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 28, 2014
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.) |
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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 |
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Non- accelerated filer | o |
| Smaller reporting company | o |
(Do not check if a smaller reporting company) |
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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 4, 2014 |
Common Stock, $1 par value |
| 11,427,469 shares |
COURIER CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands except per share amounts)
|
| QUARTER ENDED |
| NINE MONTHS ENDED |
| ||||||||
|
| June 28, |
| June 29, |
| June 28, |
| June 29, |
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| 2014 |
| 2013 |
| 2014 |
| 2013 |
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Net sales |
| $ | 67,665 |
| $ | 64,143 |
| $ | 201,904 |
| $ | 190,677 |
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Cost of sales |
| 54,335 |
| 49,315 |
| 159,659 |
| 147,845 |
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Gross profit |
| 13,330 |
| 14,828 |
| 42,245 |
| 42,832 |
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Selling and administrative expenses |
| 11,219 |
| 11,813 |
| 37,989 |
| 35,062 |
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Impairment charge and adjustment to contingent consideration liability (Notes G and H) |
| — |
| — |
| 1,870 |
| — |
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Operating income |
| 2,111 |
| 3,015 |
| 2,386 |
| 7,770 |
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Interest expense, net |
| 207 |
| 325 |
| 490 |
| 706 |
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Pretax income |
| 1,904 |
| 2,690 |
| 1,896 |
| 7,064 |
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Income tax provision (Note C) |
| 731 |
| 1,009 |
| 1,446 |
| 2,627 |
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Net income |
| $ | 1,173 |
| $ | 1,681 |
| $ | 450 |
| $ | 4,437 |
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Net income per share (Note J): |
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Basic |
| $ | 0.10 |
| $ | 0.15 |
| $ | 0.04 |
| $ | 0.39 |
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Diluted |
| $ | 0.10 |
| $ | 0.15 |
| $ | 0.04 |
| $ | 0.39 |
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Cash dividends declared per share |
| $ | 0.21 |
| $ | 0.21 |
| $ | 0.63 |
| $ | 0.63 |
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Other comprehensive income, net of tax: |
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Amounts reclassified from accumulated other comprehensive income |
| — |
| — |
| 48 |
| — |
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Unrealized gain on foreign currency cash flow hedge (Note A) |
| 2 |
| 75 |
| 2 |
| 75 |
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Other comprehensive income, net of tax |
| 2 |
| 75 |
| 50 |
| 75 |
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Comprehensive income |
| $ | 1,175 |
| $ | 1,756 |
| $ | 500 |
| $ | 4,512 |
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The accompanying notes are an integral part of the consolidated condensed financial statements.
COURIER CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
|
| June 28, |
| September 28, |
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| 2014 |
| 2013 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents (Note L) |
| $ | 4,600 |
| $ | 57 |
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Investments |
| 1,013 |
| 1,012 |
| ||
Accounts receivable, less allowance for uncollectible accounts of $383 at June 28, 2014 and $940 at September 28, 2013 |
| 34,316 |
| 43,837 |
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Inventories (Note B) |
| 41,911 |
| 35,086 |
| ||
Deferred income taxes |
| 4,286 |
| 3,954 |
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Recoverable income taxes |
| 2,874 |
| — |
| ||
Other current assets |
| 1,885 |
| 2,579 |
| ||
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Total current assets |
| 90,885 |
| 86,525 |
| ||
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Property, plant and equipment, less accumulated depreciation: $228,852 at June 28, 2014 and $214,671 at September 28, 2013 |
| 85,876 |
| 93,051 |
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Goodwill (Notes A, G and H) |
| 17,191 |
| 21,723 |
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Other intangibles, net (Note A) |
| 3,338 |
| 4,033 |
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Prepublication costs, net (Note A) |
| 6,095 |
| 6,717 |
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Deferred income taxes |
| 3,083 |
| 2,924 |
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Long-term investments (Note L) |
| 5,461 |
| 500 |
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Other assets |
| 1,204 |
| 1,521 |
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Total assets |
| $ | 213,133 |
| $ | 216,994 |
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The accompanying notes are an integral part of the consolidated financial statements.
COURIER CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
|
| June 28, |
| September 28, |
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| 2014 |
| 2013 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Current maturities of long-term debt (Note D) |
| $ | — |
| $ | 1,125 |
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Current maturities of capital lease obligation (Note D) |
| 2,606 |
| — |
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Accounts payable |
| 13,195 |
| 13,699 |
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Accrued payroll |
| 7,505 |
| 9,630 |
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Accrued taxes |
| 913 |
| 3,117 |
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Other current liabilities (Note M) |
| 9,222 |
| 8,403 |
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Total current liabilities |
| 33,441 |
| 35,974 |
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Long-term debt (Note D) |
| 25,938 |
| 24,583 |
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Capital lease obligation (Note D) |
| 6,498 |
| — |
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Contingent consideration (Notes G and H) |
| 2,775 |
| 4,960 |
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Other liabilities (Note M) |
| 5,552 |
| 5,433 |
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Total liabilities |
| 74,204 |
| 70,950 |
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Stockholders’ equity (Note F): |
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Preferred stock, $1 par value - authorized 1,000,000 shares; none issued |
|
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| — |
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Common stock, $1 par value - authorized 18,000,000 shares; issued 11,431,000 at June 28, 2014 and 11,473,000 at September 28, 2013 |
| 11,431 |
| 11,473 |
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Additional paid-in capital |
| 21,152 |
| 20,066 |
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Retained earnings |
| 107,161 |
| 115,370 |
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Accumulated other comprehensive loss |
| (815 | ) | (865 | ) | ||
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Total stockholders’ equity |
| 138,929 |
| 146,044 |
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Total liabilities and stockholders’ equity |
| $ | 213,133 |
| $ | 216,994 |
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The accompanying notes are an integral part of the consolidated financial statements.
COURIER CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
|
| NINE MONTHS ENDED |
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| June 28, |
| June 29, |
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| 2014 |
| 2013 |
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Operating Activities: |
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Net income |
| $ | 450 |
| $ | 4,437 |
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Adjustments to reconcile net income to cash provided from operating activities: |
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Depreciation of property, plant and equipment |
| 16,418 |
| 14,395 |
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Amortization of prepublication costs |
| 2,765 |
| 3,025 |
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Amortization of intangible assets |
| 695 |
| 403 |
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Impairment charge (Note H) |
| 4,500 |
| — |
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Change in fair value of contingent consideration (Note H) |
| (2,185 | ) | 125 |
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Stock-based compensation (Note F) |
| 1,136 |
| 1,002 |
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Deferred income taxes |
| (491 | ) | 514 |
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Changes in assets and liabilities: |
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Accounts receivable |
| 9,521 |
| 2,979 |
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Inventory |
| (6,825 | ) | (785 | ) | ||
Accounts payable |
| (504 | ) | 341 |
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Accrued and recoverable taxes |
| (5,078 | ) | (4,463 | ) | ||
Other elements of working capital |
| (312 | ) | (161 | ) | ||
Other long-term, net |
| 64 |
| (734 | ) | ||
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Cash provided from operating activities |
| 20,154 |
| 21,078 |
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Investment Activities: |
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Capital expenditures |
| (9,365 | ) | (14,461 | ) | ||
Acquisition of business (Note G) |
| — |
| (5,000 | ) | ||
Prepublication costs |
| (2,143 | ) | (2,598 | ) | ||
Loan receivable and other investments |
| (4,962 | ) | (686 | ) | ||
Life insurance proceeds |
| 387 |
| — |
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Cash used for investment activities |
| (16,083 | ) | (22,745 | ) | ||
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Financing Activities: |
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Proceeds from capital lease financing (Note D) |
| 10,488 |
| — |
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Repayments under capital lease financing (Note D) |
| (1,384 | ) | — |
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Other long-term debt borrowings (repayments) (Note D) |
| 230 |
| 10,673 |
| ||
Cash dividends |
| (7,270 | ) | (7,244 | ) | ||
Share repurchases (Note K) |
| (1,767 | ) | (1,568 | ) | ||
Proceeds from stock plans |
| 175 |
| 170 |
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Contingent consideration paid |
| — |
| (235 | ) | ||
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Cash provided from financing activities |
| 472 |
| 1,796 |
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Increase in cash and cash equivalents |
| 4,543 |
| 129 |
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Cash and cash equivalents at the beginning of the period |
| 57 |
| 64 |
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Cash and cash equivalents at the end of the period |
| $ | 4,600 |
| $ | 193 |
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The accompanying notes are an integral part of the consolidated condensed financial statements.
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 28, 2014 and the consolidated condensed statements of comprehensive income for the three-month and nine-month periods ended June 28, 2014 and June 29, 2013 and the statements of cash flows for the nine-month periods ended June 28, 2014 and June 29, 2013 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 28, 2013 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 28, 2013.
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 H).
In the third quarter of fiscal 2013, the Company acquired FastPencil, Inc. (“FastPencil”) and recorded goodwill of $5.8 million (see Notes G and H). In addition, the Company recorded intangibles related to technology, trade name and other intangibles with this acquisition totaling $2.8 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 $230,000 and $200,000 in the third quarters and $700,000 and $400,000 in the first nine months of fiscal years 2014 and 2013, 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 (see Note H). 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 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations 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 3—Valuations 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 (Level 1), investment in a convertible promissory note (Level 3), accounts receivable, accounts payable, debt obligations and contingent consideration (Level 3). At June 28, 2014 and September 28, 2013, 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. At June 28, 2014, the Company had two forward exchange contracts to sell a total of 7.7 million South African Rands (ZAR) designated as cash flow hedges against two foreign currency customer orders to be settled for $0.7 million in December 2014 and March 2015. The fair values of the foreign exchange forward contracts were determined using market exchange rates (Level 2). The unrealized gain on these foreign currency cash flow hedges of $2,000, net of tax, was included in accumulated other comprehensive loss at June 28, 2014. The Company expects to reclassify the unrealized gain or loss in accumulated other comprehensive loss into earnings upon recognition of the related hedged forecasted transactions. 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 59% and 55% of the Company’s inventories at June 28, 2014 and September 28, 2013, respectively. Other inventories, primarily in the publishing segment, are determined on a first-in, first-out (FIFO) basis. Inventories consisted of the following:
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| (000’s Omitted) |
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|
| June 28, |
| September 28, |
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Raw materials |
| $ | 10,205 |
| $ | 6,750 |
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Work in process |
| 10,928 |
| 8,724 |
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Finished goods |
| 20,778 |
| 19,612 |
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Total |
| $ | 41,911 |
| $ | 35,086 |
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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. In the second quarter of fiscal 2014, the Company recorded two such 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 Notes G and H).
The provision for income taxes differs from that computed using the statutory federal income tax rates for the following reasons:
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| (000’s Omitted) |
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| Nine Months Ended |
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|
| June 28, 2014 |
| June 29, 2013 |
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Federal taxes at statutory rates |
| $ | 664 |
| 35.0 | % | $ | 2,472 |
| 35.0 | % |
State taxes, net of federal tax benefit |
| 178 |
| 9.4 |
| 302 |
| 4.3 |
| ||
Federal manufacturer’s deduction |
| (140 | ) | (7.4 | ) | (201 | ) | (2.8 | ) | ||
Impairment charge and change in fair value of contingent consideration |
| 763 |
| 40.2 |
| — |
| — |
| ||
Other |
| (19 | ) | (1.0 | ) | 54 |
| 0.8 |
| ||
Total |
| $ | 1,446 |
| 76.2 | % | $ | 2,627 |
| 37.2 | % |
D. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION
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 June 28, 2014, $9.1 million of debt was outstanding under this arrangement and the implicit interest rate was 1.8%. Scheduled annual principal payments under this obligation are approximately $2.6 million in the next twelve months, $2.7 million in each of the following two years and $1.1 million in the final year. Total imputed interest under the agreement is approximately $0.4 million. 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 $1.2 million in the first nine months of fiscal 2014.
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%. The Company’s interest rate at June 28, 2014 was 1.4%. At June 28, 2014 and September 28, 2013, the Company had $25.9 million and $24.6 million, respectively, in borrowings outstanding under its long-term revolving credit facility, which matures in March 2016.
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 specialty trade book publishers. In April 2013, the Company acquired FastPencil, which has been included in the book manufacturing segment (see Note G). 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, 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 28, 2014 and June 29, 2013.
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| (000’s Omitted) |
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| Quarter Ended |
| Nine Months Ended |
| ||||||||
|
| June 28, |
| June 29, |
| June 28, |
| June 29, |
| ||||
|
| 2014 |
| 2013 |
| 2014 |
| 2013 |
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Net sales: |
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Book manufacturing |
| $ | 61,121 |
| $ | 58,060 |
| $ | 182,052 |
| $ | 171,460 |
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Publishing |
| 8,462 |
| 8,818 |
| 26,574 |
| 27,305 |
| ||||
Elimination of intersegment sales |
| (1,918 | ) | (2,735 | ) | (6,722 | ) | (8,088 | ) | ||||
Total |
| $ | 67,665 |
| $ | 64,143 |
| $ | 201,904 |
| $ | 190,677 |
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Pretax income: |
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Book manufacturing operating income |
| $ | 2,979 |
| $ | 4,245 |
| $ | 7,571 |
| $ | 11,139 |
|
Publishing operating loss |
| (493 | ) | (889 | ) | (2,262 | ) | (2,393 | ) | ||||
Impairment charge and reduction in fair value of contingent consideration (Note H) |
| — |
| — |
| (1,870 | ) | — |
| ||||
Stock-based compensation |
| (393 | ) | (330 | ) | (1,136 | ) | (1,002 | ) | ||||
Elimination of intersegment profit |
| 18 |
| (11 | ) | 83 |
| 26 |
| ||||
Interest expense, net |
| (207 | ) | (325 | ) | (490 | ) | (706 | ) | ||||
Total |
| $ | 1,904 |
| $ | 2,690 |
| $ | 1,896 |
| $ | 7,064 |
|
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 2014 and 2013 was $393,000 and $330,000, respectively. The related tax benefit recognized in the third quarters of fiscal 2014 and 2013 was $140,000 and $117,000, respectively. For the first nine months of fiscal 2014 and 2013, stock-based compensation was approximately $1.1 million and $1.0 million, respectively, and the related tax benefit recognized was approximately $400,000 and $350,000, respectively. Unrecognized stock-based compensation cost at June 28, 2014 was $1.9 million, to be recognized over a weighted-average period of 2.2 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 2013 were awarded in November 2013; 22,738 stock options were awarded under the 2011 Plan with an exercise price of $17.56 per share, which was the stock price on the date of grant, and a weighted-average fair value of $4.83 per share. In addition, 34,161 stock grants were awarded in November 2013 with a weighted-average fair value of $17.56 per share. In April 2014, 2,256 stock options were awarded under the 2011 Plan with an exercise price of $14.94 per share, which was the stock price on the date of grant, and a weighted-average fair value of $3.60 per share. In addition, 4,026 stock grants were awarded in April 2014 with a weighted-average fair value of $14.94 per share.
The weighted average Black-Scholes fair value assumptions for stock options awarded under the 2011 Plan in fiscal 2014 were as follows:
Estimated life of options |
| 10 years |
|
Risk-free interest rate |
| 2.8%-3.0% |
|
Expected volatility |
| 41%-42% |
|
Expected dividend yield |
| 4.8%-5.6% |
|
The Company annually issues stock grants to its non-employee directors under the Courier Corporation 2010 Stock Equity Plan for Non-Employee Directors (the “2010 Plan”). Stock grants generally vest over three years. During the second quarter of fiscal 2014, 22,752 stock awards, with a weighted-average fair value of $17.58 per share, were granted to non-employee directors. No stock options were issued under the 2010 Plan in the first nine months of fiscal 2014. Directors may also elect to receive their annual retainer and committee chair fees as shares of stock in lieu of cash; 17,363 such shares were issued in the second quarter of fiscal 2014.
G. 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 four 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 business combination 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. During the second quarter of fiscal 2014, the Company finalized the
accounting for this acquisition and recorded a measurement period adjustment to recognize a $97,000 deferred tax asset with a corresponding reduction in goodwill at acquisition. This measurement period adjustment was reflected in the accompanying consolidated condensed balance sheet as of September 28, 2013.
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 |
| $ | 3 |
|
Inventories |
| 42 |
| |
Licensing contract receivable |
| 1,500 |
| |
Amortizable intangibles |
| 2,770 |
| |
Goodwill |
| 5,778 |
| |
Other assets |
| 32 |
| |
Accounts payable and accrued liabilities |
| (325 | ) | |
Deferred tax liabilities, net |
| (100 | ) | |
Total |
| $ | 9,700 |
|
H. 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 2014, the Company determined there was a triggering event for FastPencil, which had been acquired in April 2013 (see Note G), 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 assets and liabilities. Based on the results of these valuations, 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. In addition, at March 29, 2014, the Company performed a fair value analysis of the related contingent “earn out” consideration payable and lowered the probability of FastPencil meeting the revenue targets during the earn out period. Accordingly, a fair value assessment of the contingent consideration liability was performed at March 29, 2014 resulting in a reduction in the liability of $2.6 million. 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 2014; both adjustments are non-cash and not deductible for income tax purposes.
I. 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 (see Notes G and H).
The following table shows the assets and liabilities carried at fair value measured on a recurring basis as of June 28, 2014 and September 28, 2013 classified in one of the three levels as described in Note A:
|
| (000’s Omitted) |
| |||||||||
|
| Total |
| Quoted |
| Significant |
| Significant |
| |||
As of June 28, 2014: |
|
|
|
|
|
|
|
|
| |||
Short-term investments in mutual funds |
| $ | 1,010 |
| $ | 1,010 |
| — |
| — |
| |
Investment in convertible promissory notes |
| 1,000 |
| — |
| — |
| $ | 1,000 |
| ||
Forward foreign exchange contract (Note A) |
| 3 |
| — |
| 3 |
| — |
| |||
Contingent consideration liability (Note H) |
| (2,775 | ) | — |
| — |
| (2,775 | ) | |||
|
|
|
|
|
|
|
|
|
| |||
As of September 28, 2013: |
|
|
|
|
|
|
|
|
| |||
Short-term investments in mutual funds |
| $ | 900 |
| $ | 900 |
| — |
| — |
| |
Investment in convertible promissory notes |
| 500 |
| — |
| — |
| 500 |
| |||
Forward foreign exchange contract (Note A) |
| 112 |
| — |
| 112 |
| — |
| |||
Contingent consideration liability (Note G) |
| (4,960 | ) | — |
| — |
| (4,960 | ) | |||
Fair Value Measurements Using Significant Unobservable Inputs (Level 3):
|
| (000’s Omitted) |
| ||||
|
| Convertible |
|
|
| ||
|
| Promissory |
| Contingent |
| ||
|
| Notes |
| Consideration |
| ||
|
| (Note L) |
| Liabilities |
| ||
Balance as of September 28, 2013 |
| $ | 500 |
| $ | (4,960 | ) |
Change in fair value (Note H) |
| — |
| 2,185 |
| ||
Amounts paid |
| 500 |
| — |
| ||
Balance at June 28, 2014 |
| $ | 1,000 |
| $ | (2,775 | ) |
|
|
|
|
|
| ||
Balance as of September 29, 2012 |
| — |
| $ | (385 | ) | |
Change in fair value |
| — |
| (125 | ) | ||
Amounts paid |
| $ | 500 |
| 400 |
| |
Acquisition of business (Note G) |
| — |
| (4,700 | ) | ||
Balance at June 29, 2013 |
| $ | 500 |
| $ | (4,810 | ) |
In fiscal 2014, assets remeasured at fair value on a nonrecurring basis subsequent to initial recognition are summarized below:
|
| Impairment |
| Fair Value |
| Net Book |
| |||
Goodwill |
| $ | 4,500 |
| $ | 1,278 |
| $ | 1,278 |
|
In the second quarter of fiscal 2014, the Company determined that the fair value of FastPencil was below its carrying value using a valuation methodology based on a discounted cash flow and a market value approach (Level 3). Key assumptions and estimates included revenue and operating income forecasts and the assessed growth rate after the forecast period. The Company recorded an impairment charge of $4.5 million for FastPencil’s goodwill (see Note H).
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.
|
| (000’s Omitted) |
| ||||||
|
| Quarter Ended |
| Nine Months Ended |
| ||||
|
| June 28, |
| June 29, |
| June 28, |
| June 29, |
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding for basic |
| 11,311 |
| 11,242 |
| 11,303 |
| 11,286 |
|
Effect of potentially dilutive shares |
| 159 |
| 140 |
| 226 |
| 129 |
|
Average shares outstanding for diluted |
| 11,470 |
| 11,382 |
| 11,529 |
| 11,415 |
|
K. SHARE REPURCHASE PROGRAM
On November 21, 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 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 28, 2014 the Company repurchased 133,472 shares of common stock for approximately $1.8 million under this program.
In November 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 2013, the Company repurchased 123,261 shares of common stock for approximately $1.6 million. This program expired on November 20, 2013.
L. LONG-TERM INVESTMENTS
In October 2013, the Company announced plans to invest in the education market in Brazil, the largest such market in Latin America, through two separate agreements. Under the first agreement, the Company has a licensing arrangement for its proprietary custom textbook platform with Santillana, the largest Spanish/Portuguese educational publisher in the world. In addition, on October 24, 2013, the Company entered into a definitive agreement (“Investment Agreement”) with Digital Page Gráfica E Editora (“Digital Page”), a Sao Paulo-based digital printing firm, which has a multiyear print agreement with Santillana. Under the Investment Agreement, the Company had agreed to invest a total of 20 million Brazilian reals, approximately $9 million, for a 40% equity interest and the founder of Digital Page would continue to own 60% of the business and actively manage the operations. During the first quarter of fiscal 2014, the Company funded two loans to Digital Page totaling approximately $4.5 million which are secured by a pledge of a 40% interest in Digital Page’s equity and bear interest at 1% per month. The principal amount of the loans was to be credited towards the purchase price of the Company’s ownership interest. These loans matured on June 18, 2014. Digital Page was unable to fulfill the closing conditions set forth in the Investment Agreement as its financial results have not met expectations. As a result, the Company is negotiating with the founder to restructure the proposed investment to reflect Digital Page’s current financial condition. If mutually agreeable terms are not reached with the founder, the proposed investment transaction will not be completed. If the investment transaction is not completed, the Company expects to demand repayment of the loans and if the loans are not repaid, the Company expects to exercise available remedies, including potentially foreclosing on the pledge of equity interests. At June 28, 2014, approximately $4.5 million of cash was on deposit in Brazil in the Company’s bank accounts in anticipation of a potential closing of the transaction.
Long-term investments also include convertible promissory notes for $1.0 million issued by Nomadic Learning Limited, a startup business focused on corporate and educational learning. At June 28, 2014, a fair value assessment was performed using a discounted cash flow model and the fair value approximated the carrying value of the notes at the end of the Company’s third quarter.
M. RESTRUCTURING COSTS
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. As of June 28, 2014, remaining payments of approximately $2.8 million will be made over periods ranging from 2 years for the building lease obligation to 17 years for the liability related to the multi-employer pension plan. At June 28, 2014, approximately $0.6 million of the restructuring payments were included in “Other current liabilities” and $2.3 million were included in “Other liabilities” in the accompanying consolidated condensed balance sheet.
The following table depicts the remaining accrual balances for these restructuring costs.
|
| (000’s omitted) |
| |||||||||
|
| Accrual at |
| Charges |
| Costs |
| Accrual at |
| |||
|
| September 28, |
| or |
| Paid or |
| June 28, |
| |||
|
| 2013 |
| Reversals |
| Settled |
| 2014 |
| |||
Employee severance, post-retirement and other benefit costs |
| $ | 308 |
| — |
| $ | (208 | ) | $ | 100 |
|
Early withdrawal from multi-employer pension plan |
| 2,001 |
| — |
| (56 | ) | 1,945 |
| |||
Lease termination, facility closure and other costs |
| 1,241 |
| — |
| (364 | ) | 877 |
| |||
Total |
| $ | 3,550 |
| — |
| $ | (628 | ) | $ | 2,922 |
|
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 three to fifteen 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 28, 2013, which resulted in no change to the nature or carrying amounts of its intangible assets. In the second quarter of fiscal 2014, the Company recorded a $4.5 million impairment charge of FastPencil’s goodwill with a corresponding reduction in the related contingent consideration liability of $2.6 million. 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.
Overview:
Courier Corporation, founded in 1824, is among America’s leading book manufacturers and provider of 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 second 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 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. 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 28, |
| June 29, |
| % |
| June 28, |
| June 29, |
| % |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net sales |
| $ | 67,665 |
| $ | 64,143 |
| 5 | % | $ | 201,904 |
| $ | 190,677 |
| 6 | % |
Cost of sales |
| 54,335 |
| 49,315 |
| 10 | % | 159,659 |
| 147,845 |
| 8 | % | ||||
Gross profit |
| 13,330 |
| 14,828 |
| -10 | % | 42,245 |
| 42,832 |
| -1 | % | ||||
As a percentage of sales |
| 19.7 | % | 23.1 | % |
|
| 20.9 | % | 22.5 | % |
|
| ||||
Selling and administrative expenses |
| 11,219 |
| 11,813 |
| -5 | % | 37,989 |
| 35,062 |
| 8 | % | ||||
Impairment charge, net |
| — |
| — |
|
|
| 1,870 |
| — |
|
|
| ||||
Operating income |
| 2,111 |
| 3,015 |
| -30 | % | 2,386 |
| 7,770 |
| -69 | % | ||||
Interest expense, net |
| 207 |
| 325 |
| -36 | % | 490 |
| 706 |
| -31 | % | ||||
Pretax income |
| 1,904 |
| 2,690 |
| -29 | % | 1,896 |
| 7,064 |
| -73 | % | ||||
Income tax provision |
| 731 |
| 1,009 |
| -28 | % | 1,446 |
| 2,627 |
| -45 | % | ||||
Net income |
| $ | 1,173 |
| $ | 1,681 |
| -30 | % | $ | 450 |
| $ | 4,437 |
| -90 | % |
Net income per diluted share |
| $ | 0.10 |
| $ | 0.15 |
| -33 | % | $ | 0.04 |
| $ | 0.39 |
| -90 | % |
Revenues in the third quarter of fiscal 2014 were $67.7 million, up 5% from the same period last year. For the first nine months, revenues were up 6% to $201.9 million compared to the corresponding prior-year period. Book manufacturing segment sales increased 5% in the quarter to $61.1 million, with sales growth in two of the segment’s three principal markets. For the first nine months of fiscal 2014, book manufacturing sales increased 6% to $182.1 million with growth in all three of its principal markets. In the publishing segment, revenues were down 4% in the third quarter and down 3% in the first nine months of fiscal 2014 to $8.5 million and $26.6 million, respectively, compared with the same periods last year.
Net income in the third quarter of fiscal 2014 was $1.2 million, down 30% from the same period last year. For the first nine months of fiscal 2014, net income was $450,000 compared to $4.4 million in the corresponding period of fiscal 2013. Year-to-date results include a $4.5 million impairment charge to the goodwill of FastPencil, acquired in April 2013, as well as a $2.6 million reduction in the amount accrued for the contingent “earn out” consideration 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. Both adjustments are non-cash and not deductible for income tax purposes. In the second quarter of fiscal 2014, the Company also recorded an $825,000 write-off in the publishing segment related to the failure of a book distribution customer.
Book Manufacturing Segment
|
| SEGMENT HIGHLIGHTS |
| ||||||||||||||
|
| (dollars in thousands) |
| ||||||||||||||
|
| Quarter Ended |
| Nine Months Ended |
| ||||||||||||
|
| June 28, |
| June 29, |
| % |
| June 28, |
| June 29, |
| % |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net sales |
| $ | 61,121 |
| $ | 58,060 |
| 5 | % | $ | 182,052 |
| $ | 171,460 |
| 6 | % |
Cost of sales |
| 50,747 |
| 46,209 |
| 10 | % | 150,098 |
| 138,165 |
| 9 | % | ||||
Gross profit |
| 10,374 |
| 11,851 |
| -12 | % | 31,954 |
| 33,295 |
| -4 | % | ||||
As a percentage of sales |
| 17.0 | % | 20.4 | % |
|
| 17.6 | % | 19.4 | % |
|
| ||||
Selling and administrative expenses |
| 7,395 |
| 7,606 |
| -3 | % | 24,383 |
| 22,156 |
| 10 | % | ||||
Operating income |
| $ | 2,979 |
| $ | 4,245 |
| -30 | % | $ | 7,571 |
| $ | 11,139 |
| -32 | % |
Within the book manufacturing segment, the Company focuses on three key publishing markets: education, religious and specialty trade. In the third quarter of fiscal 2014, sales to the education market were $29 million, up 7% from the same period last year, and for the year to date, were $79 million, up 9% from the first nine months of last year. This improvement is primarily due to increased sales of elementary and high school textbooks, reflecting improving state budgets and associated school funding levels. Seasonal demand in the education market is typically highest in the second half of the Company’s fiscal year. Sales to the religious market increased 12% in the quarter to $17 million compared to the third quarter of last year, with sales to the Company’s largest religious customer up 11%. On a year-to-date basis, sales to this customer increased 2%. For the first nine months of fiscal 2014, sales to the religious market were $53 million, up 5% compared to the same period last year. Sales to the specialty trade market were $12 million in the quarter, a decrease of 3% from the third quarter of last year. On a year-to-date basis, sales to the specialty trade market were up 3% to $44 million compared with the first nine months of last year, reflecting higher demand for both four-color work and sales of digital print.
The Company installed a digital print facility at its Kendallville, Indiana facility which began production in the third quarter of fiscal 2013. With continuing growth in digital print demand, in July 2013, the Company announced plans to install a second HP digital inkjet press and expanded binding capabilities for the Kendallville location. Installation was completed in the first quarter of fiscal 2014.
Cost of sales in the book manufacturing segment increased 10% to $50.7 million in the third quarter and increased 9% to $150.1 million in the first nine months of fiscal 2014 compared to the same periods last year. These increases reflect the growth in sales as well as increased depreciation expense of $620,000 and $2.0 million in the third quarter and first nine months, respectively, primarily related to the expansion of the Kendallville digital facility. Gross profit for the third quarter decreased 12%, or $1.5 million, to $10.4 million compared with the corresponding period in fiscal 2013 and, as a percentage of sales, decreased to 17.0% from 20.4%. For the first nine months of fiscal 2014, gross profit decreased 4% to $32.0 million and, as a percentage of sales, decreased to 17.6% from 19.4% for the same period of last year. This decline in gross profit as a percentage of sales reflects a highly competitive pricing environment and increased depreciation expense.
Selling and administrative expenses for the segment decreased 3%, to $7.4 million in the third quarter of fiscal 2014 compared with the same period last year, reflecting the impact of effective cost management and a reduction in variable compensation. On a year-to-date basis, selling and administrative expenses increased $2.2 million compared to the first nine months of last year, primarily due to operating and amortization expenses related to the acquisition of FastPencil in the third quarter of last year.
Third quarter operating income in the book manufacturing segment was $3.0 million compared with $4.2 million in the same period of fiscal 2013. For the first nine months of fiscal 2014, operating income was $7.6 million compared to $11.1 million in fiscal 2013. Results for the quarter and first nine months of fiscal 2014 reflect a highly competitive pricing environment, increased depreciation expense, and costs associated with the acquisition of FastPencil.
Publishing Segment
|
| SEGMENT HIGHLIGHTS |
| ||||||||||||||
|
| (dollars in thousands) |
| ||||||||||||||
|
| Quarter Ended |
| Nine Months Ended |
| ||||||||||||
|
| June 28, |
| June 29, |
| % |
| June 28, |
| June 29, |
| % |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net sales |
| $ | 8,462 |
| $ | 8,818 |
| -4 | % | $ | 26,574 |
| $ | 27,305 |
| -3 | % |
Cost of sales |
| 5,525 |
| 5,831 |
| -5 | % | 16,366 |
| 17,795 |
| -8 | % | ||||
Gross profit |
| 2,937 |
| 2,987 |
| -2 | % | 10,208 |
| 9,510 |
| 7 | % | ||||
As a percentage of sales |
| 34.7 | % | 33.9 | % |
|
| 38.4 | % | 34.8 | % |
|
| ||||
Selling and administrative expenses |
| 3,430 |
| 3,876 |
| -12 | % | 12,470 |
| 11,903 |
| 5 | % | ||||
Operating loss |
| $ | (493 | ) | $ | (889 | ) |
|
| $ | (2,262 | ) | $ | (2,393 | ) |
|
|
Revenues in the Company’s publishing segment were down 4% in the third quarter to $8.5 million and down 3% to $26.6 million for the first nine months of fiscal 2014, compared with the corresponding prior year periods. Sales at Dover in fiscal 2014 were $6.6 million in the quarter and $21.0 million for the year to date, slightly ahead of revenues in both the third quarter and first nine months of last year. Growth in Dover’s ebook sales and sales to online retailers were offset in part by a decline in both direct-to-consumer and international sales in both the quarter and first nine months. Sales at REA were $1.1 million in the quarter and $3.4 million in the first nine months of fiscal 2014, comparable to the corresponding periods of fiscal 2013. During the first quarter of fiscal 2014, the Company took steps at REA to narrow the focus of its new product development to key test preparation markets, such as AP, CLEP and GED. During the second quarter of fiscal 2014, Creative Homeowner’s primary distributor to the home improvement channel suddenly closed and liquidated. Creative Homeowner’s sales in the third quarter were $0.8 million, compared to $1.1 million for the same period last year. On a year-to-date basis, sales were $2.2 million, including a reversal of the returns reserve of $450,000 for that distributor, down from $3.0 million in the first nine months of last year. During fiscal 2014, the publishing segment has continued to increase its range of titles offered online in both printed and ebook form, including approximately 4,900 titles now available as ebooks through Amazon, Apple, Barnes & Noble and Google as well as its own websites.
Cost of sales in the publishing segment decreased 5% to $5.5 million in the third quarter and decreased 8% to $16.4 million in the first nine months of fiscal 2014 compared to the same periods last year, reflecting the lower sales volume and cost reductions. Gross profit in the quarter was $2.9 million, slightly lower than the third quarter of last year, and, as a percentage of sales, increased to 34.7% from 33.9%. For the first nine months of fiscal 2014, gross profit increased 7% to $10.2 million and, as a percentage of sales, increased to 38.4% from 34.8%, reflecting a favorable sales mix, including the impact of growth in ebook sales, and an improved cost structure in the segment.
Selling and administrative expenses for the segment decreased $0.4 million in the quarter compared to the corresponding period last year, reflecting the impact of previous cost reduction measures. For the first nine months of fiscal 2014, selling and administrative expenses increased $0.6 million compared to the same period in fiscal 2013, reflecting an increase in bad-debt expense offset in part by the impact of previous cost reduction measures. During the second quarter of fiscal 2014, Creative Homeowner’s primary distributor to the home improvement channel suddenly closed and liquidated and, as a result, the Company recorded a bad debt provision of $1.3 million.
The publishing segment’s operating loss was $0.5 million in the third quarter of fiscal 2014 compared to $0.9 million in the corresponding period last year. For the first nine months, the operating loss was $2.3 million compared to $2.4 million in the corresponding period of fiscal 2013. The segment’s operating loss for the year to date includes a $1.3 million bad debt provision related to Creative Homeowner’s primary distributor. This charge was offset in part by the related reduction in the returns reserve of $450,000, resulting in a net expense of $825,000 in the publishing segment’s year-to-date results for fiscal 2014.
Total Consolidated Company
Interest expense, net of interest income, was $207,000 in the third quarter of fiscal 2014 compared to $325,000 of net interest expense in the same period last year. For the first nine months of fiscal 2014, interest expense, net of interest income, was $490,000 compared to $706,000 of net interest expense in the corresponding period of fiscal 2013. Average debt under the revolving credit facility in the third quarter
of fiscal 2014 was approximately $29.4 million at an average annual interest rate of 1.4%, generating interest expense of approximately $105,000 in the quarter. Average debt under the revolving credit facility in the third quarter of last year 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 first nine months of fiscal 2014 was approximately $25.9 million at an average annual interest rate of 1.4%, generating interest expense of approximately $275,000 over the first nine months of fiscal 2014. Average debt under the revolving credit facility in the first nine months of last year was approximately $15.3 million at an average annual interest rate of 1.5%, generating interest expense of approximately $170,000. In the first quarter of fiscal 2014, the Company entered into a capital lease arrangement for certain assets in its Kendallville, Indiana digital print facility. At June 28, 2014, $9.1 million of debt was outstanding under this arrangement at an implicit interest rate of 1.8%, generating interest expense of approximately $45,000 in the third quarter and $108,000 in the first nine months of fiscal 2014. In addition, approximately $85,000 and $100,000 of interest expense was amortized in the first nine months of fiscal years 2014 and 2013, 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. In the third quarter and first nine months of fiscal 2014, the Company recorded interest income of approximately $135,000 and $315,000, respectively, from loans made in connection with the investment in Brazil.
The tax provision in the first nine months of fiscal 2014 includes the impact of the impairment charge and corresponding reduction in the related contingent consideration liability for FastPencil, neither of which is deductible for income tax purposes. Excluding the impact of these items, the effective tax rate for the first nine months of fiscal 2014 was 38% compared to 37% in the same period last year.
For purposes of computing net income per diluted share, weighted average shares outstanding were 11.5 million in both the third quarter and first nine months of fiscal 2014 compared with 11.4 million in the corresponding periods of last year.
Restructuring Costs
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. As of June 28, 2014, remaining payments of approximately $2.8 million will be made over periods ranging from 2 years for the building lease obligation to 17 years for the liability related to the multi-employer pension plan. At June 28, 2014, approximately $0.6 million of the restructuring payments were included in “Other current liabilities” and $2.3 million were included in “Other liabilities” in the accompanying consolidated condensed balance sheet. The following table depicts the remaining accrual balances for these restructuring costs.
|
| (000’s omitted) |
| |||||||||
|
| Accrual at |
| Charges |
| Costs |
| Accrual at |
| |||
|
| September 28, |
| or |
| Paid or |
| June 28, |
| |||
|
| 2013 |
| Reversals |
| Settled |
| 2014 |
| |||
Employee severance, post-retirement and other benefit costs |
| $ | 308 |
| — |
| $ | (208 | ) | $ | 100 |
|
Early withdrawal from multi-employer pension plan |
| 2,001 |
| — |
| (56 | ) | 1,945 |
| |||
Lease termination, facility closure and other costs |
| 1,241 |
| — |
| (364 | ) | 877 |
| |||
Total |
| $ | 3,550 |
| — |
| $ | (628 | ) | $ | 2,922 |
|
Liquidity and Capital Resources:
During the first nine months of fiscal 2014, operations provided $20.2 million of cash, compared to $21.1 million in the corresponding period of last year. Net income of $450,000 for the year to date included the $4.5 million non-cash goodwill impairment charge and $2.2 million net reduction in the related contingent consideration liability. Depreciation and amortization were $19.9 million compared with $17.8 million in the first nine months of fiscal 2013.
Investment activities used $16.1 million of cash for the year to date. Capital expenditures were $9.4 million. For the entire fiscal year, capital expenditures are expected to be approximately $12 to $14 million, with approximately $10 million related to expanding digital capabilities. Prepublication costs were $2.1 million in the first nine months of fiscal 2014, compared to $2.6 million in the same period last year. For the full fiscal year, prepublication costs are projected to be approximately $3 million.
In October 2013, the Company announced plans to invest in the education market in Brazil, the largest such market in Latin America, through two separate agreements. Under the first agreement, the Company has a licensing arrangement for its proprietary custom textbook platform with Santillana, the largest Spanish/Portuguese educational publisher in the world. In addition, on October 24, 2013, the Company entered into a definitive agreement (“Investment Agreement”) with Digital Page Gráfica E Editora (“Digital Page”), a Sao Paulo-based digital printing firm, which has a multiyear print agreement with Santillana. Under the Investment Agreement, the Company had agreed to invest a total of 20 million Brazilian reals, approximately $9 million, for a 40% equity interest and the founder of Digital Page, who would continue to own 60% of the business and actively manage the operations, would have been entitled to receive up to approximately $3 million of the proceeds over a twelve-month period. The Company, the founder and Digital Page also entered into a stockholders agreement containing restrictions on the transfer of equity interests, put and call rights and governance provisions, including restrictive covenants requiring the Company’s consent for any significant action by Digital Page. During the first quarter of fiscal 2014, the Company funded two loans to Digital Page totaling approximately $4.5 million which are secured by a pledge of a 40% interest in Digital Page’s equity and bear interest at 1% per month. The principal amount of the loans was to be credited towards the purchase price of the Company’s ownership interest. These loans matured on June 18, 2014. Digital Page was unable to fulfill the closing conditions set forth in the Investment Agreement as its financial results have not met expectations. As a result, the Company is negotiating with the founder to restructure the proposed investment to reflect Digital Page’s current financial condition. If mutually agreeable terms are not reached with the founder, the proposed investment transaction will not be completed. If the investment transaction is not completed, the Company expects to demand repayment of the loans and if the loans are not repaid, the Company expects to exercise available remedies, including potentially foreclosing on the pledge of equity interests. At June 28, 2014, approximately $4.5 million of cash was on deposit in Brazil in the Company’s bank accounts in anticipation of a potential closing of the transaction.
Financing activities for the first nine months of fiscal 2014 provided approximately $0.5 million of cash. 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 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 28, 2014 the Company repurchased 133,472 shares of common stock for approximately $1.8 million under this program and paid cash dividends of $7.3 million. 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 June 28, 2014, $9.1 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%. At June 28, 2014, the Company had $25.9 million in borrowings under this facility at an interest rate of 1.4%. For the first nine months of fiscal 2014, overall net borrowings increased by $9.3 million. 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 Company was in compliance with all debt covenants at June 28, 2014. 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 June 28, 2014 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 |
| |||||
Contractual Payments: |
| Total |
| 1 Year |
| Years |
| Years |
| 5 Years |
| |||||
Debt, including capital lease obligation (1) |
| $ | 35,042 |
| $ | 2,606 |
| $ | 31,295 |
| $ | 1,141 |
| — |
| |
Interest due on debt (2) |
| 279 |
| 140 |
| 136 |
| 3 |
| — |
| |||||
Operating leases (3) |
| 6,019 |
| 1,114 |
| 1,729 |
| 1,669 |
| 1,507 |
| |||||
Purchase obligations (4) |
| 1,425 |
| 1,425 |
| — |
| — |
| — |
| |||||
Contingent consideration (5) |
| 2,775 |
| — |
| 2,705 |
| 70 |
| — |
| |||||
Other liabilities (6) |
| 6,365 |
| 813 |
| 1,808 |
| 637 |
| 3,107 |
| |||||
Total |
| $ | 51,905 |
| $ | 6,098 |
| $ | 37,673 |
| $ | 3,520 |
| $ | 4,614 |
|
(1) Includes $25.9 million under the Company’s long-term revolving credit facility, which has a maturity date of March 2016.
(2) Represents scheduled interest payments on the Company’s capital lease. 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 28, 2013, except for the Stoughton, Massachusetts building lease obligation which was included in the restructuring accrual in “Other liabilities.”
(4) Represents capital commitments.
(5) Related to the acquisition of FastPencil in April 2013.
(6) Includes approximately $2.3 million of restructuring costs related to closing the Stoughton, Massachusetts facility, in addition to a current liability of $0.6 million. Operating leases exclude the Stoughton building lease obligation which is included in the above table 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 and changes in the Company’s effective income tax rate. 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 28, 2013. At June 28, 2014, the Company had two forward exchange contracts to sell a total of 7.7 million South African Rands (ZAR) as hedges against future sales proceeds, which were designated as cash flow hedges. The fair values of the foreign exchange forward contracts were 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 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 56% and 55% of our fiscal 2013 and 2012 revenues, respectively, from two major customers. We expect similar concentrations in fiscal 2014. 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 or pricing with us, especially if our pricing is not deemed competitive. A significant reduction in order volumes or pricing 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 from that customer 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.
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. For example, at the end of the second quarter of fiscal 2014, the Company determined that the fair value of FastPencil was below its carrying value and a $4.5 million goodwill impairment charge was recorded as well as a $2.6 million reduction in the related contingent consideration liability.
Any of these factors may materially and adversely affect our business and operations.
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, each of which was renewed in fiscal year 2013, to allow the plans to meet the pension benefit obligations to plan participants. We currently expect that we will be required to contribute approximately $352,000 to these two plans in fiscal 2014, 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 comprehensive income 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 28, 2014 and have a Pension Protection Act zone status of critical (“red”); such 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 two other contributing employers. A withdrawal by one or more of these employers could materially increase the amount of our required contributions to this plan. Under our contract with the bindery union, we now have the right to withdraw from the pension plan without the union’s consent. 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.
Our proposed investment in Brazil increases our exposure to the risks of operating internationally.
Substantially all of our operations are conducted within the United States. Investing in Brazil or elsewhere outside the United States will expose us to a number of risks, including:
· compliance with a wide variety of foreign laws and regulations, including licensing, tax, trade, intellectual property, currency, political and other business restrictions and requirements and local laws and regulations, whose interpretation and enforcement vary significantly among jurisdictions and can change significantly over time;
· additional U.S. and other regulation of non-domestic operations, including regulation under the Foreign Corrupt Practices Act and other anti-corruption laws;
· potential difficulties in managing foreign operations, obtaining accurate and timely financial information, enforcing agreements and collecting receivables through foreign legal systems;
· tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers imposed by foreign countries;
· potential adverse tax consequences, including tax withholding laws and policies and restrictions on repatriation of funds to the United States;
· fluctuations in currency exchange rates;
· impact of recessions and economic slowdowns in economies outside the United States, including foreign currency devaluation, higher interest rates, inflation, and increased government regulation or ownership of traditional private businesses;
· the instability of foreign economies, governments and currencies and unexpected regulatory, economic or political changes in foreign markets; and
· developing and emerging markets may be especially vulnerable to periods of instability and unexpected changes, and consumers in those markets may have relatively limited resources to spend on products and services.
We cannot assure you that one or more of these factors will not have a material adverse effect on our investment in Brazil and our business, results of operation or financial condition.
From time to time, we make investments in companies over which we do not have sole control, including our proposed investment in Digital Page in Brazil.
From time to time, we make debt or equity investments in other companies that we may not control or over which we may not have sole control. For example, we expect to own only 40% of the outstanding Digital Page equity interests. While we will have two designees serving on the Board of Directors of Digital Page and veto rights over certain significant actions by Digital Page under the terms of our shareholders agreement with them, we do not have the ability to control day-to-day operations of that company. Investments in these businesses, among other risks, subject us to the operating and financial risks of the businesses we invest in and to the risk that we do not have sole control over the operations of these businesses. From time to time, we may make additional investments in or acquire other entities that may subject us to similar risks. Investments in entities over which we do not have sole control, including joint ventures and strategic alliances, present additional risks such as having differing objectives
from our partners or the entities in which we invest, time consuming decision making and information sharing procedures or becoming involved in disputes. The benefits from such joint ventures are shared among the co-owners, so that we do not receive all the benefits from our successful joint ventures. In addition, we rely on the internal controls and financial reporting controls of these entities and their failure to maintain effectiveness or comply with applicable standards may adversely affect us.
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”). Any bankruptcy, liquidation, insolvency or other failure of a major retailer or distributor could also have a material impact on the Company. For example, during fiscal 2014, we recorded a net bad debt expense of $825,000 related to the closing and liquidation of a primary distributor for our Creative Homeowner business.
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. Non-profit organizations have worked to encourage development of educational content that can be “open sourced” for educational purposes. If these initiatives increase the availability and utilization of free or inexpensive materials online, it may adversely impact sales, reduce demand or change customer expectations regarding pricing and delivery.
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 offering approximately 4,900 of our titles as ebooks, as well as 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.
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 second quarter of fiscal 2014, the Company determined that the fair value of FastPencil was below its carrying value and a $4.5 million goodwill impairment charge was recorded as well as a $2.6 million reduction in the related contingent consideration liability.
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, recent reductions in capacity may impact paper production and 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.
Fluctuations in the costs and availability of paper and 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 other 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.
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.
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 21, 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 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 expires on November 21, 2014. The following table summarizes the monthly purchases under this program during the third quarter of the Company’s fiscal year 2014.
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
| (c) Total Number of |
| (d) Approximate Dollar |
| ||
|
| (a) Total |
|
|
| Shares Purchased as |
| Value of Shares that |
| ||
|
| Number of |
| (b) Average |
| Part of Publicly |
| May Yet Be |
| ||
|
| Shares |
| Price Paid |
| Announced Plans or |
| Purchased Under |
| ||
Fiscal Month |
| Purchased |
| per Share |
| Programs |
| the Plans or Programs |
| ||
March 30, 2014 - April 26, 2014 |
| — |
| — |
| — |
| — |
| ||
April 27, 2014- May 24, 2014 |
| — |
| — |
| — |
| — |
| ||
May 25, 2014 - June 28, 2014 |
| 133,472 |
| $ | 13.24 |
| 133,472 |
| $ | 8,233,154 |
|
|
|
|
|
|
|
|
|
|
| ||
Total |
| 133,472 |
| $ | 13.24 |
| 133,472 |
|
|
| |
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.
Item 6. Exhibits
Exhibit No. |
| Description |
|
|
|
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.
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 6, 2014 |
| By: | /s/James F. Conway III | ||
Date |
|
| James F. Conway III | ||
|
| Chairman, President and | |||
|
| Chief Executive Officer | |||
August 6, 2014 |
| By: | /s/Peter M. Folger | |||||
Date |
|
| Peter M. Folger | |||||
|
|
| Senior Vice President and | |||||
|
|
| Chief Financial Officer | |||||
|
|
| ||||||
|
|
| ||||||
August 6, 2014 |
| By: | /s/Kathleen M. Leon | |||||
Date |
|
| Kathleen M. Leon | |||||
|
|
| Vice President and | |||||
|
|
| Controller | |||||
EXHIBIT INDEX
Exhibit No. |
| Description |
|
|
|
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.