The following management's discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes to unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto included in our Annual Report on Form 10-K/A as of and for the year ended March 31, 2009. 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 the section entitled "Forward-Looking Statements" below.
Overview
Our Organization
Consolidated Graphics is a leading U.S. and Canadian provider of commercial printing services with 70 printing businesses located in 27 U.S. states, one Canadian province and Prague, the Czech Republic. Complementing the printing services we provide, we also offer state-of-the-art fulfillment services and proprietary digital technology solutions and e-commerce capabilities. Generally, each facility substantially relies on locally-based customers; accordingly, we have over 20,000 individual customers with a broad diversification by industry-type and geographic orientation. No individual facility accounts for more than 12% of our total revenues. No individual customer accounts for more than 4% of our total revenues.
Our printing businesses maintain their own sales, customer service, estimating and planning, prepress, production and accounting departments. Our corporate headquarters staff provides support to our printing businesses in such areas as human resources, purchasing, internal financial controls design and management information systems. We also maintain centralized treasury, risk management, tax, internal audit and consolidated financial reporting activities. Nature of Our Services
We are a service business that utilizes sophisticated technology and equipment to produce high-quality, custom-designed printed materials for a large base of customers in a broad cross-section of industries, the majority of which are located in the markets 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 software solutions and other print-related, value-added services. The technology solutions, like the printed materials we produce, are customized to the specific needs of our customers. For marketing purposes, we refer to our e-commerce capabilities using the "CGXSolutions" trademark. Collectively, all of these discrete capabilities comprise a "comprehensive range of printing services." Accordingly, for financial reporting purposes, we report our revenues and results of operations as a single segment.
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 material and/or design, procure, distribute, track and analyze results of printing-based marketing programs and activities. Examples of the types of documents we print for our customers include high-quality, multi-color marketing materials, product and capability brochures, point-of-purchase displays, direct mail pieces, shareholder communications, 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 followed by revenue in the quarter ended March. Conversely, revenues tend to be seasonally weaker in the quarters ended June and September. Due to the current economic recession, which began in late fiscal 2008 and may potentially continue into fiscal 2010, these seasonal trends may not have a significant impact on our sales as revenues are generally depressed. Additionally, a further deterioration in the economy would likely adversely impact our revenues and results of operations.
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, supplies, 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 share-based compensation, as well as office rent, utilities and communications expenses, various professional services, depreciation and amortization of identifiable intangible assets. Our Strategy
We are focused on adding value to our printing businesses by providing the financial and operational strengths, management support and technological advantages associated with a 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 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.

Results of Operations
The following table sets forth our Company's unaudited condensed consolidated
income statements and certain percentage relationships for the periods
indicated:

                                           Three Months Ended          Six Months Ended
                                              September 30,              September 30,
                                            2009          2008         2009         2008
                                              (In millions)              (In millions)
   Sales                                 $    251.6      $ 297.0     $   477.5     $ 582.1
   Cost of sales                              196.2        224.4         377.2       438.9

   Gross profit                                55.4         72.6         100.3       143.2
   Selling expenses                            23.6         26.8          46.4        55.2
   General and administrative expenses         22.4         24.7          43.6        47.0
   Litigation and other charges                 2.6            -           2.6           -
   Other (income) expense, net                  0.2         (0.3 )         0.2        (0.3 )

   Operating income                             6.6         21.4           7.5        41.3
   Interest expense, net                        2.4          3.9           4.8         8.1

   Income before taxes                          4.2         17.5           2.7        33.2
   Income taxes                                 2.1          7.2           0.9        13.3

   Net Income                            $      2.1      $  10.3     $     1.8     $  19.9

The following table sets forth the components of income expressed as a percentage of sales for the periods indicated:

                                             As a Percentage            As a Percentage
                                                of Sales                   of Sales
                                           Three Months Ended          Six Months Ended
                                              September 30,              September 30,
                                            2009          2008         2009         2008
   Sales                                      100.0 %      100.0 %       100.0 %     100.0 %
   Cost of sales                               78.0         75.6          79.0        75.4

   Gross profit                                22.0         24.4          21.0        24.6
   Selling expenses                             9.4          9.0           9.7         9.5
   General and administrative expenses          8.9          8.3           9.1         8.0
   Litigation and other charges                 1.1            -           0.6           -
   Other (income) expense, net                    -         (0.1 )           -           -

   Operating income                             2.6          7.2           1.6         7.1
   Interest expense, net                        0.9          1.3           1.0         1.4

   Income before taxes                          1.7          5.9           0.6         5.7
   Income taxes                                 0.9          2.4           0.2         2.3

   Net Income                                   0.8 %        3.5 %         0.4 %       3.4 %

Our sales and expenses for the six months ended September 30, 2009 were not impacted by acquisitions.
Comparative Analysis of Consolidated Income Statements for the Three Months Ended September 30, 2009 and 2008
Sales during the three month period ended September 30 2009 declined $45.4 million, or 15%, to $251.6 million from $297 million for the same period in the prior year. The decline in sales was primarily due to a year-over-year same store revenue decline caused by the current economic environment and lower election-related print business.
Gross profit during the three months ended September 30, 2009 declined $17.2 million, or 24%, to $55.4 million compared to $72.6 million for the same period in the prior year. The decline in gross profit primarily resulted from the decline in sales. The decline in sales had the effect of increasing fixed costs as a percentage of revenues thereby reducing gross profit margin (gross profit divided by revenues) from 24.4% in the September 2008 quarter to 22.0% this quarter.
Selling expense during the three months ended September 30, 2009 declined $3.2 million, or 12%, to $23.6 million from $26.8 million for the same period in the prior year. The decrease was primarily due to lower sales commissions and other miscellaneous selling expenses resulting from lower sales. As a percentage of sales, selling expenses increased to 9.4% in the current quarter as compared to 9.0% for the same period in the prior year.
General and administrative expenses during the three months ended September 30, 2009 declined $2.3 million, or 9%, to $22.4 million from $24.7 million for the same period in the prior year. This decline was primarily due to a reduction in salary and wages and bad debt expense. As a percentage of sales, general and administrative expenses increased to 8.9% in the current quarter compared to 8.3% for the same period in the prior year.
Litigation and other charges during the three months ended September 30, 2009 related to the previously disclosed lawsuit that resulted in a charge in the December 2008 quarter and the impairment of certain production equipment. Interest expense during the three months ended September 30, 2009 declined $1.5 million to $2.4 million compared to the same period last year, due to a lower level of average debt outstanding and lower interest rates on floating rate bank debt.
For the quarter ended September 30, 2009, the Company's effective tax rate was 51% as compared to an effective tax rate of 41% for the same period in the prior year. The increase primarily relates to a higher state income tax rate and a larger percentage impact on the effective tax rate caused by permanent differences, due to lower income before taxes compared to the prior year. Comparative Analysis of Consolidated Income Statements for the Six Months Ended September 30, 2009 and 2008
Sales in the six month period ended September 30, 2009 declined $104.6 million, or 18%, to $477.5 million from $582.1 million for the same period in the prior year. The decline in sales was due to a reduction in demand for print due to the continuing weakness in the overall U.S. economy and lower election-related print business.

Gross profit during the six months ended September 30, 2009 declined $42.9 million, or 30%, to $100.3 million compared to $143.2 million for the same period in the prior year. The decline in gross profit primarily resulted from the decline in sales. The decline in sales had the effect of increasing fixed costs as a percentage of revenues thereby reducing gross profit margin (gross profit divided by revenues) from 24.6% in the prior period compared to 21.0% in the current period.
Selling expense during the six months ended September 30, 2009 declined $8.8 million, or 16%, to $46.4 million from $55.2 million for the same period in the prior year. The decrease was primarily due to lower sales commissions and other miscellaneous selling expenses resulting from lower sales. As a percentage of sales, selling expenses slightly increased to 9.7% in the current period as compared to 9.5% for the same period in the prior year.
General and administrative expenses during the six months ended September 30, 2009 declined $3.4 million, or 7%, to $43.6 million from $47 million for the same period in the prior year. This decline was primarily due to a reduction in salary and wages and bad debt expense. As a percentage of sales, general and administrative expenses increased to 9.1% in the current period compared to 8.0% for the same period in the prior year. This increase was due to the decline in sales, which had the affect of increasing fixed costs as a percentage of revenues.
Litigation and other charges during the six months ended September 30, 2009 related to the previously disclosed lawsuit that resulted in a charge in the December 2008 quarter and the impairment of certain production equipment. Interest expense during the six months ended September 30, 2009 declined $3.3 million to $4.8 million compared to the same period last year, due to a lower level of average debt outstanding and lower interest rates on floating rate bank debt.
For the six months ended September 30, 2009, the Company's effective tax rate was 33% as compared to an effective tax rate of 40% for the same period in the prior year. The difference primarily relates to a lower state income tax rate mostly due to the release of a valuation allowance, due to tax planning, and a larger percentage impact on the effective rate caused by permanent differences, due to lower income before taxes compared to the prior year. 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. Components of our statement of cash flows are as follows:

                                                                  Six Months Ended
                                                                    September 30,
                                                                  2009         2008
                                                                    (In millions)
Net cash provided by operating activities                       $    96.4     $  44.3
Acquisitions of businesses                                           (0.8 )      (6.7 )
Capital expenditures, net of proceeds from asset dispositions       (10.8 )     (26.1 )
Net payments under bank credit facilities                           (63.5 )      (4.8 )
Net payments on term equipment notes and other debt                 (20.3 )      (9.3 )
Proceeds from exercise of stock options                                 -         3.0

Our cash position, working capital and debt obligations are shown below:

                                          September 30,       March 31,
                                              2009              2009
                                                  (In millions)
             Cash and cash equivalents   $          11.0     $       9.8
             Working capital                        64.0           109.4
             Total debt                            232.7           314.2

Net cash provided by operating activities increased $52.1 million over the same six-month period in the prior year, due primarily to a reduction in working capital items offset by lower net income. We invested $11.4 million in new equipment and technology during the six months ended September 30, 2009. We believe that our cash flow provided by operations, combined with new borrowings, will be adequate to cover our debt service requirements, planned capital expenditures and working capital requirements for the remaining fiscal year 2010. For the year ended March 31, 2010, we expect to spend approximately $20 million on capital expenditures.

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 also 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. Debt Obligations
Our primary bank credit facility (the "Credit Agreement") currently provides for $335 million in revolving credit and has a maturity date of October 6, 2011. On July 30, 2009, we entered into a Fifth Amendment to our Credit Agreement. The most significant change under the amendment was an increase in the maximum permitted leverage ratio, which provides us with additional financial flexibility. The amendment also provided for an increase in margin of 1% to 1.5% on the interest paid on the London Interstate Bank Offered Rate ("LIBOR") borrowings based upon the applicable leverage ratio. At September 30, 2009, outstanding borrowings under the Credit Agreement were $127 million and accrued interest at a weighted average rate of 2.5%.
Under the terms of the Credit Agreement the proceeds from borrowings may be used to repay certain indebtedness, finance certain acquisitions, provide for working capital and general corporate purposes and, subject to certain restrictions, repurchase our common stock. Borrowings outstanding under the Credit Agreement are secured by substantially all of our assets other than real estate and certain equipment subject to term equipment notes and other financings. Borrowings under the Credit Agreement accrue interest, at our option, at either LIBOR plus a margin of 1.625% to 3%, or an alternate base rate (based upon the greater of the agent bank's prime lending rate or the Federal Funds effective rate plus .50%) plus a margin of .125% to 1.5%. We are also required to pay an annual commitment fee ranging from .25% to .5% on available but unused amounts under the Credit Agreement. The interest rate margin and the commitment fee are based upon certain financial performance measures set forth in the Credit Agreement and are redetermined quarterly. At September 30, 2009 the applicable LIBOR interest rate margin was 2.25% and the applicable commitment fee was .375%.
We are subject to certain covenants and restrictions and we must meet certain financial tests as defined in the Credit Agreement. We were in compliance with these covenants and financial tests at September 30, 2009. In the event that we are unable to remain in compliance with the Credit Agreement's covenants and financial tests in the future, our lenders would have the right to declare us in default with respect to such obligations, and consequently, certain of our other debt obligations, including substantially all of our term equipment notes, would be deemed to also be in default. All debt obligations in default would be required to be reclassified as a current liability. In the event that we were unable to obtain a waiver from our lenders, or renegotiate or refinance these obligations, a material adverse effect on our ability to conduct our operations in the ordinary course likely would result.
We also maintain an unsecured credit facility with a commercial bank currently consisting of a U.S. $5 million maximum borrowing limit component and a separate Canadian dollar ("C$") C$27 million maximum borrowing limit component. At September 30, 2009, outstanding borrowings were $2.0 million, which accrued interest at a weighted average rate of 2.8%, and C$16 million ($14.7 million U.S. equivalent), which accrued interest at a weighted average rate of 3%. In addition, we maintain two auxiliary revolving credit facilities (each an "Auxiliary Bank Facility" and collectively the "Auxiliary Bank Facilities") with commercial banks. Each Auxiliary Bank Facility is unsecured and has a maximum borrowing capacity of $5 million. One facility expires in October 2011 while the other facility expires in December 2009. At September 30, 2009, outstanding borrowings under the Auxiliary Bank Facilities totaled $9.8 million and accrued interest at a weighted average rate of 3%. Because we currently have the ability and intent to refinance the borrowings outstanding under the Auxiliary Bank Facility expiring in December 2009, such borrowings are classified as long-term debt in our condensed consolidated balance sheet at September 30, 2009. The Auxiliary Bank Facilities cross-default to the events of default set forth in the Credit Agreement.
At September 30, 2009, outstanding borrowings under our term equipment notes totaled $74.9 million and accrued interest at rates between 3.9% and 7.1%. The term equipment notes provide for principal payments plus interest for defined periods of up to ten years from the date of issuance, and are secured by certain equipment of the Company. We are not subject to any significant financial covenants in connection with any of the term equipment notes. The term equipment notes cross-default to the events of default set forth in the Credit Agreement. At September 30, 2009, other debt obligations totaled $4.3 million and provided for principal payments plus interest (at fixed and variable rates) for defined periods up to 16 years from the date of issuance. We do not have any significant financial covenants or restrictions associated with the other debt obligations. The Credit Agreement places certain limitations on the amount of additional term note obligations and other indebtedness we may incur in the future.

As of September 30, 2009, our available credit under existing credit facilities as amended was approximately $215.2 million. Commitment and Contingencies
Operating leases - We have entered into various noncancelable operating leases primarily related to facilities and equipment used in the ordinary course of our business. Our future contractual obligations under such operating leases total approximately $90.2 million as of September 30, 2009.
Letters of credit - We had letters of credit outstanding as of September 30, 2009 totaling $6.1 million. All of these letters of credit were issued pursuant to the terms of our Credit Agreement, which expires October 6, 2011. Insurance programs - We maintain third-party insurance coverage in amounts and against risks we believe are reasonable under our circumstances. We are self-insured for most workers' compensation claims and for a significant component of our group health insurance programs. For these exposures, we accrue expected loss amounts which are determined using a combination of our historical loss experience and subjective assessment of our future loss exposure, together with advice provided by administrators and consulting actuaries. The estimates of expected loss amounts are subject to uncertainties arising from various sources, including changes in claims reporting patterns, claims settlement patterns, judicial decisions, legislation and economic conditions, which could result in an increase or decrease in accrued costs in future periods for claim matters which occurred in a prior period. Although we believe that our 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 . . .