XNYS:CGX Annual Report 10-K Filing - 3/31/2012

Effective Date 3/31/2012

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-K

 

(MARK ONE)

 

x

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

 

FOR THE FISCAL YEAR ENDED MARCH 31, 2012

 

OR

 

o

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

 

FOR THE TRANSITION PERIOD FROM                      TO                    

 

COMMISSION FILE NUMBER 001-12631

 


 

CONSOLIDATED GRAPHICS, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

TEXAS

 

76-0190827

(STATE OR OTHER JURISDICTION

OF INCORPORATION OR ORGANIZATION)

 

(IRS EMPLOYER IDENTIFICATION NO.)

 

 

 

5858 WESTHEIMER, SUITE 200

HOUSTON, TEXAS

 

77057

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

 

(ZIP CODE)

 

(713) 787-0977

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

 

Securities registered pursuant to Section 12(b) of the Act:

 

COMMON STOCK, PAR VALUE $.01 PER SHARE

 

NEW YORK STOCK EXCHANGE

(TITLE OF CLASS)

 

(NAME OF EACH EXCHANGE ON WHICH REGISTERED)

 

Securities registered pursuant to Section 12(g) of the Act:

NONE

 


 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of Securities Act. Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 30, 2011 (last business day of Consolidated Graphics, Inc.’s most recently completed second fiscal quarter):

 

COMMON STOCK, $.01 PAR VALUE—$325,332,344

 

The number of shares outstanding of the registrant’s common stock as of April 30, 2012:

COMMON STOCK, $.01 PAR VALUE—10,252,319

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s Proxy Statement for the Annual Shareholders’ Meeting to be held on or about August 16, 2012, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, are incorporated by reference into Part III of this Form 10-K. Such Proxy Statement, except for the parts therein which have been specifically incorporated by reference, shall not be deemed “filed” for the purposes of this Form 10-K.

 

 

 



Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

FORM 10-K

FOR THE YEAR ENDED MARCH 31, 2012

 

INDEX

 

Forward Looking Statements

3

 

 

PART I

 

 

 

Item 1. Business

3

 

 

Item 1A. Risk Factors

10

 

 

Item 1B. Unresolved Staff Comments

14

 

 

Item 2. Properties

14

 

 

Item 3. Legal Proceedings

14

 

 

Item 4. Mine Safety Disclosures

14

 

 

PART II

 

 

 

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

15

 

 

Item 6. Selected Consolidated Financial Data

16

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

24

 

 

Item 8. Financial Statements and Supplementary Data

25

 

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

47

 

 

Item 9A. Controls and Procedures

47

 

 

Item 9B. Other Information

47

 

 

PART III

 

 

 

Item 10. Directors, Executive Officers and Corporate Governance

48

 

 

Item 11. Executive Compensation

48

 

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

48

 

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

48

 

 

Item 14. Principal Accountant Fees and Services

48

 

 

PART IV

 

 

 

Item 15. Exhibits and Financial Statement Schedules

48

 

 

Signatures

51

 

 

Exhibit Index

52

 

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Forward Looking Statements

 

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, in which the Company discusses factors it believes may affect its performance or results in the future. Forward-looking statements are all statements other than historical facts, such as statements regarding assumptions, expectations, beliefs and projections about future events or conditions. You can generally identify forward-looking statements by the appearance in such a statement of words like “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “forecast,” “project,” “should” or “will” or other comparable words or the negative of such words. The accuracy of the Company’s assumptions, expectations, beliefs and projections depends on events or conditions that change over time and are thus susceptible to change based on actual experience, new developments and known and unknown risks, including those created by general market conditions, competition and the possibility that events may occur beyond the Company’s control, which may limit its ability to maintain or improve its operating results or financial condition or acquire additional printing businesses. The Company gives no assurance that the forward-looking statements will prove to be correct and does not undertake any duty to update them. The Company’s actual future results might differ from the forward-looking statements made in this Annual Report on Form 10-K for a variety of reasons, which include, weakness in the economy, financial stability of its customers, the sustained growth of its digital printing business, seasonality of election-related business, its ability to adequately manage business expenses, including labor costs, the unfavorable outcome of legal proceedings, the lack of or adequacy of insurance coverage for its operations, the continued availability of raw materials at affordable prices, retention of its key management and operating personnel, satisfactory labor relations, the potential for additional goodwill impairment charges, its ability to identify new acquisition opportunities, negotiate and finance such acquisitions on acceptable terms and successfully absorb and manage such acquisitions in a timely and efficient manner, as well as other risks described under the heading “Risk Factors” of this Annual Report on Form 10-K and the risk factors and cautionary statements described in the other documents the Company files or furnishes from time to time with the Securities and Exchange Commission, including its Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Should one or more of the foregoing risks or uncertainties materialize, or should the Company’s underlying assumptions, expectations, beliefs or projections prove incorrect, the Company’s actual results may vary materially from those anticipated in its forward-looking statements, and its business, financial condition and results of operations could be materially and adversely affected.

 

PART I

 

Item 1. Business

 

In this annual report, the words “Consolidated Graphics,” “CGX,” the “Company,” “we,” “our” and “us” refer to Consolidated Graphics, Inc., including our consolidated subsidiaries, unless the context indicates otherwise. Our fiscal year ends on March 31st.

 

Company Overview

 

Consolidated Graphics, headquartered in Houston, Texas, is one of North America’s leading general commercial printing and print-related companies, with 70 printing businesses strategically located across 27 states, Toronto, Prague, and Gero, Japan. Each of our North American printing businesses has a well-established operating history, more than 25 years in most cases. Approximately 95% of our revenues are attributable to our U.S. businesses. Approximately 95% of our long-lived assets are located in the U.S.

 

Our sales are derived from providing commercial printing and print-related services. These services consist of (i) traditional print services, including electronic prepress, digital and offset printing, finishing, storage and delivery of high-quality printed documents which are custom manufactured to our customers’ design specifications; (ii) fulfillment and mailing services for such printed materials; (iii) technology solutions that enable our customers to more efficiently procure and manage printed materials and/or design, procure, distribute, track and analyze results of printing-based marketing programs and activities; and (iv) crossmedia capabilities allowing our customers to supplement the message of their printed materials through other media, such as the internet, email, or text messaging. Examples of the types of documents we print for our customers include high-quality, multi-color marketing materials, product and capability brochures, point-of-purchase displays, direct mail pieces, shareholder communications, trading cards, photo products such as calendars and photo books, catalogs and training manuals.

 

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The scope and extent of services provided to our customers typically varies for each individual order we receive, depending on customer-specific factors, including the intended uses for the printed materials. Furthermore, each of our printing businesses is generally capable of providing the complete range of our services to its customers. Accordingly, we do not operate our business in a manner that differentiates among our respective capabilities and services for financial or management reporting purposes, rather each of our printing businesses define a distinct reporting unit.

 

The Company was incorporated in Texas in 1985. Our website address is www.cgx.com. We make available free of charge on or through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended (“Exchange Act”) and other filings as soon as reasonably practicable after we electronically file such reports with or furnish such reports to the Securities and Exchange Commission (“SEC”). In addition, the current forms of our Corporate Governance Guidelines, Code of Ethics, and the charters of the respective committees of our Board of Directors, and contact information for our Lead Independent Director, which is the Presiding Director for purposes of communications with interested parties, including shareholders, are all available on our website. We will also provide printed copies of these materials to any shareholder upon request directed to Consolidated Graphics, Inc., Attn: Secretary, 5858 Westheimer, Suite 200, Houston, Texas 77057. We intend to disclose on our website any changes to or waivers from the Code of Ethics that are also required under SEC rules and regulations to be disclosed under Item 5.05 of Form 8-K. The information on our website is not, and shall not be deemed to be, a part of this Annual Report on Form 10-K or incorporated into any other filings we make with the SEC.

 

Industry Background

 

The printing industry is one of the largest industries in the U.S. and is comprised of many segments, including general commercial printing, newspapers, directories, book and magazine publishing, financial printing, business forms, greeting cards and stationery-type products. We operate in the general commercial printing segment of the industry which generates in the U.S. over $50 billion in annual sales based on available industry data. Most of the general commercial printing businesses operating in the U.S. today are privately-owned and individually generate less than $35 million in annual sales.

 

A consolidation trend in the general commercial printing industry emerged in the 1990’s as owners of printing businesses sought to evaluate exit strategies and address new industry challenges, a trend that has continued to date. The decline in demand for printing services since 2008, caused by the global recession, has further increased the risk for owners of printing companies. In order to limit personal financial risk, increase personal financial liquidity, facilitate retirement goals or obtain access to additional resources that would support the continued growth of their businesses, owners of these printing businesses are increasingly willing to sell their companies to larger, better-capitalized companies. We have been an industry-leader in the consolidation trend since our initial public offering in 1994. We believe that there are very few companies that currently possess the industry knowledge, financial strength and management expertise necessary to acquire such printing businesses effectively.

 

Primary industry challenges faced by printing business owners include the need to make on-going investments in new technology and equipment and downturns in the economy. General commercial printing businesses must make substantial capital investments over time in new equipment and technology in order to remain competitive in the industry, but they may not have the financial resources to do so. The current state of the financial market has also limited the amount of available credit to many printing businesses, thus hindering their ability to invest in new equipment and technology.

 

Because of the development and on-going advancement in digital technology, print buyers have increasingly sought shorter print runs, the ability to personalize more sophisticated marketing materials to strategically target certain markets or demographics, and e-commerce solutions for executing and controlling the print procurement and printed materials management processes. This factor has also contributed substantially to the burden on companies in our industry to invest in new technology and equipment to remain competitive. Additionally, large corporations have increasingly sought to achieve a reduction in operating costs by streamlining their print-related processes and limiting their number of suppliers. To accomplish these objectives, these large customers frequently seek to align

 

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themselves with printing companies that have a significant national presence and offer a wide range of commercial print capabilities and services, putting additional pressure on single-location, privately-held printing companies.

 

In general, changes in prevailing U.S. economic conditions have and will continue to impact the general commercial printing industry (approximately 95% of our fiscal 2012 revenues were generated in the U.S.). Generally, if weakness in the U.S. economy causes local and national corporations to reduce their spending on advertising and marketing materials, the demand for commercial printing services may be adversely affected. Further compounding a potential decline in demand, competitive pricing pressures may occur and negatively impact the level of sales and profit margins throughout the industry.

 

Competition

 

The general commercial printing industry in the U.S. is highly fragmented and most customers procure print services from local sources. Therefore, we compete primarily with locally-based printing companies for most print projects. Most of our competitors are privately-held, single location operations; however, some competitors are large corporations, both publicly and privately owned.

 

The major competitive factors in our business are:

 

·             Extent and quality of customer service, including ability to meet customer deadlines

 

·             Quality of finished materials

 

·             Technology infrastructure

 

·             Cost structure and sales pricing strategy

 

·             Financial strength

 

The ability to provide high-quality customer service is also dependent on production and distribution capabilities, along with the availability of equipment that is appropriate in size and function for a given project. We believe that our broad range of printing capabilities and services, along with our ability to use our geographic footprint to serve customers on local, regional and national levels, gives us a competitive advantage over smaller, local printing companies. Furthermore, the economic advantages created by our purchasing power, advanced technological capabilities and ability to utilize available production capacity throughout our organization, enable our printing businesses to compete more effectively and provide faster turnaround times than many of our competitors. Furthermore, our strong financial position enables us to invest in newer, more efficient technology infrastructure and to make strategic acquisitions, which expands our industry-leading position in terms of locations, capabilities, and services.

 

Business Strategy

 

Our overall business strategy is to be the market leader in the commercial printing industry by combining the customer service and responsiveness of well-managed, local printing businesses with the competitive advantages provided by a large national organization. Management at each of our printing businesses maintains responsibility for the day-to-day operations and profitability of their business, while continuing to strengthen and build new customer relationships in their respective markets. At the same time, our printing businesses are supported by the management expertise, purchasing power, technology investments, including technology infrastructure and support, national sales and marketing and other operating advantages that exist because they are part of a large organization.

 

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Internal Sales Growth — Our printing businesses have numerous opportunities, individually and collectively, to achieve long-term sales growth. Our current initiatives to drive internal sales growth include:

 

·             Aggressively pursuing new business opportunities and experienced sales professionals to gain market share and strengthen our competitive position going forward.

 

·             Continuing to invest in new equipment and technology that enables us to provide increasingly higher levels of service and a broader range of capabilities.

 

·             Capitalizing on our national presence, international operations and wide range of capabilities, including our technology related offerings (see “Printing Operations — Print-Related Services” below) to pursue sole or preferred-source opportunities with national accounts.

 

·             Providing information and training to our sales professionals (598 currently) to ensure they are knowledgeable about the complete range of services and capabilities we offer.

 

Disciplined Acquisition Program — We are actively seeking to grow a leading North American geographic footprint through additional acquisitions of medium and large-sized general commercial printing businesses that generally have an excellent reputation and quality customer base. We may also acquire smaller and/or distressed printing businesses for integration into one of our existing businesses. This type of transaction is commonly referred to as a “tuck-in” acquisition.

 

Cost Savings — Because of our size and extensive geographic footprint, we leverage our economies of scale to purchase supplies and equipment used in the printing process and to purchase newer, more efficient equipment. We have various national purchasing contracts in place with major suppliers and manufacturers. Our purchasing support staff continually monitor market conditions and negotiate pricing and other contractual terms with these vendors to maximize the cost savings we achieve under these agreements. In addition, we have centralized certain administrative services, such as human resources, legal, treasury, tax and risk management, to generate cost savings.

 

Best Practices/Benchmarking — Management teams at our printing businesses have access to strategic counsel and professional management techniques in such areas as planning, organization, and controls. We provide a forum for them to share their knowledge of technical processes and their best practices with one another through periodic group meetings attended by top management and other key personnel. We utilize our wide-area network and management information systems to benchmark financial and operational data, and share such information across our printing businesses to help their management teams identify and respond to changes in operating trends.

 

Leadership Development — Our program to recruit, train and develop recent college graduates as printing sales and management professionals is an integral component of our growth strategy. Participants in our Leadership Development Program follow a curriculum that provides them with technical industry knowledge, coupled with general business, managerial, sales and best practices training. Our Leadership Development Program is unique to the industry, and we believe it is a key factor in our ability to provide a high degree of quality customer service, as well as to provide a pool of talent for future management positions at our printing businesses. As of April 30, 2012 we had 543 employees who were current participants in or graduates of this program, 24 of whom serve as presidents of the printing business at which they are employed, representing 36% of our printing company presidents.

 

Printing Operations

 

We currently operate 70 printing businesses strategically located across 27 states, Toronto, Prague, and Gero, Japan (see Item 8. Financial Statements and Supplementary Data — Note 2. — Significant Accounting Policies and Other Information — Geographic Information for additional financial information with respect to our foreign operations). Each printing business is operated as a direct or indirect wholly-owned subsidiary of our Company, except for our printing business in Japan. Our Japanese printing business is a joint venture that is 51% owned by the Company and was established in April 2012. No individual facility accounts for more than 10% of our total revenues. We produce high-quality, custom-designed printed materials for a large base of customers in a broad cross-section of industries, the majority of which are located in the markets where our printing businesses are based.

 

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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.

 

Commercial Printing Services

 

In general, commercial printing includes developing printable content through electronic prepress services, reproducing images on paper using printing presses and providing comprehensive finishing and delivery services. We maintain flexible production schedules in order to react swiftly to our customers’ requirements. Many printing projects require fast turnaround times, from conception through delivery, and our printing businesses must be able to absorb unexpected or short-notice demands for our services when called upon to do so. Consequently, our printing businesses do not generally operate at full capacity.

 

Our electronic prepress services include all of the steps necessary to prepare media (photographs, artwork, and typed copy) for printing. This process involves converting the media into digital images, separating digital color images into process colors, and in some cases preparing a proof for customer approval. Our printing businesses produce printing plates using “computer-to-plate” technology, whereby digitized text, graphic images and line art are transferred directly from digital files onto printing plates. In addition, our printing businesses have the latest technologies that enable delivery of a high-quality proof for customer approval electronically via the internet, eliminating the cost of producing and delivering a proof, or multiple rounds of proofs, in hard copy format. Computer-to-plate and remote proofing technology reduces costs, shortens turnaround times and improves product quality. We continually evaluate our existing electronic prepress capabilities and closely monitor the development of newer technology that may be used to increase productivity and improve quality to better serve our customers.

 

We primarily use offset lithography to reproduce images on paper, which is the process that generally provides the highest quality, lowest cost printed materials for most commercial printing projects. Short and medium-run projects are generally printed on sheetfed presses, while longer-run projects are typically printed on web presses. Our printing businesses primarily use sheetfed printing presses, which are generally capable of printing up to 16 pages of letter-sized finished product on a 28 by 40 inch sheet of paper with eight pages on each side (known as a 16-page “signature”). Currently our printing businesses operate a total of 279 sheetfed presses capable of simultaneously printing from one to 12 colors and are capable of running at speeds of up to 18,000 impressions an hour. We operate 59  half and full-size web printing presses which print up to eight colors on a continuous roll of paper, print up to 32-page signatures on both sides of the paper at speeds of up to 50,000 impressions an hour and are also capable of folding, gluing and/or perforating the printed material in a single pass.

 

Digital printing is a smaller but rapidly-growing component of the general commercial printing industry that enables high quality, variable data customization (such as personalization by name, relationship or interests) on very short to medium-run projects. We operate a total of 251 digital presses, including 140 high capacity, ultra high quality presses such as HP Indigo, Kodak Nexpress, Xeikon, and Xerox iGen. In addition we operate 5 digital inkjet webpresses, each capable of producing approximately 15 times the output of a traditional digital press.

 

Our finishing services include cutting, folding, binding and other operations necessary to finish printed materials according to customer specifications. Many of our printing businesses also offer specialty finishing capabilities, such as die-cutting, embossing, UV coating, and foil stamping.

 

Print-Related Services

 

By offering innovative print-related capabilities and e-commerce solutions that respond to the needs of our customers, we believe that our Company has a competitive advantage that will help us generate additional sales. We provide a variety of fulfillment services, which primarily include assembling, packaging, storing, and distributing printed promotional, educational, and training documents and materials on behalf of our customers. Many corporations utilize our fulfillment capabilities to help manage their inventories of printed materials, as well as to provide “just in time” assembly and delivery of printed materials to end users. Orders for fulfillment services are commonly received via proprietary, internet-based print procurement and inventory management systems maintained by our printing businesses, as discussed below. Additionally, we provide extensive mailing services for printed materials, particularly consumer-direct marketing, advertising and promotional pieces produced for our

 

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customers. We also offer a number of options for sorting, packaging, inkjet labeling and shipping of printed materials.

 

Utilizing our information technology infrastructure and resources, as well as our expertise in digital technology, we offer print-related e-commerce solutions that enable our customers to (i) streamline their print procurement process and improve their ability to manage the printed materials they order, (ii) design, procure, distribute, track and analyze results of printing-based marketing programs and activities and (iii) supplement the message of their printed materials through other media, such as the internet, email or text messaging. Most of these 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 “WorkSmart Suite” group of products. The key e-commerce capabilities we offer include:

 

·             Streamline

 

A fully customizable online system with an array of tools that streamline the purchase, management and distribution of the customer’s entire range of marketing materials.

 

·             Connect

 

A unique capability that enables the customer to combine the use of printed material with other media such as internet, email and text messages to create highly engaging personalized marketing campaigns designed to increase response rates.

 

·             Organize

 

A powerful online system that provides the customer limitless means to organize, protect and facilitate proper use of their vast library of digital assets.

 

·             Publish

 

A convenient online solution for businesses to create and print professionally-bound materials in units as low as one, for applications such as customized sales presentations, highly targeted promotional material and brand-building programs.

 

·             Digital print solutions

 

Provides print on-demand capabilities giving the customer the flexibility to respond to market changes and manage inventories more efficiently. Our distribution and print system receives orders electronically, prepares them for production and distributes them across our entire network of digital presses, reducing time to market and delivering product more efficiently.

 

Under our national sales organization (which is discussed below), sales support for our technology solutions, including WorkSmart Suite products, is provided to our printing businesses to assist them in identifying prospective customers and marketing our suite of technology based capabilities and services. We maintain technology project management and staff to design and develop customized solutions in response to the specific needs of each customer. We also utilize support staff at each of our printing businesses who are trained and able to serve our customers’ needs related to our technical capabilities and services.

 

Sales and Marketing

 

Most of our sales are generated by individual orders through commissioned sales personnel. As of April 30, 2012 we employed 598 sales professionals. In addition to soliciting business from existing and prospective customers, our sales personnel act as liaisons between customers and our production departments and also provide technical advice and assistance to customers throughout the printing process.

 

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The nature of commercial printing using offset lithography manufacturing processes requires a substantial amount of interaction with customers, including personal sales calls, reviews of color proofs and “press checks” (customer approval of printed materials during the printing process). Our sales professionals and customer service personnel maintain strict control of the printing process for every job we produce as it moves through our scheduling, prepress, printing, and finishing operations.

 

A significant element of our marketing focus is to ensure rapid response to customer requirements and produce high-quality printed materials at competitive prices. Rapid responsiveness is essential because of the short lead time on most commercial printing projects. Our printing operations are designed to maintain maximum flexibility to meet customer needs, both on scheduled and short-notice basis. Each of our printing businesses generally seek projects that it believes will best utilize its respective equipment and expertise; however, each has access to and is encouraged to offer its customers the broad range of capabilities we offer throughout our organization.

 

We also actively pursue opportunities to establish sole or preferred-source, printing relationships with large corporations that are seeking to leverage their print spending and limit their number of commercial print providers. We refer to these customers as “national accounts.” To better position ourselves to capitalize on future national account opportunities, as well as to provide more sales training and support to our printing businesses, our national sales organization consists of an executive level team of sales and marketing professionals who play a key support role to the efforts of our printing businesses to identify and develop national account opportunities.

 

Customers

 

Our diverse customer base includes both national and local corporations in North America operating in a wide range of industries, as well as mutual fund companies, advertising agencies, graphic design firms, catalog retailers, direct mail marketers, state and local governments and quasi-governmental agencies, educational institutions, not-for-profit associations, and political campaign organizations. During fiscal 2012, we served approximately 20,000 customers, and our top ten customers accounted for approximately 17% of total sales, with none representing more than 6% individually. We believe that our large and diverse customer base, broad geographic coverage of the U.S. and extensive range of printing and print-related capabilities may lessen our exposure to economic slowdowns or other adverse consequences that may generally affect any particular industry or any particular geographic region. However, because we typically produce a large number of advertising and marketing materials for our customers, to the extent that advertising and marketing spending is reduced during an economic downturn, our level of sales and results of operations may be adversely affected.

 

Our customers generally are not contractually obligated to purchase printing services from us in the future. Typically, we receive discrete orders from our customers for each printing project or service. Consequently, our continued engagement to provide additional commercial printing services largely depends upon, among other things, the customer’s satisfaction with the quality of services we provide. Although we do not depend on any one customer, group of customers or type of customer, our sales to many of our largest customers may fluctuate from year to year depending upon the number, size and complexity of projects they initiate and award us.

 

Suppliers

 

We purchase raw materials used in the commercial printing process (such as paper, prepress supplies, ink, and boxes) from a number of major North American, as well as many local, suppliers. We are not materially dependent on any one supplier and the raw materials we utilize are generally readily available. We use a two-tiered approach to purchasing in order to maximize the economies associated with our size, while maintaining the local efficiencies and time sensitivity required to meet customer demands. We negotiate master purchasing arrangements centrally with major suppliers and manufacturers to obtain preferential pricing and terms, and then communicate the terms of these arrangements to our individual printing businesses. Each printing business orders goods and services through our major vendors as needed based on the terms set forth in our master purchasing agreements or, when appropriate, purchases locally. We continually monitor market conditions and product developments, and we regularly review the contractual terms of our master purchasing agreements to take advantage of our increasing buying power and maximize the benefits associated with these agreements. We have no material supplier contracts that obligate us to minimum purchase requirements.

 

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We incur significant costs to purchase paper used in the printing process. However, fluctuations in paper pricing generally do 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, changes in paper pricing are typically passed through to customers by our printing businesses. The majority of our paper supply is obtained through merchant distributors. There are relatively few merchants that are considered national in scope in North America, with numerous regional organizations that serve one or more of our printing businesses. We have negotiated master purchasing agreements with certain mills, which produce paper, and certain merchants, who distribute the paper produced by the mills. These agreements typically provide for volume-related discounts and additional periodic rebates based on the total amount of purchases made by our printing businesses from each mill and/or merchant. Certain of our mill suppliers produce a Consolidated Graphics branded paper we named “Inspire”, under arrangements generally similar to our other major vendor agreements. “Inspire” enables us to further leverage our purchasing power and differentiate ourselves to customers in the marketplace. We also purchase “Inspire Earth” paper. This branded paper features the same overall quality characteristics of “Inspire,” except it is Forest Stewardship Council Certified, the global benchmark for responsible forest management, and contains 10% post-consumer waste.

 

We purchase a large quantity of prepress supplies, consisting mainly of plates and proofing materials. There are a limited number of key manufacturers of these materials, and we generally purchase prepress supplies from both major and regional distributors. We have obtained volume-related discounts and incentive arrangements from these manufacturers and receive periodic rebates based on the total amount of prepress supplies we purchase through these distributors. We also have contractual arrangements with certain freight carriers that provide us with discounts and periodic rebates.

 

Employees

 

As of April 30, 2012, we had 5,487 employees throughout our organization. Of this total, 504 were employed subject to the terms of various collective bargaining agreements, 342 of which are under collective bargaining agreements that have expired or will expire within one year. We are currently in negotiations for new collective bargaining agreements with unions at four of our printing businesses with expired collective bargaining agreements. We believe that our relations with our employees are generally satisfactory.

 

Government Regulation and Environmental Matters

 

Our printing businesses are subject to the environmental laws and regulations of the U.S., Canada, Japan and the European Union, as well as state, provincial and local laws and regulations concerning emissions into the air, discharges into waterways and the generation, handling and disposal of waste materials. The commercial printing process generates substantial quantities of inks, solvents and other waste products requiring disposal under the numerous laws and regulations relating to the environment. Our printing businesses typically recycle waste paper and contract for the removal of waste products. We believe we are in material compliance with all applicable air quality, waste disposal and other environmental-related rules and regulations, as well as with other general employee health and safety laws and regulations. We do not anticipate any material future capital expenditures for environmental control facilities. There can be no assurance, however, that future changes in environmental laws and regulations will not have a material effect on our consolidated financial condition or results of operations.

 

Item 1A. Risk Factors

 

Our consolidated results of operations, financial condition and cash flows can be adversely affected by various risks. These risks include, but are not limited to, the principal factors listed below. You should carefully consider all of these risks.

 

Fluctuations in the costs of paper, ink, energy, postage and other raw materials may adversely impact us.

 

Purchases of paper, ink, energy, postage and other raw materials and goods and services represent a large portion of our costs. Any increases in the costs of these items will also increase our costs. Depending on the timing and severity of such increases, we may not always be able to pass these costs on to customers through higher prices. Increases in the costs of these items may also adversely impact our customers’ demand for printing and related services.

 

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We may be adversely affected by a decline in the availability of raw materials.

 

We are dependent on the availability of paper, ink, and other raw materials to support our operations. Circumstances outside of our control in these markets could result in a decrease in the supply of paper, ink or other raw materials and could adversely affect our business and results of operations.

 

We may not be able to improve our operating efficiencies rapidly enough to adapt to current market conditions.

 

Because the markets in which we compete are highly-competitive, we must continue to improve our operating efficiency in order to maintain or improve our profitability. Although we have been able to improve efficiency and reduce costs in the past, there is no assurance that we will continue to do so in the future. In addition, the need to reduce ongoing operating costs may result in significant up-front costs to reduce workforce, close or consolidate facilities, or upgrade equipment and technology.

 

We may be unable to successfully integrate the operations of acquired businesses and may not achieve the cost savings and increased revenues anticipated as a result of these acquisitions.

 

Achieving the anticipated benefits of acquisitions will depend in part upon our ability to integrate these businesses in an efficient and effective manner. The integration of companies that have previously operated independently may result in significant challenges, and we may be unable to accomplish the integration smoothly or successfully. In particular, the coordination of geographically dispersed organizations with differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration of acquired businesses may also require the dedication of significant management resources, which may temporarily shift senior management’s attention from the other day-to-day operations of the Company. Our strategy is, in part, predicated on our ability to realize cost savings and to increase revenues through the acquisition of businesses that add to the breadth and depth of our capabilities and services.

 

We may be unable to hire and retain talented employees, including senior management.

 

Our success depends, in part, on our general ability to attract, develop, motivate and retain highly skilled employees. The loss of a significant number of our employees or the inability to attract, hire, develop, train and retain additional skilled personnel could have a material adverse effect on us. Although our operating platform consists of many locations with a wide geographic dispersion, individual locations may encounter strong competition from other employers for skilled labor. In addition, various members of our management team have significant industry experience and a long track record with us that is important to our continued success. If one or more members of our senior management team leave and we cannot replace them with a suitable candidate quickly, we could experience difficulty in managing our business properly, which could harm our business and results of operations.

 

Costs to provide health care and certain other benefits to our employees may increase.

 

We generally provide health care and certain other benefits to our employees. In recent years, costs for health care have increased more rapidly than general inflation in the U.S. economy. If this trend in health care costs continues, our cost to provide such benefits could increase, adversely impacting our business and results of operations.

 

Declines in general economic conditions or acts of war and terrorism may adversely impact our business.

 

A decline in the U.S. and global economic conditions will most likely affect our results of operations and financial position. A decline in such economic conditions can cause our customers difficulty in obtaining credit to fund their operations. Additionally, many of our direct and indirect customers may delay or reduce their purchases of printed materials. These conditions could adversely affect our revenues, increase price competition and/or increase operating costs, which could adversely affect our business, result of operations and financial condition. Additionally, we could suffer significant losses if such economic conditions would cause customers whom we have offered certain trade credit to fail or otherwise not have the ability to pay us. A significant write-off of accounts

 

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receivable due to uncollectability would also have a negative impact on our financial results. The overall business climate may also be impacted by domestic and foreign wars or acts of terrorism. Such acts may have sudden and unpredictable adverse impacts on demand for our services.

 

The highly competitive market for our services may create adverse pricing pressures.

 

The markets for our services are highly fragmented and we have a large number of competitors, resulting in a highly competitive market and increasing risk of adverse pricing pressures in various circumstances outside of our control, including the current economic conditions.

 

Decline in preference for using or receiving printed materials in lieu of alternative mediums may adversely affect our business.

 

In addition to traditional non-print based marketing and advertising channels, online distribution and hosting of media content may gain broad acceptance or preferred status relative to printed materials among consumers generally and could have an adverse effect on our business. Consumer acceptance of electronic delivery as well as the extent that consumers may have previously replaced traditional reading of print material with online hosted media contents is uncertain. We have no ability to predict the likelihood that this may occur.

 

Changes in the laws and regulations to which we are subject may increase our costs.

 

We are subject to numerous laws and regulations, including, but not limited to, environmental and health and welfare benefit regulations, as well as those associated with being a public company. These rules and regulations may be changed by local, state, provincial, national or foreign governments or agencies. Changes in these regulations may result in a significant increase in our compliance costs. Compliance with changes in rules and regulations could require increases to our workforce, increased cost for services, compensation and benefits, or investments in new or upgraded equipment.

 

Advances in technology may reduce barriers to entry and may result in increased competition.

 

Future advances in technology could cause certain cost and logistics barriers to entry in the general commercial printing industry to be reduced or eliminated, which may result in an adverse effect on our business and results of operations. Current cost barriers include the relatively large scale of equipment and real estate required to effectively compete in our industry, while logistics barriers include shipping, customer service and other costs that have historically precluded competitors not having a local presence from competing effectively from outside of a particular market, particularly foreign-based competitors.

 

We rely on our information technology infrastructure and our management information systems for many enterprise-critical functions. If our information systems fail to adequately perform these functions or if we experience an interruption in their operation, our business and results of operations could be adversely affected.

 

The efficient operation of our business depends on our information technology infrastructure and management information systems. We generally rely on our management information systems to effectively manage accounting and financial functions, job entry, tracking, production, distribution and cost accumulation and certain purchasing functions. Our information technology infrastructure underlies both our management information systems and our technology-based product offerings. The failure of our information technology infrastructure and/or our management information systems to perform could severely disrupt our business and adversely affect our results of operations. In addition, our information technology infrastructure and/or our management information systems are vulnerable to damage or interruption from natural or man-made disasters, terrorist attacks, computer viruses or hackers, power loss, or other computer systems, internet telecommunications or data network failures. Any such interruption could adversely affect our business and results of operations.

 

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We generally do not have long-term customer agreements.

 

Our customers are typically not contractually obligated to purchase future services from us. Although our business does not depend on any one customer or group or type of customers, we cannot be sure that any particular customer will continue to do business with us for any period of time.

 

We depend on good labor relations.

 

If the employees at one or more of our unionized businesses were to engage in a strike or other work stoppage for any reason, including failure to enter into satisfactory collective bargaining agreements with unions, or if other employees were to become unionized, we could experience a disruption of operations, higher labor costs or both, which could have a material adverse effect on our results of operations. Currently we are in negotiations with unions at four of our printing businesses and there is no assurance that such negotiations will be successful or result in favorable collective bargaining agreements.

 

We rely on the ability to borrow cash to make acquisitions, fund capital expenditures and provide working capital to the extent such cash needs exceed our internally generated cash flow. Our failure to comply with financial and other covenant requirements contained in our loan agreements, could limit our ability to borrow cash.

 

We currently have adequate capacity under our primary bank credit facility as well as other sources of capital to fund our foreseeable cash needs in excess of our projected internally-generated cash flows. However, adverse changes in general economic conditions or in our financial performance could cause a limitation in the amount of capital available to us, and could result in a material adverse effect on our business, results of operations and growth strategies. Limitations in the amount of capital available to us could result from our failure to comply with financial or other covenants contained in our loan agreements or an inability to refinance our debt when it comes due.

 

A decline in expected profitability of the Company or individual reporting units of the Company could result in the impairment of assets, including goodwill, other long-lived assets and deferred tax assets.

 

We have a significant amount of goodwill, other long-lived assets and deferred taxes on our balance sheet. Declines in expected profitability could lead to impairment charges related to goodwill, other long-lived assets, or deferred tax assets.

 

Unfavorable results of legal proceedings could materially adversely affect us.

 

We are subject to various legal proceedings and claims that have arisen out of the ordinary conduct of our business and are not yet resolved and additional claims may arise in the future. Results of legal proceedings cannot be predicted with certainty. Regardless of its merit, litigation may be both time-consuming and disruptive to our operations and cause significant expense and diversion of management attention. Publicity resulting from allegations in some of these proceedings may materially affect us. Should we fail to prevail in certain matters, or should several of these matters be resolved against us, we may be faced with significant monetary damages or injunctive relief against us that would materially adversely affect a portion of our business and might materially affect our financial condition and operating results.

 

We are subject to risks associated with the availability and coverage of insurance.

 

For certain risks, we do not maintain insurance coverage because of cost and/or availability. Because we retain some portion of our insurable risks, and in some cases self-insure completely, unforeseen or catastrophic losses in excess of insured limits could have a material adverse effect on our financial condition and operating results. In addition, disputes may also arise between us and our insurers relating to coverage of certain losses which, if not resolved favorably, could have a material adverse effect on our financial condition and operating results.

 

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Our stock price continues to be volatile.

 

Our stock has at times experienced substantial price volatility as a result of variations between actual and anticipated financial results, announcements by us and our competitors, or uncertainty about current global economic conditions. The stock market as a whole also has experienced extreme price and volume fluctuations that have affected the market price of many public companies in ways that may have been unrelated to these companies’ operating performance. If we fail to meet any expectations with respect to our operations or profitability, our stock price may decline significantly.

 

Change in postal rates and regulations may adversely impact demand for our products and services.

 

Postal costs are a significant cost for many of our customers. Changes in postal rates can influence the number of pieces and types of mailings that our customers mail thereby reducing their demand for our products and services. Any resulting decline in print volumes would have an adverse effect on our business.

 

We could face significant withdrawal liability if we withdraw from participation in one or more multi-employer pension plans in which we participate.

 

We participate in various “multi-employer” pension plans for certain of our union employees covered by collective bargaining agreements. We make periodic contributions to these plans to allow them to meet their pension benefit obligations to their participants. In the ordinary course of renegotiating collective bargaining agreements with labor unions that maintain these plans, we may decide to discontinue participation in a plan.  If we withdraw from a plan, the plan will demand that we pay a withdrawal liability as may be required under applicable law.  We can choose to pay the withdrawal liability in a lump sum or in quarterly payments.  We will record such withdrawal liability, calculated as an amount equal to the present value of future payments required to satisfy such liability, as an expense in our consolidated statement of operations and a liability on our consolidated balance sheet at the time of withdrawal.  However, since the withdrawal liability is not fixed until we receive notice of the actual withdrawal liability from the plan administrator, we estimate the withdrawal liability based on the limited information available to us from the plan, which we cannot independently validate.  The information setting forth our actual withdrawal liability, which includes the unfunded vested benefits in the plan, contributions of other participants in the plan, and our contributions, is generally not available until the end of the plan year following the year of withdrawal.

 

Several of our companies have recently withdrawn from multi-employer pension plans and we have recorded an estimated withdrawal liability for such withdrawals, while a few of our companies continue to participate in such plans.  The actual withdrawal liability may differ significantly from the estimates we recorded at the time of withdrawal, and any difference will be recorded at the time we receive notice of the actual withdrawal liability from the plan administrator.  Some multi-employer plans, including ones in which we participate, are reported to have significant underfunded liabilities. Such underfunding could increase the size of our potential withdrawal liability, and could affect our financial condition and results of operations.

 

Item 1B. Unresolved Staff Comments

 

The Company has no unresolved written comments from the SEC staff regarding its periodic or current reports under the Exchange Act.

 

Item 2. Properties

 

As of April 30, 2012, our principal facilities consisted of approximately 6.4 million square feet that contain production, storage and office space, of which approximately 2.5 million square feet is owned and approximately 3.9 million square feet is leased. Certain of the leased facilities, totaling approximately 0.3 million square feet, are leased from former owners and current employees of four of our printing businesses. All other leases are with unaffiliated third parties. We believe our facilities are generally suitable for their present and intended purposes and are adequate for our current level of operations. These facilities are located across 27 states, Toronto, Prague and Gero, Japan.

 

Item 3. Legal Proceedings

 

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

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 

Our common stock is traded on the New York Stock Exchange under the symbol “CGX.” The following table presents the quarterly high and low sales prices for our common stock for each of the last two fiscal years:

 

Fiscal 2012—Quarter Ended: 

 

High

 

Low

 

 

 

 

 

 

 

June 30, 2011

 

60.84

 

49.29

 

September 30, 2011

 

57.99

 

30.52

 

December 31, 2011

 

51.60

 

35.34

 

March 31, 2012

 

55.88

 

44.14

 

 

Fiscal 2011—Quarter Ended: 

 

High

 

Low

 

 

 

 

 

 

 

June 30, 2010

 

48.25

 

34.53

 

September 30, 2010

 

47.44

 

33.71

 

December 31, 2010

 

51.69

 

40.93

 

March 31, 2011

 

56.50

 

48.50

 

 

As of April 30, 2012, there were 62 shareholders of record representing approximately 4,593 beneficial owners.

 

Our Board of Directors previously authorized a $100.0 million share repurchase program. On February 6, 2012, our Board of Directors authorized the purchase of up to an additional $70.0 million of the Company’s common shares under the current share repurchase program. The amended $170.0 million share repurchase program will expire on September 30, 2013, and enables us to repurchase shares of our common stock in open-market purchases, as well as privately negotiated transactions, pursuant to applicable securities regulations, and subject to the terms of our primary credit facility, market conditions and other factors. Our Board of Directors may modify, suspend, extend or terminate the program at any time. We expect to fund any additional repurchases under such program through cash flow provided by operations or additional borrowings under our primary credit facility. The following are details of repurchases under this program for the quarter ended March 31, 2012:

 

Period

 

Total Number of
Shares
Purchased (1)

 

Average
Price Paid
per Share

 

Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plan

 

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

 

Purchases from January 1, 2012 through January 31, 2012

 

7,742

 

$

49.85

 

7,742

 

$

100,423,039

 

Purchases from February 1, 2012 through February 29, 2012

 

40,017

 

$

49.78

 

40,017

 

$

98,430,913

 

Purchases from March 1, 2012 through March 31, 2012

 

 

$

 

 

$

98,430,913

 

 

 

 

 

 

 

 

 

 

 

Quarterly Total

 

47,759

 

$

49.79

 

47,759

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2012 Total

 

1,023,098

 

$

42.81

 

1,023,098

 

 

 

 


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

 

We have not previously paid cash dividends on our common stock. We presently intend to retain all of our earnings to finance the continuing development of our business and do not anticipate paying cash dividends on our common stock in the foreseeable future. Any future payment of cash dividends will depend upon the financial condition, capital requirements and earnings of our Company, as well as other factors our Board of Directors may

 

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deem relevant. In addition, our primary bank credit facility contains restrictions that limit our ability to pay cash dividends.

 

Information regarding our Amended and Restated Long-Term Incentive Plan, as amended, as of March 31, 2012 is incorporated by reference from Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Item 6. Selected Consolidated Financial Data

 

The following selected consolidated financial data should be read in conjunction with and is qualified in its entirety by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements of our Company and the notes thereto included in Item 8. Financial Statements and Supplementary Data and elsewhere in this Annual Report on Form 10-K:

 

 

 

Year Ended March 31

 

 

 

2012

 

2011

 

2010

 

2009

 

2008

 

 

 

(In thousands, except per share data)

 

Income Statement Data

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

1,045,195

 

$

1,054,040

 

$

990,861

 

$

1,145,146

 

$

1,095,388

 

Cost of sales

 

801,088

 

795,991

 

770,075

 

874,711

 

812,401

 

Gross profit

 

244,107

 

258,049

 

220,786

 

270,435

 

282,987

 

Selling expenses

 

90,765

 

91,626

 

91,378

 

105,688

 

106,952

 

General and administrative expenses

 

105,529

 

95,185

 

88,091

 

95,261

 

78,804

 

Goodwill impairment charge

 

1,984

 

 

6,134

 

83,324

 

 

Other charges

 

18,786

 

(1,945

)

7,210

 

17,350

 

 

Other expense (income), net

 

294

 

237

 

357

 

(809

)

(3,064

)

Operating income (loss)

 

26,749

 

72,946

 

27,616

 

(30,379

)

100,295

 

Interest expense, net

 

6,291

 

7,612

 

9,592

 

14,995

 

12,020

 

Income (loss) before taxes

 

20,458

 

65,334

 

18,024

 

(45,374

)

88,275

 

Income tax expense (benefit)

 

6,356

 

23,922

 

3,936

 

(5,804

)

28,951

 

Net income (loss)

 

$

14,102

 

$

41,412

 

$

14,088

 

$

(39,570

)

$

59,324

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.33

 

$

3.63

 

$

1.26

 

$

(3.55

)

$

4.76

 

Diluted

 

$

1.32

 

$

3.57

 

$

1.23

 

$

(3.55

)

$

4.63

 

 

 

 

March 31

 

 

 

2012

 

2011

 

2010

 

2009

 

2008

 

 

 

(In thousands)

 

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

71,331

 

$

63,099

 

$

48,364

 

$

109,433

 

$

138,250

 

Property and equipment, net

 

377,055

 

388,681

 

380,708

 

430,519

 

421,347

 

Goodwill

 

24,847

 

27,124

 

24,226

 

29,436

 

102,423

 

Total assets

 

681,909

 

698,483

 

687,235

 

765,208

 

872,663

 

Long-term debt, net of current portion

 

140,150

 

154,161

 

159,321

 

287,164

 

362,448

 

Total shareholders’ equity

 

273,701

 

297,361

 

269,426

 

250,464

 

279,793

 

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and their notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that reflect our current views with respect to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors such as those referenced in “Forward Looking Statements.”

 

Overview

 

Our Company is one of North America’s leading general commercial printing and print-related companies, with 70 printing businesses across 27 states, Toronto, Prague, and Gero, Japan. In connection with our traditional print services, we also provide our customers fulfillment and mailing services, digital technology solutions and e-commerce capabilities.

 

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

 

·             Internal Sales Growth — We seek to use our competitive advantages to expand market share. We continually seek to hire additional sales professionals, invest in new equipment and technology, expand our national accounts program, develop new and expanded digital technology-based print-related services and provide sales training and education about our breadth of capabilities and services to our sales professionals.

 

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

 

·             Cost Savings — Because of our size and extensive geographic footprint, we leverage our economies of scale to purchase supplies and equipment at preferential prices, and centralize various administrative services to generate cost savings.

 

·             Best Practices/Benchmarking — We provide a forum for our printing businesses to share their knowledge of technical processes and their best practices with one another, as well as benchmark financial and operational data to help our printing businesses identify and respond to changes in operating trends.

 

·             Leadership Development — Through our unique Leadership Development Program, we develop talent for future sales and management positions at our printing businesses.

 

Our printing businesses maintain their own sales, customer service, estimating and planning, prepress, production and accounting departments. Our corporate headquarters staff provides support to our printing businesses in such areas as human resources, purchasing, internal financial controls design and management information systems. We also maintain centralized treasury, risk management, legal, tax, internal audit and consolidated financial reporting activities.

 

Our sales are derived from providing commercial printing and print-related services. These services consist of (i) traditional print services, including electronic prepress, digital and offset printing, finishing, storage and delivery of high-quality printed documents which are custom manufactured to our customers’ design specifications; (ii) fulfillment and mailing services for such printed materials; (iii) technology solutions that enable our customers to more efficiently procure and manage printed materials and/or design, procure, distribute, track and analyze results of printing-based marketing programs and activities; and (iv) crossmedia capabilities allowing our customers to supplement the message of their printed materials through other media, such as the internet, email, or text messaging. Examples of the types of documents we print for our customers include high-quality, multi-color marketing materials, product and capability brochures, point-of-purchase displays, direct mail pieces, shareholder communications, trading cards, photo products such as calendars and photo books, catalogs and training manuals.

 

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Most of our sales are generated by individual orders through commissioned sales personnel. We predominately recognize revenue from these orders when we deliver the ordered goods and services. To a large extent, continued engagement of our Company by our customers for successive business opportunities depends upon the customers’ satisfaction with the quality of products and services we provide. As such, it is difficult for us to predict with any high degree of certainty the number, size, and profitability of printing services that we expect to provide for more than a few weeks in advance. Our revenues, however, tend to be strongest in the quarter ended December. Revenues tend to be seasonally weaker in the June quarter. Sales from election-related print business tend to be higher every other year, including years in which national elections are held.

 

Our cost of sales mainly consists of raw materials consumed in the printing process, as well as labor and outside services, such as delivery costs. Paper cost is the most significant component of our materials cost; however, 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, changes in paper pricing are typically passed through to customers by our printing businesses. Additionally, our cost of sales includes salary and benefits paid to operating personnel, maintenance, utilities, repair, rental and insurance costs associated with operating our facilities and equipment and depreciation charges.

 

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

 

Results of Operations

 

The following table sets forth our Company’s historical consolidated income statements and certain percentage relationships for the periods indicated:

 

 

 

Year Ended March 31

 

As a Percentage of Sales
Year Ended March 31

 

 

 

2012

 

2011

 

2010

 

2012

 

2011

 

2010

 

 

 

(In millions)

 

 

 

 

 

 

 

Sales

 

$

1,045.2

 

$

1,054.0

 

$

990.9

 

100.0

%

100.0

%

100.0

%

Cost of sales

 

801.1

 

796.0

 

770.1

 

76.6

 

75.5

 

77.7

 

Gross profit

 

244.1

 

258.0

 

220.8

 

23.4

 

24.5

 

22.3

 

Selling expenses

 

90.7

 

91.6

 

91.4

 

8.7

 

8.7

 

9.2

 

General and administrative expenses

 

105.5

 

95.2

 

88.1

 

10.1

 

9.0

 

8.9

 

Goodwill impairment charge

 

2.0

 

 

6.1

 

0.3

 

 

0.6

 

Other charges

 

18.8

 

(1.9

)

7.2

 

1.8

 

(0.1

)

0.7

 

Other expense

 

0.3

 

0.1

 

0.4

 

 

 

0.1

 

Operating income

 

26.8

 

73.0

 

27.6

 

2.5

 

6.9

 

2.8

 

Interest expense, net

 

6.3

 

7.7

 

9.6

 

0.6

 

0.7

 

1.0

 

Income before taxes

 

20.5

 

65.3

 

18.0

 

1.9

 

6.2

 

1.8

 

Income tax expense

 

6.4

 

23.9

 

3.9

 

0.6

 

2.3

 

0.4

 

Net income

 

$

14.1

 

$

41.4

 

$

14.1

 

1.3

%

3.9

%

1.4

%

 

Our sales and expenses during fiscal year 2012 were impacted by the acquisition of the assets of one printing business. In accordance with the acquisition 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 one year compared to the prior year by the full-year impact of prior year acquisitions (as compared to the partial impact in the prior year) and the partial-year impact of current year acquisitions. This revenue impact is referred to below as the “impact of acquisitions.” We refer to revenue growth or decline, excluding the effect of revenues contributed by acquisitions and election-related business, in the most recent or prior fiscal year as “internal” or “same-store” sales growth or decline.

 

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Table of Contents

 

Analysis of Consolidated Income Statements for Fiscal Year 2012 as Compared to Fiscal Year 2011

 

Sales for 2012 declined $8.8 million, or 1%, to $1.05 billion. The decline in sales was due to a 1.4% decline in same-store sales, and a decline in election-related business, partially offset by impact of acquisitions.

 

Gross profit for 2012 declined by $13.9 million, or 5%, to $244.1 million from $258.0 million in 2011 due to lower sales and lower gross profit margins. Gross profit margin (gross profit divided by revenues) declined to 23.4% in 2012 compared to 24.5% in 2011 as a result of a less favorable selling price environment and higher fixed costs as a percentage of revenue, such as facilities and depreciation, due in large part to our technology investments.

 

Selling expense for 2012 declined $0.9 million, or 1%, to $90.7 million from $91.6 million in 2011. The decrease was attributable to lower sales commissions resulting from lower sales. As a percentage of sales, selling expenses were 8.7% in both years.

 

General and administrative expenses for 2012 increased $10.3 million, or 11%, to $105.5 million from $95.2 million in 2011. This increase primarily resulted from higher employee costs, and higher depreciation expenses. Both these increases related primarily to technology investments. As a percentage of sales, general and administrative expenses increased to 10.1% in fiscal 2012 compared to 9.0% in fiscal 2011.

 

A goodwill impairment charge of $2.0 million was recorded for the fiscal year ended March 31, 2012.

 

Other charges of $18.8 million for 2012 included charges related to multi-employer pension plan withdrawals of $16.8 million and long-lived asset impairment charges of $2.0 million. Other charges for 2011 included a $5.7 million gain resulting from the settlement of litigation for an amount lower than previously recognized, partially offset by a $1.0 million charge for the cost of withdrawing from a multi-employer pension plan and various asset impairment charges.

 

Other expense and other income consists of foreign currency transaction losses and gains resulting from certain transactions of our Canadian and Czech Republic subsidiaries.

 

Net interest expense for 2012 declined $1.4 million, or 18%, to $6.3 million from $7.7 million in 2011, due to lower interest rates on fixed rate debt. Total debt declined from $170.1 million at March 31, 2011 to $163.7 million at March 31, 2012.

 

Income tax expense for 2012 was $6.4 million, reflecting an overall effective income tax rate of 31.1% as compared to an effective tax rate of 36.6% in fiscal 2011. In fiscal 2012, the effects of credits related to income tax uncertainties, due to the expiration of certain statues of limitations, had a larger impact on the effective income tax rate due to lower pre-tax book income.

 

Analysis of Consolidated Income Statements for Fiscal Year 2011 as Compared to Fiscal Year 2010

 

Sales for 2011 increased $63.2 million, or 6%, to $1.05 billion from $990.9 million in 2010. The increase in sales was primarily due to higher election-related print business, the impact of acquisitions, and a 2% year-over-year increase in same-store sales.

 

Gross profit for 2011 increased by $37.3 million, or 17%, to $258.0 million from $220.8 million in 2010.  The increase in gross profit was due to the 6% increase in sales and an increase in our gross profit margin. Gross profit margin (gross profit divided by revenues) increased to 24.5% for 2011 from 22.3% for 2010 as a result of lower labor costs, higher scrap paper recycling income, and fixed costs, such as depreciation, decreasing or not increasing as much as sales.

 

Selling expense for 2011 increased $0.2 million, or 0.3%, to $91.6 million from $91.4 million in 2010. As a percentage of sales, selling expenses decreased to 8.7% in the current year as compared to 9.2% for the prior year primarily as a result of lower compensation expense.

 

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Table of Contents

 

General and administrative expenses for 2011 increased $7.1 million, or 8%, to $95.2 million from $88.1 million in 2010. This increase primarily resulted from increased investments in staff within our information technology group and new software licenses, offset by lower stock based compensation and bad debt expense. As a percentage of sales, general and administrative expenses increased to 9.0% in fiscal 2011 compared to 8.9% in fiscal 2010.

 

Other charges, which increased operating income, in total, $1.9 million for 2011, includes a $5.7 million gain resulting from the settlement of litigation for an amount lower than previously recognized, partially offset by a $1.0 million charge for the cost of withdrawing from a multi-employer pension plan and various asset impairment charges. The previously disclosed litigation settled an isolated dispute between the Company and the former employer of an existing sales employee.

 

Other expense and other income consists of foreign currency transaction losses and gains resulting from certain transactions of our Canadian and Czech Republic subsidiaries.

 

Net interest expense for 2011 declined $1.9 million, or 20%, to $7.7 million from $9.6 million in 2010, due to a lower level of average debt outstanding and lower interest rates on floating rate bank debt. Total debt declined from $181.6 million at March 31, 2010 to $170.1 million at March 31, 2011.

 

Income tax expense for 2011 was $23.9 million, reflecting an overall effective income tax rate of 36.6% as compared to an effective tax rate of 21.8% in fiscal 2010. In fiscal 2010, the effects of credits for income tax uncertainties, due to the expiration of certain statutes of limitations, and non-deductible expenses had a larger impact on the effective income tax rate due to lower pre-tax book income.

 

Liquidity and Capital Resources

 

Sources and Uses of Cash

 

Our historical sources of cash have primarily been cash provided by operations and borrowings under our various bank credit facilities. Our historical uses of cash have been for acquisitions of printing businesses, capital expenditures, payment of principal and interest on outstanding debt obligations, repurchases of our common stock and for working capital requirements. Various components of our statement of cash flows are as follows and should be read in conjunction with our consolidated statements of cash flows and the notes thereto included in Item 8. Financial Statements and Supplementary Data:

 

 

 

Year Ended March 31

 

 

 

2012

 

2011

 

2010

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

108.2

 

$

101.2

 

$

156.8

 

Acquisitions of businesses, net of cash acquired

 

(3.4

)

(7.2

)

(2.9

)

Capital expenditures net of proceeds from asset dispositions

 

(56.8

)

(64.8

)

(17.0

)

Net payments under bank credit facilities

 

(14.1

)

(5.5

)

(104.8

)

Net proceeds/(payments) on term equipment notes and other debt

 

7.9

 

(8.3

)

(31.1

)

Payments to repurchase and retire common stock

 

(43.8

)

(27.8

)

 

Purchase of remaining interest in consolidated subsidiary

 

 

 

(5.5

)

Proceeds from exercise of stock options, including excess tax benefit

 

4.3

 

9.6

 

1.3

 

 

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Table of Contents

 

Additionally, our cash position, working capital and debt obligations as of March 31, 2012, 2011 and 2010 are shown below and should be read in conjunction with our consolidated balance sheets and the notes thereto included in Item 8. Financial Statements and Supplementary Data:

 

 

 

March 31

 

 

 

2012

 

2011

 

2010

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6.1

 

$

3.7

 

$

6.7

 

Working capital

 

71.3

 

63.1

 

48.4

 

Total debt

 

163.7

 

170.1

 

181.6

 

 

Net cash provided by operating activities increased by $7.0 million for fiscal 2012 compared to fiscal 2011. This increase was due primarily to a decrease in net income and a decrease in deferred income taxes, offset by an increase in other charges and working capital items. Significant changes in working capital include accounts receivable, accounts payable, accrued liabilities and income taxes payable. During fiscal 2012, we placed in service $60.0 million in new technology, equipment and real estate.

 

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

 

In May 2011, we acquired the assets of The EGT Group, Inc. located in Detroit, Michigan.

 

We intend to continue pursuing acquisition opportunities at prices we believe are reasonable based upon prevailing market conditions. However, we cannot accurately predict the timing, size and success of our acquisition efforts or our associated potential capital commitments. There can be no assurance that we will be able to acquire additional printing businesses on terms acceptable to us. We expect to fund future acquisitions through cash flow provided by operations and/or additional borrowings under our primary bank credit facility. We have, however, in the past issued our common stock as purchase price consideration in some of our acquisitions and may do so again in the future.

 

Our Board of Directors previously authorized a $100.0 million share repurchase program.  On February 6, 2012, our Board of Directors authorized the purchase of up to an additional $70.0 million of the Company’s common shares under the current share repurchase program. The amended $170.0 million share repurchase program will expire on September 30, 2013, and enables us to repurchase shares of our common stock in open-market purchases, as well as privately negotiated transactions, pursuant to applicable securities regulations, and subject to the terms of our primary credit facility, market conditions and other factors. Our Board of Directors may modify, suspend, extend or terminate the program at any time. We expect to fund any additional repurchases under such program through cash flow provided by operations or additional borrowings under our primary credit facility. During the year ended March 31, 2012, we repurchased 1,023,098 shares of our common stock for a total cost of $43.8 million. Remaining authorization under the amended share repurchase program at May 30, 2012 was $93.2 million.

 

Debt Obligations

 

For information with respect to our existing debt obligations with our lenders, as well as the available credit under our existing credit facilities, refer to Item 8. Financial Statements and Supplementary Data — Note 5. — Long-Term Debt.

 

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Table of Contents

 

Contractual Obligations and Other Commitments

 

As of March 31, 2012, the scheduled maturity of our contractual obligations is as follows (in millions):

 

 

 

Total

 

Less Than
1 Year

 

1 – 3
Years

 

3 – 5
Years

 

More Than
5 Years

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt obligations(1)

 

$

163.7

 

$

23.6

 

$

125.7

 

$

12.9

 

$

1.5

 

Operating lease obligations

 

73.9

 

18.4

 

25.9

 

13.7

 

15.9

 

 


(1)               Includes all long-term debt, including the current portion of long-term debt on the face of the balance sheet as of March 31, 2012.

 

Operating leases — We have entered into various noncancelable operating leases primarily related to facilities and equipment used in the ordinary course of our business.

 

Letters of credit —We had letters of credit outstanding as of March 31, 2012 totaling $6.8 million. All of these letters of credit were issued pursuant to the terms of our primary bank facility, which expires October 6, 2014.

 

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

 

Critical Accounting Policies

 

We have identified our critical accounting policies based on the following factors — significance to our overall financial statement presentation, complexity of the policy and its use of estimates and assumptions. We are required to make certain estimates and assumptions in determining the reported amounts of assets and liabilities, disclosure of contingent liabilities and the reported amounts of revenues and expenses. We evaluate our estimates and assumptions on an ongoing basis and rely on historical experience and various other factors that we believe to be reasonable under the circumstances to determine such estimates. Because uncertainties with respect to estimates and assumptions are inherent in the preparation of financial statements, actual results could differ from these estimates.

 

Revenue Recognition — We primarily recognize revenue upon delivery of the printed product to the customer. In the case of customer fulfillment arrangements, including multiple deliverables of printing services and distribution services, revenue relating to the printed product is recognized upon the delivery of the printed product into our fulfillment warehouses, and invoicing of the customer for the product at an agreed price. Revenue from distribution services is recognized when the services are provided. Because printed products manufactured for our customers are customized based upon the customer’s specifications, product returns are insignificant. Revenue is recognized net of sales taxes.

 

Receivables, net of valuation allowance — Accounts receivable at March 31, 2012 were $162.1 million, net of a $3.2 million allowance for doubtful accounts. The valuation allowance was determined based upon our evaluation of aging of receivables, historical experience and the current economic environment. While we believe we have appropriately considered known or expected outcomes, our customers’ ability to pay their obligations could be adversely affected by a contraction in the U.S. economy or other factors beyond our control. Changes in our estimates of collectability could have a material adverse effect on our consolidated financial condition or results of operations.

 

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Table of Contents

 

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

 

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

 

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

 

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

 

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

 

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Table of Contents

 

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

 

Market risk generally means the risk that losses may occur in the value of certain financial instruments as a result of movements in interest rates, foreign currency exchange rates and commodity prices. We do not currently hold or utilize derivative financial instruments to manage market risk or that could expose us to other market risk. We are exposed to market risk in interest rates related primarily to our debt obligations, which as of March 31, 2012, include $66.9 million of fixed rate debt and $96.8 million of variable rate debt. A 1.0% increase in the interest rate on our variable rate debt would change our interest expense by approximately $1.0 million on an annual basis. The following table sets forth the average interest rate for the scheduled maturities of our debt obligations as of March 31, 2012 ($ in millions):

 

 

 

2013

 

2014

 

2015

 

2016

 

2017

 

Thereafter

 

Total

 

Estimated
Fair Value
At March 31,
2012

 

Fixed Rate Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

$

20.6

 

$

18.5

 

$

13.4

 

$

10.5

 

$

2.4

 

$

1.5

 

$

66.9

 

$

68.0

 

Average interest rate

 

3.89

%

3.63

%

3.68

%

3.68

%

3.21

%

3.29

%

3.71

%

 

 

Variable Rate Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

$

3.0

 

$

 

$

93.8

(1)

$

 

$

 

$

 

$

96.8

 

$

96.8

 

Average interest rate

 

.40

%

 

2.16

 

 

 

 

2.11

%

 

 

 


(1)    Includes $3.0 million denominated in Canadian dollars.

 

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Table of Contents

 

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rule 13a-15(f) or 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Consolidated Graphics, Inc. and its consolidated subsidiaries (the “Company”); (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on its consolidated financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of our internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of March 31, 2012. The Company’s internal control over financial reporting as of March 31, 2012 has been audited by KPMG LLP, an independent registered public accounting firm, which issued an attestation report that is included in this Annual Report on Form 10-K.

 

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Table of Contents

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders

Consolidated Graphics, Inc.:

 

We have audited the accompanying consolidated balance sheets of Consolidated Graphics, Inc. and subsidiaries (collectively, the Company) as of March 31, 2012 and 2011, and the related consolidated income statements, statements of shareholders’ equity, and statements of cash flows for each of the years in the three-year period ended March 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Consolidated Graphics, Inc. and subsidiaries as of March 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2012, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Consolidated Graphics, Inc.’s internal control over financial reporting as of March 31, 2012, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 1, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

/s/ KPMG LLP

 

Houston, Texas

June 1, 2012

 

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Table of Contents

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders
Consolidated Graphics, Inc.:

 

We have audited Consolidated Graphics, Inc.’s (the Company) internal control over financial reporting as of March 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of March 31, 2012 and 2011, and the related consolidated income statements, statements of shareholders’ equity, and statements of cash flows for each of the years in the three-year period ended March 31, 2012, and our report dated June 1, 2012 expressed an unqualified opinion on those consolidated financial statements.

 

/s/ KPMG LLP

 

Houston, Texas

June 1, 2012

 

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Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

 

 

March 31

 

 

 

2012

 

2011

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

6,065

 

$

3,710

 

Accounts receivable, net

 

162,093

 

171,779

 

Inventories

 

54,129

 

50,888

 

Prepaid expenses

 

14,976

 

13,447

 

Deferred income taxes

 

16,552

 

10,787

 

Total current assets

 

253,815

 

250,611

 

PROPERTY AND EQUIPMENT, net

 

377,055

 

388,681

 

GOODWILL

 

24,847

 

27,124

 

OTHER INTANGIBLE ASSETS, net

 

15,623

 

19,376

 

OTHER ASSETS

 

10,569

 

12,691

 

 

 

$

681,909

 

$

698,483

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Current portion of long-term debt

 

$

23,596

 

$

15,911

 

Accounts payable

 

90,392

 

90,100

 

Accrued liabilities

 

68,496

 

81,501

 

Total current liabilities

 

182,484

 

187,512

 

LONG-TERM DEBT, net of current portion

 

140,150

 

154,161

 

OTHER LIABILITIES

 

31,523

 

13,820

 

DEFERRED INCOME TAXES, net

 

54,051

 

45,629

 

Total liabilities

 

408,208

 

401,122

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

Common stock, $.01 par value; 100,000,000 shares authorized; 10,239,819 and 11,072,053 issued and outstanding

 

102

 

110

 

Additional paid-in capital

 

161,914

 

170,547

 

Retained earnings

 

109,832

 

123,990

 

Accumulated other comprehensive income

 

1,853

 

2,714

 

Total shareholders’ equity

 

273,701

 

297,361

 

 

 

$

681,909

 

$

698,483

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

CONSOLIDATED INCOME STATEMENTS

(In thousands, except per share data)

 

 

 

Year Ended March 31

 

 

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

SALES

 

$

1,045,195

 

$

1,054,040

 

$

990,861

 

COST OF SALES

 

801,088

 

795,991

 

770,075

 

Gross profit

 

244,107

 

258,049

 

220,786

 

SELLING EXPENSES

 

90,765

 

91,626

 

91,378

 

GENERAL AND ADMINISTRATIVE EXPENSES

 

105,529

 

95,185

 

88,091

 

GOODWILL IMPAIRMENT CHARGE

 

1,984

 

 

6,134

 

OTHER CHARGES

 

18,786

 

(1,945

)

7,210

 

OTHER EXPENSE

 

294

 

237

 

357

 

Operating income

 

26,749

 

72,946

 

27,616

 

INTEREST EXPENSE

 

6,387

 

7,713

 

9,773

 

INTEREST INCOME

 

(96

)

(101

)

(181

)

Income before taxes

 

20,458

 

65,334

 

18,024

 

INCOME TAX EXPENSE

 

6,356

 

23,922

 

3,936

 

Net income

 

$

14,102

 

$

41,412

 

$

14,088

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE

 

$

1.33

 

$

3.63

 

$

1.26

 

DILUTED EARNINGS PER SHARE

 

$

1.32

 

$

3.57

 

$

1.23

 

 

 

 

 

 

 

 

 

SHARES USED TO COMPUTE EARNINGS PER SHARE

 

 

 

 

 

 

 

Basic

 

10,592

 

11,416

 

11,169

 

Diluted

 

10,708

 

11,598

 

11,453

 

 

See accompanying notes to consolidated financial statements.

 

30



Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

 

 

 

Common Stock

 

Additional
Paid-In

 

Retained

 

Accumulated
Other
Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income (Loss)

 

Total

 

BALANCE, March 31, 2009

 

11,153

 

$

111

 

$

163,131

 

$

87,806

 

$

(584

)

$

250,464

 

Net income

 

 

 

 

14,088

 

 

14,088

 

Other comprehensive income — currency translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

1,910

 

1,910

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

15,998

 

Exercise of stock options, including tax benefit

 

58

 

1

 

1,310

 

 

 

1,311

 

Share-based compensation expense

 

 

 

5,031

 

 

 

5,031

 

Purchase of remaining interest in a consolidated subsidiary

 

 

 

(3,378

)

 

 

(3,378

)

BALANCE, March 31, 2010

 

11,211

 

$

112

 

$

166,094

 

$

101,894

 

$

1,326

 

$

269,426

 

Net income

 

 

 

 

41,412

 

 

41,412

 

Other comprehensive income — currency translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

1,388

 

1,388

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

42,800

 

Exercise of stock options, including tax benefit

 

417

 

4

 

9,590

 

 

 

9,594

 

Repurchase and retirement of common stock

 

(556

)

(6

)

(8,444

)

(19,316

)

 

(27,766

)

Share-based compensation expense

 

 

 

3,307

 

 

 

3,307

 

BALANCE, March 31, 2011

 

11,072

 

$

110

 

$

170,547

 

$

123,990

 

$

2,714

 

$

297,361

 

Net income

 

 

 

 

14,102

 

 

14,102

 

Other comprehensive (loss) — currency translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

(861

)

(861

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

13,241

 

Exercise of stock options, including tax benefit

 

191

 

2

 

4,249

 

 

 

4,251

 

Repurchase and retirement of common stock

 

(1,023

)

(10

)

(15,532

)

(28,260

)

 

(43,802

)

Share-based compensation expense

 

 

 

2,650

 

 

 

2,650

 

BALANCE, March 31, 2012

 

10,240

 

$

102

 

$

161,914

 

$

109,832

 

$

1,853

 

$

273,701

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Year Ended March 31

 

 

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

14,102

 

$

41,412

 

$

14,088

 

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

 

 

 

 

 

 

 

Depreciation

 

68,506

 

65,106

 

67,616

 

Amortization

 

3,593

 

3,574

 

3,734

 

Bad debt expense

 

970

 

102

 

974

 

Goodwill impairment charge

 

1,984

 

 

6,134

 

Other charges

 

18,786

 

(1,945

)

7,210

 

Foreign currency (gain) loss

 

50

 

87

 

(422

)

Deferred income taxes

 

2,711

 

12,059

 

(6,366

)

Share-based compensation expense

 

2,650

 

3,307

 

5,031

 

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

 

 

 

 

 

 

 

Accounts receivable, net

 

11,498

 

2,179

 

6,191

 

Inventories

 

(2,761

)

(666

)

4,845

 

Prepaid expenses

 

(1,528

)

(4,021

)

8,056

 

Other assets

 

2,141

 

(4,886

)

494

 

Accounts payable and accrued liabilities

 

(16,161

)

(4,814

)

30,153

 

Other liabilities

 

1,649

 

(909

)

(68

)

Income taxes payable

 

2

 

(9,422

)

9,149

 

Net cash provided by operating activities

 

108,192

 

101,163

 

156,819

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions of businesses, net of cash acquired

 

(3,399

)

(7,224

)

(2,944

)

Purchases of property and equipment

 

(59,965

)

(68,752

)

(24,195

)

Proceeds from asset dispositions

 

3,209

 

3,905

 

7,163

 

Net cash used in investing activities

 

(60,155

)

(72,071

)

(19,976

)

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from bank credit facilities

 

167,021

 

229,289

 

161,042

 

Payments on bank credit facilities

 

(181,092

)

(234,787

)

(265,839

)

Proceeds from issuance of term equipment notes

 

24,052

 

25,508

 

 

Payments on term equipment notes and other debt

 

(16,123

)

(33,820

)

(31,120

)

Payments to repurchase and retire common stock

 

(43,802

)

(27,766

)

 

Purchase of remaining interest in consolidated subsidiary

 

 

 

(5,500

)

Proceeds from exercise of stock options, including excess tax benefit

 

4,251

 

9,594

 

1,311

 

Net cash used in financing activities

 

(45,693

)

(31,982

)

(140,106

)

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

11

 

(141

)

242

 

 

 

 

 

 

 

 

 

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS

 

2,355

 

(3,031

)

(3,021

)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

 

3,710

 

6,741

 

9,762

 

CASH AND CASH EQUIVALENTS AT END OF YEAR

 

$

6,065

 

$

3,710

 

$

6,741

 

 

See accompanying notes to consolidated financial statements.

 

32


 


Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

1. BUSINESS

 

Consolidated Graphics, Inc. (collectively with its consolidated subsidiaries, referred to herein as the “Company”) is a provider of commercial printing and print-related services with 70 printing businesses across 27 states, Toronto, Prague, and Gero, Japan.

 

The Company’s printing businesses maintain their own sales, customer service, estimating and planning, prepress, production and accounting departments. The Company’s corporate headquarters staff provides support to its printing businesses in such areas as human resources, purchasing, internal financial controls design and management information systems. The Company also maintains centralized treasury, risk management, legal, tax, internal audit and consolidated financial reporting activities.

 

The Company’s sales are derived from providing commercial printing and print-related services. These services consist of (i) traditional print services, including electronic prepress, digital and offset printing, finishing, storage and delivery of high-quality printed documents which are custom manufactured to its customers’ design specifications; (ii) fulfillment and mailing services for such printed materials; (iii) technology solutions that enable its customers to more efficiently procure and manage printed materials and/or design, procure, distribute, track and analyze results of printing-based marketing programs and activities; and (iv) crossmedia capabilities allowing its customers to supplement the message of their printed materials through other media, such as the internet, email, or text messaging.

 

The scope and extent of services provided to the Company’s customers typically varies for each individual order it receives, depending on customer-specific factors including the intended uses for the printed materials. Furthermore, each of the Company’s locations generally is capable of providing a complete range of services to its customers. Accordingly, the Company does not operate its business in a manner that differentiates among its respective capabilities and services for financial or management reporting purposes, rather each of its printing businesses is defined as a distinct reporting unit.

 

2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION

 

Accounting Policies

 

The accounting policies of the Company reflect industry practices and conform to generally accepted accounting principles in the United States. The more significant of such accounting policies are described below.

 

Principles of Consolidation — The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The Company’s operations constitute one reportable segment because all of its printing businesses operate in the commercial printing industry and exhibit similar economic characteristics.

 

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 and Other Corrections — Certain reclassifications of prior period data have been made to conform to the current period reporting. The Company has previously presented additions to construction-in-process as cash flows used in operating activities in the statement of cash flows until the assets were placed in service, at which point they were reflected as investing activities. The Company has corrected the statement of cash flows to reflect all additions to construction-in-process as investing activities at the time of the related expenditure. As a

 

33



Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

result of this correction, the revised cash provided by operating activities and cash used in investing activities increased by $4,049 for the fiscal year ended March 31, 2010 as compared to what had been previously reported.

 

Cash and Cash Equivalents — The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Pursuant to the Company’s cash management system, the Company deposits cash into its bank accounts as checks written by the Company are presented to the bank for payment. Checks issued by the Company but not presented to the bank for payment are included in accounts payable and totaled $42,993 as of March 31, 2012 and $38,996 as of March 31, 2011.

 

Revenue Recognition and Accounts Receivable — The Company primarily recognizes revenue upon delivery of the printed product to the customer. In the case of customer fulfillment arrangements, including multiple deliverables of printing services and distribution services, revenue relating to the printed product is recognized upon the delivery of the printed product into the Company’s fulfillment warehouses, and invoicing of the customer for the product at an agreed price. Revenue from distribution services is recognized when the services are provided. Because printed products manufactured for the Company’s customers are customized based upon the customers specifications, product returns are not significant. Revenue is recognized net of sales taxes. The Company derives the majority of its revenues from sales and services to a broad and diverse group of customers with no individual customer accounting for more than 7% of the Company’s revenues in any of the years ended March 31, 2012, 2011 or 2010. The Company maintains an allowance for doubtful accounts based upon its evaluation of aging of receivables, historical experience and the current economic environment. Accounts receivable in the accompanying consolidated balance sheets are reflected net of allowance for doubtful accounts of $3,246 and $3,657 at March 31, 2012 and 2011, respectively.

 

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

 

 

 

March 31

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Raw materials

 

$

24,565

 

$

23,658

 

Work in progress

 

21,345

 

21,815

 

Finished goods

 

8,219

 

5,415

 

 

 

$

54,129

 

$

50,888

 

 

Goodwill and Long-Lived Assets — Goodwill totaled $24,847 at March 31, 2012 and represents the excess of the Company’s purchase cost over the fair value of the net identifiable assets acquired, net of previously recorded amortization and impairment charges. Each of the Company’s printing businesses is separately evaluated for goodwill impairment because they comprise individual reporting units. The Company evaluates goodwill for impairment at the end of each fiscal year, or at any time that management becomes aware of an indication of impairment.

 

For the year ended March 31, 2012, the Company adopted Accounting Standards Update No. 2011-08 “Intangibles-Goodwill and Other” (Topic 350): Testing for Impairment (“ASU 2011-08”), which permits an entity to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of the events or circumstances, an entity determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity is required to perform the first step of the two-step impairment test. The first step, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value including goodwill. The Company estimates the fair value for each reporting unit using trailing twelve months earnings before interest, income taxes and depreciation and amortization (“EBITDA”) multiplied by management’s estimate of an appropriate enterprise value-to-EBITDA multiple for each reporting unit, adjusted for a control premium. Management’s total Company enterprise value-to-EBITDA multiple is based upon the multiple derived from using the market capitalization of the Company’s common stock on or around the applicable balance sheet date, after considering an appropriate control premium (25% at March 31, 2012, based upon historical transactions in the printing industry). If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an

 

34



Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

indication of impairment and the second step is performed to measure the amount of impairment. The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated potential impairment. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangible assets as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill in the “proforma” business combination accounting described above exceeds the goodwill assigned to the reporting unit, there is no impairment. If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. A recognized impairment loss cannot exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. The Company recognized a non-cash, pre-tax impairment charge to its goodwill in the amount of $1,984 for the year ended March 31, 2012 and $6,134 for the year ended March 31, 2010. Tax benefits totaling $774 in 2012 and $2,392 in 2010 were recorded in connection with these impairments.

 

Goodwill is as follows:

 

 

 

Year Ended March 31

 

 

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Beginning balance, gross

 

$

240,524

 

$

237,626

 

$

236,702

 

Accumulated impairments

 

(213,400

)

(213,400

)

(207,266

)

Beginning balance, net

 

27,124

 

24,226

 

29,436

 

Acquisitions

 

(102

)

2,546

 

 

Foreign exchange translation

 

(191

)

352

 

924

 

 

 

 

 

 

 

 

 

Impairment charges

 

(1,984

)

 

(6,134

)

 

 

 

 

 

 

 

 

Ending balance

 

$

24,847

 

$

27,124

 

$

24,226

 

 

The Company compares the carrying value of long-lived assets, including property, plant and equipment and intangible assets (other than goodwill or intangible assets with indefinite lives), to projections of future undiscounted cash flows attributable to such assets whenever events or changes in conditions indicate the carrying value may not be recoverable. In the event that the carrying value of any long-lived asset exceeds the projection of future undiscounted cash flows attributable to such asset, the Company records an impairment charge against income equal to the excess, if any, of the carrying value over the asset’s fair value. The Company recorded impairments of $2,016 in 2012, $1,205 in 2011 and $3,973 in 2010, which are included in other charges in the consolidated income statements.

 

The net book value of other intangible assets at March 31, 2012 was $15,623. Other intangible assets consist primarily of the value assigned to such items as customer lists and trade names in connection with the allocation of purchase price for acquisitions and are generally amortized on a straight-line basis over periods of between 5 and 25 years. Such assets are evaluated for recoverability with other long-lived assets as discussed above. Amortization expense totaled $3,593 in 2012, $3,574 in 2011 and $3,734 in 2010. The Company’s future amortization expense by fiscal year is as follows:

 

 

 

2013

 

2014

 

2015

 

2016

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization expense

 

$

3,585

 

$

3,252

 

$

3,252

 

$

2,148

 

$

954

 

 

35



Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Accrued Liabilities — The significant components of accrued liabilities are as follows:

 

 

 

March 31

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Compensation and benefits

 

$

26,920

 

$

32,095

 

Advances from customers

 

10,066

 

10,731

 

Other(1)

 

17,815

 

23,550

 

Manufacturing materials and services

 

9,136

 

9,943

 

Sales, property and other taxes

 

4,559

 

5,182

 

 

 

$

68,496

 

$

81,501

 

 


(1) Other accrued liabilities include accrued self-insurance claims for certain insurance programs. None of the individual items in other accrued liabilities at March 31, 2012 and 2011 were individually greater than 5% of total current liabilities in those years.

 

Litigation Charge — In late fiscal 2009, a jury rendered verdicts for compensatory and punitive damages against the Company due to a lawsuit involving an isolated dispute between the Company and the former employer of an existing sales employee. As a result of these verdicts, a pre-tax litigation charge of $17,000 was accrued in the fiscal 2009 consolidated financial statements. In fiscal 2010 the Company accrued additional charges to reflect the actual damages, fees and other costs included in the order entered by the judge. In fiscal 2011, the Company settled the litigation for an amount lower than previously recognized and reduced the litigation charge by $5.7 million. (See Note 7. Commitments and Contingencies).

 

Income Taxes — The provision for income taxes includes federal, state and foreign income taxes which are currently payable or deferred based on current tax laws. Deferred income taxes are provided for the tax consequences of differences between the financial statement and tax bases of assets and liabilities. The Company reduces deferred tax assets by a valuation allowance when, based on its estimates, it is more likely than not that a portion of those assets will not be realized in a future period. The Company is subject to audit by taxing authorities and these audits occasionally result in proposed assessments which may result in additional tax liabilities and, in some cases, interest and penalties. The Company recognizes a tax position in its financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. The recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely to be realized upon ultimate settlement. The Company has a reserve for unrecognized tax benefits related to uncertain tax positions. The Company adjusts the reserve upon changes in circumstances that would cause a change to the estimate of the ultimate liability, upon effective settlement, or upon the expiration of the statute of limitations relating to such tax positions, in the period in which such event occurs. Although we believe our estimates are reasonable, the final outcome of uncertain tax positions may be different from that which is reflected in the financial statements.

 

Supplemental Cash Flow Information — The consolidated statements of cash flows provide information about the Company’s sources and uses of cash and exclude the effects of non-cash transactions. The Company paid cash for interest totaling $6,389, $7,797 and $9,636 for the years ended March 31, 2012, 2011 and 2010, respectively. The Company paid cash for income taxes, net of refunds, totaling $2,857 and $17,521 for the years ended March 31, 2012 and 2011, respectively. The Company received an income tax refund, net of taxes paid, totaling $7,036 for the year ended March 31, 2010.

 

36



Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Other Information

 

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

 

 

 

Year Ended March 31

 

 

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

Net income

 

$

14,102

 

$

41,412

 

$

14,088

 

Denominator:

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

10,591,642

 

11,416,002

 

11,168,665

 

Dilutive options and awards

 

115,886

 

182,146

 

284,720

 

Diluted weighted average number of common shares outstanding

 

10,707,528

 

11,598,148

 

11,453,385

 

Net earnings per share

 

 

 

 

 

 

 

Basic

 

$

1.33

 

$

3.63

 

$

1.26

 

Diluted

 

$

1.32

 

$

3.57

 

$

1.23

 

 

Diluted net earnings per share take into consideration the dilutive effect of certain unvested restricted stock unit awards and unexercised stock options. For the years ended March 31, 2012, 2011 and 2010, options to purchase 866,300, 881,341 and 1,093,987 shares of common stock, respectively, were outstanding but not included in the computation of diluted net earnings per share because the inclusion would have an anti-dilutive effect.

 

Fair Value of Financial Instruments — The Company’s financial instruments consist of cash, trade receivables, trade payables and debt obligations. The Company does not currently hold or issue derivative financial instruments. The Company believes that the recorded values of its variable rate debt obligations, which totaled $96,793 and $111,249 at March 31, 2012 and 2011, respectively, approximated their fair values. The Company believes that the recorded values of its fixed rate debt obligations, which totaled $66,953 and $58,823 at March 31, 2012 and 2011, respectively, approximated their fair values. Estimates of fair value are based on estimated interest rates for the same or similar debt offered to the Company having the same or similar maturities and collateral requirements.

 

Concentrations of Credit Risk — Financial instruments that potentially subject the Company to concentrations of credit risk are primarily trade accounts receivable. Concentrations of credit risk with respect to trade accounts receivable are limited because the Company’s printing businesses provide services to a large, diverse group of customers in various geographical regions. Management performs ongoing credit evaluations of its customers and generally does not require collateral for extensions of credit. The Company’s cash deposits are held with large, well-known financial institutions.

 

Share-Based Compensation — The Company accounts for share-based compensation by measuring the cost of the employee services received in exchange for an award of equity instruments, including grants of stock options and restricted stock unit awards, based on the fair value of the award at the date of grant. In addition, to the extent that the Company receives an excess tax benefit upon exercise of an award, such benefit is reflected as cash flow from financing activities in the consolidated statement of cash flows.

 

Foreign Currency — Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than the U.S. dollar are translated at period-end exchange rates. Income and expense items are translated at the average monthly exchange rates. The effects of period-end translation are included as a component of Accumulated Other Comprehensive Income (Loss) in the consolidated statements of shareholders’ equity. The net foreign currency transaction loss related to the revaluation of certain transactions denominated in currencies other than the reporting unit’s functional currency totaled $294, $237 and $357 in fiscal 2012, 2011 and 2010, respectively, and is recorded in Other Expense on the consolidated income statements.

 

37



Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

Geographic Information — Revenues of the Company’s subsidiaries operating outside the United States were $58,041, $55,956 and $49,980 in fiscal 2012, 2011 and 2010, respectively, and long-lived assets were $36,233 and $35,700 as of March 31, 2012 and 2011, respectively.

 

3. ACQUISITIONS

 

Revenues and expenses of the acquired businesses have been included in the accompanying consolidated financial statements beginning on their respective dates of acquisition. The allocation of purchase price to the acquired assets and liabilities is based on estimates of fair value and may be prospectively revised if and when additional information the Company is awaiting concerning certain asset and liability valuations is obtained, provided that such information is received no later than one year after the date of acquisition.

 

In fiscal 2012, the Company paid cash totaling $3,162 and assumed liabilities totaling $3,142 to acquire the assets of one printing business and $237 to satisfy liabilities in connection with a prior year acquisition.

 

In fiscal 2011, the Company paid cash totaling $7,224 and assumed liabilities totaling $8,279 to acquire the assets of two printing businesses.

 

In fiscal 2010, the Company paid cash totaling $2,194 to acquire certain assets of two printing businesses and $750 to satisfy liabilities in connection with a prior period acquisition. In addition, the Company paid cash totaling $5,500 to acquire the remaining interest in a consolidated subsidiary. The purchase price of $5,500 plus transaction costs were recorded directly to Shareholders’ Equity, net of a deferred tax benefit of $2,160.

 

4. PROPERTY AND EQUIPMENT

 

Property and equipment are stated at cost, net of accumulated depreciation. The costs of major renewals and betterments are capitalized; repairs and maintenance costs are expensed when incurred. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the various classes of assets.

 

The following is a summary of the Company’s property and equipment and their estimated useful lives:

 

 

 

March 31

 

Estimated
Life

 

Description 

 

2012

 

2011

 

in Years

 

 

 

 

 

 

 

 

 

Land

 

$

15,717

 

$

15,786

 

 

Buildings and leasehold improvements

 

134,297

 

125,066

 

5-30

 

Machinery and equipment

 

610,770

 

582,702

 

3-20

 

Computer equipment and software

 

58,182

 

41,138

 

2-5

 

Furniture, fixtures and other

 

21,738

 

40,083

 

2-7

 

 

 

840,704

 

804,775

 

 

 

Less—accumulated depreciation

 

(463,649

)

(416,094

)

 

 

 

 

$

377,055

 

$

388,681

 

 

 

 

Depreciation expense related to the Company’s property and equipment totaled $68,855 in 2012, $65,323 in 2011 and $66,427 in 2010.

 

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Table of Contents

 

CONSOLIDATED GRAPHICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

5. LONG-TERM DEBT

 

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

 

 

 

March 31

 

 

 

2012

 

2011