Consolidated Graphics, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-12631
CONSOLIDATED GRAPHICS, INC.
(Exact name of Registrant as specified in its charter)
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Texas
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76-0190827 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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5858 Westheimer Road, Suite 200 |
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Houston, Texas
(Address of principal executive offices)
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77057
(Zip Code) |
Registrants telephone number, including area code: (713) 787-0977
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Securities Exchange Act of 1934).
Yes o No þ
The number of shares of Common Stock, par value $.01 per share, of the Registrant outstanding
at January 31, 2007 was 13,527,562.
CONSOLIDATED GRAPHICS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2006
INDEX
2
PART I FINANCIAL INFORMATION
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ITEM 1. |
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Financial Statements |
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
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December 31, |
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March 31, |
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2006 |
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2006 |
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(Unaudited) |
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(Audited) |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
12,642 |
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$ |
4,993 |
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Accounts receivable, net |
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172,098 |
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146,296 |
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Inventories |
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44,040 |
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38,430 |
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Prepaid expenses |
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5,871 |
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6,799 |
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Deferred income taxes |
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8,023 |
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8,356 |
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Total current assets |
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242,674 |
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204,874 |
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PROPERTY AND EQUIPMENT, net |
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299,307 |
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297,308 |
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GOODWILL AND OTHER INTANGIBLE ASSETS, net |
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98,249 |
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100,035 |
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OTHER ASSETS |
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7,149 |
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6,953 |
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$ |
647,379 |
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$ |
609,170 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES |
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Current portion of long-term debt |
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$ |
13,539 |
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$ |
10,821 |
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Accounts payable |
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58,235 |
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54,666 |
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Accrued liabilities |
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80,363 |
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68,436 |
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Income taxes payable |
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3,084 |
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3,477 |
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Total current liabilities |
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155,221 |
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137,400 |
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LONG-TERM DEBT, net of current portion |
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80,953 |
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90,678 |
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DEFERRED INCOME TAXES |
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59,784 |
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62,146 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS EQUITY |
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Common stock, $.01 par value;
100,000,000 shares authorized;
13,527,236 and 13,714,121 issued and
outstanding |
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135 |
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138 |
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Additional paid-in capital |
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178,118 |
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170,581 |
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Retained earnings |
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173,168 |
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148,227 |
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Total shareholders equity |
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351,421 |
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318,946 |
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$ |
647,379 |
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$ |
609,170 |
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See accompanying notes to consolidated financial statements.
3
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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December 31 |
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December 31 |
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2006 |
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2005 |
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2006 |
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2005 |
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SALES |
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$ |
269,611 |
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$ |
226,204 |
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$ |
742,272 |
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$ |
657,112 |
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COST OF SALES |
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197,253 |
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170,472 |
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543,453 |
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495,512 |
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Gross profit |
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72,358 |
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55,732 |
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198,819 |
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161,600 |
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SELLING EXPENSES |
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26,487 |
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23,325 |
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74,387 |
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67,868 |
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GENERAL AND ADMINISTRATIVE EXPENSES |
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18,702 |
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15,091 |
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50,930 |
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44,554 |
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Operating income |
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27,169 |
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17,316 |
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73,502 |
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49,178 |
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INTEREST EXPENSE, net |
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1,576 |
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1,449 |
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4,744 |
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4,239 |
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Income before taxes |
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25,593 |
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15,867 |
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68,758 |
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44,939 |
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INCOME TAXES |
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9,218 |
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5,926 |
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24,963 |
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16,936 |
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Net income |
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$ |
16,375 |
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$ |
9,941 |
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$ |
43,795 |
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$ |
28,003 |
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BASIC EARNINGS PER SHARE |
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$ |
1.21 |
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$ |
.73 |
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$ |
3.22 |
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$ |
2.04 |
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DILUTED EARNINGS PER SHARE |
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$ |
1.17 |
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$ |
.71 |
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$ |
3.14 |
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$ |
1.98 |
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SHARES USED TO COMPUTE EARNINGS
PER SHARE |
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Basic |
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13,529 |
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13,657 |
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13,582 |
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13,726 |
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Diluted |
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13,968 |
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14,093 |
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13,958 |
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14,146 |
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See accompanying notes to consolidated financial statements.
4
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands)
(Unaudited, except March 31, 2006 balances)
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Additional |
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Common Stock |
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Paid-In |
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Retained |
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Shares |
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Amount |
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Capital |
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Earnings |
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Total |
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BALANCE, March 31, 2006 |
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13,714 |
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$ |
138 |
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$ |
170,581 |
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$ |
148,227 |
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$ |
318,946 |
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Exercise of stock options, including tax benefit |
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279 |
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1 |
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11,090 |
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11,091 |
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Share-based compensation expense |
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2,245 |
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2,245 |
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Repurchase and retire common stock |
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(466 |
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(4 |
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(5,798 |
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(18,854 |
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(24,656 |
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Net income |
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43,795 |
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43,795 |
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BALANCE, December 31, 2006 |
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13,527 |
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$ |
135 |
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$ |
178,118 |
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$ |
173,168 |
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$ |
351,421 |
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See accompanying notes to consolidated financial statements.
5
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Nine Months Ended |
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December 31 |
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2006 |
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2005 |
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OPERATING ACTIVITIES |
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Net income |
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$ |
43,795 |
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$ |
28,003 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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32,480 |
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34,994 |
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Deferred income tax provision |
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(2,029 |
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1,251 |
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Share-based compensation expense |
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2,245 |
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Changes in assets and liabilities, net of effects of acquisitions: |
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Accounts receivable, net |
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(25,602 |
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(7,451 |
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Inventories |
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(5,665 |
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527 |
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Prepaid expenses |
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928 |
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178 |
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Other assets |
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(196 |
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(313 |
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Accounts payable and accrued liabilities |
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14,226 |
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351 |
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Income taxes payable |
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(393 |
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2,624 |
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Net cash provided by operating activities |
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59,789 |
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60,164 |
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INVESTING ACTIVITIES |
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Acquisitions of businesses, net of cash acquired |
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(4,757 |
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(7,094 |
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Purchases of property and equipment |
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(24,245 |
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(8,961 |
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Proceeds from asset dispositions |
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2,544 |
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2,019 |
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Net cash used in investing activities |
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(26,458 |
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(14,036 |
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FINANCING ACTIVITIES |
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Proceeds from bank credit facilities |
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98,548 |
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25,300 |
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Payments on bank credit facilities |
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(112,138 |
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(57,977 |
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Proceeds from issuance of term equipment notes |
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8,154 |
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Payments on term equipment notes and other debt |
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(6,681 |
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(5,950 |
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Payments to repurchase and retire common stock |
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(24,656 |
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(6,655 |
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Proceeds from exercise of stock options, including tax benefit |
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11,091 |
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1,686 |
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Net cash used in financing activities |
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(25,682 |
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(43,596 |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
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7,649 |
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2,532 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
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4,993 |
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7,752 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
12,642 |
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$ |
10,284 |
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See accompanying notes to consolidated financial statements.
6
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and percentages)
(Unaudited)
1. |
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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 Commissions (SEC)
rules and regulations for reporting interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation of the accompanying
unaudited consolidated financial statements have been included. Operating results for the nine
months ended December 31, 2006 are not necessarily indicative of future operating results. Balance
sheet information as of March 31, 2006 has been derived from the 2006 annual audited consolidated
financial statements of the Company. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the
fiscal year ended March 31, 2006, filed with the SEC in June 2006 (2006 Form 10-K).
Use of Estimates The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of certain estimates and assumptions by management
in determining the reported amounts of assets and liabilities, disclosure of contingent liabilities
as of the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period including depreciation of property and equipment and amortization or
impairment of intangible assets. The Company evaluates its estimates and assumptions on an ongoing
basis and relies on historical experience and various other factors that it believes to be
reasonable under the circumstances to determine such estimates. Because uncertainties with respect
to estimates and assumptions are inherent in the preparation of financial statements, actual
results could differ from these estimates.
Reclassification Certain reclassifications of prior periods data have been made to conform
to current period reporting.
Revenue Recognition The Company recognizes revenue upon delivery of each job, except for
bill and hold transactions, in which case such revenue is recognized when all of the service
delivery criteria are fully met as per Staff Accounting Bulletin 104 issued by the SEC. Losses, if
any, on jobs are recognized at the earliest date such amount is determinable.
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. The carrying values of inventories are set forth below:
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December 31, |
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March 31, |
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2006 |
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2006 |
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Raw materials |
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$ |
14,244 |
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$ |
11,485 |
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Work in progress |
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24,484 |
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21,951 |
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Finished goods |
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5,312 |
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4,994 |
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$ |
44,040 |
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$ |
38,430 |
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Goodwill and Other Intangible Assets, net Goodwill totaled $87,493 at December 31, 2006 and
represents the excess of the Companys purchase cost over the fair value of the net assets of
acquired businesses, net of previously recorded amortization and impairment expense. The net book
value of other intangible assets at December 31, 2006 was $10,756. Other intangible assets consist
primarily of the value assigned to such items as customer lists and tradenames in connection with
the allocation of purchase price for acquisitions under Statement of Financial Accounting Standards
(SFAS) No. 142 and are generally amortized on a straight-line basis over periods of up to ten
years. Amortization expense totaled $1,209 and $818 for the nine months ended December 31, 2006 and
2005.
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 and dilutive stock options and
restricted stock unit awards outstanding.
7
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and percentages)
(Unaudited)
Supplemental Cash Flow Information The consolidated statements of cash flows provide
information about the Companys sources and uses of cash and exclude the effects of non-cash
transactions. Certain of the Companys capital expenditures are considered to be non-cash
transactions, including for the nine months ended December 31, 2006, $5,110, which was financed
using term notes (See Note 3. Long-term Debt). For the nine months ended December 31, 2006, the
Company paid cash for interest and income taxes, net of refunds, totaling $4,660 and $23,466. For
the nine months ended December 31, 2005, the Company paid cash for interest and income taxes, net
of refunds, totaling $3,912 and $12,228.
During the nine months ended December 31, 2006, the Company (i) paid cash totaling $5,107 to
acquire certain real property and (ii) received cash totaling $350 in connection with the
finalization of certain working capital adjustments, in connection with certain prior year
acquisitions. Based on certain additional information received by the Company regarding its fiscal
2006 acquisitions, $1,530 of purchase price previously attributed to other intangible assets was
allocated to goodwill in the nine month period ended December 31, 2006. The Company is awaiting
additional information concerning certain asset and liability valuations in order to finalize the
allocation of purchase price for certain of the Companys 2006 acquisitions, and expects to receive
such information no later than one year following the respective dates of acquisition.
Subsequent to December 31, 2006, the Company completed the acquisitions, of Annan and Bird
Lithographers Partnership (Annan & Bird), located near Toronto in Mississauga, Ontario and The
Hennegan Company, located near Cincinnati in Florence, Kentucky.
The following is a summary of the Companys long-term debt as of:
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December 31, |
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March 31, |
|
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|
2006 |
|
|
2006 |
|
Bank credit facilities |
|
$ |
29,461 |
|
|
$ |
43,051 |
|
Term equipment notes |
|
|
51,235 |
|
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|
44,037 |
|
Other |
|
|
13,796 |
|
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|
14,411 |
|
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|
|
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|
|
|
|
94,492 |
|
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|
101,499 |
|
Less: current portion |
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(13,539 |
) |
|
|
(10,821 |
) |
|
|
|
|
|
|
|
|
|
$ |
80,953 |
|
|
$ |
90,678 |
|
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|
On October 6, 2006, the Company entered into a new revolving credit agreement (the Credit
Agreement) effectively amending and restating our primary bank credit facility. The Credit
Agreement provides for a $155,000 revolving credit facility, with an accordion feature that could
under prescribed conditions increase the facility to $240,000, and has a maturity date of October
6, 2011. At December 31, 2006, outstanding borrowings were $22,000 and accrued interest at a
weighted average rate of 6.61%.
Under the terms of the Credit Agreement the proceeds from borrowings may be used to repay
certain indebtedness, finance certain acquisitions, provide for working capital and general
corporate purposes and, subject to certain restrictions, repurchase the Companys common stock.
Borrowings outstanding under the Credit Agreement are secured by substantially all of the Companys
assets other than real estate and certain equipment subject to term equipment notes and other
financings. Borrowings under the Credit Agreement accrue interest, at the Companys option, at
either (1) the London Interbank Offered Rate (LIBOR) plus a margin of .625% to 1.25%, or (2) an
alternate base rate (based upon the greater of the agent banks prime lending rate or the Federal
Funds effective rate plus .50%). The Company is also required to pay an annual commitment fee
ranging from .15% to .25% on available but unused amounts under the Credit Agreement. 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. At December 31, 2006, the applicable
LIBOR interest rate margin was .625% and the applicable commitment fee was .15%.
The Company is subject to certain covenants and restrictions and must meet certain financial
tests under the Credit Agreement. The Company was in compliance with such covenants, restrictions
and financial tests at December 31, 2006.
8
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and percentages)
(Unaudited)
In addition to the Credit Agreement, the Company maintains two auxiliary revolving credit
facilities (each an Auxiliary Bank Facility and collectively the Auxiliary Bank Facilities)
with commercial banks. Each Auxiliary Bank
Facility is unsecured and has a maximum borrowing capacity of $5,000. One facility expires in
October 2008 while the other facility expires in December 2007. At December 31, 2006, outstanding borrowings under the Auxiliary
Bank Facilities totaled $7,461 and accrued interest at a weighted average rate of 6.32%. Because
the Company currently has the ability and intends to refinance borrowings outstanding under the
Auxiliary Bank Facility expiring in December 2007, such borrowings are classified as long-term debt
in the accompanying consolidated balance sheet at December 31, 2006. The Auxiliary Bank Facilities
cross-default to the covenants and restrictions set forth in the Credit Agreement.
The Companys 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 affiliate of a printing equipment manufacturer (the Equipment Notes). At December 31,
2006, outstanding borrowings under the Lender Notes totaled $38,558 and accrued interest at a
weighted average rate of 5.85%. The Lender Notes provide for either fixed monthly principal
payments plus interest (at fixed rates) or for fixed payments of principal and interest (at fixed
rates) for defined periods of up to eight years from the date of issuance, and are secured by
certain equipment of the Company. At December 31, 2006, outstanding borrowings under the Equipment
Notes totaled $10,455 and accrued interest at a weighted average rate of 5.92%. The Equipment Notes
provide for fixed payments of principal and interest (at fixed rates) for defined periods of up to
ten years from the date of issuance and are secured by the equipment which was concurrently
purchased from the manufacturer. At December 31, 2006, the remaining balance of term equipment
notes totaling $2,222 primarily consists of various secured debt obligations assumed by the Company
in connection with certain prior year acquisitions. The Company is not subject to any significant
financial covenants in connection with any of the term equipment notes.
The Companys remaining debt obligations consist of a mortgage note totaling $4,657, a
promissory note totaling $1,804, industrial revenue bonds totaling $6,185 and various other debt
obligations totaling $1,150. The Company does not have any significant financial covenants or
restrictions associated with these other debt obligations.
Subsequent to December 31, 2006, the Company entered into a First Amendment (the Amendment)
to the Credit Agreement. The Amendment specifically (i) consented (a) to the incurrence of
indebtedness and the maximum amount of indebtedness that can be incurred under the A&B Credit
Facility (as defined below) and (b) to the guaranty of the A&B Credit Facility by the Company and
(ii) waived certain provisions of the Credit Agreement that would have been applicable to the
acquisition of Annan & Bird (See Note 2. Acquisitions).
Concurrently with the Amendment, the Company entered into an unsecured credit facility with a
commercial bank (the A&B Credit Facility) consisting of a US$35,000 maximum borrowing limit
component and a separate Canadian $5,000 maximum borrowing limit component. U.S. dollar
denominated borrowings under the A&B Credit Facility accrue interest and bear an annual commitment
fee at rates equal to those applicable to borrowings by the Company under the Credit Agreement.
Canadian dollar denominated borrowings under the A&B Credit Facility accrue interest at the
Companys option, at either (1) the Canadian Dollar Offer Rate plus a margin of .625% to 1.25%, or
(2) an alternate base rate based upon the Canadian Prime Rate. The Company is also required to pay
an annual commitment fee ranging from .15% to .25% on available but unused Canadian dollar amounts.
For both components, the interest rate margin and the commitment fee are based upon the financial
performance measures set forth in the Credit Agreement and are redetermined quarterly. An annual
reduction of US$4,000 on the U.S. dollar denominated commitment occurs on each anniversary date of
the A&B Credit Facility until the final maturity date of January 2, 2011. There are no significant
covenants or restrictions set forth in the A&B Credit Facility; however, a default by the Company
under the Credit Agreement will constitute a default under the A&B Credit Facility. Proceeds from
borrowings under the A&B Credit Facility may be used by the Company for general corporate purposes,
including the acquisition of Annan & Bird.
4. |
|
SHARE BASED COMPENSATION |
The Company has a share-based compensation plan which is administered by the compensation
committee of the Companys Board of Directors. For additional information regarding this plan,
refer to Note 8. Stock Options of the Notes to the Consolidated Financial Statements contained in
the 2006 Form 10-K. Prior to April 1, 2006, the Company accounted for share-based compensation
using the intrinsic value method in accordance with Accounting Principles Board Opinion (APBO)
No. 25, Accounting for Stock Issued to Employees. Compensation expense is not recognized under
APBO No. 25 for share-based compensation transactions made at fair-value on the date of grant.
9
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and percentages)
(Unaudited)
In December 2004, SFAS No. 123(R), Share-Based Payment, was issued, pursuant to which the
intrinsic value method of accounting under APBO No. 25 was superseded with a fair-value method that
requires recognition of compensation expense in the consolidated statement of operations for all
share-based compensation transactions.
Effective April 1, 2006, the Company adopted SFAS No. 123(R) using the modified prospective
method of transition, pursuant to which, compensation expense is recognized over the vesting period
in the consolidated statement of operations beginning with the date of adoption for (a) the
unvested portion of share-based compensation transactions previously occurring and (b) all
prospective share-based compensation transactions. For the nine months ended December 31, 2006,
the Company recognized share-based compensation expense of $2,245 and a related income tax benefit
of $841. As of December 31, 2006, $2,382 of currently unrecognized share-based compensation expense
remains to be recognized in future periods.
In addition, SFAS No. 123(R) provides that the benefit of certain tax deductions the Company
receives in connection with the exercise of share-based compensation instruments be classified as
cash flow from financing activities as compared to cash flow from operating activities as required
under APBO No. 25. Accordingly, $3,262 of tax benefit is reflected as cash flow from financing
activities and $990 of tax benefit is recognized as cash flow from operations in the accompanying
consolidated statements of cash flows as of December 31, 2006 and 2005.
As discussed above, results of operations for periods prior to April 1, 2006 have not been
restated to reflect the provisions of SFAS No. 123(R). The following table sets forth pro forma
information as if share-based compensation expense for the three and nine months ended December 31,
2005 was determined using the fair-value method of accounting.
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
December 31, 2005 |
|
|
December 31, 2005 |
|
Net income as reported |
|
$ |
9,941 |
|
|
$ |
28,003 |
|
Less: Share-based compensation expense, net of tax |
|
|
(406 |
) |
|
|
(1,163 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
9,535 |
|
|
$ |
26,840 |
|
|
|
|
|
|
|
|
Basic Earnings Per Share: |
|
|
|
|
|
|
|
|
Net income as reported |
|
$ |
0.73 |
|
|
$ |
2.04 |
|
Pro forma net income |
|
$ |
0.70 |
|
|
$ |
1.96 |
|
Diluted Earnings Per Share: |
|
|
|
|
|
|
|
|
Net income as reported |
|
$ |
0.71 |
|
|
$ |
1.98 |
|
Pro forma net income |
|
$ |
0.68 |
|
|
$ |
1.90 |
|
The total intrinsic value of stock options exercised during the nine months ended December 31,
2006 was $8,983. The following table summarizes stock option activity for the nine months ended
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average Exercise |
|
Stock Options |
|
Shares |
|
|
Price |
|
Outstanding at March 31, 2006 |
|
|
1,974,459 |
|
|
$ |
34.31 |
|
Granted |
|
|
26,416 |
|
|
|
49.19 |
|
Exercised |
|
|
(278,759 |
) |
|
|
28.15 |
|
Forfeited or expired |
|
|
(24,352 |
) |
|
|
39.87 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 (a) |
|
|
1,697,764 |
|
|
$ |
35.49 |
|
|
|
|
|
|
|
|
Exercisable at December 31, 2006 (a) |
|
|
1,242,375 |
|
|
$ |
34.56 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Stock options outstanding as of December 31, 2006 have a weighted average remaining
contractual term of 5.1 years. Based on the market value of the Companys common stock on
December 31, 2006, outstanding stock options have an aggregate intrinsic value of $40,033 and
exercisable stock options have an aggregate intrinsic value of $30,451. |
10
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and percentages)
(Unaudited)
Our
share-based payments consist of stock options and restricted stock awards. For stock options, we determine the fair value
of each stock option at the grant date using a Black-Scholes model, with the following weighted-average assumptions used for grants made during the nine months
ended December 31, 2005; dividends per quarter of zero; expected
volatility of 32.7%; an average risk-free interest rate of 4.1%;
and an average expected life of 5 years. For grants made during the
nine months ended December 31, 2006 assumptions used were as follows; dividends per quarter of zero; expected
volatility of 33.8%; an average risk-free interest rate of 4.2%; and an average expected life of 5 years.
The Company granted an award of 12,500 restricted stock unit awards during the nine months
ended December 31, 2006 having a fair value of $651. The following table summarizes restricted
stock unit award activity for the nine months ended December 31, 2006:
|
|
|
|
|
Restricted Stock Unit Awards |
|
Shares |
|
Outstanding at March 31, 2006 |
|
|
|
|
Granted |
|
|
12,500 |
|
Exercised |
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 (a) |
|
|
12,500 |
|
|
|
|
|
Exercisable at December 31, 2006 (a) |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Restricted stock units outstanding and exercisable as of December 31, 2006 have a remaining
contractual term of 9.3 years and a total intrinsic value of $738. |
11
|
|
|
ITEM 2. |
|
Managements 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 beyond our control, which
may limit our ability to maintain or improve our operating results or financial condition or
acquire additional printing businesses. When you consider our forward-looking information, you
should keep in mind the Risk Factors described in this Quarterly Report on Form 10-Q and in our
most recently filed Annual Report on Form 10-K for the fiscal year ended March 31, 2006. Although
management believes that the assumptions underlying the forward-looking statements are reasonable,
any of the assumptions could be inaccurate and there can be no assurance that any or all of the
assumptions underlying the forward-looking statements will prove to be accurate. The inclusion of
such information should not be regarded as a representation by us or any other person 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 Quarterly 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, 2006 and other
reports filed by us with the Securities and Exchange Commission. Operating results for the nine
months ended December 31, 2006 are not necessarily indicative of the results to be expected for the
entire fiscal year ending March 31, 2007 or any periods thereafter.
Overview
Our Organization
Consolidated Graphics is a leading national provider of commercial printing services and is
recognized as the largest sheetfed and digital commercial printing company in North America. Our
corporate headquarters are in Houston, Texas, and we currently operate 68 printing businesses
spanning 27 states plus one Canadian province. Each of our printing businesses has a
well-established operating history, more than 25 years in most cases. Complementing the printing
services we provide, we also offer (i) state-of-the-art fulfillment services from 12 fulfillment
centers located at or near one of our printing businesses and (ii) proprietary digital technology
solutions and e-commerce capabilities from two technology hubs located at our corporate
headquarters and at one of our printing businesses near Washington D.C. Generally, each facility
substantially relies on locally-based customers; accordingly, we have a broad diversification of
customers by industry-type and geographic orientation, totaling more than 22,000. No individual
facility or any individual customer account for more than 10% of our 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 and management information
systems. We also maintain centralized treasury, risk management, tax 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 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 e-commerce software solutions and other print-related, value-added services. Most of the
e-commerce solutions are Internet-based, and like the printed materials we produce, are customized
to the specific needs of our customers. For marketing purposes, we refer to our e-commerce
capabilities using the CGXSolutions trademark. Collectively, all of these discrete capabilities
comprise a comprehensive range of printing services for which we typically charge an
all-inclusive fee. Accordingly, for financial reporting purposes, we report our revenues and
results of operations as a single segment.
Our sales are derived from commercial printing services. These services consist of (i)
traditional print services, including electronic prepress, printing, finishing, storage and
delivery of high-quality materials which are custom manufactured to our customers design
specifications; (ii) fulfillment and mailing services for such printed materials; and (iii) digital
technology solutions and e-commerce capabilities that enable our customers to more efficiently
procure and
manage printed material and/or design, procure, distribute, track and analyze results of
printing-based marketing programs and activities. Examples of the types of documents we print for
our customers include high-quality, multi-color marketing materials, product and capability
brochures, point-of-purchase displays, direct mail pieces, shareholder communications, catalogs,
and training manuals.
12
Most of our sales are generated by individual orders through commissioned sales personnel. We
recognize revenue from these orders when we deliver the ordered goods and services. To a large
extent, continued engagement of our Company by our customers for successive business opportunities
depends upon the customers satisfaction with the quality of 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 cost of sales mainly consists of raw materials consumed in the printing process, as well
as labor and outside services, such as delivery costs. Paper cost is the most significant component
of our materials cost; however, fluctuation in paper pricing generally does not materially impact
our operating margins because we typically quote, and subsequently purchase, paper for each
specific printing project we are awarded. As a result, any changes in paper pricing are effectively
passed through to customers by our printing businesses. Additionally, our cost of sales includes
salary and benefits paid to operating personnel, maintenance, repair, 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, as well as office rent, utilities and communications expenses, various
professional services 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 national
organization. Our strategy currently includes the following initiatives to generate sales and
profit growth:
|
|
|
Internal Sales GrowthWe seek to use our competitive advantages to expand
market share. We continue to pursue additional experienced sales professionals, invest
in new equipment and technology, expand our national accounts program, promote
cross-selling opportunities among individual facilities, and develop new and expanded
digital technology-based print-related services. |
|
|
|
|
Disciplined Acquisition ProgramWe selectively pursue opportunities to acquire
additional printing businesses at reasonable prices. Some of these acquisitions may
include smaller and/or distressed printing businesses for merger into one of our
existing businesses. |
|
|
|
|
Cost SavingsBecause of our size and national presence, we leverage our
economies of scale to purchase raw materials, supplies and equipment at preferential
prices, and centralize various administrative services to generate cost savings. |
|
|
|
|
Best Practices/BenchmarkingWe provide a forum for our printing businesses to
share their knowledge of technical processes and their best practices with one another,
as well as benchmark financial and operational data to help our printing businesses
identify and respond to changes in operating trends. |
|
|
|
|
Leadership DevelopmentThrough our unique Leadership Development Program, we
develop college graduates for future sales and management positions at our printing
businesses. |
13
Results of Operations
The following table sets forth our Companys unaudited condensed consolidated income
statements for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended December 31 |
|
|
Ended December 31 |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(In millions) |
|
|
(In millions) |
|
Sales |
|
$ |
269.6 |
|
|
$ |
226.2 |
|
|
$ |
742.3 |
|
|
$ |
657.1 |
|
Cost of sales |
|
|
197.2 |
|
|
|
170.5 |
|
|
|
543.5 |
|
|
|
495.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
72.4 |
|
|
|
55.7 |
|
|
|
198.8 |
|
|
|
161.6 |
|
Selling expenses |
|
|
26.5 |
|
|
|
23.3 |
|
|
|
74.4 |
|
|
|
67.9 |
|
General and administrative expenses |
|
|
18.7 |
|
|
|
15.1 |
|
|
|
50.9 |
|
|
|
44.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
27.2 |
|
|
|
17.3 |
|
|
|
73.5 |
|
|
|
49.1 |
|
Interest expense, net |
|
|
1.6 |
|
|
|
1.4 |
|
|
|
4.7 |
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
25.6 |
|
|
|
15.9 |
|
|
|
68.8 |
|
|
|
44.9 |
|
Income taxes |
|
|
9.2 |
|
|
|
6.0 |
|
|
|
25.0 |
|
|
|
16.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
16.4 |
|
|
$ |
9.9 |
|
|
$ |
43.8 |
|
|
$ |
28.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the components of income expressed as a percentage of sales for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a Percentage |
|
|
As a Percentage |
|
|
|
of Sales |
|
|
of Sales |
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended December 31 |
|
|
Ended December 31 |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
73.2 |
|
|
|
75.4 |
|
|
|
73.2 |
|
|
|
75.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
26.8 |
|
|
|
24.6 |
|
|
|
26.8 |
|
|
|
24.6 |
|
Selling expenses |
|
|
9.8 |
|
|
|
10.3 |
|
|
|
10.0 |
|
|
|
10.3 |
|
General and administrative expenses |
|
|
6.9 |
|
|
|
6.6 |
|
|
|
6.9 |
|
|
|
6.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
10.1 |
|
|
|
7.7 |
|
|
|
9.9 |
|
|
|
7.5 |
|
Interest expense, net |
|
|
0.6 |
|
|
|
0.7 |
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
9.5 |
|
|
|
7.0 |
|
|
|
9.3 |
|
|
|
6.9 |
|
Income taxes |
|
|
3.4 |
|
|
|
2.6 |
|
|
|
3.4 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
6.1 |
% |
|
|
4.4 |
% |
|
|
5.9 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our sales and expenses during the periods shown were impacted by the acquisition of four
printing businesses (two as tuck-ins) in fiscal 2006. In accordance with the purchase method of
accounting, our consolidated income statements reflect sales and expenses of acquired businesses
only for post-acquisition periods. Accordingly, acquisitions affect our financial results in any
period compared to the prior year period by the full-period impact of prior year acquisitions (as
compared to the partial period impact in the prior year) and the partial-period impact of current
year acquisitions, and is referred to below as incremental impact of acquisitions.
Comparative Analysis of Consolidated Income Statements for the Three Months Ended December 31, 2006
and 2005
Sales in the three month period ended December 31, 2006 increased $43.4 million, or 19%, to
$269.6 million from $226.2 million for the same period in the prior year. The $43.4 million revenue
increase is attributable to $34.7 million of internal sales growth and $8.7 million from the
incremental impact of acquisitions. Electionrelated printing, which recurs generally on a
bi-annual basis, accounted for $13.9 million of our internal sales growth. The remainder of our
internal sales growth was primarily attributable to our strategic sales initiatives, consisting of
national sales, CGXSolutions and cross-selling. Compared to the prior year, national sales were up
47% in the December quarter and accounted for 10% of total sales and sales attributable to our
CGXSolutions sales channel (including $1.3 million of national sales) were up 5% in the December
quarter and accounted for 5% of total sales.
Gross profit in the three months ended December 31, 2006 increased $16.7 million, or 30%, to
$72.4 million from $55.7 million for the same period in the prior year. Approximately $10.7 million
of the increase is attributable to the increased sales levels discussed above, including the
incremental impact of acquisitions. The remaining increase of $6.0 million accounts for the
increase in gross profit percentage to 26.8% compared to 24.6% and is attributable to (i) margin
leverage as certain of our operating costs are more fixed in nature (for example depreciation and
rent expense) and (ii) incremental purchasing and pricing gains that we have been able to achieve.
14
Selling expense in the three months ended December 31, 2006 increased $3.2 million, or 14%, to
$26.5 million from $23.3 million for the same period in the prior year. The increase is directly
attributable to the increased sales levels noted above. As a percentage of sales, selling expenses
decreased to 9.8% in the current quarter as compared to 10.3% for the same period last year as (i)
our sales growth leveraged certain selling expenses which are more fixed in nature (for example
sales overhead) and (ii) certain of our sales growth including election-related printing bears a
lower level of sales commission and other expense.
General and administrative expenses in the three months ended December 31, 2006 increased $3.6
million, or 24%, to $18.7 million from $15.1 million for the same period in the prior year due
principally to the incremental impact of acquisitions (including direct expenses and incremental
intangible asset amortization) and due to the current period recognition of $.5 million of
share-based compensation expense. As a percentage of sales, general and administrative expenses
increased to 6.9% in the current quarter as compared to 6.6% for the same period last year. This
increase is principally attributable to incremental current period costs, including, of more
relative significance, intangible asset amortization, allowance for doubtful accounts and
share-based compensation expense.
Interest expense in the three months ended December 31, 2006 increased $.2 million, or 9%, to
$1.6 million from $1.4 million in the same period in the prior year, due principally to a higher
level of average debt outstanding.
We provided for income taxes in the three months ended December 31, 2006 of $9.2 million,
reflecting an effective tax rate of 36.0% as compared to an effective tax rate of 37.3% for the
same period in the prior year. An increase in the estimated domestic production activities
deduction for the current year contributed to the decrease in our effective tax rate. Also, due to
the increase in pretax earnings, non-deductible expenses were a smaller percentage of pretax
earnings, thus lowering our effective tax rate.
Comparative Analysis of Consolidated Income Statements for the Nine Months Ended December 31, 2006
and 2005
Sales in the nine month period ended December 31, 2006 increased $85.2 million, or 13%, to
$742.3 million from $657.1 million for the same period in the prior year. The $85.2 million revenue
increase is attributable to $58.7 million of internal sales growth and $26.5 million from the
incremental impact of acquisitions. Approximately 40% of our internal sales growth resulted from
election-related printing, which recurs generally on a bi-annual basis. The remainder of our
internal sales growth was primarily attributable to our strategic sales initiatives, consisting of
national sales, CGXSolutions and cross-selling. Compared to the prior year, national sales were up
45% and accounted for 9% of total sales and sales attributable to our CGXSolutions sales channel
(including $5.8 million of national sales) were up 55% and accounted for 6% of total sales.
Gross profit in the nine months ended December 31, 2006 increased $37.2 million, or 23%, to
$198.8 million from $161.6 million for the same period in the prior year. Approximately $21.0
million of the increase is attributable to the increased sales levels discussed above, including
the incremental impact of acquisitions. The remaining increase of $16.2 million accounts for the
increase in gross profit percentage to 26.8% compared to 24.6% and is attributable to (i) margin
leverage as certain of our operating costs are more fixed in nature (for example depreciation and
rent expense) and (ii) incremental purchasing and pricing gains that we have been able to achieve.
Selling expense in the nine months ended December 31, 2006 increased $6.5 million, or 10%, to
$74.4 million from $67.9 million for the same period in the prior year. The increase is directly
attributable to the increased sales levels noted above. As a percentage of sales, selling expenses
decreased to 10.0% in the nine months ended December 31, 2006 as compared to 10.3% for the same
period in the prior year as (i) our sales growth leveraged certain selling expenses which are more
fixed in nature (for example sales meetings and overhead) and (ii) certain of our sales growth
including election-related printing bears a lower level of sales commission and other expense.
General and administrative expenses in the nine months ended December 31, 2006 increased $6.3
million, or 14%, to $50.9 million from $44.6 million in the same period in the prior year.
Recognition of share-based compensation expense totaling $2.2 million was the most significant
element of the increase. The remainder of the increase was primarily attributable to the
incremental impact of acquisitions (including direct expenses and incremental intangible asset
amortization), net of a one-time sales and use tax credit of $.6 million. Overall, general and
administrative expenses as a percentage of sales increased slightly to 6.9% in the nine months
ended December 31, 2006 as compared to 6.8% for the same period in the prior year.
Interest expense in the nine months ended December 31, 2006 increased $.5 million, or 12%, to
$4.7 million from $4.2 million in the same period in the prior year, due principally to a higher
level of average debt outstanding and a generally higher interest rate environment.
15
We provided for income taxes for in the nine months ended December 31, 2006 of $25.0 million,
reflecting an effective tax rate of 36.3% as compared to an effective tax rate of 37.7% for the
same period in the prior year. A one-time credit of $.7 million, or 1.0% of taxable income, was
recognized in the current period for the impact of a net reduction in legislated state income tax
rates on previously provided deferred income taxes. An increase in the estimated domestic
production activities deduction for the current year contributed to the decrease in our effective
tax rate. In addition, due to the increase in pretax earnings, non-deductible expenses were a
smaller percentage of pretax earnings, thus lowering our effective tax rate.
Liquidity and Capital Resources
Sources and Uses of Cash
Our historical sources of cash have primarily been cash provided by operations or 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 and repurchases of our common stock. Supplemental information pertaining to our
historical sources and uses of cash is presented as follows and should be read in conjunction with
our consolidated statements of cash flows and notes thereto included in Item 1. Financial
Statements:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
December 31 |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In millions) |
|
Net cash provided by operating activities |
|
$ |
59.8 |
|
|
$ |
60.2 |
|
Acquisitions of businesses |
|
|
(4.8 |
) |
|
|
(7.1 |
) |
Capital expenditures, net of proceeds from asset dispositions (1) |
|
|
(21.7 |
) |
|
|
(6.9 |
) |
Net payments under bank credit facilities |
|
|
(13.6 |
) |
|
|
(32.7 |
) |
Net proceeds (payments) on term equipment notes and other debt |
|
|
1.5 |
|
|
|
(6.0 |
) |
Payments to repurchase and retire common stock |
|
|
(24.7 |
) |
|
|
(6.7 |
) |
|
|
|
(1) |
|
Included in capital expenditures for 2006 is $2.0 million which was reflected as an
accrued liability in the March 31, 2006 balance sheet. |
Additionally, our cash position, working capital and debt obligations are shown below and
should be read in conjunction with our consolidated balance sheets and notes thereto included in
Item 1. Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2006 |
|
|
|
(In millions) |
|
Cash and cash equivalents |
|
$ |
12.6 |
|
|
$ |
5.0 |
|
Working capital, inclusive of cash and cash equivalents |
|
|
87.5 |
|
|
|
67.5 |
|
Total debt obligations |
|
|
94.5 |
|
|
|
101.5 |
|
During the nine months ended December 31, 2006, net cash provided by operating activities
decreased by $.4 million as compared to the same period last year. Although net income increased by
$15.8 million, an offsetting increase in working capital, excluding cash and cash equivalents,
caused the slight decline in net cash provided by operating activities.
We believe that our cash flow provided by operations will be adequate to cover our remaining
fiscal 2007 working capital needs, debt service requirements and planned capital expenditures to
the extent such items are known or are reasonably determinable based on current business and market
conditions. However, we may elect to finance certain of our capital expenditure requirements
through borrowings under our primary bank credit facility or the issuance of additional term
equipment notes.
We intend to continue pursuing acquisition opportunities at prices we believe are reasonable
based upon market conditions. However, we cannot accurately predict the timing, size or success of
our acquisition efforts or our associated potential capital commitments. There can be no assurance
that we will be able to acquire additional printing businesses on terms acceptable to us. During
the nine months ended December 31, 2006, the Company announced that it had entered into non-binding
letters of intent to acquire Global Group Inc. in Fort Worth, Texas, Annan & Bird Lithographers,
located near Toronto in Mississauga, Ontario and The Hennegan Company, located outside of
Cincinnati, Ohio in Florence, Kentucky. Subsequent to December 31, 2006, we completed the
acquisitions of Annan & Bird Lithographers and The Hennegan Company.
16
The Annan & Bird Lithographers and The Hennegan Company acquisitions were funded principally
by borrowings under bank credit facilities. We expect to fund future acquisitions through cash
flow provided by operations and/or additional borrowings. We have in the past issued our common
stock as purchase price consideration in some of our acquisitions. Although we may issue common
stock for such purposes in the future, we do not expect to do so in the foreseeable future because
of our current financial liquidity and ability to utilize available cash or make additional
borrowings instead of issuing common stock. The extent to which we will be willing or able to use
our common stock in the future to make acquisitions will depend on its market value from time to
time and the willingness of potential sellers to accept it as full or partial payment for the
acquisition price, as well as our financial liquidity and available financing options.
In May 2006, our Board of Directors approved a common stock share repurchase program that will
expire in May 2007 providing for repurchases of our common stock not to exceed an aggregate of
$68.3 million in open-market or block purchase transactions. We expect to fund any repurchases
under the program through cash flow provided by operations or additional borrowings under our
primary bank credit facility. The amount and timing of any purchases will depend upon a number of
factors, including our liquidity and potential alternative uses of our capital resources, the price
and availability of our shares, and general market conditions. During the nine month period ended
December 31, 2006, we repurchased 465,644 shares of our common stock at a total cost of $24.7
million. There can be no assurance that we will determine to make additional repurchases of our
common stock, and if so, whether we will be able to do so on terms acceptable to us.
Debt Obligations
On October 6, 2006, we entered into a new revolving credit agreement (the Credit Agreement)
effectively amending and restating our primary bank credit facility. The Credit Agreement provides
for a $155.0 million revolving credit facility, with an accordion feature that could under
prescribed conditions increase the facility to $240.0 million, and has a maturity date of October
6, 2011. At December 31, 2006, outstanding borrowings were $22.0 million and accrued interest at a
weighted average rate of 6.61%.
Under the terms of the Credit Agreement the proceeds from borrowings may be used to repay
certain indebtedness, finance certain acquisitions, provide for working capital and general
corporate purposes and, subject to certain restrictions, repurchase our common stock. Borrowings
outstanding under the Credit Agreement are secured by substantially all of our assets other than
real estate and certain equipment subject to term equipment notes and other financings. Borrowings
under the Credit Agreement accrue interest, at our option, at either (1) the London Interbank
Offered Rate (LIBOR) plus a margin of .625% to 1.25%, or (2) an alternate base rate (based upon
the greater of the agent banks prime lending rate or the Federal Funds effective rate plus .50%).
We are also required to pay an annual commitment fee ranging from .15% to .25% on available but
unused amounts under the Credit Agreement. 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. At December 31, 2006, the applicable LIBOR interest rate margin was .625%
and the applicable commitment fee was .15%.
We are subject to certain covenants and restrictions and we must meet certain financial tests
as defined in the Credit Agreement. We were in compliance with these covenants and financial tests
at December 31, 2006. In the event that we are unable to remain in compliance with these covenants
and financial tests in the future, our lenders would have the right to declare us in default with
respect to such obligations, and consequently, certain of our other debt obligations, including
substantially all of our term equipment notes, would be deemed to also be in default. All debt
obligations in default would be required to be re-classified as a current liability. In the event
that we were to be unable to obtain a waiver, re-negotiate or re-finance these obligations, a
material adverse effect on our ability to conduct our operations in the ordinary course likely
would be the result. Based on our view of current market and business conditions and our
expectations regarding our future operating results and cash flows, we believe that we will be able
to remain in compliance with these covenants and financial tests in the foreseeable future.
In addition to the Credit Agreement, we maintain two auxiliary revolving credit facilities
(each an Auxiliary Bank Facility and collectively the Auxiliary Bank Facilities) with
commercial banks. Each Auxiliary Bank Facility is unsecured and has a maximum borrowing capacity of
$5.0 million. One facility expires in October 2008 while the other facility expires in December
2007. At December 31, 2006, outstanding borrowings under the Auxiliary Bank Facilities totaled $7.5
million and accrued interest at a weighted average rate of 6.32%. Because we currently have the
ability and intend to refinance the borrowings outstanding under the Auxiliary Bank Facility
expiring in December 2007, such borrowings are classified as long-term debt in our consolidated
balance sheet at December 31, 2006. The Auxiliary Bank Facilities cross-default to the covenants
and restrictions set forth in the Credit Agreement.
17
Our term equipment notes consist primarily of notes payable pursuant to financing agreements
between us and various lenders (the Lender Notes) and between us and the finance affiliate of a
printing equipment manufacturer (the
Equipment Notes). At December 31, 2006, outstanding borrowings under the Lender Notes totaled
$38.6 million and accrued interest at a weighted average rate of 5.85%. The Lender Notes provide
for either fixed monthly principal payments
plus interest (at fixed rates) or for fixed payments of principal and interest (at fixed rates) for
defined periods of up to eight years from the date of issuance, and are secured by certain
equipment of the Company. At December 31, 2006, outstanding borrowings under the Equipment Notes
totaled $10.4 million and accrued interest at a weighted average rate of 5.92%. The Equipment Notes
provide for fixed payments of principal and interest (at fixed rates) for defined periods of up to
ten years from the date of issuance and are secured by equipment which was concurrently purchased
from the manufacturer. At December 31, 2006, the remaining balance of term equipment notes totaling
$2.2 million primarily consists of various secured debt obligations assumed by us in connection
with certain prior year acquisitions. We are not subject to any significant financial covenants in
connection with any of the term equipment notes.
Our other debt obligations consist of a mortgage note of $4.7 million, a promissory note
totaling $1.8 million, industrial revenue bonds totaling $6.2 million and various other debt
obligations totaling $1.1 million. We do not have any significant financial covenants or
restrictions associated with these other debt obligations.
Subsequent to December 31, 2006, we entered into a First Amendment (the Amendment) to the
Credit Agreement. The Amendment specifically (i) consented (a) to the incurrence of indebtedness
and the maximum amount of indebtedness that can be incurred under the A&B Credit Facility (as
defined below) and (b) to our guaranty of the A&B Credit Facility and (ii) waived certain
provisions of the Credit Agreement that would have been applicable to the acquisition of Annan &
Bird Lithographers.
Concurrently with the Amendment, we entered into an unsecured credit facility with a
commercial bank (the A&B Credit Facility) consisting of a US$35.0 million maximum borrowing limit
component and a separate Canadian $5.0 million maximum borrowing limit component. U.S. dollar
denominated borrowings under the A&B Credit Facility accrue interest and bear an annual commitment
fee at rates equal to those applicable to borrowings by us under the Credit Agreement. Canadian
dollar denominated borrowings under the A&B Credit Facility accrue interest at our option, at
either (1) the Canadian Dollar Offer Rate plus a margin of .625% to 1.25%, or (2) an alternate base
rate based upon the Canadian Prime Rate. We are also required to pay an annual commitment fee
ranging from .15% to .25% on available but unused Canadian dollar amounts. For both components, the
interest rate margin and the commitment fee are based upon the financial performance measures set
forth in the Credit Agreement and are redetermined quarterly. An annual reduction of US$4.0 million
on the U.S. dollar denominated commitment occurs on each anniversary date of the A&B Credit
Facility until the final maturity date of January 2, 2011. There are no significant covenants or
restrictions set forth in the A&B Credit Facility; however, a default by us under the Credit
Agreement constitutes a default under the A&B Credit Facility. Proceeds from borrowings under the
A&B Credit Facility may be used for general corporate purposes, including the acquisition of Annan
& Bird Lithographers.
To complete the acquisition of Annan & Bird Lithographers and The Hennegan Company, as well as
to fund certain equipment purchases and other general corporate purposes, we borrowed US$30.9
million on the A&B Credit Facility and $36.0 million on the Credit Agreement in January 2007.
Contractual Obligations and Other Commitments
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 $62.9 million as of
December 31, 2006.
Letters of credit In connection with our assumption of obligations under outstanding
industrial revenue bonds, which are reflected as debt in the accompanying consolidated financial
statements, and our assumption of certain contingent liabilities related to certain of our
acquisitions, we had letters of credit outstanding as of December 31, 2006 totaling $8.1
million. In addition, we had one other letter of credit totaling $.1 million outstanding as
of December 31, 2006. All of these letters of credit were issued pursuant to the terms of our
Credit Agreement, which expires in October 2011, and we will be required to obtain replacement
letters of credit at that time.
Insurance programs We maintain third-party insurance coverage in amounts and against risks
we believe are reasonable under our circumstances. We are self-insured for most workers
compensation claims and for a significant component of our group health insurance programs. For
these exposures, we accrue expected loss amounts which are determined using a combination of our
historical loss experience and subjective assessment of our future loss exposure, together with
advice provided by administrators and consulting actuaries. The estimates of expected loss amounts
are subject to uncertainties arising from various sources, including changes in claims reporting
patterns, claims settlement patterns, judicial decisions, legislation and economic conditions,
which could result in an increase or decrease in accrued costs in future periods for claim matters
which occurred in a prior period. Although we believe that the accrued estimated loss amounts are
reasonable under the circumstances, significant differences related to the items noted above could
materially affect our risk exposure, insurance obligations, and future expense.
18
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.
Receivables, net of valuation allowance Accounts receivable at December 31, 2006 were
$172.1 million, net of a $3.0 million allowance for doubtful accounts. The valuation allowance was
determined based upon our evaluation of known requirements, aging of receivables, historical
experience and the current economic environment. While we believe we have
appropriately considered known or expected outcomes, our customers ability to pay their
obligations could be adversely affected by contraction in the economy or other factors beyond our
control. Changes in our estimates of collectibility could have a
material adverse effect on our
consolidated financial condition or results of operations.
Goodwill We evaluate the carrying value of our goodwill as of March 31st of each year, or
at any time that management becomes aware of an indication of impairment. Our evaluation is based
on certain data estimated by management to be indicators of future cash flows at each of our
facilities. Estimating future cash flows requires judgments regarding future economic conditions,
demand for services and pricing. Our evaluation also makes use of estimates of market multiples of
cash flow at which transactions could be completed in the current market. If our estimates of
future cash flows or market multiples prove to be materially inaccurate, an impairment charge could
be necessary in future periods.
Impairment of long-lived assets We evaluate long-lived assets, including property, plant
and equipment and intangible assets other than goodwill 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 an impairment
may exist. Estimating future cash flows requires judgments regarding future economic conditions,
demand for services and pricing. Although we believe our estimates are reasonable, significant
differences in the actual performance of the asset or group of assets may materially affect our
asset values and require an impairment charge in future periods.
Insurance liabilities We are self-insured for the majority of our workers compensation and
group health insurance costs. Insurance claims liabilities have been accrued using a combination of
our historical loss experience and subjective assessment of our future loss exposure, together with
advice provided by administrators and consulting actuaries. The estimates of expected loss amounts
are subject to uncertainties arising from various sources, including changes in claims reporting
patterns, claims settlement patterns, judicial decisions, legislation and economic conditions,
which could result in an increase or decrease in accrued costs in future periods for claim matters
which occurred in a prior period.
Accounting for income taxes As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes. This process involves estimating our
actual current tax exposure, together with assessing temporary differences resulting from differing
treatment of items for tax and financial reporting purposes. The tax effects of these temporary
differences are recorded as deferred tax assets or deferred tax liabilities. We must then assess
the likelihood that our deferred tax assets will be recovered from future taxable income, and to
the extent we believe that recovery is not likely, we must establish a valuation allowance.
Significant judgment is required in determining our provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance recorded against our net deferred tax assets.
Additionally, we establish reserves when, despite our belief that our tax return positions are
fully supportable, we believe that certain positions are likely to be challenged and that we may
not succeed. We adjust these reserves in light of changing facts and circumstances. Our effective
tax rate includes the impact of reserve provisions and changes to reserves that we consider
appropriate.
Accounting for acquisitions The allocations of purchase price to acquired assets and
liabilities are initially based on estimates of fair value and is prospectively revised if and when
additional information we are waiting for at the time of the initial allocations concerning certain
asset and liability valuations is obtained, provided that such information is received no later
than one year after the date of acquisition. In addition, we retain an independent third-party
valuation firm to assist in the identification, valuation and determination of useful lives of
identifiable intangible assets in connection with our acquisitions.
19
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. FIN 48 prescribes
a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 will be effective for us beginning April 1, 2007. We have not yet
evaluated the effect FIN 48 will have on our financial statements and related disclosures.
|
|
|
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 that could
expose our Company to market risk. However, we are exposed to market risk for changes in interest
rates related primarily to our debt obligations, which as of December 31, 2006 include borrowings
under our bank credit facilities, various term equipment notes and other debt obligations. As of
December 31, 2006, 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, 2006.
|
|
|
ITEM 4. |
|
Controls and Procedures |
Disclosure Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of the Companys
disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period
covered by this report. Based on such evaluation, the Companys CEO and CFO have concluded that, as
of the end of such period, the Companys disclosure controls and procedures were effective to
ensure that information required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms.
Internal Control Over Financial Reporting
There have not been any changes in the Companys 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, the Companys internal control over financial reporting.
20
CONSOLIDATED GRAPHICS, INC.
PART II OTHER INFORMATION
|
|
|
ITEM 1. |
|
Legal Proceedings |
From time to time, our Company is involved in 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. Currently, we are not aware of
any legal proceedings or claims pending against the Company that our management believes will have
a material adverse effect on our financial condition or results of operations.
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, 2006 in response to Item 1A to Part I of
Form 10-K.
|
|
|
ITEM 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds |
In May 2006, the Board of Directors approved a new common stock share repurchase program that
will expire in May 2007 providing for repurchases of our common stock not to exceed $68.3 million
in the aggregate in open-market or block purchase transactions. The following are details of
repurchases under this program for the period covered by this report:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
of Shares |
|
|
Dollar Value of |
|
|
|
|
|
|
|
|
|
|
|
Repurchased |
|
|
Shares that May |
|
|
|
|
|
|
|
|
|
|
|
as Part of |
|
|
Yet Be |
|
|
|
Total Number of |
|
|
Average |
|
|
Publicly |
|
|
Repurchased |
|
|
|
Shares |
|
|
Price Paid |
|
|
Announced |
|
|
Under the |
|
Period |
|
Repurchased (a) |
|
|
per Share |
|
|
Plans |
|
|
Announced Plans |
|
Repurchases from
October 1, 2006
through October
31, 2006 |
|
|
41,344 |
|
|
$ |
61.87 |
|
|
|
41,344 |
|
|
$ |
43,642,547 |
|
Repurchases from
November 1, 2006
through November
30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
43,642,547 |
|
Repurchases from
December 1, 2006
through December
31, 2006 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
43,642,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
41,344 |
|
|
$ |
61.87 |
|
|
|
41,344 |
|
|
|
|
|
|
|
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(a) |
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All shares were purchased in open-market transactions. |
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ITEM 3. |
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Defaults upon Senior Securities |
None.
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ITEM 4. |
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Submission of Matters to a Vote of Security Holders1 |
None.
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ITEM 5. |
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Other Information |
None.
21
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*3.1 |
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Restated Articles of Incorporation of the Company filed with the Secretary of State of the State of
Texas on July 27, 1994 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1994), Exhibit 4(a)). |
*3.2 |
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Articles of Amendment to the Restated Articles of Incorporation of the Company dated as of July 29,
1998 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1998), Exhibit 3.1). |
*3.3 |
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Second Amended and Restated By-Laws of the Company adopted as of June 30, 2004 (Consolidated Graphics,
Inc. Form 10-Q (June 30, 2004), Exhibit 3.3). |
*4.1 |
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Specimen Common Stock Certificate (Consolidated Graphics, Inc. Form 10-K (March 31, 1998), Exhibit 4.1). |
*4.2 |
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Rights Agreement dated as of December 15, 1999 between Consolidated Graphics, Inc. and American Stock
Transfer and Trust Company, as Rights Agent, which includes as Exhibit A the Certificate of
Designations of Series A Preferred Stock, as Exhibit B the form of Rights Certificate and as Exhibit C
the form of summary of Rights to Purchase Shares (Consolidated Graphics, Inc. Form 8-K (December 15,
1999), Exhibit 4.1). |
*4.3 |
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Amendment to Rights Agreement dated as of July 10, 2006 between Consolidated Graphics, Inc. and
American Stock Transfer and Trust Company and the related Summary of Rights to Purchase Stock, as
amended (Consolidated Graphics, Inc. Form 8-A/A (July 13, 2006), Exhibits 2 and 3). |
*10.1 |
|
Credit Agreement among the Company and JPMorgan Chase Bank, N.A., as Administrative Agent, Wells Fargo
Bank, National Association, as Syndication Agent, dated as of October 6, 2006 (Consolidated Graphics,
Inc. Form 8-K (October 6, 2006), Exhibit 10.1). |
*10.2 |
|
First Amendment to the Credit Agreement among the Company and JPMorgan Chase Bank, N.A., as
Administrative Agent, Wells Fargo Bank, National Association, as Syndication Agent, dated as of January
2, 2007 (Consolidated Graphics, Inc. Form 8-K (January 2, 2007), Exhibit 99.1). |
*10.3 |
|
Revolving Credit Facility between Consolidated Annan & Bird Lithographers, Ltd. and JPMorgan Chase
Bank, N.A., Toronto Branch, dated as of January 2, 2007 (Consolidated Graphics, Inc. Form 8-K (January
2, 2007), Exhibit 99.2). |
*10.4 |
|
Guaranty executed and delivered by the Company to JPMorgan Chase Bank, N.A., Toronto Branch, as
Administrative Agent under the Consolidated Annan & Bird Lithographers Revolving Credit Facility, dated
January 2, 2007 (Consolidated Graphics, Inc. Form 8-K (January 2, 2007), Exhibit 99.3). |
31.1 |
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Certification of Joe R. Davis, principal executive officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
31.2 |
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Certification of G. Christopher Colville, principal financial officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
32.1 |
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Certification of Joe R. Davis, principal executive officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
32.2 |
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Certification of G. Christopher Colville, principal financial officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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* |
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Incorporated by reference |
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant,
Consolidated Graphics, Inc., has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
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CONSOLIDATED GRAPHICS, INC.
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Dated: February 7, 2007 |
By: |
/s/ G. Christopher Colville
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G. Christopher Colville |
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Executive Vice President,
Chief Financial and Accounting
Officer and Secretary |
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23
Exhibit Index
|
|
|
*3.1 |
|
Restated Articles of Incorporation of the Company filed with the Secretary of State of the State of
Texas on July 27, 1994 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1994), Exhibit 4(a)). |
*3.2 |
|
Articles of Amendment to the Restated Articles of Incorporation of the Company dated as of July 29,
1998 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1998), Exhibit 3.1). |
*3.3 |
|
Second Amended and Restated By-Laws of the Company adopted as of June 30, 2004 (Consolidated Graphics,
Inc. Form 10-Q (June 30, 2004), Exhibit 3.3). |
*4.1 |
|
Specimen Common Stock Certificate (Consolidated Graphics, Inc. Form 10-K (March 31, 1998), Exhibit 4.1). |
*4.2 |
|
Rights Agreement dated as of December 15, 1999 between Consolidated Graphics, Inc. and American Stock
Transfer and Trust Company, as Rights Agent, which includes as Exhibit A the Certificate of
Designations of Series A Preferred Stock, as Exhibit B the form of Rights Certificate and as Exhibit C
the form of summary of Rights to Purchase Shares (Consolidated Graphics, Inc. Form 8-K (December 15,
1999), Exhibit 4.1). |
*4.3 |
|
Amendment to Rights Agreement dated as of July 10, 2006 between Consolidated Graphics, Inc. and
American Stock Transfer and Trust Company and the related Summary of Rights to Purchase Stock, as
amended (Consolidated Graphics, Inc. Form 8-A/A (July 13, 2006), Exhibits 2 and 3). |
*10.1 |
|
Credit Agreement among the Company and JPMorgan Chase Bank, N.A., as Administrative Agent, Wells Fargo
Bank, National Association, as Syndication Agent, dated as of October 6, 2006 (Consolidated Graphics,
Inc. Form 8-K (October 6, 2006), Exhibit 10.1). |
*10.2 |
|
First Amendment to the Credit Agreement among the Company and JPMorgan Chase Bank, N.A., as
Administrative Agent, Wells Fargo Bank, National Association, as Syndication Agent, dated as of January
2, 2007 (Consolidated Graphics, Inc. Form 8-K (January 2, 2007), Exhibit 99.1). |
*10.3 |
|
Revolving Credit Facility between Consolidated Annan & Bird Lithographers, Ltd. and JPMorgan Chase
Bank, N.A., Toronto Branch, dated as of January 2, 2007 (Consolidated Graphics, Inc. Form 8-K (January
2, 2007), Exhibit 99.2). |
*10.4 |
|
Guaranty executed and delivered by the Company to JPMorgan Chase Bank, N.A., Toronto Branch, as
Administrative Agent under the Consolidated Annan & Bird Lithographers Revolving Credit Facility, dated
January 2, 2007 (Consolidated Graphics, Inc. Form 8-K (January 2, 2007), Exhibit 99.3). |
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 G. Christopher Colville, principal financial 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 G. Christopher Colville, principal financial officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Incorporated by reference |
24