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 2015

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 March 28, 2015

 

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 1-34268

 

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

(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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 May 4, 2015

Common Stock, $1 par value

 

11,516,746 shares

 

 

 



 

COURIER CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

(Dollars in thousands except per share amounts)

 

 

 

QUARTER ENDED

 

SIX MONTHS ENDED

 

 

 

March 28,

 

March 29,

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

60,580

 

$

60,580

 

$

127,074

 

$

132,840

 

Cost of sales

 

51,102

 

50,070

 

100,108

 

104,583

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

9,478

 

10,510

 

26,966

 

28,257

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses (Note A)

 

25,618

 

11,429

 

39,805

 

24,544

 

Impairment charge, net (Note G)

 

434

 

1,870

 

434

 

1,870

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss) from continuing operations

 

(16,574

)

(2,789

)

(13,273

)

1,843

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

691

 

108

 

828

 

283

 

 

 

 

 

 

 

 

 

 

 

Pretax income (loss) from continuing operations

 

(17,265

)

(2,897

)

(14,101

)

1,560

 

 

 

 

 

 

 

 

 

 

 

Income tax provision (benefit) (Note C)

 

(1,709

)

(339

)

(341

)

1,297

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

(15,556

)

(2,558

)

(13,760

)

263

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operation, net of tax (Note I)

 

 

(812

)

 

(986

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(15,556

)

(3,370

)

(13,760

)

(723

)

 

 

 

 

 

 

 

 

 

 

Less: Loss attributable to noncontrolling interests

 

(49

)

 

(49

)

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Courier common stockholders

 

$

(15,507

)

$

(3,370

)

$

(13,711

)

$

(723

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share (Note J)

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

(1.37

)

$

(0.23

)

$

(1.22

)

$

0.02

 

Net loss from discontinued operation

 

 

(0.07

)

 

(0.09

)

Net income (loss)

 

(1.37

)

(0.30

)

(1.22

)

(0.06

)

Less: Net loss attributable to noncontrolling interests

 

 

 

 

 

Net loss attributable to Courier common stockholders

 

$

(1.37

)

$

(0.30

)

$

(1.21

)

$

(0.06

)

Diluted:

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

(1.37

)

$

(0.23

)

$

(1.22

)

$

0.02

 

Net loss from discontinued operation

 

 

(0.07

)

 

(0.09

)

Net income (loss)

 

(1.37

)

(0.30

)

(1.22

)

(0.06

)

Less: Net loss attributable to noncontrolling interests

 

 

 

 

 

Net loss attributable to Courier common stockholders

 

$

(1.37

)

$

(0.30

)

$

(1.21

)

$

(0.06

)

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

0.21

 

$

0.21

 

$

0.42

 

$

0.42

 

 

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

 

1



 

COURIER CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF

COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands)

 

 

 

QUARTER ENDED

 

SIX MONTHS ENDED

 

 

 

March 28,

 

March 29,

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(15,556

)

$

(3,370

)

$

(13,760

)

$

(723

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income

 

19

 

 

 

48

 

Translation adjustments (Note F)

 

(1,007

)

 

(1,007

)

 

Change in fair value of derivative (Note H)

 

175

 

 

112

 

 

Other comprehensive income (loss)

 

(813

)

 

(895

)

48

 

Comprehensive income (loss)

 

(16,369

)

(3,370

)

(14,655

)

(675

)

Less comprehensive loss attributable to noncontrolling interests (Note F)

 

(452

)

 

(452

)

 

Comprehensive income (loss) attributable to Courier stockholders

 

$

(16,821

)

$

(3,370

)

$

(15,107

)

$

(675

)

 

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

 

2



 

COURIER CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

 

 

 

March 28,

 

September 27,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,646

 

$

4,144

 

Investments

 

1,129

 

1,024

 

Accounts receivable, less allowance for uncollectible accounts of $321 at March 28, 2015 and $296 at September 27, 2014

 

35,582

 

48,200

 

Inventories (Note B)

 

46,239

 

38,239

 

Deferred income taxes

 

4,007

 

4,021

 

Recoverable income taxes

 

6,804

 

2,974

 

Other current assets

 

1,615

 

1,400

 

 

 

 

 

 

 

Total current assets

 

97,022

 

100,002

 

 

 

 

 

 

 

Property, plant and equipment less accumulated depreciation: $236 at March 28, 2015 and $231 at September 27, 2014

 

80,869

 

83,145

 

 

 

 

 

 

 

Goodwill (Notes A, F and G)

 

24,003

 

16,880

 

 

 

 

 

 

 

Other intangibles, net (Notes A, F and G)

 

4,227

 

1,946

 

 

 

 

 

 

 

Prepublication costs, net (Note A)

 

5,393

 

5,711

 

 

 

 

 

 

 

Long-term investments (Notes F and H)

 

2,629

 

6,429

 

 

 

 

 

 

 

Other assets

 

2,880

 

2,403

 

 

 

 

 

 

 

Total assets

 

$

217,023

 

$

216,516

 

 

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

 

3



 

COURIER CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

 

 

 

March 28,

 

September 27,

 

 

 

2015

 

2014

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of capital lease obligations (Notes D and F)

 

$

3,742

 

$

2,618

 

Current maturities of long-term debt (Notes D and F)

 

1,199

 

 

Accounts payable

 

14,274

 

11,124

 

Accrued payroll

 

6,820

 

8,610

 

Accrued taxes

 

1,128

 

1,051

 

Termination fee reimbursement (Note A)

 

10,000

 

 

Other current liabilities

 

10,129

 

8,918

 

 

 

 

 

 

 

Total current liabilities

 

47,292

 

32,321

 

 

 

 

 

 

 

Long-term debt (Notes D and F)

 

24,148

 

24,508

 

Capital lease obligations (Notes D and F)

 

5,261

 

5,839

 

Deferred income taxes

 

1,857

 

1,286

 

Contingent consideration (Note G)

 

 

1,415

 

Other liabilities

 

7,990

 

6,731

 

 

 

 

 

 

 

Total liabilities

 

86,548

 

72,100

 

 

 

 

 

 

 

Stockholders’ equity (Notes L and N):

 

 

 

 

 

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

 

 

 

Common stock, $1 par value-authorized 18,000,000 shares; issued 11,532,000 at March 28, 2015 and 11,424,000 at September 27, 2014

 

11,532

 

11,424

 

Additional paid-in capital

 

23,077

 

21,617

 

Retained earnings

 

93,362

 

111,901

 

Accumulated other comprehensive loss

 

(1,019

)

(526

)

Total Courier stockholders’ equity

 

126,952

 

144,416

 

 

 

 

 

 

 

Noncontrolling interest (Note F)

 

3,523

 

 

 

 

 

 

 

 

Total equity

 

130,475

 

144,416

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

217,023

 

$

216,516

 

 

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)

 

 

 

SIX MONTHS ENDED

 

 

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

Operating Activities:

 

 

 

 

 

Net income (loss) from continuing operations

 

$

(13,760

)

$

263

 

Loss from discontinued operation, net of tax (Note I)

 

 

(986

)

Net loss

 

(13,760

)

(723

)

Adjustments to reconcile net income (loss) to cash provided from operating activites:

 

 

 

 

 

Depreciation of property, plant and equipment

 

10,250

 

10,812

 

Amortization of prepublication costs

 

1,573

 

1,816

 

Amortization of intangible assets

 

334

 

464

 

Impairment charge (Note G)

 

1,742

 

4,500

 

Change in fair value of loans receivable (Note F)

 

581

 

 

Change in fair value of contingent consideration (Note G)

 

(1,415

)

(2,280

)

Change in fair value of derivative (Note H)

 

(161

)

 

Stock-based compensation

 

639

 

743

 

Deferred income taxes

 

(564

)

(282

)

Changes in assets and liabilities - net of acquisition:

 

 

 

 

 

Termination fee reimbursement (Note A)

 

10,000

 

 

Accounts receivable

 

13,228

 

11,638

 

Inventory

 

(7,781

)

(2,050

)

Accounts payable

 

1,164

 

(2,646

)

Accrued and recoverable taxes

 

(3,398

)

(5,340

)

Other elements of working capital

 

(2,388

)

(2,647

)

Other long-term, net

 

(533

)

91

 

Cash provided from operating activities

 

9,511

 

14,096

 

 

 

 

 

 

 

Investment Activities:

 

 

 

 

 

Capital expenditures

 

(3,199

)

(7,532

)

Acquisition of business, net of cash acquired (Note F)

 

(482

)

 

Prepublication costs (Note A)

 

(1,255

)

(1,479

)

Loan receivable and other investments (Notes F and G)

 

(605

)

(4,917

)

Proceeds on disposition of assets (Note I)

 

275

 

 

Life insurance proceeds

 

 

387

 

Cash used for investment activities

 

(5,266

)

(13,541

)

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

Proceeds from capital lease financing (Note D)

 

 

10,488

 

Repayments under capital lease financing (Note D)

 

(330

)

(740

)

Other long-term debt borrowings (repayments) (Note D)

 

(2,415

)

(1,242

)

Cash dividends

 

(4,828

)

(4,842

)

Proceeds from stock plans

 

943

 

175

 

Cash provided from (used for) financing activities

 

(6,630

)

3,839

 

 

 

 

 

 

 

Effect of exchange rate on cash and cash equivalents

 

(113

)

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(2,498

)

4,394

 

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the period

 

4,144

 

57

 

 

 

 

 

 

 

Cash and cash equivalents at the end of the period

 

$

1,646

 

$

4,451

 

 

The accompanying notes are an integral part of the consolidated 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 March 28, 2015 and the consolidated condensed statements of operations and statements of comprehensive income for the three-month and six-month periods ended March 28, 2015 and March 29, 2014 and the statements of cash flows for the six-month periods ended March 28, 2015 and March 29, 2014 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 27, 2014 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 27, 2014.

 

Agreement and Plan of Merger

 

On February 5, 2015, the Company entered into an Agreement and Plan of Merger with RR Donnelley (the “RRD Merger Agreement”).  Under the terms of the RRD Merger Agreement, the Company’s shareholders will have the option to elect to receive either $23.00 in cash or 1.3756 RR Donnelley common shares for each outstanding share of the Company they own.  Such elections are subject to pro ration so that a total of 8.0 million shares of RR Donnelley common stock, representing approximately 51% of the total merger consideration based on the price of RR Donnelley stock on the date of the RRD Merger Agreement, will be issued in the merger.  The completion of the transaction is subject to customary closing conditions, including regulatory approval and approval by Courier’s shareholders. One of the conditions to closing was met on March 23, 2015 with the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The transaction is expected to close in the Company’s third quarter of fiscal 2015.

 

On January 16, 2015, the Company entered into an Agreement and Plan of Merger (the “Quad Merger Agreement”) with Quad/Graphics, Inc. (“Quad”) and subsequently terminated the Quad Merger Agreement on February 5, 2015. In accordance with the terms of the Quad Merger Agreement, upon termination, the Company paid Quad a $10 million termination fee.  Under the terms of the RRD Merger Agreement, RR Donnelley reimbursed the Company the entire $10 million termination fee.  For accounting purposes, recognition of the $10 million reimbursement from RR Donnelley has been deferred until the transaction closes and as such, the deferral of the reimbursement was included in Current Liabilities in the accompanying Consolidated Condensed Balance Sheet at March 28, 2015.

 

Discontinued Operations

 

The Company sold one of the businesses in its publishing segment, Federal Marketing Corporation, d/b/a Creative Homeowner (“Creative Homeowner”), in September 2014 (see Note I). Creative Homeowner was classified as a discontinued operation in the Company’s financial statements for all periods presented.

 

Goodwill and Other Intangibles

 

The Company evaluates possible impairment 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. These tests are performed at the reporting unit level, which is the operating segment or one level below the operating segment. The goodwill impairment test is a two-step test.  In the first step, the Company compares the fair value of the reporting unit to its carrying value.  If the fair value of the reporting unit exceeds the carrying value of its net assets, then goodwill is not impaired and the Company is not required to perform further testing.  If the carrying value of the net assets of the reporting unit exceeds its fair value, then a second step is performed in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of its goodwill (see Note G).

 

6



 

On November 18, 2014, the Company acquired a 60% ownership interest in Digital Page Gráfica E Editora (“Digital Page”), a Sao Paulo-based digital printing firm serving the education market in Brazil, and recorded goodwill of approximately $8.9 million (see Note F). “Other intangibles” include trade names, customer lists, and technology. Trade names with indefinite lives are not subject to amortization and are reviewed at least annually at the end of the fiscal year or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable.  The Company recorded $3.7 million of amortizable intangible assets in the first quarter of fiscal 2015 with the acquisition of Digital Page (see Note F).

 

Other intangible assets are being amortized over two to ten-year periods. Total amortization expense for intangibles was approximately $176,000 and $233,000 in the second quarters and $334,000 and $464,000 in the first six months of fiscal years 2015 and 2014, respectively. Annual amortization expense is expected to be approximately $304,000 in fiscal 2015, $235,000 in fiscal 2016, $205,000 in fiscal 2017, and $200,000 in fiscal years 2018 through 2020.

 

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 (see Note G).  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.

 

Fair Value of Financial Instruments

 

Financial instruments consist primarily of cash, investments in mutual funds, accounts receivable, investment in convertible promissory notes (see Note H), accounts payable, and debt obligations.  At March 28, 2015 and September 27, 2014, the fair value of the Company’s cash, accounts receivable and accounts payable approximated their carrying values due to the short maturity of these instruments. 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. 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 three 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 63% and 62% of the Company’s inventories at March 28, 2015 and September 27, 2014, 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)

 

 

 

March 28,
2015

 

September 27,
2014

 

Raw materials

 

$

12,382

 

$

9,652

 

Work in process

 

13,460

 

10,326

 

Finished goods

 

20,397

 

18,261

 

Total

 

$

46,239

 

$

38,239

 

 

7



 

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 Company recorded discrete items in the first and second quarters of fiscal 2015 of $0.8 million and $13.0 million, respectively, for transaction costs, which are generally not deductible for income tax purposes, relating to the pending acquisition of the Company discussed in Note A. In addition, in the second quarter of fiscal 2015, the Company recorded two discrete items; an impairment charge and a related adjustment to the fair value of contingent consideration, which are not deductible for income tax purposes (see Note G).

 

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

 

 

 

(000’s Omitted)

 

 

 

Six Months Ended

 

 

 

March 28, 2015

 

March 29, 2014

 

Federal taxes at statutory rates

 

$

(4,936

)

35.0

%

$

546

 

35.0

%

State taxes, net of federal tax benefit

 

(23

)

0.2

 

138

 

8.9

 

Federal manufacturer’s deduction

 

40

 

(0.3

)

(141

)

(9.1

)

Impairment charge and change in fair value of contingent consideration (Note G)

 

(116

)

0.8

 

716

 

45.9

 

Transaction costs (Note A)

 

4,701

 

(33.3

)

 

 

Other

 

(7

)

 

38

 

2.4

 

Total

 

$

(341

)

2.4

%

$

1,297

 

83.1

%

 

D.                                    LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

 

The Company 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%.  In December 2014, the Company extended the maturity date of this credit facility from March 2016 to December 2019.  At March 28, 2015, the Company had $24.0 million in borrowings under this facility at an interest rate of 1.4%. The revolving credit facility contains restrictive covenants including provisions relating to the incurrence of additional indebtedness and a quarterly test of EBITDA to debt service.  The Company was in compliance with all such covenants at March 28, 2015.  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.

 

In the first quarter of fiscal 2014, the Company entered into a $10.5 million master security lease agreement for printing and binding equipment in its Kendallville, Indiana digital print facility. The Company accounted for this transaction as a capital lease obligation, which expires in October 2017. At March 28, 2015, $7.2 million of debt was outstanding under this arrangement and the implicit interest rate was 1.8%.  Depreciation expense was calculated on a straight-line basis over the estimated useful life of the assets under the capital lease and such depreciation was approximately $750,000 and $700,000 in the first six months of fiscal years 2015 and 2014, respectively.

 

In November 2014, the Company acquired Digital Page (see Note F) and assumed various capital lease and other debt obligations. Current maturities under the capital lease obligations and other debt of $1.1 million and $1.2 million, respectively, were included in the accompanying consolidated condensed balance sheet at March 28, 2015. The long-term portion of this debt of $0.9 million includes principal payments under Digital Page’s capital leases of $0.7 million due through June 2017.

 

E.                                    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 trade book publishers.  In November 2014, Company acquired a 60% ownership interest in

 

8



 

Digital Page Gráfica E Editora (“Digital Page”), a Sao Paulo-based digital printing firm serving the education market in Brazil, which has been included as a reporting unit within the book manufacturing segment (see Note F). The publishing segment consists of Dover Publications, Inc. and Research & Education Association, Inc. (“REA”). In September 2014, the Company sold its Creative Homeowner business (see Note I), which had been included in the publishing segment. Creative Homeowner was classified as a discontinued operation in the Company’s financial statements and, as such, was not reflected in the net sales and operating income (loss) in the table below.

 

Segment performance is evaluated based on several factors, of which the primary financial measure is operating income.  For segment reporting purposes, 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.  The Company recorded $13.8 million for transaction costs in the first six months of fiscal 2015 relating to the pending acquisition of the Company discussed in Note A.  Such costs are not allocated to the business segments. As such, segment performance is evaluated exclusive of interest, income taxes, stock-based compensation, impairment charges, other income and certain transaction costs associated with the pending acquisition.  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 from continuing operations for the three-month and six-month periods ended March 28, 2015 and March 29, 2014.

 

 

 

(000’s Omitted)

 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

March 28,

 

March 29,

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

2015

 

2014

 

Net sales:

 

 

 

 

 

 

 

 

 

Book manufacturing

 

$

55,224

 

$

55,355

 

$

114,869

 

$

120,931

 

Publishing

 

7,548

 

8,128

 

16,563

 

16,713

 

Elimination of intersegment sales

 

(2,192

)

(2,903

)

(4,358

)

(4,804

)

Total

 

$

60,580

 

$

60,580

 

$

127,074

 

$

132,840

 

 

 

 

 

 

 

 

 

 

 

Pretax income (loss):

 

 

 

 

 

 

 

 

 

Book manufacturing operating income (loss)

 

$

(2,700

)

$

(718

)

$

1,535

 

$

4,592

 

Publishing operating income (loss)

 

(141

)

211

 

117

 

(201

)

Impairment charge and reduction in fair value of contingent consideration (Note G)

 

(434

)

(1,870

)

(434

)

(1,870

)

Transaction costs (Note A)

 

(13,015

)

 

(13,815

)

 

Stock-based compensation

 

(274

)

(385

)

(639

)

(743

)

Elimination of intersegment profit

 

(10

)

(27

)

(37

)

65

 

Interest expense, net

 

(691

)

(108

)

(828

)

(283

)

Total

 

$

(17,265

)

$

(2,897

)

$

(14,101

)

$

1,560

 

 

F.                                     BUSINESS ACQUISITION

 

On November 18, 2014, the Company acquired 60% of the outstanding stock of Digital Page Gráfica E Editora (“Digital Page”), a Sao Paulo-based digital printing firm, and the founder of Digital Page continues to own 40% of the business and actively manage the operations. The investment in Digital Page complements the Company’s license of its custom publishing platform to Santillana, the largest Spanish/Portuguese educational publisher in the world as Digital Page has a multiyear commercial print agreement with Santillana. Under the investment agreement, as revised in August 2014, the Company invested a total of 20 million Brazilian Reals or $7.7 million. During the first quarter of fiscal 2014, the Company funded two loans to Digital Page totaling approximately 10 million Brazilian Reals which were secured by the pledge of the equity interest in Digital Page. The principal amount of the loans was credited towards the total purchase price, which was a non-cash investing activity for the first quarter of fiscal 2015.  The Company then made a capital contribution of approximately 10 million Brazilian Reals to Digital Page upon closing of which 1.25 million was paid directly to the founding shareholder.  The acquisition was accounted for as a business combination and, accordingly, Digital Page’s financial results are included as a reporting unit within the book manufacturing segment in the

 

9



 

consolidated financial statements from the date of acquisition and are reported on a one-month lag to facilitate accurate reporting. In the second quarter and first half of fiscal 2015, sales of $3.8 million and operating income of $0.3 million, prior to reflecting the 40% noncontrolling interest, were included in the accompanying consolidated condensed financial statements. Pro forma information related to this acquisition is not included because the impact on the Company’s consolidated results of operations is considered to be immaterial. Acquisition costs of approximately $150,000 were included in selling and administrative expenses in the first six months of fiscal 2015.

 

The acquisition of Digital Page was recorded by allocating 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.

 

The acquisition-date fair value of the consideration transferred, including the $482,000 paid directly to the founding shareholder, was as follows:

 

 

 

(000’s Omitted)

 

Cash consideration

 

$

3,535

 

Conversion of principal of loans

 

4,168

 

Total fair value of consideration transferred

 

$

7,703

 

 

Based on these valuations, the preliminary purchase price allocation was as follows:

 

 

 

(000’s Omitted)

 

Cash

 

$

3,053

 

Accounts receivable

 

1,051

 

Inventories

 

239

 

Machinery and equipment

 

5,227

 

Goodwill

 

8,896

 

Identified intangibles

 

3,694

 

Other assets

 

1,110

 

Accounts payable and accrued liabilities

 

(5,874

)

Capital leases and other debt obligations

 

(4,462

)

Deferred income tax liability

 

(1,256

)

Total fair value of net assets acquired

 

11,678

 

Less: Noncontrolling interest

 

(3,975

)

Total fair value of consideration transferred

 

$

7,703

 

 

The fair value of the acquired identifiable intangible assets, deferred taxes and tax obligations are provisional pending receipt of the final valuations for those assets and liabilities. The Company expects to finalize the preliminary estimates of the fair value of the intangible assets, deferred taxes, and tax obligations by the end of this fiscal year.

 

G.                                   GOODWILL IMPAIRMENT CHARGE

 

The Company evaluates possible impairment 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 (a “triggering event”). These tests are performed at the reporting unit level, which is the operating segment or one level below the operating segment. The goodwill impairment test is a two-step test.  In the second quarter of fiscal 2015, the Company determined there was a triggering event for FastPencil, which had been acquired in April 2013 and is a reporting unit within the book manufacturing segment. Revenue growth for this start-up business had been slower than projected at acquisition and the Company performed the step-one impairment test on FastPencil’s goodwill.  After performing the step-one test, the Company determined that the fair value of FastPencil was below its carrying value and as such the second step was required.  In arriving at this conclusion, the Company used a valuation methodology based on a discounted cash flow and a market value approach (Level 3 in the three-tier hierarchy — see Note A).  Key assumptions and estimates included revenue and operating income forecasts and the assessed growth rate after the forecast period. The second step of the impairment test for FastPencil included estimating the fair value of the tangible and identified intangible assets and liabilities of the impaired reporting unit.  The implied fair value of goodwill is the residual of the total fair value of the reporting unit less the accumulated fair value of identified tangible and intangible

 

10



 

assets and liabilities.  Based on the results of these valuations, the Company concluded it was necessary to record a goodwill impairment charge of $1.0 million at the end of the second quarter of fiscal 2015 as well as an impairment charge of $0.7 million for FastPencil’s other intangible assets, representing all of the remaining goodwill and intangible assets of FastPencil. In addition, at March 28, 2015, the Company performed a fair value assessment of the related contingent “earn out” consideration payable and recorded a reduction in the liability of $1.3 million. The net impact of the impairment of FastPencil’s goodwill and the reduction in the contingent consideration payable was a charge of $434,000 in the second quarter of fiscal 2015; both adjustments are non-cash and the goodwill impairment and reduction in the contingent consideration liability are not deductible for income tax purposes. In April 2015, the Company sold 100% of its stock in FastPencil to one of the founders of FastPencil and expects to recognize a small gain on the sale.

 

H.                                   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 convertible promissory notes 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 (see Note G).

 

Long-term investments in the accompanying consolidated condensed balance sheet include convertible promissory notes of $2.0 million issued by Nomadic Learning Limited, a startup business focused on corporate and educational learning. At March 28, 2015, a fair value assessment was performed using a discounted cash flow model and the fair value approximated the carrying value of the notes. In addition, a fair value assessment of the conversion feature embedded in the convertible promissory notes was performed at March 28, 2015 resulting in a fair value of $0.6 million reflected in “Long-term investments” and “Accumulated other comprehensive loss” in the accompanying consolidated balance sheet.

 

The following table shows the assets and liabilities carried at fair value measured on a recurring basis as of March 28, 2015 and September 27, 2014 classified in one of the three levels 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 March 28, 2015:

 

 

 

 

 

 

 

 

 

Short-term investments in mutual funds

 

$

1,129

 

$

1,129

 

 

 

 

Convertible promissory notes:

 

 

 

 

 

 

 

 

 

Investment in notes receivable

 

2,000

 

 

 

 

 

$

2,000

 

Embedded derivative

 

629

 

 

 

 

 

629

 

 

 

 

 

 

 

 

 

 

 

As of September 27, 2014:

 

 

 

 

 

 

 

 

 

Short-term investments in mutual funds

 

$

1,016

 

$

1,016

 

 

 

Convertible promissory notes:

 

 

 

 

 

 

 

 

 

Investment in notes receivable

 

1,500

 

 

 

$

1,500

 

Embedded derivative

 

468

 

 

 

468

 

Forward foreign exchange contracts

 

8

 

 

 

8

 

 

 

Contingent consideration liability (Note G)

 

(1,415

)

 

 

(1,415

)

 

11



 

The following table reflects fair value measurements using significant unobservable inputs (Level 3):

 

 

 

(000’s omitted)

 

 

 

Convertible
Promissory
Notes

 

Embedded
Derivative

 

Contingent
Consideration
Liability

 

Balance at September 27, 2014

 

$

1,500

 

$

468

 

$

(1,415

)

Change in fair value

 

 

161

 

1,415

 

Amounts paid

 

500

 

 

 

Balance at March 28, 2015

 

$

2,000

 

$

629

 

 

 

 

 

 

 

 

 

 

Balance at September 28, 2013

 

$

500

 

 

$

(4,960

)

Change in fair value

 

 

 

2,280

 

Amounts paid

 

500

 

 

 

Balance at March 29, 2014

 

$

1,000

 

$

 

$

(2,680

)

 

I.                                        DISCONTINUED OPERATIONS

 

In September 2014, the Company sold Creative Homeowner, which was a separate reporting unit within its publishing segment, for $1.0 million. Proceeds received from the sale were $450,000 in fiscal 2014, $275,000 in the first half of fiscal 2015 and the balance due before the end of fiscal 2015. The following table summarizes the operating results of this discontinued operation for the six-month period ended March 29, 2014.

 

 

 

(000’s Omitted)

 

Revenues

 

$

1,399

 

 

 

 

 

Pretax loss from operations

 

$

(1,568

)

Income tax provision (benefit)

 

(582

)

Net loss from discontinued operations

 

$

(986

)

 

J.                           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. In the second quarter and first six months of fiscal 2015, 203,000 and 237,000, respectively, of potentially dilutive shares were excluded due to the Company incurring losses in those periods. In the second quarter of fiscal 2014, 221,000 of potentially dilutive shares were excluded due to the Company incurring a loss in that period.

 

 

 

(000’s Omitted)

 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

March 28,
2015

 

March 29,
2014

 

March 28,
2015

 

March 29,
2014

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares for basic

 

11,335

 

11,314

 

11,305

 

11,299

 

Effect of potentially dilutive shares

 

 

 

 

233

 

Weighted average shares for diluted

 

11,335

 

11,314

 

11,305

 

11,532

 

 

K.                                   SHARE REPURCHASE PROGRAM

 

On November 20, 2014, 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 March 28, 2015, the Company had not repurchased any shares of common stock under this program.

 

12



 

In November 2013, 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.  In fiscal 2014, the Company repurchased 153,150 shares of common stock for approximately $2.0 million under this program. This program expired on November 21, 2014.

 

L.                        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 second quarters of fiscal 2015 and 2014 was $274,000 and $385,000, respectively.  The related tax benefit recognized in the second quarters of fiscal 2015 and 2014 was $96,000 and $137,000, respectively.  For the first six months of fiscal 2015 and 2014, stock-based compensation was $639,000 and $743,000, respectively, and the related tax benefit recognized was $233,000 and $264,000 respectively. Unrecognized stock-based compensation cost at March 28, 2015 was $1.6 million, to be recognized over a weighted-average period of 2.1 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. Options and grants relating to fiscal 2014 were awarded in November 2014; 34,896 stock options were awarded under the 2011 Plan with an exercise price of $13.44 per share, which was the stock price on the date of grant, and a weighted-average fair value of $3.03 per share. In addition, 45,132 stock grants were awarded in November 2014 with a weighted-average fair value of $13.44 per share. In the second quarter of fiscal 2015, 4,558 options were exercised at a weighted-average exercise price of $13.71 per share. Also in the second quarter of fiscal 2015, 53,179 options that had been issued under the Courier Corporation 2010 Stock Equity Plan for Non-Employee Directors were exercised at a weighted-average exercise price of $13.71 per share.

 

The weighted average Black-Scholes fair value assumptions for stock options awarded under the 2011 Plan in fiscal 2015 were as follows:

 

Estimated life of options (years)

 

10

 

Risk-free interest rate

 

2.6

%

Expected volatility

 

42

%

Expected dividend yield

 

6.0

%

 

M.                                 RESTRUCTURING COSTS

 

In fiscal 2011, the Company recorded restructuring costs of $7.7 million in the book manufacturing segment 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. As of March 28, 2015, remaining payments of approximately $2.4 million will be made over periods ranging from less than one year for the building lease obligation to 17 years for the liability related to the multi-employer pension plan.  At March 28, 2015, approximately $0.8 million of the restructuring payments were included in “Other current liabilities” and $1.7 million were included in “Other liabilities” in the accompanying consolidated condensed balance sheet.

 

13



 

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

 

 

 

(000’s omitted)

 

 

 

Accrual at

 

Charges

 

Costs

 

Accrual at

 

 

 

September 27,

 

or

 

Paid or

 

March 28,

 

 

 

2014

 

Reversals

 

Settled

 

2015

 

Employee severance, post-retirement and other benefit costs

 

$

88

 

 

$

(24

)

$

64

 

Early withdrawal from multi-employer pension plan

 

1,926

 

 

(38

)

1,888

 

Lease termination, facility closure and other costs

 

765

 

 

(185

)

580

 

Total

 

$

2,779

 

 

$

(247

)

$

2,532

 

 

N.                                    EQUITY

 

The Company’s equity as of March 28, 2015 and September 27, 2014, and changes during the six month period ended March 28, 2015, were as follows:

 

 

 

(000’s omitted)

 

 

 

Company
Stockholders’
Equity

 

Noncontrolling
Interest

 

Total
Equity

 

Balance at September 27, 2014

 

$

144,416

 

 

$

144,416

 

Net income (loss)

 

(13,711

)

(49

)

(13,760

)

Cash dividends

 

(4,828

)

 

(4,828

)

Noncontrolling interest in acquired business (Note F)

 

 

3,975

 

3,975

 

Changes in other comprehensive income (loss)

 

(492

)

(403

)

(895

)

Stock-based compensation

 

639

 

 

639

 

Other stock plan activity

 

928

 

 

928

 

Balance at March 28, 2015

 

$

126,952

 

$

3,523

 

$

130,475

 

 

The Company’s equity as of March 29, 2014 and September 28, 2013, and changes during the six month period ended March 29, 2014, were as follows:

 

 

 

(000’s omitted)

 

 

 

Company
Stockholders’
Equity

 

Noncontrolling
Interest

 

Total
Equity

 

Balance at September 28, 2013

 

$

146,044

 

 

$

146,044

 

Net income (loss)

 

(723

)

 

(723

)

Cash dividends

 

(4,842

)

 

(4,842

)

Changes in other comprehensive income

 

48

 

 

48

 

Stock-based compensation

 

743

 

 

743

 

Other stock plan activity

 

365

 

 

365

 

Balance at March 29, 2014

 

$

141,635

 

 

$

141,635

 

 

14



 

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 two to ten years and indefinite-lived trade names. 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 27, 2014, which resulted in no change to the nature or carrying amounts of its intangible assets, with the exception of FastPencil, a reporting unit within the book manufacturing segment. The Company concluded it was necessary to record a goodwill impairment charge of $4.5 million at the end of the second quarter of fiscal 2014 and $0.3 million at the end of the fourth quarter of fiscal 2014, as well as an impairment charge of $1.2 million for FastPencil’s other intangible assets at the end of the fourth quarter of fiscal 2014. At the end of the second quarter of fiscal 2015, an impairment charge of $1.7 million was recorded representing the remainder of FastPencil’s goodwill and other intangible assets.  Changes in market conditions or poor operating results could result in a decline in the fair value of the Company’s goodwill and other intangible assets thereby potentially requiring an 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 three 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.

 

15



 

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 two 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.  Courier offers 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”) and Research & Education Association, Inc. (“REA”).  Dover publishes over 10,000 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.

 

On November 18, 2014, the Company acquired 60% of the outstanding stock of Digital Page Gráfica E Editora (“Digital Page”), a Sao Paulo-based digital printing firm, and the founder of Digital Page continues to own 40% of the business and actively manage the operations. The investment in Digital Page complements the Company’s license of its custom publishing platform to Santillana, the largest Spanish/Portuguese educational publisher in the world as Digital Page has a multiyear commercial print agreement with Santillana. The acquisition of Digital Page was accounted for as a business combination and, accordingly, Digital Page’s financial results are included as a reporting unit within the book manufacturing segment in the consolidated financial statements from the date of acquisition and are reported on a one-month lag to facilitate accurate reporting.

 

On January 16, 2015, the Company entered into an Agreement and Plan of Merger (the “Quad Merger Agreement”) with Quad/Graphics, Inc. (“Quad”) pursuant to which the Company’s shareholders would have received $20.50 per share, consisting of cash and shares of Quad common stock.  On January 26, 2015, the Company received an unsolicited proposal from R.R. Donnelley & Sons Company (“RR Donnelley”) to acquire the Company for $23.00 per share, consisting of cash and shares of RR Donnelley common stock.

 

On February 5, 2015, the Company terminated the Quad Merger Agreement and simultaneously entered into an Agreement and Plan of Merger with RR Donnelley (the “RRD Merger Agreement”).  Under the terms of the RRD Merger Agreement, the Company’s shareholders will have the option to elect to receive either $23.00 in cash or 1.3756 RR Donnelley common shares for each outstanding share of Courier they own.  Such elections are subject to pro ration so that a total of 8.0 million shares of RR Donnelley common stock, representing approximately 51% of the total merger consideration based on the price of RR Donnelley stock on the date of the RRD Merger Agreement, will be issued in the merger.  The completion of the transaction is subject to customary closing conditions, including approval by Courier’s shareholders.  One of the conditions to closing was met on March 23, 2015 with the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976  and the Company expects the transaction to close in the second quarter of calendar 2015.

 

In accordance with the terms of the Quad Merger Agreement, upon termination, the Company paid Quad a $10 million termination fee.  Under the terms of the RRD Merger Agreement, RR Donnelley reimbursed the Company the entire $10 million termination fee.  The $10 million termination fee paid to Quad was included in selling and administrative expenses in the second quarter of fiscal 2015. For accounting purposes, recognition of the $10 million reimbursement from RR Donnelley has been deferred until the transaction closes and as such, the deferral of the reimbursement was included in current liabilities in the accompanying consolidated condensed balance sheet at March 28, 2015.

 

16



 

Results of Continuing Operations:

 

FINANCIAL HIGHLIGHTS

(dollars in thousands except per share amounts)

 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

March 28,
2015

 

March 29,
2014

 

%
Change

 

March 28,
2015

 

March 29,
2014

 

%
Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

60,580

 

$

60,580

 

0

%

$

127,074

 

$

132,840

 

-4.3

%

Cost of sales

 

51,102

 

50,070

 

2.1

%

100,108

 

104,583

 

-4.3

%

Gross profit

 

9,478

 

10,510

 

-9.8

%

26,966

 

28,257

 

-4.6

%

As a percentage of sales

 

15.6

%

17.3

%

 

 

21.2

%

21.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

 

25,618

 

11,429

 

124.1

%

39,805

 

24,544

 

62.2

%

Impairment charge, net

 

434

 

1,870

 

-76.8

%

434

 

1,870

 

-76.8

%

Operating income (loss)

 

(16,574

)

(2,789

)

 

 

(13,273

)

1,843

 

 

 

Interest expense, net

 

691

 

108

 

 

 

828

 

283

 

 

 

Pretax income (loss)

 

(17,265

)

(2,897

)

 

 

(14,101

)

1,560

 

 

 

Income tax provision (benefit)

 

(1,709

)

(339

)

 

 

(341

)

1,297

 

 

 

Net income (loss)

 

$

(15,556

)

$

(2,558

)

 

 

$

(13,760

)

$

263

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per diluted share

 

$

(1.37

)

$

(0.23

)

 

 

$

(1.22

)

$

0.02

 

 

 

 

Revenues from continuing operations in the second quarter of fiscal 2015 were $60.6 million, the same as last year. For the first six months, revenues were $127.1 million, down 4% from the same period last year. Book manufacturing segment sales for the quarter of $55.2 million were comparable to last year’s second quarter, as growth in the religious market and sales at Digital Page since its acquisition were offset by lower sales in the U.S. education market. For the first six months of fiscal 2015, book manufacturing sales decreased 5% to $114.9 million with lower sales in each of the three U.S. markets the Company serves. In the publishing segment, revenues were down 7% in the second quarter and down 1% in the first half of fiscal 2015 to $7.5 million and $16.6 million, respectively, compared to the corresponding periods last year.

 

In the second quarter of fiscal 2015, the Company reported a loss of $15.6 million compared with a loss of $2.6 million in the same period last year. For the first six months, the loss was $13.8 million compared to net income of $263,000 in the corresponding period of fiscal 2014. Results in fiscal 2015 include approximately $13 million, or $1.14 per diluted share, and $13.8 million, or $1.21 per diluted share, for the second quarter and first six months, respectively, for transaction costs associated with the pending acquisition of the Company, which are generally not deductible for income tax purposes. Fiscal 2015 year-to-date results also included losses on foreign currency translation related to the Company’s acquisition of Digital Page of $1.1 million, or $0.06 per diluted share. Results in last year’s second quarter included a $4.5 million impairment charge to the goodwill of FastPencil, acquired in April 2013. Results for the second quarter of fiscal 2014 also included a $2.6 million reduction in the contingent “earn out” consideration payable in the FastPencil acquisition due to a lower probability of FastPencil meeting the revenue targets during the earn out period. The net impact of the impairment of FastPencil’s goodwill and the reduction in the contingent consideration payable was a charge of $1.9 million. In the second quarter of fiscal 2015, the Company recorded a $1.7 million impairment charge representing the remainder of FastPencil’s goodwill and other intangible assets, as well as eliminating the balance of the related contingent consideration liability of $1.3 million, the net impact of which was a charge of $0.4 million. These goodwill impairments and adjustments to the contingent consideration liability are not deductible for income tax purposes. In April 2015, subsequent to the end of the fiscal 2015 second quarter, the Company sold FastPencil.

 

17



 

Book Manufacturing Segment

 

SEGMENT HIGHLIGHTS

(dollars in thousands)

 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

March 28,
2015

 

March 29,
2014

 

%
Change

 

March 28,
2015

 

March 29,
2014

 

%
Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

55,224

 

$

55,355

 

0

%

$

114,869

 

$

120,931

 

-5

%

Cost of sales

 

48,570

 

48,135

 

1

%

94,233

 

99,351

 

-5

%

Gross profit

 

6,654

 

7,220

 

-8

%

20,636

 

21,580

 

-4

%

As a percentage of sales

 

12.0

%

13.0

%

 

 

18.0

%

17.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

 

9,354

 

7,938

 

18

%

19,101

 

16,988

 

12

%

Operating income (loss)

 

$

(2,700

)

$

(718

)

 

 

$

1,535

 

$

4,592

 

-67

%

 

Within the book manufacturing segment, the Company focuses on three key U.S. publishing markets: education, religious and specialty trade. In the second quarter of fiscal 2015, sales to the education market were $17 million, down from $21 million for the same period last year, with most of the decline attributable to lower sales of college textbooks. For the first six months of fiscal 2015, educations sales of $47 million were down 6% from last year with the decrease entirely attributable to elementary and high school textbooks. Sales to the religious market were $18 million in the second quarter, up 8% from last year, with sales to the Company’s largest religious customer up 18% from last year’s second quarter after an unusually slow first quarter. On a year-to-date basis, sales to this customer were down 13%. The volume of orders from this customer fluctuates from quarter to quarter within a long-term pattern of low single-digit growth. For the first six months of fiscal 2015, sales to the religious market were down 17% to $29 million. Sales to the specialty trade market were down 2% in the second quarter to $15 million, while year-to-date sales of $31 million were down 1% from the same period last year. In addition to the U.S. publishing markets, the Company also provides digital printing capabilities in Brazil with the acquisition of Digital Page on November 18, 2014.  Since Digital Page’s results are reported on a one-month lag, second quarter and year-to-date revenue includes sales for the period from the acquisition date through February 2015, which amounted to approximately $4 million.

 

In the second quarter of fiscal 2015, cost of sales in the book manufacturing segment increased less than 1% to $48.6 million on comparable sales levels.  For the year-to-date, cost of sales decreased 5%, or $5.1 million, compared to the same six month period last year, largely due to the decline in sales volume. Gross profit for the second quarter decreased $0.6 million to $6.7 million compared with the corresponding period in fiscal 2014 and, as a percentage of sales, decreased to 12.0% from 13.0%, principally due to lower sales in the education market and an unfavorable sales mix. For the first six months of fiscal 2015, gross profit decreased by $0.9 million, reflecting the sales levels, but increased slightly as a percentage of sales to 18.0% from 17.8%, despite a highly competitive pricing environment, as a result of lower depreciation expense and improved productivity.

 

Selling and administrative expenses for the segment increased $1.4 million in the second quarter and $2.1 million in the first half of fiscal 2015 compared to the same periods last year, primarily due to operating and amortization expenses commencing in the second quarter in relation to the acquisition of the Brazilian printer, Digital Page. Foreign currency exchange losses of approximately $1.1 million associated with the investment in Brazil also contributed to the year-to-date increase in selling and administrative expenses.

 

The book manufacturing segment reported an operating loss of $2.7 million in the second quarter of fiscal 2015 compared with $718,000 in the same period last year.  For the year to date, operating income in the book manufacturing segment was $1.5 million in fiscal 2015, down from $4.6 million for the first six months of last year.  Results for the quarter and first half of fiscal 2015 reflect lower sales, a highly competitive pricing environment and foreign currency exchange losses associated with the acquisition of Digital Page in Brazil.

 

18



 

Publishing Segment

 

SEGMENT HIGHLIGHTS

(dollars in thousands)

 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

March 28,
2015

 

March 29,
2014

 

%
Change

 

March 28,
2015

 

March 29,
2014

 

%
Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

7,548

 

$

8,128

 

-7.1

%

$

16,563

 

$

16,713

 

-0.9

%

Cost of sales

 

4,715

 

4,809

 

-2.0

%

10,198

 

10,100

 

-1.0

%

Gross profit

 

2,833

 

3,319

 

-14.6

%

6,365

 

6,613

 

-3.8

%

As a percentage of sales

 

37.5

%

40.8

%

 

 

38.4

%

39.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

 

2,974

 

3,108

 

-4.3

%

6,248

 

6,814

 

-8.3

%

Operating income (loss)

 

$

(141

)

$

211

 

 

 

$

117

 

$

(201

)

 

 

 

The Company’s publishing segment revenues were down 7% in the second quarter to $7.5 million and down 1% to $16.6 million for the first six months of fiscal 2015, compared to the corresponding prior year periods. Sales at REA in the quarter were $1.1 million compared to $1.5 million in last year’s second quarter and for the year to date were $1.9 million, down from $2.2 million for the first six months of fiscal 2014.  The decrease in sales at REA reflects steps taken last year to narrow the focus of its new product development to key test preparation markets, such as AP, CLEP and GED. Sales at Dover in the second quarter of fiscal 2015 were down 4% to $6.4 million compared to the same period last year. Despite the shortfall in the second quarter, which historically is the slowest seasonal period for Dover, sales on a year-to-date basis of $14.7 million were up over the $14.5 million for the corresponding prior year period.  This increase reflects growth in sales to online retailers and the success of its Creative Haven line of adult coloring books.  Dover entered this emerging category in 2013 and revenues have risen steadily, with sales doubling in the first six months of fiscal 2015.

 

Cost of sales in this segment decreased 2% to $4.7 million in the second quarter and increased 1% to $10.2 million for the first six months of fiscal 2015 compared to the corresponding periods last year, reflecting the level of sales and product mix. Gross profit decreased 15% to $2.8 million compared to last year’s second quarter and, as a percentage of sales, decreased to 37.5% from 40.8%.  For the first six months of fiscal 2015, gross profit decreased 4% to $6.4 million and, as a percentage of sales, decreased to 38.4% from 39.6%. The decline in both the second quarter and first six months of fiscal 2015 resulted from lower sales and product mix.

 

Previous cost structure measures benefitted selling and administrative expenses for the segment, which were down 4% in the second quarter and 8% for the first six months from the comparable prior year periods. The first quarter of last year included approximately $100,000 related to actions taken to reduce overhead at REA and refocus new product development.

 

The publishing segment reported a loss of $141,000 in the second quarter of fiscal 2015 compared to operating income of $211,000 in the corresponding period last year. Despite the second-quarter loss, the segment remained modestly profitable for the year to date, with income of $117,000 versus a loss of $201,000 in the first half of last year. Major factors for the improvement included previous cost containment measures and the success of the Creative Haven product line.

 

Total Consolidated Company

 

Interest expense, net of interest income, was $691,000 in the second quarter of fiscal 2015 compared to $108,000 of net interest expense in the same period last year. For the first six months of fiscal 2015, interest expense, net of interest income was $828,000 compared to $283,000 in the first half of fiscal 2014.  Interest expense in the second quarter and first six months included $530,000 attributable to Digital Page for capital lease and other financing costs since its acquisition on November 18, 2014. Average debt under the revolving credit facility in the second quarter and first half of fiscal 2015 was approximately $22 million at an average annual interest rate of 1.4%, generating interest expense of approximately $75,000 in the second quarter and $160,000 in the first six months of the year. Average debt under the revolving credit facility in the second quarter and first half of fiscal 2014 was approximately $24 million at an average annual interest rate of 1.4%, generating interest expense of approximately $85,000 in the second quarter and $171,000 in the first six months of last year. In the first quarter of fiscal 2014, the Company entered into a capital lease arrangement

 

19



 

for certain assets in its Kendallville, Indiana digital print facility. At March 28, 2015, $7.2 million of debt was outstanding under this arrangement at an implicit interest rate of 1.8%.  Interest expense under the capital lease was approximately $32,000 and $45,000 in the second quarters of fiscal 2015 and 2014, respectively, and approximately $65,000 and $60,000 in the first six months of fiscal 2015 and 2014, respectively.  In addition, approximately $48,000 and $58,000 of interest expense was amortized in the first six months of fiscal years 2015 and 2014, respectively, associated with the restructuring costs incurred in fiscal 2011. Interest expense also includes commitment fees and other costs associated with maintaining the Company’s $100 million revolving credit facility.

 

The tax benefit in the first half of fiscal 2015 includes the impact of the goodwill and other intangible assets impairment charges and corresponding reduction in the related contingent consideration liability for FastPencil.  The goodwill impairment charge and reduction in the contingent consideration liability are not deductible for income tax purposes. The first half of fiscal 2014 was similarly impacted by a goodwill impairment charge and reduction in the related contingent consideration liability for FastPencil. The Company’s effective tax rate in fiscal 2015 was also impacted by nondeductible transaction costs of $13.8 million in the first six months associated with the pending acquisition of the Company. Excluding the impact of these items, the effective tax rate for continuing operations for the first six months of fiscal 2015 was 35% compared to 38% in the same period last year, reflecting a lower effective state tax rate.

 

For purposes of computing net income (loss) per diluted share, weighted average shares outstanding of 11.3 million for the second quarter of fiscal 2015 were comparable to the same period last year.  In the second quarter of fiscal years 2015 and 2014, approximately 237,000 and 221,000, respectively, of potentially dilutive shares were excluded due to the Company incurring losses in those periods. For the first six months of fiscal 2015, weighted average shares outstanding were 11.3 million, excluding approximately 203,000 of potentially dilutive shares due to the Company incurring a loss in that period. For the first six months of fiscal 2014, weighted average shares outstanding were 11.5 million, including approximately 233,000 of potentially dilutive shares in the calculation of net income per diluted share from continuing operations.

 

Restructuring Costs

 

In fiscal 2011, the Company recorded restructuring costs of $7.7 million in the book manufacturing segment 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. As of March 28, 2105, remaining payments of approximately $2.4 million will be made over periods ranging from less than one year for the building lease obligation to 17 years for the liability related to the multi-employer pension plan.  At March 28, 2015, approximately $0.8 million of the restructuring payments were included in “Other current liabilities” and $1.7 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 27,

 

or

 

Paid or

 

March 28,

 

 

 

2014

 

Reversals

 

Settled

 

2015

 

Employee severance, post-retirement and other benefit costs

 

$

88

 

 

$

(24

)

$

64

 

Early withdrawal from multi-employer pension plan

 

1,926

 

 

(38

)

1,888

 

Lease termination, facility closure and other costs

 

765

 

 

(185

)

580

 

Total

 

$

2,779

 

 

$

(247

)

$

2,532

 

 

20



 

Liquidity and Capital Resources:

 

During the first six months of fiscal 2015, operations provided $9.5 million of cash, compared to $14.1 million in the first half of last year.  A net loss of $13.8 million included transaction costs associated with the pending acquisition of the Company of $13.8 million. Reimbursement of the $10 million termination fee included in these costs was received in the second quarter but recognition has been deferred for accounting purposes until the pending acquisition by RR Donnelley closes. Cash provided from operations in the first half of fiscal 2015 also included a $1.7 million non-cash impairment charge and a $1.3 million reduction in the related contingent consideration liability. Depreciation and amortization were $12.2 million compared with $13.1 million in the first six months of fiscal 2014.

 

Investment activities in the first half of this fiscal year used $5.3 million of cash. Capital expenditures were $3.2 million and prepublication costs were $1.3 million.

 

On November 18, 2014, the Company acquired 60% of the outstanding stock of Digital Page Gráfica E Editora (“Digital Page”), a Sao Paulo-based digital printing firm. Under the investment agreement, as revised in August 2014, the Company invested a total of 20 million Brazilian Reals. During the first quarter of fiscal 2014, the Company funded two loans to Digital Page totaling approximately 10 million Brazilian Reals which were secured by the pledge of the equity interest in Digital Page. The principal amount of the loans was credited towards the total purchase price of $7.7 million, with $3.5 million in cash paid upon closing, of which $482,000 was paid to the founder.

 

In December 2014, the Company signed an agreement to sell approximately 110,000 square feet of unoccupied or underutilized portions of its multi-building manufacturing complex in Westford, Massachusetts for $1.2 million. The Company will continue its current levels of book manufacturing at the site. The agreement contains a number of significant contingencies. Assuming these contingencies can be resolved, closing is anticipated in late 2015. Although the carrying value of the property is nominal, the agreement requires that the Company incur certain costs to complete the transaction, such as the separation of all utilities within the complex. If the transaction is completed, the Company anticipates realizing a gain on the sale.

 

Financing activities for the first six months of fiscal 2015 used approximately $6.6 million of cash.  Cash dividends of $4.8 million were paid and net borrowings decreased by $2.7 million during the first half of fiscal 2015.  In the first quarter of fiscal 2014, the Company entered into a $10.5 million capital lease arrangement for printing and binding equipment in its Kendallville, Indiana digital print facility. At March 28, 2015, $7.2 million of debt was outstanding under this capital lease arrangement and the implicit interest rate was 1.8%. 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%.  In December 2014, the Company extended the maturity date of this credit facility from March 2016 to December 2019.  At March 28, 2015, the Company had $24.0 million in borrowings under this facility at an interest rate of 1.4%.  The revolving credit facility contains restrictive covenants including provisions relating to the incurrence of additional indebtedness and a quarterly test of EBITDA to debt service.  The Company was in compliance with all debt covenants at March 28, 2015.  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.

 

The following table summarizes the Company’s contractual obligations and commitments at March 28, 2015 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:

 

 

 

 

 

 

 

 

 

 

 

Debt, including capital lease obligations (1)

 

$

34,350

 

$

4,941

 

$

5,377

 

$

24,032

 

 

Interest due on debt (2)

 

204

 

130

 

74

 

 

 

Operating leases (3)

 

4,693

 

920

 

1,590

 

1,440

 

$

743

 

Purchase obligations (4)

 

882

 

882

 

 

 

 

Other liabilities (5)

 

9,050

 

1,060

 

3,233

 

725

 

4,032

 

Total

 

$

49,179

 

$

7,933

 

$

10,274

 

$

26,197

 

$

4,775

 

 

21



 


(1)         Includes $24.0 million under the Company’s long-term revolving credit facility, which has a maturity date of December 2019, as well as capital leases and other debt associated with the acquisition of Digital Page in November 2014.

 

(2)         Represents scheduled interest payments on the Company’s capital lease financing. 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 27, 2014, except for the Stoughton, Massachusetts building lease obligation which was included in the restructuring accrual in “Other liabilities.”

 

(4)         Represents capital commitments.

 

(5)         Includes approximately $2.5 million of restructuring costs related to closing the Stoughton, Massachusetts facility. Operating leases exclude the Stoughton building lease obligation which is included above in “Other liabilities.”

 

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, pricing actions by competitors and other competitive pressures in the markets in which the Company competes, consolidation among customers and competitors, changes in customers’ demand for the Company’s products, including seasonal changes in customer orders and shifting orders to lower cost regions, increased concentration with a few customers, success in the execution of acquisitions and the performance and integration of acquired businesses including carrying value of intangible assets and contingent consideration, performance of investments in unconsolidated subsidiaries and exposure to risks of operating internationally, restructuring and impairment charges required under generally accepted accounting principles, insolvency of key customers or vendors, changes in technology including migration from paper-based books to digital, changes in market growth rates, changes in obligations of multiemployer pension plans and general changes in economic conditions, including currency fluctuations, changes in interest rates, changes in consumer confidence, changes in the housing market, and tightness in the credit markets, changes in raw material costs and availability, changes in the Company’s labor relations, changes in operating expenses including medical and energy costs, difficulties in the startup 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 risks related to the pending acquisition of the Company.  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 27, 2014. With the acquisition of 60% of the equity in Digital Page in November 2014, the Company is exposed to the impact of foreign currency fluctuations in Brazil. The exposure to foreign currency movements is limited because the operating revenues and expenses of Digital Page are substantially in the local currency in which they operate. Although operating in the local currency may limit the impact of currency rate fluctuations on the results of operations of Digital Page, fluctuations in such rates may affect the translation of these results into the Company’s condensed consolidated financial statements.  The Company does not use financial instruments for trading or speculative purposes.

 

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Item 4.                                                         CONTROLS AND PROCEDURES

 

(a)                     Evaluation of disclosure controls and procedures<