Annual Reports

 
Quarterly Reports

  • 10-Q (May 7, 2015)
  • 10-Q (Feb 5, 2015)
  • 10-Q (Aug 6, 2014)
  • 10-Q (May 8, 2014)
  • 10-Q (Feb 6, 2014)
  • 10-Q (Aug 8, 2013)

 
8-K

 
Other

Courier 10-Q 2013

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x

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

 

For the quarterly period ended  June 29, 2013

 

OR

 

o

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

 

For the transition period from                  to                 

 

Commission file number  0-7597

 

COURIER CORPORATION

(Exact name of registrant as specified in its charter)

 

Massachusetts

 

04-2502514

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

15 Wellman Avenue, North Chelmsford, Massachusetts

 

01863

(Address of principal executive offices)

 

(Zip Code)

 

(978) 251-6000

(Registrant’s telephone number, including area code)

 

NO CHANGE

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non- accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at August 5, 2013

Common Stock, $1 par value

 

11,460,274 shares

 

 

 



 

COURIER CORPORATION

CONSOLIDATED CONDENSED STATEMENT OF

COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands except per share amounts)

 

 

 

QUARTER ENDED

 

NINE MONTHS ENDED

 

 

 

June 29,

 

June 23,

 

June 29,

 

June 23,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

64,143

 

$

58,896

 

$

190,677

 

$

184,220

 

Cost of sales (Note E)

 

49,315

 

45,864

 

147,845

 

143,392

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

14,828

 

13,032

 

42,832

 

40,828

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses (Note E)

 

11,813

 

10,285

 

35,062

 

35,227

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

3,015

 

2,747

 

7,770

 

5,601

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

325

 

246

 

706

 

699

 

Other income (Note L)

 

 

 

 

(587

)

 

 

 

 

 

 

 

 

 

 

Pretax income

 

2,690

 

2,501

 

7,064

 

5,489

 

 

 

 

 

 

 

 

 

 

 

Income tax provision (Note C)

 

1,009

 

937

 

2,627

 

2,031

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,681

 

$

1,564

 

$

4,437

 

$

3,458

 

 

 

 

 

 

 

 

 

 

 

Net income per share (Note G):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.15

 

$

0.13

 

$

0.39

 

$

0.29

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.15

 

$

0.13

 

$

0.39

 

$

0.29

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

0.21

 

$

0.21

 

$

0.63

 

$

0.63

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Unrealized gain on foreign currency cash flow hedge (Note A)

 

75

 

 

75

 

 

Other comprehensive income, net of tax

 

75

 

 

75

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

1,756

 

$

1,564

 

$

4,512

 

$

3,458

 

 

The accompanying notes are an integral part of the consolidated condensed financial statements.

 

2



 

COURIER CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

 

 

 

June 29,

 

September 29,

 

 

 

2013

 

2012

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

193

 

$

64

 

Investments

 

951

 

765

 

Accounts receivable, less allowance for uncollectible accounts of $927 at June 29, 2013 and $944 at September 29, 2012

 

32,199

 

35,152

 

Inventories (Note B)

 

37,262

 

36,364

 

Deferred income taxes

 

4,512

 

4,273

 

Recoverable income taxes

 

1,431

 

 

Other current assets (Note J)

 

2,742

 

950

 

 

 

 

 

 

 

Total current assets

 

79,290

 

77,568

 

 

 

 

 

 

 

Property, plant and equipment, less accumulated depreciation: $211,104 at June 29, 2013 and $199,267 at September 29, 2012

 

90,043

 

89,952

 

 

 

 

 

 

 

Goodwill (Notes A and J)

 

21,412

 

15,988

 

 

 

 

 

 

 

Other intangibles, net (Notes A and J)

 

4,749

 

1,892

 

 

 

 

 

 

 

Prepublication costs, net (Note A)

 

6,708

 

7,135

 

 

 

 

 

 

 

Deferred income taxes

 

2,320

 

3,451

 

 

 

 

 

 

 

Other assets (Note K)

 

1,888

 

1,374

 

 

 

 

 

 

 

Total assets

 

$

206,410

 

$

197,360

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3



 

COURIER CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

 

 

 

June 29,

 

September 29,

 

 

 

2013

 

2012

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of long-term debt

 

$

1,599

 

$

1,872

 

Accounts payable

 

11,938

 

11,364

 

Accrued payroll

 

7,779

 

8,360

 

Accrued taxes

 

818

 

3,857

 

Other current liabilities (Notes E and J)

 

7,961

 

7,417

 

 

 

 

 

 

 

Total current liabilities

 

30,095

 

32,870

 

 

 

 

 

 

 

Long-term debt

 

24,642

 

13,696

 

Other liabilities (Notes E and J)

 

10,405

 

6,283

 

 

 

 

 

 

 

Total liabilities

 

65,142

 

52,849

 

 

 

 

 

 

 

Stockholders’ equity (Note F):

 

 

 

 

 

Preferred stock, $1 par value - authorized 1,000,000 shares; none issued

 

 

 

Common stock, $1 par value - authorized 18,000,000 shares; issued 11,460,000 at June 29, 2013 and 11,464,000 at September 29, 2012

 

11,460

 

11,464

 

Additional paid-in capital

 

19,690

 

18,958

 

Retained earnings

 

110,992

 

115,038

 

Accumulated other comprehensive loss (Note M)

 

(874

)

(949

)

 

 

 

 

 

 

Total stockholders’ equity

 

141,268

 

144,511

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

206,410

 

$

197,360

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4



 

COURIER CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

 

 

 

NINE MONTHS ENDED

 

 

 

June 29,

 

June 23,

 

 

 

2013

 

2012

 

Operating Activities:

 

 

 

 

 

Net income

 

$

4,437

 

$

3,458

 

Adjustments to reconcile net income to cash provided from operating activities:

 

 

 

 

 

Depreciation of property, plant and equipment

 

14,395

 

14,455

 

Amortization of prepublication costs

 

3,025

 

3,260

 

Amortization of intangible assets

 

403

 

307

 

Stock-based compensation (Note F)

 

1,002

 

1,098

 

Deferred income taxes

 

514

 

983

 

Gain on disposition of assets (Note L)

 

 

(587

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

2,979

 

4,555

 

Inventory

 

(785

)

255

 

Accounts payable

 

341

 

(1,967

)

Accrued and recoverable taxes

 

(4,463

)

(2,916

)

Other elements of working capital

 

(161

)

(6

)

Other long-term, net

 

(609

)

(1,003

)

 

 

 

 

 

 

Cash provided from operating activities

 

21,078

 

21,892

 

 

 

 

 

 

 

Investment Activities:

 

 

 

 

 

Capital expenditures

 

(14,461

)

(4,065

)

Acquisition of business (Note J)

 

(5,000

)

 

Prepublication costs

 

(2,598

)

(3,171

)

Proceeds on disposition of assets (Note L)

 

 

587

 

Investments

 

(686

)

(169

)

 

 

 

 

 

 

Cash used for investment activities

 

(22,745

)

(6,818

)

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

Long-term debt borrowings (repayments)

 

10,673

 

(2,479

)

Cash dividends

 

(7,244

)

(7,693

)

Share repurchases (Note H)

 

(1,568

)

(4,842

)

Proceeds from stock plans

 

170

 

167

 

Contingent consideration

 

(235

)

(275

)

 

 

 

 

 

 

Cash provided from (used for) financing activities

 

1,796

 

(15,122

)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

129

 

(48

)

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the period

 

64

 

104

 

 

 

 

 

 

 

Cash and cash equivalents at the end of the period

 

$

193

 

$

56

 

 

The accompanying notes are an integral part of the consolidated condensed financial statements.

 

5



 

COURIER CORPORATION

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

 

A.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Unaudited Financial Statements

 

The consolidated condensed balance sheet as of June 29, 2013 and the consolidated condensed statement of comprehensive income for the three-month and nine-month periods ended June 29, 2013 and June 23, 2012 and the statements of cash flows for the nine-month periods ended June 29, 2013 and June 23, 2012 are unaudited.  In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair presentation of such financial statements have been recorded.  The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) have been condensed or omitted.  The balance sheet data as of September 29, 2012 was derived from audited year-end financial statements, but does not include disclosures required by generally accepted accounting principles.  It is suggested that these interim financial statements be read in conjunction with the Company’s most recent Annual Report on Form 10-K for the year ended September 29, 2012.

 

Goodwill and Other Intangibles

 

The Company evaluates possible impairment to goodwill and other intangible assets annually at the end of its fiscal year or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. There were no such events or changes in circumstances in the period ended June 29, 2013.  On April 30, 2013, the Company acquired FastPencil, Inc. (“FastPencil”) and recorded goodwill of $5.5 million (see Note J). In addition, the Company recorded intangibles related to technology, trade name and other intangibles with this acquisition totaling $3.3 million, which are being amortized over periods ranging from three to fifteen years.  “Other intangibles” also include trade names with indefinite lives which are not subject to amortization as well as customer lists and technology that are being amortized over five to ten-year periods. Total amortization expense for intangibles was approximately $200,000 and $100,000 in the third quarters of fiscal years 2013 and 2012, respectively.  For the first nine months, amortization expense was approximately $400,000 and $300,000 in fiscal years 2013 and 2012, respectively. Prospectively, annual amortization expense for fiscal 2013 will be approximately $650,000 and for fiscal years 2014, 2015, 2016 and 2017 will be approximately $980,000, $700,000, $575,000 and $560,000, respectively.

 

Fair Value Measurements

 

Certain assets and liabilities are required to be recorded at fair value on a recurring basis, while other assets and liabilities are recorded at fair value on a nonrecurring basis, generally as a result of impairment charges.  Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Assets measured at fair value on a nonrecurring basis include long-lived assets and goodwill and other intangible assets. The three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies, is:

 

Level 1Valuations based on quoted prices for identical assets and liabilities in active markets.

 

Level 2Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

 

Level 3Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

 

6



 

Fair Value of Financial Instruments

 

Financial instruments consist primarily of cash, investments in mutual funds (Level 1), investment in a convertible promissory note (Level 3), accounts receivable, accounts payable, debt obligations and contingent consideration (Level 3).  At June 29, 2013 and September 29, 2012, the fair value of the Company’s financial instruments approximated their carrying values.  The fair value of the Company’s revolving credit facility approximates its carrying value due to the variable interest rate and the Company’s current rate standing. At June 29, 2013, the Company had a forward exchange contract to sell approximately 11 million South African Rands (ZAR) designated as a cash flow hedge against a foreign currency customer order to be settled for $1.2 million in October 2013. The fair value of the foreign exchange forward contract was valued using market exchange rates (Level 2). The unrealized gain on this foreign currency cash flow hedge of $75,000, net of tax, was included in accumulated other comprehensive loss at June 29, 2013. The Company expects to reclassify the unrealized gain or loss in accumulated other comprehensive loss into earnings upon recognition of the related hedged forecasted transaction.  The Company does not use financial instruments for trading or speculative purposes.

 

Prepublication Costs

 

Prepublication costs, associated with creating new titles in the publishing segment, are amortized to cost of sales using the straight-line method over estimated useful lives of two to four years.

 

B.            INVENTORIES

 

Inventories are valued at the lower of cost or market.  Cost is determined using the last-in, first-out (LIFO) method for approximately 54% and 57% of the Company’s inventories at June 29, 2013 and September 29, 2012, respectively.  Other inventories, primarily in the publishing segment, are determined on a first-in, first-out (FIFO) basis.  Inventories consisted of the following:

 

 

 

(000’s Omitted)

 

 

 

June 29,
2013

 

September 29,
2012

 

Raw materials

 

$

5,568

 

$

4,523

 

Work in process

 

9,408

 

8,763

 

Finished goods

 

22,286

 

23,078

 

Total

 

$

37,262

 

$

36,364

 

 

C.            INCOME TAXES

 

In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known and applies that rate to its ordinary year-to-date earnings or losses. The effect of discrete items, such as unusual or infrequently occurring events, is recognized in the interim period in which the discrete item occurs.

 

The provision for income taxes differs from that computed using the statutory federal income tax rates for the following reasons:

 

 

 

(000’s Omitted)

 

 

 

Nine Months Ended

 

 

 

June 29, 2013

 

June 23, 2012

 

Federal taxes at statutory rates

 

$

2,472

 

35.0

%

$

1,922

 

35.0

%

State taxes, net of federal tax benefit

 

302

 

4.3

 

257

 

4.7

 

Federal manufacturer’s deduction

 

(201

)

(2.8

)

(136

)

(2.5

)

Other

 

54

 

0.8

 

(12

)

(0.2

)

Total

 

$

2,627

 

37.2

%

$

2,031

 

37.0

%

 

D.            OPERATING SEGMENTS

 

The Company has two operating segments: book manufacturing and publishing. The book manufacturing segment offers a full range of services from production through storage and distribution for religious, educational and specialty trade book publishers.  In April 2013, the Company acquired FastPencil, which

 

7



 

has been included in the book manufacturing segment (see Note J). The publishing segment consists of Dover Publications, Inc., Federal Marketing Corporation, Inc., d/b/a Creative Homeowner, and Research & Education Association, Inc. (“REA”).

 

Segment performance is evaluated based on several factors, of which the primary financial measure is operating income.  Operating income is defined as gross profit (sales less cost of sales) less selling and administrative expenses, and includes severance and other restructuring costs but excludes stock-based compensation.  As such, segment performance is evaluated exclusive of interest, income taxes, stock-based compensation, intersegment profit, impairment charges, and other income.  The elimination of intersegment sales and related profit represents sales from the book manufacturing segment to the publishing segment.

 

The following table provides segment information for the three-month and nine-month periods ended June 29, 2013 and June 23, 2012.

 

 

 

(000’s Omitted)

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

June 29,

 

June 23,

 

June 29,

 

June 23,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net sales:

 

 

 

 

 

 

 

 

 

Book manufacturing

 

$

58,060

 

$

52,413

 

$

171,460

 

$

163,863

 

Publishing

 

8,818

 

9,127

 

27,305

 

28,214

 

Elimination of intersegment sales

 

(2,735

)

(2,644

)

(8,088

)

(7,857

)

Total

 

$

64,143

 

$

58,896

 

$

190,677

 

$

184,220

 

 

 

 

 

 

 

 

 

 

 

Pretax income (loss):

 

 

 

 

 

 

 

 

 

Book manufacturing operating income

 

$

4,245

 

$

3,982

 

$

11,139

 

$

10,537

 

Publishing operating loss

 

(889

)

(975

)

(2,393

)

(3,938

)

Stock-based compensation

 

(330

)

(331

)

(1,002

)

(1,098

)

Elimination of intersegment profit

 

(11

)

71

 

26

 

100

 

Interest expense, net

 

(325

)

(246

)

(706

)

(699

)

Other income

 

 

 

 

587

 

Total

 

$

2,690

 

$

2,501

 

$

7,064

 

$

5,489

 

 

E.            RESTRUCTURING COSTS

 

During fiscal 2012, approximately $3.3 million of pre-tax restructuring charges were recorded for cost reduction measures taken throughout the year in the Company’s operating segments, including a reduction in the Company’s one-color offset press capacity. Severance and post-retirement benefit expenses were $1.9 million and accelerated depreciation on an unutilized one-color press was $1.4 million. Approximately $1.8 million of these costs were recorded in the first nine months of fiscal 2012 for severance and post-retirement benefit costs, with approximately $1.5 million recorded in the first quarter of last year.  Approximately $1.0 million and $0.6 million of these restructuring costs were included in selling and administrative expenses in the Company’s book manufacturing segment and publishing segment, respectively, and approximately $200,000 in costs of sales in the book manufacturing segment last year. At June 29, 2013, approximately $275,000 of the remaining restructuring payments were included in “Other current liabilities” in the accompanying consolidated balance sheet.

 

In fiscal 2011, the Company recorded restructuring costs of $7.7 million associated with closing and consolidating its Stoughton, Massachusetts manufacturing facility due to the impact of technology and competitive pressures affecting the one-color paperback books in which the plant specialized.  Restructuring costs included $2.3 million for employee severance and benefit costs, $2.1 million for an early withdrawal liability from a multi-employer pension plan, and $3.3 million for lease termination and other facility closure costs; no sub-lease income was assumed at the time due to local real estate market conditions.  Subsequently, a portion of the facility was sublet beginning in March 2013. Remaining payments of approximately $3.5 million will be made over periods ranging from 2 years for the building lease obligation to 18 years for the liability related to the multi-employer pension plan.  At June 29, 2013,

 

8



 

approximately $1.1 million of the restructuring payments were included in “Other current liabilities” and $2.4 million were included in “Other liabilities” in the accompanying consolidated balance sheet.

 

The following table depicts the remaining accrual balances for these restructuring costs.

 

 

 

(000’s omitted)

 

 

 

Accrual at

 

Charges

 

Costs

 

Accrual at

 

 

 

September 29,

 

or

 

Paid or

 

June 29,

 

 

 

2012

 

Reversals

 

Settled

 

2013

 

Employee severance, post-retirement and other benefit costs

 

$

870

 

 

$

(430

)

$

440

 

Early withdrawal from multi-employer pension plan

 

2,072

 

 

(54

)

2,018

 

Lease termination, facility closure and other costs

 

1,665

 

 

(318

)

1,347

 

Total

 

$

4,607

 

 

$

(802

)

$

3,805

 

 

F.        STOCK ARRANGEMENTS

 

The Company records stock-based compensation expense for the cost of stock options and stock grants as well as shares issued under the Company’s 1999 Employee Stock Purchase Plan, as amended. The fair value of each option awarded is calculated on the date of grant using the Black-Scholes option-pricing model. Stock-based compensation recognized in selling and administrative expenses in the accompanying financial statements in the third quarters of fiscal 2013 and 2012 was $330,000 and $331,000, respectively.  The related tax benefit recognized in the third quarters of fiscal 2013 and 2012 was $117,000 and $120,000, respectively.  For the first nine months of fiscal 2013 and 2012, stock-based compensation was approximately $1.0 million and $1.1 million, respectively, and the related tax benefit recognized was $353,000 and $356,000, respectively.  Unrecognized stock-based compensation cost at June 29, 2013 was $1.9 million, to be recognized over a weighted-average period of 3.0 years.

 

The Company annually issues a combination of stock options and stock grants to its key employees under the Courier Corporation 2011 Stock Option and Incentive Plan (the “2011 Plan”).  Stock options and stock grants generally vest over three years. Such options and grants were historically issued in September each year.  However, beginning this past fiscal year, the Company shifted the timing of such awards to November. As a result, options and grants relating to fiscal 2012 were awarded in November 2012.  As such, no annual awards were issued during the fiscal year ended September 29, 2012.  In the first quarter of fiscal 2013, 54,635 stock options were awarded under the 2011 Plan with an exercise price of $11.01 per share, which was the stock price on the date of grant, and a weighted-average fair value of $1.75 per share. In addition, 64,028 stock grants were awarded in November 2012 with a weighted-average fair value of $11.01 per share.

 

The Company annually issues a combination of stock options and stock grants to its non-employee directors under the Courier Corporation 2010 Stock Equity Plan for Non-Employee Directors (the “2010 Plan”).  Stock options and stock grants generally vest over three years.  During the second quarter of fiscal 2013, 14,931 stock awards, with a weighted-average fair value of $11.77 per share, were granted to non-employee directors as well as 85,498 stock options with an exercise price of $11.77 per share, which was the stock price on the date of grant, and a weighted-average fair value of $2.05 per share. Directors may also elect to receive their annual retainer and committee chair fees as shares of stock in lieu of cash; 12,320 such shares were issued in the second quarter of fiscal 2013.

 

The weighted average Black-Scholes fair value assumptions for stock options awarded under the 2011 Plan and the 2010 Plan in the first nine months of fiscal 2013 were as follows:

 

 

 

2011 Plan

 

2010 Plan

 

 

 

 

 

 

 

Estimated life of options (years)

 

10

 

10

 

Risk-free interest rate

 

1.7

%

2.0

%

Expected volatility

 

41.5

%

41.6

%

Expected dividend yield

 

7.6

%

7.2

%

 

9



 

G.        NET INCOME PER SHARE

 

The following is a reconciliation of the outstanding shares used in the calculation of basic and diluted net income per share. Potentially dilutive shares, calculated using the treasury stock method, consist of shares issued under the Company’s stock option plans.

 

 

 

(000’s Omitted)

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

June 29,
2013

 

June 23,
2012

 

June 29,
2013

 

June 23,
2012

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding for basic

 

11,242

 

11,951

 

11,286

 

12,028

 

Effect of potentially dilutive shares

 

140

 

75

 

129

 

65

 

Average shares outstanding for diluted

 

11,382

 

12,026

 

11,415

 

12,093

 

 

H.            SHARE REPURCHASE PROGRAM

 

On November 20, 2012, the Company announced the approval by its Board of Directors for the repurchase of up to $10 million of the Company’s outstanding common stock from time to time on the open market or in privately negotiated transactions, including pursuant to a Rule 10b5-1 nondiscretionary trading plan.  This stock repurchase authorization is effective for a period of twelve months. Through June 29, 2013, the Company repurchased approximately 123,000 shares of common stock for approximately $1.6 million.

 

In April 2012, the Company’s Board of Directors approved a similar program for the repurchase of up to $10 million of the Company’s outstanding common stock. In fiscal 2012, the Company repurchased 823,970 shares of common stock for approximately $10 million.

 

I.             MULTI-EMPLOYER PENSION PLANS

 

The Company contributes to two multi-employer pension plans under collective bargaining agreements covering certain employees at its book manufacturing facility in Philadelphia. Multi-employer pension plans cover employees of and receive contributions from two or more unrelated employers pursuant to one or more collective bargaining agreements, and the assets contributed by each employer may be used to fund the benefits of all employees covered by the plan.

 

The risks of participating in these multi-employer benefit plans are different from single-employer benefit plans in the following aspects:

 

·                  Assets contributed to the multi-employer benefit plan by one employer may be used to provide benefits to employees of other participating employers.

·                  If a participating employer stops contributing to the multi-employer benefit plan, the unfunded obligations of the plan may be borne by the remaining participating employers.

·                  If the Company stops participating in either of its multi-employer pension plans, the Company may be required to pay those plans an amount based on its allocable share of the underfunded status of the plan, referred to as a withdrawal liability, subject to safe harbors based on its annual contribution level.

 

The Company is required to make contributions to the multi-employer plans in accordance with two separate collective bargaining agreements covering the Company’s employees in each plan as well as the terms of such plan.

 

The Company’s contributions for the Bindery Industry Employers GCC/IBT Pension Plan represented approximately 70% of total contributions in each of the last three years. This plan currently includes only three other contributing employers. The Company contributed less than 5% of total contributions to the GCIU — Employer Retirement Benefit Plan in each of the past three years. The Company is not subject to surcharges for the remainder of 2013 and currently estimates that it will be required to contribute approximately $373,000 to these two plans in fiscal 2013.  These contributions could significantly increase due to other employers’ withdrawals or changes in the funded status of the plans. Both plans are

 

10



 

estimated to be underfunded as of June 29, 2013 and have a Pension Protection Act zone status of critical (“red”). Such status identifies plans that are less than 65% funded. Rehabilitation plans have been adopted for each plan.

 

On January 6, 2013, a new 5-year contract was entered into for the Bindery Industry Employers GCC/IBT Pension Plan. This new contract provides the Company with the right to withdraw from the plan if certain future events occur. If one of these future events were to occur and the Company exercises its right to withdraw from the plan, the potential withdrawal liability would equal the Company’s proportionate share of the unfunded vested benefits based on the year in which the liability is triggered, subject to safe harbors based on the Company’s annual contribution level. In addition, a new 5-year contract was entered into for the GCIU — Employer Retirement Benefit Plan effective May 1, 2013.

 

The Company believes that the multi-employer pension plans in which it currently participates have significant unfunded vested benefits. Due to uncertainty regarding future withdrawal liability triggers or further reductions in participation or withdrawal by other employers, the Company is unable to determine the amount and timing of its future withdrawal liability, if any. The Company’s participation in these multi-employer pension plans could have a material adverse impact on its financial condition, results of operations or liquidity. Disagreements over a potential withdrawal liability for either plan may lead to legal disputes.

 

J.          BUSINESS ACQUISITION

 

On April 30, 2013, the Company acquired all of the outstanding stock of FastPencil, Inc. (“FastPencil”), a California-based developer of end-to-end, cloud-based content management technologies. FastPencil’s products primarily serve traditional publishers and self-publishers. The acquisition complements the Company’s content management and customization for educational publishers and also brings a comparable offering to a broader market.  The Company paid $5 million at the time of acquisition, with additional future “earn out” potential payments from $0 up to a maximum of $13 million (undiscounted) which may be paid out over the next five years based on achieving certain revenue targets. The future earn out potential payments were valued at acquisition at $4.7 million using a probability weighted, discounted cash flow model.  Related acquisition costs of approximately $250,000 were included in selling and administrative expenses through the third quarter. The acquisition was accounted for as a purchase and, accordingly, FastPencil’s financial results are included in the book manufacturing segment in the consolidated financial statements from the date of acquisition.

 

The acquisition of FastPencil was recorded by allocating the fair value of the consideration paid to the identified assets acquired, including intangible assets and liabilities assumed, based on their estimated fair value at the acquisition date. The excess of the fair value of the consideration paid over the net amounts assigned to the fair value of the assets acquired and liabilities assumed was recorded as goodwill, which is not tax deductible. Based on these valuations, the purchase price allocation was as follows:

 

 

 

(000’s Omitted)

 

 

 

 

 

Cash paid

 

$

5,000

 

Fair value of contingent “earn out” consideration

 

4,700

 

Total

 

$

9,700

 

 

 

 

 

Accounts receivable

 

$

26

 

Inventories

 

113

 

Licensing contract receivable

 

1,500

 

Amortizable intangibles

 

3,260

 

Goodwill

 

5,456

 

Other assets

 

38

 

Accounts payable and accrued liabilities

 

(315

)

Deferred tax liabilities, net

 

(378

)

Total

 

$

9,700

 

 

The Company expects to finalize the preliminary estimates of the fair value of the intangible assets in the next quarter.

 

11



 

K.            FAIR VALUE MEASUREMENTS

 

Certain assets and liabilities are required to be recorded at fair value on a recurring basis.  The Company’s only assets and liabilities adjusted to fair value on a recurring basis are short-term investments in mutual funds, a long-term investment in a convertible promissory note and contingent consideration.  In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record certain assets and liabilities on a nonrecurring basis, generally as a result of acquisitions or the remeasurement of assets resulting in impairment charges.

 

The following table shows the assets and liabilities carried at fair value measured on a recurring basis as of June 29, 2013 and September 29, 2012 classified in one of the three levels as described in Note A:

 

 

 

(000’s Omitted)

 

 

 

Total
Carrying
Value

 

Quoted
Prices in
Active
Markets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

As of June 29, 2013:

 

 

 

 

 

 

 

 

 

Short-term investments in mutual funds

 

$

832

 

$

832

 

 

 

Long-term investment in convertible promissory note

 

500

 

 

 

500

 

Contingent consideration liability

 

(4,810

)

 

 

(4,810

)

Forward foreign exchange contract (Note A)

 

119

 

 

119

 

 

 

 

 

 

 

 

 

 

 

 

As of September 29, 2012:

 

 

 

 

 

 

 

 

 

Short-term investments in mutual funds

 

$

765

 

$

765

 

 

 

Contingent consideration liability

 

(385

)

 

 

(385

)

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3):

 

 

 

Convertible

 

 

 

 

 

Promissory

 

Contingent

 

 

 

Note

 

Consideration

 

(000’s Omitted)

 

Investment

 

Liabilities

 

Balance as of September 29, 2012

 

 

 

$

(385

)

Change in fair value

 

 

 

(125

)

Amounts paid

 

$

500

 

400

 

Acquisition of business (Note J)

 

 

(4,700

)

Balance at June 29, 2013

 

$

500

 

$

(4,810

)

 

 

 

 

 

 

Balance as of September 24, 2011

 

 

 

$

(685

)

Change in fair value

 

 

 

(49

)

Amounts paid

 

 

 

400

 

Balance at June 23, 2012

 

 

 

$

(334

)

 

L.            OTHER INCOME

 

The Company historically leased non-operating real property to cell phone companies for two cell-tower sites on a month-to-month basis.  In the first quarter of fiscal 2012, the Company recorded a gain of $587,000 associated with the sales and assignments of both of these interests. The Company does not have further financial obligations under these arrangements.

 

12



 

Item 2.                                 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Critical Accounting Policies and Estimates:

 

The Company’s consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles.  The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes.  On an ongoing basis, management evaluates its estimates and judgments, including those related to collectibility of accounts receivable, recovery of inventories, impairment of goodwill and other intangibles, and prepublication costs.  Management bases its estimates and judgments on historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.  Actual results may differ from these estimates.  The significant accounting policies which management believes are most critical to aid in fully understanding and evaluating the Company’s reported financial results include the following:

 

Accounts Receivable.  Management performs ongoing credit evaluations of the Company’s customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness.  Collections and payments from customers are continuously monitored.  A provision for estimated credit losses is determined based upon historical experience and any specific customer collection risks that have been identified.  If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

 

Inventories.  Management records reductions in the cost basis of inventory for excess and obsolete inventory based primarily upon historical and forecasted product demand.  If actual market conditions are less favorable than those projected by management, additional inventory charges may be required.

 

Goodwill and Other Intangibles.  Other intangibles include customer lists and technology, which are amortized on a straight-line basis over periods ranging from five to ten years, and an indefinite-lived trade name. The Company evaluates possible impairment of goodwill and other intangibles at the reporting unit level, which is the operating segment or one level below the operating segment, on an annual basis or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable.  The Company completed its annual impairment test at September 29, 2012, which resulted in no change to the nature or carrying amounts of its intangible assets.  Changes in market conditions or poor operating results could result in a decline in value of the Company’s goodwill and other intangible assets thereby potentially requiring an additional impairment charge in the future.

 

Prepublication Costs.  The Company capitalizes prepublication costs, which include the costs of acquiring rights to publish a work and costs associated with bringing a manuscript to publication such as artwork and editorial efforts. Prepublication costs are amortized on a straight-line basis over periods ranging from two to four years.  Management regularly evaluates the sales and profitability of the products based upon historical and forecasted demand.  If actual market conditions are less favorable than those projected by management, additional amortization expense may be required.

 

13



 

Overview:

 

Courier Corporation, founded in 1824, is among America’s leading book manufacturers and a leader in content management and customization in new and traditional media.  The Company also publishes books under three brands offering award-winning content and thousands of titles. The Company has two operating segments: book manufacturing and publishing.  The book manufacturing segment streamlines the process of bringing books from the point of creation to the point of use.  Based on sales, Courier is the third largest book manufacturer in the United States, offering services from prepress and production through storage and distribution, as well as innovative content management, customization and state-of-the-art digital print capabilities.  The publishing segment consists of Dover Publications, Inc. (“Dover”), Research & Education Association, Inc. (“REA”), and Federal Marketing Corporation, d/b/a Creative Homeowner (“Creative Homeowner”).  Dover publishes over 9,000 titles in more than 30 specialty categories including children’s books, literature, art, music, crafts, mathematics, science, religion and architecture.  REA publishes test preparation and study-guide books and software for high school, college and graduate students, and professionals.  Creative Homeowner publishes books on home design, decorating, landscaping, and gardening, and also sells home plans.

 

Results of Operations:

 

 

 

FINANCIAL HIGHLIGHTS

 

 

 

(dollars in thousands except per share amounts)

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

June 29,
2013

 

June 23,
2012

 

%
Change

 

June 29,
2013

 

June 23,
2012

 

%
Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

64,143

 

$

58,896

 

8.9

%

$

190,677

 

$

184,220

 

3.5

%

Cost of sales

 

49,315

 

45,864

 

7.5

%

147,845

 

143,392

 

3.1

%

Gross profit

 

14,828

 

13,032

 

13.8

%

42,832

 

40,828

 

4.9

%

As a percentage of sales

 

23.1

%

22.1

%

 

 

22.5

%

22.2

%

 

 

Selling and administrative expenses

 

11,813

 

10,285

 

14.9

%

35,062

 

35,227

 

-0.5

%

Operating income

 

3,015

 

2,747

 

9.8

%

7,770

 

5,601

 

38.7

%

Interest expense, net

 

325

 

246

 

32.1

%

706

 

699

 

1.0

%

Other income

 

 

 

 

 

 

(587

)

 

 

Pretax income

 

2,690

 

2,501

 

7.6

%

7,064

 

5,489

 

28.7

%

Income tax provision

 

1,009

 

937

 

7.7

%

2,627

 

2,031

 

29.3

%

Net income

 

$

1,681

 

$

1,564

 

7.5

%

$

4,437

 

$

3,458

 

28.3

%

Net income per diluted share

 

$

0.15

 

$

0.13

 

15.4

%

$

0.39

 

$

0.29

 

34.5

%

 

Revenues grew in the third quarter and first nine months of fiscal 2013 compared to the same periods last year. For the third quarter, revenues were up 9% to $64.1 million and for the first nine months were up 4% to $190.7 million compared to fiscal 2012.  Book manufacturing segment revenues increased 11% in the quarter to $58.1 million and 5% year to date to $171.5 million.  Sales growth in the third quarter was experienced in all three of this segment’s principal markets of education, religious and specialty trade.  For the first nine months of fiscal 2013, sales growth in the education and religious markets was offset in part by a slight decline in sales to the specialty trade market. In the publishing segment, revenues were down 3% in both the third quarter and first nine months to $8.8 million and $27.3 million, respectively, compared to the corresponding prior year periods. Modest sales growth at Dover was offset by a decline in sales at both REA and Creative Homeowner in the third quarter and first nine months of fiscal 2013.

 

Net income for the third quarter of fiscal 2013 was $1.7 million, up 8% from the same period last year. For the first nine months, net income increased 28% to $4.4 million compared to the corresponding period of fiscal 2012. Results in the first nine months of last year included pre-tax restructuring costs of $1.8 million for severance and post-retirement benefits as well as a pre-tax gain of $0.6 million from the sale of certain non-operating assets.

 

14



 

Restructuring Costs

 

During fiscal 2012, approximately $3.3 million of pre-tax restructuring charges were recorded for cost reduction measures taken throughout the year in the Company’s operating segments, including a reduction in the Company’s one-color offset press capacity. Severance and post-retirement benefit expenses were $1.9 million and accelerated depreciation on an unutilized one-color press was $1.4 million. Approximately $1.8 million of these costs were recorded in the first nine months of fiscal 2012 for severance and post-retirement benefit costs, with approximately $1.5 million recorded in the first quarter of last year.  Approximately $1.0 million and $0.6 million of these restructuring costs were included in selling and administrative expenses in the Company’s book manufacturing segment and publishing segment, respectively, and approximately $200,000 in costs of sales in the book manufacturing segment last year. At June 29, 2013, approximately $275,000 of the remaining restructuring payments were included in “Other current liabilities” in the accompanying consolidated balance sheet.

 

In fiscal 2011, the Company recorded restructuring costs of $7.7 million associated with closing and consolidating its Stoughton, Massachusetts manufacturing facility due to the impact of technology and competitive pressures affecting the one-color paperback books in which the plant specialized.  Restructuring costs included $2.3 million for employee severance and benefit costs, $2.1 million for an early withdrawal liability from a multi-employer pension plan, and $3.3 million for lease termination and other facility closure costs; no sub-lease income was assumed at the time due to local real estate market conditions.  Subsequently, a portion of the facility was sublet beginning in March 2013. Remaining payments of approximately $3.5 million will be made over periods ranging from 2 years for the building lease obligation to 18 years for the liability related to the multi-employer pension plan.  At June 29, 2013, approximately $1.1 million of the restructuring payments were included in “Other current liabilities” and $2.4 million were included in “Other liabilities” in the accompanying consolidated balance sheet.

 

The following table depicts the remaining accrual balances for these restructuring costs.

 

 

 

(000’s omitted)

 

 

 

Accrual at

 

Charges

 

Costs

 

Accrual at

 

 

 

September 29,

 

or

 

Paid or

 

June 29,

 

 

 

2012

 

Reversals

 

Settled

 

2013

 

Employee severance, post-retirement and other benefit costs

 

$

870

 

 

$

(430

)

$

440

 

Early withdrawal from multi-employer pension plan

 

2,072

 

 

(54

)

2,018

 

Lease termination, facility closure and other costs

 

1,665

 

 

(318

)

1,347

 

Total

 

$

4,607

 

 

$

(802

)

$

3,805

 

 

Business Acquisition

 

On April 30, 2013, the Company acquired all of the outstanding stock of FastPencil, Inc. (“FastPencil”), a California-based developer of end-to-end, cloud-based content management technologies. FastPencil’s products primarily serve traditional publishers and self-publishers. The acquisition complements the Company’s content management and customization for educational publishers and also brings a comparable offering to a broader market.  The Company paid $5 million at the time of acquisition, with additional future “earn out” potential payments from $0 up to a maximum of $13 million (undiscounted) which may be paid out over the next five years based on achieving certain revenue targets. The future earn out potential payments were valued at acquisition at $4.7 million using a probability weighted, discounted cash flow model.  The acquisition was accounted for as a purchase and, accordingly, FastPencil’s financial results are included in the book manufacturing segment in the consolidated financial statements from the date of acquisition.

 

15



 

Book Manufacturing Segment

 

 

 

SEGMENT HIGHLIGHTS

 

 

 

(dollars in thousands)

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

June 29,
2013

 

June 23,
2012

 

%
Change

 

June 29,
2013

 

June 23,
2012

 

%
Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

58,060

 

$

52,413

 

10.8

%

$

171,460

 

$

163,863

 

4.6

%

Cost of sales

 

46,209

 

42,193

 

9.5

%

138,165

 

132,008

 

4.7

%

Gross profit

 

11,851

 

10,220

 

16.0

%

33,295

 

31,855

 

4.5

%

As a percentage of sales

 

20.4

%

19.5

%

 

 

19.4

%

19.4

%

 

 

Selling and administrative expenses

 

7,606

 

6,238

 

21.9

%

22,156

 

21,318

 

3.9

%

Operating income

 

$

4,245

 

$

3,982

 

6.6

%

$

11,139

 

$

10,537

 

5.7

%

 

Within the book manufacturing segment, the Company focuses on three key publishing markets: education, religious and specialty trade. In fiscal 2013, sales to the education market in the third quarter were up 18% to $28 million and up 9% to $72 million for the first nine months compared to the same periods last year. The revenue growth in this market was primarily due to increased sales of college textbooks and reflects an over 40% increase in year-to-date revenues from the Company’s digital print capabilities, including growing demand for customized college textbooks. Seasonal demand in the education market is typically highest in the second half of the Company’s fiscal year. Sales to the religious market in the third quarter increased 7% to $15 million and 4% to $50 million for the first nine months of this year compared to the same periods last year, driven by growth in sales to the Company’s largest religious customer. Sales to the specialty trade market increased 4% to $12 million in the third quarter compared to the same period last year, reflecting an increased use of digital printing, but were down 1% to $42 million for the first nine months, reflecting tight inventory management among publishers.

 

In October 2012, the Company announced plans to install a fourth HP digital production line. This new digital print facility at the Company’s Kendallville, Indiana location began production in the third quarter after a smooth start up. The new press is expected to serve a larger customer base across a full range of run lengths as many publishers are moving to utilize both offset and digital inkjet print technology to maximize the lifespan of their titles, while reducing inventory and obsolescence costs. Given the continuing growth in digital print demand, in July 2013 the Company announced the addition of a second HP digital inkjet press and expanded binding capabilities for the Kendallville location, with installation expected to be completed in the first quarter of fiscal 2014. Approximately half of this $12 million project will be spent in fiscal 2013 and the remainder in fiscal 2014.  Also, during the third quarter of fiscal 2013, the Company announced a strategic relationship with Ingram Content Group to provide customers with more options for efficient print distribution and fulfillment.

 

Cost of sales in the book manufacturing segment increased $4.0 million to $46.2 million in the third quarter and increased $6.2 million to $138.2 million in the first nine months of fiscal 2013 compared to the same periods last year, reflecting the growth in sales and lower waste recycling income. Gross profit for the third quarter increased $1.6 million to $11.9 million compared with the corresponding period in fiscal 2012 and, as a percentage of sales, increased to 20.4% from 19.5%, reflecting a favorable sales mix, increased capacity utilization and severance costs included in last year’s third quarter. For the first nine months of fiscal 2013, gross profit increased $1.4 million to $33.3 million and, as a percentage of sales, was comparable to the same period last year at 19.4%. For the year to date, the segment’s gross profit margin reflects a favorable sales mix and improved capacity utilization offset by a highly competitive pricing environment and reduced recycling income from waste byproducts, including paper.

 

Selling and administrative expenses for the segment increased $1.4 million to $7.6 million in the third quarter of fiscal 2013 and increased $0.8 million to $22.2 million for the first nine months compared to the same periods last year. These increases reflect the growth in the Company’s digital print operation as well as acquisition costs of approximately $250,000 and increased amortization expense related to the acquisition of FastPencil.  In addition, selling and administrative expenses in fiscal 2013 reflect an increase in variable compensation tied to this year’s increased sales and income. Selling and

 

16



 

administrative expenses in this segment in the first nine months of last year included $1.0 million of restructuring costs.

 

Third quarter operating income in the book manufacturing segment was $4.2 million compared with $4.0 million in the same period of fiscal 2012. For the first nine months of fiscal 2013, operating income was $11.1 million compared to $10.5 million in fiscal 2012, which included $1.2 million of restructuring costs. Despite improvements in sales mix and capacity utilization, these results reflect a highly competitive pricing environment, startup costs related to the new digital print production line, reduced recycling income and costs associated with the acquisition of FastPencil, including acquisition costs, amortization expense and operating costs totaling approximately $500,000.

 

Publishing Segment

 

 

 

SEGMENT HIGHLIGHTS

 

 

 

(dollars in thousands)

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

June 29,
2013

 

June 23,
2012

 

%
Change

 

June 29,
2013

 

June 23,
2012

 

%
Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

8,818

 

$

9,127

 

-3.4

%

$

27,305

 

$

28,214

 

-3.2

%

Cost of sales

 

5,831

 

6,387

 

-8.7

%

17,795

 

19,340

 

-8.0

%

Gross profit

 

2,987

 

2,740

 

9.0

%

9,510

 

8,874

 

7.2

%

As a percentage of sales

 

33.9

%

30.0

%

 

 

34.8

%

31.5

%

 

 

Selling and administrative expenses

 

3,876

 

3,715

 

4.3

%

11,903

 

12,812

 

-7.1

%

Operating loss

 

$

(889

)

$

(975

)

 

 

$

(2,393

)

$

(3,938

)

 

 

 

Revenues in the Company’s publishing segment were down 3% in both the third quarter and first nine months of fiscal 2013 to $8.8 million and $27.3 million, respectively, compared with the corresponding prior year periods. Sales at Dover in the quarter were $6.5 million, up 3% from last year’s third quarter, and were up slightly to $20.9 million for the first nine months compared to the prior year.  Sales at REA were down 15% in the quarter to $1.2 million and decreased 11% for first nine months to $3.3 million compared with the same periods last year. Creative Homeowner’s sales were down 21% in the third quarter to $1.1 million and decreased 16% to $3.0 million in first nine months compared to the corresponding prior year periods. These declines reflect in part a shrinking base of brick and mortar retail channels and, in the case of Creative Homeowner, less new title development.  During the first nine months of fiscal 2013, the segment continued to increase its range of titles offered online in both printed and ebook form, including over 4,000 titles now available as ebooks through Amazon, Apple, Barnes & Noble and Google. Sales of ebooks were launched in the second half of 2012 and were approximately $1 million through the first nine months of fiscal 2013; such ebook sales were only $20,000 for the same period last year.

 

Cost of sales in this segment declined 9% to $5.8 million in the third quarter and 8% to $17.8 million in the first nine months of fiscal 2013 compared to the same periods last year, reflecting the lower sales volume and an improved cost structure in the segment. Gross profit increased 9% to $3.0 million compared to last year’s third quarter and, as a percentage of sales, increased to 33.9% from 30.0%.  For the first nine months of fiscal 2013, gross profit increased 7% to $9.5 million and, as a percentage of sales, increased to 34.8% from 31.5%, reflecting the benefit of prior cost reduction measures as well as the impact of ebook sales.

 

Selling and administrative expenses for the segment increased slightly in the third quarter to $3.9 million compared to last year’s third quarter.  For the first nine months of fiscal 2013, selling and administrative expenses decreased $0.9 million to $11.9 million compared to the corresponding prior year period, largely attributable to cost reduction measures and $0.6 million of restructuring costs recorded in the first nine months of last year.

 

The publishing segment’s operating loss was $0.9 million in the third quarter of fiscal 2013 compared to $1.0 million in the corresponding period last year.  For the first nine months, the operating loss was $2.4 million compared to $3.9 million in the first nine months of fiscal 2012.  These reductions in the segment’s

 

17



 

operating loss reflect the impact of cost reduction benefits and $0.6 million of restructuring costs in the first quarter of fiscal 2012.

 

Total Consolidated Company

 

Interest expense, net of interest income, was $325,000 in the third quarter of fiscal 2013 compared to $246,000 of net interest expense in the same period last year. For the first nine months of fiscal 2013, interest expense, net of interest income, was $706,000 compared to $699,000 of net interest expense in the first nine months of fiscal 2012. Average debt under the revolving credit facility in the third quarter of fiscal 2013 was approximately $23.4 million at an average annual interest rate of 1.5%, generating interest expense of approximately $85,000 in the quarter. Average debt under the revolving credit facility in the third quarter of last year was approximately $15.7 million at an average annual interest rate of 1.5%, generating interest expense of approximately $60,000 in the quarter. Average debt under the revolving credit facility in the first nine months of fiscal 2013 was approximately $15.3 million at an average annual interest rate of 1.5%, generating interest expense of approximately $170,000 over the first nine months of fiscal 2013. Average debt under the revolving credit facility in the first nine months of last year was approximately $16.4 million at an average annual interest rate of 1.1%, generating interest expense of approximately $133,000 over the first nine months of fiscal 2012. At June 29, 2013, $1.6 million was outstanding under the Company’s term loan with related interest expense of $20,000 in the third quarter and $60,000 in the first nine months of fiscal 2013 compared to $37,000 in the quarter and $111,000 in the first nine months of last year. In addition, approximately $34,000 and $102,000 of interest expense was amortized in the third quarter and first nine months of fiscal 2013, associated with the restructuring costs incurred in fiscal 2011, compared with approximately $52,000 and $115,000 in the corresponding prior year periods, respectively. Interest expense also includes commitment fees and other costs associated with maintaining the Company’s $100 million revolving credit facility.

 

In the first quarter of fiscal 2012, the Company recorded other income of $587,000 from gains associated with the sale of its interests in non-operating real property relating to cell towers.

 

The Company’s effective tax rate for the first nine months of fiscal 2013 was 37.2%, comparable to the 37.0% effective tax rate for the same period last year.

 

For purposes of computing net income per diluted share, weighted average shares outstanding decreased by 644,000 in the third quarter and by 678,000 for the first nine months of fiscal 2013 compared with the corresponding periods last year, reflecting the Company’s repurchase of approximately 824,000 shares in the second half of fiscal 2012 and 123,000 shares in the second quarter of fiscal 2013.

 

Liquidity and Capital Resources:

 

During the first nine months of fiscal 2013, operations provided $21.1 million of cash, compared to $21.9 million in the first nine months of last year. Net income was $4.4 million and depreciation and amortization were $17.8 million.

 

Investment activities in the first nine months of fiscal 2013 used $22.7 million of cash, of which $5 million was attributable to the acquisition of FastPencil on April 30, 2013. Capital expenditures for the first nine months of fiscal 2013 were $14.5 million.  For the entire fiscal year, capital expenditures are expected to be approximately $23 to $25 million, with approximately $20 million dedicated to digital capabilities, primarily the expanded digital capacity in the Kendallville, Indiana location.  Prepublication costs were $2.6 million in the first nine months of fiscal 2013, compared to $3.2 million in the same period last year.  For the full fiscal year, prepublication costs are projected to be below the $4 million level in fiscal 2012. In the third quarter, the Company invested $500,000 in a convertible promissory note.

 

Financing activities for the first nine months of fiscal 2013 provided approximately $1.8 million of cash.  Cash dividends of $7.2 million were paid and the Company repurchased $1.6 million of its common stock. Borrowings increased by $10.7 million during the first nine months of fiscal 2013.  At June 29, 2013, borrowings under a term loan used to finance the purchase of a portion of the Company’s digital print equipment were $1.6 million, with $0.7 million at a fixed annual interest rate of 3.9% and $0.9 million at a fixed annual interest rate of 3.6%.  The Company also has a $100 million long-term revolving credit facility in place under which the Company can borrow at a rate not to exceed LIBOR plus 2.25%.  At June 29, 2013, the Company had $24.6 million in borrowings under this facility at an interest rate of 1.4%.  The revolving credit facility, which matures in March 2016, contains restrictive covenants including provisions relating to the incurrence of additional indebtedness and a quarterly test of EBITDA to debt service.  The

 

18



 

Company was in compliance with all debt covenants at June 29, 2013.  The facility also provides for a commitment fee not to exceed 3/8% per annum on the unused portion.  The revolving credit facility is used by the Company for both its long-term and short-term financing needs.  The Company believes that its cash on hand, cash from operations and the available credit facility will be sufficient to meet its cash requirements for at least the next twelve months.

 

On November 20, 2012, the Company announced the approval by its Board of Directors for the repurchase of up to $10 million of the Company’s outstanding common stock from time to time on the open market or in privately negotiated transactions, including pursuant to a Rule 10b5-1 nondiscretionary trading plan.  Through June 29, 2013, the Company had repurchased 123,261 shares of common stock for approximately $1.6 million under this program. In April 2012, the Company’s Board of Directors approved a similar program for the repurchase of up to $10 million of the Company’s outstanding common stock. During the second half of fiscal 2012, the Company repurchased 823,970 shares of common stock for approximately $10 million under this program.

 

The following table summarizes the Company’s contractual obligations and commitments at June 29, 2013 to make future payments as well as its existing commercial commitments.

 

 

 

 

 

(000’s Omitted)

 

 

 

 

 

Payments due by period

 

 

 

 

 

Less than

 

1 to 3

 

3 to 5

 

More than

 

 

 

Total

 

1 Year

 

Years

 

Years

 

5 Years

 

Contractual Payments:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt (1)

 

$

26,241

 

$

1,599

 

$

24,642

 

$

 

$

 

Interest due on debt (2)

 

27

 

27

 

 

 

 

Operating leases (3)

 

6,750

 

1,181

 

1,826

 

1,515

 

2,228

 

Purchase obligations (4)

 

1,182

 

1,182

 

 

 

 

Other liabilities (5)

 

11,858

 

1,503

 

6,244

 

912

 

3,199

 

Total

 

$

46,058

 

$

5,492

 

$

32,712

 

$

2,427

 

$

5,427

 

 


(1) Includes the Company’s revolving credit facility, which has a maturity date of March 2016.

(2) Represents scheduled interest payments on the Company’s term loan. Future interest on the Company’s revolving credit facility is not included because the interest rate and principal balance fluctuate on a daily basis and an estimate could differ significantly from actual interest expense.

(3) Represents amounts at September 29, 2012, except for the Stoughton, Massachusetts building lease obligation, which was included in “Other liabilities” at both September 29, 2012 and June 29, 2013.

(4) Represents capital commitments.

(5) Includes approximately $3.8 million of restructuring costs, of which the current liability is $1.3 million.

 

Forward-Looking Information:

 

This Quarterly Report on Form 10-Q includes forward-looking statements.  Statements that describe future expectations, plans or strategies are considered “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 and releases issued by the Securities and Exchange Commission.  The words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements.  Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those currently anticipated.  Some of the factors that could affect actual results are discussed in Item 1A of this Form 10-Q and include, among others, changes in customers’ demand for the Company’s products, including seasonal changes in customer orders and shifting orders to lower cost regions, changes in market growth rates, changes in raw material costs and availability, pricing actions by competitors and other competitive pressures in the markets in which the Company competes, consolidation among customers and competitors, insolvency of key customers or vendors, changes in the Company’s labor relations, changes in obligations of multiemployer pension plans, success in the execution of acquisitions and the performance and integration of acquired businesses including carrying value of intangible assets and contingent consideration, restructuring and impairment charges required under generally accepted accounting principles, changes in operating expenses including medical and energy costs, changes in technology including migration from paper-based books to digital, difficulties in the start up of new equipment or information technology systems, changes in copyright laws, changes in consumer product safety regulations, changes in environmental regulations, changes in tax regulations, changes in the Company’s effective income tax rate and general changes in economic conditions, including currency fluctuations, changes in interest rates, changes in consumer confidence, changes in the housing market, and tightness

 

19



 

in the credit markets.  Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements will prove to be accurate.  The forward-looking statements included herein are made as of the date hereof, and the Company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances.

 

Item 3.                                 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no material changes from the information concerning the Company’s “Quantitative and Qualitative Disclosures About Market Risk” as previously reported in the Company’s Annual Report on Form 10-K for the year ended September 29, 2012. At June 29, 2013, the Company had a forward exchange contract to sell approximately 11 million South African Rands (ZAR) as a hedge against the future sales proceeds, which was designated as a cash flow hedge. The fair value of the foreign exchange forward contract was valued using market exchange rates.  The Company does not use financial instruments for trading or speculative purposes.

 

Item 4.                                 CONTROLS AND PROCEDURES

 

(a)                     Evaluation of disclosure controls and procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report, the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

(b)                     Changes in internal controls over financial reporting

 

There was no change in the Company’s internal control over financial reporting that occurred during the period covered by this Quarterly Report that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II.  OTHER INFORMATION

 

Item 1.                                 Legal Proceedings

 

None.

 

Item 1A.                        Risk Factors

 

The Company’s consolidated results of operations, financial condition and cash flows can be adversely affected by various risks.  Our business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond our control.  We discuss below the risks that we believe are material.  You should carefully consider all of these factors.  For other factors that may cause actual results to differ materially from those indicated in any forward-looking statement contained in this report, see Forward-Looking Information in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Industry competition and consolidation may increase pricing pressures and adversely impact our margins or result in a loss of customers.

 

The book industry is extremely competitive.  In the book manufacturing segment, consolidation over the past few years of both customers and competitors within the markets in which the Company competes has caused downward pricing pressures.  In addition, excess capacity and competition from printing

 

20



 

companies in lower cost countries may increase competitive pricing pressures.  Furthermore, some of our competitors have greater sales, assets and financial resources than us, and those in foreign countries may derive significant advantages from local governmental regulation, including tax holidays and other subsidies.  All or any of these competitive pressures could affect prices or customers’ demand for our products, impacting our profit margins and/or resulting in a loss of customers and market share.

 

A reduction in orders or pricing from, or the loss of, any of our significant customers may adversely impact our operating results.

 

We derived approximately 55% and 53% of our fiscal 2012 and 2011 revenues, respectively, from two major customers.  We expect similar concentrations in fiscal 2013.  We do business with these customers on a purchase order basis and they are not bound to purchase at particular volume levels.  As a result, either of these customers could determine to reduce their order volume with us, especially if our pricing is not deemed competitive.  A significant reduction in order volumes from, or the loss of, either of these customers could have a material adverse effect on our results of operations and financial condition.  In addition, our publishing segment is dependent on Amazon as a primary sales channel. Any change in pricing or order volume could have a material adverse effect on our results.

 

A failure to successfully integrate acquired businesses may have a material adverse effect on our business or operations.

 

Over the past several years, we have completed several acquisitions, and may continue to make acquisitions in the future.  We believe that these acquisitions provide strategic growth opportunities for us.  Achieving the anticipated benefits of these acquisitions will depend in part upon our ability to integrate these businesses in an efficient and effective manner.  The challenges involved in successfully integrating acquisitions include:

 

·                  we may find that the acquired company or assets do not further our business strategy, or that we overpaid for the company or assets, or that economic conditions have changed, all of which may result in a future impairment charge;

 

·                  we may have difficulty integrating the operations and personnel of the acquired business and may have difficulty retaining the customers and/or the key personnel of the acquired business;

 

·                  we may have difficulty incorporating and integrating acquired technologies into our business;

 

·                  our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing diverse locations;

 

·                  we may have difficulty maintaining uniform standards, controls, procedures and policies across locations;

 

·                  an acquisition may result in litigation from terminated employees of the acquired business or third parties; and

 

·                  we may experience significant problems or liabilities associated with technology and legal contingencies of the acquired business.

 

These factors could have a material adverse effect on our business, results of operations and financial condition or cash flows, particularly in the case of a larger acquisition or multiple acquisitions in a short period of time.  From time to time, we may enter into negotiations for acquisitions that are not ultimately consummated.  Such negotiations could result in significant diversion of management’s time from our business as well as significant out-of-pocket costs. Tightness in credit markets may also affect our ability to consummate such acquisitions.

 

The consideration that we pay in connection with an acquisition could affect our financial results.  If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash and credit facilities to consummate such acquisitions.  To the extent we issue shares of stock or other rights to purchase stock, including options or other rights, our existing stockholders may experience dilution in their share ownership in our company and their earnings per share may decrease.

 

21



 

In addition, acquisitions may result in the incurrence of debt, large one-time write-offs and restructuring charges.  They may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges.  Accounting for business combinations may involve complex and subjective valuations of the assets and liabilities recorded as a result of the business combination or other agreement, and in some instances contingent consideration, which is recorded in the Company’s Consolidated Financial Statements pursuant to the standards applicable for business combinations in accordance with accounting principles generally accepted in the United States.  Differences between the inputs and assumptions used in the valuations and actual results could have a material effect on our financial position and results of operation.

 

Any of these factors may materially and adversely affect our business and operations.

 

Because a significant portion of publishing sales are made to or through retailers and distributors, the insolvency of any of these parties could have an adverse impact on our financial condition and operating results.

 

In our publishing segment, sales to retailers and distributors are highly concentrated on a small group, which previously included Borders Group, Inc. (“Borders”). During fiscal 2011, we recorded a bad debt expense of $700,000 related to the Borders’ bankruptcy and liquidation. Sales to Borders for our publishing segment in fiscal 2011 declined $3.3 million compared to fiscal 2010. In addition, the Company experienced a 9% reduction in sales in the trade market of its book manufacturing segment in fiscal 2011 compared with the prior year. As a result of the impact of the Borders situation, in the third quarter of fiscal 2011, the Company recorded a pre-tax impairment charge of $8.6 million, representing 100% of REA’s goodwill as well as approximately $200,000 for prepublication costs related to underperforming titles.  Similarly, any bankruptcy, liquidation, insolvency or other failure of another major retailer or distributor could also have a material impact on the Company.

 

Electronic delivery of content may adversely affect our business.

 

Electronic delivery of content offers an alternative to the traditional delivery through print.  Widespread consumer acceptance of electronic delivery of books is uncertain, as is the extent to which consumers are willing to replace print materials with online hosted media content.  If our customers’ acceptance of electronic delivery of books and online hosted media content continues to grow, demand for and/or pricing of our printed products may be adversely affected. To the extent that we do not successfully adapt to provide our content in electronic form, demand for and sales of our content may suffer.

 

We could face significant liability as a result of our participation in multi-employer pension plans.

 

We participate in two multi-employer defined benefit pension plans for certain union employees. Multi-employer pension plans cover employees of and receive contributions from two or more unrelated employers under one or more union contracts. Our risks of participating in these types of plans include the fact that (i) plan contributions by each employer, including us, may be used to provide benefits to employees of other participating employers, (ii) if another participating employer withdraws from either plan, the unfunded obligations of the plan may be borne by the remaining participating employers, including us, and (iii) if we withdraw from participating in either plan, we may be required to pay the plan an amount based on our allocable share of the underfunded status of the plan.

 

We make periodic contributions to two multi-employer plans pursuant to our union contracts to allow the plans to meet the pension benefit obligations to plan participants. We currently expect that we will be required to contribute approximately $373,000 to these two plans in fiscal 2013, but these contributions could significantly increase due to other employers’ withdrawals or changes in the funded status of the plans. Further, if we continue to participate in such pension plans, our contributions may increase depending on the outcome of future union negotiations and applicable law, changes in the funding status of the plans, and any reduction in participation or withdrawal by other employers from the plans. Our continued participation in these plans could have a material adverse impact on our results of operations, cash flows or financial condition. In the event that we withdraw from participation in one or both of these plans, we could be required to make a withdrawal liability payment or series of payments to the plan, which would be reflected as an expense in our consolidated statements of operations and a liability on our consolidated balance sheet. Our withdrawal liability for any multiemployer plan would depend on the funded status of the plan and the level of our prior plan contributions.  Both plans are estimated to be underfunded as of June 29, 2013 and have a Pension Protection Act zone status of critical (“red”); such

 

22



 

status identifies plans that are less than 65% funded. In addition, our contributions to the Bindery Industry Employers GCC/IBT Pension Plan represented approximately 70% of total contributions in each of the last three years.  This plan currently includes only three other contributing employers.  A withdrawal by one or more of these employers could materially increase the amount of our required contributions to this plan.  A future withdrawal by us from either of the two multi-employer pension plans could result in a withdrawal liability for us, the amount of which could be material to our results of operations, cash flows and financial condition.

 

A failure to successfully adapt to changing book sales channels may have an adverse impact on our business.

 

Over the last several years, the “bricks & mortar” bookstore channel has experienced a significant contraction, including the bankruptcy of Borders Group, Inc. and Nebraska Book Co., the closure of many independent bookstores, and the reduction in inventory and shelf space for books in other national chains.  In addition to expanding our online and direct to consumer sales, we have responded by seeking alternative channels for our products, such as mass merchandising chains.  However, there is no guarantee that we will be able to address the challenges in these channels, including creating price competitive products that will successfully penetrate these markets and accurately predicting the volume of returns.

 

Declines in general economic conditions may adversely impact our business.

 

Economic conditions have the potential to impact our financial results significantly.  Within the book manufacturing and publishing segments, we may be adversely affected by the current worldwide economic downturn, including as a result of changes in government, business and consumer spending.  Examples of how our financial results may be impacted include:

 

·                  Fluctuations in federal or state government spending on education, including a reduction in tax revenues due to the current economic environment, could lead to a corresponding decrease in the demand for educational materials, which are produced in our book manufacturing segment and comprise a portion of our publishing products.

 

·                  Consumer demand for books can be impacted by reductions in disposable income when costs such as electricity and gasoline reduce discretionary spending.

 

·                  Tightness in credit markets may result in customers delaying orders to reduce inventory levels and may impact their ability to pay their debts as they become due and may disrupt supplies from vendors, and may result in customers becoming insolvent.

 

·                  Changes in the housing market may impact the sale of Creative Homeowner’s products.

 

·                  Reduced fundraising by religious customers may decrease their order levels.

 

·                  A slowdown in book purchases may result in retailers returning an unusually large number of books to publishers to reduce their inventories.

 

A failure to keep pace with rapid industrial and technological change may have an adverse impact on our business.

 

The printing industry is in a period of rapid technological evolution.  Our future financial performance will depend, in part, upon the ability to anticipate and adapt to rapid industrial and technological changes occurring in the industry and upon the ability to offer, on a timely basis, services that meet evolving industry standards.  If we are unable to adapt to such technological changes, we may lose customers and may not be able to maintain our competitive position. In addition, we may encounter difficulties in the implementation and start-up of new equipment and technology.

 

We are unable to predict which of the many possible future product and service offerings will be important to establish and maintain a competitive position or what expenditures will be required to develop and provide these products and services.  We cannot assure investors that one or more of these factors will not vary unpredictably, which could have a material adverse effect on us. In addition, we cannot assure investors, even if these factors turn out as we anticipate, that we will be able to implement our strategy or that the strategy will be successful in this rapidly evolving market.

 

23



 

Our operating results are unpredictable and fluctuate significantly, which may adversely affect our stock price.

 

Our quarterly and annual operating results have fluctuated in the past and are likely to fluctuate in the future due to a variety of factors, some of which are outside of our control. Factors that may affect our future operating results include:

 

·                  the timing and size of the orders for our books;

 

·                  the availability of markets for sales or distribution by our major customers;

 

·                  the lengthy and unpredictable sales cycles associated with sales of textbooks to the elementary and high school market;

 

·                  the migration of educators and students towards electronic delivery of content;

 

·                  our customers’ willingness and success in shifting orders from the peak textbook season to the off-peak season to even out our manufacturing load over the year;

 

·                  fluctuations in the currency market may make manufacturing in the United States more or less attractive and make equipment more or less expensive for us to purchase;

 

·                  issues that might arise from the integration of acquired businesses, including their inability to achieve expected results; and

 

·                  tightness in credit markets affecting the availability of capital for ourselves, our vendors, and/or our customers.

 

As a result of these and other factors, period-to-period comparisons of our operating results are not necessarily meaningful or indicative of future performance. In addition, the factors noted above may make it difficult for us to forecast and provide in a timely manner public guidance (including updates to prior guidance) related to our projected financial performance. Furthermore, it is possible that in future quarters our operating results could fall below the expectations of securities analysts or investors. If this occurs, the trading price of our common stock could decline.

 

Our financial results could be negatively impacted by impairments of goodwill or other intangible assets, or other long-lived assets.

 

We perform an annual assessment for impairment of goodwill and other intangible assets, as well as other long-lived assets, at the end of our fiscal year or whenever events or changes in circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value, including a downturn in the market value of the Company’s stock.  A downward revision in the fair value of one of our acquired businesses could result in impairments of goodwill and non-cash charges.  Any impairment charge could have a significant negative effect on our reported results of operations.  For example, at the end of the third quarter of fiscal 2011, the Company determined that the fair value of REA was below its carrying value and a pre-tax impairment charge of $8.6 million was recorded, which represented 100% of REA’s goodwill as well as approximately $200,000 for prepublication costs related to underperforming titles and long-lived assets.

 

Fluctuations in the cost and availability of paper and other raw materials may cause disruption and impact margins.

 

Purchases of paper and other raw materials represent a large portion of our costs.  In our book manufacturing segment, paper is normally supplied by our customers at their expense or price increases are passed through to our customers.  In our publishing segment, cost increases have generally been passed on to customers through higher prices or we have substituted a less expensive grade of paper.  However, if we are unable to continue to pass on these increases or substitute a less expensive grade of paper, our margins and profits could be adversely affected.

 

Availability of paper is important to both our book manufacturing and publishing segments.  Although we generally have not experienced difficulty in obtaining adequate supplies of paper, unexpected changes in the paper markets could result in a shortage of supply.  If this were to occur in the future, it could cause disruption to the business or increase paper costs, adversely impacting either or both net sales or profits.

 

24



 

Fluctuations in the costs and availability of other raw materials could adversely affect operating costs or customer demand and thereby negatively impact our operating results, financial condition or cash flows.

 

In addition, fluctuations in the markets for paper and raw materials may adversely affect the market for our waste byproducts, including recycled paper, and used plates, and therefore adversely affect our income from such sales.

 

Energy costs and availability may negatively impact our financial results.

 

Energy costs are incurred directly to run production equipment and facilities and indirectly through expenses such as freight and raw materials such as ink.  In a competitive market environment, increases to these direct and indirect energy related costs might not be able to be passed through to customers through price increases or mitigated through other means.  In such instances, increased energy costs could adversely impact operating costs or customer demand.  In addition, interruption in the availability of energy could disrupt operations, adversely impacting operating results.

 

Inadequate intellectual property protection for our publications could negatively impact our financial results.

 

Certain of our publications are protected by copyright, primarily held in the Company’s name.  Such copyrights protect our exclusive right to publish the work in the United States and in many other countries for specified periods.  Our ability to continue to achieve anticipated results depends in part on our ability to defend our intellectual property against infringement.  Our operating results may be adversely affected by inadequate legal and technological protections for intellectual property and proprietary rights in some jurisdictions and markets.  In addition, some of our publications are of works in the public domain, for which there is nearly no intellectual property protection.  Our operating results may be adversely affected by the increased availability of such works elsewhere, including on the Internet, either for free or for a lower price.

 

A failure to maintain or improve our operating efficiencies could adversely impact our profitability.

 

Because the markets in which we operate are highly competitive, we must continue to improve our operating efficiency in order to maintain or improve our profitability.  Although we have been able to expand our capacity, improve our productivity and reduce costs in the past, there is no assurance that we will be able to do so in the future.  In addition, reducing operating costs in the future may require significant initial costs to reduce headcount, close or consolidate operations, or upgrade equipment and technology.

 

Changes in postal rates and postal regulations may adversely impact our business.

 

Postal costs are a significant component of our direct marketing cost structure and postal rate changes can influence the number of catalogs that we may mail.  In addition, increased postal rates can impact the cost of delivering our products to customers.  The occurrence of either of these events could adversely affect consumer demand and our results of operations.

 

Our facilities are subject to stringent environmental laws and regulations, which may subject us to liability or increase our costs.

 

We use various materials in our operations that contain substances considered hazardous or toxic under environmental laws.  In addition, our operations are subject to federal, state, and local environmental laws relating to, among other things, air emissions, waste generation, handling, management and disposal, waste water treatment and discharge and remediation of soil and groundwater contamination.  Permits are required for the operation of certain of our businesses and these permits are subject to renewal, modification and in some circumstances, revocation.  Under certain environmental laws, including the Comprehensive Environmental Response, Compensation and Liability Act, as amended (“CERCLA,” commonly referred to as “Superfund”), and similar state laws and regulations, we may be liable for costs and damages relating to soil and groundwater contamination at off-site disposal locations or at our facilities.  Future changes to environmental laws and regulations may give rise to additional costs or liabilities that could have a material adverse impact on our financial position and results of operations.

 

25



 

A failure to hire and train key executives and other qualified employees could adversely affect our business.

 

Our success depends, in part, on our ability to continue to retain our executive officers and key management personnel.  Our business strategy also depends on our ability to attract, develop, motivate and retain employees who have relevant experience in the printing and publishing industries.  There can be no assurance that we can continue to attract and retain the necessary talented employees, including executive officers and other key members of management and, if we fail to do so, it could adversely affect our business.

 

A lack of skilled employees to manufacture our products may adversely affect our business.

 

If we experience problems hiring and retaining skilled employees, our business may be negatively affected.  The timely manufacture and delivery of our products requires an adequate supply of skilled employees, and the operating costs of our manufacturing facilities can be adversely affected by high turnover in skilled positions.  Accordingly, our ability to increase sales, productivity and net earnings could be impacted by our ability to employ the skilled employees necessary to meet our requirements.  Although our book manufacturing locations are geographically dispersed, individual locations may encounter strong competition with other manufacturers for skilled employees.  There can be no assurance that we will be able to maintain an adequate skilled labor force necessary to efficiently operate our facilities.  In addition, unions represent certain groups of employees at one of our locations, and periodically, contracts with those unions come up for renewal.  The outcome of those negotiations could have an adverse effect on our operations at that location.  Also, changes in federal and/or state laws may facilitate the organization of unions at locations that do not currently have unions, which could have an adverse effect on our operations.

 

We are subject to various laws and regulations that may require significant expenditures.

 

We are subject to federal, state and local laws and regulations affecting our business, including those promulgated under the Consumer Product Safety Act, the rules and regulations of the Consumer Products Safety Commission as well as laws and regulations relating to personal information.  We may be required to make significant expenditures to comply with such governmental laws and regulations and any amendments thereto. Complying with existing or future laws or regulations may materially limit our business and increase our costs.  Failure to comply with such laws may expose us to potential liability and have a material adverse effect on our results of operations.

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

 

On November 20, 2012, the Company announced the approval by its Board of Directors for the repurchase of up to $10 million of the Company’s outstanding common stock from time to time on the open market or in privately negotiated transactions, including pursuant to a Rule 10b5-1 nondiscretionary trading plan. This stock repurchase authorization is effective for a period of twelve months. Through June 29, 2013, 123,261 shares of common stock were repurchased for approximately $1.6 million.  No shares of the Company’s common stock were repurchased during the third quarter of fiscal 2013.

 

Item 3.   Defaults Upon Senior Securities

 

None.

 

Item 4.   Mine Safety Disclosures

 

Not applicable.

 

Item 5.   Other Information

 

There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors.

 

26



 

Item 6.   Exhibits

 

Exhibit No.

 

Description

 

 

 

10.1

 

Stock Purchase and Sale Agreement for the acquisition of FastPencil, Inc. dated April 30, 2013 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on May 3, 2013, and incorporated herein by reference).

 

 

 

31.1*

 

Certification of Chief Executive Officer

 

 

 

31.2*

 

Certification of Chief Financial Officer

 

 

 

32.1**

 

Certification of Chief Executive Officer

 

 

 

32.2**

 

Certification of Chief Financial Officer

 

 

 

101.INS**

 

XBRL Instance Document

 

 

 

101.SCH**

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL**

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF**

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB**

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE**

 

XBRL Taxonomy Extension Presentation Linkbase Document

 


*   Filed herewith.

** Furnished herewith.

 

27



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

COURIER CORPORATION

(Registrant)

 

 

 

 

 

August 8, 2013

 

By:

/s/James F. Conway III

Date

 

 

James F. Conway III

 

 

 

Chairman, President and

 

 

 

Chief Executive Officer

 

 

 

 

 

 

 

 

August 8, 2013

 

By:

/s/Peter M. Folger

Date

 

 

Peter M. Folger

 

 

 

Senior Vice President and

 

 

 

Chief Financial Officer

 

 

 

 

 

 

 

 

August 8, 2013

 

By:

/s/Kathleen M. Leon

Date

 

 

Kathleen M. Leon

 

 

 

Vice President and

 

 

 

Controller

 

28



 

EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

10.1

 

Stock Purchase and Sale Agreement for the acquisition of FastPencil, Inc. dated April 30, 2013 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on May 3, 2013, and incorporated herein by reference).

 

 

 

31.1*

 

Certification of Chief Executive Officer

 

 

 

31.2*

 

Certification of Chief Financial Officer

 

 

 

32.1**

 

Certification of Chief Executive Officer

 

 

 

32.2**

 

Certification of Chief Financial Officer

 

 

 

101.INS**

 

XBRL Instance Document

 

 

 

101.SCH**

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL**

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF**

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB**

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE**

 

XBRL Taxonomy Extension Presentation Linkbase Document

 


*    Filed herewith.

** Furnished herewith.

 

29


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