By Trevor Shackelford February 14, 2006 -- Consolidated Graphics Inc., (NYSE: CGX) recently announced their third quarter results. Total revenue for the third quarter was $226.2 million, 8% higher than the same period last year. Net income for the quarter was $9.9 million, 2% higher than the $9.7 million reported for the same period last year. Diluted earnings per share for the quarter were $0.71 per share, 4% higher than the $0.68 per share reported in the third quarter of fiscal 2005. Acquisitions and a 39% year-over-year increase in national sales were the leading drivers of the CGX’s top-line growth. Contents of this Summary * Quarter Highlights * Guidance * Raine Radar * Q & A Quarter Highlights • In November, the company completed its acquisition of Atlanta-based printer GraphCom, Inc. • In the third quarter, operating margin increased to 7.7% from 7.4% reported in the second quarter of fiscal 2006. • Contribution from acquisitions for the third quarter was $29 million. • EBITDA for the quarter was $29.09 million, an increase of $1.4 million, or 5% from a year ago. • In the third quarter, the company processed approximately 29,518 individual commercial printing and print on-demand orders through CGX technologies, representing 5% of total revenue. This represents a 32% increase in transactions and a 41% increase in revenue from the third quarter last year. • National sales represented 8% of total sales in the third quarter. Year-to-date growth in national sales was 39%, compared to the prior year. • Capital expenditure for the quarter was $3.5 million, and total capital expenditure year-to-date was $15.2 million. • Debt outstanding at the end of the third quarter was $87.4 million, or 22.1% of the company’s total capitalization. This is a decrease of $18.4 million from the second quarter and a decrease of $32.1 million, or 27%, since the end of the fiscal year 2005. • Cash flow from operations for the quarter was $28.9 million. Guidance In the fourth quarter, company expects diluted EPS will be slightly lower than the third quarter because of normal seasonal effect. For the fourth quarter, which ends in March, the company forecasts revenues of $220 million, which would be an 11% increase from last year. Expected diluted EPS for the quarter would be $0.70 per diluted share, represents a 17% increase year-over-year. Other expectations are as follows: • Expected EBITDA for the fourth quarter to be $29 million, resulting full year EBITDA of $113 million. • Expected cash flow from operations for the fourth quarter to be in the range of $15 - $17 million, resulting in operating cash flow for the year to be in the range of $75 - $77 million, compared to $75.2 million in 2005. • Estimated free cash flow for the fiscal 2006 to be in the range of $45 - $47 million, compared to $48.2 million in 2005. • Estimated operating margin for the fourth quarter will be 7.8% • Estimated interest expenses for the fourth quarter was $1.4 million Raine Radar The company stated during the call that they believe for the first time they are being considered a national player in the print industry, and I think I would have to agree. Although over 90% of the company’s revenue still comes from its regional print accounts, the company has seen substantial growth in its national accounts over the last nine months. The company has focused its strategy on becoming the marketing materials experts for its clients, and its sales training program seems to be paying off. Now, growth is coming in the form of key strategic accounts. The company is also increasing the pace of its acquisitions. Expect a solid fiscal fourth quarter from the company as well as a strong performance for 2006. Q & A 1. The company didn’t expect any dilution of the operating margin due to acquisitions. Historically, acquired companies have typically lower operating margins before acquisition and then get some immediate benefit from purchasing synergies after the acquisition. 2. CGX expects double digit operating margins in the future. 3. The company expects approximately 1% organic growth. 4. In terms of pricing potential acquisitions, CGX focuses first on the physical facility and equipment. 5. The company has “substantially” grown its acquisition pipeline. 6. CGX believes that in the last two to three years, the company has been recognized as a national player. The company has approximately 70 locations in 25 states, which it believes puts it in a superior position to its competition. 7. Currently the company is focusing on selling marketing materials, unlike the other firms in the industry engaged in selling the total print management strategy; trying to be “everything to everybody.” 8. In terms of acquisition criteria, the company said that it is always looking for good companies, good customers, good employees, and good management regardless of geographic location. 9. In terms of pricing acquisitions, the company evaluates potential synergies, management teams, required capex, existing markets and customers. The prices of acquisitions are typically about three to five times EBITDA.