Commentary & Analysis
Intelligence from Consolidated Graphics: Third Quarter Results and Conference Call
By WhatTheyThink Staff
Published: January 29, 2003
Editor's Note: Houston, Texas-based Consolidated Graphics, Inc. (NYSE: CGX) first gained national attention with its aggressive acquisition strategy for a national "footprint" of integrated commercial printing plants. Today with over 5,000 employees and companies in 25 states, Consolidated is the largest sheetfed and half-web commercial printer in the United States. An expanded service bundle is offered through CGXmedia including digital and Internet-based services and solutions. This quarterly update not only reports quarterly results, but also offers insight into both the challenges and successes of the Consolidated story.
Consolidated Graphics has announced 3rd quarter revenues of $186.3 million, up 2.5% compared with $181.8 million in the September quarter and up 21.1% compared with $153.8 million a year ago. (Note: This was an unanticipated upside in sales from second quarter projections for a third quarter "slight sequential decline in sales due to normal seasonality.")
Operating margins were 6.3% for the third consecutive quarter. Net income for the December quarter was $5.7 million, or $.42 per diluted share, compared with $5.4 million, or $.40 per diluted share, in the September quarter and $3.6 million, or $.27 per diluted share, including after-tax goodwill amortization expense of $1.2 million, or $.09 per diluted share, versus a year ago.
For the nine months ended December 31, 2002, total revenues were $544.2 million, up 13.8% compared to $478.3 million for the comparable period a year ago. Results include an internal revenue growth of 6.5% and EPS growth, adjusted for goodwill amortization expense, of 17% compared to the same period last year. (It is important to note, however, that year-over-year comparables benefited from the particularly weak December quarter last year, which was impacted by the events of September.) The third quarter produced $22.3 million in operating cash flow. Operating cash flow for the first nine months of fiscal 2003 was $72.6 million, already exceeding the record amount for the full year of 2002.
Third quarter results were reviewed at a January 23, 2003 Conference Call, including forward-looking statements presented by Joe R. Davis, Chairman and CEO, and G. Christopher Colville, Executive VP and CFO.
Highlights from the Management Team comments:
- Davis notes that third quarter results were a very positive note due to revenues. Operating margins are essentially flat signaling that while the industry is more favorable; it is still weak compared to past years. An unstable economy combined with very difficult industry conditions continues to impact operating margins.
- Most significant is the top line improvement in sales for both existing and recently acquired companies. A full year initiative to improve sales staffing has resulted in the addition of 100 new sales personnel this year. This 5% increase (excluding affected acquisitions) brings the CGX sales team to 600+, while still "enabling the flexibility to deal with marginal and under-performing sales personnel on a more active basis." (It is interesting to note that a majority of these new sales hires came from a management development program and from competitors' sales groups.)
- Over the past year, the CGXmedia Sales teams have been developed to provide more technical support on a regional level. The longer sales cycle associated with electronic products and more complex services, such as fulfillment, means the "full benefits are yet to come."
- National accounts (totaling 8% of quarter sales) are the best long-term internal growth opportunity as these buyers want to leverage print spend across the CGX national footprint.
- A new management team has been installed for each of the five acquisitions undertaken in 2002. While as a group these acquisitions are not as profitable as other CGX companies, there has been positive sales momentum for all.
- There is an acquisition strategy in place for expanding the national footprint and adding new customers in the upcoming quarters (no timing given). CGX states that they are already in selected negotiations.
- Depressed operating margins (6.3% for the third consecutive quarter) are the lowest in history of the company. Generating half of what is considered acceptable income has forced staff reductions and last year's wage freeze. The wage freeze will continue as "long as the economy continues to chug at its existing rate " although CGX has not had to implement a wage reduction as has some its competitors.
- Colville projects that March quarter earnings will be in line with the December quarter. Operating margins will stay sequentially flat at 6.3% with lower interest offsetting a slight decline in revenue. Davis bases this conservative outlook on sustained near-term weakness in the U.S. economy, but with a sequential 2-4% year-over-year growth.
A question-and-answer session with call participants (generally analysts and representatives from financial institutions) followed the results review. A summary of this session includes these key points:
1. When asked about any perceived impact of the Moore-Wallace consolidation announcement, Davis stated that both companies were primarily business forms companies versus direct commercial print competitors. Although Moore had acquired Graphic Industries, there had been integration struggles. (He also noted that CGX focused on acquisitions in its own commercial print sector to avoid these integration challenges.)
2. Local competition ("mom-and-pop" shops) has not had an impact. With continued sales growth and a strong balance sheet, Consolidated has been able to invest in the latest technology for production processes, while other local printers are experiencing stretched balance sheets to pay for existing equipment. A number of local printers are already going out of business. (CGX has invested primarily in direct-to-plate, sheetfed and web presses, and custom stitchers and folders.)
3. Regarding speculation that corporate advertising spend may be higher in the first half of 2003 than expected, Davis stated he expected any positive impact would come from internal efforts. "A strong balance sheet and the inherent strength of our business model are the primary reasons for Consolidated Graphics' continued success."
4. Davis is convinced that CGX can get back to 12 1/2% operating margin (a CGX internal bogey) company-wide in the future. In fact, a number of companies already are producing over 12-_%. A new VP of Purchasing has been hired to concentrate on improved corporate paper and ink programs. Recruiting, capital expenditures and CGXmedia will positively contribute although Davis cautions the economy is a critical factor.