 

1,325,800

 

$

46.58

 

Granted

 

117,500

 

28.82

 

Exercised

 

(56,000

)

15.01

 

Forfeited or expired

 

(48,223

)

$

44.48

 

Outstanding at December 31, 2012 (a)

 

1,339,077

 

$

46.34

 

Exercisable at December 31, 2012 (a)

 

954,077

 

$

48.96

 

 


(a)                   Stock options outstanding as of December 31, 2012 have a weighted average remaining contractual life of 5.2 years. Based on the market value of the Company’s common stock on December 31, 2012, outstanding stock options have an aggregate intrinsic value of $3,404 and exercisable stock options have an aggregate intrinsic value of $1,699.

 

The following table summarizes restricted stock unit award activity for the nine months ended December 31, 2012:

 

Restricted Stock Unit Awards

 

Shares

 

Outstanding at March 31, 2012

 

16,667

 

Granted

 

 

Vested and issued

 

(12,500

)

Forfeited or expired

 

 

Outstanding at December 31, 2012 (a)

 

4,167

 

 


(a)                   Restricted stock units outstanding as of December 31, 2012 have a weighted average remaining contractual term of .2 years and a total intrinsic value of $146.

 

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.

 

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Table of Contents

 

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

 

The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes to unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto included in our Annual Report on Form 10-K as of and for the year ended March 31, 2012. 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 one of North America’s leading general commercial printing and print-related companies, with 70 printing businesses strategically located across 27 states, Toronto, Prague, and Gero, Japan. In connection with our traditional print services, we also provide our customers fulfillment and mailing services and digital technology solutions and e-commerce capabilities. Generally, each facility primarily relies on locally-based customers; accordingly, we have approximately 20,000 individual customers with a broad diversification by industry-type and geographic orientation. 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 human resources, treasury, risk management, legal, tax, internal audit and consolidated financial reporting activities.

 

Nature of Our Services

 

We are a service business that utilizes sophisticated technology and equipment to produce high-quality, custom-designed printed materials for a large base of customers in a broad cross-section of industries, the majority of which are located in the markets where our printing businesses are based.  In addition to providing a full range of prepress, digital and offset printing and finishing services, our printing businesses offer fulfillment and mailing services, as well as software solutions and other print-related, value-added services. The technology solutions, like the printed materials we produce, are customized to the specific needs of our customers. For marketing purposes, we refer to our e-commerce capabilities as the “WorkSmart Suite” group of products. 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; (iii) technology solutions that enable our customers to more efficiently procure and manage printed material and/or design, procure, distribute, track and analyze results of printing-based marketing programs and activities; and (iv) cross media capabilities allowing our customers to supplement the message of their printed materials through other media, such as the internet, email, or text messaging. Examples of the types of documents we print for our customers include high-quality, multi-color marketing materials, product and capability brochures, point-of-purchase displays, direct mail pieces, shareholder communications, trading cards, photo products such as calendars and photo books, catalogs and training manuals.

 

Most of our sales are generated by individual orders through commissioned sales personnel. We predominantly recognize revenue from these orders when we deliver the ordered goods and services. To a large extent, continued engagement of our Company by our customers for successive business opportunities depends upon the customers’ satisfaction with the quality of products and services we provide. As such, it is difficult for us to predict with any high degree of certainty the number, size, and profitability of printing services that we expect to provide for more than a few weeks in advance. Our revenues, however, tend to be strongest in the quarter ended December. December quarter sales are strongest, in part due, to sales of custom photo products for which demand is highest during this quarter. Sales from election-related printing tend to be higher every other year, including years 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, fluctuations in paper pricing generally does not materially impact our operating margins because we typically quote, and subsequently purchase, paper for each

 

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Table of Contents

 

specific printing project we are awarded. As a result, any changes in paper pricing are effectively passed through to customers by our printing businesses. Additionally, our cost of sales includes salary and benefits paid to operating personnel, maintenance, utilities, repair, rental and insurance costs associated with operating our facilities and equipment and depreciation charges.

 

Our selling expenses generally include the compensation paid to our sales professionals, along with promotional, travel and entertainment costs. Our general and administrative expenses generally include the salary and benefits paid to support personnel at our printing businesses and our corporate staff, including share-based compensation, as well as office rent, communication expenses, various professional service fees, depreciation charges and amortization of identifiable intangible assets.

 

Our Strategy

 

We are focused on adding value to our printing businesses by providing the financial and operational strengths, management support and technological advantages associated with a large, national organization. Our strategy currently includes the following initiatives to generate sales and profit growth:

 

·                                          Internal Sales Growth—We 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 Program—We selectively pursue opportunities to acquire additional printing businesses at reasonable prices. Some of these acquisitions may include smaller and/or distressed printing businesses for integration into one of our existing businesses.

 

·                                          Cost Savings—Because 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/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 develop talent for future sales and management positions at our printing businesses.

 

Results of Operations

 

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

 

 

 

Three Months
Ended December 31

 

Nine Months
Ended December 31

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In millions)

 

(In millions)

 

Sales

 

$

295.3

 

$

283.9

 

$

797.2

 

$

794.6

 

Cost of sales

 

222.7

 

216.1

 

613.4

 

611.2

 

Gross profit

 

72.6

 

67.8

 

183.8

 

183.4

 

Selling expenses

 

23.9

 

23.1

 

70.0

 

68.4

 

General and administrative expenses

 

24.6

 

24.8

 

73.6

 

72.2

 

Goodwill impairment charge

 

 

2.0

 

 

2.0

 

Other charges

 

0.4

 

 

4.3

 

5.3

 

Other expense

 

0.3

 

0.3

 

 

0.4

 

Operating income

 

23.4

 

17.6

 

35.9

 

35.1

 

Interest expense, net

 

1.2

 

1.7

 

4.1

 

4.9

 

Income before taxes

 

22.2

 

15.9

 

31.8

 

30.2

 

Income tax expense

 

5.9

 

5.1

 

9.3

 

10.2

 

Net income

 

$

16.3

 

$

10.8

 

$

22.5

 

$

20.0

 

 

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Table of Contents

 

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

 

 

 

As a Percentage
of Sales

 

As a Percentage
of Sales

 

 

 

Three Months
Ended December 31

 

Nine Months
Ended December 31

 

 

 

2012

 

2011

 

2012

 

2011

 

Sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of sales

 

75.4

 

76.1

 

76.9

 

76.9

 

Gross profit

 

24.6

 

23.9

 

23.1

 

23.1

 

Selling expenses

 

8.1

 

8.2

 

8.8

 

8.6

 

General and administrative expenses

 

8.3

 

8.8

 

9.2

 

9.1

 

Goodwill impairment charge

 

 

0.7

 

 

0.3

 

Other charges

 

0.2

 

 

0.6

 

0.7

 

Other expense

 

0.1

 

 

 

 

Operating income

 

7.9

 

6.2

 

4.5

 

4.4

 

Interest expense, net

 

0.4

 

0.6

 

0.5

 

0.6

 

Income before taxes

 

7.5

 

5.6

 

4.0

 

3.8

 

Income tax expense

 

2.0

 

1.8

 

1.2

 

1.3

 

Net income

 

5.5

%

3.8

%

2.8

%

2.5

%

 

Comparative Analysis of Consolidated Income Statements for the Three Months Ended December 31, 2012 and 2011

 

Sales during the three months ended December 31, 2012 increased $11.4 million, or 4.0%, to $295.3 million from $283.9 million for the prior year quarter. The sales increase this quarter compared to the prior year quarter was primarily due to an increase in election-related revenue, partially offset by a 3.7% decline in same-store sales, excluding election-related business.

 

Gross profit during the three months ended December 31, 2012 increased $4.8 million, or 7%, to $72.6 million, compared to $67.8 million for the same period in the prior year.  The increase in gross profit was due to the 4% increase in sales and an increase in gross profit margin. Cost of sales as a percentage of sales declined from 76.1% to 75.4% during the three months ended December 31, 2012. The decline was primarily caused by lower facilities expense related to the consolidation of facilities and the renegotiation of building leases and more efficient use of direct labor, partially offset by higher subcontracting expenses, net of direct materials costs, and lower wastepaper recycling income. For these same reasons, gross profit margin (gross profit divided by revenues) increased from 23.9% to 24.6% during the three months ended December 31, 2012.

 

Selling expense during the three months ended December 31, 2012 increased $.8 million, or 3%, to $23.9 million compared to $23.1 million in the same period in the prior year primarily due to higher compensation expense. As a percentage of revenues, selling expenses declined slightly to 8.1% of sales in the current quarter compared to 8.2% for the same period in the prior year.

 

General and administrative expenses during the three months ended December 31, 2012 declined slightly $.2 million, or 1%, to $24.6 million, from $24.8 million for the same period in the prior year. Due to higher sales, general and administrative expenses declined to 8.3% of sales in the current quarter, compared to 8.8% for the prior year quarter.

 

The December 31, 2011 quarterly results include a goodwill impairment charge of $2.0 million.

 

Interest expense declined from $1.7 million in last year’s December quarter to $1.2 million for the quarter ended December 31, 2012, primarily due to lower interest rates and lower borrowings.

 

For the three months ended December 31, 2012, the Company’s effective tax rate was 26.4% compared to an effective tax rate of 32.1% for the same period in the prior year.  The effective tax rate decline was primarily due to an increase in the IRC Section 199 domestic production deduction and a reduction in the state income tax rate, partially offset by a lower tax rate benefit for the release of reserves for uncertain tax position due to the expiration of certain statutes of limitation.

 

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Comparative Analysis of Consolidated Income Statements for the Nine Months Ended December 31, 2012 and 2011

 

Sales during the nine months ended December 31, 2012 increased $2.6 million, or .3%, to $797.2 million from $794.6 million for the same period in the prior year.  Sales increased primarily as a result of election related sales growth, partially offset by a 3.8% decline in same-store sales excluding election-related business.

 

Gross profit during the nine months ended December 31, 2012 increased $.4 million to $183.8 million, compared to $183.4 million for the same period in the prior year, due to the increase in sales. While cost of sales as a percentage of revenues, was 76.9% for both periods, lower facilities expense related to the consolidation of facilities and the renegotiation of building leases and lower direct labor expenses were offset by higher subcontracting expenses, net of direct materials costs, and lower wastepaper recycling income. For the same reasons, gross profit margin (gross profit divided by revenues) was 23.1% for the nine months ended December 31, 2012 and 2011.

 

Selling expense during the nine months ended December 31, 2012 increased $1.6 million, or 2%, to $70.0 million, compared to $68.4 million in the same period in the prior year primarily due to higher compensation expense. As a percentage of sales, selling expenses increased from 8.6% last year to 8.8%.

 

General and administrative expenses during the nine months ended December 31, 2012 increased $1.4 million, or 2%, to $73.6 million, from $72.2 million for the same period last year. This increase primarily resulted from higher compensation expenses and higher depreciation expense due to technology investments. General and administrative expenses increased to 9.2% of revenues in the current period compared to 9.1% in the same period last year.

 

During the nine months ended December 31, 2011, the Company recognized a $2.0 million goodwill impairment charge.

 

Other charges during the nine months ended December 31, 2012 were $4.3 million and consist primarily of costs related to relocating certain of our production facilities, related asset impairments and multi-employer pension withdrawal liability charges. During the nine months ended December 31, 2011, the Company recognized other charges of $5.3 million related to withdrawing from certain multi-employer pension plans.

 

Interest expense during the nine months ended December 31, 2012 declined to $4.1 million from $4.9 million for the same period last year, due primarily to lower interest rates and lower borrowings.

 

For the nine months ended December 31, 2012, the Company’s effective tax rate was 29.2% compared to an effective tax rate of 34.0% for the same period in the prior year.  The effective tax rate decline is primarily due to an increase in the IRC Section 199 domestic production deduction and a reduction in the state income tax rate.

 

Liquidity and Capital Resources

 

Sources and Uses of Cash

 

Our historical sources of cash have primarily been provided by operations and borrowings under our various bank credit facilities. Our historical uses of cash have been for acquisitions of printing businesses, capital expenditures, payment of principal and interest on outstanding debt obligations, repurchases of common stock and for working capital requirements. Various components of our statement of cash flows are as follows:

 

 

 

Nine Months Ended
December 31

 

 

 

2012

 

2011

 

 

 

(In millions)

 

Net cash provided by operating activities

 

$

61.8

 

$

63.3

 

Acquisitions of businesses, net of cash acquired

 

 

(3.3

)

Capital expenditures, net of proceeds from asset dispositions

 

(29.6

)

(46.1

)

Net proceeds under bank credit facilities

 

3.7

 

27.7

 

Net payments on term equipment notes and other debt

 

(15.6

)

(0.2

)

Payments to repurchase and retire common stock

 

(18.9

)

(41.4

)

Proceeds from exercise of stock options, including excess tax benefit

 

1.1

 

3.4

 

 

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Our cash position, working capital and debt obligations are shown below:

 

 

 

December 31,
2012

 

March 31,
2012

 

 

 

(In millions)

 

Cash and cash equivalents

 

$

8.5

 

$

6.1

 

Working capital

 

85.9

 

71.3

 

Total debt

 

152.2

 

163.7

 

 

Net cash provided by operating activities declined slightly from $63.3 million last year to $61.8 million for the nine months ended December 31, 2012. Cash used in investing activities declined from $49.4 million for the nine months ended December 31, 2011 to $29.7 million for the same period this year due to lower capital expenditures.

 

We believe that our cash flow provided by operations, combined with new borrowings, will be adequate to cover remaining fiscal year 2013 working capital needs, debt service requirements, common share repurchase programs, planned capital expenditures and the acquisitions of printing businesses.

 

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 associated capital requirements. 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.

 

Our Board of Directors previously authorized a $170.0 million share repurchase program. The share repurchase program will expire on September 30, 2013, and enables us to repurchase shares of our common stock in open-market purchases, as well as privately negotiated transactions, pursuant to applicable securities regulations, and subject to the terms of our primary credit facility, market conditions and other factors. The Board of Directors may modify, suspend, extend or terminate the program at any time. We expect to fund any additional repurchases under the amended program through cash flow provided by operations or additional borrowings under our primary credit facility. During the nine months ended December 31, 2012, we repurchased 689,844 shares of our common stock for a total cost of $18.9 million.  Remaining authorization under the amended share repurchase program on February 6, 2013 was $79.5 million, taking into account share repurchases occurring through such date.

 

Debt Obligations

 

For information with respect to our existing debt obligations with our lenders, as well as the available credit under our existing credit facilities, refer to Item 1. Financial Statements — Note 3. — Long-Term Debt.

 

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 $64.7 million as of December 31, 2012.

 

Letters of credit —We had letters of credit outstanding as of December 31, 2012 totaling $3.6 million. All of these letters of credit were issued pursuant to the terms of our primary credit facility, which expires in June 2017.

 

Insurance programs — We maintain third-party insurance coverage in amounts and against risks we believe are reasonable under our circumstances. We are self-insured for most workers’ compensation claims and for a significant component of our group health insurance programs. For these exposures, we accrue expected loss amounts which are determined using a combination of our historical loss experience and subjective assessment of the future costs of incurred losses, together with advice provided by administrators and consulting actuaries. The estimates of expected loss amounts are subject to uncertainties arising from various sources, including changes in claims reporting patterns, claims settlement patterns, judicial decisions, legislation and economic conditions, which could result in an increase or decrease in accrued costs in future periods for claim matters which occurred in a prior period. Although we believe that the accrued loss estimates are reasonable, significant differences related to the items noted above could materially affect our risk exposure, insurance coverage, and future expense.

 

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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. Revenue from distribution services is recognized when the services are provided. Because printed products manufactured for our customers are customized based upon the customer’s specifications, product returns are insignificant. Revenue is recognized net of sales tax.

 

Receivables, net of valuation allowance — Accounts receivable at December 31, 2012 were $181.5 million, net of a $3.7 million allowance for doubtful accounts. The valuation allowance was determined based upon our evaluation of aging of receivables, historical experience and the current economic environment. While we believe we have appropriately considered known or expected outcomes, our customers’ ability to pay their obligations could be adversely affected by a contraction in the U.S. economy or other factors beyond our control. Changes in our estimates of collectability could have a material adverse effect on our consolidated financial condition or results of operations.

 

Impairment of GoodwillWe evaluate the carrying value of our goodwill as of each fiscal year end, or at any time that management becomes aware of an indication of potential impairment. Under the applicable accounting standards, we first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of the events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we are required to perform the first step of the two-step impairment 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 management’s estimate of an appropriate enterprise value-to-EBITDA multiple for each reporting unit, adjusted for a control premium. Management’s total Company enterprise value-to-EBITDA multiple is based upon the multiple derived from using the market capitalization of the Company’s common stock on or around the applicable balance sheet date, after considering an appropriate control premium (25% at March 31, 2012, based upon historical transactions in the printing industry). This total Company enterprise value-to-EBITDA multiple is then used as a starting point in determining the appropriate multiple for each reporting unit. If the carrying value of the reporting unit exceeds the estimated fair value of the reporting unit, we must perform a second step to measure the amount of impairment. This second step involves estimating the fair value of identifiable tangible and intangible assets and determining an implied value of goodwill. To the extent the implied value of goodwill is less than the carrying value of goodwill for a particular reporting unit, we are required to record an impairment charge. The process of determining the fair values of assets and liabilities can involve a considerable degree of estimation.

 

Impairment of long-lived assets — We evaluate long-lived assets, including property, plant and equipment, and intangible assets, excluding goodwill and intangible assets with indefinite lives, whenever events or changes in conditions indicate that the carrying value may not be recoverable. The evaluation requires us to estimate future undiscounted cash flows associated with an asset or group of assets. If the cost of the asset or group of assets cannot be recovered by these undiscounted cash flows, then the need for an impairment exists. Estimating future cash flows requires judgments regarding future economic conditions, demand for services and pricing. Although we believe our estimates are reasonable, significant differences in the actual performance of the asset or group of assets may materially affect our asset values and require an impairment charge in future periods.

 

Insurance liabilities — We are self-insured for the majority of our workers’ compensation and group health insurance costs. Insurance claims liabilities have been accrued using a combination of our historical loss experience and subjective assessment of the future costs of incurred losses, together with advice provided by administrators and consulting actuaries. The estimates of expected loss amounts are subject to uncertainties arising from various sources, including changes in claims reporting patterns, claims settlement patterns, judicial decisions, legislation and economic conditions, which could result in an increase or decrease in accrued costs in future periods for claims matters which occurred in a prior period.

 

Accounting for income taxes — As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes. This process involves estimating our actual current tax exposure, together with assessing temporary

 

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differences resulting from differing treatment of items for tax and financial reporting purposes. The tax effects of these temporary differences are recorded as deferred tax assets or deferred tax liabilities. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. Additionally, to account for uncertain tax positions we use a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Although we believe our estimates are reasonable, the final outcome of uncertain tax positions may be different from that which is reflected in our consolidated financial statements.

 

Accounting for acquisitions — The allocations of purchase price to acquired assets and liabilities are initially based on estimates of fair value and are revised if and when additional information concerning certain asset and liability valuations we are waiting for at the time of the initial allocations is obtained, provided that such information is received no later than one year after the date of acquisition. In addition, when appropriate, we retain an independent third-party valuation firm to assist in the identification, valuation and determination of useful lives of identifiable intangible assets in connection with our acquisitions.

 

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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 Company’s 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 Company’s 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 Company’s 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, 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 or charges related to our withdrawal from multi-employer pension plans, 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 Form 10-K and the risk factors and cautionary statements described in the other documents the Company files or furnishes from time to time with the Securities and Exchange Commission, including its Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Should one or more of the foregoing risks or uncertainties materialize, or should the Company’s underlying assumptions, expectations, beliefs or projections prove incorrect, the Company’s actual results may vary materially from those anticipated in its forward-looking statements, and its business, financial condition and results of operations could be materially and adversely affected.

 

ITEM 3.  Quantitative and Qualitative Disclosure About Market Risk

 

Market risk generally means the risk that losses may occur in the value of certain financial instruments as a result of movements in interest rates, foreign currency exchange rates and commodity prices. We do not currently hold or utilize derivative financial instruments to manage market risk or that could expose us to other market risk. We are exposed to market risk in interest rates related primarily to certain of our debt obligations, which as of December 31, 2012, include borrowings under our bank credit facilities, various term equipment notes and other debt obligations. As of December 31, 2012, there were no material changes in our market risk or the estimated fair value of our debt obligations relative to their recorded value, as reported in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012.

 

ITEM 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial and Accounting Officer (“CFO”), has evaluated the effectiveness of the Company’s 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 Company’s CEO and CFO have concluded that, as of the end of such period, the Company’s 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 Commission’s 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.

 

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CONSOLIDATED GRAPHICS, INC.

PART II — OTHER INFORMATION

 

ITEM 1.  Legal Proceedings

 

From time to time, our Company is involved in litigation relating to claims arising out of its operations in the normal course of business. We maintain insurance coverage against certain types of potential claims in an amount which we believe to be adequate, but there is no assurance that such coverage will in fact cover, or be sufficient to cover, all potential claims. Currently, we are not aware of any legal proceedings or claims pending against the Company that our management believes may have a material adverse effect on our financial condition or results of operations.

 

Also, the SEC’s Regulation S-K, Item 103, Instruction 5.C requires us to report administrative or judicial proceedings that were instituted or contemplated by governmental authorities against us under laws or regulations relating to the protection of the environment that may involve monetary sanctions of at least $100,000, even if the Company reasonably believes the monetary sanctions are not material to its business or financial condition. The Office of the Attorney General of the State of New York (“NYOAG”) is conducting an investigation into possible civil or criminal violations at a facility in New York operated by one of the Company’s subsidiaries. Specifically, in December 2012, this subsidiary received written notice from the NYOAG alleging that the subsidiary’s operation violated the terms of its State Pollutant Discharge Elimination System (SPDES) permit. If the NYOAG decides to continue to pursue these allegations, the NYOAG may seek more than $100,000 in penalties or sanctions. We intend to vigorously defend against these allegations. The Company does not believe that these proceedings are material to its overall business, consolidated results of operations or consolidated financial condition.

 

ITEM 1A.  Risk Factors

 

There have been no material changes from risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The Company’s Board of Directors previously approved a share repurchase program that provides for repurchases of our common stock not to exceed $170.0 million in the aggregate in open-market or privately negotiated transactions. The share repurchase program expires September 30, 2013. The following are details of repurchases under this program as in effect for the period covered by this report:

 

Period

 

Total Number of
Shares

Purchased (1)

 

Average
Price Paid
per Share

 

Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plan

 

Maximum
Dollar Value of
Shares that May
Yet Be
Purchased
Under the
Announced Plan

 

Purchases from October 1, 2012 through October 31, 2012

 

46,336

 

$

26.06

 

46,336

 

$

79,519,518

 

Purchases from November 1, 2012 through November 30, 2012

 

 

$

 

 

$

79,519,518

 

Purchases from December 1, 2012 through December 31, 2012

 

 

$

 

 

$

79,519,518

 

 

 

 

 

 

 

 

 

 

 

Total

 

46,336

 

$

26.06

 

46,336

 

 

 

 


(1)  All shares were purchased in open-market transactions.

 

ITEM 3.  Defaults upon Senior Securities

 

None.

 

ITEM 4.  Mine Safety Disclosures

 

Not applicable.

 

ITEM 5.  Other Information

 

None.

 

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ITEM 6. Exhibits

 

10.1

 

Form of 2012 Long-Term Incentive Plan, Non-Employee Director Non-Statutory Stock Option Agreement. +

10.2

 

Form of 2012 Long-Term Incentive Plan, Employee Incentive Stock Option Agreement. +

10.3

 

Form of 2012 Long-Term Incentive Plan, Employee Non-Statutory Stock Option Agreement. +

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.

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 


+Compensatory plan or arrangement under which executive officers or directors of the Company may participate.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant, Consolidated Graphics, Inc., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

CONSOLIDATED GRAPHICS, INC.

 

 

 

 

Dated: February 6, 2013

By:

/s/ Jon C. Biro

 

 

Jon C. Biro

 

 

Executive Vice President and

 

 

Chief Financial and Accounting Officer

 

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Exhibit Index

 

10.1

 

Form of 2012 Long-Term Incentive Plan, Non-Employee Director Non-Statutory Stock Option Agreement. +

10.2

 

Form of 2012 Long-Term Incentive Plan, Employee Incentive Stock Option Agreement. +

10.3

 

Form of 2012 Long-Term Incentive Plan, Employee Non-Statutory Stock Option Agreement. +

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.

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 


+Compensatory plan or arrangement under which executive officers or directors of the Company may participate.

 

25