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Article by DailyStocks_admin    (11-24-08 10:31 AM)

Consolidated Graphics Inc. CEO JOE R DAVIS bought 151500 shares on 11-19-2008 at $10.8

BUSINESS OVERVIEW

Company Overview
Consolidated Graphics, headquartered in Houston, Texas, is a leading U.S. and Canadian general commercial printing company, with 70 printing businesses strategically located across 27 states plus one Canadian province. Each of our printing businesses has a well-established operating history, more than 25 years in most cases. Complementing the printing services we provide, we also offer (i) state-of-the-art fulfillment services from 13 fulfillment centers located at or near one of our printing businesses and (ii) proprietary digital technology solutions and e-commerce capabilities from two technology hubs located at our corporate headquarters and at one of our printing businesses in the Baltimore/Washington D.C. area.
Our sales are derived from providing commercial printing and print-related services. These services consist of (i) traditional print services, including electronic prepress, digital and offset printing, finishing, storage and delivery of high-quality printed documents which are custom manufactured to our customers’ design specifications; (ii) fulfillment and mailing services for such printed materials; and (iii) digital technology solutions and e-commerce capabilities that enable our customers to more efficiently procure and manage printed materials and/or design, procure, distribute, track and analyze results of printing-based marketing programs and activities. Examples of the types of documents we print for our customers include high-quality, multi-color marketing materials, product and capability brochures, point-of-purchase displays, direct mail pieces, shareholder communications, trading cards, catalogs and training manuals.
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 generally is 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 Presiding Director for purposes of shareholder communications, 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 medium-sized printing businesses (those with annual sales of $2 million to $35 million) sought to evaluate exit strategies and address new industry challenges, a trend that has continued to date. 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 became more 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 comparable objectives, financial strength and management expertise necessary to acquire such printing businesses.
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. For example, most printing design and prepress activities are now accomplished in a digital environment. Prepress computer equipment based on a complete digital workflow, along with more sophisticated printing presses and finishing equipment, are more efficient, operate faster and require less labor than the equipment they typically replace. 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.
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 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 significantly impact the general commercial printing industry (approximately 96% of our fiscal 2008 revenues were U.S.-based). To the extent 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. Beginning in 2000, industry conditions experienced a significant downturn due in part to overcapacity caused by a high rate of investment by the overall industry in new technology and equipment, which was subsequently followed by a broad deterioration in the U.S. economy. This downturn continued through 2003 and many printing businesses failed. The combination of these failures, and a subsequent strengthening in the U.S. economy, have resulted in generally stable industry conditions in recent years.



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

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Cost structure and sales pricing strategy

•
Financial strength
The ability to provide high-quality customer service is often 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 leading 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. Our strong financial position enables us to invest in newer, more efficient technology and equipment 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 infrastructure and support, national sales and marketing and other operating advantages that exist because they are part of a large national organization.
Internal Sales Growth —Our printing businesses have numerous opportunities, individually and collectively, to achieve consistent, long-term sales growth at a rate that exceeds industry averages. 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 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 (688 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 U.S. and Canadian geographic footprint through additional acquisitions of medium and large-sized general commercial printing businesses, typically ones that are well-managed, profitable and that generally have an excellent reputation and quality customer base. We may also acquire smaller and/or distressed printing businesses whose operations can be merged into one of our existing locations. This type of transaction is commonly referred to as a “tuck-in” acquisition.
Cost Savings— Because of our size and national presence, we leverage our economies of scale to obtain preferential pricing for paper and supplies used in the printing process and for 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, 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 provide a pool of talent for future management positions at our printing businesses. As of April 30, 2008 we had 305 employees who were current participants in or graduates of this program, 21 of whom serve as the president of the printing business at which they are employed, representing 30% of our printing company presidents.
Printing Operations
We currently operate 70 printing businesses in 27 states and one Canadian province, plus 13 fulfillment centers and two technology hubs. Each printing business is operated as a wholly-owned subsidiary of our Company. 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. 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. Most of 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 adopted recent advances in technology 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 289 sheetfed presses capable of simultaneously printing from one to 12 colors and are capable of running at speeds of up to 15,000 impressions an hour. We operate 63 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 164 digital presses, including 64 high capacity, ultra high quality presses such as Kodak Nexpress, Xerox iGen3 and HP Indigo. Digital presses enable variable information printing and automatic personalization of printed materials.

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 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 and (ii) design, procure, distribute, track and analyze results of printing-based marketing programs and activities. 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 “CGXSolutions” trademark. The key e-commerce capabilities we offer include:
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StoreFront


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

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CrossMedia


A unique capability that enables the customer to create highly engaging personalized one-to-one direct mail campaigns designed to increase response rates

•
Digital asset management


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

•
Digital print solutions


Provides print on demand capabilities giving the customer the flexibility to respond to market changes and manage inventories more efficiently. Our distribute and print system receives orders electronically, prepares them for production and distributes them across our network of digital presses across the U.S., reducing time to market and delivering product more efficiently.
Other e-commerce and electronic media services we offer include Internet services such as designing websites and programming interactive tools, CD-ROM development and production, foreign language translation services in over 100 different languages, composition and typesetting, and database management for customer-retention programs.
Under our national sales organization (which is discussed below), sales support for CGXSolutions is provided to our printing businesses to assist them in identifying prospective customers and marketing our suite of CGXSolutions capabilities and services. We maintain CGXSolutions 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 CGXSolutions capabilities and services.


CEO BACKGROUND

Joe R. Davis has been the Chief Executive Officer and Chairman of the Board of Directors of the Company since it was founded in 1985. Mr. Davis serves on the Executive Committee and also serves on the board of directors of Carriage Services, Inc., a publicly traded death care company. Prior to forming the Company, Mr. Davis was a Vice President for a division of International Paper Company. He also previously served as a partner of a national public accounting firm. Mr. Davis is 65 years of age.

Hugh N. West, M.D. , was in private practice in Houston, Texas in the field of diagnostic radiology until his retirement in 1996. Dr. West has been a director of the Company since 1985 and serves on the Compensation Committee and the Nominating and Governance Committee. Dr. West is 62 years of age.

Larry J. Alexander retired from the San Antonio Spurs Professional Basketball Team in May 1996, where he had been Vice President — Administration and Communications since August 1994. Prior to joining the Spurs, he spent 27 years with SBC, Inc. (now AT&T, Inc.), a telecommunications company, where he had various responsibilities in advertising and corporate communications, most recently as Senior Vice President — External Affairs. Mr. Alexander has been a director of the Company since May 1995 and serves on the Compensation Committee. Mr. Alexander is 66 years of age.

Brady F. Carruth has been President of Gulf Coast Capital Corporation, a commercial landscaping business, since 1987 and President and Chief Executive Officer of Saratoga Financial Group, an insurance holding company, since 2001. Mr. Carruth has been a director of the Company since 1985 and serves on the Audit Committee and the Nominating and Governance Committee. Mr. Carruth is 50 years of age.

Gary L. Forbes is currently Senior Vice President of Equus Total Return, Inc., a publicly traded investment company, with whom he has been employed since 1991. Mr. Forbes serves on the board of directors of NCI Building Systems, Inc., a publicly traded manufacturer of prefabricated metal buildings and Carriage Services, Inc., a publicly traded death care company. Mr. Forbes is a certified public accountant and has been a director of the Company since 1993. He serves on the Audit Committee and the Executive Committee and is 64 years of age.

James H. Limmer retired as a partner from the law firm of Tekell, Book, Matthews & Limmer, L.L.P., where he had practiced law for 34 years, in July of 2007. The Houston, Texas based law firm specializes in all phases of insurance defense, since July 1973. Mr. Limmer has been a director of the Company since 1985 and serves on the Audit Committee and the Nominating and Governance Committee. Mr. Limmer is 66 years of age.


MANAGEMENT DISCUSSION FROM LATEST 10K

Overview
Our Company is a leading U.S. and Canadian provider of commercial printing services with 70 printing businesses spanning 27 states plus one Canadian province. Complementing the printing services we provide, we also offer (i) state-of-the-art fulfillment services from 13 fulfillment centers located at or near one of our printing businesses and (ii) proprietary digital technology solutions and e-commerce capabilities from two technology hubs located at our corporate headquarters and at one of our printing businesses in the Baltimore/Washington D.C. area.
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 experienced 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 consolidation 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, tax, internal audit and consolidated financial reporting activities.
Our sales are derived from commercial printing services. These services consist of (i) traditional print services, including electronic prepress, printing, finishing, storage and delivery of high-quality materials which are custom manufactured to our customers’ design specifications; (ii) fulfillment and mailing services for such printed materials; and (iii) digital technology solutions and e-commerce capabilities that enable our customers to more efficiently procure and manage printed materials and/or design, procure, distribute, track and analyze results of printing-based marketing programs and activities. Examples of the types of documents we print for our customers include high-quality, multi-color marketing materials, product and capability brochures, point-of-purchase displays, direct mail pieces, shareholder communications, trading cards, catalogs and training manuals.
Most of our sales are generated by individual orders through commissioned sales personnel. We recognize revenue from these orders when we deliver the ordered goods and services. To a large extent, continued engagement of our Company by our customers for successive business opportunities depends upon the customers’ satisfaction with the quality of products and services we provide. As such, it is difficult for us to predict with any high degree of certainty the number, size, and profitability of printing services that we expect to provide for more than a few weeks in advance. Our revenues, however, tend to be strongest in the quarter ended December 31 followed by revenue in the quarter ended March 31. Conversely, revenues tend to be seasonally weaker in the quarters ended June 30 and September 30.

Our cost of sales mainly consists of raw materials consumed in the printing process, as well as labor and outside services, such as delivery costs. Paper cost is the most significant component of our materials cost; however, fluctuation in paper pricing generally does not materially impact our operating margins because we typically quote, and subsequently purchase, paper for each specific printing project we are awarded. As a result, any changes in paper pricing are effectively passed through to customers by our printing businesses. Additionally, our cost of sales includes salary and benefits paid to operating personnel, maintenance, repair, rental and insurance costs associated with operating our facilities and equipment and depreciation charges.
Our selling expenses generally include the compensation paid to our sales professionals, along with promotional, travel and entertainment costs. Our general and administrative expenses generally include the salary and benefits paid to support personnel at our printing businesses and our corporate staff including stock-based compensation, as well as office rent, utilities and communications expenses, various professional services and amortization of identifiable intangible assets.

Results of Operations

Our sales and expenses during the periods shown were impacted by the acquisition of three printing businesses in fiscal 2008, two printing businesses in fiscal 2007 and four printing businesses in fiscal 2006. In accordance with the purchase method of accounting, our consolidated income statements reflect sales and expenses of acquired businesses only for post-acquisition periods. Accordingly, acquisitions affect our financial results in any 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 “incremental impact of acquisitions.” We refer to revenue growth or decline, excluding the effect of revenues contributed by acquisitions in the most recent fiscal year as “organic” or “same-store” sales growth or decline.
Analysis of Consolidated Income Statements for Fiscal 2008 as Compared to Fiscal 2007
Sales for fiscal 2008 increased $89.2 million, or 9%, to $1.10 billion from $1.01 billion in fiscal 2007. The $89.2 million revenue increase is attributable to an increase of $109.4 million from the incremental impact of acquisitions, partially offset by an internal same-store revenue decline of $20.2 million due largely to an $11.7 million decline in election-related printing. Excluding the decline in election-related printing, internal sales were down .8% compared to 2007. We believe this decline was generally due to the weakness of the U.S. economy during the year.
Fiscal 2008 gross profit increased by $13.8 million, or 5%, to $283 million from $269.2 million in fiscal 2007. This increase was primarily attributable to the increased sales levels discussed above, which were significantly affected by the incremental impact of acquisitions. Gross profits as a percentage of sales, declined to 25.8% from 26.8% in fiscal 2007 due to relatively lower gross margins for recently acquired businesses, as well as higher expenses related to direct start-up expenses associated with our growing digital printing business.
Selling expense for fiscal 2008 increased $5.3 million, or 6%, to $107 million from $101.7 million in fiscal 2007. The increase is attributable to higher commission expense due to the increased sales levels noted above. As a percentage of sales, selling expenses in fiscal 2008 declined to 9.8% from 10.1% in fiscal 2007. The decline was primarily due to lower selling expense as a percentage of sales for recently acquired businesses.
General and administrative expenses for fiscal 2008 increased $9.6 million, or 14%, to $78.8 million from $69.2 million in fiscal 2007. This increase was caused by the incremental impact of acquisitions (including intangible asset amortization) and an increase in professional fees related to legal costs and information technology consulting fees. Overall, as a percentage of sales, general and administrative expenses in fiscal 2008 increased to 7.2% from 6.9% in fiscal 2007.
Other income for fiscal 2008 of $3.1 million related to a foreign currency transaction gain primarily resulting from certain transactions at our Canadian subsidiary denominated in U.S. dollars.
Based on our annual evaluation of goodwill at March 31, 2008, no goodwill impairment was recorded. Goodwill impairment for fiscal 2007 was $11.5 million.
Net interest expense for fiscal 2008 increased $5.3 million, or 80%, to $12 million from $6.7 million in fiscal 2007, mostly due to a higher level of average debt outstanding due to borrowings used to fund 2008 acquisitions and share repurchases under our common stock repurchase program. The increase was partially offset by a decrease in our weighted average interest rate.
Income taxes for fiscal 2008 were $29.0 million, reflecting an overall effective tax rate of 32.8% as compared to an effective tax rate of 36.6% in fiscal 2007. In fiscal 2008, the effective tax rate declined primarily as a result of a reduction in reserves related to certain tax positions, partially offset by an increase in state income taxes.
Analysis of Consolidated Income Statements for Fiscal 2007 as Compared to Fiscal 2006
Sales for fiscal 2007 increased $127.2 million, or 14%, to $1.01 billion from $879.0 million in fiscal 2006. The $127.2 million revenue increase is attributable to $68.0 million of internal sales growth and $59.2 million from the incremental impact of acquisitions. Approximately 36% (or $24.4 million) of our internal sales growth resulted from election-related printing (which recurs generally on a biennial basis), while approximately 57% (or $38.9 million) was attributable to sales growth from National Sales and CGXSolutions. Compared to the prior year, National Sales were up 44% and accounted for 9% of our total sales. Sales attributable to our CGXSolutions sales channel (including $7.2 million of National Sales) were up 35% compared to the prior year and accounted for 5% of our total sales.
Gross profit for fiscal 2007 increased by $51.7 million, or 24%, to $269.2 million from $217.5 million in fiscal 2006. Approximately $31.5 million of the increase is attributable to the increased sales levels discussed above, including the incremental impact of acquisitions. The remaining increase of $20.2 million accounts for the increase in our gross profit percentage to 26.8% in fiscal 2007 compared to 24.7% in fiscal 2006, and is attributable to (i) margin leverage as certain of our operating costs are more fixed in nature (for example depreciation and rent expense) and (ii) incremental purchasing and pricing gains that we have been able to achieve.
Selling expense for fiscal 2007 increased $10.4 million, or 11%, to $101.7 million from $91.3 million in fiscal 2006. The increase is directly attributable to the increased sales levels noted above. As a percentage of sales, selling expenses in fiscal 2007 decreased to 10.1% from 10.4% in fiscal 2006, as (i) our sales growth leveraged certain selling expenses which are more fixed in nature (for example sales meetings and overhead) and (ii) a lower level of sales commissions and other expenses were incurred in connection with election-related printing and certain other components of our fiscal 2007 sales growth.
General and administrative expenses for fiscal 2007 increased $10.2 million, or 17%, to $69.2 million from $59.0 million in fiscal 2006. Recognition of share-based compensation expense totaling $2.7 million was a significant cause of the increase. The remainder of the increase was primarily attributable to the incremental impact of acquisitions (including direct expenses and $.3 million of incremental intangible asset amortization). Overall, as a percentage of sales, general and administrative expenses in fiscal 2007 increased to 6.9% (including a .3% increase attributable to share-based compensation expense) from 6.7% in fiscal 2006.
Goodwill impairment for fiscal 2007 was $11.5 million based on the Company’s annual evaluation of goodwill at March 31, 2007, in accordance with SFAS No. 14 2. The impairment was attributed to four printing businesses that in the aggregate accounted for approximately 3% of the Company’s total sales in fiscal 2007. No goodwill impairment was recorded in fiscal 2006.
Net interest expense for fiscal 2007 increased $1.2 million, or 22%, to $6.7 million from $5.5 million in fiscal 2006, due principally to a higher level of average debt outstanding and a generally higher interest rate environment. This increase in average debt outstanding in fiscal 2007 related principally to acquisitions completed and funded during the year, which totaled $67.6 million, and our common stock repurchases, which totaled $24.7 million.
We provided for income taxes for fiscal 2007 of $29.4 million, reflecting an overall effective tax rate of 36.6% as compared to an effective tax rate of 37.6% in fiscal 2006. In fiscal 2007, an income tax benefit of $3.7 million attributable to the goodwill impairment discussed above and a one-time credit of $.7 million for the impact of a net reduction in legislated state income tax rates on previously provided deferred income taxes were recorded. These tax benefits resulted in a net decrease of .2% on our overall effective tax rate. Excluding these items, the decrease in our overall effective tax rate was primarily attributable to (i) an increase in pre-tax earnings, which caused non-deductible expenses to be a smaller percentage of pre-tax earnings, thus lowering our effective tax rate and (ii) an increase in the estimated domestic production activities deduction for fiscal 2007.
Liquidity and Capital Resources
Sources and Uses of Cash
Our historical sources of cash have primarily been cash provided by operations or borrowings under our various bank credit facilities. Our historical uses of cash have been for acquisitions of printing businesses, capital expenditures, payment of principal and interest on outstanding debt obligations and repurchases of our common stock.

Net cash provided by operating activities increased by $38.0 million for fiscal 2008 compared to fiscal 2007. This increase was primarily related to a $26.1 million increase in accounts receivable, an $8.6 million increase in net income, and an $11.5 million decrease in goodwill impairment. Since our cash requirements in fiscal 2008 for capital expenditures, business acquisitions and stock repurchases exceeded internally generated cash flow, we incurred additional borrowings resulting in a $231.1 million increase in our total debt obligations for the year.
During fiscal 2008, we invested $82.4 million in new technology, equipment and real estate, of which $21.5 million was for digital presses and related technology.
We believe that our cash flow provided by operations, combined with new borrowings, will be adequate to cover our fiscal 2009 working capital growth, debt service requirements and planned capital expenditures.


MANAGEMENT DISCUSSION FOR LATEST QUARTER


Results of Operations

Our sales and expenses for the six months ended September 30, 2008 were impacted by the acquisition of three printing businesses in fiscal 2008. In accordance with the purchase method of accounting, our condensed consolidated income statements reflect sales and expenses of acquired businesses only for post-acquisition periods. Accordingly, acquisitions affect our financial results in any period compared to the prior year period by the full-period impact of prior year acquisitions (as compared to the partial-period impact in the prior year) and the partial-period impact of current year acquisitions, and is referred to below as “impact of acquisitions.” We refer to revenue growth or decline, excluding the effect of revenues contributed by acquisitions, in the most recent fiscal year as “internal” or “same-store” sales growth or decline.

Comparative Analysis of Consolidated Income Statements for the Three Months Ended September 30, 2008 and 2007
Sales in the three month period ended September 30, 2008 increased $37.3 million, or 14%, to $297.0 million from $259.7 million for the same period in the prior year. The impact of acquisitions provided $34.7 million of the revenue increase in fiscal year 2008 and an increase in election-related business contributed $6.9 million. The increases were partially offset by a $4.3 million decline in same-store sales, compared to the same period in the prior year. The decline in internal sales growth was primarily due to a reduction in demand for printing services as a result of continuing weakness in the overall U.S. economy, along with a more competitive pricing environment.
Gross profit during the three months ended September 30, 2008 increased $6.3 million, or 10%, to $72.6 million from $66.3 million for the same period in the prior year. This increase was primarily due to the impact of acquisitions on the sales volumes discussed above. Gross profit as a percentage of sales declined to 24.4% from 25.5% compared to the same period in the prior year due to relatively lower gross margins for recently acquired businesses, offset in part by an increase in election-related business and the beneficial impact of the Company’s growing digital print business.
Selling expense during the three months ended September 30, 2008 increased $1.6 million, or 6%, to $26.8 million from $25.2 million for the same period in the prior year. The increase was due to the impact of acquisitions on the sales volumes discussed above. As a percentage of sales, selling expenses declined to 9.0% in the current quarter as compared to 9.7% for the same period in the prior year. The decline was primarily due to relatively lower selling expenses as a percentage of sales for businesses acquired in fiscal year 2008.

General and administrative expenses during the three months ended September 30, 2008 increased $5.6 million, or 30%, to $24.7 million from $19.1 million for the same period in the prior year. This increase was primarily due to the impact of acquisitions (including direct expenses and incremental intangible asset amortization) and increases in bad debt expense, share-based compensation and salary expenses. As a percentage of sales, general and administrative expenses increased to 8.3% in the current quarter as compared to 7.4% for the same period in the prior year due to the factors described above.
Other income during the three months ended September 30, 2008 decreased $.9 million to $.3 million from $1.2 million for the same period in the prior year. Other income primarily consists of foreign currency transaction gains resulting from certain transactions at our Canadian subsidiary denominated in U.S. dollars.
Interest expense during the three months ended September 30, 2008 increased $1.4 million to $3.9 million from $2.5 million for the same period in the prior year, due principally to higher levels of average debt outstanding due to borrowings that funded fiscal year 2008 acquisitions, capital expenditures and share repurchases under our now expired common stock repurchase program.
We provided for income taxes during the three months ended September 30, 2008 of $7.2 million, reflecting an effective tax rate of 41.1% as compared to an effective tax rate of 35.9% for the same period in the prior year. The increase primarily relates to higher state taxes in the current quarter and a lower foreign effective tax rate in the prior year.

CONF CALL

Alice Kramer

Thank you and good morning. Welcome to the Consolidated Graphics Conference Call. During the call, management will discuss the companies results to the quarter September 30, 2008. You may receive a copy of today’s press release by called FD at 212-850-6500, or by visiting Consolidated Graphics’ website.

This conference is being broadcast live on the internet at www.cgx.com, and a subsequent archive will be available. Before we begin, I would like to remind everyone the remarks made by management during the course of this mornings call contain forward looking statements which involve known and unknown risks, uncertainties or other factors that could cause actual results to differ materially from results, performance or other expectations expressed or implied by these forward-looking statements.

Consolidated Graphics’ expectations regarding future sales and profitability assume, among other things, continuing weakness in the economy and reasonable demands for its products. The continued availability of raw materials at affordable prices. The retention of its key management and operating personnel. And satisfactory labor relations, as well as other factors detailed in Consolidated Graphics filings with the Securities and Exchange Commission. Including the risk factors set forth in our most recently filed Annual Report on Form 10K.

Forward looking statements, assumptions or factors stated or referred to on this conference call are based on information available on Consolidated Graphics as of today. Consolidated Graphics expressly disclaims any duty to provide updates to these forward looking statements, assumptions or other factors after the date of this call to reflect the occurrence of the events or circumstances, or changes in expectations.

In addition, during the course of this call, management of the company may make reference to certain non-gap financial performance measures. Management’s opinion regarding the usefulness of such measures, together with the reconciliation of such measures for the most directly comparable gap measures for historical periods are included in the company’s previous filings with the Securities and Exchange Commission.

Now with these formalities out of the way, I would like to turn the call over to Joe Davis, Chairman and Chief Executive Officer. Mr. Davis, you may begin.

Joe Davis

Thank you. Good morning. With me on the call today is Jon Biro, Executive Vice President, Chief Financial Officer, and Aaron Grohs, Executive Vice President Sales and Marketing.

This morning we released our results for September quarter. The results of the quarter include revenue of $297.0 million which is a new quarter record for Consolidated Graphics, up 14% compared to the prior year. The growth in sales compared to the second quarter of last year was primarily due to our recent acquisitions and to election-related printing, which it continues to ramp up into the next quarter. These sales increases were partially offset by decline in our same store sales, excluding election-related business.

Acquisitions continue to be a meaningful contributor to our growth strategy. As you know we acquired two first class companies in the last 10 months, PBM Graphics and the Cyril-Scott Company. Acquisitions contributed $34.7 million to our sales growth in the second quarter compared to last year.

All these acquisitions broadened our service offerings, particularly in specialty packaging, collectable cards, and direct mail. During the September quarter, and today, we are seeing the adverse impact of the weakness in the US economy, on our sales volume and selling prices. Once again, I would like to emphasize that we are not seeing what I would consider an erosion of market share, or the loss of any significant customers. But rather a reduction in demand across our customer base.

I would add that we believe our sales are holding up much better than the industry averages according to industry sources. In light of the current economic environment, we are keeping a very close eye on our operating expenses. We are reacting quickly by adjusting our cost structure. In particular, labor, when customer demand decline.

Although we were successful in maintaining our margins at many of our operations during the September quarter, lower margins of our recent acquisitions had a negative impact on our consolidated operating margins. We also had significant lower foreign currency gains in the current year quarter. As a result of our operating margin declined to 7.2% from 8.9% in the prior year.

A bright spot, is the fact that revenues of digital printing grew to $35 million in the second quarter, representing nearly 12% of our overall revenues. This represents an increase of over 160% from last year. We expect this part of our business to continue to grow at a healthy pace.

We have invested approximately $46 million in digital printing presses and related technology over the last 18 months. Today, Consolidated Graphics has the largest integrated fleet of high speed digital presses in the commercial printing industry, both in terms of number of presses, and strategic locations. We will continue to invest in state-of-the-art digital technology to satisfy our customers growing demand for digital printing solutions.

Now I’d like to step back and provide some historical perspective of Consolidated Graphics. I believe that it is important to reflect on history as we are in the midst of a serious recession and financial crisis.

I founded Consolidated Graphics in 1985 with the purchase of a single company, Western Lithograph of Houston, Texas. Shortly after this time, Houston entered a deep recession due to the oil bust and interest rates were over 13%. Despite the economic conditions, we continued our acquisition strategy and purchased several printing companies, mainly in the Houston market.

We were profitable every year through 1994 when we went public with $50 million annual revenues. (Inaudible) our IPO, we continued making acquisitions and have reported a profit each and every year since. In fact, excluding goodwill write-off, we’ve had a profit each quarter since 1985.

Our business has matured over the years and we now operate from a position of strength, not only financially, but also from an economic, geographic, and technological standpoint. Let me share with you some of these advantages.

First, we have built a world class digital printing platform that is unrivaled in our industry. The last 90 days, we have enhanced our digital print infrastructure even further by expanding our four digital print centers in the US. These fully integrated digital print facilities boast the latest digital print technology, complete finishing services, mailing as fulfillment and are strategically located in Medford, Oregon, Minneapolis, St. Louis, and our newest location in Memphis. In addition, we are pleased to announce the opening of our first European facility, located in Prague.

By concentrating our digital investments, we will maximize our returns and the value provided to our customers. Storefront, our proprietary online print management solution now has enhanced functionality that will enable our customers to leverage digital technology and transition to a more efficient print on demand model. Our ability to work with large companies on a national level will provide innovative technology solutions and create real value is a substantial competitive advantage.

The general commercial is a $50 billion industry and it's highly fragmented. In past recessions we’ve had the opportunity to buy attractive businesses, and this time around should be no different. Additionally, as many businesses in the industry struggle, we will have the opportunity to hire good people, and in particular, sales people. In times like these, Consolidated Graphics’ financial strength, network of operating facilities, and leading technology offerings, including our unmatched distribute and print capabilities, will server us very well.

We will continue to invest in our business by hiring sales people, associates for our leadership development program, and making the necessary capital investments in equipment and technology that set us apart from the competition.

Today, Consolidated Graphics has the best group of employees that we have every had in the history of the company. Our executive team, the presidents that run our 70 companies, the dedicated employees that sell our products and services, and others that produce the work, are the best in the business.

I believe our leadership development program is the best investment we’ve ever made and continues to position us with the brightest and most technologically savvy group of leaders to support our continued growth.

As I mentioned earlier, we will remain proactive in managing our operating expenses as customer demand fluctuates. We recently held our fall presidents meeting and I have confidence that the presidents will carefully manage their cost structures. And in particular their labor metrics as the business changes.

Furthermore, I’m now receiving weekly updates from each of the 70 presidents in an effort to closely monitor the state of the business. So far business is a lot better on Main Street than it is on Wall Street.

I will now turn the call over to Aaron Grohs, Executive Vice President, Sales and Marketing, who will provide more details about our offerings to the market place. Following Aaron, Jon Biro, our Chief Financial Officer will provide you with additional financial information. Aaron.

Aaron Grohs

Thank you Joe. As mentioned, we continue to invest in our industry-leading technology and our growing digital print solutions. Today, we boast a world class, digital print infrastructure that is unmatched in the industry.

Consolidated Graphics is capable of digitally producing over 15 million four color pages in a 24 hour period. Further, to support the growing needs of our customers for international print solutions, our new facility in Prague is ideally situated to manufacture and distribute product more efficiently across Europe, helping our customers reduce shipping costs and delivering product to end users faster.

Our investment in online digital print technology supports our customers’ growing need to find better, more efficient, cost effective ways to design, source, manufacture, fulfill and distribute printed products.

Some of our competitors have built their value proposition around price per piece and guaranteed cost savings. They say they achieve savings by brokering work across a network of printers that have excess capacity. We don’t believe that it's strategy built on price alone is a long term, sustainable business strategy and is ultimately risky for customers.

At Consolidated Graphics we stand fast in our position that we can provide overall value and cost savings to our customers without having to always produce product at the lowest per unit price.

Furthermore, we own and operate our manufacturing facilities and can assure customers quality, consistency, and on-time delivery. Our value proposition is centered on our experience in delivering the lowest total cost of ownership, and the greatest return on investment for our customers.

I would like to expand on our solutions further. As uncertainty continues to build around the economy, we have seen an increase in demand from customers to help them find new and better ways to manage their print spend. The cost of printed, a printed piece, is certainly and important part of this conversation. However, it is a small part of the overall cost of ownership.

Several recent industry studies have been conducted, and the results indicate that for every dollar spent on printing, there’s at least an additional $3 to $6 in additional cost associated with the process, and the ancillary services, surrounding the printed piece.

Through our unmatched manufacturing footprint, and complimentary technology, we offer a best in class solution for helping customers transition their current marketing and fulfillment strategy to one that is better aligned with the company’s business goals, including their bottom line.

Our solutions are designed to transition a client through the entire process that includes creative design, sourcing, manufacturing, fulfillment, distribution and information reporting.

As an example, Consolidated Graphics was recently awarded a contract with a leading financial insurance service organization. This customer conducted a lengthy analysis of the leading print service providers in the US. They recognized an opportunity to aggregate their print volume to drive a lower cost.

Consolidated Graphics can not only help them leverage their volume, but more importantly, help them drive on-going savings through managing their print procurement process more efficiently. We educated them on the total cost of ownership and introduced them to a number of innovative solutions.

We won the business because we offered the most creative solution and the best overall value. Let’s review a few of the cost savings opportunities we presented and are implementing today for this customer as well as others.

Creative Design. Consolidated Graphics offers a proprietary online storefront application that gives users the complete control over the design, purchase, management and distribution of personalized marketing collateral from any location, at any time, on any deadline. This solution enables customers to reduce costs associated with redesigning and creating products over and over again.

Sourcing. With our 70 locations equipped with unique capabilities, Consolidated Graphics is the only company providing true best-fit manufacturing models, while at the same time taking full responsibility for the quality and timeliness of the finished product.

In addition, there is a growing demand for outsourcing non-core business functions as a way to reduce costs. Our ability to leverage highly trained associates from our leadership development program to work on-site with our customers is a significant value and a competitive advantage.

Manufacturing. Our growing fleet of digital print solutions, combined with our unmatched printing capability, enables us to offer clients a print-on-demand model that gives customers the flexibility to respond to market changes and manage printed materials more efficiently. In many cases, print-on-demand can virtually eliminate warehousing and storage fees, and the need for large inventories that may become obsolete.

Fulfillment Distribution. Consolidated Graphics has engineered a print management system, including hardware, software and business processes. Orders are received electronically, prepared for production, and distributed across our digital print centers for manufacturing and efficient distribution. This distribute then print model also helps customers meet their sustainability objectives by reducing energy consumption and emissions associated with long distance shipping.

Information Reporting. Our solutions enable customers to have up to the minute access to reporting and centralized accounting for every job, regardless of location or distribution point. Reviewing real time inventory, reorder points, and inventory turns provide the needed visibility and transparency customers need to manage their print spend among stakeholders that are often times decentralized.

Consolidated Graphics is increasingly becoming a recognized name in the marketplace, and customers appreciate our diverse solution offering supported by our financial strength. It is an exciting time to be part of an organization that’s setting the pace in the industry. Customers are looking to suppliers for innovation and creative solutions to help them reduce their cost of business.

We are in a position of strength to capitalize on this expectation and we look forward to helping our customers achieve their short term and long term objective. I will turn the call over to Jon Biro.

Jon Biro

Thanks Aaron and good morning. As a reminder, earlier this morning, we filed with the Securities and Exchange Commission the basis for our use and reconciliations of certain non-GAAP financial measures, including adjusted operating margin, adjusted EBITA, adjusted EBITA margin and free cash flow. Please refer to this filing for additional information.

As Joe mentioned, we enjoyed record revenues for the quarter as a result of our recent acquisitions and election-related business. Overall, revenues increase year over year during the September quarter by $37.3 million to $297 million. $34.7 million of this increase was due to our prior year acquisitions, namely PBM and Cyril-Scott, and additional $6.9 million was due to election-related business.

These revenue gains were offset by decline in same store sales excluding election-related business of $4.3 million. Overall, same store sales increased 1%. Gross margins were down from 25.5% last year to 24.4% this year. This drop was due to lower gross margins generated by our recent acquisitions relative to our base business.

On a same source sales basis, our gross margins actually improved 110 basis points over last year. Thanks in large part to our continued cost management efforts and the increase in election-related and digital print business. As a result of lower overall gross margins, gross profit rose less in revenues, increasing 10% year over year, to $72.6 million.

Selling expenses rose due to higher sales volumes and declined as a percentage of revenue due to the recent acquisitions. General administrative expenses increased $5.6 million, or 30% to $24.7 million for the quarter compared to $19.1 million last year. 30% of this increase was due to the recent acquisitions and the remaining increase was due to higher (inaudible) 123R expense, bad debt expense, and salaries compared to the prior year.

Second quarter adjusted operating income, excluding foreign currency gain of $300, 000 declined 4% to $21.1 million or a 7.1% of revenues. This compares to last years adjusted operating income of $22 million or 8.5% of revenues. Again, excluding the $1.2 million foreign currency gain in that quarter.

Incidentally, the foreign currency gains are included in the other income or expense line on the face of our income statement, and as I stated last year, or excuse me, last conference call, thankfully we have not effectively hedged the foreign currency exposure that caused a large prior year gain.

We had lower adjusted net income of $10.1 million compared to last year’s quarter of $12.3 million, again excluding the foreign currency gains. Fully diluted EPS based on these adjusted amounts was .88 for the September 2008 quarter, compared to last years adjusted EPS of .91. Our adjusted EBITA improved year over year, to $39.4 million from $35.6 million in the prior year quarter, an increase of $3.8 million, or 11%.

Capital expenditures total $26.5 million in the September quarter and was $34.5 million year to date primarily due to the timing of the purchase of the number of new digital presses.

We currently expect 2009 capital expenditures to run between $65 and $70 million, approximately our annual depreciation amortization expense. We consider the lion’s share of these expenditures to be investments to expand our business. And in particular, expansion of our digital print capabilities and equipment to serve collectable trading card market.

In today’s economic uncertainty in the unsettled credit markets, we believe that we continue to have a strong balance sheet and have the liquidity to make the necessary investments in our business. At September 30th, our total debt outstanding was $378.5 million, consisting of $266 million of floating bank rate debt during an average interest rate of 4.3%, and $112 million of fixed rate debt bearing an average interest rate of 5.8%.

Cash on hand was $15.5 million at the end of the quarter. And our available credit, under existing credit facilities was $106.6 million. Currently our debt stands at $364 million and we have $114.5 million of credit available. Our primary US credit facility doesn’t expire until October 2011 and we are currently in compliance by a healthy margin with a financial covenants under the agreement.

Before I discuss our outlook for the December quarter, please keep in mind that forecasting our revenues and earnings in this environment is incredibly difficult. Not only due to the economic headwinds we are facing, but also due to the nature of the business. We do not operate under long term contracts. Rather we tend to generate our revenues on a job by job basis.

As a result, clear visibility of our revenues is only a few weeks out. Having said that, in the December quarter we expect revenues of between $300 and $320 million, and diluted EPS of .75 to .95. Our December projections assume, among other things, a year over year same source sales decline, excluding election-related business of between 6% and 12% at competitive pricing environment, higher (inaudible) 123R expense relative to the prior year, and an effective tax rate of between 37% and 40% for the quarter.

Including election-related business, we are assuming a same stores sales decline of between 3% and 9%. I will now turn the call back over to Joe.

Joe Davis

Thank you Jon. Operator, we’re now available for any questions anyone might have.

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